transforming vietnam^s economy into

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T R A N S F O R M I N G V I E T N A M ^ S E C O N O M Y I N T O A N E F F I C I E N C Y - D R I V E N G R O W T H T R A J E C T O R Y

T O A V O I D T H E M I D D L E - I N C O M E T R A P

Nguyen Cao Due*

1. Introduction

In spite of having been one of the fastest economic growth countries (with its growth rate of 8.8% per year in the period of 1992-1997 and about 7.1% per year in 2002-2007) all over the world, Vietnam has been faced with its rising risks of the high public debt, the low economic growth, and the low productivity as well as the low competitiveness compared with those of raany Asian countries since Vietnam's joining WTO (in November 2006). Particularly, the raost noteworthy point here is that both GDP and GNl per capita growth of Vietnam have its falling tendency and even lagged alarmingly behind many ASEAN countries in the post-global financial crisis phase.

On the one hand, Vietnam's GDP per capita growth has a significantly decreasing tendency from 6.97% per year in the period of 1992-1997 to 5.85% per year in the period of 2002-2007 and quickly to 4.67% per year in the period of 2009-2014 (at constant price of 2010). Even more alarmingly, Vietnam's GNI per capita growth has a faster falling trend in the same period (respectively, from 7.57% per year in the period of 1992-1997 to 5.58% per year over the period of 2002-2007 and rapidly to 4.26% per year in 2009-2013) (GSO, 2004, 2013). If the falling tendency of Vietnam's GDP and GNl per capita growth is not changed significantly, it will be so much raore difficult for Vietnam's economy to effectively avoid the middle-income in the future.

* Nguyen Cao Due. Master, Centre for Analysis and Forecasting (CAF), Vietnam Academy of Social Sciences (VASS)

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On the other hand, the relative gap in both GDP and GNI per capita of Vietnam compared with those of many Asian countries at the same time has been so large alarmingly up to now. Vietnam's GDP per capita was only about 5.370 thousand PPP$

in 2014 (at constant 2011 international PPP $). Hence, it was 14.7 times lower than that of Singapore, 4.4 tiraes lower than Malaysia's, and 2.6 times lower than in Thailand's, and 2.3 times lower than China, and 1.9 times lower than Indonesia's, and 1.2 times lower than Philippines' in 2014 (In 1990. these comparison gaps were 22.9 times; 6.8 tiraes; 4.2 times; 1.0 times; 3.0 times; 2.7 times respectively).

This means that how to accelerate narrowing such a large gap to catch up quickly with Southeast Asian countries and China as well as avoid the middle-income trap in the long term has been one of the hottest topics of so special importance in Vietnam and has attracted much more attention from Vietnam's policy makers and researchers. One of the most important reasons for being unable to catch up quickly with these regional countries is that it is so difficult to investigate comprehensively the fundamental sources of Vietnam's GDP per capita growth with a view to finding out the most useful lessons reasonable for Vietnam in each given stage of development.

Therefore, the author has a decision to study the topic: "Transforming Vietnam's economy into an efficiency-driven growth trajectory to avoid the middle-income trap".

The chief objectives of this paper are to investigate the key sources of Vietnam's GDP per capita growth since 1986, and recommend some reasonable solutions for Vietnam to catch up fast with the regional countries and avoid the middle-income trap in the next stage of development. So as to obtain these objectives, this paper focuses on answering three research questions as follows: (i) Where is the relative position of Vietnam's economy in the stage of development in the period of 1986-2014? (ii) What are the fundamental sources of Vietnam's GDP per capita growth in the same period?

(iii) What are the policy implications for Vietnam to catch up quickly with the regional countries and avoid the middle-income trap in the next stage of development?

This paper consists of three main sections in addition to the Introduction.

Section II makes a description of the relative position of Vietnam's economy in the trajectory of development in the period of 1986-2014. Besides, Section III places a focus on finding out the fundamental sources of Vietnam's GDP per capita growth in the same period, particulariy in each given growth trajectory. Finally, Section IV suraraarizes the key findings and suggests the most useful policy solutions suitable for

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Transforming Vietnam's Economy into an Efficiency - Driven Growth Trajectory

Vietnam to catch up quickly with the regional countries as well as avoid the middle- income trap in the next trajectory of development.

