Impacts of the Sectoral Transformation

on the Economic Growth in Vietnam

Nguyen Minh Hai(&)

Department of Economic Mathematics, Banking University of HCM City, Ho

Chi Minh City, Vietnam
minhhai.nguyen77@gmail.com

Abstract. The objective of this paper is to research and analyze impacts of the
sectoral transformation on the recent economic growth in Vietnam. At the same
time, promoting economic growth towards sectoral restructuring is considered
whether it is a critically viable direction for the Vietnam economy. The paper
shows that the sectoral transformation during the period of 2000–2016 had
significant impact to sustain economic growth. This has supported the direction
of economic growth, moving towards a shift from a low-productivity sector to a
high-productivity sector in the past is a right direction. Based on the analysis, the
paper recommends a number of policies on promoting positive impacts to boost
rapid and sustainable economic development.

Keywords: Sectoral transformation
Economic growth
Vietnam

1 Introduction

Sectoral transformation (ST) in Vietnam after the Doi Moi (Renovation) period is
always one of the most popular topics, attracting much attention of researchers.
Although there are a number of published studies but due to different perspective in
different times. There is no comprehensive assessment of the ST in Vietnam economy
after the renovation period. Recognizing Vietnam previous growth model, mainly focus
on investments, cheap labor, raw materials extraction, export handicrafts, etc. is no
longer suitable with the context of world economic integration. Moreover, experience
from successful countries in the economic restructuring strategy by ST such as Korea,
Indonesia, Singapore and Thailand shows that this strategy has contributed to bringing
them from undeveloped economies to developed countries in the world, after decades of
high growth and they have become Asia’s brightest economies. Besides successful
countries the economic restructuring, there are many unsuccessful countries, such as the
sub-Saharan African countries, Latin America and the former Soviet Union, etc., which
raises questions about the direction of ST impact on economic growth is really a right
option for Vietnam. The Socio-Economic Development Strategy until 2020 has set the
target: ‘‘Economic restructuring towards industrialization and modernization is an
indispensable way for Vietnam to quickly get out of backwardness, slow development
and become a civilized and modern country”. The Government has taken initiative in

© Springer Nature Switzerland AG 2019

V. Kreinovich et al. (Eds.): ECONVN 2019, SCI 809, pp. 1062–1072, 2019.
https://doi.org/10.1007/978-3-030-04200-4_77
 Impacts of the Sectoral Transformation 1063

restructure the economy, focusing on ST so that it is modern, effective and sustainable

linked with the sectors following the nission: industry, agriculture, service plays the key
role. Therefore, the review and re-assessment of the effectiveness of economic ST
activities, especially whether ST has positive impacts on economic growth, whether it is
a right decision for Vietnam at this period or not is very crucial. For all these reasons, the
study will focus on analyzing impacts of ST on economic growth in Viet Nam over time
based on data collected. Hopefully, the research results will be a scientific basis to guide
the policy of sustainable growth for the following years.

2 Overview and Analytical Framework

2.1 Overview of Studies and Researches

The theory of economic transformation (ET) is one of the theories that has been studied
from the early time. Smith (1776), Ricardo (1817) argued that the structural charac-
teristics of economic components are closely related to level of development of a
country and emphasize that ET is one of the prerequisites promote economic growth.
Schumpeter’s viewpoint (1939): ET is just a minor problem and the effectiveness of
market allocation make considering ET as a natural outcome of the market develop-
ment, not a crucial condition for economic growth. However, studies conducted by
Chenery and Syrquin (1986), Kuznets (1966), Hoffman (1958) and recently by Rodrik
(2008) expressed the view that support for classical economists, arguing that economic
growth in semi-industrialized countries could not be explained by the neoclassical
model and could only be improved by adding structural elements. The fact that all
countries have prospered growth is a “path-dependent” process of sectoral transfor-
mation from the low-productivity sector into high-productivity ones. Emphasizing the
importance of the ET to economic growth, classic theories such as “take-off theory” by
Rostow (1960), “dualism theory” by Lewis (1954), “balanced growth” by Nurkse
(1953) all assert that the transfer of resources from low productivity - to highproduc-
tivity areas is characteristic of economic development. At the same time, it is
emphasized that the form of ET in developing countries is diverse and difficult to find a
common for all countries, depending on the specific characteristics of each country.
Together with theoretical research, experiments on ST have also been conducted.
One of significant research conducted by Chenery (1980), using an input-output model,
applies to a number of semi-industrial countries to implement industrialization-led
policy from export orientation to import substitution during the study period. The
results showed that sustainable economic growth 1requires a shift in the composition of
production and the compatibility of both domestic demandand international trade
opportunities. According to this method, Akita and Hermawan (2000), Hayashi (2005),
show that Indonesia succeeded in implementing the ET during 1971–2000. In partic-
ular, the manufacturing industry (MI) expanded its production capacity, strong export

