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JES
35,2 The roles of capital and
technological progress in
Vietnam’s economic growth
200
Phan Minh Ngoc
Sumitomo Mitsui Banking Corporation, Singapore Branch, Singapore
Received May 2006
Accepted May 2007

Abstract
Purpose – The purpose of this paper is to measure the contribution of capital formation, labor, and
technological progress to the growth of the Vietnamese economy, the impact of economic reforms (doi
moi ) since the end of 1986, and the rates of returns to capital and labor.
Design/methodologyapproach – Cobb-Douglas production functions are built for Vietnam’s
economy and then estimated using annual data for 1975-2005.
Findings – The two major findings are that: technological progress was statistically absent in the
growth of the Vietnamese economy throughout the period studied; and the most important source of
economic growth is capital accumulation, accounting for between 84 percent and 89 percent of
Vietnamese economic growth throughout the period 1975-2005, and between 85 percent and 90 percent
in the reform period (1986-2005).
Originality/value – This paper is the first of its kind in the Vietnamese literature that successfully
sheds light on, among other things, the roles of capital and technological progress in the Vietnamese
economy during the period 1975-2005. It also makes clear that Vietnam’s economic growth has been
fueled mainly by foreign funds and, thus, the continued heavy reliance of the economy on this financial
source will make its growth unsustainable. In order to achieve sustainable growth in the coming
decades, Vietnam must shift to rely more on productivity growth, which has been absent so far, and
less on factor accumulation growth.
Keywords Production economics, Capital, Economic reform, Economic growth, Vietnam
Paper type Research paper

1. Introduction
The failure of the Soviet-style central planning economic system applied in Vietnam
from 1975 until the mid-1980s forced the Vietnamese government at the end of 1986 to
adopt an economic reform program, widely known as doi moi (or renovation), to open
itself to the world and build a market-based economy. As a result, high and sustainable
rates of economic growth have been achieved since then, albeit with some slowdowns
at the end of the 2000s, which was thought to be partly due to the negative effects of the
1997 Asian economics crisis. According to Table I, the average growth rate of GDP in
the reform period (1986-2005) was almost double that in the pre-reform period
(1975-1986), i.e. 7.0 percent and 3.7 percent, respectively.

JEL classification – D24, O40

This paper was written when the author was a visiting researcher at the Faculty of
Journal of Economic Studies
Vol. 35 No. 2, 2008 Economics, Kyushu University, Japan. The author thanks Professor Mohsen Bahmani-Oskooee,
pp. 200-219 Editor, for instruction and cooperation, and an anonymous referee of this journal for helpful
q Emerald Group Publishing Limited
0144-3585
comments. Eric Ramstetter’s provision of part of the data used in this paper is greatly
DOI 10.1108/01443580810870173 acknowledged. Any remaining errors are the author’s alone.
 Vietnam’s
Year GDP Investment Exports Labor force
economic growth
1975 4.38 4.31 – 2.36
1976 6.33 6.66 56.71 2.34
1977 1.98 1.58 44.74 2.30
1978 2.91 2.79 2.26 2.25
1979 21.89 20.50 23.49 2.20 201
1980 24.81 26.38 6.14 2.12
1981 4.05 4.21 20.37 2.33
1982 8.73 11.69 30.77 2.48
1983 6.25 0.58 242.11 2.31
1984 8.41 11.86 158.96 2.50
1985 6.20 12.77 212.11 2.79
1986 2.92 28.22 243.77 2.91
1987 3.63 10.72 7.92 2.89
1988 6.01 5.79 22.56 2.71
1989 4.68 210.27 312.69 2.66
1990 5.09 45.87 26.24 2.25
1991 5.81 28.52 222.21 2.61
1992 8.70 40.68 4.10 2.44
1993 8.08 47.17 26.42 2.30
1994 8.83 14.12 19.65 2.46
1995 9.54 17.07 15.62 2.38
1996 9.34 14.23 22.45 2.50
1997 8.15 9.38 22.27 2.23
1998 5.76 12.63 8.38 2.43
1999 4.77 1.20 23.67 2.50
2000 6.79 10.11 23.30 2.24
2001 6.89 10.77 5.80 2.03
2002 7.08 12.72 10.95 2.23
2003 7.34 11.86 16.18 1.87
2004 7.79 10.54 23.40 2.19
2005 8.43 10.71 15.11 2.13

Average annual rate of growth in 1975-2005 5.74 9.35 16.43 2.39

Average annual rate of growth in 1975-1986 3.66 3.15 9.71 2.41
Average annual rate of growth in 1986-2005 6.97 13.12 20.51 2.37
Sources: Calculations based on data taken from the World Bank’s World Development Indicators
(various years) for labor force; the United Nations (http://unstats.un.org/unsd/snaama/
SelectionCountry.asp) for current GDP; the General Statistical Office (www.gso.gov.vn) and the
United Nations (http://unstats.un.org/unsd/snaama/SelectionCountry.asp) for GDP in 1994 prices and
GDP deflators; the United Nations (http://unstats.un.org/unsd/snaama/SelectionCountry.asp) for Table I.
exchange rates; the General Statistical Office (2000) and the Asian Development Bank’s Key Indicators Growth of GDP,
of Developing Asian and Pacific Countries (various issues) for exports in current US dollars; and the investment, exports and
General Statistical Office (www.gso.gov.vn) and the United Nations (http://unstats.un.org/unsd/ labor (constant 1994 VND
snaama/SelectionCountry.asp) for investment in current and 1994 prices prices, percent)

A quick check of the data on the growth rates of investment and labor reported in
Table I suggests that the high growth rate of investment in the reform period, which
averaged 13.1 percent as compared to a mere 3.2 percent in the pre-reform period, was
likely the main factor behind this outstanding economic performance. There also is the
possibility that GDP growth was fueled significantly by an improvement in total
JES productivity as a result of doi moi, which has exerted positive effects on, among other
35,2 things, resource allocation (partly reflected through the strong performance of the
export sector, which recorded a growth rate of 20.5 percent in the reform period, more
than double that in the pre-reform period; see Table I), as well as production
organization and techniques.
Surprisingly, in spite of a large number of studies that attempt to analyze the effects
202 of doi moi on various aspects of the Vietnamese economy[1], these and other related
important issues have not been discussed rigorously, and the existing literature has
failed to ascertain the contribution of capital, labor, and technological progress to
Vietnam’s economic success. Furthermore, there has been no quantitative study to
measure explicitly the effects of doi moi on economic growth and productivity
improvement in Vietnam.
Against this backdrop, in the present study we rely on annual data[2] to discuss the
following three important questions, among others, in a production function
framework:
(1) To what extent have capital, labor, and technological progress contributed to
economic growth in Vietnam?
(2) What are the impacts of doi moi on economic growth and productivity
improvement?
(3) What has been the marginal productivity of capital and labor?

