Economic Reform and Growth Performance: China and Vietnam in Comparison

Khuong Vu*

Abstract: Since the launch of economic reformsChina in 1978 and Vietnam in 1986both countries have recorded impressive achievements. However, the two countries have experienced a widening gap in growth performance, while the context and characteristics of their reforms are strikingly similar. The paper documents three principal findings: (1) China and Vietnam are noticeably similar in their initial conditions and approaches to reform and economic management (2) the widening gap in growth performance between China and Vietnam can be explained by two broad sets of factors; one related to institutions and another to governance. While the institutional factors have certain effects, the governance-related factors are more powerful in driving the divergence; and (3) the divergence between the two countries was notably accelerated at certain critical moments during their courses of reforms. Our analysis also reveals the weaknesses of China in its fundamentals for long-term growth, which concern political stability, control of corruption, regulatory quality, heavy reliance on the hands-on effectiveness of leadership, and the intensity of its energy use.

JEL Classification: O25; O38; O43; O57 Key words: Economic Growth; Reform; China; Vietnam; East Asia; * National University of Singapore, 469C Bukit Timah Road, Singapore 259772. I am grateful to Danny Quah, Dwight Perkins, John Wong, Henry Wan, and Erik Thorbecke for helpful suggestions and thank Matthew Beckwith and Stevenson You for research assistance.

1. Introduction

Over the past five decades, East Asia has emerged as a region breeding economies with spectacular growth performance. The World Bank (1993) identified the nine highperforming Asian economies (HPAEs), which includes Japan, the Four Tigers (Hong Kong, Singapore, South Korea, and Taiwan), and the three newly industrialized economies (NIEs) Indonesia, Malaysia, and Thailand. While the Four Tigers and the NIEs have made impressive achievements in economic growth and development, their gaps in the pace and efficiency of growth have been substantial1. Furthermore, the faster and stronger recovery2 from the 1997 Asian financial crisis of the Four Tigers relative to the NIEs suggest these gaps reflect some fundamental weaknesses in the growth foundation of the latter group.

The emergence of China and Vietnam as the economies with impressive growth performance since their launch of reforms appears to resemble the divergence observed for the Four Tigers and the NIEs. Figure 1, which plots the relationship between per capita GDP and GDP growth rate3, shows that China and Vietnam have followed very similar growth patterns; however, Vietnams growth is below Chinas by a notable gap.

[Place Figure 1 here]

Furthermore, Vietnams GDP per capita growth path appears to follow Indonesias (from the $200 level4) and Thailands (from the $400 level), while Chinas shows a decisive deviation from these patterns (Figure 2).

For example, over the period 1960-1985, average GDP growth rate was about 6 percent or higher for the Four Tigers, while this rate was only around 4 percent for the NIEs (World Bank, 1993, Figure 1.1, p. 29). The NIEs also lagged behind the Four Tigers (except Singapore) in TFP growth (Figure A1.4, p.67). For example, GDP in 2000 relative to 1996 was 125% for Taiwan and 116% for Korea but only 97% for Thailand and 96% for Indonesia (source: authors calculation with data from ADB, 2001). We use the 5-year Forward Moving Average (FMA) growth rate to smooth out short-term fluctuations and capture the growth trend.
4 3 2

Measured in constant 2000 US$.

[Place Figure 2 Here]

What has caused the substantial gap in the growth patterns between China and Vietnam? Some may think that it has happened simply because China has advantages over Vietnam in population size and in connectedness to Hong Kong and Taiwan. It is more puzzling, however, that Cambodia, Vietnams another neighbor, has also far outperformed Vietnam in growth over the past 10 years even though it is much smaller than Vietnam in population size and less connected to Hong Kong and Taiwan5. The growth divergence between China and Vietnam, therefore, needs to be examined through a comprehensive and analytical lens

This study aims to portray the similarities between China and Vietnam in the context and characteristics of their economic reform and analyzes the factors causing the widening gap in growth performance between the two countries over their courses of reform. The paper is organized as follows. Section 2 presents the similarities between China and Vietnam in initial conditions of growth and reform characteristics. Section 3 depicts the quantitative and qualitative gaps in economic growth performance between the two countries. Section 4 analyzes the factors responsible for this divergence. Section 5 uses the Thorbecke and Wan framework to strengthen the insights gained from section 4 about the causes of the growth divergence. Section 6 concludes the paper.

Vietnam is neighbored by China, Laos, and Cambodia. Cambodia, with a population less than 20% of Vietnams, achieved an average GDP growth rate of over 10% for the period 1986-2006, while this rate was 7.8% for Vietnam (Source: authors calculation from WDI, 2008).

2. Economic Reform in Vietnam and China: The Similarities China started building its socialist economy in 1949, while the construction of the socialist economy in Vietnam began in 1954 for the North and for the unified country in 1975. Both China and Vietnam began their economic development from economies dominated by the agriculture sectors, and their endeavors to build a Soviet-style economy achieved desperate failures rather than successes during their pre-reform periods.

In December 1978, the Third Plenary Session of the 11th Central Committee, in which Deng Xiaoping became the core of the Communist Party of Chinas leadership, initiated Chinas economic reform. Eight years later, in December 1986, the sixth congress of the Communist Party of Vietnam (CPV) launched Vietnams economic reform, known as Doimoi (Renewal).

Although the economic reforms in the two countries were launched nearly a decade apart, they have strikingly similar features. These similarities include the circumstances leading to reform, the initial conditions of the development setting, and the approach to reform and economic management.

2.1. Similarities in the factors leading to economic reform The economic reforms in both China and Vietnam were initiated under circumstances with three critical factors for change: receptivity, crisis, and opportunity.

Receptivity: During their pre-reform periods (China: 1949-1978; Vietnam: 1954-1986), the two countries made extraordinary efforts to build their socialist economies but they experienced desperate failures rather than success. China was impoverished by catastrophic drivers such as the Great Leap Forward and the Cultural Revolution, while the Vietnamese economy was ruined by collectivization of land, nationalization of privately owned industrial and trading establishments, and socialist ideology-driven initiatives.

After nearly 30 years of economic development with an annual growth rate of 2.7%,6 Chinas per capita GDP in 1978 remained at only US$164 (Table 1). Nathan (1990, p. 200) described the beginning of Chinas reform as a time when "agriculture was stagnant, industrial production was low, and the people's living standards had not increased in twenty years.

In 1986, Vietnam was listed among the poorest countries in the world, with per capita GDP at $203 (Table 1). The per capita GDP growth rate was only 1.4% over the 10 years since the country was officially reunified in 1976 (GSO, 1996), and the country was heavily reliant on the Soviet Union for economic aid.

The frustrating economic development results made the people in both China and Vietnam highly receptive to a profound change in the way the government managed the economy. For Vietnam in 1986, the receptivity to change was even greater due to the encouraging success observed after the initial reforms in China.

Crisis: the two countries faced critical difficulties which made their reforms even more urgent. Chinas agriculture sector shrank by 1.8% in 1976 and 2.2% in 1977 (WDI, 2008). Vietnam suffered severe food shortages, hyperinflation, and aid reduction. The annual per capita food output fell from 304 kg (of paddy rice equivalent) in 1985 to 301 kg in 1986, and to 281 kg in 1987 (GSO, 1996). The inflation rate was extremely high: 90% in 1985, 455% in 1986, 361% in 1987, and 374% in 1988 (IMF, 2008). The annual aid per capita received by Vietnam dropped by more than 50%, from $6 during 19781982 to $2.6 during 1983-1987 (WDI, 2008).

Opportunity: the reforms in the two countries became possible after the deaths of their paramount leaders (Mao Zedong in 1976; Le Duan in 1986), who were steeped in orthodox socialist ideology and had dominated the political system for decades prior to their deaths.

Computed from the Penn World Table (PWT) dataset for the period 1952-1978.

The similar circumstances leading to reforms in China and Vietnam, as discussed above, also implies that the reform to be launched in each country would be more economic than political in character as asserted by Fforde and Vylder (1996, p. 304).

2.2. Similarities in the development conditions at the launching of reform

At the launch of economic reform, China and Vietnam had similar developmental conditions, including basic human capital, economy, and infrastructure, as depicted in Table 1 below.

[Place Table 1 Here]

With regard to human capital, the two countries had comparable levels of young adult literacy and nutrition (measured by calorie supply per day). While the life expectancy was somewhat higher for China, Vietnam had a slight edge in the adult literacy rate and population age.

The Chinese and Vietnamese economies at the launch of reform were at the underdeveloped stage of development, with per capita GDP being $165 for China and $203 for Vietnam7.