2. Relative Position of Vietnam's Economy in the Development Trajectory The relative position of Vietnam's economy in the development trajectory is identified on the basis of two key criteria in the context of the rising and deeper economic integration process, namely (i) the gross national income GNl per capita at tiie current exchange rates using the World Bank Atlas method ', and (ii) the gross domestic product GDP per capita at the market exchange rates using the World Economic Forum using Global Competitiveness Index GCl framework ^.

Firstly, following World Bank's income thresholds, the world's economies are classified into three groups, namely (i) low-income economies with a GNI per capita of 1,045 US$ or less; (ii) middle-income economies with a GNl per capita of more than 1,045 US$ but less than 12,746 US$; of which middle-income economies is further subolassified into the lower-middle-income • and upper-middle-income economies at a GNI per capita threshold of 4,125 US$. On the basis of this World Bank's income thresholds,. Vietnam's economy has been officially transformed from one of the world's poorest countries (GNI per capita of 122 US$ in 1986) to a middle- income country In 2009 (GNI per capita of 1,120 US$ in 1986). In other words, thanks to "DoiMoi", Vietnam to achieve the great success as a lower-middle-income country from one of the world's poorest countries 24 years ago (poverty headcount ratio at 2 PPP$ a day of total population decreased rapidly to 85.71% in 1993 and even speedily to 12.45% in 2012). Despite achieving such a great success of being a lower-middle- income country in 2009, Vietnam's GNl per capita growth has a alarming downtrend in the same period. In fact, Vietnam's GNI per capita growth decreased significantly from 7.57% per year in tiie period of 1992-1997 to 5.58% per year over the period of 2002- 2007 and even to 4.32% in 2008. The alarming downtrend of Vietnam's GNI per capita growth in this stage of development is likely to be affected much by the transition from Vietnam's highest growth trajectory (about 8.8% per year in the period of 1992-1997) to the lower growth trajectory (about 7.1% per year in 2002-2007 and 5.66% in 2008) (Table 1).

' http://data.worldbank.org/news/2015-country-classiflcations

' http://reports.weforum.org/global-competitiveness-report-20l4-2015/methodology/

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Secondly, according to World Economic Forum's income thresholds (on the assumption of the share of exports of mineral goods in total exports of goods and services less than 70 percent in a five-year average), the world's economies are officially classified into three main stages of development in addition to two transitional stages, namely (i) Stage 1 known as "Factor-driven stage of development" with GDP per capita of less 2,000 US$; (ii) Transitional stage from Stage 1 to Stage 2 with GDP per capita from 2,000 to 2,999 US$; (iii) Stage 2 known as "Efficiency-driven stage of development" with GDP per capita from 3,000 to 8,999 US$; (ii) Transitional stage from Stage 2 to Stage 3 with GDP per capita from 9,000 to 17,000 US$; (iii) Stage 3 known as 'innovation-driven stage of development" with GDP per capita higher than 17,000 US$. On the basis of this World Economic Forum's income thresholds, Vietnam's economy has been officially transformed from the "Factor-driven stage" in the period of 1986-2013 (GDP per capita of 84 US$ in 1986 and 1,909 USS in 2013) to the "Transitional stage" towards the Efficiency-driven stage since 2014 (GDP per capita of 2,052 USS in 2014, and exactly higher than WEF's threshold criteria of 2000 US$). In other words, it took five years since becoming a lower-middle-income economy in 2009 (and about 29 years since "DoiMoi") for Vietnam to enter the

"Transitional stage of development" by 2014 towards the Efficiency-driven stage of development in the next decades. In spite of making a very important turning point of entering the "Transitional stage" from Factor-driven stage to Efficiency-driven stage in 2014, Vietnam's GDP per capita growth has an alarming downtrend. In fact, Vietnam's GDP per capita growth fell significantly from 6.97% per year in the period of 1992- 1997 to 4.67% per year in the period of 2009-2014 (Table 1).