The rest of the paper is organized as follows. Section 2 reviews some important facts
concerning the Vietnamese economy. In Section 3, attempts are made to build series of
capital stock to be used in production functions. This section also discusses briefly the
growth trend of total productivity throughout the years. In Section 4, the role of capital,
the degree of technological progress, and the marginal productivity of capital and labor
are analyzed in a production function framework. Findings and their implications are
summarized in the final section.

2. Economic performance: some stylized facts

Vietnam was reunited in 1975 after 30 years of war and division. The Communist
government quickly applied a Socialist centrally planned economic system to the
whole country in 1976. Under this system, private ownership was not recognized or
was discriminated against in favor of state and collective ownership. In addition,
emphasis was given to the development of heavy industry at the expense of agriculture
and light industry. As a result, thousands of agricultural cooperatives and production
collectives as well as state-owned enterprises (SOEs) were created within a couple of
years.
Nevertheless, massive state and collective ownership did not bring about the
expected outcomes. The economy stagnated in 1977 and 1978, and even recorded
negative growth rates in 1979 and 1980 (see Table I). This was mainly because of the
deficiencies inherent in the economic model itself. In agriculture, initially the main
economic sector (see Table II), lack of incentives as a result of collectivization, among
other things, had a detrimental effect on agricultural output and productivity in
1975-1979.
In the industrial sector, the government’s ambition for rapid industrialization and
economic growth led to excessive state investment in the development of production
 Vietnam’s
Growth Share
Year Agriculture Industry Construction Others Agriculture Industry Construction Others economic growth
1976 – – – – 39.0 39.2 6.9 14.9
1977 2 5.6 10.8 0.9 4.8 37.0 41.4 6.7 15.0
1978 2 1.9 8.2 2 0.4 4.5 35.2 43.4 6.4 15.0
1979 2.8 2 4.7 2 0.2 2 3.3 36.8 42.0 6.5 14.8 203
1980 6.0 2 10.3 2 0.5 0.7 39.9 38.5 6.5 15.0
1981 3.5 1.0 2 3.0 2.7 40.2 38.4 6.2 15.2
1982 11.3 8.7 2 11.3 6.0 41.6 38.4 5.1 14.9 Table II.
1983 3.3 13.0 13.6 3.7 41.1 39.5 5.3 14.1 Sectoral growth and
1984 5.3 13.2 13.2 15.8 39.1 40.6 5.4 14.8 share in GDP in the
1985 2.5 9.9 9.9 2 0.7 36.0 40.5 6.8 16.7 pre-doi moi period
(constant 1982 VND
Sources: General Statistical Office (1988, 1998), Kim (1994) prices, percent)

capacity. However, the investment efficiency was so low (due mainly to economic
mismanagement, administrative inefficiency, and bureaucratic inertia) that many
development projects were left uncompleted and the capacity utilization rate of others
stood at less than 50 percent (Kim, 1994). Consequently, after a short boom in 1977 and
1978 (10.8 percent and 8.2 percent, respectively; Table II), this sector’s output declined
severely in the two subsequent years (2 4.7 percent and 2 10.3 percent in 1979 and
1980, respectively).
Poor performance in agriculture and industry, combined with the great economic
costs incurred by Vietnam’s invasion of Cambodia in December 1978 and its border
war with China in early 1979, had led the country to the edge of collapse, with the
growth rate in GDP turning negative in 1979 and 1980 (2 1.9 percent and 2 4.8 percent,
respectively).
Faced with such a so-called economic crisis, the government had no choice but to
adjust its development model. A greater degree of private ownership was allowed and
several new economic policies, which in essence were piecemeal reform measures
aimed toward market disciplines, were introduced in 1981 to encourage all economic
agents, including individuals, to actively involve themselves in the production and
circulation of goods. In agriculture, where the reform attempt was boldest, forced
collectivization was suspended and an output contract system was adopted, giving
individual peasant households more autonomy in production and the right to sell their
surpluses on the open market. In addition, they were allowed to cultivate land not in
use by cooperatives. These limited reform measures immediately brought about a
short-term improvement in this sector’s performance (Table II). Agricultural output
increased impressively in the following year at a rate of 11.3 percent, before slowing
down in 1983 and 1984.
Similarly, there were also some experimental reform measures in the industrial
sector in 1981. Industrial SOEs were given more autonomy in their production and
were allowed to involve themselves in other productive activities outside state
obligations. Material incentives were also applied to improve workers’ productivity.
The result of this decentralization in economic management was very encouraging,
with industrial output recording a rate of growth of nearly 9 percent in 1982, and a
much higher rate in 1983 and 1984 (above 13 percent).
JES The improved performance of agriculture and, in particular, industry fueled the
35,2 recovery and growth of the whole economy through 1984[3]. GDP expanded at a rate of
4 percent in 1981, and more than twice that rate in 1982 (8.7 percent). After a slight
slowdown in 1983 (6.3 percent), growth gained momentum again and reached a level of
8.4 percent in 1984.
However, the positive effects on the economy brought about by these piecemeal
204 reform measures wore off in the mid-1980s because the deep structural problems of the
economy remained unsolved. In practice, the country’s leaders strongly defended
Socialist disciplines in their development strategy while allowing for some
microeconomic market-oriented reforms, as mentioned above. The economy
continued to be centrally planned and the state sector continued to be subsidized
heavily despite its low efficiency and the searing size of budget deficits, which were
estimated at about 37 percent of total budget revenue in 1985 (General Statistical
Office, 1988). Wide-scale collectivization resumed in 1985, particularly in the South.
As a result, agriculture, and particularly industry, showed significant slowdowns in
1985 and 1986 (2.5 percent and 4.8 percent for agriculture, 9.9 percent and 6.2 percent
for industry, respectively; see Table II). Correspondingly, the growth rate of GDP fell in
these two years, most considerably in 1986 (6.2 percent and 2.9 percent, respectively),
as compared to 8.4 percent in 1984.
The economic difficulties in 1985-1986 prompted the government to accept even
more radical measures to reform the economy. A comprehensive reform program, doi
moi, was introduced in December 1986. In this program, among other things, the
development of the private sector was emphasized; the strategy for industrialization
was altered in that priority was given to the development of light industry instead of
heavy industry as before; exports and inward foreign direct investment (FDI) were
encouraged; and the role of SOEs was reduced. It should be noted that in the first two
years of the reform period (1987 and 1988) only part of the reform program was
implemented, on a gradual basis. However, the early improvement in economic
performance brought about by the reform measures in these years, together with
pressing external developments in the late 1980s (e.g. the collapse of the Soviet Union
and the corresponding loss of major traditional export markets, as well as cheap
imports and aid), prompted the government to implement a more radical,
comprehensive reform program in 1989 with a “big bang” approach.
As shown in Tables I and III, the economy recovered quickly from the 1985-1986
recession, with GDP expanding by 3.6 percent in 1987 and 6 percent in 1988. Due to the
collapse of the Soviet Union in 1989, manufacturing was badly affected, and the growth
rate of GDP slowed down again, to 4.7 percent. As a result of the 1989 reform program,
the economy entered a new development phase in which high and sustained growth
was achieved until 1997. Significant slowdowns were seen in 1998 and 1999, though at
respectable rates of 5.8 percent and 4.8 percent, respectively, compared with the
negative growth rates of some neighboring countries badly hit by the region’s financial
crisis. Most observers have argued that the 1997 regional crisis was directly
responsible for the slowdowns in GDP growth in 1998-1999 (see, for example, the
World Bank’s, World Development Indicators, 1998). GDP growth was over 7 percent in
recent years, which was relatively high in the dynamic Asian region.
We now turn to compare the structure of the economy in terms of sectoral share and
expenditure on GDP in the pre-reform and reform periods. Much of the high growth of
 Vietnam’s
Mining, Other
Period Agriculture utilities Manufacturing Construction Trade Services activities economic growth
1986 3.6 13.1 13.1 6.4 2 2.5 22.8 2 1.4
1987 22.1 10.1 10.6 2 1.9 2.3 1.8 5.4
1988 20.6 2 4.6 21.0 8.5 19.3 22.4 8.9
1989 6.7 2 3.9 212.4 3.9 4.1 0.0 14.3 205
1990 1.6 2.5 25.8 4.6 5.3 5.2 14.6
1991 2.2 13.7 10.3 4.8 4.8 6.3 6.2
1992 7.1 10.2 11.8 11.1 6.1 6.3 12.2
1993 3.8 12.2 10.4 18.3 6.0 6.3 9.8
1994 3.9 12.7 10.1 19.5 9.0 7.1 8.6
1995 4.8 13.9 13.5 12.7 11.1 10.1 8.6
1996 4.4 13.9 13.6 16.0 9.9 7.3 8.0
1997 4.3 13.1 12.8 11.4 6.9 8.8 7.0
1998 3.5 11.3 10.2 2 0.5 4.4 3.8 6.0
1999 5.2 9.3 8.0 2.4 2.1 6.5 1.6
2000 4.6 10.8 11.7 7.6 5.9 5.9 4.6
2001 3.0 9.8 11.3 12.8 7.0 6.5 5.0
2002 4.2 9.2 11.6 10.4 7.2 7.2 5.7
2003 3.6 10.4 11.6 10.8 6.6 5.3 6.5
2004 4.4 10.6 10.8 8.9 7.8 8.3 6.4
2005 4.1 10.6 13.2 10.9 9.7 9.8 6.8 Table III.
Sectoral growth in the doi
Source: United Nations web site (http://unstats.un.org/unsd/snaama/SelectionCountry.asp; accessed moi period (constant 1990
April 1, 2007) VND prices, percent)