With regard to the GDP structure, the industrial sector was dominant for China (48.2%), while for Vietnam, the agricultural sector was largest (38.1%). This difference between the two countries in the GDP structure posed both advantages and disadvantages for each country in executing economic reforms. For China, the large industrial sector provided a good base for industrialization, but its serious inefficiency, overstaffing, and lack of market-orientation would require formidable efforts and costs to reform this sector. For Vietnam, the larger agricultural sector could allow it to leap frog with new industrial
7

Measured in Constant 2000 US$.

development projects, but the smaller industrial sector also meant that the country would face a more serious shortage of skilled labor.

Concerning the rural economy, 80% of the population in each country lived in rural areas, and the two countries had a similar level of cereal yield per hectare (2,802 kg for China and 2,715 kg for Vietnam).

Both China and Vietnam had a very low level of openness and its infrastructure was severely inadequate. Export share in GDP was 6.6% of GDP for both countries. Telephone penetration (per 1,000 inhabitants) was 1.3 for Vietnam and 2.0 for China8.

2.3. Similarities in reform approach and implementation As discussed in section 1, the reforms in China and Vietnam were initiated under the pressure of economic destitution and the critical need to find a new way to build the economy. However, the paramount concern of the leadership in both the countries was to maintain political stability and the absolute ruling power of the Communist Party. As a result, both countries chose a gradualist approach to reform with a special focus on economic growth to justify the legitimacy of the political system.

[Place Table 2 Here]

Table 2 lists the reform milestones and major initiatives undertaken by China and Vietnam over their reform periods9, which show striking similarities represented in the following elements. The launch of reform is a landmark decision of the communist party led by a new leadership team:

For comparison, this figure was 8.2 for the Philippines in 1978.

For some helpful surveys of reform milestones and initiatives, see OECD (2005) and Zhang (2006) for China; and Gates (2001) and Leipziger (1992) for Vietnam.

 Unshackling the agricultural sector (which accounted for over 80% of labor force in

each country): Both countries introduced the household contract responsibility system. This step turned households into production units, giving farmers the incentive to maximize their efforts, which officially took place in China in 1980 and in Vietnam in 1988, that is, about two years after the launch of reform in each country.
Legalizing the formation and growth of the private sector: This step was taken by

China in 1982 through a constitution amendment, placing the private sector as a supplement to the socialist economy and by Vietnam in 1990 with the introduction of the Private Business Law.
SOE reform: this has been conducted in three phases: The first phase (1979-1984 for China and 1987-1994 for Vietnam) focused on giving SOEs more autonomy and making them more commerce-oriented, along with eradication of the command economy. The second phase (1985-1993 for China and 1994-1998 for Vietnam) aimed to restructure SOEs, while establishing a legal framework for SOEs to operate in a market economy. The third phase (1994-onwards for China and 1999 for Vietnam) sought to level the playing field for all players in the economy and to speed up privatization. Embracing globalization, promoting FDI and exports: Both countries have proactively embraced globalization, making great efforts in attracting FDI and promoting exports. Both the countries introduced their laws for attracting FDI shortly after the launch of reform (China: 1979; Vietnam: 1987). Financial reform: Both countries started with banking sector reform, separating the specialized major state-own commercial banks from the central bank and putting on a more strictly commercial footing with newly established joint-stock and private banks. It took each country more than a decade from the launch of reform to establish the first stock market exchange (China in 1990; Vietnam in 2000).

Table 2 also indicates that Vietnam has accelerated the pace of its reforms to catch up with China on reform initiatives. The time lag between Vietnam following China on similar reform milestones/initiatives has decreased over time. For example, Vietnam legalized the private sector in 1990, eight years after China, but leveled the business playing field with a unified enterprise law in 1999, only five years after China, and it revised this law at the same time as China in 2006.

It is worth noting that, while China and Vietnam are strikingly similar in the conditions of and approaches to reforms, they differ distinctively in the effectiveness of leadership. For China, the leadership, first formed and led by Deng Xiaoping, has been far more visionary, proactive, pragmatic, and innovative in pushing for reforms, while the Vietnamese leadership was built on the consensus of a politburo of 13-15 members, who understand the critical need for reforms but have been notably indecisive in making decisions and the consensus-based decision-making mechanism has hindered their accountability. This distinction will be presented in section 4 and it is probably one of the core factors causing the divergence in growth performance between the two countries.

3. Divergence in economic growth performance The growth pattern during economic reform has been observed for Vietnam over the past 20 years, since 1986, and for China over nearly 30 years since 1978. Therefore, there are two meaningful time frames to conduct comparative analyses of growth for the two countries.

The first time frame is the first 20 years of reform (1978-1998 for China and 1986-2006 for Vietnam), during which the two countries underwent similar stages of reform and development. The second timeframe is the past 20 years (1986-2006), during which both China and Vietnam were exposed to the same external environment.

To analyze the growth patterns of the two countries, we will identify the episodes of sustained growth accelerations for each country or the growth divergence between the two. We provide some definitions of these terms before our analysis. Sustained growth acceleration episode (SGAE)10 Concerning the growth pattern of a country, a period [t, t +k] (from year t to year t + k) is defined as a SGAE if it meets the following conditions: k 5 ; that is, the SGAE must last at least five years. g t 1 > 0 ; that is, the growth in year t-1, the year before the SGAE, is positive.
10

This definition is inspired by Hausmann, Pritchet, and Rodrik (2004).

 g t +i > g t 1 + a for 0 i k and a 2.0% ; that is, the growth rate in any year during the period [t, t + k] is higher than the growth rate in the year just before the episode by at least a%. The period is called a moderate SGAE if 2.0% a < 3.0% , and a rapid SGAE if a 3.0% ;

Growth divergence episode (GDE) Concerning the growth patterns of two countries X and Y, a period [t, t +k] is defined as a GDE led by country X if the following conditions are met: k 5 ; that is, the GDE must last at least five years. g tX 1 g tY1 ; that is, the growth rate of country X is not higher than country Ys in year t-1, the year just before the GDE.

g tX i g tY+i for 0 i k and g tX i > g tY+i in most (say, k 1 ) years; that is, the growth + +
rate of country X exceeds or equals country Ys throughout the GDE, and the equal growth rate can take place in not more than one year during the episode.

We now analyze the growth performance of Vietnam and China during their first 20 years of reform (subsection 3.1) and over the past 20 years (subsection 3.2) and the efficiency of their growth (subsections 3.3).

The patterns and sources of economic growth experienced by Vietnam and China during the two 20-year timeframes are captured in Figure 3 and Table 3.

[Place Figure 3 and Table 3 Here]

3.1. The First 20 Years of Reform (Vietnam: 1986-2006; China: 1978-1998) In the first 20 years of reform, Vietnam experienced two moderate SGAEs. One was from year 6 to year 11, which was denoted as [ y 6 y11] , and the other was [ y14 y 20]. At the same time, China underwent two rapid SGAEs, one was [ y 4 y10] and the other was

[ y13 y 20] (Figures 3A.1).

10

The two SGAEs for Vietnam and China were rather similar in timing. The first SGAE, which started after a few years of reform, was enabled mainly by unshackling resources mismanaged in the old system for more efficient uses driven by market forces. The second SGAE, which started only after 13-14 years of reform, was the result of new investments made during the reform period. Therefore, the magnitude of the first SGAE depended on the severity of the mismanagement and the decisiveness of the reformist leadership, while the second SGAE was determined by the depth and consistence of reform, which laid the foundation for longer-term growth. Interestingly, the two SGAEs, [ y 6 y11] and [ y14 y 20] for Vietnam and [ y 4 y10] and

[ y13 y 20] for China, nearly coincided with the two GDEs [ y 4 y10] and [ y13 y19] , during which one observed the growth divergence in favor of China. This

means that the growth divergence between Vietnam and China happened not because of a slowdown in Vietnams growth. Rather, the divergence occurred when Vietnams growth

increased, but at a slower pace than Chinas. This observation implies that growth
divergence could be even more widened in good times. Therefore, it should be a cause for concern when a country pales beside comparable economies during the good times because it signals some weakness in its growth fundamentals.

The two GDEs have enabled China to far outperform Vietnam in growth in the first 20 years of the reform timeframe. The 5-year moving average of the GDP growth rate curve of China is well above Vietnams, except for year 12 (year 1990 for China), when China suffered the consequence of the Tiananmen Square incident. This curve ranges between 8.0% and 12.5% for China and moves in a lower range of 5.0% to 8.5% for Vietnam (Figure 3A.1).

