Structural transformation and economic growth of asian developing countries and vietnam

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

STRUCTURAL TRANSFORMATION AND
ECONOMIC GROWTH OF ASIAN
DEVELOPING COUNTRIES AND VIETNAM
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

TRAN THIEN T AI

Academic Supervisor:

Dr. TRAN TIEN KHAI

HO CHI MINH CITY, NOVEMBER 2012


ACKNOWLEDGEMENT

Joining classes of rural development was conducted by Dr. Ha Thuc Vien, Dr.

Tran Tien Khai and was hold by the Vietnam Netherlands Program have encouraged
me confident to write this paper ahead.
I would like to express my sincere thank to Dr. Nguyen Trong Hoai, Dr. Pham

•

Khanh Nam for all valuable academics coaching
I would like to express my special thanks to Dr. Tran Tien Khai, my supervisor,
who provides me directive suggestions during the thesis performing.
I would like to thank all professors in the teaching board of MDE program, who
have helped me accumulate valuable knowledge to acquire this study.
I would like to express my appreciation and thank to my bosses, Mr. Allan Y ong
and Mr. Pham Quoc Hung, Mr. Min Soo Kim for creation condition to my successful
of this research.
I am also grateful to my classmate, Mr. Le Anh Khang for his valuable support
in econometric, Mr. Nguyen Van Dung for his support to coach how to search
reference paper and access databases.
Finally I would like to express my deeply appreciation and thank to my mother,
my wife for spiritual support .

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ABSTRACT

This paper investigates the structural transformation and growth of some
developing Asian countries and Vietnam, using data extracted from World
Development Indicator and Global Finance Development ofWorld Bank from 1985

to 2010. The paper uses polynomial model regression and description statistics

method. Findings from the paper includes: (1) except Korea and Malaysia, others
Asian developing countries are all in the first phase of structural transformation.
•

Agriculture sector trends to decrease once GDP per capita increases. Industry sector
trends to increase once GDP per capita increases. Service sector increases once

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GDP per capita increases; (2) the threshold of structural transformation from the
first phase to the second phase is when GDP per capita equals US$ 6,600 per
person. At that level, sectoral share of agriculture, industry, and services reach 7%,
45% and 48% respectively; (3) Asian developing countries including Vietnam are
not all followed the same process and are not homogeneity of structural
transformation; (4) compared to Malaysia, Thailand and the Philippines, the share
of agriculture in GDP of Vietnam is still high and is the highest in the four
countries. The share of services in GDP of Vietnam is always the lowest in the four
studied countries; (5) the rate of labor distribution in the agricultural sector of
Vietnam is high compared to Malaysia, Thailand, and the Philippines and in the
opposite direction, the rate of labor in services of Vietnam is low compared to
Malaysia, Thailand, and the Philippines; (6) labor productivity in all three sectors of
Vietnam are lower than Malaysia, Thailand, and the Philippines but the most
inefficient is agricultural sector, followed by the service and industrial.
Key Words: structural transformation, GDP per capita, growth, Asian developing
countries, Vietnam.

1


TABLE OF CONTENT

CHAPTER 1: INTRODUCTION ................................................................................ ?

.

-~

CHAPTER2: LITERATURE REVIEW .................................................................... 9
2.1

Theoretical review ...................................................................................... 9

2.2

Empirical studies ...................................................................................... 13

2.3

Conceptual framework ............................................................................. 17

CHAPTER 3: RESEARCH METHOLODOGY ....................................................... 21
•

3.1

Data ........................................................................................................... 21

3.2

Research methodology ............................................................................. 21

j

CHAPTER 4: EMPIRICAL ANALYSIS OF STRUCTRUAL
TRANSFORMATION AND GROWTH .................................................................. 25
4.1

Overview of economic growth of Asian developing countries in period

1985 -2010 ............................................................................................................. 25
4.2

Experimental study result of structural transformation Asian developing

countries during 1985-2010 ................................................................................... 30
4.2.1 Result of statistics descriptive model.. ................................................................ 30
4.2.1.1 Korea ...................................................................................................... 30
4.2.1.2 Malaysia ............................................................................................ 36
4.2.1.3 Thailand ............................................................................................. 37
4.2.1.4 China ................................................................................................. 38
4.2.1.5 India ................................................................................................... 40
4.2.1.6 Sri Lanka ........................................................................................... 41
4.2.1.7 The Philippines .................................................................................. 42
4.2.1.8 Indonesia ........................................................................................... 43
4.2.1.9 Vietnam ............................................................................................. 44
4.2.1.10 Nepal ............................................................................................... 46
4.2.2 Result of economestric model ............................................................................ .48

2

4.2.3 Structural transformation and labor productivity of Vietnam and acomparision
with Malaysia, Thailand and the Philippines ............................................................... 56
CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS ............................ 69

.

