India-Vietnam: A Comparative Analysis of Economic Performance

469C Bukit Timah Road Singapore 259772
Tel: (65) 6516 6134 Fax: (65) 6778 1020
Website: www.lkyspp.nus.edu.sg
Lee Kuan Yew School of Public Policy
Working Paper Series
India-Vietnam: A Comparative Analysis of
Economic Performance
Khuong Vu
Assistant Professor
Lee Kuan Yew School of Public Policy
National University of Singapore
Email: sppkmv@nus.edu.sg
Mukul G. Asher
Professor of Public Policy
Lee Kuan Yew School of Public Policy
National University of Singapore
Email: sppasher@nus.edu.sg
February, 2009
Working Paper No.: SPP09-03
Keywords: India, Vietnam, growth, investment, total factor productivity
JEL classification: O40, O47, O53
2
India-Vietnam: A Comparative Analysis of Economic Performance
Khuong Vu and Mukul Asher
Lee Kuan Yew School of Public Policy, National University of Singapore
This paper examines economic performance of India and Vietnam since 1990, when the two
countries launched their respective economic reforms. The paper also indentifies the key
policy challenges facing each country which need to be addressed to manage the reform and
sustain growth.
The analysis suggests that while the two countries achieved rapid economic growth over the
period 1990-2008, their growth patterns are distinct in three aspects: (i) Economic growth
has tended to accelerate for India as reforms progressed while decelerate for Vietnam; (ii)
The service sector was the major driver of India’s growth performance, while the industrial
sector played this role for Vietnam; and (iii) Vietnam relied heavily on capital investment,
while India relied on TFP growth for sustaining high growth in GDP and labor productivity.
The paper suggests that for India, the policy priority should be to foster capital investment,
particularly in infrastructure, while for Vietnam the imperative is to enhance the efficiency of
resource use (in some areas, such as electricity transmission and distribution, Vietnam’s
record, however, is much better than India’s).
Implicit in the paper is the need for both countries to convert budgetary and other outlays in
actual outcomes and results in more effective manner.
Key words: India, Vietnam, growth, investment, total factor productivity
JEL classification: O40, O47, O53
We thank Jeremy Schwarz for very helpful comments.
3
1. Introduction
India and Vietnam initiated economic reforms around the same time and both have had a fair degree
of success in making their respective economies more broad-based and integrated in the world
economy.
As two countries strive to inject greater economic substance to their otherwise positive relationship,
it may be useful to undertake a comparative analysis of their performance, with a view to drawing
possible lessons. The current global economic crisis has lent greater urgency to this exercise.
Economic reforms in both India and Vietnam were prompted by the severity of economic difficulties
as their previous economic paradigms had reach severe diminishing returns. India embarked on
economic reforms in 1991 in the wake of a severe macroeconomic crisis1, while Vietnam launched
its reforms in late 1980s at the depth of an economic turbulence.2
[Place Table 1 here]
The two countries launched their economic reforms from a low base of development with Vietnam
further behind India in most measures except for basic human capital as presented in Table 1, which
will be elaborated below.
The per capita income in 1990 price was US$ 374 and PPP$873 for India, while it was US$98 and
PPP$653 for Vietnam. The rural sector was dominant in both countries with rural population in 1990
accounting for 75% in India and 80% in Vietnam. In addition, in both economies in 1990, the
1 India’s GDP growth fell sharply from 5.6% in 1990 to about 1% in 1991; foreign currency reserves in 1990/91 plunged
to $ 1 billion, worth for only two weeks of imports and the country was faced with the prospect of defaulting on its
international payments, while the budget deficits and inflation rose went up substantially (Klein, 2000).
2 Vietnam suffered severe food shortage, hyperinflation, and foreign aid reduction: The annual per capita food
production output fell from 301 kg (of paddy rice equivalent) in 1986 to 281 kg in 1987 (Source: GSO, 1996). The
inflation rose from 90% in 1985 to 455% in 1986, 361% in 1987, 374% in 1988, 96% in 1989, and 36% in 1990 (Source:
IMF, 2009).
4
agricultural sector, in terms of share in GDP, was larger than the industrial sector (29.3% vs. 26.9%
for India; 38.7% vs. 22.7% for Vietnam). As an indicator of the infrastructure condition, the
telephone penetration (measured as number of main lines per 100 inhabitants) in 1990 was 0.6 for
India and 0.15 for Vietnam3.
Regarding the human capital, at the beginning of reform, India had higher school enrolment rates
than Vietnam on secondary (42.0% vs. 32.2%) and tertiary education (6.1% vs. 1.9%), while lower
than Vietnam on life expectancy (59 vs. 62.8) and health care, proxied by child mortality rate (114.9
vs. 53).
Both countries have followed a gradualist approach in carrying out economic reforms with a
systemic shift towards market economy, recognizing the role for the private sector, opening the
economy to the world, and restructuring the role of government (Ahluwalia, 2000; Riedel, 1997;
Gates, 2000).
The remainder of this paper is organized as follows. Section 2 provides a comparative analysis of the
economic growth patterns of India and Vietnam since 1990 to present; Section 3 points out a
different set of policy issues that each country has to urgently address to enhance its growth
performance. Section 4 provides concluding remarks.
