UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM- THE NETHERLANDS PROJECT ON DEVELOPMENT ECONOMICS EXPORTS - THE DETERMINANT OF ECONOMIC GROWTH IN ASEAN DEVELOPING COUNTRIES 1986-2001, THE CASE OF VIETNAM A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DECREE OF MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY HAVANDUNG HO CHI MINH CITY, 2003 CERTIFICATION I certify that the substance of this dissertation has not already been submitted for any degree and is not being currently submitted for any other degrees. I certify that to the best of my knowledge any help received in preparing this dissertation, and all sources used, have been acknowledged in this dissertation. Ha Van Dung Date: . 11 ACKNOWLEDGEMENTS First of all, I would like to express my sincere and grateful appreciation to my academic supervisor MA Nguyen Huu Loc for his guiding me during every step in my study, especially during my time of writing thesis. I would also like to express my grateful thanks to all professors, lecturers in Vietnam - the Netherlands Project, especially Dr. Youdi Schipper, Dr. Gabrielle Berman, and Dr. Karel Jansen for their precious lectures and assistance during the period of writing thesis proposal. Furthermore, I would like to thank all the staffs of the project, especially the librarian Ms. Dang Kim Chi, and the project secretary Ms. Dinh Anh Nguyet. I would like to express my sincere thanks to all of my classmates in class 8, who have helped me a lots with their encouragements, collaboration, and ideas during my study as well as during the time I do my thesis. Above all, I am indebted to my grandmother, my parents and my daughters, who have given me a lot of encouragement, sympathy, and support during my study. 11l ABSTRACT In recent years, Vietnam has gained impressive growth from the renovation in 1986. The average growth of more than 7.5 percent has ranked Vietnam into the fastest growth group in the world. This is a result of the process of transition from centrally planned economy to market economy. The key element of this success is the openness of the economy and trade has expanded its role in stimulating growth in Vietnam. In deed, exports have been contributing to economic growth, and Vietnamese exports are quite similar to those of five other ASEAN developing countries including Malaysia, Indonesia, the Philippines and Thailand. Thus, it is useful to investigate the relationship between exports and economic growth in these countries through the findings of determinants of economic growth. By using both descriptive and econometric method, the study examines the determinants of growth with an emphasis on the role of exports on economic growth in the ASEAN-5 developing countries during the period of 1986-2001. The econometric method is based on the neoclassical model, using panel data of five countries during sixteen years. The empirical findings reveal that capital; labor force, export growth, spending on education, and external debts are determinants of growth. In which, external debt and spending on education have negative effect on growth while the rest has positive impact on economic growth. In relation with the role of exports, the study has found that exports have positive effect on economic growth in these countries, and this result is consistent with those in previous studies. It also suggests that the opened-door policy in these countries has been effective and it should be considered carefully in order to contribute more to economic growth. IV TABLE OF CONTENTS C ertifi cation Acknowledgements Abstract Tables of contents Lists oftables Lists of figures Acronyms CHAPTER 1: INTRODUCTION I.l. Problem statement 1 !.2. Overall objectives 3 !.3. Scope and limitation of the study 3 !.4. Methodology and data 4 !.5. Structure of the thesis 4 CHAPTER II: LITERATURE REVIEW ILl Definitions 6 1!.2. Literature review 7 11.2.1. Growth theories 7 1!.2.1.1. Keys ian Growth 7 11.2.1.2. The neoclassical growth model 10 11.2.1.3. The endogenous growth theory 13 11.2.2. The traditional theory of international trade and development 17 11.2.3. Effects of Exports on Growth 19 v II.3. Empirical Studies 28 II.3.1. Study of H. Sun and A. Parikh (1996) 28 II.3.2. StudyofY. A. Al-Yousif(1999) 29 II.3.3. Study ofT. Lloyd, 0. Morrissey, and R. Osei (2001) 31 II.3.4. Study of G. K. Nigugala (1999) 