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AN ANALYSIS AND EXAMINATION INTO VIETNAM’S ECONOMIC GROWTH POST-1986:
TAKING ADVANTAGE OF THE OPPORUNITIES
Roman Derevyanko – Undergraduate Student
College of St. Benedict/St. Johns University
Working Paper
December, 2016
ABSTRACT
This research explores the contributing factors to Vietnam’s economic growth following its introduction
of market-oriented political reforms beginning in 1986 (Doi Moi). In accordance with a Solow model
growth model, elaborated to include more inputs, a growth accounting exercise will provide insight into
the biggest contributors to Vietnam’s increase in output. While a growth accounting analysis will broadly
explain the main contributions to this growth, a further analysis will attempt provide context for the
reasoning behind the contributions. This paper will then examine the opportunities these contributions are
presenting for businesses to take advantage of Vietnam’s economic potential.
Keywords: Vietnam, FDI, Economic, Growth
1. Background: Vietnam’s Political Reform
“
“…we have made mistakes due to ‘leftist infantilism,’ idealism, and to the contravention of the
objective laws of socio-economic development. These mistakes were manifested in
the…[emphasis given to] developing heavy industry on large scale beyond our practical
capacity…[maintaining] the bureaucratically centralizes mechanism of economic management
based on state subsidies with a huge superstructure which overburden the infrastructure. As a
result, we relied mostly on foreign aid for our subsistence.”
-Truong Chinh, 1986
”
Prior to 1986, long-time party leaders Le Duan, Truong Ching, and Pham Van Dong were
attributed to the prolonging calamities of the Vietnamese socialist state. Vietnam’s central planning and
large-scale production had presented the nation with rising economic problems. Even with price controls
on most goods and services, Vietnam’s annual rate of inflation was over 700%. The value of their imports
was more than double the value of their exports. Budget resources were diminished due to high military
expenditures as well as expenditure on unsuccessful state enterprises and their foreign investment was
mostly nonexistent. In addition, the technology and development gap with neighboring nations had been
increasing.
The passing of Party Secretary-General Le Duan in April of 1986 led to the brief appointment of
Truong Chinh as acting Secretary-General of the Party. Truong Chinh had begun to realize the
consequences of the party’s central planning system after visiting Vietnam’s countryside poverty in 1983
and was beginning to lean towards economic reform. In December of 1986 the Sixth Party Congress
appointed Nguyen Van Linh to replace Truong Ching as Secretary General, as well, Do Muoi was elected
as Prime Minister and replaced Pham Van Dong and solidifying a reformist movement, titled Doi Moi
(literally: “renovation”).
Doi Moi presented intense debate amongst party officials regarding the effectiveness of past
policies in helping the Vietnamese people’s wellbeing but nonetheless pushed forward policy reforms.
The Sixth Party Congress agreed towards reducing macroeconomic instability and accelerating economic
growth by utilizing all economic tools available including fiscal and monetary policies. In addition,
Vietnam’s centralized bureaucratic management system built upon state subsidies was eradicated and
transitioned into a multi-sector, market-oriented economy allowing the private sector to compete with
state enterprises. The limited public investment that was available was distributed amongst three main
goals: development of agriculture, expansion of consumer good productions, and expansion of trade and
foreign investment relations.
The objectives of Doi Moi continued to follow through in the form of steady easing of
government constraints to private sector activity and domestic trade. In early 1987, the reform-oriented
leadership implemented measures to increase the private sector, reduce the budget deficit, and boost the
output of agricultural and consumer goods in order to raise market supplies and exports. This aimed to
make prices more responsive to market forces, which would allow Vietnamese producers to make profits.
Some of the steps that were taken to accomplish this included lowering barriers to trade, the checkpoints
inspection system that required goods in transit to be frequently inspected was abolished, and regulation
on private inflow of money, goods, and tourists from overseas were relaxed. Furthermore, wage increases
were planned within the state-controlled industrial sector, reductions of workers in the overstaffed state
administrative and service organizations were planned, and a restructure of the tax system to boost
revenue and improve incentives was introduced.