2. Growth Performance and Patterns
For the period 1990-2008, GDP growth rate averaged4 6.4% for India and 7.6 % for Vietnam. Based
on information in Figure 1, the following observations may be made on growth patterns in the two
countries.
[Place Figure 1 here]
3 For a comparison, this figure was 2.4 for Thailand.
4 We use Compound Annual Growth Rate (CAGR)
5
(i) The growth for both countries was increasing in the 1990s until the Asian financial crisis
erupted in 1997. The growth accelerated again in the 2000s (starting in 2002 for India) before
falling down sharply in 2008 when the world economy entered into the on-going global
economic crisis.
(ii) India underperformed Vietnam nearly all the years during the 1990s and early 2000s but has
outperformed Vietnam since 20035 and was projected to maintain a higher growth rate than
Vietnam during the next two years, 2009-2010 when both countries will have to struggle to
overcome the challenges caused by the global economic turmoil.
(iii) Economic growth in both India and Vietnam is significantly affected by the external economic
environment. However, the effects of the crisis erupted in 2008 might be far more severe than
those observed for the Asian Financial crisis 1997-1998 and during the US and regional growth
slowdown in 2001-2002.
2.1. Growth Performance by Economic Sector
Figure 2 depicts the growth performance over the period 1990-2008 of the two countries in
agriculture, industry, and services sectors. In addition, Table 2 presents the average growth rate of
each sector and its contribution to overall GDP growth over the period 1990-2008 as well as for the
three six-year subperiods 1990-1996, 1996-2002, and 2008-2008.
The agricultural sector:
Vietnam’s agricultural sector has performed better than India’s in terms of both growth rate and
growth stability, i.e. with much less variation (Table 2 and Figure 2-top panel).
However, India has recently showed a notable improvement in this sector’s growth. During the last
subperiod 2002-2008, India surpassed Vietnam with an average growth rate 4.5% well above
Vietnam’s 3.7% for (Table 2).
5 India’s average GDP growth was lower than Vietnam’s in the two subperiods 1990-1996 (5.5% vs. 8.4%) and 1996-
2002 (5.1% vs. 6.6%) and higher than Vietnam’s in the last subperiod, 2002-2008 (8.6% vs. 7.7%) (Table 2).
6
While the agricultural sector remains the largest sector by employment for the two countries, the
growth contribution by this sector has declined rapidly in both countries, from 19% in 1990-1996 to
nearly 11% in 2002-2008 (Table 2). Both countries therefore need to shift part of employment from
agriculture other sectors, particularly through greater agriculture related value-added activities, such
as post-harvest processing. In addition, combining of agriculture and non-agriculture activities by
same individuals needs to be explored.
The Industry sector:
The two countries’ industrial sector had a fairly similar growth trend during the period over the past
two decades: an upward trend in the first half of 1990s, a downward trend in the second half of
1990s, then a good growth episode in the 2000s before the growth fell sharply in 2008 (Figure 2,
middle panel).
Overall picture, this sector’s growth has been much lower for India, especially before 2004. The gap
in growth between India and Vietnam was 4.3% for the entire period 1990-2008. However, this gap
narrowed considerably during the 2002-2008 period (Table 2).
The contribution of the industry sector to GDP growth, averaged for the period 1990-2008 was
32.2% for Vietnam, well above India’s 27.2%; furthermore, this share rose rapidly overtime for
Vietnam, from 33.5% during 1990-1996 to 44.1% for 1996-2002, to 50.3% in 2002-2008; while this
share remained around 27% for India over the three subperiods (Table 2).
The service sector:
For India, the contribution of the service sector to GDP growth for the period 1990-2008 was 55.3%,
much greater than Vietnam’s 36.4%. It is important to note that this sector accounted for a lion share
of India’s GDP growth in the last two subperiods, 69.8% in 1996-2002, and 58.3% in 2008-2008,
while this was just about 35% for Vietnam (Table 2).
[Place Figure 2 here]
7
The sharp contrast between India and Vietnam on the contribution of the industry and services
sectors to economic growth is also obvious in external trade. In 2007, India’s merchandise exports
was US$145.3 billion, claiming a share of about 62%, while its commercial services exports was
US$89.8 billion or 38% of the total exports; At the same time, Vietnam’s exports was US$48.4
billion (89% of total exports) for merchandise goods and only US$6.0 billion (11%) for commercial
services. Furthermore, transportation and travel dominated Vietnam’s commercial services exports,
while these two items accounted for a share of just about 20% for India’s6.
It is, however, important to further disaggregate growths and their reasons for each of the three
sectors to draw nuanced conclusions. This is, however, beyond the scope of this paper.
2.2. Sources of Growth
Table 3 provides estimates of sources of GDP growth using the growth accounting technique to
estimate the contribution of capital, labor, and total factor productivity (TFP) to growth.
For the entire period 1990-2008, India’s GDP average growth rate was lower than Vietnam’s by
1.2%. However, this gap for the three six-year subperiods showed a striking dynamics, narrowing
down from 2.9% in 1990-1996 to 1.5% in 1996-2002, and then turning around with India’s higher
than Vietnam’s by 0.9% in the 2002-2008 period (Table 2).
