Introduction
Vietnam’s development is without doubt one of the most successful stories of the last decade. The populous south-eastern country (85 million people; World Bank database, 2010), from being an impoverished and isolated nation with a long history of wars and divisions has become, in the world of Ajay Chhibber (cited in The Economist, 2008) the “poster child” for economic development. Today, in 2010, Vietnam is on the verge of joining the middle-income countries’ group (World Bank, 2008), setting itself the ambitious target to become a rich, high-tech country by 2020 (The Economist, 2008).
Vietnam’s rise from poverty has started from a very low base; in 1989 its GNI per capita, PPP in dollars was just 610$, three and an half times less than an average middle income country and nearly thirty times lower than the GNI PPP $ of an high income country. Yet, Vietnam’s GNI PPP $ over nearly twenty years has increased more than threefold, averaging an annual rate of growth of 8% , twice faster than an average high income country and a typical low income country. However, despite its notable progress, Vietnam is still a poor country compared to other Asian economies; though, Vietnam’s income level (GNI PPP $) has doubled in the period 2001-2008 while other ASEAN countries such as Philippines, Thailand, Indonesia have only registered an average annual increase of their income level in the range of 3-6%
The striking characteristic of Vietnam’s growth is the progress made in the eradication of poverty and in other development indicators. Vietnam ranks at the 116th place in the latest Human Development report (2009), a position thirteen places higher than the equivalent GDP per capita table; a result that highlights the social and equitable focus of the Vietnamese development (Vietnam’s Gini coefficient is 0.37). In fact, Vietnam scores relatively well compared to other LDC countries in all the indicators that form the HDI index. It has met or it is likely to achieve six of the ten Millennium Development goals outlined by the United Nations Development Program (World Bank, 2008) and poverty has been reduced by two/thirds between 1993 and 2006; well beyond the target set by UNDP to halve the proportion of people living in poverty by 2015.
Vietnam has escaped deep poverty by embracing free trade; as a result, Vietnam’s economy is today one of the world's most open with merchandise trade (exports plus imports) equal to 160% of GDP (World Bank, 2010). The rapid integration of the Vietnamese economy explains 20% of the outstanding 7% average annual rate of GDP growth of the past twenty years.
If the size of the government is often determined by the degree of market failure in society, in a country such as Vietnam, in which private initiative was practically outlawed, it’s not surprising that the State has a major role in Vietnam’s economy. SOEs (State Owned Enterprises) still retain a major control over more “strategic” activities; in fact, the strongly nationally-owned character of Vietnam’s development strategy allows the government to have through the SOEs direct control over employment and FDI and thus fulfil its vision of an equitable development. However, despite the suspicion that often attracts the State’s involvement in the economy, SOEs have been maintaining a greater productivity compared to the private sector (Thoburn, 2004) resulting from years of experience of the Communist management’s elite in the field. Nevertheless, its monopoly in the manufacturing sector has been partially declining (from 52% in 1995 to under 35% in 2006; World Bank, 2008) and a dynamic private sector is slowly emerging, sparking hopes that the country's latent entrepreneurialism has finally burst back into life (The Economist, 2008), although the generated share of output (22.7%) is still little more than an half of the share of foreign-invested enterprise (Thoburn, 2009).
Commodity trade and Trade policy
The outstanding growth achieved by the south-eastern country certainly vindicates the many neo-liberals who advocates “trade as the main engine of economic development” (Todaro, 2009); indeed, Vietnam’s move to a market economy, its gradual integration into world trade and the swift openness to foreign investment have certainly helped sustaining a economic growth that has seen its total output tripling in 2008 to 90.7 US$ billions from 31.17 US$ billions in 2000 (World Bank Database, 2010).
The move towards a more open economy was the core of the trade strategy actuated with the doi moi reform programme in 1986. This approach, in line with the neo-classical theory, aimed at increasing the economic performance of Vietnam by integrating its economy in the global exchange of goods that is International trade. In fact, according to classical theory (Todaro, 2009), with trade a developing country can access goods that otherwise would be unable (or be too expensive) to produce in exchange for products in which it has a comparative advantage. Through this mechanism, based on the classical belief that trade allows a better allocation of resources (labour, land, capital), the country would focus on developing sectors of the economy where it is more efficient (in absolute or compared to its trading partners), hence where the margin of gains are greater. Indeed, the comparative advantage would be acquired by specialising in goods that have a relatively lower cost of production as explained by David Ricardo in his theory of comparative advantage (Todaro, 2009) or by maximising the use of factors which are abundant such as labour, as demonstrated by the Heckscher-Ohlin theory (Todaro, 2009). Though, the gains from trade arise because a bigger market allows economies of a large scale and so greater profits, because exposure to the world allows the access to foreign technology and finally because by opening the domestic market to foreign importers, internal competition is increased thus lowering the prices. (The Economist, 1998).
