UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS VIETNAM ECONOMIC GROWTH AND SAVING ANALYSIS IN THE PERIOD 1989 - 2012 BY LE DUC ANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2014 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS VIETNAM ECONOMIC GROWTH AND SAVING ANALYSIS IN THE PERIOD 1989 - 2012 A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By Le Duc Anh Academic Supervisor: Dr. Dinh Cong Khai HO CHI MINH CITY, DECEMBER 2014 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Acknowledgement Foremost, I would like to express my sincere gratitude to my supervisor Dr. Dinh Cong Khai for the continuous support of my M.A study and research, for his patience, motivation, enthusiasm and immense knowledge. His guidance helped me in all the time of research and writing of this thesis.
Besides my supervisor, I would like to thank VNP teaching staff for their encouragement, insightful comments, and hard questions. Last but not the least, I would like to thank my family: my parents, my wife and my brothers for supporting me spiritually throughout my life. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com OUTLINE Abstract.6 Structure of the study. 6 Chapter 2: Literature Review.
18 Chapter 3: Research Methodology .2 Unit root test .4 Granger causality analysis. 24 Chapter 4: Empirical Analysis .1 Unit root test results .2 Cointegration test results .3 Granger causality test results .2 Discussion of findings. 33 Chapter 5: Concluding Remarks. 40 References Appendix LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES AND FIGURES Figures Figure 1: Relationship between saving and economic growth stated by Solow (1956).
8 Figure 2: The grapth of LGDP, LGDS and LFDI series. 26 Tables Table 1: The summary of the main empirical studies. 13 Table 2: Unit root test of variables at level value. 27 Table 3: Unit root test of variables at the first difference.
28 Table 4: Results of ARDL bound test. 29 Table 5: Estimated long run coefficients using the conditional ARDL(2, 0, 0). 30 Table 6: Results of VECM based on error terms taken from the conditional ARDL. 31 Table 7: Results of diagnostic tests for equation 11.
32 Table 8: Results of short-run Granger causality. 33 Table 9: Average values of FDI, GDP and GDS in three stages. 34 Table 10: Commercial bank network density. 36 Table 11: Average percentage of rural population over total population in three stages.
36 Table 12: Vietnam stock market in the period 2006 – 2012. 37 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF ABBREVIATIONS Abbreviation Meaning ADF Augmented Dickey-Fuller test AIC Akaike Information Criterion ARDL Autoregressive Distributed Lag ASEAN Association of Southeast Asian Nations ECT Error Correction Term FDI Foreign Direct Investment GDP Gross Domestic Product GDS Gross Domestic Saving LGDP Logarithm of Gross Domestic Product LGDS Logarithm of Gross Domestic Saving LFDI Logarithm of Foreign Direct Investment OLS Ordinary Least Squares PP Phillips-Perron test VECM Vector Error Correction Method WTO World Trade Organization LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com VIETNAM ECONOMIC GROWTH AND SAVING ANALYSIS IN THE PERIOD 1989 – 2012 Abstract This paper employs Autoregressive-Distributed Lag model to detect the cointegrating vectors amongst three variables that are gross domestic saving per capita, gross domestic product per capita and foreign direct investment being stationary at the mixture of I(0) and I(1) in the period 1989 – 2012. The results do not support for the hypothesis as Solow (1956) states in which domestic saving and foreign direct investment are sources for domestic investments, then push economic growth. The long run relationship amongst these indicators is consistent with some recent empirical studies for the case of developing countries.
That is, the long run causal direction running from economic growth to domestic saving. Additionally, foreign direct investment does not cause economic growth in both short and long run, but tends to reduce domestic saving in long run. Furthermore, combining the estimated results with some statistical measurements of demographic change in total population and financial market development gives to us evidences in which financial market in Vietnam is still weak, thus does not strengthen the channel of domestic private saving accumulation, especially from huge amount of rural population. FDI has increased annually, but it only takes a small percentage in GDP.
As a result, there is no evidence to support for the nexus from saving to growth. GDS increasing annually is explained by a rise of GDP, and perhaps by some positive demographic change in total population. Last but not the least, in long run FDI tends to reduce domestic saving due to ineffective channel of domestic capital accumulation, especially for Vietnam stock market. Then, it casts doubts on an assumption of Solow about the positive nexus running from saving to growth, especially for developing countries.
1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1: Introduction In this chapter, the study presents the reason of choosing this kind of research for the specific case of Vietnam to analyze the interaction amongst domestic saving, foreign direct investment and economic growth in the period 1989 – 2012.1 Problem statement The central assumption of the Solow’s (1956) growth model is a positive nexus between saving rate and economic growth in which saving rate plays a role of conditional factor to push growth. This model implies some policy implications for a country to concentrate on increasing saving, thus economic growth will increase in response. However, inversely if there is a possibility of negative impact, a country shall focus on removing barriers to growth instead of accumulating saving. There are some robust empirical findings about the positive association between saving and growth.