The first year of reform marked the key changes of the Vietnamese government towards reducing
their control over the industrialization process. From there many changes were enacted leading towards a
more free-market oriented economy. In 1986 and 1988, Vietnam drastically reduced the number of line
ministries, state committees, and other central government agencies. Other notable changes were made
including the “Foreign Investment Law” passed by the National Assembly in late 1987 and enacted in
1988. A Law on Land was also passed by the National Assembly in the same time which recognized
private land use and was aa crucial step towards the introduction of property rights. The radical reforms
beginning in 1986 and 1987 continued from thereon, for more details see Table 1 in the appendix1.
The reformist movement in Vietnam clearly showed positive signs for the country. The changes
resulted in some of the largest annual economic growth in the 1990’s at an average 7.9% and a decrease
in poverty from 58.71% in 1992-1993 to 37.4% in 1997-1998 (Glewwe and Dang, 2011).
2. Introduction
Vietnam’s political reforms have paved the way for an impressive rate of economic output. After
the enactment of Doi Moi gradual, yet quickly acting, movements towards a market-oriented economy
aimed at resolving a struggling economy in crisis from bureaucratic centralism and an inefficient state
subsidy system. What followed, with the exception of the 1997 Asian Financial Crisis, was impressive
growth in Vietnam’s gross domestic product.
Figure 1: Vietnam's Gross Domestic Product
10
1997 Asian Financial Crisis
Gross domestic product per capita
Gross domestic product
9
7
6
5
4
3
2
1
0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Percent Change (%)
8
Source: World Bank
Although the increases in output relating to the GDP is clear, what isn’t, are the sources from which these
increases came from.
To identify the contributing factors it is crucial to first understand the models used to measure
economic growth. The next section explains the history and contributions made from economists into
economic growth theory and analysis. The main focus will be on the Solow growth model and the
subsequent altercations of it to include more accurate factor contribution measures. Ultimately, a growth
accounting exercise is performed to identify the share of physical capital, labor, human capital, and total
factor productivity’s (TFP) contributions to output.
1
The above reform summary came from chapter 6 of Brian Van Arkadie and Raymond Mallon’s 2004
book titled, “Viet Nam: A Transition Tiger?”
With insight into what share contribution each input has to Vietnam’s output growth an
examination of the sources of these increases will follow. Looking into the sources of domestic and
foreign investment allowing for the capital increases will provide insight into capital’s share. Labor
increases and the increasing rate of an educated labor force will provide an examination of how labor
productivity has increased post Doi Moi and contributed to a larger share of output growth. Lastly,
explaining the total factor productivity increase will pose to be the most difficult portion of the
examination. Total factor productivity measures everything that isn’t included in physical capital, labor,
and human capital. To this effect, TFP leaves many potential areas of examination to be explored. In this
analysis the focus will be on increases in TFP from movements into more economically productive
industries, as well as, the urbanization that accounts for a more productive labor force.
3. Methodology and Literature Review
The purpose of this research is to examine main streams contributing to Vietnam’s growth after
it’s political restructuring beginning in 1986. To this effect, the fundamental approach to understanding a
nation’s economic progress was introduced by Robert Solow in his 1956 paper titled “A Contribution to
the Theory of Economic Growth.” This neoclassical growth model, coined the “Solow model,” expands
upon the production function in the Cobb-Douglas form2, which describes output growth based on capital
and labor contribution and is given by
𝑌 = 𝐾 𝛼 𝐿1−𝛼
where 𝑌 denotes output, 𝐾 is capital input, 𝐿 is labor input, and 𝛼 is a number between 0 and 1
representing the share of capital and labor to output with decreasing returns to all capital.
In 1957, Solow introduced technological progress to the production function in his paper titled
“Technological Change and the Aggregate Production Function.” Prior to introducing technological
progress, diminishing returns to capital accumulation provided inaccuracies in measuring economic
output. By introducing technological progress to the production function, improvements in technology
progress continuously balances the diminishing returns to capital accumulation. As a result, labor
productivity grows because of the direct improvements in technology and indirectly because of the
additional capital stock made possible by technology progress. With the addition of a Hicks-neutral3
productivity term, Solow provided an empirical accounting for components of growth, called “growth
accounting.” This breaks down growth in output into growth in capital, growth in labor, and growth in
technological change revealing the production function
𝑌 = 𝐴𝐾 𝛼 𝐿1−𝛼
where 𝐴 is a Hicks-neutral productivity term (Solow 1957).
