The Vietnamese Economy and Its Transformation to an Open Market System

William T. Alpert

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781317453970
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

These previously unpublished papers by leading American and Vietnamese economists analyze the dramatic transformation of Vietnam's economy during the 1990s and its prospects for the future. The three main sections of the book discuss Vietnam's turbulent history, recent economic reforms, and the country's emerging role in the world economy and geopolitics. The contributors examine a myriad of issues, including specific reforms in agriculture, banking, and tax policy, as well as the attempts to create a business-oriented legal infrastructure, the development of foreign trade and a viable balance of payments, and U.S. policy reactions to Vietnam's rapid development in the last decade.

Chapter 1
Economic Framework for Growth and Poverty Reduction

Key Messages

To achieve the draft Strategy’s goals of growth, employment-creation and poverty-reduction, Vietnam will have to raise both the quantity and quality of investment.

(a) Goals ambitious but attainable

With around 30 million people (i.e. 37 percent of population) living in poverty, around 25 million (i.e. 60 percent of labor force) either underemployed or unemployed and around 1 million annual additions to the w orkforce, doubling GDP and creating employment for 15 million people are appropriate and ambitious goals. These are also attainable goals, given the experience of Vietnam and other high performing economies. For this purpose the draft Strategy proposes total investment rate to rise from an average of 25% in the 1990s to an average of 30% of GDP in the coming decade. Export earnings are projected to grow at 14% (with manufactured exports at 18%) and industry’s share in GDP to rise from 30 to 40 percent.

(b) Raising the quantity or level of investment

Rapid growth of domestic private investment – especially by private SMEs – will be key to reaching the target rate of total investment. Government investment is unlikely to exceed 7% of GDP a year (compared to 6% in the 1990s). SOE investment is likely to average 7% of GDP, the same as in the 1990s, given the poor financial performance of SOEs in manufacturing, over the last four years and the restructuring they will underg o in the next five years. Foreign investment could be anywhere between 3 and 5 percent of GDP, depending on how favorably Vietnam’s investment environment compares to ASEAN countries and to China. Thus domestic private investment will have to rise from around 7 % of GDP in the 1990s to between 11 and 13% of GDP in the coming decade.

(c) Raising the quality of investment

Raising the quality of investment (i.e. raising total factor productivity growth and employment for a given rate of investment) will be critical to attaining the draft Strategy’s goals of growth, job-creation and poverty-reduction.

• Higher productivity. At investment rates of 30% of GDP, Vietnam’s total factor productivity growth will have to be 40% higher than the average in the 1990s and any shortfall in investment will have to be compensated by even higher rates of productivity growth. Moving labor out of agriculture into the higher productivity manufacturing sector and better access to foreign technology will bring this about.
• Creating more jobs and higher paying jobs. Most of the jobs, as well as most of the higher paying ones, are likely to come from the manufacturing sector. Domestic private SMEs, that are generally more labor-intensive and export-oriented, are likely to undertake the investments and the labor reallocation to manufacturing and manufactured exports. Thus private SMEs’ manufacturing output will have to grow by 18-25 percent a year, substantially higher than that achieved by Vietnam, but still much lower than those achieved by China in the 1990s.
• Ensuring efficiency and equity of public expenditures, including investment. Improved management and screening of public investment and greater pro-poor orientation of public expenditures will be needed to ensure their best impact on growth and on poverty-reduction.

(d) External Financing Requirements

Domestic savings are expected to rise to finance higher investment, at least in part. However, quick-disbursing concessional assistance may be required for the first five years to complement project aid disbursements, and that would be available if the Government adopts the needed policy and institutional reforms.

I. Economic Goals of the Ten Year Strategy

1.1. The draft ten-year Socioeconomic Development Strategy (2001-2010) seeks to repeat Vietnam’s superb performance of rapid growth, employment-creation and poverty reduction in the 1990s. This is the right objective, given that around 30 million people (i.e. 37 percent of the population) live in poverty, around 25 million (i.e. 60 percent of the labor force) are either underemployed or unemployed and around one million people are added to the workforce each year. This objective can be achieved only if bold changes in policies and institutions are adopted and implemented early on in the decade.

1.2. Attaining rapid growth, employment creation and poverty reduction will require significant changes in the structure of the economy. The draft Strategy recognizes this and wants Vietnam to develop from an economy where agriculture accounts for 24 percent of value added and 60 percent of labor force, to an “industrialized economy by 2020”. The Strategy does not define what is meant by an “industrialized economy”. But it would be appropriate to expect the manufacturing sector within industry to generate most of the jobs and more of the higher paying jobs. As the manufacturing sector grows in both rural and urban areas, it will attract people away from agriculture and the low-paying informal-sector jobs. Agriculture and service sector growth will continue to be important, but fewer people will be working in agriculture. And underemployment in agricultural occupations will decline and productivity of those continuing to work in agriculture will rise.

