VIETNAM : SOLOW MODEL

Doi moi policy implementation (1986)

Led to increase in capital accumulation by -

● Foreign Investment:
● Privatisation: The privatisation of state-owned enterprises has transferred
assets into private hands. These assets can be used to generate profits and
reinvest in the business, leading to capital accumulation.
● Economic Growth
● Improved Infrastructure: The government has invested in infrastructure
projects, such as roads, ports, and industrial parks, to support economic
development. These investments have created opportunities for businesses to
expand and accumulate capital.

FDI over the years

SOURCE : world bank

Capital formation (as % of GDP)

Gross savings ( as a % of GNI)
GDP growth (usd)

Labour force growth %

● Role in Solow Model: In the Solow model, labour force growth is another
driver of economic expansion. A growing labour force contributes to an
increase in output. However, similar to capital, the marginal productivity of
 labour decreases as the labour supply increases, unless balanced by capital
investment and productivity gains.
●
○ Vietnam has a relatively young and expanding labour force, which has
been a key factor in its rapid economic growth. The country has been
able to leverage its demographic advantage to attract labour-intensive
manufacturing industries, making it a hub for global production,
particularly in electronics and textiles.
○ The ARDL-based study on the Solow model with technological
progress highlights that while labour is a crucial factor, improvements in
productivity and technology are necessary to enhance the contribution
○ of the labour force to economic growth​(paper 1 ) Vietnam's transition
from an agriculture-based economy to manufacturing and services has
also played a role in absorbing its growing labour force, increasing
overall productivity.
○ However, the model and the research findings suggest that simply
increasing the labour supply is insufficient for sustained growth. The
shift towards higher-value industries and improvements in skills
through education and training are necessary to maintain growth levels
as the labour force matures.

Labour force (total)

TECHNICAL PROGRESS
 ○ Vietnam has made strides in improving productivity through technology
transfer, largely facilitated by FDI. Many foreign companies bring in
advanced production techniques and management practices, which
help local industries upgrade their processes.
● The shift towards more sophisticated manufacturing, such as electronics
production, has been significant. Companies like Samsung have set up large
production bases in Vietnam, bringing with them new technologies that have
boosted productivity.
● The steady-state analysis suggests that while capital accumulation has been
a significant driver of Vietnam's growth, long-term stability and the ability to
achieve growth targets (like 7% annually) require continued improvements in
technological capabilities and productivity

[Link]

Patents and Technological Progress:

● Patents are a measure of innovation output and are closely linked to

technological progress. In the case of Vietnam:
○ The decline in resident patent applications (down 12.3%) suggests
that while there may be technological innovations, the
commercialization or legal protection of these innovations is limited,
which may hinder sustained technological progress in the long run.
○ Utility model applications, which increased by 33.7%, represent
smaller-scale innovations or improvements, indicating that Vietnam
is focusing on more incremental technological advancements. This
still supports productivity improvements but may not lead to
breakthrough technologies that drive rapid long-term growth.
According to the Solow model, if technological progress (captured by patenting
activity) slows down, it could eventually limit the economy's ability to sustain high
levels of growth because capital accumulation alone will not be sufficient.

patent applications negatively influenced GDP per capita in the long term. This
could suggest inefficiencies in the process of turning patents into commercially
viable technologies or that patent applications do not always translate into real
economic gains.

Trademarks and Economic Growth:

● Trademarks protect branding and business-related innovations, which

indirectly contribute to economic growth by fostering competitive markets
and encouraging businesses to innovate and differentiate themselves.
● The increase in trademark filings (up 7%) and the large share of resident
trademark filings (70.8%) suggests that Vietnam is becoming more focused
on intellectual property protection. This could encourage businesses to
innovate and expand, ultimately contributing to productivity and growth in
the long run.

In terms of the Solow model, this rise in trademark protection signals

improvements in the business environment and can lead to higher productivity
through better use of existing resources (capital and labor), which is reflected in
improved TFP.