The Solow model with technological progress can fundamentally accomplish identifying the
sources of economic growth. However, leaving the Solow model at this can often misrepresent a nation’s
sources of economic growth. As Alwyn Young points out in his 1995 paper appropriately titled “The
Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,” East
Asian countries (Singapore, Hong Kong, Taiwan, and South Korea) experienced large rates of economic
growth between 1966-1990, however, their respective TFP did not grow at a rate as high as other
countries experiencing smaller growth rates. Young concludes that increases in capital, labor, and a shift
from agriculture to manufacturing (a TFP contributor) are not enough to explain the rapid growth rates in
these East Asian countries. The increases in investment into a population’s education were a key
2
Charles Cobb and Paul Douglas introduced the Cobb-Douglas production function in 1928. The two
argued that in their analysis of the US manufacturing industry the production function, with an 𝛼 value of
¼, the data well without technological progress being added (Jones and Vollrath, 2013).
3
The Hicks-neutral productivity terms states that the ratio of A remains the same for a given capital labor
ratio.
contributor to the East Asian nation’s economic growth. To this effect, the Solow model can provide a
better insight into Vietnam’s growth if the effectiveness of labor output is introduced, known as human
capital.
In 1992, Mankiw, Romer, and Weil supplemented the Solow model with human capital. The
model restricted human capital to being a function of the investment in education, ignoring investments in
things such as health. This gives the Cobb-Douglas production function the following new form:
𝑌 = 𝐾 𝛼 𝐻𝛽 (𝐴𝐿)1−𝛼−𝛽
where 𝐻 is human capital, 𝐴𝐿 is productivity-augmented labor (Hicks-neutral), and 𝛼 and 𝛽 is the share
of physical and human capital to output, respectively. This suggests that the production function exhibits
constant returns to scale. Human capital also accumulates similarly to physical capital where decreasing
consumption and increasing saving raises both physical and human capital. The increase in human capital,
therefore, increases output per worker and in turn economic growth. Taking the logs and differentiating
the production function with human capital and technology the formula for growth derive as accounting
𝑌̇
𝐾̇
𝐿̇
𝐻̇
𝐴̇
= (𝛼 ) + ((1 − 𝛼 − 𝛽) ) + (𝛽 ∗ ) + ( )
𝑌
𝐾
𝐿
𝐻
𝐴
𝑌̇
𝑌
𝐾̇
𝐾
where output growth ( ) is equal to the weighted average of capital (𝛼 ) plus labor growth ((1 − 𝛼 −
𝐿̇
𝐻̇
𝛽) 𝐿) plus human capital growth plus (𝛽 ∗ 𝐻) the growth rate of technological progress, also known as
𝐴̇
total factor productivity (𝐴)4. The growth accounting exercise implies decreasing returns to all capital
where 𝛼 + 𝛽 < 1. If 𝛼 + 𝛽 = 1 then there are constant returns to scale in the reproductible inputs. While
this variation of the Solow model now includes human capital, the measurement of human capital varies
across growth accounting exercises.
4. Vietnam’s Growth Accounting
By briefly introducing the methodology behind growth accounting, examination of the sources
contributing to Vietnam’s economic growth can now be performed. In this analysis, the growth
accounting formula is:
𝑌̇
𝐾̇
𝐿̇
𝐻̇
𝐴̇
= (𝛼 ) + ((1 − 𝛼 − 𝛽) ) + (𝛽 ∗ ) + ( )
𝑌
𝐾
𝐿
𝐻
𝐴
1
where 𝛼 = 3 5 and is the fraction of output that is appropriated to capital (for example, in profits and
1
1
depreciation), 1 − 𝛼 − 𝛽 ≈ 3 and is the fraction of output that is appropriated to labor (wages), and 𝛽 = 3
and is the fraction of output that is appropriated to human capital. This formula shows changes in factor
contribution to output in regards to time and can be simplified and rewritten as
4
𝑌̇
𝐾̇
𝐿̇
𝐴̇
The growth accounting formula, 𝑌 = 𝛼 𝐾 + (1 − 𝛼) 𝐿 + 𝐴, introduces variables with a “dot” notation. In
𝑑𝐾
regards to derivatives with respect to time, the dot is used to represent this. For example, 𝑑𝑡 = 𝐾̇ .