1.3. Although rapid growth will be central to reducing poverty in the coming decade, the quality and pattern of growth will also be important. This is because better quality of growth, in the sense of more evenly distributed growth across the population, will reduce poverty more even with a lower growth rate. A lower growth rate that is accompanied by sufficiently higher employment-creation with a larger share of manufacturing jobs created in rural areas, where most of the poor live, is likely to be more poverty-reducing than a higher growth rate that is less employment-creating or more urban-biased. It is therefore important for Vietnam not only to ensure a high rate of growth but also to promote a better quality and pattern of growth.

1.4. Higher job-creation can be encouraged by appropriate economy-wide policies and institutions, but more jobs in rural areas will, in addition, require a better distribution of rural-urban infrastructure and social services. Thus careful choices of location of public investment in infrastructure and provision of social services would be needed to maintain an appropriate distribution of such services. For that purpose, the public investment program (PIP) needs to be processed through professional systems of careful cost-benefit analysis (see Overview).

1.5. This chapter explores the economic framework for growth and poverty-reduction that underlies the Government’s ten-year Strategy. It examines whether its investment, savings and external balance are consistent with its growth and poverty-reduction objectives and whether the projected sources of investment and savings are plausible. It also assesses whether the structural shifts are feasible and if so, under what policies they can create sufficient jobs and generate adequate total productivity growth. This chapter’s assessment draws on Vietnam’s past and present experience, as well as the experience of high-performing East Asian economies, during their periods of high growth and poverty-reduction.

1.6. Economic Goals are Ambitious but Attainable. The draft Strategy’s goals can certainly be achieved in the next decade, if the needed reforms in economy-wide policies are adopted quickly. It seeks to double real GDP over the next decade. Industrial GDP is targeted to grow at around 10 percent a year, driven in part by faster manufacturing sector growth. Export earnings are projected to grow by 14 percent per year, with manufactured export value contributing over 60 percent of the growth in total export earnings. With labor force growth of around 2.4 percent per annum over the next ten years, the projected growth and structural change has to create sufficient employment in rural and urban areas if it is to reduce poverty significantly.

1.7. These economic goals (see Table 1 in Overview), are similar to those achieved by Vietnam in the last decade. The experience of neighboring countries also suggest that Vietnam’s goal for GDP growth per capita of around 6 percent a year are similar to those achieved by South Korea, Taiwan (China), Indonesia, Malaysia, Thailand and China during their periods of rapid growth and poverty reduction (see Box 1.1).

II. Raising the Level of Investment

1.8. The target of rapid growth with equity will require a higher level of investment and an improved quality of investment. The draft Strategy proposes the total investment rate to be 30 percent of GDP. Vietnam achieved this rate in the mid-1990s due to high household investment in 1993-94 and to the foreign investment boom of 1995-97. Following the decline of FDI and domestic investment in 1998 and 1999, total investment has fallen too. Figure 1.1 shows that the target rate of investment is at the high end of the range of investments that was reached in other high performing countries of the region during their periods of high growth, although still below the rate of China.

Vietnam aims for high investment

Figure 1.1:Total investment as a share of GDP in selected countries
Source: Government of Vietnam and World Bank, SIMA database.

Box 1.1: High Performing Asian Countries

The transition envisaged in Vietnam’s draft Strategy is consistent with what was achieved in other countries, provided appropriate policies are also implemented in Vietnam.

Comparative Indicators of High-Performing Asian Countries: GDP Sectoral Shares, Annual Growth Rates, and Incidence of Poverty (%)

Source: World Bank, World Development Report (various annual issues), East Asia: The Road to Recovery, SIMA database.

The types of policies that the Governments of these countries introduced included:

(i) reigning in inflation and maintaining a competitive exchange rate through prudent macroeconomic policies; (ii) investing in human capital through basic education funded by public sources; (iii) providing incentives for high savings rates with positive real interest rates, depositor protection in financial institutions ...

Table of contents

• Cover
• Abbreviations
• Preface
• Acknowledgements
• Contents
• Tables
• Boxes
• Figures
• Chapter 1: Economic Framework for Growth and Poverty Reduction
• Chapter 2: Creating A Supportive Climate for Enterprises
• Chapter 3: Transforming the Rural Economy
• Chapter 4: Enhancing Human Capacity
• Chapter 5: Providing Efficient Infrastructure services
• Chapter 6: Improving Environmental Quality
• Chapter 7: Building Modern Governance
• Statistical Appendix
• Bibliography