As the coronavirus pandemic brought out vulnerabilities in the healthcare systems of countries to the forefront, one country that stood out was Vietnam. In January 2021, the country was ranked no. 2 among 98 countries by the Lowy Institute, Australia, on an index that measured how successfully countries handled the pandemic. Few countries have been able to contain a global pandemic, without imposing a nation-wide lockdown; in this regard, Vietnam has a lot to teach to its fellow nations.
But lessons in healthcare aren’t the only lessons that Vietnam has to give. While the world economy has been plagued with a slowdown for quite a while now, Vietnam continues to exhibit tremendous growth: its GDP grew by 7% in 2019, which was one of the highest growth rates among developing countries. This has led many to look at the country as Asia’s ‘next miracle’. This is a stellar feat, when one considers that Vietnam’s growth has not been propelled by any post-war boom years, or an era of rapid globalization, which was the case for countries like Japan, South Korea, and China. A discussion paper by McKinsey Global Institute, prepared for the 2018 Singapore Summit, identified Vietnam as one of the eleven developing economies which had outpaced US growth consistently from 1996 to 2016.
As was the case with other Asian economies like Singapore, Taiwan, South Korea, and China, that reached pinnacles in economic development under authoritarian rule, Vietnam too made the leap to economic eminence after a series of reforms called the Doi Moi Policy were adopted by the autocrat Communist Party of Vietnam in 1986. The extensive program was initiated to set in motion the transition of the one-party socialist republic from a close and centralized economy to a ‘socialist-oriented’ market economy, by unleashing external and domestic reforms throughout the country. The post-war reconstruction period in 1975 had seen Vietnam in a state of severe economic deterioration, characterized by weak agricultural and industrial production, soaring inflation rates and rising debt, among other problems. Further, the country was heavily dependent on Soviet assistance. After the trading system in the Soviet Union bloc disintegrated, and the country faced sanctions on trade imposed by the US, it became internationally isolated. This led to a further dampening of economic growth and a period of hyper-inflation, highlighting the need for a drastic set of reforms for the economy’s survival. The Doi Moi reforms can be credited for taking a country, which was on the brink of economic collapse, and putting it on a trajectory of high, sustained growth.
Following the reforms, Vietnam became a multi-sector market economy, with an open-door policy towards international trade and investment.
The reforms were aimed at abandoning collectivization and encouraging privatization in agriculture, giving more rights to farmers, and recognizing long-term land use. The removal of price controls on agricultural products enabled farmers and industrial producers to sell their produce at a profit. As yields improved, rice production increased to the extent that the country, which had earlier been hugely dependent on imports for rice consumption, emerged as one of the largest exporters of rice following the reforms. Further, private business was encouraged in all sectors and greater freedom was imparted in proprietary rights. The government gradually reduced subsidies provided to state-owned prices in order to improve price control and to strengthen financial markets. The exchange rate system and the pricing system were also liberalized.
Strategic efforts were made to integrate into the world economy, with the intention of strengthening exports. Vietnam entered into a trade agreement with the European Union in 1992. The country joined ASEAN in 1995, and subsequently became a part of the ASEAN trade agreements. It also normalized its relations with the US in the same year and in 2001, the two countries entered a bilateral trading agreement. After eleven long years of negotiation, Vietnam finally secured a place in the World Trade Organization in 2007, and in 2010, the country became a negotiating member of the Trans-Pacific Partnership. The introduction of the Foreign Investment Law in 1987 and subsequent amendments to it in the following years led to an inflow of FDI into the country: in 2008, after Vietnam’s accession to the WTO, FDI inflows were pegged at US$ 9.58 billion, almost 10% of the GDP.
As Vietnam has continued to embed itself into global value chains by entering into trade agreements, it has also seen its exports burgeon. This can be attributed to several factors. The country devotes a significant fraction of its resources not only towards better infrastructure, such as roads and ports to transport goods, information technology and manufacturing plants, but also on educating its workforce, which although constitutes a low-income class, is still well-educated. The high-skilled, low-cost labour force has pushed Vietnam’s climb up the export basket: high technology exports as a portion of manufactured exports reached 40.4% in 2019 from 32% in 2014. A growing labour force, which is relatively inexpensive and high-skilled, paired with a business-friendly environment and favourable infrastructure has made the country one of the top destinations for manufacturers and exporters in the world. In a post-pandemic world stricken by the US-China trade war, as companies look to move their factories out of China, Vietnam seems like the ideal production base.
However, there are certain limitations to Vietnam’s ascent as well. Given that the country attributes much of its economic growth and development to exports and FDI, an increasingly protectionist world may fare badly for it. However, as purchasing power rises in the country, any fall in global demand is likely to be made up for by the country’s burgeoning middle class. Another concern is an aging working class, and a declining growth in the labour force. This would require the country to focus its efforts on increasing the productivity of labour and capital to continue to sustain its past growth rates.
Nevertheless, a 2017 report by PricewaterhouseCoopers projected Vietnam to be one of the world’s fastest growing economies over the next 30 years, with an average growth rate of 5%. In spite of the global economic crisis that the pandemic has inflicted on the world, one can expect this to happen, considering how rapidly Vietnam opened up its economy after the COVID-19 pandemic struck, From one of the poorest countries in the world in 1985, with a GDP per capita of US$ 231, Vietnam is a middle-income country today, with a GDP per capita of US$ 2,700 in 20192, and one of the emerging economies driving the global economy. Apart from its significant contributions to world trade, Vietnam has a lot to give to developing economies of the world, including lessons on how strategic reforms and proactive measures for global integration can catapult a country to great economic heights.
By: Tanya Jain