1
Second sector: export expansion, manufacturing industry (MI).
1064 N. M. Hai

potential and reduced dependence on imports. To measure the degree of interdepen-

dence among economic regions and Vietnam’s economic growth with Indonesia,
Malaysia in the 1996–2000 period, Akita and Hau (2006) affirmed that, similar to
Malaysia, the source of Vietnam’s economic growth was mainly based on the second
sector1; different from Indonesia- the source of Indonesia’s economic growth is the
third sector2. However, the above results do not represent the characteristics of many
developing countries, because the default of each country’s technology level in the
model is the same, there is no difference in each economy structure.
In addition, studies with array data have more realistic results. The studies con-
ducted by Chenery (2000), Dani Rodrik (2012), Van Ark and Timmer (2003) in 39
economies are divided into three groups: developed, developing and planed economy
in the regions: Africa, Latin America, Asia. The findings confirm that ST from low-
productivity to high- productivity sector is a significant source of growth for devel-
oping countries rather than for developed countries. This occurs most strongly in the
East and South Asia countries. The shift in the opposite direction occurs in sub-Saharan
Africa, Latin American and former Soviet Union countries.
In summary, the differences in the results of ST research on economic growth are
explained in different ways depending on the specific characteristics of the countries, in
each stage of development and the degree of data accuracy. Therefore, in order to
measure the impact of ST on economic growth, it is necessary to research thoroughly
the microstructure of each country. This requires us to have a clear separation of the
effects of the composition of the contribution component to economic growth. This
study will focus on the impact of ST on Vietnam’s economic growth in the period
2000–2016.

3 Research Methodology

3.1 Research Model

The author’s research model is inherited from the basic model proposed by Sundrum
(1990) and adjusted by Cornwall (1990) to explain the growth rate of labor productivity
(LP) of the economy through both supply and demand approach. According to
Cornwall, the economy is divided into four sectors: agriculture, industry, service and
non-agriculture. Thus, the regression model assessing impacts of ST on economic
growth is decomposed into equations based on the components of economic growth
that affect economic growth. Specifically:
Equation 1: Impacts of sectoral input transformation on the economic growth:

LnðGDPÞit ¼ a1 LnKit þ a2 LnLit þ a3 K Iit þ a4 K Sit þ a5 L Iit þ a6 K Sit þ Ci þ ui

ð3:1Þ

2
Third sector: goods and service production.
 Impacts of the Sectoral Transformation 1065

Equation 2: Impacts of sectoral input transformation on the economic growth of the

agricultural sector:

LnGDP Ait ¼ a1 LnðK AÞit þ a2 LnðL AÞit þ a3 K Iit þ a4 K Sit

ð3:2Þ
þ a5 L Iit þ a6 K Sit þ Ci þ ui

Equation 3: Impacts of sectoral input transformation on the economic growth of the

industrial sector:

LnðGDP IÞit ¼ a1 LnðK IÞit þ a2 LnðL IÞit þ a3 K Ait þ a4 K Sit

þ a5 L Ait þ a6 L Sit þ Ci þ ui
ð3:3Þ

Equation 4: Impacts of sectoral input transformation on the economic growth of the

service sector:

LnðGDP SÞit ¼ a1 LnðK SÞit þ a2 LnðL SÞit þ a3 K Ait

ð3:4Þ
þ a4 K Iit þ a5 L Ait þ a6 L Iit þ Ci þ uit

Equation 5: Impacts of sectoral input transformation on the economic growth of non-

agricultural sectors:

LnðGDP NAÞit ¼ a1 LnðK NAÞit þ a2 LnðL NAÞit þ a3 K Iit þ a4 L Iit þ Ci þ uit

ð3:5Þ

When considering the economic growth of localities, it is important to notice the

differences among the provinces in terms of geo-economics, resources, infrastructure,
development level, socio-economic policies, etc. Therefore, in order to solve these
heterogeneous problems, the Panel data models are most appropriate, as the difference
between localities will be distinguished by the number Ci in the model.