GDP in the reform period can be attributed to the rapid growth of mining and utilities
and construction, as well as manufacturing (Table III). In contrast, if in the pre-reform
period the agriculture sector grew at a rate slightly higher than the whole economy, it
grew most slowly in the reform period. As a result, the share of agriculture in GDP was
on a steadily decreasing trend, from an average of 37 percent in the pre-reform period
to about 22 percent in recent years, demonstrating a significant change in the structure
of the economy (Table IV).
With regard to the structure of expenditure on GDP, during the pre-reform period,
the share of consumption in real GDP was astonishingly high, almost 100 percent of
GDP (Table V). The share of capital formation was relatively low, at 13 percent. Thus,
the fact that consumption was almost equal to GDP in this period indicates that the
country’s investment was totally financed by foreign aid and borrowing, as
represented by an average trade deficit of a little over 10 percent of GDP[4]. Put
differently, domestic savings were totally non-existent.
In the reform period, the picture changed considerably. Although consumption
continued to increase at an average growth rate of 5.2 percent, which was higher than
in the previous period (3.7 percent)[5], its rate of growth was slower than that of GDP
growth (7 percent). As a result, the average share of GDP devoted to consumption
contracted significantly to 83.1 percent[6]. Nevertheless, this contraction was not
sufficiently large to cover the high rate of capital formulation, which averaged 14.7
percent in this period, as compared to a mere 3.2 percent in the pre-reform period
(Table I). This means that a large part of this growth was still financed by foreign
resources, as represented by a large trade deficit recorded until recently (Table V).
 JES
35,2

206

Table IV.

prices, percent)
the doi moi period
(constant 1990 VND
Sectoral share in GDP in
Year/period Agriculture Mining, utilities Manufacturing Construction Trade Services Other activities

1975-1985 37.60 18.24 13.60 3.36 13.70 2.81 10.69

1986 37.69 18.69 13.94 3.42 13.23 2.71 10.33
1987 35.68 19.90 14.90 3.23 13.09 2.67 10.53
1988 34.42 18.42 14.31 3.41 15.15 3.17 11.12
1989 35.96 17.32 12.27 3.46 15.44 3.11 12.44
1990 35.38 17.20 11.19 3.51 15.75 3.15 13.82
1991 34.01 18.41 11.62 3.47 15.53 3.16 13.80
1992 33.45 18.63 11.93 3.54 15.14 3.09 14.23
1993 32.18 19.35 12.20 3.88 14.86 3.05 14.48
1994 30.82 20.10 12.39 4.27 14.93 3.00 14.49
1995 29.45 20.88 12.82 4.39 15.12 3.01 14.34
1996 28.08 21.72 13.30 4.65 15.16 2.95 14.14
1997 26.97 22.61 13.82 4.77 14.93 2.95 13.94
1998 26.22 23.63 14.30 4.45 14.64 2.88 13.87
1999 26.15 24.46 14.64 4.32 14.17 2.90 13.35
2000 25.45 25.21 15.20 4.32 13.96 2.86 12.99
2001 24.43 25.78 15.78 4.54 13.92 2.84 12.71
2002 23.64 26.16 16.36 4.67 13.87 2.83 12.48
2003 22.71 26.78 16.93 4.79 13.71 2.76 12.32
2004 21.91 27.38 17.34 4.82 13.66 2.76 12.12
2005 20.92 27.78 18.00 4.90 13.76 2.78 11.87
Source: United Nations web site (http://unstats.un.org/unsd/snaama/SelectionCountry.asp; accessed April 1, 2007)
 Vietnam’s
Year/period Consumption Gross capital formation Exports less imports
economic growth
1975-1987 98.98 13.00 2 10.06
1988 98.44 12.07 2 12.73
1989 98.10 10.35 2 9.21
1990 97.09 14.36 2 9.24
1991 94.97 12.40 2 4.40 207
1992 91.12 16.05 2 3.30
1993 87.98 21.86 2 8.03
1994 84.85 22.92 2 8.83
1995 83.14 24.50 2 8.55
1996 82.83 25.59 2 8.72
1997 80.97 25.88 2 6.96
1998 79.88 27.56 2 7.64
1999 77.61 26.62 2 4.35
2000 75.04 27.45 2 2.85
2001 73.47 28.45 2 3.17
2002 73.70 29.94 2 5.93
2003 74.11 31.21 2 8.38
2004 73.75 32.03 2 7.27 Table V.
2005 71.42 31.90 2 3.19 GDP by type of
expenditure – percentage
Source: United Nations web site (http://unstats.un.org/unsd/snaama/SelectionCountry.asp; accessed distribution (constant
April 1, 2007) 1990 VND prices)

