Greg Thorkelson, From Revolution to Reform: Prospects for the Future Economic Growth of Vietnam Based on Analysis of Recent Trends

From Revolution to Reform:

Prospects for the Future Economic Growth of Vietnam

Based on Analysis of Recent Trends

…it seems to me that the fate of the so-called west is today being

decided in the so-called East.   If the west does not find a key to us,

who were once violently separated from the west (with no great

resistance on its part), or to those who somewhere far away have

likewise extricated themselves from communist domination, it will

ultimately lose the key to itself.   If its own consumer affluence remains

more important for it than all the foundations of that affluence,

it will soon forfeit that affluence.

The following analysis of the economic situation in Vietnam is based upon data provided primarily by the World Bank, the International Monetary Fund (IMF), and the United Nations Conference on Trade and Development (UNCTAD), in addition to anecdotal evidence and inference of the author.   Whenever possible, the author’s experiences in country during March 2003 were weighed against conclusions drawn from the literature and a diverse array of statistical data.   It is important to note that much of the literature on Vietnam was written prior to the Asian financial crisis of 1997; thus, analysis of near-term statistics is subject to wide variation due in large part to a lack of prescient and available information.   In an effort to overcome this deficiency and to lend perspective to the current situation in Vietnam, the case of the recent rapid economic growth and subsequent decline in Thailand is utilized as a basis of comparison.  

I would venture that among the next countries to burst upon the global economy

will be a number of the transition economies…In many cases, we will no longer

think of these countries as ‘transition economies,’ for the ‘transition,’

as such, will be over.

Ravaged by centuries of conflict, occupation, and periods of instability, Vietnam has gradually emerged as a viable economic force in the Southeast Asian region.   This transition is far from complete, however, and Vietnam still faces many challenges.   While the fervor surrounding the growth prospects of Southeast Asian economies such as Thailand and, to a lesser extent, Vietnam was largely overrated, the dramatic decline in economic growth and investment in the region corrected much of the overvaluation.   It is possible to distill trends in growth through the period of the late 1990s and into the early part of the 21 st century by taking into account the implications of the Asian financial crisis.   The far-reaching ramifications of the 1997 correction do not spell economic disaster for Vietnam; rather, the new economic situation is a guidepost on the road to recovery, a demarcation point between the apparent revolution of the 1990s and the post-crisis period of reform.   Taken in context, many economic indicators point to a gradual, conservative recovery for Vietnam.   Although hurdles remain, Vietnam is positioned to experience continued economic growth in the coming years, a conviction supported in part by Thailand’s experience twenty years prior.  

Vietnam: The Thai Economy Delayed Two Decades

Thailand and Vietnam are more closely linked than by geographic proximity alone.   Based on historical analysis and a consideration of economic developmental factors, the Thailand of today represents the staging ground for the Vietnamese economy twenty years hence.   According to Tran Van Tho, professor of economics at Waseda University in Tokyo and a leading expert on the Vietnamese economy, comparable population sizes, comparable levels of development in the 1950s, and similar natural resource endowments qualify Thailand as a compelling proxy for the Vietnamese economy – with a twenty-year delay.  

Although no indicators directly cover the entire development of each country, a study of the ratio of investment to gross domestic product (GDP) for Vietnam and Thailand illuminates interesting patterns.   In the 1970s, the ratio of investment to GDP was 25 percent, a figure that grew over twenty years to more than 35 percent in the 1990s.   Vietnam, in comparison, had a rate of roughly 28 percent in 1997, a figure comparable to the rate in Thailand two decades prior.    Furthermore, analysis of research conducted by Tran suggests that Vietnam’s level of industrialization was approximately twenty years behind the levels of Thailand.   In summary, the prevailing economic indicators for Thailand provide some insight into future prospects for Vietnam’s economy.

Development Indicators

Economic growth and sociological development often parallel one another; to a large degree, one influences the other.   Thus, analysis of trends in fundamental development indicators suggests a direct correlation to the state of the economy as a whole.   In the case of Vietnam, the following indicators and their recent trends will be studied: the female share of the total labor force, average life expectancy, literacy rates, and the degree of urbanization.  

Vietnam, like much of Asia, is unique in its arguably progressive posture toward women in the workplace and women’s rights in general.   For purposes of comparison, Vietnam is on par with both the United States and Thailand in terms of the percentage share of women in the total labor force.   This is a positive indication of Vietnam’s openness and labor culture.

Life expectancy, an effective benchmark for the quality of life and healthcare, tends to increase as a nation becomes more industrialized.   The average life expectancy at birth in the US is 77 years compared to 67 and 69 years in Vietnam and Thailand, respectively.   Although the average life expectancy in Vietnam is lower than in most western countries and Japan, it is following an increasing trend as investment in infrastructure and healthcare grows at a rate roughly commensurate with the increase in GDP per person. The continued growth in the life expectancy of the average Vietnamese suggests a growth in the economy as a whole.   With increased life expectancy and quality of life comes increased productivity and prosperity.