5
The weights of 𝛼 are generally estimated from national income statistics and reflect the income shares of
capital (and labor from 1 − 𝛼). Mankiw, Romer, and Weil showed that in the US the average
manufacturing wage has roughly been twice the minimum wage. If minimum wage is compared to raw
labor it can be suggested that roughly half the wage of a typical worker is compensation for raw labor and
the other half is the return on human capital. This would mean that physical capital, human capital, and
raw (unskilled) labor would then all be around 1/3.
1
1
1
%∆𝑂𝑢𝑡𝑝𝑢𝑡 = ( ∗ %∆𝐶𝑎𝑝𝑖𝑡𝑎𝑙) + ( ∗ %∆𝐿𝑎𝑏𝑜𝑟) + ( ∗ %∆𝐻𝑢𝑚𝑎𝑛 𝐶𝑎𝑝𝑖𝑡𝑎𝑙)
3
3
3
+ %∆𝑇𝑜𝑡𝑎𝑙 𝐹𝑎𝑐𝑡𝑜𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦.
In this simplified analysis, data for output, capital, labor, and human capital is collected and inputted to
calculate Vietnam’s TFP contribution. Output is collected using data on real gross domestic product (real
GDP). Capital stock is multiplied by 1 – the average depreciation rate of the capital stock at time 𝑡 and
used to estimate the factor contribution of capital. The number of persons engaged, or any person 15 years
or older who worked during the reference week, is used for the factor contribution of labor. All of the
aforementioned data was gathered from the Penn World Tables (PWT) version 9.0 (Feenstra, Inklaar, and
Timmer, 2015). In combination with the PWT, the human capital equation is derived in James and
Vollrath’s book (pg. 55-57, 2013) and takes the following form:
𝐻 = 𝑒 𝜓∗𝑢 𝐿
where 𝜓 is a positive constant estimated to be 0.10 and 𝑢 is a human capital index estimated by PWT
using data on the average years of schooling from Robert Barro and Jong-Wha Lee6 (Barrow and Lee
2010) and an assumed rate of return to education around the world based on a Mincer7 equation.
Human Capital
(H)
Effective
Physical Capital
(K)
Capital Stock,
Shares Contributing
Workforce (L)
Population 15+
Working
Output (Y)
Real GDP
Total Factor
Productivity (A)
As with any growth accounting exercise, the parameters can be expanded to allow for different
types of physical capital, raw labor, and human capital. Nonetheless, even in this simpler form, there is
6
Barrow and Lee provide educational attainment data for 146 countries from 1950 to 2010. The data is
disaggregated by sex. In this 2010 data, estimation accuracy was increased through using consistent
census data, disaggregating data by age group in 5-year intervals, and introducing new estimates of
mortality rates and completion rates by age and education level. Average years of schooling, 𝑠𝑡 , is found
𝑔
𝑔
by 𝑠𝑡 = ∑𝐴𝑎=1−13 𝑙𝑡 𝑠𝑡𝑎 where 𝑙𝑡 is the population share of group 𝑔 15 years or older and 𝑠𝑡𝑎 is the number
of schooling years by age group 𝑎 (𝑎 = 1: 15-19 years old, . . . , 𝑎 = 13: 75≥). Years of schooling by age
𝑎
𝑎
group, 𝑎, at time, 𝑡, is calculated by 𝑠𝑡𝑎 = ∑𝑗 ℎ𝑗,𝑡
𝐷𝑢𝑟𝑗,𝑡
where ℎ𝑗𝑎 is the fraction of group 𝑎 having
reached education level 𝑗 (𝑗 = primary, secondary, tertiary), and 𝐷𝑢𝑟 is the corresponding duration in
year.
