The Growth of Vietnam’s Economy
After reunification in 1975, Vietnam’s economy was largely centrally planned, albeit with a considerable informal sector. Private trade and manufacturing were nationalised and collective farming meant most citizens were not permitted private agricultural plots.
In 1986, the Communist Party of Vietnam launched a political and economic renovation campaign, known as Doi Moi, which would promote a multi-sectoral economy, open door policies, and recognise private property rights spearheading 25 years of change. This was intended to engender a smooth transition from the previously centrally planned economy to socialist market mechanisms, otherwise referred to as a “market-oriented socialist economy under state guidance”. Actual implementation of Doi Moi did not begin until 1988, when a deepening economic crisis and declining support from the Soviet Union incited the government to slash spending, encourage foreign investment, and liberalise trade. Effectively, this saw a move from the old Confucian view which favoured “educated scholars serving the government” to fostering a culture of entrepreneurship. By 1994, over 17,400 entrepreneurial firms started up.
The 1987 Law on Foreign Investment permitted a surge of FDI (Foreign Direct Investment) into Vietnam, reaching 10% of GDP in 1994. Indeed, the macroeconomic stability derived from Doi Moi meant Vietnam was the largest FDI recipient among developing countries and economies in transition, relative to the size of its economy. It is important to note that realpolitik was a significant contributing factor to policymaker’s introduction of market features. The growth of price and market mechanisms came as a result of incremental change over three decades. Hence, there was no radical shift in power structure.
Early examples of liberalisation include the normalisation of illegal trade sanctioned by local officials, which was habitually carried out by managers of state-owned enterprises (SOEs). These clandestine approvals created markets for otherwise illicit commodities, whilst opening up the labour market to official positions that controlled these activities. Indeed, it was often SOE managers and local officials who would lobby senior party peers to accept market changes. Beyond the reduction of SOEs, agriculture was decollectivized, and fixed prices and subsidies were ended. These liberal measures saw the output of food staples per capita increase sufficiently (approximately 1.2 million tonnes were exported) for Vietnam to become the world’s third largest exporter of rice in 1989 after a half century of decline.
Vietnam successfully reconfigured its trading partners from fledgling ex-communist countries to new partners such as Hong Kong, Singapore, South Korea, Taiwan, and Japan. GDP growth averaged nearly 8 percent annually through the 1990s. This was accompanied by a rapid reduction in poverty, more political openness, and cultural diversity.
Notwithstanding the unequivocally positive effects of economic restructuring, it must be acknowledged these play a significant role in Vietnam’s primary economic challenge today- that of how to address its ‘missing middle’, or the shortage of private medium-sized enterprises. As Beresford comments in ‘Doi Moi in Review’, “The sheer rapidity of change…presents some serious challenges concerning the way forward…Few non-Vietnamese observers appear to think that socialism is any longer relevant to the Vietnamese case.” However, there has been a marked lack of progress in unwinding state economic ownership.
The Vietnamese aphorism: ‘SOEs are your son, FDI enterprises are your mistress’s son, and private enterprises are somebody else’s son’ pithily encapsulates the country’s challenges with broadening the economy to address the missing middle. More than 95 percent of Vietnamese companies are small-scale, and they struggle with structural lack of access to credit and land. Foreign investors often have more bargaining power when negotiating with local governments on taxation and access to land. Thus, it is difficult for SMEs (small and medium sized enterprises) to compete, and a lack of internal competition over the past decade has resulted in larger export-focused FDI enterprises, which have little incentive to establish business rapports with domestic firms.
This is compounded by the effects of an ever-opening international economy. Vietnam’s various Free Trade Agreements (FTAs) and international trade arrangements make it difficult for the government to extend subsidies or special treatment to its SMEs. The contrived relationship between export-focused industries and the rest of the domestic economy further imperils Vietnam’s macroeconomy. Consequently, Vietnam has struggled to reap the full benefits of its impressive trade and investment performance.
Vietnam’s economy today
Vietnam’s economic and social potential is underpinned by its progress in key human development indicators, including maternal health, electrification, and literacy. Whilst in 1993, more than half of the population lived in ‘extreme poverty’, today only 3 per cent do, with more than 40 million people coming out of poverty over the past two decades. With its Chinese-inspired Confucian emphasis on education, Vietnam achieved the Millennium Development Goal of universal primary education in 2015, with a net enrolment of 99 percent.
Vietnam is one of Southeast Asia’s most eminent economic performers. with favourable demographics- a population of 90 million and a growing middle class-, good income distribution, and attractive human capital compared to similar countries.It has attracted considerable FDI, including a record US$15.8 billion in 2016, up 9 per cent from 2015. This has spurred growth in the production of crude oil, light manufacturing, and tourism. Technology multinationals such as Intel and Samsung, are large investors in the country, with Samsung assembling nearly one-third of its smartphones in Vietnam. Mobile phone handsets now make up 20 percent of Vietnamese exports. The country is also the second-largest supplier of apparel to the United States, Japan, and South Korea.
During the 2000s, Vietnam’s GDP per capita increased by an average of 7.9 per cent per annum. Since 2010, annual growth averaged 6.5 per cent and in 2016 reached 6.4 per cent. After joining the World Trade Organization (WTO) in 2007, Vietnam’s exports more than trebled from US$45 billion in 2006 to US$190 billion in 2016. Over the same period, merchandise trade as a share of GDP expanded from 127 per cent in 2006 to 173 per cent in 2016.
According to the IMF, “To maintain growth and raise its quality, Vietnam needs to modernize economic institutions”, notably in terms of fiscal and monetary management. They point towards continued tightening of credit policies, developing capital markets, and building a modern market infrastructure to help enhance the financial sector’s ability to support sustainable growth. Further, as highlighted above, they state the “Recapitalization of Vietnam’s state-owned commercial banks should also be a priority”.
Vietnam’s population will be aging rapidly in coming decades, making deeper reforms in the pension system now a priority. In Vietnam, the dependency ratio is expected to double in the next 25 years, and replacement rates (the percentage of an individual's annual employment income that is replaced by retirement income when they retire) are around 70 percent- significantly higher than the 54 percent average for countries in OECD (Organisation for Economic Co-operation and Development). Retirement ages are also low, at 55 for women and 60 for men - far below both the OECD and other Asian countries’ averages. Thus, among the policy changes now under discussion in the National Assembly are raising the retirement ages to 62 for men and 60 for women. Although reforming pensions is an arduous process as they take decades to complete, the IMF recommend that the National Assembly should start as soon as possible to ensure long-term sustainability. Continued monitoring and reforms will be needed to ensure that vulnerable groups are adequately protected from aging and other risks.
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