Can Vietnam be Asia’s new rising star?
May 30, 2017
Vietnam has been one of the strongest growing economies in the world since the Doi Moi reforms of the late 1980s. Only China has achieved consistently stronger growth in GDP per capita according to World Bank data for 1991-2014.
Vietnam’s success has reflected a combination of visionary leaders, a shared sense of societal purpose and an embrace of globalisation. Foreign investment has been strong, which has helped Vietnam become one of the new ‘workshops of the world’, initially in labour-intensive areas like clothing and footwear, but increasingly extending into higher value-added sectors like electronics.
This strong and sustained economic growth has lifted Vietnam from being a relatively poor country in 1990 to a middle income economy today. It has also been associated with major improvements in life expectancy, significantly reduced child mortality and impressive gains in education levels.
Vietnam has great potential – but requires continued progress on structural reforms
Our analysis, as published in our latest World in 2050 report earlier this year, suggests that Vietnam could be one of the fastest growing economies in the world over the period to 2050, together with India and Bangladesh. This could lift Vietnam to around 20th place in the global GDP rankings by the middle of the century based on purchasing power parity (PPP) measures that correct for differences in price levels across economies.
However, realising this growth potential will not be automatic for Vietnam. It will require continued steady progress on structural reform efforts in four key areas: macroeconomic stability, banking reform, boosting private sector activity and embracing new technologies.
- Macroeconomic stability – fiscal and monetary policy reform
In terms of macroeconomic stability, a key requirement – as recognised by the Vietnam government – is to reduce the annual budget deficit to more sustainable levels of no more than around 3% of GDP by 2020. This will require broadening the tax base in areas like property tax and capital gains tax, as well as imposing greater discipline on the public pay bill.
The government could also continue the gradual process already underway to make the exchange rate more flexible, so that it can act as a shock absorber for the economy. As in most advanced economies and an increasing number of emerging economies, this could also be linked to a move in the medium term to an inflation target set by government but delivered by an independent central bank.
- Banking reform – tackling non-performing loans
As in China, the Vietnam government responded to the global financial crisis of 2008-9 by boosting investment and credit. That was an appropriate response at the time, but it did leave the Vietnamese banking system with a legacy of non-performing loans. Progress has been made in addressing this issue but, as last year’s IMF report on Vietnam said, there is still more to do here. A longer term programme of recapitalisation and consolidation of the Vietnamese banking system would also enhance financial stability and provide a strong platform for future growth.
- Boosting private sector activity and creating domestic export champions
Looking beyond the next few years, one of the key challenges facing the Vietnam economy is to develop its private sector as well as making its state-owned enterprises more efficient. Part of this will involve levelling the playing field for access to capital and land between state enterprises and their private sector competitors.
Another priority for government policy should be to support the development of domestic suppliers to multinational companies investing in Vietnam in areas like motor parts, electronics and other higher technology sectors. Experience from China and earlier Asian tigers like South Korea has shown that this will enable knowledge and technology transfer from multinationals to domestic suppliers, some of which can then eventually become Vietnamese export champions in their own right in the long run.
- Technological progress – from adaptor to innovator
As Vietnam’s population ages, further economic development will rely increasingly on boosting productivity growth, which in the long run will be driven above all by technological progress. Over the next decade or so, this may mostly be a matter of Vietnam making the best use of technologies developed in other countries. This could involve everything from adopting modern digital technologies in factories and offices to using the latest farm machinery and fertilisers to boost productivity in the agricultural sector. This would allow more workers to move to manufacturing and services where their average productivity should be much higher than as farmers.
Once you look to 2030 and beyond, however, Vietnam – like Japan, South Korea and China before it – will need to move from being an adopter of other countries’ technologies to an innovator in its own right. This will require developing a world class research base in selected areas linked to stronger universities and surrounding networks of entrepreneurial private companies, backed by government funding for basic science research and early stage business development. Intellectual property laws will also need to be developed and enforced more effectively as Vietnam develops its own technological innovations in the long run.
Having visited Vietnam recently and seen how much progress its economy has already made, I feel optimistic that it can rise to these challenges. For British companies looking beyond Brexit, Vietnam – and the wider ASEAN region of 600 million people within which it sits – could also be an increasingly important new market and trading partner in the decades to come.
This blog is a modified version of an article that appeared recently in the Vietnam Investment Review