Capital and labour misallocation in Vietnam

Vietnam has achieved remarkable development outcomes since reforms in 1986. However, there are concerns about the inclusiveness and sustainability of the country’s development. The share of agriculture in GDP keeps decreasing but employment in agriculture remains high, reflecting the sector’s low labour productivity. The high and rising incremental capital output ratio is a signal of inefficient investment, which is most obvious in the state sector. And the wage increase ahead of productivity deteriorates Vietnam’s competitiveness. Government policies have contributed to these problems. The agriculture sector plays an important role in food security, job creation, and is a major exporter, but receives relatively little investment. Meanwhile, the state sector accounts for a large share of total investment despite recent attempts at privatization. Restrictions in rural-urban migration hinder labour moving out of agriculture and contributing to higher labour costs in urban areas. I extend the 1-2-3 computational general equilibrium model of Devarajan et al. (1997) to include the agricultural sector, then simulate a shift in investment and government spending toward agriculture. This shift is evaluated against the stimulus package in the context of the global financial crisis in 2009. The results suggest that the stimulus package helps improve total welfare at the cost of government savings. However, the poor in the agricultural sector would have been better off if the investment policy had boosted demand for agricultural products. To assess the efficiency of state-owned enterprises (SOEs), I estimate firm-level production functions using a dynamic panel estimator on enterprise survey data over 2000-2010. The results show that SOEs have significantly lower output elasticity of capital than non-state enterprises in the three industries that SOEs have the largest market share: agriculture, mining and utilities, and financial intermediation. Within types of SOEs, the 100 per cent SOEs generally have lower output elasticity of capital than the ones having non-state investment. This implies transferring capital away from the 100 per cent SOEs and from SOEs in the three mentioned industries will help improve overall investment efficiency. I model the migration restrictions through the urban-rural wage gap. Using the enterprise survey data, I show that the urban-rural wage gap is significant even after controlling for labour qualifications. The results from my simple CGE model indicate that narrowing the wedge in urban and rural wage by relaxing migration restrictions help improve Vietnam’s competitiveness through lowering the average wage and raising labour productivity. It also helps to withdraw a sizable amount of labour out of agriculture and brings about a large welfare gain. Especially, this relatively low cost policy option seems to bring about much greater impacts than an ambitious labour skill upgrade program. The case studies show the misallocation of capital and labour due to inefficient policies that have been implemented since the central planning period, and their consequences as well. Alleviating such misallocation across industries, sectors and regions could help improve overall productivity and contribute to an inclusive and sustainable growth. Results from this thesis could provide suggestions for building a roadmap to implement the announced structural reform in Vietnam