5.1 Conclusions ....................................................................................................... 69

:

5.2 Recommendations ............................................................................................. 70
5.3 Limitations ........................................................................................................ 71
REFERENCES .......................................................................................................... 72
APPENDIX ............................................................................................................... 75

..

3


LIST OF TABLES
Table 1: Average GDP growth of Asian developing countries in period 1985-2010
(%) ..................................................................................................................................26

Table 2: GDP per capita of Asian developing countries (current, US$) ................... 28
Table 3: Average GDP per capita growth 1985-2010 (%) ......................................... 29
Table 4: Summary Regression Result for Asia Developing Countries ...................... 49
Table 5: Fixed Effect Deviation from the Mean ......................................................... 51
Table 6: GDP per capita of Vietnam, Malaysia, Thailand and the Philippines ......... 57

Table 7: Sectoral labor productivity of Vietnam (US$ per person per year) ............ 67
Table 8: Agriculture output share ofVietnam, Malaysia, Thailand and the
Philippines (o/o of GDP) ................................................................................................ 75
Table 9: Industry output share of Vietnam, Malaysia, Thailand and the Philippines
(o/o ofGDP) .................................................................................................................... 76

Table 10: Service output share of Vietnam, Malaysia, Thailand and the Philippines
(% ofGDP) .................................................................................................................... 77
Table 11: Agriculture employment share of Vietnam, Malaysia, Thailand and the
Philippines(%) .............................................................................................................. 78
Table 12: Industry employment share of Vietnam, Malaysia, Thailand and the
Philippines (o/o) .............................................................................................................. 78
Table 13: Service employment share ofVietnam, Malaysia, Thailand and the
•

I

Philippines (o/o) .............................................................................................................. 79
Table 14: Agriculture labor productivity of Vietnam, Malaysia, Thailand and the
Philippines (US$ per person per year) ......................................................................... 79
Table 15: Industry labor productivity of Vietnam, Malaysia, Thailand and the
Philippines (US$ per person per year) ......................................................................... 80
Table 16: Service labor productivity of Vietnam, Malaysia, Thailand and the
Philippines (US$ per person per year) ......................................................................... 80

4


LIST OF FIGURES

Figure 1: Conceptual framework- structural transformation and growth ................ 20
Figure 2: Average GDP growth of Asian developing counties, 1985-2010 (%) ...... 26
Figure 3: GDP per capita 1985 and 2010 (current, US$) ........................................... 28
Figure 4: GDP per capita of Asian developing countries 1985-2010 ........................ 30
Figure 5: Structural transformation of Asian developing countries 1985 and 2010 Time series ..................................................................................................................... 36
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Figure 6: Scatter chart of agriculture output share and Log of GDP per capita ........ 52
Figure 7: Scatter chart of industry output share and Log GDP per capita ................. 53
Figure 8: Scatter chart of service output share and Log GDP per capita ................... 54
Figure 9: Structural transformation of Asian developing Countries .......................... 56
Figure 10: GDP per capita of Vietnam, Malaysia, Thailand and the Philippines ..... 58
Figure 11: Strutural transformation ofVietnam, Malaysia, Thailand and the
Philippines ..................................................................................................................... 59
Figure 12: Sectoral employment share ofVietnan 1996-2009 ................................... 60
Figure 13: Sectoral employment share of Vietnam, Malaysia, Thailand and the
Philippines ..................................................................................................................... 61
Figure 14: Sectoral employment share ofVietnam, Malaysia, Thailand and the
Philippines ..................................................................................................................... 62
Figure 15: Labor productivity in agriculture sector ofVietnam, Malaysia, Thailand
and the Philippines ........................................................................................................ 64
Figure 16: Labor productivity in industry sector of Vietnam, Malaysia, Thailand
and the Philippines ........................................................................................................ 65
Figure 17: Labor productivity in service sector of Vietnam, Malaysia, Thailand and
the Philippines ............................................................................................................... 66
Figure 18: Sectoral labor productivity ofVietnam ..................................................... 68

5

LIST OF ABBREVIATIONS

!

