Luận văn thạc sĩ UEH financial development and economic growth in vietnam, a quantitative assessment

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

FINANCIAL DEVELOPMENT AND

ECONOMIC GROWTH IN VIETNAM:

A QUANTITATIVE ASSESSMENT

BY

LÊ TẤN BỬU DUY

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, April 2014

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UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

FINANCIAL DEVELOPMENT AND

ECONOMIC GROWTH IN VIETNAM:

A QUANTITATIVE ASSESSMENT

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

LÊ TẤN BỬU DUY

Academic Supervisor:

DƯƠNG NHƯ HÙNG

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ACKNOWLEDGEMENT

I want to send special thanks to my academic supervisor, Dr. Duong Nhu Hung, for his

patience as well as his continuous supports and valuable comments during my thesis

writing process.

I am also thankful to all of the lecturers in VNP for their wonderful lessons, to all

administrators in the VNP Office for their supports, and especially to Mr. Nguyen Dinh

Quy for being so helpful every time I come to the VNP Library.

Finally, I want to show my gratitude to my family and my friends for their endless

encouragements to me so that I could finish the program as well as the thesis.

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ABSTRACT

The thesis employs two quantitative methods to explore the relationship between

economic growth and financial development in Vietnam using quarterly data from 1999

to 2012. Firstly, the ARDL cointegration test developed by Pesaran and Shin (1999), and

Pesaran, Shin, and Smith (2001) was used to search for a long run relationship among

economic growth, financial development, and other macroeconomic variables including

exports, imports, inflation, and real interest rate. The existence of such long run

cointegration relationship is confirmed through the ARDL bound testing procedure with

all four indicators of financial development, namely ratio of M2 to GDP, ratio of deposits

to GDP, ratio of credits to GDP, and ratio of credits provided to the private sector to

GDP. Secondly, Toda and Yamamoto (1995) causality test was employed to determine

the causal relationship between economic growth and financial development under a

multivariate VAR framework. Evidence of causality running from financial development

to economic growth is found for all indicators of financial development. These results

provide strong support to the supply-leading hypothesis on the relationship between

economic growth and financial development for the case of Vietnam.

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ACRONYMS AND ABBREVIATIONS

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TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION ..................................................................................................... 8

1.1 PROBLEM STATEMENT .......................................................................................................... 8

1.2 RESEARCH OBJECTIVES AND QUESTIONS...................................................................... 10

1.3 RESEARCH METHODOLOGY ............................................................................................... 11

1.4 STRUCTURE OF THE THESIS ............................................................................................... 11

CHAPTER 2: LITERATURE REVIEW ....................................................................................... 12

2.1 KEY CONCEPTS ...................................................................................................................... 12

Economic Growth................................................................................................................................. 12

Financial Development......................................................................................................................... 12

2.2 THEORETICAL REVIEW........................................................................................................ 12

2.2.1 Theoretical Hypotheses............................................................................................................. 12

2.2.2 Financial Repression Theory..................................................................................................... 14

2.2.3 Financial Liberalization Theory ................................................................................................ 15

2.2.4 Financial Structure Theory........................................................................................................ 17

Bank-based Theory................................................................................................................ 17

Market-based Theory............................................................................................................. 19

Other Views in Financial Structure Theory........................................................................... 21

2.2.5 Endogenous Growth Theory...................................................................................................... 22

2.2.6 Summary of Theoretical Predictions......................................................................................... 25

2.3 EMPIRICAL REVIEW.............................................................................................................. 26

2.3.1 Traditional Cross-Country Analysis........................................................................................... 26

2.3.2 Panel Cointegration and Causality Analysis .............................................................................. 27

2.3.3 Time series analysis.................................................................................................................... 29

VECM Approach.................................................................................................................. 29

VAR Approach..................................................................................................................... 32

2.3.4 Previous empirical studies about Vietnam ................................................................................ 35

2.3.5 Summary of findings from previous empirical studies ............................................................. 35

2.4 CONCEPTUAL FRAMEWORK............................................................................................... 26

CHAPTER 3: RESEARCH METHODOLOGY AND DATA COLLECTION........................... 38

3.1 ANALYTICAL FRAMEWORK ............................................................................................... 38

3.2 MODEL SPECIFICATION AND DATA COLLECTION........................................................ 39

Economic Growth (EG)......................................................................................................... 39

Financial Development (FD)................................................................................................. 40

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Trade (EX, IM)...................................................................................................................... 41

Inflation (INF) ....................................................................................................................... 43

Real Interest Rate (RIR) ........................................................................................................ 44

