Wednesday, June 16, 2010

Without the Right Leadership, Vietnam’s Economic Boom Could Turn to Bust

Since unprecedented economic reforms began in 1986, Vietnam has transformed itself from a country on the verge of economic collapse and isolation into one of the most open and fastest-growing economies in the world.

Enabling the country’s rapid GDP growth, averaging 7.5 percent between 1990 and 2008, is its robust integration into the world economy, with an average trade growth rate exceeding 20 percent over the same period.

In 2008, Vietnam was more integrated than most its Asian peers in both trade and FDI measures.

Vietnam’s impressive economic performance has been driven by its three major strengths.

The first is related to the country’s geographic, strategic and demographic advantages.

The country is situated in the heart of Asia and borders China, a booming economic giant.

The distance from Hanoi to any other major city in Asia, including Hong Kong, Shanghai, Beijing, Seoul, Tokyo, Singapore and New Delhi, is but a two-to-six-hour flight.

And with more than 3,000 kilometers of coastline, this S-shaped country offers excellent conditions for all parts of the country to participate in global trade.

Vietnam is the world’s 13th most populous country and enjoys a young population, which implies the country has both a large market and an energetic labor force.

The country’s second major strength is its political stability, on which the World Bank ranks it well above most of its Asian peers, including China, India, Malaysia, Indonesia, Thailand and the Philippines.

Its third major strength lies in its human capital. The Vietnamese people are known for their eagerness to improve their lives through hard work, for their commitment to education, to entrepreneurship and for their willingness to seize opportunities.

Foreign investors have often praised Vietnamese workers for being quick-learning and industrious.

As evidence, Vietnam has overtaken China, India, Indonesia and the Philippines with respect to Internet penetration and number of students studying in the United States per 100,000 population.

Does Vietnam’s impressive past economic performance coupled with its considerable strengths suggest that it has a bright future?

A “yes” answer depends on the national leadership’s vision, determination and practical approach in overcoming the three fundamental weaknesses it is facing.

First, although Vietnam has reaped immense benefits in shifting from a command to a market economy, it has not entirely committed to unleashing the full impact of market forces.

Unjustified subsidies provided to state-owned enterprises, large investments poured into commercially unviable industrial projects, ineffective support for private sector development and the persistence of “market control” attitudes (with effects across prices, exchange rates and interest rates) have caused severe market distortions and investment inefficiencies.

In fact, the economy is beset by low capital investment efficiency, evidenced by a high incremental capital output ratio relative to its Asian peers.

For Vietnam, it takes more capital investment per percentage point growth in GDP than most other Asian countries. The country’s rapid growth has been driven more by labor reallocation and expansion on a low value added structure than by within-sector productivity growth and the effort to move up the technological ladder.

Second, while Vietnam has enjoyed rapid economic growth, it seems to have paid inadequate efforts to good governance.

The poor quality of public policy in the country — especially with regards to urban planning and management, corruption controls and environmental protection — is one of society’s most serious concerns.

The rapid expansion of government and party-sector employment may also have helped deter improvements to institutional competence and effectiveness.

The productivity of the sectors associated with the government, the party and its affiliated organizations, have declined substantially over time.

Vietnam’s third weakness is its heavy dependence on external resources. As a percentage of GDP, foreign aid and workers’ remittances are much higher for Vietnam than for its Asian peers.

With sizeable sources of foreign aid, the country can afford to pay less attention to raising the efficiency and strategic effectiveness of large projects.

With large and increasing flows of workers’ remittances, the country can enjoy rapid increases in consumption and impressive reductions in poverty without the pressing urgency for efforts to make people more productive and frugal.

As a result, the overall cost of Vietnam’s heavy dependence on external resources lies rather in neglecting to upgrade and to leverage the strength of its human capital — the most powerful engine of a country’s growth and critical in moves toward a high-performance economy.

Vietnam is at a pivotal juncture in its development journey. Making decisive and urgent efforts to address the country’s weaknesses by upholding free market principles, building good governance and leveraging human capital will shift the country toward a better strategic position on its path to prosperity.

Neglecting these efforts, due to complacency or a fear of change, could cost the country and its future dearly.

For Vietnam, the fact is that today determines tomorrow. This is not only a time-tested truth; it is a national imperative.

The situation has become so urgent and so strategically important that if the country is to avoid the middle-income trap, it will require inspired national leadership and decisive action.

Vu Minh Khuong is an assistant professor of economics at the Lee Kuan Yew School of Public Policy, National University of Singapore.

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