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Virtual and real metrics

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The Ministry of Planning and Investment has proposed adding some indexes not yet stated in the statutory economic criteria, such as per capita gross domestic product (GDP), contribution of total factor productivity (TFP) to growth and labor productivity. These indexes, in reality, do not have much significance. What should be added instead are measures for real economic health, such as gross national income (GNI), national disposable income (NDI) and saving.

Adding the per capita GDP, or productivity, is essentially, apart from the growth factor, increasing the scale of the GDP, as the per capita GDP is calculated by dividing the GDP in current prices by the population, and productivity is calculated by dividing the GDP by labor.

The GDP is measured by calculating income, including the income of laborers, the gross surplus (including fixed asset depreciation) and the production tax (including product tax and other production taxes). However, Vietnam does not use this calculation method and naturally has never announced it.

So, in view of factors of the GDP by the income calculation method, the per capita GDP does not seem to have much significance. For example, in 2013, the General Statistics Office (GSO) raised the GDP of two sectors, banking and own housing of the population, to more than 10%. The additional GDP due to raising the added value of own housing is neither beneficial to anybody nor created from production, recorded the same in the source as well as the use column. However, it increases the scale of the GDP, leading to the decrease in the percentage of other indexes, such as public debt against GDP and budget deficit against GDP.

A look into statistics shows that the productivity of Vietnam owes to the mining sector (with productivity 13 times as much as average productivity), the electricity sector (18 times as much as average productivity) and the real estate trading sector (10 times as much as average productivity). So, with these statistics, does it mean that the higher electricity price, the higher productivity?

According to figures from the Vietnam Business White Book 2020 of the Ministry of Planning and Investment, the ratio of added value against gross income of the business sector is extremely low, around 11%, with the ratio of the non-State sector being only 8.9%. So, it’s not worth being proud of high per capita GDP or productivity. With such a low ratio of added value against gross income (not production value), Vietnam’s economy is manifested as mostly sub-contracting. When the products under sub-contracting are exported, the country which benefits the most is not Vietnam.

The contribution of total factor productivity (TFP) to growth has been mentioned by the GSO in its socio-economic reports in recent years, but it’s not known how the office has calculated this index.

In general, the TFP depends on some factors like GDP growth, capital stock growth, labor growth and the elasticities of capital and labor. However, it seems that the factors of capital stock and fixed asset depreciation have never existed in any documents of the GSO.

It should be noted that the capital for TFP calculation is not the “investment capital” published annually by the GSO. Due to the non-existence of the capital stock factor, research groups and even the GSO usually have to make an estimate for this factor, but different methods and different data give widely different results.

In addition, the estimation of elasticities of capital and labor by the regression method and from the overall equilibrium model gives different results. Therefore, in many cases, the TFP is revised to fit somebody’s will.

Over the past many years, along with the GDP, the GSO has also published other indexes like the GNI and the gross owner income on its website, but regrettably policymakers have not used them. For effective management of the country, policymakers should not rely only on pompous indexes but need indexes which reflect truly the current situation of the country.

One paradox is the share of pre-tax profit of the foreign direct investment (FDI) sector in the total pre-tax profit of the corporate sector in 2011 was 32% and the tax payment by the sector was also 32%. The sector’s share of pre-tax profit in 2015 increased to 34%, but its tax payment dropped to 30%. In 2016, the share of pre-tax profit increased to 45% but the tax payment surprisingly fell to 25%. (1)

So, it’s not surprising that the growth of the owner payment outflow of Vietnam in recent years is very high. One interesting coincidence is the money outflow also equals to the profit of the FDI sector. The question is why the sector has enjoyed excessive incentives? The bigger the FDI enterprises, the higher the money outflow; and the more the GDP depends on the FDI sector, the more losses of the resources of the economy in terms of saving.

The indexes which the Ministry of Planning and Investment should add as statutory criteria are those which measure the true health of the economy like the GNI, NDI and saving.

By Bui Trinh

(1) Enterprise surveys of the GSO since 2017 no longer have the tax indexes.

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