3. Capital stock and total productivity

Because a production function framework is adopted to analyze the effects of changes
and shocks on the Vietnamese economy, it is crucial to have data on capital stock that
is not readily available from the existing sources. In this paper we estimate capital
stock in year t (or Kt) from the following function:

K t ¼ K t21 þ I t ; ð1Þ

where K t21 is the capital stock in the previous year and It is the net increase in capital
stock in year t. The data on investment from the General Statistical Office and the
United Nations sources is, by definition, It. We thus need to compute only the capital
stock in the initial year, 1975, (denoted by K75) from the following function:

K 75 ¼ k75 *Y 75 ; ð2Þ

where k75 is the capital-output ratio (COR) and Y75 is the level of GDP in 1975.
To estimate k75, we assume that Vietnam’s COR in 1975 was equal to that of China
in the early 1970s. The rationale is that the Chinese economy was also an agrarian,
centrally planned economy, with agriculture accounting for around 40 percent of GDP
in the early 1970s, on a par with that in Vietnam (see Table II). Therefore, the nature
and structure of the Vietnamese economy at least through doi moi were similar to a
large extent to those of the Chinese economy in the early 1970s. Since the COR estimate
for China in the early 1970s was around 2, as estimated in Wang and Yao (2003), we
assign this value to k75 in equation (2) and obtain the first series of capital stock data
(denoted by K2 in Table VI) from equation (1) for the period 1975-2003.
JES
Value Growth
35,2 Year K1 K2 K3 K1 K2 K3

1975 73,558 147,117 220,675 – – –

1976 83,970 157,529 231,087 14.15 7.08 4.72
1977 94,547 168,105 241,664 12.60 6.71 4.58
208 1978 105,419 178,977 252,536 11.50 6.47 4.50
1979 116,236 189,794 263,353 10.26 6.04 4.28
1980 126,362 199,921 273,479 8.71 5.34 3.85
1981 136,915 210,473 284,032 8.35 5.28 3.86
1982 148,702 222,260 295,819 8.61 5.60 4.15
1983 160,557 234,116 307,674 7.97 5.33 4.01
1984 173,819 247,378 320,936 8.26 5.66 4.31
1985 188,775 262,333 335,892 8.60 6.05 4.66
1986 202,501 276,059 349,618 7.27 5.23 4.09
1987 217,698 291,257 364,815 7.50 5.51 4.35
1988 233,775 307,334 380,892 7.39 5.52 4.41
1989 248,202 321,760 395,319 6.17 4.69 3.79
1990 269,246 342,804 416,363 8.48 6.54 5.32
1991 288,497 362,055 435,614 7.15 5.62 4.62
1992 315,578 389,137 462,695 9.39 7.48 6.22
1993 355,435 428,994 502,552 12.63 10.24 8.61
1994 400,918 474,477 548,035 12.80 10.60 9.05
1995 454,167 527,726 601,284 13.28 11.22 9.72
1996 514,993 588,552 662,110 13.39 11.53 10.12
1997 581,522 655,081 728,639 12.92 11.30 10.05
1998 656,453 730,012 803,570 12.89 11.44 10.28
1999 732,283 805,842 879,400 11.55 10.39 9.44
2000 815,779 889,338 962,896 11.40 10.36 9.49
2001 908,266 981,825 1,055,383 11.34 10.40 9.61
2002 1,012,522 1,086,081 1,159,639 11.48 10.62 9.88
2003 1,129,145 1,202,704 1,276,262 11.52 10.74 10.06
Table VI. 2004 1,258,061 1,331,620 1,405,178 11.42 10.72 10.10
Estimated capital stock 2005 1,400,789 1,474,347 1,547,906 11.35 10.72 10.16
value and growth (VND
billion or percent, Note: K1, K2 and K3 represent series of capital stocks constructed based on the initial
constant 1994 prices) capital-to-output ratio in 1975 being 1, 2 and 3, respectively

However, realizing the possible inaccuracy of the initial estimate, we also estimate a
range of possible values of the initial capital stock based on the experience of other
developing countries (see, for example, the case of Indonesia examined in Sundrum,
1986, and King and Levine, 1994, and the case of Slovenia in Mrkaic, 2002), and use this
range to estimate our production functions. More specifically, we assign two other
smaller and greater values, namely 1 and 3, to k75 and obtain two additional series of
capital stock data denoted by K1 and K3, as reported in Table VI. As such, K1 and K3
can be considered as the lower and upper bounds, respectively, of the capital stock.
It should be noted that K3 is very unlikely to be appropriate for the case of the
Vietnamese economy, as it is constructed based on k75 bearing a value of 3 in 1975,
which seems to be too high for a developing economy based heavily on agriculture and,
most notably, just escaping from a sabotaging war like Vietnam in 1975. Nevertheless,
K3 can still be useful and, thus, worth being considered here in that significant
technological progress might only be detected when the growth rate of capital stock is Vietnam’s
not overwhelmingly large. Put differently, here we have three series of capital stock economic growth
that show different (decreasing) rates of growth; the growth rates of capital stock were
largest with K1 (the lower bound), second largest with K2, and smallest with K3 (the
upper bound). This means that the contribution of capital stock to GDP growth was
smallest and the contribution of technological progress was correspondingly largest
with K3 (see more on this point in the conclusion section). If we, say, fail to detect 209
significant technological progress even with K3 being used, we can safely conclude
that the Vietnamese economy grew without benefiting from technological progress
throughout the studied period.
Plotting log(GDP/labor) against log(capital/labor) as in Figure 1, which is
constructed for K2, the most reasonable value of capital stock, we can see how
significant changes in total productivity and thus technological progress has been over
the years[7].
The fact that the points in Figure 1 are fairly close to a straight line (except the
points from 1975-1980, due to the great upheaval of the 1979-1980 economic crisis that
caused a setback in capital formation in this period; see Table I) suggests that
productivity improved insignificantly throughout most of 1975-2005. This would also
mean that significant technological progress was absent in Vietnam during this period.
We shall get back to this issue later.