The increased integration of the economy also implies a notable change from its past. In fact prior to the “doi moi” reform plan, Vietnam was a rather isolated country; its isolationist approach, based on the concept of “developing from within” initially theorised by the Argentinean economist Raul Prebisch (cited in Cypher and Dietz, 2009), persistently pursued strict industrial policies of import substitution (ISI) aimed at manufacturing simple and non-durable goods that were being imported, while developing trade- links only with the former Soviet Union and other communist countries (Thoburn, 2009). Nevertheless, similarly to the unsuccessful attempts of other developing countries that engaged in inward-looking policies (Todaro, 2009), Vietnam also failed to sustain this strategy; indeed in 1986, Vietnam’s economy was surviving solely on aid flowing from the Soviet Union that shortly thereafter collapsed, inflation was over 700%, exports were only half the value of imports and there were severe shortages of food and consumer goods (Thoburn, 2009) that induced many desperate Vietnamese to flee the country (“boat people”, The Economist, 2008).
However, although the evidence shows that the openness of its market to foreign goods has had a very positive effect on its rate of growth, Vietnam did not rapidly move towards a market-based system of foreign trade. In fact, Vietnam’s trade strategy, as in other Asian countries previously, was mainly centred on the development of an export-led industrialisation (ELI). Similar to ISI but outward looking; during this process the dismantling of imports restrictions such as tariffs and quotas happen quite gradually in order to protect the infant export industry from foreign competition while a programme of light industrialisation creates the basis for the creation of a competitive advantage in labour-intensive manufactures. Indeed, Vietnam’s effective rate of protection has been constantly high and it has only decreased recently as a result of joining the WTO in 2007
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On the other hand, as noted in Cypher et al (2009) “an industrial revolution without an agricultural transformation would be a partial success”. Indeed, the de-collectivisation of the land (one of the biggest privatisations yet seen; The Economist, 2008) and the gradual alignment of farm prices toward market prices provided the basis for the spectacular development of the agricultural sector. Vietnam from being a net importer of rice in the 1980 has moved to become the world second exporter (after Taiwan), resolving also the problem of food security, considering that at least 70% of population is a consumer of rice. Moreover, its produce is highly diversified; it ranges from coffee to nuts and from peppers to rubber (Thoburn, 2009).
The Vietnamese process of modernisation of the rural area also went hand in hand with a gradual urban development. As often the success of structural changes of this sort are measured by the falling share of agriculture in the country's gross domestic product, Vietnam’s achievement is highlighted by the decline of its share of agriculture as percentage of GDP to a 20% in 2007 from the 46% of 1988, an average annual decline rate of 2.1% offset by a faster growth of the secondary and tertiary sector during the same period.
However, Vietnam’s strategic approach to export promotion was not limited only to the export of primary products but it was mainly intended for more productive and growth-inducing product lines. In fact, Vietnam has successfully been able to add manufactured goods to the existing export structure of the primary products (Fig. 6). In 2007, the light industrial and handicraft goods represent the 45% of the export volume (in mill.USD; Fig.7). In fact, Vietnam’s diversification of its main manufacturing exports from garments and textiles into footwear reflects the country’s comparative advantage of a low-cost but high-quality labour force (World Bank, 2008) but also an effective strategy of limitation of export earning instability, a problem common to other Asian economies.
The positive characteristic of Vietnam’s development has been the successful although not complete transition to a more open economy. In fact, as protective tariffs were progressively reduced, the country has effectively managed to overcome common transactional inefficiencies that arise when moving from a highly protected economy to a more integrated one. In particular in three key areas, Vietnam created the conditions for a sustainable development; those are the economic climate, human capital and foreign investments.
Economic stabilization and the early “doi moi” reforms were closely linked. In 1988 a severely restrictive monetary policy was introduced to reduce the very high inflation. In fact, years of isolation and imports restrictions had artificially overvalued the Vietnamese “dong”. Hence, as part of the export –promoting strategy, the government devalued the currency in order to raise the local prices that firms receive for goods that can be exported. This policy certainly renders the exports much cheaper to foreign importers, though more significantly accounts for a “veiled” subsidisation of the exports.
