Peter Vanham, Media Lead at the US and Industries of the World Economic Forum (WEF) has hailed Vietnam's impressive economic development in an article posted recently on its website.
A woman reads a newspaper while selling flowers in a Hanoi market November 14, 2006. Photo by Reuters
"Vietnam is young, growing, and anything feels possible," the article said.
The article showed how has Vietnam grown to become a middle-income country from one of the poorest in the world when the 20-year American War ended in 1975.
Under the government’s subsequent five-year central plans after the war, per capita GDP was stuck between $200 and $300 by the mid-1980s. But then something changed. In 1986, the government introduced Đổi Mới, a series of economic and political reforms, and steered the country to becoming a “socialist-oriented market economy”, the article illustrated.
Today, Vietnam is one of the stars of the emerging markets universe. Its economic growth of 6-7% rivals China, and it exports are worth as much as the total value of its GDP. Anything from Nike sportswear to Samsung smartphones are manufactured in this ASEAN nation. Such is the success of the country, Sheng Lu, an assistant professor at the University of Delaware told the Financial Times that there are few spare workers or production facilities left.
In answering how this growth miracle happened, the writer quoted analysts from the World Bank and the think tank Brookings as saying that Vietnam’s economic rise could be explained by three main factors: “First, it has embraced trade liberalisation with gusto. Second, it has complemented external liberalisation with domestic reforms through deregulation and lowering the cost of doing business. Finally, Vietnam has invested heavily in human and physical capital, predominantly through public investments.”
Regarding the first factor, the analysts point to the various free trade agreements Vietnam has signed in the last 20 years. In 1995, Vietnam joined the ASEAN free trade area. In 2000, it signed a free trade agreement with the US, and in 2007 it joined the World Trade Organisation. Since then, further ASEAN agreements followed with China, India, Japan and Korea, and just this year, the amended Trans-Pacific Partnership went into effect – albeit without the US.
The cumulative effect of all these agreements was to gradually lower the tariffs imposed on both imports and exports to and from Vietnam, as shown in the graph below.
Vietnam is open for business. Image: Brookings Future Developments
According to the writer, the government's drive towards an open economy also included domestic reforms. In 1986 the country created its first Law on Foreign Investment, enabling foreign companies to enter Vietnam. Since then, law firm Baker & McKenzie said in a 2016 report, the law has been revised a number of times, mainly to adopt a more pro-investor approach while aiming to reduce administrative bureaucracy and better facilitate foreign investment into Vietnam.
Vietnam’s efforts did not go unnoticed in international rankings. In the World Economic Forum’s Global Competitiveness Report, Vietnam rose from 77th place in 2006 to 55th in 2017. In the World Bank’s Ease of Doing Business rankings, meanwhile, Vietnam rose from 104th place in 2007 to 68th place in 2017. Last year, the Bank said, Vietnam made progress on everything from enforcing contracts, increasing access to credit and electricity, paying taxes and trading across borders.
Finally, Vietnam invested a lot in its human capital and infrastructure. Facing a rapidly growing population - it stands at 95 million today, half of whom are under 35, and up from 60 million in 1986 – Vietnam made large public investments in primary education. This was necessary, as a growing population also means a growing need for jobs. But Vietnam also invested heavily in infrastructure, ensuring cheap mass access to the internet. The Fourth Industrial Revolution is knocking on Southeast Asia’s door, and having a sound IT infrastructure in place is essential preparation.
Those investments paid off. Armed with the necessary infrastructure and with market-friendly policies in place, Vietnam became a hub for foreign investment and manufacturing in Southeast Asia. Japanese and Korean electronics companies like Samsung, LG, Olympus and Pioneer and countless European and American apparel makers set up shop in the country. By 2017, the Financial Times reported, Vietnam was the largest exporter of clothing in the region and the seconder largest exporter of electronics (after Singapore).
Vietnam today is a major global exporter. Image: WTO, Financial Times
Economic growth followed suit. Since 2010, Vietnam’s GDP growth has been at least 5% per year, and in 2017 it peaked at 6.8%. With such rapid economic growth, the country grew from one of the poorest countries in the world to a comfortably middle-income one. Whereas its GDP per capita was barely $230 in 1985, it was more than ten times that in 2017 ($2,343). Corrected for purchasing power, it stands even higher, at over $6,000.
Vietnam's per capita GDP has increased tenfold over the past 30 years. Image: Google, World Bank
Importantly, the economic growth was fairly inclusive. According to the World Economic Forum’s Inclusive Development Index, Vietnam is part of a group of economies that have done particularly well at making their growth processes more inclusive and sustainable. Women too, fared better. Their employment rate is within 10% of that of men, notes the World Bank, and women-led households are less likely than those led by men to be poor, although inequalities remain.
The article stressed that with the appetite for globalisation on the wane in many parts of the country, Vietnam looks particularly vulnerable, as the Financial Times reported earlier this year. Its exports are worth 99.2 per cent of its GDP, and as shown previously, much of its success is based on foreign investment and trade. As an emerging market, it may also fall out of favour as a place to invest in because of the strengthening dollar.
But for now, Vietnam looks to profit from rather than be hurt by increasing global trade tensions. Although the US has backed out of the Trans-Pacific Partnership, its antagonism so far has had a greater impact on China than on Vietnam. The US government slapped imports on hundreds of billions of dollars’ worth of Chinese products, which has led companies with a manufacturing site in China to consider relocating to countries like Vietnam.
But even if Vietnam does get hurt by increasing Western protectionism, it can still count on its own burgeoning middle class to deliver the next boost of growth. Both domestic and international retailers are eyeing rapid expansion in the country, as more and more people gain the purchasing power to consume goods and services. It may mean that one day, instead of the hustle and bustle of small shops and scooters, Vietnam will be characterized by large malls and cars. But for now, Vietnam is growing, at its own pace, and in its own way, the writer noted.