This study was carried out by Dr. Le Dang Trung, RTA’s Chief Economist and Dr. Paul Shaffer from Trent University to examine the relationship between pro-poor growth and the size distribution of manufacturing enterprises in Vietnam. Below is the introduction of the study. For the full article, please visit: Pro-Poor Growth and Firm Size: Evidence from Vietnam

The past decade has seen renewed interest in the idea of pro-poor (or inclusive) growth (PPG). Large literatures have arisen that examine conceptual, methodological and empirical issues related to the topic. 1 While there are continuing definitional debates about the underlying concept, from a policy perspective the core objective is to achieve high growth along with a widespread distribution of the benefits of growth. In other words, the aim is to reconcile the imperatives of efficiency and equity.

In this context, it is surprising that the relationship between PPG and the size distribution of firms, or “firm size”, has not received greater attention. While promotion of small and medium enterprises (SMEs) appears in some of the PPG literature, detailed empirical analysis of the relationship between PPG and firm size has been lacking. As argued by Mazumdar (2003, 2010), the size distribution of firms has potential implications for both efficiency and equity. With respect to the former, firm size may have implications for choice of technology and factor proportions used in production, the cultivation of entrepreneurship and the overall efficiency of the production process. Concerning equity, or in the present case the income or consumption distribution, firm size may have a bearing on the labour intensity of production, and in the aggregate, on employment elasticities of growth, the intra- and inter-sectoral dispersion of wages and the overall absorption of labour in the secondary versus tertiary sectors. Mazumdar (2010) and Mazumdar & Sarkar (2012) have argued persuasively that the “missing middle” in the firm size distribution is a major factor contributing to rising inequality in India, for example.

This article examines the relationship between firm size and PPG in Vietnam. Vietnam is an interesting case because it has been portrayed as a poster child for PPG. Growth averaged around 8% throughout much of the 1990s and has been over 7% since 2000, while the incidence of poverty has fallen rapidly from around 58% in 1993 to around 14.5% in 2008 (VASS

[Vietnam Academy of Social Sciences], 2010). Most social indicators have seen quite rapid improvement as well, including child mortality that has fallen dramatically (SocialWatch,2008). Inaddition, Vietnam has embarked upon a relatively rapid process of industrialisation with the secondary sector increasing its share of GDP from 17% to 30% between 1990 and 2005 (GSO [General Statistics Office], 1990–2005).

This analysis makes four contributions to the literature: first, as mentioned above, there have been very few detailed empirical, country-level analyses of the relationship between firm size, and more specifically SMEs, and PPG 2 ; there has been almost no published work on any aspect of the size distribution of firms in Vietnam drawing on Vietnam’s Enterprise Census data 3 ; third, the results shed light on the relationship between PPG and the structural transformation from primary to secondary production, or pro-poor industrialisation, a process that is generating less industrial employment than in the past (Timmer & Akkus, 2008); and fourth, the analysis has relevance to an older literature on the political economy of industrialisation which calls for analysis of actually existing processes of industrialisation with a view to identifying those characteristics that have generated more favourable development outcomes (Kiely, 1998).

The structure of this article is as follows: Section 2 reviews the size distribution of manufacturing firms with respect to employment, number of firms and productivity. Section 3 presents a number of explanations for the rightward skew in the distribution, drawing on descriptive statistical data and secondary sources. Section 4 presents our econometric results with a view to assessing their consistency with the data presented in Section 3. Section 5 examines the relationship between firm size and the income or consumption distribution, and Section 6 concludes. In terms of the efficiency and equity distinction, Sections 3 and 4 address the former, while Section 5 addresses the latter.

Itis necessary to clarify at the outset what we mean by the terms efficiency and equity and their relationship to PPG. We define efficiency in a broad sense as the use of resources that maximise the production of goods and services.It is in this sense that efficiency has been used in previous discussion of the efficiency/equality trade-off (Okun,1975) and in discussions of PPG (e.g. Kakwani & Pernia, 2000). We do not use the term in the more technical sense associated with the theory of the firm (discussed below). Accordingly, we examine whether institutional factors or policy distortions impede the growth of SMEs, limit potential output and thereby undermine economic efficiency. It must be recognised, however, that efficiency so defined isnot the same as growth, a factlong emphasised by those who argue in favour of dynamic, as opposed to static, accounts of efficiency (e.g. Schumpeter, [1943] 1987).

By equity, we refer to levels and changes in the income or consumption distribution. In the literature on PPG, there is debate as to whether the “equity” dimension should focus on changes in inequality or absolute poverty (Ravallion, 2004). Likewise, there are debates over whether the referent should be changes in absolute or relative concepts of inequality or some combination (Ravallion, 2005). 4 In the main, we skirt these debates, although it should be noted that the core inequality measure used in Section 5, the Gini index, is based on a relative conception of inequality.