Trade liberalization and manufacturing performance : the case of Vietnam

Abstract

Trade liberalization is often expected to play a key role in promoting the manufacturing performance of many developing countries, where industrialization is central to economic growth. In fact, a large and growing body of empirical literature exists on the contribution of trade opening to industrial growth and transformation. However, it is recognized that the impacts of trade liberalization are country-specific and the question of how manufacturing evolves under trade opening remains an issue of concern among policy makers in developing countries. This thesis aims to contribute to the empirical trade and growth literature by examining whether trade liberalization has improved manufacturing performance in Vietnam, an Asian transitional economy where extensive trade reforms have been conducted since 2000. The thesis examines the relationship between trade liberalization and manufacturing performance in two aspects: output growth and structural transformation, and productivity performance. After undertaking a theoretical review of the main links underlying the relationship, the extent of trade liberalization is examined with a detailed review of trade reforms and estimation of measures of trade openness. The thesis investigates output growth and structural transformation by analyzing the growth and structural patterns of output, capital and employment in different phases of the trade regime. The impact of trade liberalization on productivity performance is examined at two levels with different approaches. At the four-digit industry level, the study adopts a two-step approach to evaluate the effects of trade liberalization on manufacturing productivity growth. The first step estimates total factor productivity (TFP) growth using the Tornqvist productivity index. In the second step, a panel data regression framework is used to examine the links between the TFP growth rates and trade policy variables and controlling for other key determinants of TFP growth. As a way of checking the robustness of trade liberalization impact, the firm-level analysis employs the stochastic production frontier framework to explore whether trade opening has increased the productive efficiency of existing firms. In addition, at both industry and firm levels, the role of institutional reforms in Vietnam is considered with different proxies. The findings suggest that, under trade opening, manufacturing growth has been higher, more labor-intensive and export-oriented with a greater contribution to TFP growth. Importantly, the regression results indicate that reduction in trade protection and increased trade openness have stimulated manufacturing TFP growth, supporting the positive view in the trade and growth literature. Another key finding is that the impact of trade opening is significantly dependent on domestic market-oriented reforms, which appear to be a central feature of Vietnam's transitional economy. In addition, in response to increased pressure from foreign competition, manufacturing firms and industries appear to have managed to improve their productivity by exploiting Vietnam's comparative advantage, that is, using more unskilled labor and less capital. This would indicate that in the early years of trade liberalization, the efficiency gains rather than technological progress contributed more to manufacturing TFP growth. Overall, the analysis suggests the importance of relying on comparative advantages and the need to promote the accumulation of dynamic factor endowments for the long-term sustained growth of manufacturing productivity and output.