7
George Psacharopoulos’ (1994) paper accompanies Barrow-Lee in estimating PWT’s human capital
index by using rates of return for completing different sets of years of education. To simplify, the
methodology used to estimate these returns are based on a Mincer equation using a semi-log ordinary
least squared regression where the natural logarithm of earnings is the dependent variable and years of
schooling and potential years of experience in the labor market are independent variables. This basic
𝜕𝑙𝑛𝑊
𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑑𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑙
earnings function takes the form of 𝛽 = 𝜕𝑆 =
where 𝛽 is the coefficient on
𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛 𝑑𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑙
years of schooling, 𝑙𝑛𝑊 is the function of log-wages, and 𝑆 is the years of schooling.
clear evidence that the capital stock’s share of output growth has been prominently shaping Vietnam’s
economic development. Labor, human capital, and TFP are all less than 20% of the capital’s share while
physical capital’s is over 50%. Further examination of the contributing factors is necessary to better
understand the origins of Vietnam’s economic growth.
Table 1
Growth Accounting Vietnam (1985-2014)
Contributions from
Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1985-2014
Average
Change in GDP
5.32%
3.25%
2.49%
4.85%
4.48%
4.85%
5.63%
7.96%
7.47%
8.12%
8.71%
8.54%
7.54%
5.45%
4.56%
6.36%
6.45%
6.61%
6.84%
7.01%
7.02%
6.52%
6.66%
5.36%
5.12%
6.04%
5.87%
4.99%
5.14%
5.65%
K
26.68%
41.13%
59.85%
27.72%
25.30%
43.52%
29.44%
34.70%
49.33%
53.13%
50.49%
51.91%
56.67%
77.62%
80.78%
56.19%
54.79%
53.93%
52.13%
49.41%
53.20%
50.57%
58.13%
65.04%
65.91%
56.33%
44.78%
48.43%
45.79%
43.21%
L
78.36%
54.91%
28.11%
12.76%
9.37%
32.14%
13.99%
11.96%
13.32%
12.25%
11.70%
7.90%
2.46%
22.64%
21.98%
2.31%
7.18%
13.34%
10.60%
11.39%
10.97%
13.72%
13.65%
19.46%
3.56%
16.22%
10.16%
14.64%
10.60%
6.97%
H
78.68%
53.51%
26.35%
11.87%
8.41%
31.01%
15.57%
12.95%
14.39%
13.25%
12.64%
9.10%
3.83%
24.63%
24.38%
4.02%
9.33%
15.51%
12.74%
13.52%
13.14%
16.09%
16.02%
22.48%
6.71%
19.00%
13.32%
18.57%
13.88%
9.52%
TFP
-83.72%
-49.55%
-14.31%
47.65%
56.91%
-6.67%
41.00%
40.39%
22.97%
21.36%
25.17%
31.09%
37.03%
-24.89%
-27.15%
37.48%
28.70%
17.22%
24.53%
25.68%
22.68%
19.61%
12.21%
-6.99%
23.82%
8.44%
31.74%
18.37%
29.73%
40.30%
6.05%
51.01%
14.49%
16.06%
18.43%
Source: Penn World Tables Version 9.0
The appendix (Appendix B) provides the derivation in per worker terms, which will assist in
understanding the underlying impacts each factor’s contribution has on a macroeconomic level.
5. Physical Capital
With capital being the largest factor contributing to Vietnam’s economic growth, it should not
come with surprise that in the first 5 years following the introduction of Doi Moi Vietnam saw an 18.6%
increase in total investment in comparison to the 5 years before, even with the state budget for
government investment being 6% less (Arkadie and Mallon, 2004). Increased capital comes from the
investment of saved money on capital goods such as factories, machines, and computers, amongst other
things. The use of capital raises labor productivity through increased production efficiency, or output per
worker. Capital can also be a contributor to increasing TFP through the sharing of technological
innovation8 present in the new capital and bridging the gap between advanced and developing economies.
An investigatory approach towards identifying the sources of capital growth will look at capital from
domestic and foreign investment.