.

ASEAN:

Association of South-East Asian Nations.

FE:

Fixed Effect

GDP:

Gross Domestic Product.

GSO:

General Statistics Office

MPL:

Marginal Product of Labour

WB:

World Bank.

TFP:

Total Factor Productivity

SEA:

South East Asian

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CHAPTER 1: INTRODUCTION
Some
•

empirical

studies show

structural

transformation process

is

accompanied with economic growth of developed countries. By history record,
Kuznets ( 1971) in Economic of Nations emphasizes that there are six characteristics
that every developed country manifested in the process of economic growth. One of
them is the high rate of structural transformation ofthe economy. Chenery (1979) in
Structural Change and Development Policy examines the pattern of development of

some developing countries after World War II period. The empirical study identifies
several characteristic features of development process. One of them is the shift
away from agricultural to industrial production.
Asian developing countries, including Vietnam, are under developing process.
Therefore, they maintain sustainable growth in the last two decades. During 19912010, China achieved 10.5% average annual growth rate in GDP. Following by
Vietnam maintained at 7.4%, India 6.6%, Malaysia 6.0% and Korea 5.2% (World
Bank, 2012). The rapid economic growth of Asian developing countries has
increased its important role in the world economy. Especially in the time of world
economic crisis and the European public debt crisis recently, China and India have
played a key role as important investors in supporting the US and European
countries to overcome the crises. Respective of economic growth, structural
transformation of Asian developing countries has changed continuously. It is useful
to analyze what is the structural transformation process of Asian developing
countries including Vietnam?
Despite of maintaining a high economic growth rate in the last two decades,
GDP per capita of Vietnam is still in low level versus others Asian developing
countries. GDP per capita of Vietnam improved significantly from 143 US$ in 1991
to 1,224 US$ in 2010 but it was still in low level versus Korea 20,7 56 US$,
Malaysia 8,3 72 US$, Thailand 4,608 US$ and the Philippines 2,140 US$ per person
in 2010 respectively (World Bank, 2012). Therefore, an analysis of structural

7


transformation process of Vietnam in the context of other Asian developing
countries will be a helpful topic to Vietnamese policymakers.
My paper tries to achieve three main objectives: (1) to analyze structural
transformation process 1 of some Asian developing countries, including China,
India, Indonesia, Korea, Malaysia, Nepal, the Philippines, Sri Lanka, Thailand and

Vietnam, during 1985-20 10; (2) to analyze labor productivity of between Vietnam
and Malaysia, Thailand and the Philippines; (3) to implicate ways to improve
structural transformation process of Vietnam. Therefore, the main questions of this
paper research are: (1) how is the structural transformation process of Asian
developing countries? (2) is the structural transformation process of Asian
developing countries homogenous? (3) what are the differences of structural
transformation process and labour productivity between Vietnam and Malaysia,
Thailand and the Philippines? These questions will be answered upon the analysis
in chapter four.
The paper

IS

continued with following chapters. Chapter two recalls the

literature review including the theories and empirical studies of structural
transformation in the world and Vietnam. Chapter three describes the dataset and
research methodology. Chapter four analyzes the structural transformation process
of Asian developing countries and the comparison of structural transformation and
labor productivity of Vietnam versus Malaysia, Thailand and the Philippines. Base
on the main findings identified in chapter four, chapter five will come out with the
main conclusions, policy implications and limitations of this research.

1

Structural transformation process is transformation process between sectors in an economy such
as the transformation between agriculture, industrial and service sector through time or through
development (GDP or GDP per capita). Agriculture sector covers forestry, fishing, hunting and
agriculture as a whole; Industrial sector comprise mining, quarrying, manufacturing, construction,
electricity, gas, water; Service sector includes all service activities, such as transportation, logistics,

communication, whole sale, retail, banking, insurance, real estate, public administration, defense
and others services

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CHAPTER 2: LITERATURE REVIEW

Chapter two provides a review of the theoretical and empirical studies of
structural transformation in the world and Vietnam. This chapter begins with a
theoretical review of structural transformation. Following by a number of empirical
studies are reviewed to get a comprehensive view of what have been done on
structural transformation around the world. Then it presents a Conceptual
framework which shows the relationship between structural transformation and
economic growth.