Table 1: Vietnam's development trajectory after nearly 30 years of "DoiMoi"

1.Economic Growtli

1986 1990 1992 1996 2003 2007 Low-mcnme

economy

2009 2013 2014 Lower-Middle-income

economy Factor-driven

swge of developmeni

2.79 5.10 8.65 9.34 6.90 6.98 5.40 i 5.42

Towards Efficiency- driven stage 5.98

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rate (%) 2. GDP per capita

(current USS) - GDP per capita

(current PPP$) - GDP per capita

(million VND) - Growth of GDP

per capita (Yo) 3. GNI per capita

(current USS) GNl per capita (Atlas.. USS) - GNl per capita

(million VND) - Growth of GNl

per capita CA>) 4. Openness ofl/ie Economy (% ) - Mineral & heavy

Industrial export (% total export)

1 S4 747 0.01 0.43

S6 122

0.01 NA

23.2

8.0 98 970 0.64 3.12

92 130

0.60 -3.63

H1.3

25.7 144 1,138 1.61 6.73

139 130

1.56 8.74

73.6

37.0 337

1,631 3.72 7.60

332 310

3.66 7.12

92.7

28.7 531 2.590 8.23

5.66 523

510 8.11 5.71

115.1

32.2 797 3.384 12.74

5.80 7S0

760 12.47

5.45 138.3

34.4 1,232 4,123 21.03

4.29 1,179

1,120 20.12 2.87

136.3

30.9 1,909 5,294 39.95

4.32 1,828

1,740 38.27

4.18 165.1

44.3 2,052 5,629 43.40

4.79 1,950

1.890 41.23

3.79 169.5

45.1 Source: Author's estimates based on GSO (2014), IMF (2014). WB (2014), ADB(20I4).

3. Sources of Vietnam's GDP per capita Growth in the Development Trajectory - Decomposition of GDP per capita based on Shapley decomposition approach:

Though there have been some decomposition approaches to investigate the sources of the GDP per capita growth all over the world, this paper give much attention to investigating the fundamental sources of Vietnam's GDP per capita growth in the period 1986-2013 chiefly on the basis of the Shapley decomposition approach (Shapley, 1953;

Shorrocks.1999; Sastre and Trannoy, 2002). On the one hand, we carry out the decomposition of the ratio of Y to P into three components as follows:

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•vmuiT)

Where: — is GDP per capita; and y is the gross domestic product (GDP); and

— is GDP per worker or labor productivity; and L is the total employed population at

15 years of age and above as of annual IJuly; and is the share of labor in the (WA\ .

[-yy

A In

working age population (aged 15-64 years); and is the share of the working age population in the population; WA is the working age population; P is the total population. After taking the natural logarithms of both sides of Equation (I) mentloned- above, we can obtain the following result:

Equation (2) showed that the growth rate of GDP per capita is equal to the growth rate of GDP per labor, plus the growth rate of the share of labor in the working age population, and plus the grovrth rate of the share of the working age population in the total population. We perform the decomposition of the ratio of X to i into two factors by Cobb-Douglas production function:

y.AK^,-' - ( g = - ( f l (3)

After taking the natural logarithms of both sides of Equation (3) mentioned- above, we can obtain the result as follows:

A l n [ - ] = Aln{^)-hQrxAln| —I (4)

After carrying out to replace A In — in Equation (2) with the right sides of Equation (4), we can obtain the following equation:

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A l n g ) = A I „ ( ^ ) + a x A l n [ | ) + A l n ( A J ^ A l „ ( ^ ) (5)

Where: - - i s GDP per capita; and — is GDP per worker or known as labor productivity of Vietnam; and A is the total factor productivity (TFP) or known as the technological progress; and — is the ratio of physical capital stock to labor or

known as capital deepening; and K is the physical capital stock-*; and is the share

m . t

{WAJ

(

^WA]is the share of the total working age population in the total population; and a is the elasticity of the aggregate production with respect to the physical capital stock; L is the total employed population at 15 years of age and above as of annual 1 July.

In Vietnam. K, is the physical capital stock (at time t) that is calculated in line with the Perpetual Inventory Method - PIM with the constant price of 1994 and the depreciation rate of the fixed assets about 5% per year in the whole period of 1986-2013 on the basis of Vietnam's Standard Industrial Classification 1993 (VSIC 1993)^,

Equation (5) showed that the growth rate of GDP per capita is equal to the grovrth rate of total factor productivity TFP (or known as technological progress), plus the growth rate of the ratio of the physical capital stock to labor (known as the capital deepening), plus the growth rate of the share of labor in the working age population, and plus the growth rate of the share of the working age population in the total population.