3.2 Estimation Methodology

This research applies three common methods in data regression tables: (1) Pooled OLS
model; (2) fixed effects model (FEM); random effects model (REM). After that, F tests,
LM tests and Hausman tests will be used to select the appropriate regression model. In
addition, in order to test the variance of the error, the self-correlation, the cross correlation
among the panels, the Wald test, the Wooldridge test, the Pesaran test will be used.
1066 N. M. Hai

3.3 Research Data

The experimental data used in this paper include: GDP data, capital (K) and labor
(L) data of three sectors includes: agriculture, industry and service of 60 provinces
across the country in the 2000–2015 period, which were standardized at constant prices
in 2000 from the General Statistics Office (GSO).

4 Results and Discussion

4.1 Research Results

This section mainly presents regression results of Pooled OLS, FEM and REM for the
entire research sample of each of the equations for the impacts of sectoral transformation
(ST) on the economic growth. Estimates results of the model from Stata software are as
follows:
Equation 1: Estimations of the model of impacts of sectoral input transformation on
the economic growth:
Table 2 shows that the FEM model was selected, the obtained estimates were
consistent estimates. Therefore the FEM model is applied for discussion. The estimated
results from model (1) show that the variables K_I, L_I, L_S are statistically signifi-
cant. The estimated coefficients of these variables are positive, which proves that each
increase in the proportion of capital in industries and services has a stronger impact on
economic growth than the increase proportion of capital in agriculture. This implies
that the transformation of labor and other resources to high-productivity sectors has
contributed to improving Vietnam’s economic growth. The results also show that the
attraction of labor and other resources in industry and services increases the proportion
of labor and other resources in sectors, which play an important role in economic
growth. Moreover, with the obtained results, the proportion of labor in the industry has
the strongest impact (with 1.58%), followed by the proportion of industrial capital
(with 0.65%) and finally the impact of increasing proportion of capital and service
labor (with 0.49%). Thisalso asserts the argument that the ST is closely related to
economic growth in Vietnam during the research period. In particular, the transfor-
mation of inputs from low-productivity to high-productivity sectors has a positive
impact on growth.
Equation 2: Estimation results of the impacts of sectoral input transformation model
on economic growth of the agricultural sector:
The estimation results of model (2) from Table 3 show that the FEM model was
chosen. All structural variables in the model are statistically significant. Estimation
coefficient of variables: K_I, K_S, L_I, and L_S have positive effects on GDP_A
growth. This demonstrates that the proportion of capital and labor in industries and
services have the promoting impact on agricultural growth. In addition, the compara-
tive tests of estimation coefficient of the structural variables show that the coefficient of
influence on GDP_A of variable K_I is stronger than the coefficient of K_S. This
suggests that the increase in the proportion of capital in the service sector will have less
impact on agricultural growth than that in the industry.
 Impacts of the Sectoral Transformation 1067

Equation 3: Estimation results of the model of impacts of sectoral input transfor-

mation on the economic growth of the industry:
The estimation results of model (3) from Table 4 show that the FEM model is
chosen for the variables: K_S has positive effects on GDP_A growth, L_A has neg-
atively impacts GDP_A; other variables: K_A, L_S are not statistically significant. This
explains quite well the situation in Vietnam during the research period. The increase in
the capital proportion of service sector (K_S) has a stronger impact on industrial
growth than industrial sector in the capital structure, increasing the proportion of
industrial labor has a stronger impact on industrial growth than that of agricultural labor
in the labor structure. In addition, each of similar increase in the proportion of industrial
and agricultural capital, or industrial and service labor, has the same effect on industrial
growth.
Equation 4: Estimation results of the model of impacts of sectoral input transfor-
mation on economic growth of the service sector.
Results from Table 5 shows that the K_S, L_I variables and the structural variables
K_A, K_I, L_I have positive effects on GDP_S growth. In which, the estimation

