Vietnam glided through the global recession, with economic growth hitting 5.3%
last year and expected to expand 6.5% in 2010. Nonetheless, a sharp
deterioration in the country's external finances, rising concerns about the
banking sector's health and a highly inconsistent macroeconomic policy
framework have driven a creeping devaluation of the local currency and a recent
credit-rating downgrade.
Government leaders are said to be increasingly worried about the country's
economic growth prospects, with particular concerns about the quality of recent
investments. Ahead of next year's pivotal 11th Party Congress, where key
Communist Party policies and appointments will be determined in the one-party
state, some have called for a new reform strategy that maintains fast growth
while minimizing market-driven risks, including rising disparities in wealth.
With a sharp reduction in poverty rates and an average annual growth rate among
the highest in the world over the past two decades, Vietnam has been widely
hailed as a market-reform success story. Foreign investors, including major
United States-based manufacturers such as Intel, have committed major capital
outlays to the country's low-cost, fast-growing economy.
To achieve high annual growth targets, the government has consistently pumped
up investment. Total investment, which accounted for less than 33% of gross
domestic product (GDP) in 1999, increased to nearly 43% last year. However, the
outlays have become less productive, as reflected in Vietnam's rising
Incremental Capital Output Ratio (ICOR), an indicator of investment efficiency.
There are many reasons for the statistical slide, but chief among them is the
laggard state sector, which accounts for over 40% of total investment and
significantly crowds out the private sector.
In a bid to attract ever-rising amounts of foreign direct investment (FDI),
economic managers have not been strategically selective in their approval
processes. As a result, many FDI projects in Vietnam have been geared to take
advantage of the country's abundant cheap labor, lax environmental standards
and regulatory loopholes. This phenomenon can be seen clearly when provinces
compete to attract more FDI to boost short-term economic performance, often for
the vested interests of local political leaders.
Although rising exports have been an important source of economic growth, fast
expanding trade has given rise to new problems. Many of the country's major
exports derive from the exploitation of natural resources, and relentless
efforts to boost trade and fuel growth have come at a rising cost to the
environment. For manufacturing, Vietnam imports a stubbornly high percentage of
its inputs, including machinery and spare parts, for export production. A
rising reliance on China for cheap inputs has crippled the development of local
industries.
This has contributed to a persistently high trade deficit. Fitch Ratings, a
credit risk agency, estimates Vietnam's current account deficit will top 11% of
GDP this year, a significant rise from last year's 7.4%, and indicative of
"elevated risks" of a possible current account crisis. Meanwhile foreign
exchange reserves dwindled from US$24.2 billion in 2008 to $16.8 billion last
year. The government suspended publication of reserve statistics in October
2009, a key contributing factor to Fitch's decision to downgrade its credit
rating from BB- to B+ in August this year.
Sliding competitiveness
As Vietnam bids to integrate with the global economy, facilitated by its
accession to the World Trade Organization (WTO) in 2007, domestic losers from
trade are on the rise. Among the hardest hit have been farmers unable to
compete with an influx of cheap, often Chinese-produced imports. For
labor-intensive export products to remain price competitive, real wages have
been suppressed at the expense of workers' living standards. Together, these
factors have contributed to rising income inequality, even as poverty levels
continue to come down.
Vietnam has in recent years fallen on the World Economic Forum's Global
Competitiveness Index. Vietnam ranked 68th in the 2007-2008 Index but slid down
to 75th in the 2009-2010 rankings. That's significantly below Vietnam's
Association of Southeast Asian Nation peers and rivals, including Thailand,
which ranked 36th, and Indonesia, which notched the 54th position in the most
recent rating.
Prime Minister Nguyen Tan Dung recently asserted that Vietnam would continue to
aim for "fast and sustainable" growth. To reach that broad goal, and in muted
recognition of the public sector's drag on the economy, he called for the
development of the private sector through all possible means.
This will not be easy considering the lack of consensus among powerful
political decision-makers about the future direction and pace of
market-oriented reforms. The state sector has been charged with playing a lead
role in developing the economy, and it will be difficult to quickly shift
course because of the powerful vested interest groups who guide state resources
towards state-owned enterprises.
Without strong laws to ensure a level competitive playing field, the sale of
public assets to politically connected private investors, often at below
prevailing market prices, has raised questions about the equity of
privatization. Others have reportedly profited at the state's expense through
privileged information received from Communist Party politicians about
impending reforms and policies.
A new economic strategy for Vietnam should prioritize building new institutions
genuinely geared towards managing sustainable and equitable growth over
enriching the associates and family members of politicians and officials in the
name of reform. Those institutions would be tasked with improving national
competitiveness and moving industry up the value-added ladder, including into
more technology-driven sectors.
The success of any new growth model for Vietnam will depend largely on reining
in endemic corruption. The country has arguably made little tangible progress,
despite a growing economic pie and rising incomes. Vietnam ranked 120th on the
Corruption Perception Index published by Transparency International last year,
faring worse than most other East Asian countries, including China (79th) and
Thailand (84th).
The negative effects of corruption are far reaching, ranging from undermining
the quality of policy implementation to altering the efficient distribution of
economic resources. Since the implementation of a Vietnam-US bilateral trade
agreement and Vietnam's inclusion in the WTO, progress has been made in
reforming the legal system, especially through the adoption of many new laws
that regulate various economic activities. However, the country still faces a
significant gap between what's legal and what's actually practiced.
An effective strategy to promote more sustainable growth will necessarily need
to improve government transparency, reduce red tape, close legal loopholes,
make public officials at all levels accountable for their decisions, and
facilitate public participation in the policy-making process. Government
leaders could justify these deep-reaching reforms against resistant vested
interests by playing up the country's legal obligations to the WTO to further
integrate with the global economy.
Harking to its command economy experience, Vietnam remains fond of setting and
achieving social and economic targets. Instead of setting high - and
increasingly unsustainable - annual economic growth targets, the country's
leadership should consider implementing new corruption reduction and efficiency
targets for state-owned enterprises at the upcoming Party congress. Without a
more equitable distribution of the country's rising wealth, the risk will rise
that poorly implemented reforms will lead the country into crisis rather than
prosperity.
Anh Le Tran is a professor at Lasell College in Massachusetts in the
United States.
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