- Decomposition of Vietnam's GDP per capita growth in the period of 1986- 2013: Based on Equation 5, we can show clearly the decomposition of Vietnam's GDP per capita growth into four components, namely the growth rate of the total factor productivity, the capital deepening, the share of labor in the working age population, and the share of working age population in the total population at the same time. With

' As to Vietnam, K, is the physical capital stock (at time /) thai is calculated according to the Perpetual Inventory M e t h o d - PIM with the constant pice of 1994 and the depreciation rate of 5 % in the case of Vietnam. /, is the total gross capital formation at the constant 1994 price. K, is calculated by the fomular:

K, = (\-S)K, , + / , .

"• See more: www.gso,gov.vn/Modu]es/Doc_Download.aspx?DocID=6422

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the aim of thoroughly investigating the fundamental sources of Vietnam's GDP per capita growth, it is necessary to divide the whole study period of 1986-2013 into four equal periods, namely 1986-1990, 1992-1996, 2003-2007. and 2009-2013.

TaI*!2:Dm»nposttaiorTaHMt|xiinf'ofchan^inVicdiam'sGDPlierca|itagrow1h

Growth rate of Vietnam's GDP per capita (al the constant 199-1 price)

1. Contribution of changes in Labor productivity a Labor productivity decomposition by inputs

- Contribution of Capital stock - labor ratio (K/L) - Contributions of Total factor productivity (TFP) b. Labor productivity decomposition by industries

- Contribution of Intra-sectoral Changes - Contributions of Inter-sectoral Shifts 2. Contribution of clianges in the Employment

component (changes in the share of labor to the working tige population)

3. Contribution of clianges in the Demographic component (changes in the share of the working age poptdaliim to the total population)

1986-90 [1992-96 period 'jjeriod Low- j Low- income 1 income country j country

2003-07 period

Low- income country

2009-13 period

Middle- income country

"Percent point" of total changes in Vietnttnt's GDP per capita growth

10.30

72.55

5.11 7.44 8.59 3.96 -4.44

2.19 31.82

29.10

14.83 14.27 24.56 4.54 -0.54

3.26 31.09

23.40

14.02 9.38 9.67 13.73 1.72

5.97 20.10

14.89

9.65 5.24 7,78 7.11 3.22

1.99 Source: Author's estimates based on GSO (2014). IMF (2014), WB (2014), ADB(20I4).

+ Fundamental sources of Vietnam's GDP per capita growth in the period of 1986-1990: Of Vietnam's GDP per capita growth rate of 10.3% (or about 2.1% per year) in the period of 1986-1990, the labor productivity contributed 12.55 percentage points;

the share of labor in the working age population contributed -4.44 percentages points;

the share of working age population in the total population contributed 2.19 percentage 10

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T r a n s f o r m i n g Vietnam's Economy into an Efficiency - Driven Growth Trajectory

points. Thus, the highest source of Vietnam's GDP per capita growth in the period of 1986-1990 is fundamentally based on the contribution of the labor productivity. When conducting a more detailed decomposition of the labor productivity growth, we can see cleariy that, on the one hand, of Vietnam's labor productivity contribution of the 12.55 percentage points, the capital deepening contributed 5.11 percentage points, and the TFP contributed 7.44% percentage points on the basis of the labor productivity decomposition by production inputs. On the other hand, based on the labor productivity decoraposition by industries, of Vietnam's labor productivity contribution of the 12.55 percentage points, the Intra-sectoral changes contributed 8.59 percentage points, and the Inter-sectoral shifts contributed 3.96% percentage points at the same time. It means that the highest sources of Vietnam's GDP per capita growth rate in the period of 1986-1990 are composed chiefly of the contribution of Intra-sectoral changes and the Total factor productivity (TFP). In reality, the relatively low contribution of both the Intra-sectoral changes and the TFP is regarded as one of the most important reasons for the relatively low growth rate of Vietnam's GDP per capita In the context of the seriously macroeconomic instability, especially in the 1986-1989 period (Table 3).