4. Aggregate production functions

We begin this section by considering a Cobb-Douglas production function in the
following form:

logðY t Þ ¼ a þ a logðK t Þ þ b logðLt Þ þ dT1; ð3Þ

where the denotation is as before, and T1 is a linear trend included to test the
assumption that total productivity increased at a constant rate throughout the period
1975-2003. The three series of capital stock built earlier (K1-K3) will be inserted

Figure 1.
Capital stock and total
productivity, 1975-2005
(For data sources,
see Table I
JES interchangeably into equation (3) to represent Kt. The annual data on Yt in 1975-2005
are obtained from the sources cited in Table I, while the data for labor force are from
35,2 the World Bank’s World Development Indicators (CD-ROM, various years).
Since we interpret the estimated Cobb-Douglas production functions as long-term
relations among the output and input variables, we adopt the method used in several
studies of this type, including that of Chow and Lin (2002), and first perform a set of
210 unit root and co-integration tests for the variables. The unit root tests, reported in
Table VII, show that the null hypothesis of unit roots is not rejected for all variables
under examination at the standard 5 percent level of significance.
We turn to test for co-integration, using the Johansen co-integration test, with the
intercept in the co-integration test specifications. Our tests are confined to the
regressions reported in Table VIII.
In the preliminary estimates of equations in Table VIII, it is found that the OLS
regressions have very low Durbin-Watson statistics (ranging from 0.2 to 0.6). Both
Ljung-Box and Breusch-Godfrey Lagrange multiplier tests for serial correlation
suggest that second- and fourth-order serial correlations are present[8]. We adopt
nonlinear regression techniques to account for these autocorrelations and obtain the
estimated equations as shown in Table VIII[9]. Note that the Durbin-Watson statistics
now are close to 2 in all but regressions 7-10.
The results of the Johansen co-integration test reported in Table VIII (regressions
1-6) under the heading “Johansen test” show that the following two sets of variables are
not cointegrated at the 5% level of significance:
(1) log(Y), log(K1), log(L); and
(2) log(Y/L), log(K3/L).

Therefore, we can conclude that the regressions based on these specifications

presented in Table VIII are non-stationary co-integrated relations, and thus can be
dropped from the table (with the exception of regressions 1, 7, 12, and 17, which are
kept in order to test the assumption of constant returns to scale conducted in the
following paragraph).
In Table VIII, we also report the p-value for rejecting the assumption that the capital
and labor exponents sum to 1, under the heading “CRS test”. As reported, the
hypothesis that the capital and labor exponents sum to 1 cannot be rejected for all but
regressions 16 and 21 at the 5 percent level of significance or greater. Under the
assumption of constant returns to scale, the estimates are given in regressions 2, 4, 8,
10, 13, 15, 18, and 20. It is confirmed in these regressions that significant technological
progress was absent in Vietnam throughout 1975-2005, because the coefficients of T1
are not statistically significant even at the 10 percent level (regressions 2 and 4).
Even if we replace T1 with T2, a time trend for the 1989-2005 period (the period of
bold reforms), as in regressions 8-11, based on the assumption that significant
technological progress was only present in the radical reform period as a result of
reform measures’ favorable effects, the coefficient of this variable is still insignificant.
Table VII.
ADF test statistics (with log(K1/L) log(K2/L) log(K3/L) log(Y/L) log(K1) log(K2) log(Y) log(L)
trend and intercept
included in test equations) 22.2784 21.717 21.471 22.985 2 2.278 2 2.015 2 3.293 2 1.009
 Coefficient on
Dependent CRS test Adjusted
Regression variable K C log(K/L) log(K) log(L) T1 AR(1) AR(2) ( p-value) R2 DW-statistic F-statistic Johansen test

1 log(Y) K1 118.194 0.800 2.368 -0.071 1.235 -0.504 0.429 0.999 1.939 4,729.03 Not
co-integrated
2 0.408 2 0.015 2 0.344 2 0.412 (0.0000) 2 0.002
2 log(Y/L) K1 8.878 0.608 2 0.004 1.236 2 0.487 0.997 1.963 2,256.90 Co-integrated
2 0.750 2 0.003 2 0.757 (0.0000) (0.0016)
3 log(Y) K2 164.835 0.778 4.388 2 0.105 1.198 2 0.606 0.110 0.999 2.130 5,057.89 Co-integrated
(0.1505) (0.0001) (0.0752) (0.1420) (0.0000) (0.0007)
4 log(Y/L) K2 2 21.421 0.511 0.011 1.238 2 0.534 0.997 2.007 2,275.99 Co-integrated
(0.1436) (0.0004) (0.1475) (0.0000) 2 0.001
5 log(Y) K3 149.847 0.738 4.585 2 0.098 1.188 2 0.621 0.167 0.997 2.169 1,888.38 Co-integrated
(0.1419) (0.0000) 2 0.117 (0.1261) (0.0000) (0.0005)
6 log(Y/L) K3 2 35.433 0.479 0.018 1.243 2 0.545 0.997 2.009 2,239.63 Not
co-integrated
(0.0029) (0.0004) (0.0035) (0.0000) (0.0008)

C log(K/L) log(K) log(L) T2 AR(1) AR(4)

7 log(Y) K1 2 461.629 2 1.286 2 1.851 0.256 0.711 2 0.295 0.169 0.999 1.977 3,218.10 Not
co-integrated
2 0.125 2 0.289 2 0.408 2 0.124 0.000 2 0.010
8 log(Y/L) K1 2 210.938 2 0.661 0.107 0.515 2 0.382 0.998 1.800 1,619.07 Co-integrated
(0.1459) (0.4004) (0.1454) (0.0011) (0.0187)
9 log(Y) K2 137.534 1.744 2 1.905 2 0.064 0.859 2 0.100 0.778 0.998 1.343 1,594.05 Co-integrated
(0.8055) (0.5382) (0.5032) (0.8311) (0.1647) (0.6180)
10 log(Y/L) K2 216.202 2.021 2 0.110 0.879 2 0.111 0.997 1.371 1,029.01 Co-integrated
(0.4635) (0.2709) (0.4629) (0.0476) (0.4103)
11 log(Y) K3 200.328 2.208 2 1.917 2 0.099 0.802 2 0.053 0.849 0.999 1.381 1,650.26 Co-integrated
(0.6915) (0.4407) (0.5087) (0.7159) (0.2131) (0.8309)

C log(K/L) log(K) log(L) T1 AR(1) AR(2)

12 log(Y) K1 1.298 0.583 0.312 0.002 1.232 2 0.481 0.838 0.999 1.963 4,573.79 Not
co-integrated
(0.7941) (0.0010) (0.6411) (0.9055) (0.0000) (0.0021)
13 log(Y/L) K1 0.279 0.551 0.000 1.227 2 0.472 0.997 1.946 2,246.56 Co-integrated
(0.0003) (0.0000) (0.9801) (0.0000) (0.0011)
14 log(Y) K2 2 4.044 0.529 0.881 0.000 1.231 2 0.534 0.156 0.999 2.008 4,695.25 Co-integrated
(0.1367) (0.0001) (0.0324) (0.9924) (0.0000) (0.0010)
(continued)