2.1

Theoretical review
According to Begg et al (1995), Gross Domestic Product (GDP) measures the

output produced by factors of production located in domestic economy regardless of
who own these factors. In his circular flow, there are three ways to calculate GDP
of a country including expenditure, income and value-added output. In value-added
method, GDP is calculated base on the increase in the value of goods and services
as a result of production process of all sectors including agriculture, industrial and
service sector of an economy. The model is formulated as follows:
i

gdp,. = IvaiJ

(1)

J=l

Where:
gdp; is GDP of a country in year i
va1, is value added of sector j in year i
j includes three sectors of an economy: agriculture, industry and service.

Solow ( 1962) uses the Cobb-Douglas production function to form up Solow
growth model. He describes output (Q) or GDP of an economy as a result of three
main factors: labour (L), capital (K) and productivity or efficiency factors (A)

Q =AKa L I-a

(2)

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Where:
A is multi factor of productivity or technology progress of an economy.
K is capital of an economy.
L is labour of an economy.
a and 1 - a are less than one, indicating diminishing returns to a single factor of
capital or labour and a + (1 - a) = 1, indicating constant returns to scale. Solow
notes that any increase in output Q or GDP could come from one of three sources:
(1) Increased in L, however, due to (1- a) <1, diminishing returns to scale; this
would imply a reduction in Q I L or output per worker. (2) Increased in K, an

increasing in the stock of capital would increase both output ( Q) and output per
worker (Q/L), however, since a <1, diminishing returns to scale ofK. (3) Increased
in A or in multifactor productivity or improve technology to increase efficiency of
labour could also increase Q I L or output per worker. To concentrate on what
happens to Q I L or output per worker (unless the change in employment ratio
affects to output per capita), Solow rewrites the Cobb-Douglas production function
in what we shall refer to as per capita form:

Q I L =A KaL-a= AKa I La= A ( K I L) a

(3)

Let define q = Q I L and k = K I L. In other words, small letters equal per capita
variables. We can re-write above equation as follows:
q=Aka

(4)

Equation (4) explains output per capita will be increased significantly once
productivity, efficiency or technology change happens to the economl. We all
know that a market economy tends to allocate resources from less efficient areas to
more efficient areas. Therefore, this model will support this research of structural
transformation in the following sections of this chapter.
According to Todaro and Smith (2003), developing countries today are
experiencing economic growth in many important routes which are significantly
different from that of currently developed countries have suffered. There are eight
2

In equation (4), Solow indicated q: output per person; k :capital per person.

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significant differences in initial conditions that can be identified and require a
special analysis for economic growth: ( 1) physical and human resources
endowments, (2) income per capita and level of GNP, (3) climate, (4) population
size and distribution, (5) historical role of international migration, (6) international
trade benefit, (7) basic scientific, technological research and development
capabilities, (8) stability and flexibility of political and social institutions. These
significant differences may cause differences of structural transformation between
developed countries and developing countries even though between country and
country inside developing countries. The differences of structural transformation
will be referred in chapter four of this research.
Lewis (1955) develops the two-sector labour surplus model in 1955. In this
model, the underdeveloped economy consists of two sectors which are traditional
and modem sectors. Traditional sector has a surplus of labour while a limited
resource of land. Its marginal product of labour (MPL) tends to diminish until MPL
equal to zero (MPL=O). The proportion of surplus labour in traditional sector will be
transferred to the modem sector and makes the modem sector's output grown. The
labour transfer process and employment expansion in modem sector continue
happening until all of surplus labour in traditional sector is absorbed. In two-sector
labour surplus model, Lewis makes four assumptions in both traditional sector and
modem sector. In traditional sector, he assumes there is surplus labour therefore
MPL is zero and rural worker wage share equally base on average calculation from
the output. In the modem sector, he assumes that urban wage above rural average
wage and modem-sector employer can hire as many surplus rural workers as they
want without concerning of rising wages. Despite the assumptions of Lewis are not
realistic in modem economic nowadays, but the two-sector labour surplus model
provides a basic theory of structural transformation. The structural transformation
of the economy can take place with the growth of the modem sector and modem

industry (industrial and service sector) without reducing agricultural output.