More specifically, Chinas average GDP growth rate over the 20-year reform time frame was 9.8%, exceeding Vietnams (7.1%) by 2.7%. This gap was sustained in each of the four 5-year subperiods of the 20-year reform timeframe. As a result, after the first 20

11

years of reform, Chinas GDP expanded 6.5 times, while Vietnams rose only 4.0 times. (Table 3 and Figure 3A.2.).

3.2. The Past 20 years, 1986-2006 Over the past 20 years, 1986-2006, China enjoyed a rapid SGAE [1991 06] , which occupied nearly the entire 20-year period, while Vietnam underwent two moderate SGAEs, [1991 97] and [2000 06] . Furthermore, the SGAE [1991 06] is also a GDE, throughout which Chinas growth rate was well above Vietnams (Figure 3B.1). As a result, Chinas GDP growth path has taken off since 1992 relative to Vietnams (Figure 3B.2). In fact, 1992 is the critical year, commemorating a remarkable take-off of Chinas

economy, which we will analyze in section 4.

Averaged for 1986-2006, Chinas GDP growth rate was 9.7%, exceeding Vietnams 7.1% by a gap of 2.6%. As a result, after the past two decades, Chinas GDP rose nearly 6 times, while Vietnams increased only 4 times (Table 3 and Figure 3B.2).

3.3. Gaps in the efficiency of growth Vietnam has lagged behind China not only in the pace but also in the efficiency of economic growth, which is evidenced in the contrast in TFP growth, productivity increase in the agricultural sector, and the pattern of growth in energy consumption.

TFP Growth:
TFP growth was significantly larger for China than for Vietnam over the period 19862006, especially for the subperiods 1996-2006 (Table 4). It is important to note that TFP growth for Vietnam during the subperiod 1986-1996, when the country was in the first phase of reform, was quite high (4.4%) close to that for China (5.6%). However, TFP growth slowed sharply to 1.8% during the subperiod 1996-2006 for Vietnam, while remaining high at 4.5% for China. The slowdown in TFP growth and the widening gap between Vietnam and China in this indicator suggests that Vietnam has slacked in raising labor productivity and enhancing the efficiency of investment.

12

[Place Table 4 Here]

The agricultural sectors growth pattern:

The agricultural sector in China and Vietnam were very similar at the beginning of reform, especially in terms of the sectors share of employment and the yield per arable hectare, as discussed earlier in section 2.

[Place Figure 5]

With regard to crop production, Vietnam significantly outperformed China in both the time frames the first 20 years of reform and the past two decades (Figures 5A.1 and 5B.1). However, on the agricultural sectors productivity, which is measured as valueadded per worker, China grew notably faster than Vietnam in both time frames (Figures 5A.2 and 5B.2).

The sharp contrast between the two countries in the growth performance of crop production (led by Vietnam) and in productivity (led by China) shows a notable gap in the efficiency of growth between the two countries.

Energy Consumption:
Both China and Vietnam face the challenge of low efficiency in energy consumption.

[Place Table 5 Here]

The energy consumption per unit of GDP, measured as kilograms of oil equivalent per US$1,000 of GDP (at the 2000 price level), was higher for Vietnam and China in comparison to Indonesia and Thailand in 1990, 2000, and 2005. However, China drastically reduced its energy consumption intensity from the level of 1.95 in 1990 to 0.91 in 2005, while Vietnam was less successful in cutting down this rate, which was from 1.62 in 1990 to 1.15 in 2005. (Table 5A)

13

China also outperformed Vietnam in the efficiency of electricity consumption. During 1990-2005, the period for which data are available, the growth rates of the economy and the industrial sector relative to electricity consumption were higher for China, and lower for Vietnam. As a result, the rate of Chinas electricity savings over the period is +0.4% for the entire economy and +3.3% for the industrial sector, while these figures for Vietnam show the opposite effects, with negative saving rates of -6.5% and -3.4%, respectively (Table 5B).

14

4. Explaining the growth divergence using the determinants of growth model The growth literature initiated by the seminal work of Barro (1991) shed light on the factors explaining the variations in economic growth performance across countries. The factors relevant for analyzing the growth divergence between China and Vietnam can be grouped into four interrelated categories: initial level of income, basic human capital,

institutions, and governance-related issues.

The initial level of income is expected to have a negative effect on growth. That is, a
country with lower income tends to grow faster than a country with higher income, all else being equal. This is called the conditional convergence effect (Barro, 1991, 1997; Barro and Sala-i-Martin, 1995).

Basic human capital is proxied by various variables such as education (e.g., school
enrollment, years of schooling) and health (e.g. life expectancy at birth). These factors have a positive impact on growth (Barro, 1991, 1997; 2006).

Institutions The variables capturing the quality of institutions include rule of law (Barro,
1991, 1997; Rodrik, Subramanian, and Trebbi, 2004) and property rights (Claessens and Laeven, 2003), corruption (Mauro, 1995), and political instability (Gallup, Sachs, and Mellinger, 1998). According to these studies, better maintenance of rule of law and property rights has a positive effect, while corruption and political instability have a negative effect on growth.

Governance-related factors include an array of variables. Those with a positive impact

on growth include openness (Sachs and Warner, 1995; Harrison, 1995; Ben-David, 1996), share of investment in GDP (Levine and Renelt, 1992), investment in transport and communication (Easterly and Rebelo, 1993), development of financial system (Levine and Zervos, 1993), and technology diffusion and innovation (Bloom, Canning, and Sevilla, 2002). The variables with a negative effect on growth take into account market distortions (Sachs and Warner, 1997), inflation (Levine and Renelt, 1992; Levine

15

and Zervos, 1993), government budget deficits (Fischer, 1993; Easterly and Rebelo, 1993), and share of government spending in GDP (Barro, 1991, 1997).

Furthermore, China and Vietnam are economies transitioning from command to market economies, and so government decisiveness and consistency are crucial in strengthening the private sectors confidence and strategic effectiveness, and hence fostering economic growth. Hausman, Pritchett, and Rodrik (2005) analyzed the growth acceleration patterns of 110 countries over 36 years (1957-1992) and the factors underlying the patterns, and found that the most important determinant of sustained acceleration in economic growth is a major change in economic policy. Their finding suggests that, for transition economies such as Vietnam and China, the leaderships decisiveness, innovation, and commitment to make strategic efforts in deepening reform are critical for major policy changes, and play a crucial role in accelerating economic growth and sustaining high growth performance.

We will use the insights introduced above to investigate the factors causing the growth divergence between China and Vietnam, which was substantial in both time frames - the first 20 years of reform (China: 1978-1998; Vietnam: 1986-2006) and the past 20 years (1986-2006 for both countries).

To facilitate our analysis, we focus mainly on the 1986-2006 timeframe, during which China and Vietnam carried their economic reforms in the same external economic environment.

4.1. Initial level of income Vietnams per capita income in 1986 was lower than Chinas by about 20-30% (Vietnam: US$203, PPP$1,031; China: US$311, PPP$1,289)11. This means that the initial level of income or conditional convergence effect is in favor of Vietnam, and hence not a factor explaining Chinas faster growth performance.

11

WDI (2008).

16

4.2. Basic human capital [Place Table 7 Here]

While basic human capital is influenced by policy, it is more fundamentally shaped by social legacies. Vietnam and China have striking similarities in human capital endowment due to their closeness in geography, culture, and history (Brantly, 2006). In fact, as shown in Table 6, Vietnam and China are comparable in basic measures of human capital related to health (life expectancy at birth, child mortality rate), education (literacy, school enrollments, and students studying in the US. This finding implies that basic human capital is not a factor causing the growth divergence between China and Vietnam.

4.3. Institutions We will examine the difference between China and Vietnam in the institutions dimension based on a set of variables, which include political stability, voice and accountability (an indicator of democracy), rule of law, control of corruption, and regulatory quality, as provided by the World Bank Governance Indicators, composed by Kaufmann et al. (2007)12.

We will compare the mean of each of these indicators between China and Vietnam to reveal which country is advantageous to the other on each measure13.

[Place Table 6 Here]

Political stability
12

This dataset covers 212 countries and six dimensions of governance: (i) Voice and Accountability; (ii) Political Stability; (iii) Government Effectiveness; (iv) Regulatory Quality; (v) Rule of Law; and (vi) Control of Corruption. Each index ranges from -2.5 to +2.5 (higher is better). The data for the period 19962006 is available at http://www.govindicators.org. The date for these indicators is available only the period 1996-2006.