Cobb-Douglas production
Vietnam’s

functions
economic growth

Table VIII.
211
 JES
35,2

212

Table VIII.
Coefficient on
Dependent CRS test Adjusted
Regression variable K C log(K/L) log(K) log(L) T1 AR(1) AR(2) ( p-value) R2 DW-statistic F-statistic Johansen test

15 log(Y/L) K2 2 0.217 0.690 0.013 1.295 2 0.604 0.997 2.000 2,071.77 Co-integrated
(0.0053) (0.0000) (0.4709) (0.0000) (0.0002)
16 log(Y) K3 2 6.915 0.514 1.167 2 0.002 1.236 2 0.549 0.004 0.999 2.009 4,664.40 Co-integrated
(0.0017) (0.0000) (0.0011) (0.9352) (0.0000) (0.0009)
17 log(Y) K1 1.042 0.576 0.345 1.232 2 0.480 0.863 0.999 1.957 5,962.11 Not
co-integrated
(0.8138) (0.0004) (0.5654) (0.0000) (0.0017)
18 log(Y/L) K1 0.278 0.551 1.227 2 0.472 0.997 1.946 3,120.14 Co-integrated
(0.0002) (0.0000) (0.0000) (0.0008)
19 log(Y) K2 2 4.056 0.529 0.882 1.232 2 0.534 0.110 0.999 2.007 6,124.22 Co-integrated
(0.0926) (0.0000) (0.0181) (0.0000) (0.0008)
20 log(Y/L) K2 2 0.238 0.700 1.323 2 0.615 0.997 1.934 2,819.15 Co-integrated
(0.0020) (0.0000) (0.0000) (0.0001)
21 log(Y) K3 2 6.837 0.517 1.156 1.235 2 0.550 0.001 0.999 2.016 6,082.27 Co-integrated
(0.0005) (0.0000) (0.0004) (0.0000) (0.0007)
Notes: Figures in parentheses are p-values. AR(1), AR(2) and AR(4) represent the values of serial correlation coefficients under second- and fourth-order serial correlation processes. T1 is
a time trend for the 1975-2005 period. T2 is a time trend for the 1989-2005 period. DM is a dummy for doi moi, taking a value of 0 from 1975 to 1988 and 1 from 1989 to 2005. CRS test is the
test for the hypothesis that the capital and labor exponents sum to 1. The Johansen test is the test for co-integration
This suggests that doi moi did not induce significant technological changes and total Vietnam’s
productivity improvement. Note further that a higher order of serial correlation (four) is economic growth
present, and AR(2) is therefore replaced by AR(4) in these regressions.
To confirm the possible effects of doi moi on the economy, we introduce DM, a dummy
that takes a value of 0 for 1975-1988 and 1 for 1989-2005, into the regression analysis. The
results, reported in regressions 12-16, also indicate that doi moi did not have the expected
effects on GDP in terms of growth generation when other factors are controlled for, as the 213
coefficient of DM is not statistically significant in all of these regressions.
This is also consistent with the finding in the previous regressions that doi moi did
not cause a significant change in technological progress that would lead to improved
productivity in the economy. We therefore proceed to regressions 18-21, which include
no time trend, and obtain estimates of coefficients of capital and labor, among other
things, in order to compute the marginal productivity of capital and labor as shown in
Table IX. Note that the assumption of constant returns to scale holds for K1 and K2,
but not K3. We shall therefore use the coefficients of capital and labor as given in
regressions 18, 20, and 21 for computations in Table IX.
The estimates of marginal productivity of capital show a steady decline throughout
the studied period[10]. Both the absence of technological progress and increased capital
stock could be the major factors working towards reducing capital productivity. Note
also that the marginal productivity of capital has reached a fairly low level recently.
This implies that Vietnam is using capital at a level close to its long-term equilibrium.
In other words, the country has very limited room for absorbing more capital from both
domestic and foreign sources, if other things remain unchanged[11].
On the other hand, the marginal productivity of labor shows different trends
throughout the period studied, depending on the value of the initial capital stock under
examination. With K1, we observe that the marginal productivity of labor steadily
decreased in the whole period. In contrast, with K2 and K3, this index decreased until
1982 and then increased slightly through the early 1990s or so, before decreasingly
steadily in the years after that. Perhaps changes in the general wage rate following
several significant basic wage rate adjustments by the government were the main
factor behind the increases in the marginal productivity of labor.
Table IX also reports the deviations of actual GDP from the estimates by regressions
18, 20, and 21 shown in Table VIII as fractions of the latter[12]. With a few exceptions,
the economy underperformed throughout the 1980s and the early 1990s, and the loss of
GDP was quite considerable in several years, particularly in the early 1980s. Total
productivity only improved slightly after 1992 or so, most notably in the mid-1990s, but
deteriorated again from 1999 onwards. This finding is consistent with the observation in
Figure 1 that the slope of the points from 1999 onwards is slightly smaller than the slope
of the points before 1999. Once again, the marginal effect of doi moi on productivity
improvement and the absence of technological changes are confirmed.
In Table X, we consider the three periods 1975-1986, 1986-2005 and 1975-2005, and
show the following decomposition of the GDP growth rate[13]:

Estimated g Y ¼ a*g K þ b*gL ;

or:

S ¼ K þ L; ð4Þ
JES
Marginal value of product Marginal value of product Percentage deviations of
35,2 of capital of labor GDP
Year K1 K2 K3 K1 K2 K3 K1 K2 K3