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According to Perkins et al (2006), the Engel's law was developed by Ernst
Engel in the nineteenth century. The law states that when household income
increases, the proportion of income spent on food decreases. This is one reason to
explain the decline of agriculture's share in total production when the GDP per
capita increases. Another reason comes from the productivity gains in agriculture
due to technological change which promotes the process of liberalization of the
labour force and allow them joining in non-agricultural sector such as industry and
services. Perkins et al (2006) emphasizes that economic growth involves increasing
output per capita and rising in total factor productivity (TFP). 3 As the economy
grows over time, the structure of economy tends to change in following ways: (1)
the share of agriculture in total output decreases, while the share of industry and
services increase; (2) the proportion of labour force in agriculture declines, while
this proportion in industry and services expand; (3) the population in urban area
blow up as households tend to move from rural to cities; (4) products begin to be
produced by enterprises instead of households. Therefore, the share of goods and
services, which are sold in the market, increases.
Kuznets ( 1971) finds out that developed countries are following up the same
process of structural transformation. He distinguishes structural transformation into
two different phases. The first phase is in the beginning of development process, in
which an economy allocates most of its resources to agriculture sector. As the
economy continues to develop, resources are then re-allocated from agriculture to
industrial and service sector. In the second phase, resources are re-allocated from
both agriculture and industrial to service sector4 . By history record, Kuznets ( 1971)
emphasizes six characteristics that every developed country manifested in the
process of economic growth: ( 1) high growth rates in per capita product and

population; (2) rise in productivity rate; (3) high rate of structural transformation in
economy. The major aspects of structural transformation include the shift away
3

TFP meant to measure the contribution to production of efficiency, technology, and other
influence on productivity.
4
This empirical study will be referred in chapter four and chapter five of this research.

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from agriculture to non-agriculture and from industrial to services recently,
resulting in the declining in the proportion of labour force in agricultural sector over
total labour force. The U.S. agricultural labour force declined from 53.3% in 1870
to less than 2% in 2000. Similarly, in European countries such as Belgium,
agricultural labour force decreased from 51% oftotallabour share in 1846 to 12.5%
in 1947 and less than 7% in 1970; (4) the closely related and extremely important of
social and ideological structure have also changed quickly where urbanization and
secularization come up easily; (5) increasing power of technology, especially in
transportation and communication.
Chenery ( 1979) identifies several characteristic features of economic growth
and development process that an economy experiences: (1) shift away from
agriculture to industrial production; (2) steady accumulation of physical and human
capital; (3) change in consumer demands from focusing on food and basic
necessities to hunger for diverse manufactured goods and services; (4) growth of
cities and urban industries as people migrate from farm and small town to the cities;
(5) decline in family size and overall population growth; (6) despite of spread of
modem economic growth, but three-quarters of world population still fall into of
minimum level with the potential of modem technology.

2.2

Empirical studies

The issue of structural transformation has been studied by many researchers in
some aspects such as structural transformation and economic growth, structural
transformation and productivity in each sector of the economy, etc. In this section, I
want to recall empirical studies of growth and structural transformation of the world
and Vietnam.
Bah (2008) analyzes structural transformation of developed countries
including nine countries, such as Australia, Canada, France, Germany, Italy, Japan,

13


Sweden, United ofKingdom, and the United States, during the period 1870-2000.
He applies a polynomial function as follows to analyze panel data: 5

Where:
vait is the sectoral output share ofGDP for country i (i=1~9) in period t

(t= 1870~ 2000).
a; is fixed affect of country i.

f3 is coefficients of log(gdp;,)
gdp;, is GDP per capita of country i in period t
& it

is the error term
Since the degree of polynomial is determined by the goodness of fit Bah starts

from a linear polynomial, then increases the degree of function by one and continue
this process until the change of R-square is less than 0.01. By this way, Bah
identifies that the relationship between agriculture sector's output share and log of
GDP per capita is best fitted by a quadratic polynomial. The R-square for the fixedeffect estimation is 0.92. The relationship between industrial sector's output share
and log of GDP per capita is best fitted by a third degree polynomial. The R-square
is 0.63. For service sector, the relationship is best fitted by a third degree
polynomial and R-square is 0.74. To analyze the homogeneity of structural
transformation process between countries, Bah uses both ox scatter chart and Least
Square Dummy Variable (LSDV) model to measure the fixed effects of each
country and then compare it with the average fixed effects of nine countries. The
results of this comparison provide an understanding in homogeneity between
countries. Bad estimates the mean standard deviation of fixed effects for each
country in agriculture is 3.7, while this number is 3.1 for industry and 2.5 for

5

This polynomial function and model will be used in this research and will be referred in chapter
three and chapter four of this paper.