The estimates of the sources of growth suggest the gap in GDP growth between India and Vietnam
during each of the three subperiods was shaped by two growth drivers, capital contribution and TFP
growth (Table 3). At the same time, the contribution of labor input in the two countries was rather
similar in magnitude.
In the first subperiod 1990-1996, India lagged behind Vietnam in the contributions to GDP growth
of both capital input (with a gap of 1.2%) and TFP (1.6%), which resulted7 in the gap 2.9% on GDP
growth between the two countries during this period (Table 3).
6 The data presented in this paragraph is from World Trade Organization Statistics database, available at
http://stat.wto.org/Home/WSDBHome.aspx?Language=E
7 Labor input had a contribution of 0.1% to this gap
8
It is worth noting that in the subperiod 1990-1996, when the country just embarked on its reform,
Vietnam enjoyed a large one-time efficiency gain (3.4% points), arising from the unleashing of
capacities and resources that were underutilized and mismanaged under the command economy
during the pre-reform period (Wolff, 1999, p. 42).
In the second subperiod 1996-2002, the GDP growth gap of 1.5% points between India and Vietnam
was determined totally by the gap in capital contribution (1.5%). In this subperiod, however, India
surpassed Vietnam on the contribution of TFP growth with a small gap of 0.3% points, which barely
made up for the gap in labor contribution of 0.3%, (Table 3).
In the last subperiod 2002-2008, India surpassed Vietnam on GDP growth with a notable gap of
0.9% points. This gap was contributed strongly by the contribution of TFP growth (1.4%), while the
gap in capital contribution was narrowed down sharply to 0.5% (Table 3).
Scrutinizing the two subperiods, 1990-1996 (the beginning of reform and before the Asian financial
crisis) and 2002-2008 (after the Asian financial crisis period), a sharp contrast between India and
Vietnam on the shares of the two major drivers of growth, capital contribution and TFP growth is
observed.
For India, the share of TFP contribution rose from 32.7% in 1990-1996 to 43% in 2002-2008, while
the share of capital contribution to growth was near unchanged at about 40%. In contrast, for
Vietnam, the share of TFP contribution declined substantially from 40.5% in 1990-1996 to 30% in
2002-2008, while the share of capital contribution rose by nearly 10% points, from 39.3% to 49.4%
over the two subperiods (Table 3).
In order to have a more in-depth view into this the distinct patterns of contributions of capital input
and TFP growth, how these two drivers affected the growth of labor productivity (LP) in the two
countries is examined. The LP is defined as GDP (Y) divided by employment (L), LP=Y/L, which
implies
9
• • •
LP =α k+ TFP (1)
Where
•
LP,
•k
, and
•
TFP are growth rates of labor productivity, the capital stock K per labor L
(k=K/L), and TFP, respectively8. α is the share of capital input in GDP, which is assumed to be
around 1/3.
On the measure of labor productivity growth, India underperformed Vietnam during 1990-2005
although the gap between the two countries in this measure narrowed down substantially since 1999.
India has outperformed Vietnam on this measure since 2006 (Figure 3, top panel).
The equation (1) suggests that labor productivity growth is driven by growth of capital stock per
worker or capital deepening (
•k
) and TFP growth (
•
TFP ).
Vietnam’s rate of capital deepening rose rapidly since 1991 and has stayed well above India’s since
1994. Furthermore, this rate for Vietnam exceeded 8% in most years, while it fluctuated just around
4-5% until 2005 for India. This rate for India, however, has been on the rise since 2002 (Figure 3,
middle panel). This finding suggests that capital deepening or increasing capital stock per worker
has been the key driver for Vietnam to achieve rapid growth in labor productivity, and therefore,
GDP growth.
In contrast, TFP growth has become a notable strength for India to accelerate its growth. India
surpassed Vietnam in 1999 on TFP growth and the gap between India and Vietnam on this measure
was close to 1% point in most years since then (Figure 3, bottom panel).
[Place Table 3 here]
[Place Figure 3]
8 Due to data limitations in both countries, the results should be regarded as suggestive rather than definitive.
10
The above discussions, suggest again that the major drivers of GDP growth as well as labor
productivity growth are different for India and Vietnam. For India, TFP growth played the major
role, while investment in capital stock was modest. For Vietnam, investing in capital was driving
force for growth, while the TFP growth was declining.
These findings suggest that India and Vietnam face different sets of urgent policy issues which need
to be addressed if growth momentum is to be sustained and if the current global economic crisis is to
be managed. This is discussed in the next section.
3. Policy Implications
The analyses in section 2 have suggested that, while both India and Vietnam have exhibited high
economic growth during the reform period of 1990-2008, each country could have done better if
they had addressed certain critical issues.
For India, the challenges are related to insufficient capital investment. The growth of capital stock
per employee was slow, and hence, the contribution of capital to growth was modest (Figure 3-
middle panel, Table 3).
The challenge for Vietnam, however, is low TFP growth, which implies that its economy growth
increasingly relied on investment or capital accumulation (Table 3). Furthermore, the share of valueadded
in output was significantly decreasing for the agricultural and industrial sectors (which will be
presented in section 2.2).