1975 0.551 0.350 0.172 0.449 0.150 0.385 30.9 12.5 14.8
1976 0.514 0.348 0.175 0.418 0.149 0.391 28.0 13.3 16.1
214 1977 0.465 0.332 0.171 0.378 0.142 0.382 21.1 9.6 12.7
1978 0.429 0.321 0.168 0.349 0.137 0.376 16.2 7.2 10.5
1979 0.382 0.297 0.158 0.311 0.127 0.354 6.9 0.3 3.4
1980 0.335 0.269 0.145 0.272 0.115 0.324 23.7 28.5 2 5.8
1981 0.321 0.265 0.145 0.261 0.114 0.325 25.1 28.8 2 6.4
1982 0.322 0.273 0.152 0.262 0.117 0.339 22.5 25.2 2 3.1
1983 0.316 0.276 0.155 0.257 0.118 0.346 21.7 23.6 2 1.8
1984 0.317 0.283 0.161 0.258 0.121 0.360 0.9 20.2 1.3
1985 0.310 0.283 0.163 0.252 0.121 0.365 1.1 0.9 1.8
1986 0.297 0.277 0.161 0.242 0.119 0.361 21.2 20.6 2 0.8
1987 0.287 0.272 0.160 0.233 0.116 0.359 22.8 21.7 2 2.7
1988 0.283 0.273 0.163 0.230 0.117 0.364 22.2 20.4 2 2.2
1989 0.279 0.273 0.164 0.227 0.117 0.367 22.1 0.2 2 2.5
1990 0.270 0.270 0.164 0.220 0.115 0.366 22.6 0.0 2 2.8
1991 0.267 0.270 0.166 0.217 0.116 0.371 21.9 1.1 2 2.5
1992 0.265 0.273 0.170 0.216 0.117 0.379 0.4 2 3.7 2 0.1
1993 0.254 0.268 0.169 0.207 0.115 0.377 0.6 4.0 0.8
1994 0.246 0.264 0.168 0.200 0.113 0.377 1.3 4.7 2.0
1995 0.237 0.260 0.168 0.193 0.111 0.376 2.5 5.7 3.6
1996 0.229 0.254 0.167 0.186 0.109 0.373 3.5 6.3 4.8
1997 0.219 0.247 0.164 0.178 0.106 0.367 3.6 5.9 5.1
1998 0.205 0.235 0.157 0.167 0.100 0.352 1.4 3.1 2.8
1999 0.193 0.223 0.151 0.157 0.095 0.337 21.1 0.1 2 0.1
2000 0.185 0.216 0.147 0.150 0.092 0.329 21.5 20.9 2 0.8
2001 0.178 0.209 0.143 0.144 0.089 0.320 21.6 21.8 2 1.2
2002 0.171 0.202 0.140 0.139 0.086 0.312 21.8 22.7 2 1.7
2003 0.164 0.196 0.136 0.134 0.084 0.305 21.5 23.3 2 1.7
2004 0.159 0.191 0.133 0.129 0.082 0.298 21.0 23.5 2 1.7
2005 0.155 0.187 0.131 0.126 0.080 0.294 0.3 23.2 2 1.1
Table IX. Notes: Calculations based on the results of regressions 18, 20, and 21 as given in Table VIII. Marginal
Marginal productivity productivity is measured in VND/VND a year (capital) and VND million/person per year (labor), using
and percentage 1990 VND prices. Marginal productivity of capital and labor are computed from the following
deviations of GDP equations: marginal productivity of capital ¼ aY =K, marginal productivity of labor ¼ bY =L

where the g’s are the exponential growth rates computed from the cited sources (for
GDP and labor) and Table VI (for capital), and the coefficients of capital and labor are
derived from regressions 18, 20, and 21 of Table VI.
As shown in Table X, the great importance of capital to GDP growth (contributing
between 83 percent and 90 percent% to GDP growth) is confirmed if K1 and K2
(regressions 18 and 20) are taken into consideration. The role of capital is less
significant (generating over 44 percent of GDP growth in the three periods) if K3 is
used (regression 21).
As emphasized earlier, the 1975 capital-output ratio (k75) bearing the value of 3
seems to be inappropriate for Vietnam; we are inclined to accept that K1 and K2 are
 Vietnam’s
Contribution
Sources of growth to growth economic growth
(exponential rates) (percent)
Regression number (Table VIII) Sample period K L S K L

18 1975-1986 0.0532 0.0108 0.0640 83.1 16.9

1986-2005 0.0591 0.0106 0.0697 84.7 15.3 215
1975-2005 0.0569 0.0107 0.0676 84.2 15.8
20 1975-1986 0.0412 0.0072 0.0485 85.1 14.9
1986-2005 0.0646 0.0071 0.0717 90.1 9.9
1975-2005 0.0559 0.0072 0.0631 88.7 11.3
21 1975-1986 0.0221 0.0279 0.0500 44.2 55.8 Table X.
1986-2005 0.0421 0.0274 0.0695 60.6 39.4 Sources of and
1975-2005 0.0347 0.0276 0.0623 55.7 44.3 contribution to GDP
growth for different
Note: K, capital; L, labor; S, sum of estimates sample periods

more reasonable for representing capital stock in the Vietnamese economy in the
period studied. If so, this implies that, as also shown in Table X, the contribution of
labor was relatively small in Vietnam and became even smaller in the reform period
than in the previous period. Besides the reason that the labor force grew at a decreasing
rate (Table I), the modest contribution of labor to GDP growth was also due to the
relatively small exponent of labor in the production function (ranging from 0.3 to 0.45,
deriving from regressions 18 and 20; Table VIII), and the exponent of labor shows a
downward trend in general (Table IX). The rationale for the low estimates of labor
exponents is that the elasticity of output with respect to labor was low because labor is
abundant in the country[14]. It is argued that the ratio of capital to labor will increase
and labor will not be in such abundance. However, the fact is that the abundance of
labor has persisted in Vietnam after nearly two decades of rapid growth from 1987.
This is reflected in the finding on high underemployment and unemployment rates in
the country, particularly in rural areas (see, for example, Haughton et al., 2001).