13

17

Political stability was defined by the Kaufmann et al. (2007) as the likelihood that the government will be destabilized by unconstitutional or violent means, including terrorism. Vietnam is clearly better positioned in this regard than China. Vietnam is comfortably in the positive zone of the score with the mean score at +0.29, while this figure for China is in negative zone (-0.23). Because political stability has a solid impact on investment and growth, this factor should be counted as a plus for Vietnam compared to China in its effect on economic growth.

Rule of law
Rule of law was defined by the Kaufmann et al. (2007) as the extent to which agents have confidence in and abide by the rules of society, including the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. Both China and Vietnam are in the negative zone (below the average country) on the rule of law. However, Vietnam is slightly weaker than China in this measure (-0.54 vs. -0.40). Because rule of law has a strong impact on growth, this factor should have some effect on the gap in growth performance between China and Vietnam.

Control of corruption
China and Vietnam are in the negative zone of the World Bank control of corruption indicator, which means that corruption is a serious problem in both countries. This problem is noticeably more severe for Vietnam than China (-0.71 for Vietnam vs. -.45 for China), which implies that control of corruption a significant factor responsible for the growth divergence between China and Vietnam.

Regulatory quality
As defined by the Kaufmann et al. (2007), regulatory quality is the ability of the government to provide sound policies and regulations that enable and promote private sector development. On this measure, both countries are weak, falling in the negative zone. However, China is significantly stronger than Vietnam (-0.27 vs. -0.57). This

18

observation suggests that regulatory quality is a significant factor causing the ChinaVietnam divergence in growth performance.

In summary, the gaps in control of corruption, regulatory quality, and to a lesser extent,

rule of law, are the three institutional factors that have some significant effects on the
divergence between China and Vietnam.

4.4. Governance-related factors With regard to the governance-related factors, we will examine the gap between China and Vietnam in a range of issues and variables, including the leaderships commitment to

reform, government effectiveness, government share of total fixed investment, control of inflation, industrial policy, innovative capacity building, and openness.

The leaderships commitment to reform

We analyze the gap in leadership commitment to reform between China and Vietnam in three aspects: decisiveness in making strategic decisions at the critical junctures of economic reform, streamlining the state sector, and privatization.

Decisiveness in making strategic decisions at the critical junctures: As presented in section 3, there are moments marking the notable divergences between China and Vietnam in growth, especially in the industry and service sectors. In the first 20 years of reform, this moment is year 13, which was 1991 for China and 1999 for Vietnam (Figures 3A). In the past 20 years, these two moments took place in 1991 and 1999 (Figures 3B). We now examine the events behind these moments of surging divergence.

The economic reforms in both China and Vietnam are economic in character. After the first 10 years of reform, both China and Vietnam had escaped from economic hardship and entered into a critical phase of development which requires more strategic and bolder decisions concerning the direction they should take and the reform initiatives they should launch. These decisions are particularly challenging for countries like China and

19

Vietnam, where the die-hard communist mindset is entrenched in the leadership and in revolutionary veterans. This problem led to a critical moment that coincided with the 13th

year of reform in each country.

For China, year 13 of reform was 1992. As documented by Zhao (1993), Chen Yun, the most powerful leader after Deng Xiaoping in post-Tiananmen China, and his allies launched a series of attacks against reform, including a call in 1991 for abolishing special economic zones (p. 745). Facing these critical challenges, Deng Xiaoping did not compromise but decided to undertake a preemptive fight by launching a trip to Southern China in January 1992 to rally support for accelerating reforms.

Dengs trip is evidenced to have produced both short-term and long-term effects on Chinas political and economic development although the economic effects are far more clear-cut (Wong, 2001, p. 43). Economic growth surged from 9.0% during the period 1978-91 to 12.0% over the period 1991-96, while total FDI flows amounted to US$156 billion for the period 1991-96 compared to US$23.3 billions for 1978-91 (Wong, 2001, Table 1, p. 44). For Vietnam, the 13th year of reform was 1999. Although the reform had brought about unprecedented progress on economic development, the leadership was still preoccupied with the peaceful evolution maneuvered by the foreign forces to subvert the ruling power of the communist party and with the confused about the countrys road towards socialism. The World Bank (1999) assessed that Vietnam has taken a cautious economic stance, giving priority to ensuring macroeconomic stability rather than taking risks in order to achieve higher economic growth. In particular, in September 1999, Vietnam refused to sign a trade agreement with the United States that both sides had negotiated and agreed upon. As a U.S. trade official involved in this process noted, "When you

20

compare this to the effort put forward by China during trade negotiations, [] it shows how Vietnam is simply not convinced about opening up"14. Perkins (2001) stated:
Vietnam's initial refusal to sign a trade agreement with the United States, an agreement that its own officials had negotiated, is clear evidence of the reluctance of many officials, even in the top leadership, to accept the kind of industrial policy that is likely to be the most appropriate for their country. (p. 267).

Streamlining the public sector: China and Vietnam are both burdened with a large and overstaffed public sector, which are potential causes of red tape, corruption, incompetence, and inefficiency. Therefore, streamlining the public sector is a good indicator measuring the depth of a countrys commitment to deepening reforms. In this endeavor, China and Vietnam have gone in opposite directions. As shown in Table 9, China consistently and drastically reduced its public sectors employment relative to the entire economy by 27.0% during 1995-2000 and by 22.0% in 2000-2005, while Vietnam accelerated the expansion of its public sectors employment, with the expansion rate (relative to the economys employment growth) rising from 1.3% during the period 1995-2000 to 9.3% in 2000-2005.

SOE sector reform and privatization: The SOE sector is problematic for both China and Vietnam, but Vietnam has been far behind China in reforming it. Perkins (2001) pointed out that Vietnam was much less reliant on market forces than China in reforming the SOE sector. For example:
Both China and Vietnam have experimented with a shareholding system []. In Vietnam, as of 1998, only a dozen state firms were corporatized, while the number in China was in the many thousands. Shareholding could become the vehicle for creating boards of directors who would ensure that plant managers concentrated mainly on making profits rather than on pleasing their government and party superiors (p.269). And The mergers and acquisitions process in China, therefore, has begun to take on some of the characteristics of similar processes in market economies, although the government's role remains large. [At the same time], Vietnams government-directed approach in creating stateowned conglomerates, following the Japanese and Korean models appears to be little more
14

Politburo Is Hesitating on Pact, Official Says: U.S. Aide Is Pessimistic On Hanoi Trade Accord, by Thomas Crampton, Herald Tribune, September 11, 1999 (available at http://www.iht.com/articles/1999/09/11/viet.2.t_0.php).

21

than a repackaging of existing arrangements without a change in business behavior. [] It is hard to see what contribution these new, larger units will make Vietnam's international competitiveness (p. 272).

In privatization, China has also been more effective than Vietnam. As shown in Table 11, as a percentage of GDP in 2000, the total value of proceeds from privatization over the period 1990-2005 was 4.8% and the average size of each transaction was $252 million, comparable to figures for neighboring countries such as Thailand, Indonesia, Malaysia, and the Philippines. These figures are much smaller for Vietnam, which are only 1% and 3.0 million, respectively.

The discussion above shows that China is well ahead of Vietnam in the depth of commitment to reform. As pointed out by Hausman, Pritchett, and Rodrik (2005), major policy changes are critical to the acceleration of economic growth Vietnams much weaker position in leadership commitment to reform has laid a weak foundation for major policy changes and, hence is a crucial factor causing the divergence in growth performance between the two countries.

Government Effectiveness
Government Effectiveness was defined by the Kaufmann et al. (2007) as the quality of public services, the capacity of the civil service and its independence from political pressures; the quality of policy formulation. On this measure, the gap between China and Vietnam favors China (-0.04 for China vs. -0.40 for Vietnam). World Bank (2002, p. vi) asserts that [Vietnam has a] reputation of slow decision making and inefficient transparency. The large disparity in government effectiveness is an important factor behind the growth gap between the two countries.

Governments share in total investment

A larger share of government in the total investment in a country tends to have a negative effect on efficiency of resource allocation, the vibrancy of the private sector, and control of corruption. For both China and Vietnam, the government accounts for a large share of the countrys total fixed investment, but this share is significantly larger for Vietnam.

22

This share, during the period 1995-2005, for which the data are available, was 52.6% for Vietnam and 47.3% for China (Table 8)15.