Table 1. Description of variables in the estimation model

Variables Description of variables in the model
LnGDP Logarithm GDP
LnGDP_A Logarithm GDP in the agricultural sector
LnGDP_I Logarithm GDP in the industrial sector
LnGDP_S Logarithm GDP in the service sector
LnGDP_NA Logarithm GDP in non-agricultural sector
LnK Logarithm Capital
LnK_A Logarithm capital in the agricultural sector
LnK_I Logarithm capital in the industrial sector
LnK_S Logarithm capital in the service sector
LnK_NA Logarithm capital in the non-agricultural sector
LnL Logarithm labor
LnL_A Logarithm labor in the agricultural sector
LnL_I Logarithm labor in the industrial sector
LnL_S Logarithm labor in the service sector
LnL_NA Logarithm labor in the non-agricultural sector
K_A The proportion of agricultural capital in total capital
K_I The proportion of industrial capital in total capital
K_S The proportion of service capital in total capital
K_NA The proportion of non-agricultural capital in total capital
L_A The proportion of agricultural labor in total labor
L_I The proportion of industrial labor in total labor
L_S The proportion of service labor in total labor
L_NA The proportion of non-agricultural labor in total labor
1068 N. M. Hai

coefficients of K_A, K_I and L_I variables show that increase in the capital proportion
of agricultural and industrial sectors will all have impact on the growth of the service
sector and each increase in the proportion of service labor has a less impact on the
growth of the service sector than the effect of a corresponding increase in the pro-
portion of industrial labor in the labor structure. The results also show that the L_A
variable has no effect on GDP_S growth in the entire sample. This implies that the
same increase in the proportion of agricultural and service workers have the same
impact on the growth of the service sector. This result has proved that sectoral trans-
formation towards increasing the proportion of labor and other resources that are
essential to boosting the growth of the service sector.
Equation 5: Estimation results of the model of impacts of sectoral input transfor-
mation on economic growth of non-agricultural production (Table 6).
Estimation results affirm the importance of industry in promoting the overall
growth of non-agricultural sectors. This implies that each increase in the proportion of
industrial labor has stronger effects on the growth of non-agricultural sectors than the
corresponding increase in the proportion of industrial capital.
In conclusion, the results from Tables 1, 2, 3, 4 and 5 show that ST in Vietnam is
closely related to economic growth during the research period. The results of the paper
is the evidence affirm that ST is extremely crucial. This transformation is like a push to

Table 2. Regression results with the entire sample scale for the equation 1
Explanatory Model (1)
variables Pooled FEM REM
OLS
LnK 0.5383 0.3883 0.3883
(0.147) (0.237) (0.237)
LnL 0.3549 0.3349 0.3749
(0.463) (0.123) (0.123)
K_I 0.3563 0.6533 0.6533
(0.4517) (0.7817) (0.4187)
K_S 0.6219 0.4959 0.6959
(0.3678) (0.548) (0.678)
L_I 0.5523 1.5823 1.2223
(1.254) (0.254) (0.3554)
L_S 0.4605 0.6905 0.4605
(0.4093) (0.3093) (0.5093)
Independent coefficient 1.764 7.1664 2.3664
(2.575) (1.575) (1.575)
Number of observed variables 960 960 960
Number of provinces 60 60 60
Hausman (v2) 29.86
Wald (v2) 1907.5
Wooldridge 80.517
Peasaran 26.381
 Impacts of the Sectoral Transformation 1069

Table 3. Regression results with the entire sample scale for the equation 2
Explanatory Model (2)
variables Pooled FEM REM
OLS
LnK_A 0.8383 0.15555 0.3883
(0.447) (0.0237) (0.237)
LnL_A 0.5419 0.20596 0.7749
(0.523) (0.9523) (0.323)
K_I 0.5563 1.2277 0.6533
(0.1187) (0.1587) (0.4187)
K_S 0.7312 1.0876 0.8959
(0.6128) (0.1379) (0.3478)
L_I 0.8523 0.98733 1.7223
(1.354) (0.1309) (0.5154)
L_S 0.6005 0.8267 0.5605
(0.383) (0.4973) (0.4513)
Independent coefficient 1.3164 9.4623 2.7664
(2.375) (1.0775) (1.555)
Number of observations 960 960 960
Number of provinces 60 60 60
Hausman (v2) 26.89
Wald (v2) 4895
Wooldridge 28.83
Peasaran 29.973

boost and speed up the growth of sectors and the economy. In addition, the results
support the important role of industry in attracting capital and labor to conduct ST and
contribute to GDP growth.