5.1 Domestic Investment
Within domestic investment, contributing factors can be broadly broken into private investment
and government (public) investment. By subtracting final consumption expenditure from GDP, the gross
domestic savings rate provides insight into shifting habits in private investment. Gross domestic savings
contributes to increases in capitals stock by depositing savings within banks. In turn, banks invest the
deposited savings into capital through loan operations and that end up in the form of capitals stock
through things such as plants or machinery. In 1986, the gross capital savings as percent of GDP was
4.5% and 29 years later it had increase by 640% to 28.5%. This surge in saving is echoed by the increase
in non-state (private) investment,9 from 1986-2014 non-state investment had an average annual growth of
18.60%. State (public) investments during the same time saw an average annual growth of 16.22% while
(General Statistics Office of Viet Nam).
A more cumulative measurement to look at capital increases can be seen in gross domestic
investment (GDI), otherwise known as capital investment. GDI measures increases in expenditures on
additions to fixed assets (plants, machinery, equipment, etc.), including land improvements (fences,
drains, etc.), plus net changes in the economy’s level of inventories. Prior to experiencing repercussions
from a worldwide economic downturn, from 1986-2007 GDI’s average annual growth was 4.92%.
With consideration to political reforms, it wasn’t until 1994 with the passing of “Law on
Promotion of Domestic Investment”, nearly a decade after Doi Moi, that a noticeable step towards private
investments incentives was taken (Arkadie and Mallon, 2004). Although the new government did aim to
increase private investment, there is no single political source to explain such growth in private
investments. Instead, the overall movement towards a market economy has provided the population with a
higher standard of living. Data on poverty gaps at $1.90 a day and $3.10 a day counts non-poor as
receiving at least the $1.90 or $3.10 a day, respectively.
8
The topic of investment, specifically foreign investment, leading to increase in the growth of technology
is disputed amongst economists searching for a definitive model, (or even using the Solow residual as an
accurate measure) and will not be investigated in this paper. Some insight into this is provided in Basu,
Fernald, and Shapiro (2001) and better modeled in Romer’s (1989) “Follower-Leader” model.
9
The data provided for non-state and state investment is from the General Statistics Office of Viet Nam
and does not include foreign investment in their data. This is purely private and public investment (in
current billion Dong).
40
Figure 2: Vietnam's Poverty Gap
Percentage Under (%)
35
30
Poverty gap at $1.90 a day (2011
PPP)
Source: World Bank
25
Poverty gap at $3.10 a day (2011
PPP)
20
15
10
5
0
1992
1998
2002
2004
2006
2008
2010
2012
2014
Source: World Bank
Looking at the available data for the poverty gap suggests that a large portion of the increase in private
investments can be explained by the overall increase in people’s income after the Doi Moi.
5.2 Foreign Investment
The Foreign Investment Law was approved in 1987 and implemented in 1998. After a few years,
large inflows of foreign direct investment (FDI) came to Vietnam and in 1992 it became the main source
of investment. The net inflow of FDI as a percent of GDP in 1987 was 0.03% and hit its high of 11.94%.
The annual growth rate (based on the balance of payments) of FDI net inflows was as high as 95.45% in
1993 and 109.92% in 1994. With the 1997 Asian financial crisis, Vietnam saw significant of FDI growth
rate decline from 1991-1999. This slowed the FDI growth rate down from 35.42% in 1996 to -24.73% in
1998 with only positive growth being seen again at the miniscule rate of 0.15% in 2001. The years
following 2001 saw positive growth rates and hit 179.17% in 2007 but did not last and fell to 49.27% the
following year and -20.66% in 2009 (World Bank). It can be pointed out that the FDI inflows around the
time of 2007 can be attributed to changes in laws to comply with the World Trade Organization, which
Vietnam would join in 2007. This was seen through the allowance of foreign investors to invest in some
previously government monopolized industries, most notable banking, electric supply, insurance, and
communication (Thuy et al., 2015).
An investigation may be necessary to further understand how capital became such a large share of
Vietnam’s growth when FDI has seen such volatility, even with impressive growth rates at times. Other
sources of foreign investment increases can be seen with foreign government aid designated to promote
economic development (ODA). In 1933 Vietnam repaid their outstanding loans to the International
Monetary Fund (IMF) through lenders in the Paris Club10, which allowed for Vietnam to further take
loans from the IMF and World Bank. Following 1933 Vietnam negotiated with lenders from the London
Club11 to lower their outstanding loans by 50% and allow for a longer repayment period. These steps
10
The Paris club is a group of delegates from major creditor countries who assist in resolving payment
difficulties experienced by debtor countries coordinated with sustainable solutions.