Control of inflation
Vietnam has successfully brought inflation down to a manageable level since 1993 after suffering hyperinflation in the 1980s and early 1990s, while China has kept inflation low except for 1993, 1994, and 1995 (Figure 5). Since 1996 to 2006, the inflation in both the countries has remained in single digits.

While inflation is harmful, Briault (1995) and Barro (1995) found that an inflation level below 20 percent per year does not have significant adverse effects on growth. Although the inflation has gone up drastically recently in Vietnam since late 2007 and substantially slowed down the countrys growth in 2008, it is not a significant factor responsible for the gap in growth between the two countries during 1986-200616.

Innovative capacity building

Innovation is the major driver of growth. Innovative capacity is the ability of a country both a political and economic entity to produce and commercialize a flow of new-to-the world technologies over the long term (Stern, Porter, and Furman, 2000, p. 1).

The innovative capacity of a country can be assessed based on indicators such as the rates of patent applications filed by its residents to the local and to the U.S. patent offices and the rate of published scientific and technical journal articles.

15

World Bank (2002) analyzed the serious inefficiency problem in Vietnams heavy public investment in the cement, steel, and sugar sectors, which provide examples of poor commercial investment programs that have imposed significant costs to the economy and have deprived activities with higher social returns access to scarce investment resources (p.100). Dapice (2006) provides insightful observations of the wasteful spending of the Vietnamese government on the commercially ill-considered projects such as Dung Quat refinery and Vinashin shipyards. For example, the Dung Quat refinery project (the first oil refinery in Vietnam) was ordered in January 1997 but has not been completed after 11 years, while its estimated cost rose from $1.3bn to $2.5bn .

16

The inflation in June 2008 was 26.8% for Vietnam and 7.1% for China. In 2008, China is projected to grow at 9.8% and Vietnam at 6.5%.

23

As shown in Table 11, Vietnam is far behind China in these measures in both magnitude and growth. For example, the rate (per 1 million residents) of patents filed to the local patent office rose from 6.41 in 1991 to 20.07 in 2000 to 71.4 in 2005 for China, while for Vietnam it was 0.55 in 1991, and 0.44 in 200017. The gap in the rate of published scientific and technical journal articles between China and Vietnam was also large and widening, from 5.4 vs. 1.0 in 1991, to 31.9 vs. 2.7) in 2005.

The above analysis implies that the widening gap in innovative capacity building is an important factor driving the growth divergence between China and Vietnam.

Openness
Two widely-used metrics to assess the openness of an economy to the world are the ratio of total trade to GDP and the weighted mean of tariffs. Since the launch of reform in 1986, Vietnam has rapidly increased its openness to the world. As shown in Table 8, Vietnam is more open than China in both metrics of openness. These simple openness measures, therefore, do not explain why Vietnam has lagged behind China in growth performance.

We now look deeper into the efficacy of openness of the two countries in integrating into the world. It is obvious that the two countries have achieved rapid growth in both exports and imports. However, Chinas export has grown faster than its import, while the reverse pattern was observed for Vietnam (Figure 7). Furthermore, Vietnam was slow relative to China in moving up the technology ladder18. For Vietnam, the share of low technology and agricultural products fluctuated around 57-58% during 2000-2005 and declined very little (by 0.6 percentage points) from 58.1% in 2000 to 57.5% in 2005. At the same time, this figure for China fell sharply by 12.9 percentage points, from 44.9% in 2000 to 32.0% in 2005. On the other hand, the share of high-tech industry in Vietnams exports was small and rose little (by only 1.8%) from
17

This data in WDI for Vietnam is missing from 2001 onwards. The data is available only for the period 2000-2005.

18

24

5.8% in 2000 to 7.8% in 2005, while this figure went up more drastically in China reaching 41.3% in 2005 from 28.9% in 2000 with rise of 12.3 percentage points. In particular, China has effectively embraced the boom in the Information and Communication Technology (ICT) market for expanding its exports (the share of the ICT industry in Chinas exports rose by 9.0 percentage points, from 15.3% in 2000 to 24.2% in 2005), while Vietnams gain in these exports was very moderate (1.1 percentage points, from 2.8% in 2000 to 3.9% in 2005) (Table 12).

One should also note the driver of import growth for each country over the period 20002005. As shown in Table 13, this driver is high technology for China, with its share up by 6.2% from 31.3% in 2000 to 37.6% in 2005, while the driver of import growth for Vietnam is the medium-low technology and mining (oil and gas) products, with its share rising up by 7.5 percentage points from 28.7% in 2000 to 36.2% in 2005. This finding suggests that imports have served as an engine for China to move up the technology ladder, but not for Vietnam

Vietnam has been slower than many other East Asian economies in exploiting the rapid growth of the Asian market driven by China. During the period 1990-2006, the Asia share in Vietnams total export declined from 39.2% to 36.5%, while this share rose rapidly for Korea (from 34% to 51%), Taiwan (38.2% to 64%), Singapore (47.1% to 63.4%), Hong Kong (42.3% to 61.9%), Thailand (37.8% to 53.3%), and Philippines (34.8% to 64.9%) (ADB, 2007, Table 20).

The above analyses reveal a significant gap in the efficacy and effectiveness of openness of the two countries in integrating into the world, which is indeed responsible for their divergence in growth performance. The analyses also explain why simple measures of openness, such as trade-to-GDP, are not robust predictors of the variation in growth.

25

5. The China-Vietnam growth divergence: Insights from Thorbecke and Wans framework

Thorbecke and Wan (2004) proposed an insightful framework to explain the growth divergence related to East Asian countries. The framework consists of six core elements. The first is the emphasis on agricultural development and primary education, which helps transfer surplus resources and human capital to the incipient industrial sector. The second is the emphasis on macroeconomic stability that seeks to ensure a sustainable and equitable long-term development path for the economy. The third element is the

opening up the economy to world, which allows the economy to benefit from integrating
into the world economy and learning from this interaction. The fourth element is the

emulation of the technological leader, which provides the greatest scope for knowledge
transfer. The fifth element is the advantage of intra-East Asian connections, which enables an East Asian economy to enjoy lower transaction costs in deepening economic ties with its successful neighboring economies. The sixth element concerns the unused

growth potential, which implies that economies much below its potential due to a
negative shock such as wars tend to have more strength to spur its growth

We will briefly examine the six elements of the Thorbecke and Wan framework to gain further insights into the growth divergence between China and Vietnam.

5.1. Emphasis on agricultural development and primary education The two countries have placed heavy emphasis on agricultural development since the beginning of their reform periods. As a result, their agriculture sectors have made considerable progress and experienced rather similar growth paths in the first 20 years of reform. In primary education, the two countries have very high and rather similar literacy and primary school enrollment rates (Table 6).

The above examinations suggest that the first element the emphasis on agricultural development and primary education - is only a minor factor in growth divergence between China and Vietnam.

26

5.2. Emphasis on macroeconomic stability China and Vietnam have paid special attention to political and macroeconomic stability, and both countries have been successful in this endeavor.

However, as pointed out in section 4, Vietnam has lagged in its efforts to build the longterm foundation for macroeconomic stability and growth relative to China. Vietnams weakness is evidenced by its lack of strategic commitment reform, poor industrial policy, and ineffectiveness in promoting the efficiency of economic growth.

The above analysis suggests that the sizeable gap between China and Vietnam in the strategic emphasis on long-term macroeconomic growth is a crucial factor driving the growth divergence between the two countries.

5.3. Opening up the economy to world Both China and Vietnam have been rapidly opening their economies to the world in promoting trade and attracting FDI. While the pace of Vietnams opening has been faster than Chinas, the former is far behind in the efficacy and effectiveness of openness. As presented in subsection 4.4, while China is steadily increasing its trade surplus and rapidly moving up the technology ladder, Vietnams trade deficit is rapidly widening and its openness seems stuck because exports and imports are driven by low-to-medium technology. In addition, Vietnam was also behind many other East Asian economies in exploiting the rapid growth of the Asian market and integrating into the Asian production network with China at its core.

Thus, the big gap in the efficacy and effectiveness of openness is an important factor explaining the growth divergence between China and Vietnam.

5.4. Emulation of the technological leader

27

Subsection 4.4 shows a large and widening gap between China and Vietnam in innovative capacity building, which implies that China has been far more aggressive than Vietnam in emulating the technological leader. The sharp contrast between China and Vietnam in emulating global technological leaders, therefore, is an important factor in explaining the divergence between China and Vietnam.