Nevertheless, this correlation does not imply a causal direction amongst them, and then this controversy is still unsolved. Moreover, the debate concerning with the priority of policy implication for these indicators is an important issue raised at the current macroeconomics, as stated by Schmidt-Hebbel et al (1996). Hence, determining the causal direction of saving-growth linkage is crucial, and has many implications for policy makers in developing countries. At the notion of growth to saving, it has been supported by some empirical evidences of several recent studies analyzing in developing countries.
For instance, in the research by Ramesh (2006), he finds that in the group of low-middle income countries there is mostly the causal direction from growth to saving. Furthermore, the study by Pradeep, Pravakar, and Ranjan (2008) also shows the empirical evidences from 5 countries – Bangladesh, India, Pakistan, Srilanka and Nepal – there is a causal 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com direction from growth to saving, however, only Bangladesh with bi-directional causality. In an open economy, two capital sources contributing to domestic investment are domestic and foreign saving. With foreign saving, it is represented by some forms of international capital inflows.
Theoretically, these inflows are assumed to be additive, or supplement domestic saving to increase an amount of investment, hence to push economic growth. This hypothesis is seemingly relevant in some certain capital inflows, especially to foreign direct investment (noted as FDI) because this inflow is more stable than the other components of foreign saving in term of predictability and volatility (Taylor, 1997 and Lipsey, 1999 cited in Maite, Ana and Vicente, 2004). In the research composed by Matie, Ana and Vicente (2004), they analyze the role of FDI to the nexus between economic growth and domestic saving in Mexico and find that FDI causes both GDP and GDS positively, hence to reinforce the relationship between economic growth and domestic saving. However, this hypothesis does not hold in the study by Ahmad, Marwan and Salim (2002) for the case of Malaysia, Thailand and Philippines.
They find foreign savings affecting domestic saving negatively in both short and long run. Moreover, in long run the causal direction runs from foreign to domestic saving, but the inverse direction does not exist. In the history, Latin America crisis happened in Mexico after the peso was devaluated by the authorities in 1994, then quickly spreading to several other countries in this region. Consequently, a huge amount of capital outflow left these countries into shambles.
However, on the contrary to that of Latin America countries, East Asian economies were not seriously affected by the crisis. Then, based on this fact, some economists conclude that Latin America countries were more sensitive to the shift of investor sentiments and the fluctuation of international capital outflows than Asian countries. This difference relates to domestic saving rate in which the higher the 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com domestic saving in a country is, therefore can reduce the international capital outflows’ influence through a crisis. Furthermore, in this period, an increase of foreign investment in East Asian countries correlated with a huge decrease of domestic saving rate in Latin America countries.
In the mid of year 1997, the Asian crisis started from Thailand, then influenced to several other countries. Based on this fact, it casts doubts on the economic notion held earlier through Latin America crisis by some economists. The Asian economies’ currencies were devaluated sharply, then leading to a massive outflow of foreign capital at the end of year 1997. On the other hand, the experience was similar with the case of Latin America crisis.
The retreat of foreign capital emphasizes the necessity of more domestic financing seen as a complement to that decline in capital. As dramatized by Latin America and Asian crisis, therefore, it is important to analyze the nexus between domestic and foreign saving because foreign capital could be withdrawn as easily as it enters, consequently a domestic economy could be left into shambles through a crisis. In recent years, Vietnam’s economy has succeeded in the new stage of development after opening the economy in 1988. Especially, Vietnam has been a member of ASEAN since 1995, and WTO since 2007.
Then, its economic growth has increased rapidly in the period 1989 – 2012. Tariffs and trade barriers have been reduced step by step amongst members in ASEAN and WTO, therefore, Vietnam’s trade balance has been improved as well. From a poor country with per capita income only equals to 290 U.S dollars a year in 1989, Vietnam has reached to nearly 1000 U.S dollars a year in 2012. Moreover, domestic saving rate and foreign direct investment in Vietnam have also increased annually through this period.
In detail, its gross domestic saving has changed from 0.S dollars, and FDI has also moved from 0.S dollars, respectively in 1989 and 2012 (World Bank Indicators, 2012). 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Recently, almost empirical studies for developing countries show the results that the causal direction runs from economic growth to domestic saving, however, the role of FDI to the relationship is still ambiguous. Additionally, there is a lack of empirical evidences for the specific case of Vietnam, thus we choose this research topic to answer what kind of relationship stands behind the upward movement amongst these indicators in the period, 1989 – 2012.2 Research objectives As some issues mentioned on the problem statement above, they cast an empirical research objective to analyze whether or not the hypothesis of saving – growth nexus composed by Solow (1956) holds for the case of Vietnam. Moreover, in an open economy foreign capital inflows play an important role to increase income.
Therefore, we want to measure the effect of domestic saving to economic growth with an addition of foreign direct investment seen as a component of foreign saving.