The implications for policy priorities for each country are stated in Figure 4. Both countries need to
improve both investment and efficiency. However, fostering investment is more urgent for India,
while enhancing efficiency is vital for Vietnam.
[Place Figure 4 here]
For India, the urgency to foster capital investment implies a special focus on three priorities:
11
(i) Improving business environment;
(ii) Upgrading infrastructure; and
(iii) More result-oriented social expenditure, particularly for education and health.
For Vietnam, the critical need for enhancing the efficiency of growth requires the following strategic
efforts:
(i) Enhancing the quality of governance;
(ii) Being more efficient and prudent in making investments and more selective in attracting
FDI.
(iii) Promoting the growth of the service sector
3.1. Policy Priorities for India
3.1.1. Improving business environment
Although India is increasingly becoming an attractive destination for global investors9, the economy
has remained in serious shortage of capital investment, which has been discussed in section 2.
The deficiency of India’s business environment has been identified as a significant obstacle to
capital investment made by the business sector, the major and most productive source of an
economy’s capital investment.10 Therefore, making substantial improvement in the business
environment is a critical step for India to foster capital investment in the country.
The World Bank-IFC “Doing Business (DB)” report, which has been published annually since 2004,
provides comparable indicators of the “ease of doing business” in nearly 180 economies on 10
dimensions: “Starting a Business”, “Dealing with Construction Permits”, “Employing Workers”,
9 According to AT Kearney 2005 Survey, India was ranked as 2nd most favorable destination for global FDI after China
(Asher, 2008)
10 For example, Honorati and Mengistae (2007) show that “excessive regulation, power shortages and problems of access
to finance are significant influences on business investment rates” in India’s manufacturing industries
12
“Registering Property”, “Getting Credit”, “Protecting Investors”, “Paying Taxes”, “Trading Across
Borders”, “Enforcing Contracts”, and “Closing a Business.”11
Although the report still needs significant improvement in methodology12, it provides valuable
insights into the relative quality of the business environment in each country, which suggest the way
for the country to improve its business environment.
As shown in Table 4, on the overall measure of “ease of doing business” in 2008 India ranked 120th
out of 181 economies, which was far below Vietnam, which ranked at 87th.
The major challenges to India’s business environment were the aspects by which India was ranked
too low, which include “Enforcing contract” (ranked 180th out of 181!), “Paying taxes” (167th),
“Closing a Business” (140th), “Dealing with Construction Permits” (131st), “Starting a Business”
(114th), and “Registering Property” (114th).
Making substantial progress in these business environment aspects requires India to make profound
reforms in both regulatory framework and the effectiveness of law enforcement.
For example, in order to improve its effectiveness on enforcing contracts, India has to decisively
make progress on its two major weaknesses: (i) the number of procedures necessary to enforce the
court judgment on a contract dispute, which currently is 46 (relative to 34 for Vietnam); and (ii) the
duration for contract enforcement, which is the “average number of calendar days from the moment
the Seller files the lawsuit in court until payment is received” (India’s current duration is 1420 days
relative to Vietnam’s 295)13.
11 The data for compiling the Doing Business report are collected based on a survey designed by the Doing Business
team and its academic advisers, which “uses a simple business case to ensure comparability across economies and over
time -- with assumptions about the legal form of the business, its size, its location and the nature of its operations.
Surveys are administered through more than 6,700 local experts, including lawyers, business consultants, accountants,
freight forwarders, government officials and other professionals routinely administering or advising on legal and
regulatory requirements” (World Bank, 2009). According to the World Bank, the publication has been cited by nearly
800 academic articles as of the end of 2007. Detail on this report is available at http://www.doingbusiness.org.
12 The limitations of the DB report can be found in the report by Independent Evaluation Group IEG(2009). One of the
notable limitations is its data collection, which is confined only to the economy’s largest business city, which may not be
representative of regulation in other parts of the economy.
13 Source: “Doing Business 2008”
13
[Place Table 4 here]
On the other hand, it is important to note that India’s business environment is very strong in two
measures, “Protecting Investors” (33) and “Getting Credit” (25). This is the strengths that India
should leverage more proactively to promote its business environment.
3.1.2. Upgrading infrastructure
Infrastructure deficits have been a major bottleneck to India’s economic growth and caused a huge
loss for the economy. For example, the Economic Survey of India for 2005-2006 estimates that the
power shortage of 12% at peak levels and of 8% at non-peak levels, which were the case for India,
resulted in a GDP loss of around 3 trillion Rupees or $68 billion in the year.14Such investment is also
needed to make more rapid progress towards the emergence of India as a unified market. This in turn
would create greater factor mobility, and enable firms to take better advantage of economies of scale
and scope.
Infrastructure is not only a growth accelerator but also an equalizing accelerator, investing in
infrastructure will boost not only economic growth but also foster development and enhance national
integration. However, India has been far behind Vietnam in upgrading infrastructure. For example,
during the period 1990-2005, the electric power consumption rose more five times for Vietnam,
from 98 kWh in 1990 to 573 kWh in 2005, while it increased only modestly for India from 276 to
480. In addition, the penetration information technology in India was also much slower than in
Vietnam. Especially, the telephone penetration for India rose from 0.6 in 1990 to 3.5 in 2007, while
this rate jumped from 0.15 to 33.5 for Vietnam (Table 1).