Moreover, Vietnam’s record of investment in human capital
, both in education and in health provision generated “receptivity to technical change” (Van Arkadie cited in Thoburn, 2009). But more importantly, Vietnam’s entry into the world markets has been much helped by foreign firms, following a foreign investment law passed in 1988 (Thoburn, 2009) that de-facto liberalised foreign direct investments (FDI).
Indeed, this combination of stable environment, low production costs and specialised human capital has helped Vietnam to become the darling of foreign investors and multinationals (The Economist, 2008). In 2006 Vietnam’s inward foreign direct investment flows were accounting for 12.5 per cent of its gross fixed capital formation, compared to 8 per cent in China (UNCTAD, cited in Thoburn, 2004). Global buyers have also had an important part in directing FDI to Vietnam; the favourable investment environment has attracted many manufacturing companies to outsource their production in the south-eastern country. Indeed for buyers that seek for a useful “insurance” against relying too heavily in China (a “China plus one” strategy), Vietnam is often chosen as “the plus one” (The Economist, 2008)
Finally, in line with many development economists that argue that developing countries should orientate their trade toward their regional neighbours (Todaro, 2009) Vietnam joined the ASEAN (Association of Southeast Asian Nations) in 1995. The ASEAN bloc is formed by ten members
of whom Vietnam is one of the poorest (only Cambodia, Laos and Myanmar have a lower GNI PPP per capita); this circumstance raises the possibility for the Vietnamese economy to gain from a closer integration with other rich members such as Singapore and large markets such as Indonesia which has a population of more than 200 millions.
In fact, integration provides the members countries the opportunity for a greater utilisation of their industries and to take advantage of economies of scale made possible by the expanded market (Todaro, 2009). Indeed, in 2008, more than 20% of the total of Vietnam’s imports and exports were part of an intra-ASEAN trade (table 4). But more importantly, the Asian region is Vietnam’s main source of imports while the United States, after having imposed an embargo on Vietnam’s goods that lasted until 1993, today they are the main destination of Vietnam’ exports (19% of total exports)
Conclusions
Vietnam’s successful story cannot be told as a triumph of the market fundamentalists and neither as the umpteenth Asian miracle or a light version of China; instead, the specificity of Vietnam’s development may lie in its ability to incorporate the best aspects of successful development models into something uniquely suited to it.
Although Vietnam’s development is similar to other Asian countries such as Taiwan and South Korea, the economic reform programme initiated in 1986 certainly mirrors the same economic and social transformation undertaken by China in 1978. As its northern neighbour, Vietnam abandoned its effort to introduce real Communism, (evidenced in the collectivising land ownership and the repression of private initiative) to embrace Capitalism; it dumped strict autarkic policies and the disastrous economic central-planning system that isolated the country and brought Vietnam to the brink of a humanitarian catastrophe, to open its domestic market to foreign goods and investments. But, more importantly, as the People's Republic of China, Vietnam preserves an authoritarian government structure of a one-party state that still maintain a strong grip on political debate and the private enterprise initiative.
The Vietnamese government has had the merit of courageously abandoning the ideological doctrine for the good of its own people. As the developmental state assumed by Evans (cited in Cypher and Dietz, 2009), the Vietnamese apparatus has had the power, the purpose and the capacity of directing and mobilise its development vision. However, the development project undertaken by Vietnam has not been certainly characterised by a sudden “laissez faire” approach; instead of the invisible hand of the market, Vietnam’s development has been characterised by a very visible State.
The main risk is that as the Communist ideology served as moral justification for the maintaining of the old status-quo, economic success may provide the pretext for the current regime to hang on to power. The role of the State has been certainly endogenous to the Vietnamese development; however this exploit has also been aided by external phenomena such as the increasing globalisation of the economies. Surely, the merit of the government has been to take full advantage of the global changes of the last twenty years, though many challenges lie ahead.
The latest financial crisis will definitely have the effect of re-balancing the world trade; this is likely to force Vietnam (as for other exporting countries) to stimulate the domestic demand to sustain its growth. However, Vietnam is still a very poor country, therefore, the extent of Vietnam’s reaction to external shocks will determine whether equality will be sustained or the problems facing the country will cause the government and other powerful interests to tighten their grip on the population and thus increasing discrimination.
Because development must be conceived as a multidimensional process involving major changes in social structures, popular attitudes and national institutions (Todaro, 2009), if the Vietnamese government wants to continue to act as a developmental State it will have to certainly pave the way for the major freedom of its citizens and a declining authority of itself. It is often said that democracy is not a determinant in the development of a country and Vietnam may be the latest evidence, however it is worth remembering that that most of the world's richest countries by income per head are liberal democracies (The Economist, 2008); definitely another model to which Vietnam could aspire.