Table 3: Decomposition of total contributions to Vietnam's GDP per capita growth in the period of 1986-1990 (percent point)

Contribution of changes in output per worker (percent point)

Contribution of "Intra- sectoral Changes"

in output per worker

Contributions of "Iiiler- scctoral Shifts"

Contribution of changes in

Employment (percent point)

Total (percent point)

+ Sectoral contributions to GDP per capita growth:

Sectoral .subtotals 12.55 \ 8.59

^• Demographic contributions to GDP per capita growth:

Total contribution to Vietnam's GDP per capita growth: 10.30 Source: Author's estimates based on GSO (2014), IMF (2014), WB (2014).

ADB(2014).

+ Fundamental sources of Vietnam's GDP per capita growth in the period of 1992-1996: In this period. Vietnam achieved its great success not only in the high U

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economic growth but also in the high GDP per capita growth. In reality, Vietnam's GDP per capita growth rate is about 31.82% in the period of 1992-1996 and h is 3.1 times higher than that of the period of 1986-1990. Of Vietaam's GDP per capita growth rate of 31.82% (or about 6.4% per year) in the period of 1992-1996, the share of labor in the working age population made the lowest conmbution of -0.54 percentages points, the share of working age population in the total population had the higher contribution of 3.26 percentages points, and the labor productivity gave the highest contribution of 29.1 percentages points. When carrying out a more detailed decomposition of the labor productivity growth in the period of 1992-1996, it can be seen clearly that the highest sources of Vietnam's GDP per capita growth rate in the period of 1992-1996 consisted mainly of the contribution of Intra-sectoral changes (it is 2.86 times higher than that of the 1986-1990 period) and the Capital deepening (it is 2.90 times higher than that of the period of 1986-1990). Even, the contribution of TFP to the labor productivity in the 1992-1996 period is about 1.92 times higher than that of the previous period. Therefore, it can be easily understood that the very high growth of the labor productivity in the 1992-1996 has been the most important reason for the highest growth rate of Vietnam's GDP per capita in the context of the sound macroeconomic stability (Table 4).

Table 4: Decomposition of total contributions to Vietnam's GDP per capita growth in the period of 1992-1996 (percent point)

Contribution of changes in output per wortcer

(percent point)

Contributions of "Inler- sectoral Shifts"

Contribution of changes in

Employment (percent point)

Total (percent point)

+ Sectoral contributions to GDP per capita growth:

28.56 Agriculture Mining Manufacturing Construction

4.01 2.97 5.76 3.98

2.81 3.79 5.44 3.74

1.20 -0.82 0.32 0.24

-2.34 -0.15 0.30 0.11

1.68 2.82 6.06 4.08

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Transforming Vietnam's Economy into an Efficiency - Driven Growth Trajectory

Trade & Hotels Transport & Storage Government services

Other Subtotals

4.58 0.76 2.81 4.24 29.10

1.99 0.62 2.84 3.34 24.56

2.59 0.14 -0.03 0.90 4.54 + Demographic contributions to GDP per capita growth:

Total contribution to Vietnam's GDP per capita growth:

133 0.17 -0.10 0 13 -0.54

5.91 0.93

2.71 4.37 28.56 3.26 31.82 Source: Author's estimates based on GSO (2014), IMF (2014), WB (2014), ADB(2014).

+ Fundamental sources of Vietnam's GDP per capita growth in the period of 2003-2007: This period continued to witness Vietnam's great achievement in both the high growth and the high GDP per capita growth in the post-global financial crisis phase.

The growth rate of Vietnam's GDP per capita is approximately 31.09% in the period of 2003-2007 and it is very nearly equal to that of the period of 1992-1996. In reality, of Vietnam's GDP per capita growth rate of 31.09% (or about 6.2% per year) in the period of 2003-2007, the lowest contribution is the share of labor in the working age population (about 1.72 percentages points), and the higher contribution is the share of working age population in the total population (about 5.97 percentages points), and the highest contribution is the labor productivity (about 23.4 percentages points). When implementing a more detailed decoraposition of the labor productivity growth in the period of 2003-2007, we can seen clearly that the highest sources of Vietnam's GDP per capita growth rate in the period of 2003-2007 included the contribution of Inter-sectoral shifts (it is 3.02 times higher than that of the 1992-1996 period) and the Capital deepening (it is very neariy equal to that of the period of 1992-1997). There are three most important differences in the sources of Vietnam's GDP per capita growth between the 2003-2007 period and the 1992-1996 period. The first and most important difference is that the Inter-sectoral shifts made a highest contribution to Vietnam's GDP'per capita growth in the period of 2003-2007 (rather than the highest contribution of Inti-a-sectoral changes in the two previous periods of 1986-1990 and 1992-1996). The second