14 “Investing in Infrastructure: Key to Economic Growth”, Keynote Speech by Haruhiko Kuroda (President, Asian
Development Bank) at the Administrative Staff College of India, 9 March 2006, Hyderabad, India; available at
http://www.adb.org/Documents/Speeches/2006/ms2006010.asp
14
Investing in infrastructure, nonetheless, does mean just pouring more money into infrastructure.
Indeed, this investment requires improving management effectiveness.
For example, investing in electric power should not be only investment in power plants but also need
substantial upgrading of the distribution network and improvement in electricity sale management.
In this regard, Vietnam is a good example for India. Over the past two decades, Vietnam has brought
down the rate of electric power transmission and distribution loss drastically, from 25% in 1990 to
15% in 2000, to 10% in 2005, while this rate for India jumped up from 20% in 1990 to 28% in 2000
and stayed above 25% since then (Figure 5).
[Place Figure 5 here]
3.1.3. Social expenditure
Human capital is the engine of economic growth (Lucas 1993, p. 270). Therefore, investment in
human capital is both critical and strategic to a country’s development. In this regard, India has
lagged notably behind Vietnam on the efforts to invest in social sectors, especially education and
health care.
For example, India’s child mortality rate (per 100,000) declined only from 114.9 in 1990 to only
76.4 in 2006, while this figure went down from 53 to 16.8 for Vietnam. The secondary school
enrolment in India increased slowly from 42% in 1991 to 44.4% in 2000, while it jumped up from
32.2% to 61.5% for Vietnam. It is even more urgent to see that over the same period, India’s tertiary
education climbed only from 6.1% to 9.6%, while it rose rapidly for Vietnam from 1.9% to 9.5%15
(Table 1).
15 For Vietnam’s tertiary education, however, the quality deterioration has become a serious concern
15
3.2. The Policy Issues for Vietnam
Vietnam’s high degree of reliance on capital accumulation rather than efficiency of resource use to
generate growth can be captured at the economic sector level.
Vietnam’s investment in the agricultural sector (proxied by the number of tractors per 100 sq. km of
arable land) has surpassed India’s since 1994 (Figure 7, top panel) but its labor productivity in this
sector remained far below India’s (Figure 7, middle panel). Moreover, Vietnam’s crop output grew
much faster than the value-added in this sector, while this pattern was opposite for India (Figure 7,
Bottom). These findings imply that in addition to large investments in the agricultural sector,
Vietnam needs to develop appropriate market information system to help its farmers make better
decisions in producing crops that can generate higher value-added per unit
Vietnam’s industrial sector also faces a severe problem of declining value-added share in output as
its output rapidly grows. This share dropped from 42.5% in 1995 to 26.3% in 200716.
[Place Figure 6 here]
It is suggested that Vietnam should address the above deficiencies through the policy initiatives
presented below.
3.2.1. Enhancing the quality of governance;
Enhancing the quality of governance can help the country grow more efficiently and faster
(Hausman, Pritchett, and Rodrik, 2005).
For Vietnam, improving governance quality means strengthening the role of market forces and
enhancing the competence of the government. These can be pursued by reducing subsidies to the
SOE sector, increasing transparency, and streamlining the government.
16 Source: Data obtained from Ministry of Industry and Commerce, Vietnam.
16
Better governance, for example, will also enable farmers and businesses to have better access to
market information, and reduce market distortions caused by SOEs and government interventions.
It appears that Vietnam has not made sufficient efforts to improve the quality of governance (figure
7). Vietnam’s governance quality has indeed been deteriorating over the past few years (2004-2007)
on the two key governance indicators: “Government Effectiveness and “Rule of Law” 17.
[Place Figure 7 here]
3.2.3. Being more efficient and prudent in using resources and more selective in attracting FDI.
Vietnam’s economy has relied more heavily on natural resources exploitation and foreign financing
than India’s.
The energy depletion, which is defined as the product of the physical quantities of energy (including
crude oil, natural gas, and coal) extracted and their unit rents, accounted for 10-18% of Vietnam’s
GNI during 2000-2006, while this rate was only 3-4% for India (Figure 8).
Vietnam also received a much larger amount of official development aid and worker’s remittance (in
terms of GDP) than India.18.
This abundance of natural resources and external financing has been a major obstacle to Vietnam’s
effort to make more relentless effort to enhance the efficiency of its economy.
[Place Figure 8 here]
17 The World Bank provides comparable measures for the six governance indicators: Voice and Accountability, Political
Stability, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption for over 200 countries
and territories (Kaufmann, Kraay, and Mastruzzi, 2008).