Vietnam’s Overall Innovation and the Solow Model:

● The statistics reveal mixed signals: while Vietnam has shown growth in
trademarks and utility models, there is a decline in resident patent
 applications, which is a concern for fostering long-term technological
progress.
● According to the Solow model, sustained economic growth is not achievable
without continuous technological innovation. The decrease in patent
applications could indicate that Vietnam's technological progress may not
be robust enough to drive long-term economic growth unless the country
improves its patenting activities and focuses more on high-tech innovations

Section 4.1 of the document discusses the steady state economic growth of
Vietnam, and Figure 1 presents the estimated growth rate over time. Here's a
summary and explanation:

● Steady State Growth: The estimated steady state economic growth rate is
6.13%, represented by a horizontal blue line in the graph.
● Economic Growth Fluctuations: The black line represents the actual
economic growth rate over the period from Q2 2007 to Q4 2019. Vietnam’s
economic growth fluctuates around the steady state value.
○ The growth rate was lower than 6.13% from Q1 2011 to Q3 2014 but
exceeded the steady state in 2015. After 2017, the growth rate
remained above the steady state until Q4 2019.
● Fluctuation Range: The economic growth rate mostly fluctuated within a
band of +/- 1% around the steady state (upper bound: 7.1%, lower bound:
5.1%). For example:
 ○ The highest recorded growth was 7.47% in Q4 2010 and Q1 2018.
○ The lowest was 3.10% in Q1 2009

It states that the steady state rate of 6.13% is close to the government's target of
7% for the 2021–2030 period. This suggests that while the steady state is slightly
below the target, the economy could achieve higher growth during expansion
periods.

CONVERGENCE :

Convergence suggests that poorer countries (like Vietnam) have the potential to
grow faster than richer countries (USA, Japan, South Korea) because they can adopt
existing technologies and practices, rather than developing them from scratch.

Vietnam's Growth: As seen in the graph, Vietnam has had significantly higher
growth rates, especially in the 1990s and 2000s, compared to these advanced
economies. This is a real-world reflection of the convergence hypothesis at work.

Higher Capital Marginal Returns:

 ● According to the Solow model, countries with lower capital stocks tend to
experience higher marginal returns to capital. Vietnam, starting with a
lower capital base, has benefited from higher returns on investments in
infrastructure, industry, and human capital, allowing it to grow rapidly.
● In contrast, countries like the USA, Japan, and South Korea, which are closer
to their steady-state levels of capital and technology, experience
diminishing returns to capital, leading to slower growth rates

TFP - sector wise

[Link]
State-Owned Enterprises (SOEs):

● Output Growth: The state-owned enterprises experienced modest output

growth (8%).
● TFP Growth: TFP growth is negative (-1.3%), indicating that SOEs are
relying heavily on capital accumulation rather than improving efficiency or
technology. The negative TFP implies that productivity improvements are
not contributing to growth, suggesting inefficiency in operations and a lack
of innovation.

Non-State Enterprises:

● Output Growth: Non-state enterprises show the highest output growth

(22.18%), indicating strong performance and expansion.
● TFP Growth: Although TFP growth is positive (0.95%), it is still relatively
low compared to output growth. This suggests that the non-state sector is
 benefiting from both capital accumulation and modest improvements in
efficiency and technology. This sector is more dynamic and competitive
compared to SOEs.

Foreign Direct Investment (FDI) Sector:

● Output Growth: FDI enterprises also show robust output growth (18.53%),
similar to the non-state sector.
● TFP Growth: TFP growth is negative (-1.61%), indicating that FDI-driven
growth relies more on capital investment (perhaps foreign capital) than on
productivity gains. While FDI brings significant capital to Vietnam, its
negative TFP suggests inefficiencies or slower technology transfers and
productivity enhancements.

What does negative TFP mean ?

Negative TFP growth suggests that capital (machinery, infrastructure) and labour
(workforce) are not being used efficiently to produce output. In other words, even
though the amount of capital and labour may be increasing, the overall
productivity is declining