According to World Economic Forum, Vietnam’s economic rise can be explained by three main factors: “First, it has embraced trade liberalization with gusto. Second, it has complemented external liberalization with domestic reforms through deregulation and lowering the cost of doing business. Finally, Viet Nam has invested heavily in human and physical capital, predominantly through public investments.”
Vietnam economically moved very fast after suffering for a number of years from the war tragedy. Vietnam has grown fast to middle-income status – and significantly its about 7 per cent economic growth rate is now higher than China’s. This economic miracle of Vietnam is based on manufacturing, which was boosted by trade liberalisation, domestic deregulation and investment in human and physical capital. A report by Standard Chartered forecasts that Vietnam’s GDP is on course for 7 per cent growth through the 2020s – and will surpass the $10,000 per capita GDP mark in 2030. This is a remarkable growth story.
While all nations are facing down turn in economy, Vietnam, which kept the pandemic out of the country with only a few persons suffering from the disease and no fatality, has witnessed lesser impact on economy than most other countries. Its supply chain has remained unaffected. The demand for its manufactured goods is growing and would go up further in post-COVID-19 period.
Even before the pandemic, several companies from China moved to Vietnam as better facilities were provided with availability of continuous electricity. Vietnam’s workforce of 100 mn with a median age of 35 assures sufficiency in this regard. While un-skilled workers are easily available at a cheaper rate, it has potentials for having sufficient skilled workers. Vietnam has world’s best science students according to Google engineer Neil Fraser.
During 2008-2018, Vietnam achieved an impressive yearly average growth in its GDP of 6.07%, reaching a 10 year high of 7.1% in 2018. Crucially, inflation rate stabilised at 3.54%, and unemployment rate was just 2.2% in 2018, amongst the lowest in the world. According to the IMF, Vietnam’s current account deficit declined to 2.45% of GDP in 2017, and further reduced to 2.16% in 2018. Vietnam has emerged as one of the favourite destinations for FDIs in South East Asia with FDI inward flow having increased year-on-year since 2011, reaching USD19.5 billion in 2018, up from USD17.1 billion in 2017.
In addition, despite an average year-on-year minimum wage growth rate of 8.8% between 2015 and 2019, the manufacturing costs in Vietnam remain highly competitive. Importantly, Vietnam enjoys regional connectivity with the ASEAN economies, and a strategic position on the SCS having links with the main shipping routes. Its relations with Japan, India, Australia, Russia, EU and US are excellent.
During the pandemic, the Vietnamese Government donated medical supplies worth a total of US$ 420,000 to eight countries in Southeast Asia, South Asia, and South Pacific. These included Australia, India, and six ASEAN countries – Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Earlier in April, Vietnam had shipped nearly half a million protective suits to the United States. Demand for medical supplies is increasing and Vietnam has established its capabilities to meet the growing requirements world over. The desire to help these countries despite the economic pressure because of the pandemic received appreciation from the above-mentioned countries.
Vietnam economic success has been a result of providing the appropriate macroeconomic and institutional conditions for investment. In general terms it has provided the necessary facilities for doing business with ease and confidence. Vietnam focused on improving the infrastructure. Its special attention was on transport, telecommunication and energy. This has laid down the foundation for future growth. The country is also taking steps to develop necessary skills through training. Innovation is also encouraged with substantial influx of FDI.
Productivity increased at a very fast pace- increased 36% from 2006 to 2017. Socio-political stability combined with policymakers who continue to seek removal of restrictions on businesses by initiating reforms enabling foreign companies to open up businesses in the country, have helped Vietnam attract significant business from abroad. It has increased infrastructure investment, promoted FDIs, increased education and R&D budgets, enhanced trade integration and improved institutions and policies.
Vietnam took necessary measures to deal with the business crisis caused by the pandemic, which adversely effected business in the country. Several companies became bankrupt. Vietnam launched a US$10.8 billion (about 0.4 percent of GDP) credit support package in early March, which includes policies to restructure loan terms and reduce interest rates and fees. In addition, the government has also offered two budget support packages of US$1.3 billion, which include a reduction in taxes and fees for affected companies and an extension of tax payment schedules. This has helped the companies to tide over the crisis.
In the coming period, a number of opportunities for further economic progress would be available to Vietnam. It has potentials for overtaking China in the post-COVID-19 period. The anti-Chinese sentiments are increasing world over. Several companies desire to move out of China. The new security law in Hong Kong has made several companies from there to move to better locations. Vietnam provides an alternative to such companies in the same region. Stable economy with necessary facilities makes the destination very attractive. Vietnam has several multilateral and bilateral agreements with foreign countries, which could be leveraged.
However, there would be a number of challenges to deal with. Urgent efforts would be needed to develop the country as the manufacturing hub. The three drivers would need to be given further boost- investment, skilled force, infrastructure and improved connectivity with markets. To attract the companies, modern infrastructure with skilled workforce would be needed. The foreign companies should be given assurance to modify regulations, if required. This would give them confidence to work from there. The training facilities would have to be significantly enhanced to have sufficient number of skilled workers. Efforts to have young workforce requires a long-term plan. In addition, in cooperation with other countries, secured and efficient connectivity for supply of goods to the markets would require to be given special attention.
Despite pandemic, Vietnam is forecast to be one of the fastest-growing economies in South East Asia. According to the ADB’s Asian Development Outlook 2020 report published on April 3, 2020, Vietnam’s economic growth will decline sharply to 4.8 percent in 2020 but bounce back up to 6.8 percent in 2021, provided the pandemic is contained. Future prospects are bright. Even the current economic growth of Vietnam is better than China’s. The latter’s most optimistic figure for economic growth is placed at 3 percent for 2020 and its prospects for recovery remain uncertain, given the decision of several nations to boycott its goods. The story of economic growth of Vietnam has been aptly termed as ‘miracle’.
By S D Pradhan, who has served as chairman of India’s Joint Intelligence Committee. He has also been the country’s deputy national security adviser. He was chairman of the Task Force on Intelligence Mechanism (2008-2010), which was constituted to review the functioning of the intelligence agencies. This story was first posted on The Times of India
DISCLAIMER : Views expressed above are the author’s own.