3.3 ECONOMETRIC TECHNIQUES ............................................................................................. 45

3.3.1 Seasonal Adjustment ................................................................................................................. 45

3.3.2 Unit Root Test ........................................................................................................................... 47

3.3.3 ARDL Cointegration Test ......................................................................................................... 48

3.3.4 Toda and Yamamoto Causality Test ......................................................................................... 50

CHAPTER 4: OVERVIEW OF ECONOMIC GROWTH AND FINANCIAL

DEVELOPMENT IN VIETNAM..................................................................................................... 53

4.1 ECONOMIC GROWTH ............................................................................................................ 53

4.1.1 Overview ................................................................................................................................... 53

4.1.2 Results....................................................................................................................................... 53

Structural Changes................................................................................................................ 53

Global Integration................................................................................................................. 55

4.1.3 Challenges................................................................................................................................. 56

Investment-driven Economic Growth.................................................................................... 56

Inefficient SOEs and Public Investments............................................................................... 57

Macroeconomic Instability.................................................................................................... 58

4.2 FINANCIAL DEVELOPMENT................................................................................................ 58

4.2.1 Overview ................................................................................................................................... 58

4.2.2 Results....................................................................................................................................... 59

Banking Market ..................................................................................................................... 59

Stock Market.......................................................................................................................... 62

4.3 A FIRST LOOK ON THE RELATIONSHIP BETWEEN ECONOMIC GROWTH AND

FINANCIAL DEVELOPMENT.......................................................................................................... 64

CHAPTER 5: EMPIRICAL RESULTS........................................................................................... 65

5.1 Seasonal Adjustments................................................................................................................... 65

5.2 Preliminary Analysis.................................................................................................................... 66

5.3 Unit Root Test .............................................................................................................................. 69

5.4 ARDL Cointegration Test ............................................................................................................ 70

5.5 Toda and Yamamoto Causality Test ............................................................................................ 72

CHAPTER 6: CONCLUSIONS........................................................................................................ 77

6.1 Summary and Conclusions........................................................................................................... 77

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6.2 Limitations.................................................................................................................................... 78

6.3 Directions for Further Research ................................................................................................... 79

REFERENCE ..................................................................................................................................... 80

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LIST OF TABLES

Table 2.1: Summary of theoretical predictions .................................................................................... 25

Table 2.2: Findings from previous empirical studies........................................................................... 36

Table 3.1: Critical values for ADF test............................................................................................ 48

Table 3.2: Critical values for bound F-test...................................................................................... 50

Table 4.1: Proportion of output from different economic sectors................................................ 54

Table 4.2: Industrial output share by ownership ............................................................................ 54

Table 4.3: : Investment share by ownership.................................................................................... 55

Table 4.4a: Structure of goods exports by kinds of economic sector.......................................... 56

Table 4.4b: Structure of goods imports by kinds of economic sector ......................................... 56

Table 4.5: Growth accounting of Vietnam from 1990 to 2007 .................................................... 56

Table 5.1: Descriptive statistics............................................................................................................ 68

Table 5.2: Correlation coefficients................................................................................................... 69

Table 5.3: Results of ADF test ............................................................................................................. 70

Table 5.4: AIC, SBC, F-statistic, t-statistic, and LM for different lag-lengths.......................... 71

Table 5.5: Optimal lag-length p chosen by AIC, SC, and LR test ....................................................... 73

Table 5.6: Results of VAR residual autocorrelation LM test ............................................................... 74

Table 5.7: Toda and Yamamoto causality test results.......................................................................... 75

LIST OF FIGURES

Figure 4.1: Openness, export, import, and net export (as percents of GDP) of Vietnam ........ 55

Figure 4.2: The incremental capital-output ratio (ICOR) of Vietnam in 1991-2009................ 57

Figure 4.3: Number of banks in Vietnam from 2006 to 2010 ..................................................... 60

Figure 4.4a: Deposit market share according to type of banks in 2005-2010 ........................... 60

Figure 4.4b: Credit market share according to type of banks in 2005-2010.............................. 60

Figure 4.5: Ratio of banking credits and deposits to GDP........................................................... 61

Figure 4.6: GDP growth and credit growth of Vietnam from 2000 to 2012.............................. 64

Figure 5.1: Real GDP and nominal GDP from 1999Q1 to 2012Q3.................................................... 65

Figure 5.2: Seasonal adjusted real GDP and nominal GDP from 1999Q1 to 2012Q3............. 66

Figure 5.3: Graphical presentations of all variables from 1999 to 2012 .............................................. 66

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