Abstract
The Vietnamese economy has increased at high speed over the transformation decades; however, most recent studies on the economic growth of this country used the Cobb-Douglas or CES (Constant Elasticity of Substitution) production functions, which are unable to explore the relationship between the elasticity of capital-labour substitution and development process, and hence, are not relevant to accessing a dynamic economic system. For that reason, this study is conducted to specify an unrestricted VES (Variable Elasticity of Substitution) production function in a one-sector growth model of Vietnam, highlighted by two characteristics: successful transition from plan to market and rapid progress. The VES is given preference over the CES and the Cobb-Douglas having the elasticity of substitution between capital and labour varying with economic development. By employing a Bayesian nonlinear regression through MCMC methods, the study reported the following findings: (1) the above-unity variable elasticity of capital-labour substitution in an aggregate unrestricted VES function specified for Vietnam shows that the model generates the possibility of endogenous economic growth; (2) the capital share tends to increase, while the labour share faces a downward trend along with the development of Vietnam; (3) the VES is empirically proven through a Bayes factor test to be superior to the CES and Cobb-Douglas for analysis of the growth process of Vietnam, an emerging transition economy.
Highlights
As is well known, economic growth is always among the most actual macroeconomic topics, from a theoretical and practical perspective
We specified an aggregate unrestricted Variable Elasticity of Substitution (VES) production function in a one-sector growth for the Vietnamese economy, which has experienced a transformation period consisting of three stages
In contrast to frequentist methods resulting in point estimates, the Bayesian nonlinear regression utilized to estimate the VES function yields the entire posterior distribution of the coefficients of interest, thereby minimizes model uncertainty and increases its robustness
Summary
Economic growth is always among the most actual macroeconomic topics, from a theoretical and practical perspective. The welfare of subsequent generations will depend on how economic growth currently goes on. Growth theory has attained many achievements, but debates on the origins of economic growth continue. The links among economic growth and technical change, the elasticity of capital-labour substitution, and factor shares have been subject to unceasing controversies (for example, Arrow et al 1961; Pereira 2003; Miller 2008; Gordon and Vaughan 2011). To perform well-reasoned analysis of this relationship, we should specify an appropriate production function. Since showing up in 1928, the Cobb-Douglas specification has enjoyed a long-lasting and comfortable life with no serious competitors.
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