14


service. In this research, Bah finds that: (1) developed countries follow a
homogeneity process of structural transformation; (2) the structural transformation
of developed countries is well suited to the one Simon Kuznets mentioned in
theoretical review. Agriculture declines in both first and second phases of
development. Industry increases in the first phase of development and decreases in
second phase of development. Service sector always increases in the first phase and
second phase of development; (3) the threshold between first phase and second

phase of development is when GDP per capita reach at 8,100 US$ per person; (4)
all developed countries are in the second phase of development.
Bah (2009) explores that beside the thing that structural transformation play a
positive role in economic growth, Total Factor Productivity (TFP) of each sector
also play an important role in economic growth. He uses panel data on sector
employment share and GDP per capita of the US, represent for developed country,
and Korea, Cameroon, Brazil, represent for developing countries, from 1950 to
2000, to analyze sectoral productivity of developed and developing countries. He
finds out that relative to the US, developing countries are least productive in
agriculture, then followed by services and manufacturing.
The United Nations (2006) points out that productivity growth in developed
countries mainly relies on technological innovation, while in developing countries,
growth and development are much less on pushing the technology and much more
about structural transformation of production so as to direct it towards activities
with higher levels of productivity. Structural transformation can be achieved largely
by adopting and adapting existing technologies, substituting imports, joining the
world market for manufacturing goods and services and through rapid accumulation
of physical and human capital. The report also mentions that investment and capital
accumulation are catalysts of structural transformation. It shows that changes in the
share of agricultural and industrial output are strongly associated with investment
growth or capital accumulation which took place at a rapid pace in the successful
Asian countries and was directed towards their industrial sectors.

15


Hoang Kieu Trang ( 1998) analyzes structural change of Vietnam during 19801997. The paper reveals that ( 1) the growth rate of non-agricultural sector of
Vietnam increases higher than GDP growth rate; (2) structural change, including the
declining of agriculture, increasing of industry and services, provides positive
impact to economic growth.

Dekle & Vandenbroucke (2006) investigate how structural transformation
impact to economic growth of China from 1978 to 2003. They explore three sectors
in China's economy: agriculture, private non-agriculture, and public (government)
non-agriculture sectors by using employment by sector and GDP per sector data.
The paper discloses that there are three main sources of China's growth from 19782003: (1) high productivity in private non-agriculture sector; (2) reallocation of
labor from agriculture sector to non-agriculture sector, (3) reallocation oflabor from
public non-agriculture sector to private non-agriculture sector.
Duarte & Restuccia (20 10) examine the role of sectoral labor productivity and
the reallocation of labor across sectors to explain the process of structural
transformation. The paper uses panel dataset of annual aggregate GDP per hour,

'

value added per hour and the share hours for agriculture, industry and service sector
of 29 countries including developing countries such as Argentina, Venezuela,
Mexico, Korea, etc. and developed countries such as the US, United of Kingdom,
Japan, Australia, etc. from 1950-2004. The authors find that (1) sectoral labor
productivity differences across countries are large, both at a point in time and over
time. In particular, labor productivity differences between developed and
developing countries are large in agriculture and services and smaller in industry;
(2) over time, productivity gaps between developed and developing countries have
been substantially narrowed down in agriculture and industry but not really as much
in service sector.
Gollin et al (2002) studies the important role of agricultural sector and the
effect of agricultural policy on a country's development and growth. The paper uses
the data of 62 less developed and developing countries over the world including

16

Asian developing countries such as Korea, Malaysia, Indonesia, China, India, and
The Philippines from 1960 to 1990. In the first part of the paper, the authors explore
that agricultural sector plays three important roles in a country's development and
growth. Firstly, agriculture plays important role as subsistence food for the
population and food security for a country. Second is the role of agricultural
productivity growth and agricultural transformation. Countries that have succeeded
in increasing productivity in agriculture have experienced the relative decreases
significantly in agriculture's share of GDP. The increasing productivity in
agriculture is able to release labor force and other resources from agriculture to nonagriculture sector and make structural transformation happen. Third is the role of
agricultural productivity growth and economic growth. In most of countries,
agricultural productivity growth is more rapid than non-agriculture productivity
growth. The agricultural productivity growth significantly affects the fast growth of
GDP per capita of these countries. In second part of the paper, the authors discover
that low agricultural productivity can delay the start of industrialization in a country
for a long period of time and it causes GDP per capita of a country to fall far behind
industrial leading countries.
2.3

