Misallocation, Productivity, and Trade Liberalization: The Case of Vietnamese Manufacturing

This paper attempts to measure the contribution of resource misallocation to aggregate manufacturing TFP, focusing on Vietnamese manufacturing firms for the period 2000-09. Our research questions are threefold. 1) To what extent are resources misallocated in Vietnam? 2) How large would the productivity gains have been in the absence of distortions? 3) Did the degree of misallocation decline after entry into the World Trade Organization (WTO)? The answers to these questions are as follows. First, misallocation in Vietnam is comparable to that in China and India. Second, there would have been substantial improvement in aggregate TFP in the absence of distortions. Finally, the accession to the WTO contributed to reducing the distortions in output markets. However, this positive effect was offset by increasing distortions in capital markets. These results together suggest that further reforms in capital markets could improve aggregate TFP in Vietnam through reduced misallocation.