5. Conclusions
In this paper we have estimated different production functions for Vietnam at the
aggregate level using official annual data on real GDP, labor force, and gross capital
formation, and assuming different initial values of capital stock. We have shown in this
paper that, with some exceptions, Cobb-Douglas production functions with constant
returns and constant capital and labor exponents can explain the data on GDP growth
in Vietnam in 1975-2005. The statistics of the estimated production functions have
revealed several interesting first-hand pieces of information and policy implications
concerning the Vietnamese economy that can be summarized as follows.
Capital formation was the major source of economic growth in the country
throughout the study period, particularly in the reform period. The capital exponent
ranges from 0.55 to 0.7. Capital contributed between 84 percent and 89 percent and
between 85 percent and 90 percent to GDP growth in 1975-2005 and 1986-2005,
respectively.
Significant technological progress was statistically absent in the growth of the
Vietnamese economy from 1975 to 2005. The conclusion that there was no significant
JES technological progress, even in the presence of high growth of capital formation as seen
35,2 in the reform period, is itself interesting.
Since the absence of technological progress in Vietnam in 1975-2005 is a major
conclusion of this paper, and that conclusion is reached by a regression analysis using
the Cobb-Douglas production function with an exponential trend included, we need to
look at the data differently and check the robustness of this conclusion. It is very likely
216 that official data on capital formation may have been overestimated due to the low
depreciation rates employed. Overestimation of capital stock growth would lead to the
underestimation of technological progress. However, this possibility is irrelevant in
this paper because we have tried three different initial values of capital stock that
correspond to three decreasing sets of rates of capital accumulation (Table VI), and the
conclusion regarding the absence of technological progress remained unchanged.
On the other hand, because of the high correlation between the capital stock and the
trend variables, it might be difficult to sort out their relative importance in explaining
the growth of GDP in time-series analysis. Nevertheless, our time-series data did
eliminate the trend variable as insignificant while maintaining the significance of the
capital stock variable.
One may want to ask why technological progress was absent in Vietnam from 1975
to 2005. As reviewed earlier, in the pre-reform period the government tried to build a
Soviet-style, centrally planned, self-sufficient economic system in the country. But it is
an accepted fact that such a system has often been associated with inefficiency and
lack of incentives for firms to innovate or adopt new technologies from abroad. In
addition, the country was isolated from the international community due to its invasion
of Cambodia in 1978. Therefore, it is obvious that technological progress was absent in
this period in Vietnam.
In the reform period, one may argue that technological progress must have been
present in the country, given, among other things, a large influx of FDI and an export
boom, which are two main channels conducive to technological innovation. But as
pointed out by Phan et al. (2003), who examine the causal relationship between export
expansion and long-term growth in Vietnam in 1975-2002, the expected gains of
dynamic effects, including accelerated technological progress, from export expansion
have been very limited in Vietnam. This is because of problems in, for example, export
structure, trade and industrial policies, linkage between export promotion and
industrialization, as well as the inefficient allocation of resources to the export sector.
On the effects of FDI on technological progress, Foster and McCarty (2001) and
especially Phan (2004), who uses a rich set of foreign project-level data from 1988 to
2001 in his analysis, show that a large portion of FDI has been attracted to industries
that are heavily protected and/or promoted by tariff and tax policies. Firms operating
in these industries are frequently domestic market seekers, internationally
uncompetitive, and not exposed to the option of “renovation or death”. These are
most likely the reasons for the finding in Phan (2004) and Phan and Ramstetter (2004)
that foreign firms were not clearly more productive and efficient than local firms in
Vietnam in the last decade. It is concluded in this context that the role of FDI in
accelerating technological progress is fairly limited.
It is also important to note that SOEs remained significant in many industries until
recently, despite the government’s efforts to restructure and privatize this sector. Phan
and Ramstetter (2004) show that SOEs accounted for nearly 40 percent of GDP, 50
percent of industrial sales, and 52 percent of national fixed assets in 2000. More Vietnam’s
importantly, as pointed out by UNIDO and DSI (1999) and the International Monetary economic growth
Fund (1999), more than half of SOEs are loss makers because they are badly managed,
inefficient, non-productive, and uncompetitive. The existence of most SOEs relies on
government protection and subsidies in some form. Their existence is, as pointed out
by UNIDO and DSI (1999), dragging down the economy. One can therefore hardly see
where significant technological progress has come from in this situation. 217
The country relied heavily on foreign funds to finance its capital formation
throughout the study period, especially in the pre-reform period. Although this reliance
reduced significantly in the reform period, it still stood at a high and worrying level
(see Table I). More seriously, there is no sign to suggest that this reliance has decreased
consistently until recently. Since the costs of these funds must be repaid some day, the
marginal productivity of capital has almost reached its long-term equilibrium, and the
economy’s efficiency and productivity have not been improved significantly, the
continued heavy reliance of the economy on foreign funds will undoubtedly put a brake
on the growth of income very soon.
Another significant finding is the small exponent for labor, in the range 0.3-0.45,
which can be interpreted as resulting from the large supply of labor relatively to capital
stock. Because there is no evidence to this point that the elasticity of output with
respect to labor has increased substantially, it is implied that labor is still abundant in
Vietnam.
We conclude this paper by drawing another implication regarding Vietnam’s
growth prospects in the coming decade. Because of the rapid expansion of the capital
base, the relative importance of factor accumulation may be declining (the law of
diminishing returns). Furthermore, the potential to further increase factor inputs is
limited, especially after one considers a decreasing rate of labor force growth and the
constraints in natural resources. It is therefore crucial for Vietnam to rely more on
productivity growth instead of factor accumulation growth at present if it is to achieve
high and sustainable growth again in the near future[15].

Notes
1. See, for example, Hoa (1997), Luoc (1996), and Binh and Chi (2003), as well as various country
reports prepared by international organizations such as the International Monetary Fund,
the Asian Development Bank, and the World Bank.
2. See the sources cited in Table I.
3. It should be emphasized that construction showed a negative growth in 1981-1982 but it did
not affect the whole economy’s growth considerably because its share in GDP was relatively
small (slightly higher than 6 percent).
4. For example, it was reported that by the late 1970s, from 20 percent to 30 percent of the rice
eaten in Vietnam, and most vital commodities (such as petroleum, chemical fertilizer, and
transportation system) were being supplied by the Soviet Union (Pike, 1987). For more on
this issue, see Tho (1992), Luoc (1996), and Kimura (1987).
5. Calculations in this paragraph are based on the UN data cited in Table I.
6. Not reported in Table V.
7. If K1 or K3 is used, the observed trend is similar.
8. The regression results are not reported here due to limitations of space.
JES 9. We used the Eviews 4 software package to conduct all tests and estimations in this section.
35,2 10. Marginal productivity of capital and labor are computed from the following equations:
marginal productivity of capital ¼ aY =K, marginal productivity of labor ¼ bY =L.
11. Absorption constraints include underdeveloped institutional arrangements, legal system,
and shortage of skillful technical workers and researchers, among many others.
12. To obtain the estimated GDP, we feed, for example, the coefficients obtained in regression 18
218 of Table VIII (namely, c(1)-c(4)) into the following Eviews equation: estimated
Y ¼ cð1Þ þ cð2Þ*logðK1=LÞ þ ½ARð1Þ ¼ cð3Þ; ARð2Þ ¼ cð4Þ
.
13. Note that because the coefficient on the trend variable is statistically not different from zero,
it is not included in this equation.
14. Theoretically, in the extreme case, excessive surplus labor may yield zero marginal output.
15. It is beyond the scope of this study to discuss measures that enhance productivity growth.

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Further reading
Binh, T.N. and Pham, D.C. (Eds) (2003), The Vietnamese Economy – Awakening the Dormant
Dragon, Routledge Curzon, London.
Engle, R.E. and Granger, C.W.J. (1987), “Cointegration and error-correction: representation,
estimation, and testing”, Econometrica, Vol. 55 No. 2, pp. 251-76.
Freeman, N.J. (2001), “Understanding the decline in foreign investor sentiment towards Vietnam
during the 1990s”, Asia Pacific Business Review, Vol. 8 No. 1, pp. 1-19.
General Statistical Office (1998), Major Social and Economic Information Obtained from the
Large Scale Surveys in Period of 1990-1996, Statistical Publishing House, Hanoi.
Harvie, C. and Hoa, T.V. (1997), Vietnam’s Reforms and Economic Growth, Macmillan, London.
Hoa, T.V. (Ed.) (2000), The Social Impact of the Asia Crisis, Palgrave, Basingstoke.
Kokko, A. (1998), “Vietnam: ready for doi moi II?”, ASEAN Economic Bulletin, Vol. 15 No. 3,
pp. 319-28.
Pike, D. (1984), Vietnam and the Soviet Union – Anatomy of an Alliance, Westview Press,
Boulder, CO.

Corresponding author
Phan Minh Ngoc can be contacted at: [email protected]

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