Conceptual framework

From theoretical review and empirical studies section in this chapter,
structural transformation between sectors happens through out three main factors as
figure 1 below. The first factor includes technological change, investment and
capital (both of physical and human capital) accumulation. These three components
will affect significantly the productivity of each sector of an economy. The second
factor is the consequence of the first one. By absorbing technological change,
investment and capital accumulation, the sectoral productivity will increase and
grow continuously. The differences in productivity growth of each sector and the
differences in productivity level of each sector, such as labor surplus and low
productivity in agricultural sector, make the structural transformation of a country

happen differently. The structural transformation tends to occur from low

17


-

-- ------------ ----

productivity sectors to high productivity sectors. The third factor mentions about the
structural transformation happens in the same time of resources reallocation (labor
resource and other resources) process. The resources will be allocated from lower
efficient to higher efficient areas. In the study of this thesis, I just mention three
factors as the sources and causes which impact on the structural transformation, not
a deeply analysis (qualitative and quantitative) the impact of these factors to the
structural transformation and economic growth. Consequently, the structural
transformation of a country will make a country's development and growth. This
process will be continuously happened to push an economy continuously develop
and grow. The below figure 1 describes the interaction between structural
transformation and economic growth. This paper will analyze structural
transformation process and GDP per capita growth of Asian developing countries
basing on what Kuznets ( 1971) has realized for developed countries. Structural
transformation is distinguished into two different phases. The first phase is in the
beginning of development process in which an economy allocates most of its
resources to agriculture sector. As the economy continues to develop, resources are
then reallocated from agriculture to industrial and service sector. In the second
phase, resources are again reallocated from both agriculture and industrial to service
sector. In other words, as GDP increases, agricultural output share tends to decrease
and industrial output share concurrently increases in beginning state and then
decreases subsequently, while service output share is always in the trend of

.

.

mcreasmg.
Along with other empirical studies in this chapter, the research of Kuznets
( 1971) is entirely consistent with the general trend of structural transformation
today. Agriculture, with the application of scientific advances in breeding and
management technology constantly over time, the efficiency has been improved
significantly and the output constantly increased. With this result, a proportion of
agricultural resources will be allocated to other sectors in industry and services with
more efficiently while still maintaining the growth of agricultural output,

18


contributing to continuously reduce the share of agriculture in GDP in the process
of growth and development of the economy. Industry of a country in the early stage
of development is often primitive and simple such as light industry and simple
processing industry. But with the absorption of capital investment and technology
change quickly will make the value of the industry increased significantly during
the first period of the development. However, the level of absorption of capital and
technology in industry gradually comes to a peak (because capital and technology
are limited and the rate of absorption of capital and technology in terms of benefits
will be reduced). The ratio of industrial output to total GDP will begin declining in
the second stage of the development. The resources are then gradually allocated to
services. Service sector in the beginning of the development of the economy is
simple, diversity is not much, quality is not high, economic resources is not fully
focused on. But with the growth of the economy over time, the increase in GDP per

capita, the share of services in GDP is constantly increasing, although its growth
rate is still slow in the beginning of the development. However, when reaching out
to the second stage of development, when the resources from agriculture and
industry are moving on, plus the accumulation of human capital and the
development of knowledge technologies, the share of services in GDP will grow
strongly. In this phase, the service sector is very diverse, quality and performance
are increasing rapidly.
In addition, there will be a difference in the speed of structural transformation
of the developing countries today and the developed countries in the last century. In
the 20th century, the structural transformation of the developed countries took place
in the context of low technological change, so the intensive use of labor is very
high. This means that the surplus labor in agricultural sector will be quickly
absorbed in other sectors. Therefore, the speed of structural transformation will take
place faster than developing countries today that are in the period of high science
and technology, gro\\'1h focus more on capital accumulation and technology change
rather than on labor intensity.

19


•
Figure 1: Conceptual framework- structural transformation and growth
Source: author's creation base on theoretical review and empirical studies

c

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CHAPTER 3: RESEARCH METHOLODOGY

Chapter three plays a mediating role in linking the theoretical background for
the empirical analysis. It firstly provides information about the data used. Followed
by methodology used to analyze the data, in which empirical models are presented.
3.1