5.5. Advantage of intra-East Asian connections While China has an unmatched advantage in its relationship with Hong Kong, China and Vietnam are comparable in their connectedness with other East Asian countries. Comparing the structure of FDI inflows between China and Vietnam during the periods with data available (1983-1998 for China and 1988-2005 for Vietnam), one finds that the share of FDIs from Taiwan, Singapore, Korea, and Japan were significantly higher for Vietnam compared to China. At the same time, the shares of FDI inflows from technological leaders such as the U.S. and Germany were higher for China than Vietnam. (Table 14)

This finding suggests that, except for its special link with Hong Kong, China does not posses an advantage over Vietnam in connectedness with other East Asian economies, and therefore this is not a major factor explaining the growth divergence between China and Vietnam.

5.6. Unused growth potential China and Vietnam are comparable in basic human capital, culture, history, and geography. Furthermore, both countries have been devastated and mismanaged during their pre-reform periods, which kept them in the low-income league until recently. Therefore, their unused growth potential could be considered equivalent. That is, this element is not responsible for the growth divergence between China and Vietnam.

In summary, our analyses based on the Thorbecke and Wan framework show that the divergence in growth performance between China and Vietnam is mainly driven by three

28

elements: the strategic emphasis on long-term macroeconomic stability, the efficacy of

opening up the economy to the world, and the efforts to emulate global technological leaders.

6. Conclusion Examining the economic reforms of China and Vietnam provides important insights into the determinants of growth and growth divergence. The two countries initiated their economic reforms from comparable economic and social conditions and have followed strikingly similar approach in reform and economic management.

Since the launch of reform (China in 1978; Vietnam in 1986), both countries have racked up impressive achievements in their growth performance. However, at the same time, their growth patterns have diverged as well. China has far outperformed Vietnam in both the pace and efficiency of growth. This parallels a gap between the so-called Asian Tigers such as Korea and Taiwan, on the one hand, and ASEAN economies such as Indonesia and Thailand on the other.

What explains this difference between China and Vietnam? We conclude that the divergence in growth performance between China and Vietnam gap is mainly caused by the gaps in two broad sets of factors.

The first set includes factors related to institutions. In these measures, the gap between China and Vietnam is observed for rule of law, control of corruption, and, to a lesser extent, regulatory quality. However, these gaps are not too large and both countries are weak in these measures. Our analyses show that these gaps are significant but not dominant in driving the growth divergence between the two countries.

The second set concerns the governance-related factors, which prove to be the dominant causes of the divergence. These factors include the leaderships commitment to reform, government effectiveness, the emphasis on long-term macroeconomic stability and the soundness of industrial policy, the efforts in building innovative capacity and emulating

29

global technological leaders, and the strategic efficacy in opening the economy to the world.

Our study also finds that the divergence between the two countries was notably accelerated at some critical moments during the course of reform. For both country, the critical moments, coincidently took place in the 13th year of reform in each country, which was 1992 for China and 1999 for Vietnam. In 1992, Deng Xiaoping decisively and successfully made a preemptive attack against the anti-reform forces by his trip to southern China, which remarkably boosted Chinas reform momentum. For Vietnam, 1999 marked the refusal of Vietnams leadership in signing the trade agreement with the US, which had a severely adverse impact on investors perception about Vietnams commitment to opening to the world. Furthermore, we notice that the divergence between the two countries was markedly widened in good rather than bad times, when both countries accelerated their growth but the better performer far outperformed the other.

Our analysis also reveals the weaknesses of China in its fundamentals for long-term success, which concern political stability, control of corruption, regulatory quality, heavy reliance on the hands-on effectiveness of leadership, and the intensity of its energy use.

30

References ADB. 2001. Key Indicators 2001, Asian Development Bank. ADB. 2007. Key Indicators 2007, Asian Development Bank. Aron, Janine. 2000. Growth and Institutions: A Review of the Evidence, The World Bank Research Observer, Vol. 15, No. 1, (Feb., 2000), pp. 99-135. Aschauer, D.A. 1989a. Is public expenditure productive? Journal of Monetary Economics, 23(2), 177200. Barro, Robert and Xavier Sala i Martin, "Economic Growth and Convergence across the United States," National Bureau of Economic Research working paper, July 1990. Benabou, Roland. 1996. Inequality and Growth, NBER Macroeconomics Annual, Vol. 11, (1996), pp. 11-74. Birdsall, Nancy, David Ross and Richard Sabot. 1995. Inequality and Growth Reconsidered: Lessons from East Asia, The World Bank Economic Review, Vol. 9, No. 3 (Sep., 1995), pp. 477-508. Claessens, Stijn and Luc Laeven. 2003. Financial Development, Property Rights, and Growth, The Journal of Finance, Vol. 58, No. 6, (Dec., 2003), pp. 2401-2436. Dapice, David. 2006. Fear of Flying: Why is sustaining reform so hard in Vietnam?, Vietnam Program, Harvard University, June 2006. Easterly, W and S. Rebelo. 1993. Fiscal policy and economic growth, Journal of Monetary Economics, 32, 417458. Fforde, Adam, and Stefan De Vylder.1996. From Plan to Market : The Economic Transition in Vietnam, Boulder: Westview Press, 1996. Forbes, Kristin J. 20000. A Reassessment of the Relationship between Inequality and Growth, The American Economic Review, Vol. 90, No. 4, (Sep., 2000), pp. 869-887. Gates, Carolyn L. 2000. Vietnam's Economic Transformation and Convergence with the Dynamic ASEAN Economies, Comparative Economic Studies, Vol. 42, 2000. Hausman, Ricardo, Lant Pritchett and Dani Rodrik (2005), Growth accelerations, Journal of Economic Growth, 10, 303-329. Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo. 2007. Governance Matters VI: Governance Indicators for 1996-2006, World Bank Policy Research Working Paper No. 4280. Leipziger, D.M. 1992. Awakening the Market - Viet Nam's Economic Transition, World Bank - Discussion Papers, No. 157.

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Levine, Ross. 1997. Financial Development and Economic Growth: Views and Agenda, Journal of Economic Literature, Vol. 35, No. 2, (Jun., 1997), pp. 688-726. Liew, Leong H. 1995. Gradualism in China's economic reform and the role for a strong central state, Journal of Economic Issues, Sep 1995. Vol. 29, Iss. 3; pp. 883-896. Lucas, Robert. 1993. Making a Miracle, Econometrica, March 1993. Vol. 61(2); p. 251-272. Mauro, Paolo. 1995. Corruption and Growth, The Quarterly Journal of Economics, Vol. 110, No. 3, Aug., 1995), pp. 681-712. Morrison, Catherine J. and Amy Ellen Schwartz. 1996. State Infrastructure and Productive Performance, The American Economic Review, Vol. 86, No. 5, (Dec., 1996), pp. 1095-1111. Nathan, Andrew J. 1990. China's Crisis. New York: Columbia University Press. OConnor, David. 2000. Financial Sector Reform in China and Viet Nam: A Comparative Perspective, Comparative Economic Studies, Vol. 42, 2000, 45-66. OECD. 2004. Innovation Policy in Europe 2004, European Commission. OECD. 2005. OECD Economic Surveys: China, OECD, Paris. OECD. 2006. STAN Bilateral Trade Database, Edition 2006, Directorate for Science, Technology, and Industry. Papanek, Gustav. 1973. Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries, The Journal of Political Economy, Vol. 81, No. 1, (Jan. - Feb., 1973), pp. 120-130. Perkins, Dwight. 2001. Industrial and financial policy in China and Vietnam, in Rethinking the East Asian Miracle (World Bank Publication): Joseph E. Stiglitz, Shahid Yusuf (eds), World Bank and Oxford University Press. Stern, Scott , Michael Porter, and Jeffrey Furman. 2000. Determinants of National Innovative Capacity, NBER Working Papers, No. 7876. Thorbecke, Erik and Henry Wan Jr.. 2004. Revisiting East (and South East) Asias. Development Model, Paper prepared for the Cornell Conference on the Seventy Five Years of Development, Ithaca, NY, May 7-9, 2004. UN. 2006. National Trends in Population, Resources, Environment and Development 2005: Country Profiles, United Nations, New York.