11
Similar to the London Club, except it’s an informal group with private creditors.
provided opportunities for ODA from European countries and Japan, amongst others (Thuy et. al., 2015).
In 1986 Net ODA received per capita was 3.18 and in 2014 it had reached 46.49. Another factor worth
looking into is the increase is that from 2000 to 2014 remittances as a percent of GDP grew 161.79%
(World Bank). The financial support from these channels upgraded infrastructure and reduced poverty, in
the case of ODA, but also encouraged private and foreign investment.
350000
State Invesment (Current bil. Dong)
300000
Denotes Estimates
250000
90
80
70
Non- State Investment (Current bil. Dong)
60
Gross Domestic Investment (% of GDP)
50
Gross Domestic Savings (% of GDP)
200000
40
150000
30
100000
20
50000
10
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
6. Labor and Human Capital
On average, labor from 1985-2015 has accounted for 14.5% and human capital has been 16%
share of contribution to output, respectively. The increases in both of these factors signify more
contribution to economic growth from the part of the population working, and their effectiveness.
50
3
Figure 3: Labor and Human Capital
2.5
45
2
40
35
30
25
Persons Aged 15+ who
Worked
Human Capital Index
1.5
Human Capital (based on years of
schooling and return)
55
1
Source: Penn World Tables Version 9.0
0.5
20
0
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
15
Source: World Bank
Percent of GDP
400000
Figure 2: Sources of Vietnam's Investment (19862015)
100
Source: World Bank
450000
Number of People (millions)
Current Billion Dong
Source: General Statistics Office of Viet Nam
500000
6.1 Labor
Labor contributes to economic growth because, simply, there are more people producing output.
From 1984 to 2014 the amount of people 15 or older that have worked increased 122%. There is not much
examination of this necessary at this time as its contributions are explained quite simply in its increase
from the data. Further research can look into better understanding this input by adding more factorial
contributions to labor from things such as the average hours worked by the labor force over time.
6.2 Human Capital
As mentioned in the physical capital section, increases in capital increases in output per worker.
In the same way, increases in human capital through, in this case, education and return on education
contributes to increases in output per worker through higher labor productivity. While the labor from
1984-2014 has increased by 122%, during the same time the human capital index as defined by PWT has
increase 49%. Essentially, the labor in Vietnam has become 49% more effective in labor output during
this time.
6. Total Factor Productivity
Total factor productivity is the portion of output not explained by the amount of inputs used in
production. Even amongst the pioneers of growth accounting, it has been clear that this output provides us
with little insight into the production of the economy. As Moses Abromovits put it in his 1956 paper, it is
“a measure of our ignorance.” However, by including things such as human capital, the TFP is better
explained by taking a portion of the measurement out and dedicating it to the increase in a more educated
labor force.
There are other things that could help in explaining TFP, such as the population’s increase in
more productive regions of Vietnam. The decreasing in rural populations towards urban regions can
provide context for this. Moreover, this does not necessarily mean that people are physically moving,
rather, as the economy grows and investments into particular regions are made the area becomes
identified as urban based on government’s requirements. Vietnam’s total population has been increasing,
which also explains the increasing labor force in the previous section; however, rural population has been
decreasing
Figure 4:Vietnamese Population Dispersion
80000000
0.9
0.8
70000000
0.7
60000000
Population
1
0.6
50000000
.