18 On average, during the period 2001-2006, Vietnam’s official development aid plus workers’ remittance exceeded 11%
of GDP, while this figure was about 3% for India; the Official Development Aid per capita, averaged for the period
1996-2006 was US$1.4 for India and US$18.6 for Vietnam (Source: WDI, 2009)
17
[Place Figure 9 here]
Regarding FDI, Vietnam lacks a strategy to attract the projects that enhance the sustainability and
efficiency of the country’s economic growth. Vietnam’s FDI stock in nominal value has exceeded
60% of GDP, which is very high relative to many countries, especially India, for which the rate is
still far below 10% (Figure 9).
Vietnam’s too high rate of FDI stock per GDP should be of serious concern because the country is
facing an increasingly severe problem with its FDI absorptive capacity and efficiency in utilizing
these resources. The inflation rate jumped to over 20% in 2008 was partly caused by the surge of
FDI flows and the State Bank of Vietnam rushing to buy more than US$10 billion to sterilize the
currency.19
On the other hand, the current global economic crisis is expected to lead to reduce flows to
developing countries. In fact, pledged foreign direct investment into Viet Nam in January 2009 was
just about $200 million, which was 88%, or 8.5 times, lower than $1.7 billion recorded for January
200820. This implies that FDI dependent countries such as Vietnam will therefore face even greater
challenges in sustaining growth.
Therefore, it has become imperative for Vietnam to be more strategic, selective, and effective in
attracting FDI.
3.3.Promoting the growth of the service sector
The analysis in this paper suggests that there is further scope for expanding Vietnam’s services
sector. This sector is usually less capital intensive than manufacturing, and more employment
intensive. More incentive and supporting policy should be designed to foster the growth of
Vietnam’s services sectors with great potential such as tourism, distribution, and recreation.
19 Doan Hong Quang, “Vietnam: a switch from growth to stability”, East Asia Forum, 20 Jan 2009
20 Data obtained from the Planning and Investment Ministry
18
4. Conclusion
In this paper, a comparative study of economic growth patterns of India and Vietnam during their
economic reform period has been undertaken. Despite differences in size, geography, economic
structure, and past policies, both offer contrasting yet revealing insights at the possibilities
concerning their respective policy priorities.
The study finds that while the two countries achieved high economic growth over the 1990-2008
period, their growth patterns differed in three aspects: (i) Economic growth accelerated for India
between the first 6-year subperiod 1990-1996 and the last subperiod 2002-2008, while this trend was
reversed for Vietnam; (ii) The service sector was the major driver of India’s growth performance,
while the industrial sector played this role for Vietnam; and (iii) Vietnam relied heavily on capital
investment, while India relied on TFP growth for sustaining high growth in GDP and in labor
productivity.
The paper suggests different sets of policy priorities for India and Vietnam as they focus on
sustaining economic growth, particularly during the current global economic crisis. In very broad
terms, the priority for India is to foster capital investment, especially in infrastructure, and to
increase result-oriented social expenditure. While for Vietnam, it is to enhance the efficiency with
which capital and labor are employed.
India’s urgent need for fostering capital investment suggests three policy priorities: improving
business environment, upgrading infrastructure, and more result-oriented social expenditure,
particularly in education and health.
For Vietnam, the imperative for enhancing the efficiency of growth, which means it need to achieve
higher growth from each unit of capital investment. This strategic refocus advocates three policy
priorities: improving the quality of governance; being more efficient and prudent in making
investments and more selective in attracting FDI; and promoting the growth of the services sector.
The comparative study also suggests some issues for which India and Vietnam can learn from
each other. For example, India has good experience in attracting knowledge intensive FDI
19
involving service transactions in the Information and Communication technology, financial
services, and in research and development (Asher, 2008), while Vietnam can share its experience
in attracting labor‐intensive investment.
The study has relied on broad aggregative data and on the perception surveys. While instructive,
these require considerable disaggregation and refinement before current policies and programs are
reformed or ones initiated to achieve the desired objectives. This study is therefore only an initial
step in policy oriented comparative study of India and Vietnam’s growth performance.
20
References
Ahluwalia, Montek S. (2002) “Economic Reforms in India since 1991: Has Gradualism
Worked?” The Journal of Economic Perspectives, Vol. 16, No. 3 (Summer, 2002), pp.
67-88.
Ahser, Mukul. G (2007) “India Rising Role in Asia”, the Indian Economic Journal, Vol.
55, No.1.
Chopra, Ajai (1995) India, Economic Reform and Growth: Economic Reform and
Growth, Occasional paper, IMF, Washington DC.
Gates, Carolyn L. (2000) “Vietnam's Economic Transformation and Convergence with
the Dynamic ASEAN Economies”, Comparative Economic Studies, Vol. 42, 2000.
GSO (1996) Statistic Yearbook 1996, General Statistics Office (GSO), Vietnam.
Hausman, Ricardo, Lant Pritchett and Dani Rodrik (2005), “Growth accelerations”,
Journal of Economic Growth, 10, 303-329.
IEG (2008) Doing Business: An Independent Evaluation, Taking the Measure of the
World Bank-IFC Doing Business Indicators, The Independent Evaluation Group (IEG),
World Bank, available at:
http://siteresources.worldbank.org/EXTDOIBUS/Resources/db_evaluation.pdf
IMF-WEO (2009), World Economic Outlook Databases, International Monetary Fund,
available at http://www.imf.org/external/ns/cs.aspx?id=28, accessed Jan 15, 2009.
Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi (2008) “Governance Matters
VII: Aggregate and Individual Governance Indicators, 1996-2007”, World Bank Policy
Research Working Paper No. 4654.
Klein, L.R. and T. Palanivel (2000) “Economic Reforms and Growth Prospects in India”,
ASARC Working Papers from Australian National University, Australia South Asia
Research Centre, available at http://rspas.anu.edu.au/papers/asarc/.
Lucas, Robert E. 1993. “Making a miracle”, Econometrica, Vol.61(2): 251-72.
Mengistae, Taye and Maddalena Honorati (2007) “Corruption, Business Environment,
and Small Business Fixed Investment in India”, World Bank Policy Research Working
Paper No. 4356.
Riedel, James (1997) “The Vietnamese Economy in the 1990s”, Asian-Pacific Economic
Literature, Vol. 11, No. 2, pp. 58-65(8).
21
WDI (2009) World Bank Development Indicators, online database, accessed Jan 15,
2009.
EIU (2009), Economic Intelligence Unit Country Database, accessed Jan 15, 2009.
Wolff, Peter (1999) Vietnam, the Incomplete Transformation: The Incomplete
Transformation, Gdi Book Series, No 12, Routledge.
World Bank (2006) India - Inclusive Growth and Service Delivery: Building on India’s
Success, Development Policy Review, Report No. 34580-IN.
22
Table 1: Selected Socio-Economic Indicators
Indicator India Vietnam
1990 2007 1990 2007
Population (million) 849.5 1,123.3 66.2 85.1
GDP (current PPP$, million) 742.0 3,092.1 43.2 221.3
GDP per capita
• Current US$ 374 1,042 98 836
• Current PPP$ 873 2,753 653 2,600
GDP Structure a (%)
• Agriculture 29.3 18.3 38.7 20.4
• Industry 26.9 29.3 22.7 41.6
• Services 43.8 52.4 38.6 38.1
Share of rural population (%) 74.5 70.7 79.7 72.6
Infrastructure b
Electric power consumption (kWh per capita) 276 480 98 573
Telephone per 100 inhabitants 0.60 3.5 0.15 33.5
Mobile phone per 100 inhabitants 0.12 20.8 0.29 27.9
Internet user per 100 inhabitants 0.14 17.8 0.01 21.0
Bandwidth (bit per person) 0.27 24.3 0.08 84.1
Human Capital c
Life expectancy at birth (years) 59.0 63.1 62.8 68.4
Child mortality rate, under-5 (per 1,000) 114.9 76.4 53 16.8
School enrollment, primary (% gross) 93.7 93.9 106.7 105.7
School enrollment, secondary (% gross) 42.0 44.4 32.2 61.5
School enrollment, tertiary (% gross) 6.1 9.6 1.9 9.5
Notes: a GDP structure, data in column 2007 is for 2006. b Infrastructure: Data in column 1990 for mobile phone,
internet, and bandwidth is for 1999; data for electric power consumption in column 2007 is for 2005. c Human Capital,
data for life expectancy and child mortality in column 2007 are for 2006, data on school enrolment in column 1990 is for
1991 and in column 2007 is for 2000.
Sources: WDI (2009)
23
Table 2: Growth Performance by Sector, 1990-2008
Sector India Vietnam Gap (India –Vietnam)
1990-2008 1990-96 1996-02 2002-08 1990-2008 1990-96 1996-02 2002-08 1990-2008 1990-96 1996-02 2002-08
Growth Rate, CAGR (%)
GDP 6.4 5.5 5.1 8.6 7.6 8.4 6.6 7.7 -1.2 -2.9 -1.5 0.9
Agriculture 2.9 3.6 0.7 4.5 4.0 4.1 4.1 3.7 -1.1 -0.5 -3.4 0.8
Industry 6.5 6.1 4.7 8.6 10.7 12.4 9.8 10.1 -4.2 -6.3 -5.1 -1.5
Services 8.1 6.8 7.8 9.6 7.1 8.7 5.4 7.4 1.0 -1.9 2.4 2.2
Share of Growth Contribution (%)
GDP 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Agriculture 13.4 19.1 4 10.9 20.5 19.1 17.5 11.1 -7.1 0.0 -13.5 -0.2
Industry 27.2 29.8 25.2 26.4 32.2 33.5 44.1 50.3 -5.0 -3.7 -18.9 -23.9
Services 55.3 54.6 69.8 58.3 36.4 39.9 34.9 36.8 18.9 14.7 34.9 21.5
Sectoral Shifts 4.1 -3.5 1 4.4 10.8 7.5 3.5 1.8 -6.7 -11.0 -2.5 2.6
Note: * the growth contribution share of a sector is computed as the sector’s share of GDP at the beginning of the period multiplied by its growth over the
period. The residual is defined as the effect of sectoral shifts.
Source: Authors’ calculation with data from WDI(2009) for 1990-2007, IMF(2009) for 2008.