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Womack, Brantly. 2006. China and Vietnam: The Politics of Asymmetry - Political Science. Wong, John. 2001. The Economics of the Naxun, Chapter 3 in The Nanxun legacy and China's development in the Post-Deng era, John Wong & Zheng Yongnian (eds), Singapore: Singapore University Press. World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy. A Policy Research Report. Washington, D.C. World Bank. 1999. Vietnam Preparing for Take - off? How Vietnam Can Participate Fully in the East Asian Recovery, an economic report of the World Bank for the Consultative Group Meeting for Vietnam held in December 1999. World Bank. 2002. Vietnam - Implementing Reforms for Growth and Poverty Reduction, Country Development Report. World Bank. 2003. Vietnam: Deepening Reform for Rapid Export Growth, Working Paper, Synthesis report for Vietnams export study, May 2003. Zhang, Zhibin. 2006. Competition or Privatization: Chinas Experience in SOE Reform, Journal of the Washington Institute of China Studies, Spring 2006, Vol.1, No.1. Zhao, Suisheng. 1993. Deng Xiaoping's Southern Tour: Elite Politics in Post-Tiananmen China, Asian Survey, Vol. 33, No. 8, (Aug., 1993), pp. 739-756.

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Table 1 - Chinas and Vietnams development condition at the launching of reform: Indicator Human capital* Adult literacy (% of total) Young adult literacy (% of total) Calorie supply (kcal./day) Median age Life expectancy at birth, years GDP Per Capita in 2000 US$ in 2000 PPP$ GDP Structure, % Agriculture Industry Services Rural economy Share of rural population, % Cereal yield (kg per hectare) Openness Exports of goods and services (% of GDP) Imports of goods and services (% of GDP) Infrastructure Main line telephones per 1,000 population China (1978) 67.1 91.3 2,328 22.1 67 165 685 28.1 48.2 23.7 81.3 2,802 6.6 7.1 2.0 Vietnam (1986) 89.2 93.6 2,300 19.5 63 203 1,031 38.1 28.9 33.1 80.3 2,715 6.6 16.6 1.3

Note: * For Human Capital, the data is for 1980 for China and 1985 for Vietnam. Sources: WDI (2008); Data on human capital except for life expectancy are from the UN (2006).

34

Table 2 - Reform Milestones: Comparison of Vietnam and China

Reform Initiatives Reform Launching Major Events, Policy Documents, and Timeframe China (CN) Vietnam (VN) The Sixth Congress of the The Third Plenary Session CPV, elected a new of the 11th Central leadership with a liberal Committee of the CPC, in reputation and launched which Deng Xiaoping became the core of the party Vietnams economic reform, dubbed as leadership and announced Renewal, 12/1986. the official launch of Four Modernizations, the drivers of Chinas reform, 12/1978. Time Lag VN - CN 8 years

I. Fundamental changes Nation-wide introduction of the household contract responsibility system.

Circular on further strengthening and improving the rural responding system, 1980.

Resolution 10-NQ/TW of the CPV Politburo on agricultural sector management reform, 1988. The law on private enterprises, 1990.

8 years

Legalizing the development of the private sector

Constitutional amendments posing the private economy as a supplement to the socialist economy, 1982.

8 years

II. SOE reforms Phase 1: Giving SOEs increasing autonomy through eradication of the command economic system; Implementing experimental privatization. Phase 2: Restructuring SOEs, establishing the legal framework for SOEs to operate in a market economy.

1979-1984

1987-1993

8 years

1985-1993 Interim regulations on revitalization of large and medium-sized state owned enterprises (State Council), 1985. Regulations on deepening reform and invigorating state owned enterprises (State Council), 1986. The first SOE Law, 1988

1994-1998 "Transformation of selected SOEs into JointStock Companies" (Government Decree No. 28-CP), 1996.

10-11 years

7 years The first SOE Law, 1995

35

Phase 3: Leveling the playfield and speeding up privatization

1994 onwards The first Company Law, 1994 The revised Company Law, 2005, taking effect on Jan. 1, 2006

1999 onwards The first Enterprise Law, 1999 The revised Enterprise Law, 2005, taking effect on Jan. 1, 2006

5 years

0 years

III. Embracing globalization Attracting FDI

Law on Sino-foreign joint ventures, 1979

Signed the bilateral trade agreement with the US Admitted to WTO

1979

Foreign Investment Law, 1987 Law on Industrial Zone and Export-Processing Zone, 1994. 2000.

8 years

21 years

2001

2006

5 years

IV. Financial reforms Banking sector reform

Introduction of VAT Tax

Unifying the corporate income tax code for all sectors and reducing the corporate tax rate to 25% Opening of the stock market The first major stateowned bank is listed on the stock market

Decision of state council on reform of the financial system, 1993 The Provisional Regulation of the Peoples Republic of China on Value-added Tax, 1993 (New) Corporate Income Tax Law, 2007, taking effect on Jan. 01, 2008

Law on State Bank and Law on Credit Institutions, 1997. Law on Value-added Tax, 1997

4 years

4 years

Under debate, expected to be introduced in 2008.

1 year

Establishment of Shanghai Stock Exchange (SSE), 1990. Industrial and Commercial Bank of China (ICBC), 2006

Establishment of Ho Chi Minh City Stock Exchange (HOSE), 2000. Vietnam Commercial Bank (Vietcombank), 2007

10 years

1 year

36

Table 3-Economic Growth Patterns

Period GDP Growth Rate (CAGR) 05 5 10 10 - 15 15 - 20 The first 20 years of reform China (1978-1998) Vietnam (1986-2006) Growth Gap The past 20 (1986-2006) China Vietnam Growth Gap

0 - 20

CN1 VN CN1-VN CN2 VN CN1-VN

8.1% 5.4% 2.7%

7.9%

12.1% 8.9% 3.2%

12.4%

9.0% 6.5% 2.5%

8.3%

10.2% 7.8% 2.4%

10.0%

9.8% 7.1% 2.7%

9.7%

5.4%

8.9%
3.5%

6.5%
1.8%

7.8%
2.3%

7.1%
2.6%

2.5% Source: Authors calculation with data from WDI (2008)

Table 4. Sources of GDP Growth, 1986-2006

China Growth Contribution Capital
3.7% 4.0%

Period 1986-1996 1996-2006 1986-2006

GDP Growth
10.2% 9.2%

GDP Growth
7.2% 7.1%

Vietnam Growth Contribution Capital

1.8% 3.6%

Labor
0.9% 0.7%

TFP
5.6% 4.5%

Labor
1.0% 1.7%

TFP
4.4% 1.8%

9.7% 3.8% 0.8% 5.1% 7.1% 2.7% 1.3% 3.1% Note: The key assumptions for this calculation exercise include: (i) capital stock is estimated based on the Perpetual Inventory Method (PIM) with the depreciation for aggregate capital of 7%; and (ii) the share of input in GDP is 0.35 for capital and 0.65 for labor. Source: Authors calculation from WDI (2008)

37

Table 5. Efficiency of Energy Consumption

A. Energy Consumption per 1000 US$ of GDP* (kg of oil equivalent) 1990 2000 2005 Vietnam 1.62 1.20 1.15 China 1.95 0.94 0.91 Indonesia 0.95 0.93 0.86 Thailand 0.55 0.61 0.64 B. Electricity Consumption for Growth Electricity 1990-2005 Growth (CAGR) Saving Electricity Value-Added (II) (I) Consumption (I) (II) China Economy 9.7% 10.1% +0.4% Industry Sector 9.3% 12.6% +3.3% Vietnam Economy 14.1% 7.6% -6.5% Industry Sector 14.3% 10.9% -3.4%
Note: * the 2000 price level. Sources: Key World Energy Statistics 2007, International Energy Agency; Chinas Yearbook 2006; Vietnams Ministry of Industry and Trade (for electricity consumption by sector.

Table 6. Human Capital: Basic Indicators

Indicator Life expectancy at birth (years) Child mortality rate, under-5 (per 1,000) Literacy of adults (%) School enrollment, primary (% gross) School enrollment, Secondary (% gross) School enrollment, tertiary (% gross) Students studying in the US (per 100,000 population)*
Sources: WDI (2008), * Institute of International Education (IIE) (http://opendoors.iienetwork.org/?p=28633)

China 70 41 90.9 117.4 62.9 7.6 4.8

Vietnam 69 30 90.3 103.5 64.6 9.5 5.5

38

Table 7. Institutional Determinants

Determinants* Political stability Rule of Law Control of corruption Regulatory Quality Effect on Growth + + + + China -0.23 (-0.24) -0.40 (-0.40) -0.45 (-0.46) -0.27 (-0.29) Vietnam 0.29 (0.31) -0.54 (-0.53) -0.71 (-0.73) -0.57 (-0.58) Advantage V C C C

Note: Each indicator is averaged for 1996-2006, for which the data is available. Numbers in parentheses are median. Sources: World Bank Governance Indicators

Table 8. Governance-related determinants

Determinants Effect on Growth + China Vietnam Advantage C

Leaderships commitment to reform

Government effectiveness Inflation (CPI, 1993-06)* Government share in total investment (1995-05)** Quality of industrial policy Innovative capacity building Openness Trade-to-GDP ratio (1995-05) Weighted Mean of Tariff, 2000*** Efficacy

+ + + + +

Indicators for expansion of state-own sectors employment (Table 10), privatization (Table 11), decisiveness in making strategic decisions -0.04 (-0.05) -0.40 (-0.41) Figure 6 47.3% 52.6% Perkins (2001) Table 13 44.6% (43.0%) 20% 87.9% (92.1%) 15%

C ~ C C C V V C

Import and export growth (Figure 7); Moving-up the tech ladder (Table 13)

Sources: WBGI (2007); *WEO (2008); ** National Statistics Yearbooks, 1996-2006; *** World Bank 2003, Table 2, p. 14).