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difference is that the contribution of TFP to the labor productivity of the period 1992- 1996 is 1.52 times higher than that of the 2003-2007 period, h means that the TFP contribution to Vietnam's GDP per capita growth had a falling tendency. The third important difference of this 2003-2007 period compared with the previous periods is that the demographic contribution rose quickly to 5.97 percentages points, and it is 1.83 times and 3.78 times higher than that of the 1992-1996 and 1986-1990 period, respectively. In addition to the great demographic contribution, the high contribution of both the Inter-sectoral shifts and the capital deepening has been the most important sources of Vietnam's high GDP per capita growth in the context of the macroeconomic stability, especially in the 2003-2006 period (Table 5).

Table 5: Decomposition of the contribution to Vietnam's GDP per capita growth in the period of 2003-2007 (percent point)

Contribution of changes in output per worker (percent point)

Contributions of 'inter- sectoral Shifts"

Contribution of changes in

Employment (percent point)

Total (percent point)

+ Sectoral contributions to GDP per capita growth: 25.13 Agriculture

Mining Manufacturing Construction Trade & Hotels Transport & Storage Government services Other

Subtotals

10.66 -0.22 8.09 1.86 3.10 0.77 -1,73 0.88 23.40

4.26 0.41 6.95 0.85 1.76 0.66 -2.42 -2.79 9.67

6.40 -0.63 1.14 1 01 1.34 0.10 0.69 3.68 13.73

-8.73 -0.08 1.45 1.24 2.46 0.48 3.61 1.28 1.72

1.93 -0 31 9.54 3.11 5.56 1.25 1.88 116 25.13

+ Demographic contributions to GDP per capita growth: 5.97 Total contribution to Total Growth in GDP per capita: 31.09

Source: Author's estimates ADB(2014).

based on GSO (2014), IMF (2014), WB (2014),

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+ Fundamental sources of Vietnam's GDP per capita growth in the period of 2009-2013: Vietnam's economy in this period had witnessed not only the seriously macroeconomic instability but also the relatively low economic growlh in company with the very low growth of GDP per capita. As a matter of fact, Vietnam's GDP per capita growth rate has a falling tendency to 20.10% in the period of 2009-2013, and therefore the GDP per capita growth of the 2003-2007 is 1.55 times higher than that of the period of 2009-2013. Of Vietnam's GDP per capita growth rate of 20.10% (or about 4.02% per year) in the period of 2009-2013, the labor productivity has its highest contribution (about 14.89 percentages points), and the next high contribution is the share of labor in the working age population (about 3.22 percentages points), and the lowest contribution is the share of working age population in the total population (1.99 percentages points). When decomposing the labor productivity growth in detail in the period of 2009-2013, we can seen clearly that, on the one hand, there is a significant reduction in the contribution of the capital deepening (it is equal to 68.8% of that in 2003-2007) and in the contribution of the TFP (it is equal to 55.9% of that in the period of 2003-2007) in the context of the seriously macroeconomic instability. On the other hand, both the Intra-sectoral changes and the Inter-sectoral shifts have made their falling contribution to Vietnam's GDP per capita growth in the period of 2009-2013 (respectively, they are equal to 80.5% and 51.8% of those in the period of 2003-2007).

Besides, there is a huge fall in the demographic contribution to 1.99 percentages points in 2009-2013 (it is only equal to 33.3% of that in the period of 2003-2007) in the context of entering the period of "gold population structure".