Data

The data m this research is mainly collected from World Development
Indicators and Global Development Finance of the World Bank. A time series of26
years from 1985- 2010 of 10 Asian developing countries, including Vietnam,
China, India, Indonesia, Korea6, Malaysia, the Philippines, Sri Lanka, Nepal and
Thailand are collected to form up a panel data with 260 observations. The choice of
these countries based on data availability together with other criterias such as the
less abundant of the nature resource of land by which countries like Singapore and
Taiwan are excluded. Countries which have mining and oil production above 30%
of GDP recently such as Middle East countries are also excluded. The selection also
considers some countries leading in GDP per capita such as Korea, Malaysia and
some other countries which have GDP per capita close to Vietnam such as
Thailand, Indonesia and the Philippines.
3.2

Research methodology

In this paper, I apply both descriptive statistics and econometric methods to
explain the structural transformation process and growth of Asian developing
countries and apply descriptive statistics method only to compare the structural
transformation and labor productivity of Vietnam versus Malaysia, Thailand and the
Philippines. Levels of analysis are mostly focused on country and sectoral levels of
economy. To determine how the structural transformation process of Asia

6

Despite of Korea can not be counted as developing country now, it was helpful to analyze for
period 1985-2005

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developing countries is and whether these Asian developing countries follow up the
same process of structural transformation, I use polynomial functions to indicate the
relationship between sectoral output share such as agriculture, industry and services
and log of GDP per capita of all countries. The polynomial function is fitted from
260 observations in a panel dataset. 7
For each sector, I estimate by the following equation 8 :

Where:
va. is the sectoral output share of GDP for country i (i= 1~ 10) in period t
zt

(t=1985~2010)

a, is fixed affect of country

P

f3 is coefficients of log(dgp;,)
gdp;, is GDP per capita of country i in period t

£it is the error term

According to Nguyen Trong Hoai (2006), there are many functions in
econometrics such as linear function, Cobb-Douglas production function, linear-log
function, interaction function, lag function, etc. and polynomial function.
Polynomial function reflects the long-run average trend between dependent and
independent variables. Since structural transformation process will need to be
observed and analyzed in long period time to reflect the long term average trend
between sectoral output share and log of GDP per capita, therefore I select
7

Accordance to Alan Duncan (2007), Cross-section and Panel Data Econometrics, using panel data
method can increase precision of regression estimates; provide ability to control for individual
fixed effects; provide the ability to model temporal effect without aggregation bias.
8
Bah (2008) uses the model by equation (5) to analyze structural transformation in developed
countries.
9
In this research fixed effect shows initial conditions of each country for structural transformation
as Todaro and Smith (2003) in chapter 2 mentioned. The Initial condition can be different between
countries such as nature resources, physical and human resources endowments, GDP and GDP per
capita, climate, population size, international trade benefit, basic scientific and technological
research and development capabilities, stability and flexibility of political and social institutions.

22


polynomial function to analyze the process. In this paper, I use GDP per capita
instead of GDP because GDP per capita reflects more reality of an economic
growth in term of income per person, and it is easy to compare across countries no
matter what their population. Additionally, the use of log of GDP per capita in this
paper as dependent variable rather than GDP per capita is because of by using log

of GDP per capita, I can explain the relationship between sectoral output share and
GDP per capita in percentage. For example, with 1% increases in GDP per capita,
how many percentage changes in sectoral out put share. If I don't use log of GDP
per capita, I have to explain this relationship in absolute value, e.g. with 1 US$
changes in GDP per capita, how many percentage changes in sectoral out put share.
The degree of polynomial function in equation (5) is determined by the
goodness of fit. Starting from a linear polynomial, the degree of function will be
increased one by one and continuing this process until the change of R-square is
less than 0.01 10 .The reason I do it is try to simplify the model in the lowest degree
within the highest possibility of the goodness of fit.
In this research, I use fixed effect regression method because (1) the variation
within a country and variation between countries over the period 1985-2010 are
both considered, (2) fixed effect allows a; and the time-invariant unobserved country
effects, to be correlated with explanatory variable log(dgpu) over the time t
(Cameron & Trivedi, 2009). In this research, I also use the Least Square Dummy
Variables (LSDV) to estimate average fixed effect (a; ) of each country. I call a is
average fixed affect of all ten countries, a; is fixed effect of each country estimated
by LSDV. For each country, I calculate a; = a;- a and I call it is the fixed effect
deviation from the mean of each countries. The distribution of this coefficient such
as standard deviation will helps us to determine the heterogeneity between countries
(Bah, 2008). In the following chapter four, I will discuss and analyze the structural

10

Once the degree of the polynomial increase, R-square tends to improve, I also experimented
higher degree, but there were no improvement larger than 0.01 in the fitting of the data.

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