5 Conclusions and Policy Recommendations

Based on the results of this analysis as well as current Vietnam economic con-
textVietnam, this research recommends some views and solutions to promote positively
in recognizing characteristics of ST and economic growth in Vietnam as well as some
recommendations for reasonable ST and promote the economy to grow rapidly in the
coming years:
Firstly, the transformation of production factors from agriculture to industry and
services has a positive impact, promoting the growth of sectors and the economy.
Therefore, persisting in the orientation of transformation of labor structure from low-
productivity to high-productivity sector should be thoroughly understood in Vietnam’s
strategic planning and development policy in the new phase. In the current context of
Vietnam, especially in rural society, which is most clearly expressed, should accelerate
structure transformation of rural households towards industrial, commercial and service
households.
1070 N. M. Hai

Table 4. Regression results with the entire sample scale for the equation 3
Explanatory variable Model (3)
Pooled FEM REM
OLS
LnK_I 0.3383 0.5475 0.8113
(0.147) (0.0237) (0.437)
LnL_I 0.4549 0.2515 0.3419
(0.463) (0.0624) (0.423)
K_A 0.6563 0.22517 0.7533
(0.4517) (0.2068) (0.1187)
K_S 0.5219 1.2062 0.5169
(0.4678) (0.1645) (0.777)
L_A 0.6123 - 0.9034 1.2453
(1.254) (0.3982) (0.3145)
L_S 0.6305 - 0.1048 0.6105
(0.3113) (0.6684) (0.4193)
Independent coefficient 1.264 7.7897 2.7664
(1.315) (0.8761) (1.9175)
Number of observed variables 960 960 960
Number of provinces 60 60 60
Hausman (v2) 16.29
Wald (v2) 3333.5
Wooldridge 48.827
Peasaran 16.753

Secondly, in order to promote economic growth and ST when allocating capital to

industries in the economy, industrial capital needs to expand in both scale and density.
Therefore, the government must create an enabling environment to attract investment in
sectors that are encouraged to be competitive and provide good supporting services:
infrastructure, capital, technology, and high quality human resources. In addition, it is
important to increase the proportion of industrial labor to production growth of the non-
agricultural sector in the economy.
Thirdly, policies must facilitate the flexible movement of resources into higher-
productivity economic activities. Therefore, Vietnam should build a long-term roadmap,
suitable with actual conditions and capabilities of the economy. The transformation of
labor from agriculture to industry and services has recently played a very important role
in Vietnam’s economic growth. At present, agricultural labor still occupies a large
proportion in the labor structure, so the transformation of labor to industry and services
will continue to play an active role in Vietnam’s economic growth in the future.
 Impacts of the Sectoral Transformation 1071

Table 5. Regression results with the entire sample scale for the equation 4
Explanatory variable Model (4)
Pooled FEM REM
OLS
LnK_S 0.5551 0.4527 0.3343
(0.247) (0.037) (0.337)
LnL_S 0.4549 0.2958 0.4749
(0.463) (0.1218) (0.123)
K_A 0.2336 0.4159 0.6533
(0.4517) (0.1091) (0.1177)
K_I 0.3217 1.1532 0.6959
(0.4178) (0.1415) (0.3178)
L_A 0.3523 0.63964 1.3433
(1.254) (0.4862) (0.4514)
L_I 1.605 1.9664 0.6605
(0.4093) (0.4619) (0.7518)
Independent coefficient 3.764 6.5969 1.5674
(2.575) (1.9615) (1.0375)
Number of observed variables 960 960 960
Number of provinces 60 60 60
Hausman (v2) 155.24
Wald (v2) 3397.17
Wooldridge 28.827
Peasaran 39.397

Table 6. Regression results with the entire sample scale for the equation 5
Explanatory Model (5)
variables Pooled FEM REM
OLS
LnK_NA 1.003 0.5127 1.3554
(0.2225) (0.0357) (0.237)
LnL_NA 0.2133 0.2928 0.3749
(0.3353) (0.1052) (0.2423)
K_I 0.5023 0.2477 0.5526
(0.2217) (0.091) (0.5187)
L_I 0.5119 1.0512 0.6959
(0.2071) (0.4165) (0.678)
Independent coefficient 0.7154 7.3402 1.6444
(1.154) (1.1326) (0.5550)
Number of observed variables 960 960 960
Number of provinces 60 60 60
Hausman (v2) 26.894
Wald (v2) 4895.17
Wooldridge 67.57
Peasaran 28.459
1072 N. M. Hai

5.1 Limitations and Further Researchs

Limitations of the study were two important factors: latency and spatial error. There-
fore, this research will be a prerequisite for subsequent studies using spatial economics
models to research ST and economic growth in Vietnam.

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