Table 6: Decomposition of the contribution to Vietnam's GDP per capita growth in the period of 2009-2013 (percent point)

Contribution of changes in output per worlfer

(percent point)

Contributions of "Inter- sectoral Shifts"

in output per worker + Sectoral contributions to GDP per capita growth:

Agriculture Mining

5.71 I 2.23 -0.44 1 0.20

3.48 -0.64

Contribution of clianges in

Employment (percent point) -3.61 -0.09

Total (percent point)

18.11 2.10 -0.53

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Manufacturing Construction Trade & Hotels Transport & Storage Government services Other

Subtotals

4.25 -0.20 1.54 1.10 1.88 1.04 14.89

3.84 -0.67 0.50

1.14 1.89 -1.35 7.78

0.41 0.47 1.04 -0.04 0.00 2.39 7.11 + Demographic contributions to GDP per capita growth:

Total contribution to Total Growth in GDP per capita:

0.93 1.08 3.46 0.01 0.23 1.21 3.22

519 0.87 5.00 1.12 2.11 2.25 18.11 1.99 20.10 Source: Author's estimates based on GSO (2014). IMF (2014), WB (2014), ADB(2014).

4. Conclusions and Recommendations for Vietnam

Based on the results of the fundamental sources of Vietnam's GDP per capita growth in the period of 1986-2013, we can sum up the key findings of this paper as follows: (i) The most important source of Vietnam's GDP per capita growth has been the labor productivity growth, of which the special focus given to the contribudon of Intra-sectoral changes. Inter-sectoral shifts, total factor productivity TFP, and the capital deepening K/L since 1986; (ii) The highest growth phase of Vietnam's GDP per capita in the neariy 30 years of "DoiMoi" had been resulted mainly from the highest contributions of the Intra-sectoral changes and the total factor productivity in the context of ensuring the sound macroeconomic stability; (iii) The significant downtrend of Vietnam's GDP per capita growth has been chiefly caused by the falling tendency of the labor productivity growth since Vietnam's joining WTO (in November 2006); (iv) One of the important sources of Vietnam's GDP per capita growth has been the significant contribution of changes in the demographic component (i.e. changes in the share of the working age population to the total population) in the context of Vietnam's entering the period of "gold population structure".

Some policy implications for Vietnam to catch up with the regional countries and try to avoid the middle-income trap in the next trajectory of development are recommended as follows:

- The first and most important solution is to quickly transform Vietnam's old growth from the currently width-based growth model (i.e. Factor-driven growth 16

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model) to the depth-based growth model (i.e. Efficiency-driven growth model) so that Vietnam can successfully transform its relatively low growth trajectory accompanied by serious macroeconomic instability to its higher sustainable growth trajectory along with sound macroeconomic stability.

- The second important solution is to take control of the sound macroeconomic and financial stability and enhance not only the allocation efficiency but also the technique efficiency so that Vietnam can achieve its success in the Transitional stage from the Factor-driven stage of development to the Efficiency-driven stage of development.

- The third important solution is to make a special effort to increase the labor productivity growth on the basis of enhancing the growth of the total factor productivity TFP (actively accelerating the investment in R&D and applying the technology transfer as well as establishing the chosen clusters in company with modern chies) and improving the quality of the capital deepening ¥JL (particularly improving the public investment efficiency mainly by the Public investment restructuring. State-owned enterprises restmcturing, and Banking system restructuring).

- The fourth important solution is to accelerate the more effective and suitable combination of the industrial upgrading policies and the industrial restructuring policies in line with the economic growth rate with the aim of obtaining the more sustainably and rapidly economic development so that Vietnam can effectively overcome not only the lower-raiddle-income trap in the Transitional stage of development but also successfully avoid the upper-middle-income trap in the Efficiency-driven stage of development.

In addition to maintaining the sound macroeconomic stability, the fifth important solution is to quickly improve the quality of full market-based institution and modem governance in conformity of 'transparency, consistency, accountability, legitimacy, credibility, predictability'^ in the context of Vietnam's increasingly deeper and wider international integration.

References

1. General Statistics Office-GSO (2014). Statistical Yearbook of Vietnam 2013, Statistical Publishing House. Hanoi.

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2. Nguyen Cao Due (2012), "Renovating the growth model in Vietnam in 2011-2020", August 2012. Vietnam Social Sciences, Vietnamese Academy of Social Sciences, Hanoi.

3. Nguyen Cao Due (2014), "Empirical relationship between macroeconomic instability and economic growth in Vietnam over the period 1986-2012", No. 78, July 2014. Vietnam's Socio-Economic Development Review, Hanoi.

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