39

Table 9. Employment growth, 1995-2000 and 2000-2005: Vietnam vs. China Sector The Economy [E] The Public Sector (Government, Party, and SOEs) (P) Public sector expansion (+) or reduction (-) relative to the economy (P-E) China Vietnam 1995-2000 2000-2005 1995-2000 2000-2005 5.9% 5.2% 13.9% 13.6% -21.1% -17.0% 15.2% 22.9%

-27.0%

-22.2%

+1.3%

+9.3%

Sources: Authors calculation from national statistical data (Vietnam: Statistical Yearbooks, 2001-2006, Establishment Census 2002; China: Statistical Yearbooks, 2005 and 2006).

Table 10. Privatization transactions over the Period 1990-2005

Total Proceeds Country Total number of Transactions 229 107 35 50 79 23 Relative to GDP in 2000* 4.8% 1.0% 5.1% 13.7% 5.5% 4.8% Average Transaction Size (US$ millions) 252.0 3.0 240.5 247.9 52.9 258.5

(US$ millions) 57,706 318 8,418 12,394 4,180 5,946

China Vietnam Indonesia Malaysia Philippines Thailand

Source: Authors calculation from the World Banks Privatization Transactions database; GDP data from WDI (2008).

40

Table 11. Innovative capacity building

Units: the rate per one million population Applications filed by residents to Local patent office Year
China 1991 2000 2005 6.41 20.07 71.4 Vietnam 0.55 0.44 NA

International scientific and technical journal articles

China

Vietnam

5.4 1.0 14.6 1.9 31.9 2.7 Sources: Authors computation; data from WIPO (for the number of applications filed to the U.S. Patent office) and WDI (for the number of applications filed to the local patent office and the number of scientific and technical journal articles)

Table 12. Structure Changes in Export and Import, 2000-2005

Industry China High Technology of which: ICT Industry Medium-High Technology Medium-Low Technology & Mining Low Technology & Agriculture High Technology of which: ICT Industry Medium-High Technology Medium-Low Technology & Mining Low Technology & Agriculture Vietnam High Technology of which: ICT Industry Medium-High Technology Medium-Low Technology & Mining Low Technology & Agriculture High Technology of which: ICT Industry Medium-High Technology Medium-Low Technology & Mining Low Technology & Agriculture 2000 28.9 15.3 10.4 15.8 44.9 31.3 11.3 19.3 29.0 20.3 5.8 2.8 2.3 33.8 58.1 14.3 5.3 28.3 28.7 28.6 2005 41.3 24.2 11.1 15.7 32.0 37.6 13.0 17.8 31.6 13.1 7.6 3.9 3.7 31.2 57.5 15.0 5.4 21.8 36.2 27.0 Change 2000-2005 +12.3 +9.0 +0.7 -0.1 -12.9 +6.3 +1.7 -1.5 +2.6 -7.3 +1.8 +1.0 +1.4 -2.7 -0.6 +0.6 +0.1 -6.5 +7.5 -1.5

Note: The classification of technology is based on OECD (2006) for manufacturing industries. Sources: Authors calculation from UNTAC.

41

42

Table 13. Distribution of FDI inflows into China and Vietnam by investor
Unit: %

FDI Hong Kong Taiwan Singapore Korea Japan USA Germany Others TOTAL

China (1983-1998) 52.4 7.9 4.4 2.8 8.3 8.1 1.3 14.8 100.0

Vietnam (1988-2005) 8.3 13.6 10.4 8.9 10.5 3.7 0.6 44.0 100.0

Sources: OECD (2000) for China; Vietnam Statistics Yearbook 2006 for Vietnam

Figure 1: Pattern of economic growth during reform period: China vs. Vietnam
12.5

5-year FMA GDP Growth Rate, %

China

10
China

China China China

7.5

Vietnam

Vietnam Vietnam

5 200 400 600 800 per capita GDP, 2000 US$ 1000 1200

Source: Data from WDI (2008). Note: FMA stands for Forward Moving Average.

43

Figure 2. GDP per capita growth paths: Vietnam vs. China 2A. Starting from the Level of US$200
Per Capita GDP Growth Path Since the US$200 Level
800

700

600 China, 1982-2006 Index (Initial Year=100) 500 Indonesia, 1968-2006 400

300

200

100

Vietnam, 1988-2006

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 Years Since the US$200 Level China Indonesia Vietnam

2B. Starting from the Level of US$400

Per Capita GDP Growth Path Since the US$400 Level
700

600

500 Index (Initial Year=100)

400 China, 1990-2006 300

Thailand, 1965-2006

200

100 Vietnam, 2000-2006

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

Years Since the $400 Level China Thailand Vietnam

Source: Data from WDI (2008).

44

Figure 3A: Economic Growth during the fist 20 years of reform (China: 1978-1998; Vietnam: 1986-2006) 3A.1
Growth Rate: GDP
16

14

12 Growth Rate (CARG), %

10 China_GR Vietnam_GR China_MAGR5 Vietnam_MAGR5

0 y1 y2 y3 y4 y5 y6 y7 y8 y9 y10 y11 y12 y13 y14 y15 y16 y17 y18 y19 y20 Years from the launching of reform

3A.2
Growth Path: GDP
950 900 850 800 750 In d e x (v a lu e in in itia l y e a r= 1 0 0 ) 700 650 600 550 500 450 400 350 300 250 200 150 100 50 y0 y1 y2 y3 y4 y5 y6 y7 y8 y9 y10 y11 y12 y13 y14 y15 y16 y17 y18 y19 y20 Years from the launching of reform China Vietnam

Notes: MAGR5 means 5-year moving average growth rate. Source: data from WDI (2008)

45

Figure 3B: Economic Growth during the past 20 years (1986-2006)

3B.1
Growth Rate: GDP
16

14

12

Growth Rate (CARG), %

10 China_GR Vietnam_GR China_MAGR5 Vietnam_MAGR5

0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

3B.2
Growth Path: GDP
950 900 850 800 750 700 Index (Value in 1986=100) 650 600 550 500 450 400 350 300 250 200 150 100 50
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

China Vietnam

Notes: MAGR5 means 5-year moving average growth rate. Source: data from WDI (2008)

46

Figure 4: Agricultural Sector Growth: Output vs. Productivity

4A. First 20 Years of Reform (China: 1978-96; Vietnam: 1986-2004)* 4A.1 4A.2
Crop Production Index
260.0

Value-Added per Worker

200

240.0

220.0

180

200.0

160
180.0 In dex

160.0

In d e x
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Years Since the Inception of Reform CHN-Crop production VNM-Crop production

140

140.0

120
120.0

100.0

100
80.0

80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Years Since the Inception of Reform CHN-VA/Worker VNM-VA per Worker

4B. Period 1986-2004* 4B.1

Crop Production Index
260

4B.2
Value-Added per Worker
200

240

220

180

200 In d e x (1 9 8 6= 10 0 )

160
180

160

In d e x (1 9 8 6 = 1 0 0 )
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year CHN-Crop production VNM-Crop production

140

140

120
120

100

100

80

80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year CHN-VA/Worker VNM-VA per Worker

Note: the period 1986-2004 is examined because the data is not available for 1985 and 1986. Source: Data from WDI (2008).

47

Figure 5. Control of Inflation

Consumer Price index (Annual Percentage Change), 1993-2006
30

25

20

15 % China Vietnam 10

0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-5

Source: Data from WEO (2008).

Figure 6: Export and Import Growth

Export and Import Growth Patterns, 1990-2006
2000 1900 1800 1700 1600 1500 1400 Export and Import (1990=100) 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Vietnam-Export China-Export Vietnam-Import China-Import

Source: Data from WDI (2008)

48