40000000
30000000
Population, total
Rural Proportion of Total Population
Urban Proportion of Total Population
0.5
0.4
0.3
20000000
0.2
10000000
0.1
0
Proportion of Total Population
90000000
0
Source: World Bank
Taking into consideration that urban regions are more productive, further investigating into the
sectorial changes in Vietnam’s output will provide context for this claim. Firstly, contributing share from
an industry can be described in simplest form as
𝑌𝑡 = ∑ 𝜃𝑡 , 𝜆𝑡 𝜀𝑡 ∗ 𝑇𝐹𝑃𝑡
𝑡
where 𝜃 is the industry share of output for agriculture, 𝜆 is the industry share of output for services, and 𝜀
is the industry share of output in industry (including manufacturing).12
50
Figure 5: Sectorial Output
Agriculture
Industry
Services
40
35
30
25
20
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
15
1985
Value Added (% of GDP)
45
Source: World Bank
The data shows that agricultural production post Doi Moi has been consistently decreasing
beginning its decline in 1988 when agricultural value added (in 1986, limited investment stock was first
put towards agriculture) as a percent of GDP was 46.3% and in 2015 it was a mere 17%. The decline in
agricultural production accompanies the decline in rural population as Vietnam’s production is becoming
more efficient in its labor productivity by moving its labor force towards services and industry.
Interestingly, industry and services declined in 2010. In 2010, the FDI growth rate was -16.55%
suggesting that FDI investments are heavily concentrated into these sectors, with agriculture scarcely
feeling a decreasing in output.
6. Conclusion
This paper looks into the shares contributing to Vietnam’s output growth after its political reform
from 1986-2014. By taking into consideration the shares of factor contribution from physical capital,
12For
clarification on the subgroups of industry it is the value added from mining, manufacturing (also
reported as a separate subgroup), construction, electricity, water, and gas (World Bank).
labor, human capital, and TFP from a growth accounting exercise based on an altered Solow growth
model further examination into the source of these contributing shares in conducted.
The findings from growth accounting showed that the majority of output came from increases in
capital stock. With an average annual growth of 18.6% in non-state investment from increased gross
saving from 1986-2014 combined with an average growth of 16.22% in state investment during the same
time, much of the capital came from domestic sources. Moreover, FDI has been a key contributor to
capital stock increases in Vietnam with annual growth rates of net inflow FDI being as high as 109.92%
in 1994. Other notable sources were increases in net ODA and the recent increase in remittances to
Vietnam increasing the savings rate.
The labor force in Vietnam has been gradually increasing which on its own has contributed to
more output. However, the labor force is also becoming more educated and effective at output. Overall,
Vietnam’s labor grew 122% from 1984 to 2014 and has become more efficient along the way.
Lastly, identifying the source of TFP proves to be difficult for any economy. In this investigation,
the TFP contributions could be accounted for the urbanization of the Vietnam’s population. While
population has been consistently growing, the percent of the population in rural areas has been declining
and urban population increasing. Urban areas tend to show have more productivity on a per person basis.
Meaning, labor productivity per person in rural areas is less than in urban areas. This is also supported
through the sectorial shifts in output. Much like rural population can stunt productivity on a per person
basis, the same can be said about the productivity in agriculture compared to industry of service
productivity.
In conclusion, this paper provides a crude analysis and examination into Vietnam’s economic
growth. As this is a working paper, a further investigatory approach will be taken to identify the
opportunities present for businesses with consideration to the factors contributing most to Vietnam’s
growth. With many firms taking steps to further expand their portfolio in Asia past China, Vietnam
provides flourishing opportunities for all to take advantage of.
Appendix
Appendix A
Sources: The following table was taken directly from Arkadie, Van, and Mallon (2004), their
summary was gathered from: Government of Vietnam, Communist party of Vietnam, World Bank,
and Asian B
Development Bank reports on reform processes.
Appendix
Appendix B
The production function with technological growth and human capital can be turned into a per
worker production function by dividing labor on both sides:
𝛽
1−𝛼−𝛽
𝑌𝑡 = 𝐾𝑡𝛼 𝐻𝑡 𝐴𝐿𝑡
⋮
1−𝛼−𝛽
𝛼 𝛽
𝑌𝑡 𝐾𝑡 𝐻𝑡 𝐴𝐿𝑡
𝐾𝑡
𝐻𝑡
=
= 𝐴𝑡 ( )𝛼 ( )𝛽
𝐿𝑡
𝐿𝑡
𝐿𝑡
𝐿𝑡
⋮
𝛽
𝑦𝑡 = 𝐴𝑡 𝑘𝑡𝛼 ℎ𝑡
where new variables are defined as 𝑦 = output per worker, 𝑘 = capital per worker, ℎ = human capital
per work all 𝑡 time.
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