32 II.3.5. Study ofT. Gylfason (1998) 33 11.3.6. Study of E. J. Sheeney (1992) 34 II.3.7. StudyofM. A. B. Sidique and E. A. Selvanathan (1998) 35 11.4. Conclusions 37 CHAPTER III: AN OVERVIEW OF ECONOMIC PERFORMANCE AND EXPORTS IN ASEAN-5 DEVELOPING COUNTRIES III. I. A background of five ASEAN developing countries 39 III.2. Export performance and sources of export growth of ASEAN-5 in recent years 40 III.2.1. Economic growth in ASEAN-5 40 III.2.2. Export Performance of ASEAN-5 in the studying period 42 III.2.3. Sources of Export Growth 44 III.3. Vietnamese exports in the studying period 47 III.3.1. Vietnam trade performance after applying 'renovation' policy 47 III.3.2. The commodity composition of exports 50 III.3.3. Main trading partners ofVietnam 52 III.4. Conclusions 55 CHAPTER IV: DETERMINANTS OF ECONOMIC GROWTH IN ASEAN-5 DEVELOPING COUNTRIES IV.1. Methodology 56 Vl IV.2. Descriptive Statistics 60 IV.3. Econometric Model 62 N .3 .1. Model Specification 62 N.3.2. Estimation results 66 IV.4. Conclusions 71 CHAPTER V: CONCLUSIONS AND POLICY RECOMMENDATIONS V .1. Conclusions 72 V.2. Policy recommendations 75 V.3. Suggestions for further study 77 Bibliography Vll · LIST OF TABLES Table 2.1: Determinants of economic growth Table 3.1: Growth rate of export in ASEAN-5, 1986-2001 Table 3.3: Vietnam: Commodity composition of exports, 1990-2001 Table 4.1 Description of variables Table 4.2: Test for rank correlation between export growth and GDP growth LIST OF FIGURES Figure 2.1: Employment and foreign exchange effects of export expansion Graph 3.1: GDP growth rate of ASEAN-5 Chart 3.1. Market's share ofVietnamese exports, 1995 Chart 3.3. Market's share ofVietnamese exports, 2001 Vlll AFTA ASEAN ADF CMEA FDI GDP GSO SUR us USD VECM VND WDI ACRONYMS ASEAN Free Trade Area Association of South East Asian Nations Augmented Dickey Fuller Council for Mutual Economic Assistance Foreign Direct Investment Gross Domestic Products General Statistics Office Seemingly Unrelated Regression United States United States Dollar Vector-Error-Correction Model Vietnamese Dong World Development Indicators IX CHAPTER I: INTRODUCTION 1.1. PROBLEM STATEMENT Vietnam had made its unification more than ten years before it started the economic reform to take the economy out of the crisis in 1986 (Hoang, 1996). Vietnam's economic reform or 'doi moi' (innovation) has been done for more than sixteen years and it gets many successes. Gross Domestic Products (GDP) increases more than twice in the past ten years, economic structure changes in the right direction of reducing the ratio of agriculture over GDP and increasing the ratio of industry and service over GDP (Nguyen, 2002). From the beginning of innovation, Vietnam has gained a considerable growth with the average of GDP of 7.55 per cent per year (Vo, 2002). In which, the year 1995 is considered as the most successful for growth performance with the growth rate of GDP reaching 9.5 per cent. Then, there is a bit slowdown in GDP growth rate. It is only 5.8 and 4.8 per cent in 1998 and 1999, respectively. However, it increases in 2000 and 2001 with the growth rate of 6.7 and 6.8 per cent (General Statistic Office (GSO), 2002). As a result of the economic growth, the living standard is improved dramatically (Nguyen, 2002). In accordance with GDP growth, the 2002 World Bank report shows that between 1986 and 2001, exports have increased by an average of around twenty three per cent leading to an expansion in sectors that employ large number of people, combined with a stable macroeconomic environment and reforms for favorable investment climate, it generated exceptional growth in GDP (World Bank, 2002). Not only the total volume of exports increases, the structure of exports has changed as well. Vo (2002) shows that while primary exports have decreased the share in total exports from year to year, manufactured exports have increased from only ten per cent in 1991 to forty per cent in 1999 (Vo, 2002). The Vietnamese economic performance as well as the export performance is so good in the 1 [...]... chapter first introduces the definitions of key concepts and then the literature review will be presented In the literature review, there are three sub-parts: the first sub-part is composed of growth theories including the Keysian growth, the neoclassical model, and the endogenous growth theory From these, some determinants of growth are drawn Then in the second sub-part, theories relating international... effect of the growth rate of exports on the growth rate of GDP in ASEAN developing countries during the period of 1986-2001? 