24
Table 3: Sources of Growth, 1990-2008
Sector India Vietnam Gap (India –Vietnam)
1990-2008 1990-96 1996-02 2002-08 1990-2008 1990-96 1996-02 2002-08 1990-08 1990-96 1996-02 2002-08
Growth Contribution, % points
GDP 6.4% 5.5% 5.1% 8.6% 7.6% 8.4% 6.6% 7.7% -1.2% -2.9% -1.5% 0.9%
Capital contribution 2.5% 2.1% 2.2% 3.3% 3.6% 3.3% 3.7% 3.8% -1.1% -1.2% -1.5% -0.5%
Labor contribution 1.6% 1.6% 1.6% 1.6% 1.7% 1.7% 1.9% 1.6% -0.1% -0.1% -0.3% 0.0%
TFP 2.3% 1.8% 1.2% 3.7% 2.3% 3.4% 1.1% 2.3% 0.0% -1.6% 0.1% 1.4%
Share in Growth (%)
GDP 100 100 100 100 100 100 100 100
Capital contribution 39.1 38.1 43.6 38.4 47.5 39.4 55.7 49.1 -8.4 -1.3 -12.1 -10.7
Labor contribution 25.0 29.4 32.1 18.6 22.8 20.4 28.1 20.9 2.2 9.0 4.0 -2.3
TFP 35.9 32.5 24.3 43.0 29.7 40.2 16.2 30 6.2 -7.7 8.1 13.0
Source: Authors’ calculation with data from WDI(2009), IMF (2009), and EIU(2009).
25
Table 4: Business Environment in India, 2008
Ease of... Doing Business 2008 rank
India Vietnam Gap (India - Vietnam)
Doing Business 120 87 33
Enforcing Contracts 180 42 138
Paying Taxes 167 131 36
Closing a Business 140 124 16
Dealing with Construction Permits 131 64 67
Starting a Business 114 101 13
Registering Property 114 38 76
Employing Workers 89 72 17
Trading Across Borders 81 65 16
Protecting Investors 33 168 -135
Getting Credit 25 51 -26
Source: “Doing Business 2008”, World Bank, available at http://www.doingbusiness.org
26
Figure 1: Annual GDP Growth Rate, 1990-2010: India and Vietnam
0
1
2
3
4
5
6
7
8
9
10
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
India
Vietnam
Sources: WDI(2009) for 1990-2007; IMF(2009) for 2008; EIU (2009) for 2009-2010 projections
27
Figure 2: Annual Growth Rate by Economic Sector
Agriculture, Value Added: Annual Growth Rate, 1990-2010
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
India
Vietnam
Industry, Value Added: Annual Growth Rate, 1990-2010
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
India
Vietnam
Services, Value Added: Annual Growth Rate, 1990-2010
0
1
2
3
4
5
6
7
8
9
10
11
12
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
India
Vietnam
Sources: WDI(2009) for 1990-2007; EIU (2009) for 2008(estimated) and 2009-2010 (projected).
28
Figure 3: India’s and Vietnam’s Labor Productivity Growth: Capital Deepening vs.
TFP Growth
Labor Productivity Growth, 1990-2010
0
1
2
3
4
5
6
7
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
India
Vietnam
Real Capital Stock per Labor Growth, 1990-2010
0
1
2
3
4
5
6
7
8
9
10
11
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
India
Vietnam
Total Factor Productivity Growth, 1990-2010
0
1
2
3
4
5
6
7
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
India
Vietnam
Note: For these charts we use the 5-year moving average growth rate
( ) / 5 4 3 2 1
5
t t t t t
MVA
t g = g + g + g + g + g − − − − to eliminate short-term fluctuations.
Source: data from EIU(2009)
29
Figure 4: Policy Issues for India and Vietnam in Promoting Economic
Growth.
Source: Authors
Figure 5: Vietnam’s Improvement in Economic Management
Electric power transmission and distribution losses (% of output)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
%
India Vietnam
Source: WDI (2009)
Vietnam: high investment
growth, low growth
efficiency
Growth Efficiency
High
High
Low
Low
Investment Growth
India: low investment
growth, high growth
efficiency
Aim: high investment
growth, high growth
efficiency
30
Figure 6: Selected Indicators in the Agriculture Sector: India and Vietnam
0
50
100
150
200
250
300
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Tractors oer 100 sq. km of arable land
India
Vietnam
200
250
300
350
400
450
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
US$
India
Vietnam
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
250
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Index
1990=100
India, Value-added
Vietnam, Value-added
India, Crop production
Vietnam, Crop production
Source: WDI (2009)
31
Figure 7: The Quality of Governance
World Bank Governance Indicators
20
25
30
35
40
45
50
55
60
2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007
India Vietnam India Vietnam India Vietnam India Vietnam
Control of corruption Government Effectiveness Regulatory Quality Rule of law
Percentile Rank
Source: World Bank Governance Indicators, 2008
32
Figure 8: Energy Depletion as percentage of GNI
1.0
3.0
5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
%
India
Vietnam
Note: The energy depletion is defined as the product of the physical quantities of energy
(including crude oil, natural gas, and coal) extracted and their unit rents
Source: WDI (2009)
Figure 9: FDI Stock (nominal value) as Percentage of GDP: India and Vietnam
0
10
20
30
40
50
60
70
80
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
%
India
Vietnam
Source: UNTAC