Vietnam’s economic transformation from rags-to-riches

• Current scenario in Vietnam
• Initiatives by the government for economic recovery
• Impact of automation on the manufacturing hub

Vietnam, which is a hub for low-cost manufacturing continues to attract a plethora of foreign investments. This is despite the trade war that is causing disruptions in the emerging economies, Vietnam’s economy managed to grow at 7.1% in 2018. It was around 30 years ago that Vietnam was one of the poorest countries in the world, which was much to do with the Vietnam-American war. Currently, it is the fastest-growing economy in Asia and its GDP is expected to surpass that of Singapore within a decade. 

Vietnam’s cheap labour along with its proximity to China has created a win-win situation amid rising trade tensions between the US and China. The country’s transformation began in 1986 with the introduction of political and economic reforms named Doi Moi, which were aimed at creating a socialist market-oriented economy. Its accession into the World Trade Organization in 2007 further amplified the global presence. These reforms along with an increase in China’s labour and land costs made the world to gradually shift their production focus on Vietnam.

The nation has seized every possible opportunity to sign bilateral and multilateral trade agreements, it is currently a party to over 20 free trade agreements, CPTPP, AFTA, AJCEP, EAEU to name a few. Quite strikingly, Vietnam had a positive trade balance of $15.7 billion, with a trade growth at 5.3% as compared to the world’s -1.59% (World Bank, 2017). A majority of its exports are directed towards the US, which is followed by China, Japan, South Korea and Hong Kong. The liberal economic policies have fuelled the FDI, especially in the manufacturing and the processing, with these sectors receiving $10.5 billion of foreign investment in the first five months of 2019. According to the Foreign Investment Agency, Vietnam received a total FDI of $16.74 billion in the same period, which was the highest in the last four years (YoY increase of 69.1%). In fact, foreign investments have enormously contributed to capital accumulation and accounted for as large as 29% of the total capital formation in 2018, as can be seen from the below graph.

Many analysts believe that the US-China trade war’s spill over would inevitably have an impact on Vietnam due to the global slowdown, while President Trump also signalled to withdrawing of trade concessions that were offered to Vietnam. However, contrary to the widespread beliefs on deceleration, EU and Vietnam signed a trade deal in June 2019 that would eliminate 99% of the tariffs on goods imported from Vietnam to the Union. The agreement is expected to boost Vietnam’s exports to the EU by 20% and EU’s exports to Vietnam by over 15% by 2020.

Apart from the international policies, the government has also taken initiatives on the domestic front to make the nation as the fastest growing economy in Asia. It has eased the regulatory process to foster the business climate and promote private sector growth. Sun Group that launched an airport in Quang Ninh and Vingroup that organised its car shows in Paris Motor Show are the forerunners for Vietnam’s private players being applauded in the international platforms. In 2018, the private sector contributed 43.2% to the GDP by employing 85% of its workforce. The private enterprises (national and international) have been creating 5.57 lakh jobs per year in the nation.

Additionally, Vietnam has progressively reduced the public guaranteed debt below 62% for two consecutive years, after reaching the highest level of 63.7% (2016). The government’s debt has also reduced to 50.5% of the GDP and is expected to reach 46% (2020). In fact, for the first time in 13 years, Vietnam’s government had estimated an achievement of a positive budget surplus of VND 400 billion ($17.2 million) for 2018, however quite contrary, the final figures were ultimately in deficit. Vietnam’s budget deficit remained close to 6% despite of the estimation for it to reduce significantly, majorly due to large public spending for the upliftment of the economy but the same not being recovered by collections. Thus Vietnam’ s debt even though dwindling, still remains at around 50% (as mentioned above) as it has to ultimately resort to borrowings. Nevertheless, limitations on the issuance of government guarantees, equitization of SOE’s and lower fiscal deficits have led Fitch Ratings to revise Vietnam’s Outlook to positive from stable.

The quality of life in Vietnam has also improved over the years with an equal right to education and health services. According to the World Bank, the country is ranked 48th in terms of Human Capital Index (HCI) out of 157 countries and was ranked 2nd in Asia behind Singapore. Furthermore, with gender gaps narrowing and electrification rate reaching 100%, Vietnam seems to be in the prime form to become one of the fastest-growing economies in the world.

While a lot appears to be working in Vietnam’s favour, it has to be wary of the fact that low labour costs would not provide a perennial advantage. There exists a gap, wherein productivity growth is not keeping pace with rising wages. In line with economics, the soaring demand for labour has led to an increase in the wage rate, however, the productivity has not increased in the same proportion. When Vietnam is compared with Thailand, (even though the productivity has increased in Vietnam by over 35% from 2006 to 2017) its productivity is just one-third that of Thailand, while its average monthly wage is more than half of the nation (Source: Deloitte Insights). The minimum wage to labour productivity has increased from 25% to 50% from 2007 to 2015, this is the highest as compared to China, Indonesia, Philippines and Thailand.

Vietnam’s high dependence on exports and FDI makes it more exposed to the highly volatile global environment. In order to maintain its growth rate, Vietnam, despite the global unpredictability would exert pressure on macroeconomic policies that could lead to high inflation and instability in exchange rates. The prices in Vietnam have been rising since 2015 and thus, the government needs to keep a close eye on the price movements. More importantly, it needs to reform its tax collection structure to reduce its fiscal deficit. The SOE divestment has slowed down and import taxes remain low which consequentially add to the lower revenue growth.

Furthermore, automation could also thwart its dominance in the manufacturing domain. United Nations International Labour Organization anticipates that 56% of employment in Vietnam, Cambodia, Philippines, Indonesia and Thailand could be displaced by automation in the next 20 years. In the short-run, adopting technological innovations can help productivity issues, however, over the long-run, this could lead to the loss of millions of jobs. In fact, a local textile enterprise like Viet Thang Jean Co., Ltd. is already in line to invest heavily on mechanisation and the number of workers may get reduced to 450 from 1800. These steps are adopted so that domestic manufacturers can be highly competitive on a global scale.

Artificial Intelligence is the next massive thing and replacement of humans seems inevitable, even the advanced economies of the US and Europe cannot avoid its aftermath. However, presently, there is a marginal use of robots by local enterprises in Vietnam. Nevertheless, the need of the hour is to train workers in the IT, foreign languages, and communication so as to make them better equipped to handle modern machines and to make them more productive. It has also become imperative for Vietnam to develop, invest and run welfare programs on trial in line with UBI (Universal Basic Income) to safeguard its workers. As far as the medium outlook is concerned, Vietnam is still expected to grow at a rate of 6.5%, according to the World Bank, however, its sustainability over the long-run due to high fiscal deficit leaves a big question mark.