1.3 SCOPE AND LIMITATION OF THE STUDY The year 1986 is considered as the initial year of totally innovative in Vietnam since the innovation in the mid-1986 From 1986, data available is not sufficient enough to econometric model and thus lead to unreliable results So, to increase the. .. prices of these commodities will fall in the world market, so they do not agree with an positive effect of exports on economic growth in long run (Gillis and al, 1996) Another author finding the same conclusion is Sheerey with the study of cross-section of 53 countries in the world After examining the role of exports on economic growth, he concludes that exports have not got the clear role in economic growth. .. qualify, through economic investigation of growth, the relationship between export growth and economic growth, and last suggest trade policies stimulating further economic growth The study has two specific objectives, with an emphasis on the later one: 1 What are determinants of GDP growth in ASEAN- 5 developing countries including Thailand, Malaysia, Indonesia, the Philippines, and Vietnam 2 Is there a positive... labor The Harrod-neutral has emphasized the role of capital as the only one determinant in fostering growth in short-run In the model, Solow has explained the cross-country differences in the growth rate by mainly on transition dynamics and he shows the technical progress as the source of sustained growth However, the diminishing returns have prevented the model from providing an explanation for the. .. savings so, as a result, it has effects on investment since savings are sources of investment In his work, Sundrum states that the growth of exports will create profitable opportunities, which provide the demand for high rates of investment He also shows the example of developed countries in 1960s that 'the rapid growth of GDP in these countries was due to high and growing levels of investment, but these... on economic growth Then, it also includes some empirical studies, which examine the relationship between export growth and economic growth 4 Chapter three introduces an overview of economic performance and exports in ASEAN- 5 developing countries from 1986 Especially, the case of Vietnam will be examined more carefully in order to have a general picture of Vietnamese economy since applying the 'innovation'... size the study chooses additional four ASEAN economies including Thailand, Malaysia, Indonesia, and the Philippines These countries are chosen because of two reasons The first reason is that all these countries are located in Southeast Asia and are members of AFTA The second reason is that the economic background of these countries is quite similar each other These countries are pursuing regional and international... domestic savings are too small to finance the necessary level of investment for a projected growth (the saving-investment gap), the foreign capital can help to fulfill the lack In addition, lack of foreign exchange for imports is one of the three constraints of economic growth (Maizels, 1968) Linnemann et al (1987) also agree that export expansion can contribute to economic growth in developing countries. .. result in a higher level of output in exporting industries and more people will be employed in these industries' (Linneman et al, 1987: p185) Moreover, increased activity of additional exports may foster growth in other sectors of the economy These spread effects are commonly called linkages effects Both in export and linked industries, profit and wage incomes are realized, and in tum these incomes, . OF ECONOMIC GROWTH IN ASEAN DEVELOPING COUNTRIES 1986-2001, THE CASE OF VIETNAM A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DECREE OF MASTER OF ARTS IN. Malaysia, Indonesia, the Philippines, and Vietnam. 2. Is there a positive effect of the growth rate of exports on the growth rate of GDP in ASEAN developing countries during the period of. 1996). Another author finding the same conclusion is Sheerey with the study of cross-section of 53 countries in the world. After examining the role of exports on economic growth, he