Even prior to landing in Vietnam, many visitors, myself included, are already aware of the high literacy rates in the country courtesy of guidebooks and CIA country reports.   Partially a product of President Ho Chi Minh’s desire to educate his people, all but six percent of the population in Vietnam is considered literate by United Nations Educational, Scientific, and Cultural Organization (UNESCO) standards.   As with Thailand and its equally literate populace, literacy is yet another indicator of Vietnam’s economic growth and prosperity.   Vietnam continues to invest generously in education and literacy programs even today.

On entering Vietnam, my first impressions of the country centered around the Noi Bai airport in Hanoi and the drive into the city.   Hanoi’s international airport, located in the middle of agricultural land forty minutes outside of the city by car, presents the visitor to Vietnam with a modern, clean infrastructure surrounded by massive billboards.   The drive on the newly paved roads into the capital city affords a different perspective, complete with more billboards and endless green fields of rice.   Dotting the lush landscape were hundreds of workers stooped over, laboring in the paddies.   Only a small fraction of Vietnamese legally reside in urban areas.   In fact, as with Thailand, only one-quarter of the population resides in cities, compared to an average of 37 percent for the East Asia and Pacific region as a whole.   Overall, however, the trend is toward continual urban growth.   Between 1997 and 2001, 400,000 people – five percent of the population – migrated to cities in Vietnam even as the government maintained strict control over limited urban residence permits.   In general, increasing rates of urbanization is an encouraging indicator of economic growth.

On aggregate, most of the aforementioned development factors point to a positive outlook for the economy and people of Vietnam through improved quality of life, education, and opportunities for employment.   Moreover, continued investment and development suggest encouraging prospects for Vietnam’s continued economic growth.  

Financial Indicators

Basic development indicators provide insight into only a portion of Vietnam’s financial condition through a socio-economic perspective.   While clearly important, these indicators are intended to serve as a proxy for the impact of economic changes on the welfare of the general public.   Indeed, development indicators also reflect on the future prospects for economic growth through human capital improvements.   This is only part of the picture.   The analysis of major financial capital indicators is crucial to better understand the implications of recent trends in the forecasting of growth in the near-term.   Three main indicators will be addressed – per capita gross domestic product (GDP) growth, financial flows (primarily loans), and inward foreign direct investment (FDI) flows – followed by a detailed discussion on Vietnam’s export and trade issues.  

Per Capita Real GDP Growth.

By definition, the gross domestic product (GDP) of Vietnam is the market value of all goods and services produced in one year within the country.   Accordingly, it measures the overall size of the economy.   Real GDP growth – the growth after accounting for inflation – is often used as an indicator of economic health.   On a per capita basis, real GDP growth facilitates comparison between countries of differing population sizes and levels of economic development.   Since the mid-1980s, Vietnam has experienced a trend in positive per capita real GDP growth.   Adjusting for the adverse effects of the current global recession, this per capita growth in real GDP is expected to again grow over the coming years.   The change in the production patters of Vietnam lends support to this conclusion.   Between 1997 and 2001, the value added in industry as a percentage of GDP increased at a rate of five percent with a corresponding decrease in the contribution of agriculture.   Thus, a continued push to industrialization and a decreasing reliance on agriculture position the economy for increased growth.  

Compared to Thailand, the Vietnamese economy weathered the Asian financial crisis quite well.   While Thailand’s growth decreased from 8 percent in 1994 to negative 8.7 percent in 1998, Vietnam continued to maintain a positive, albeit small, growth rate over the same period.   In fact, the Vietnamese economy continues to grow on the basis of real GDP each year.

Financial Flows

Financial flows refer to net loan disbursements, usually from a developed country to a less developed country.   In the case of Vietnam, financial flows have been generally increasing over the past twenty years.   Most financial inflows to Vietnam are in the form of loans designed to promote general economic development and welfare.   These loans are generally concessional in that a portion of the loan is allocated as a grant.   Japan is a leading contributor of these loans to Vietnam.   Two interesting trends in financial flows are apparent over the last ten years.   First, non-commitment type loans increased from zero in 1990 to 172 million dollars in 1998 indicating a belief on the part of foreign investors and governments that Vietnam’s economy was both stable and growing. 12   Second, over the same period, Thailand’s non-commitment financial inflows grew over tenfold during the period.   Although the increase in financial flows in Vietnam is a positive trend, the much more rapid growth of financial flows in Thailand indicates that Vietnam must continue to reach out to foreign government and investors for loans in order to spur economic development.

FDI Inward Flows

For Vietnam, foreign direct investment (FDI) inflows represent the direct investment from foreign companies in Vietnamese assets.   FDI is an excellent proxy for both current and perceived future economic growth prospects.   Between 1985 and 1997, FDI in Vietnam grew from effectively zero to nearly three billion dollars per year.   As before, the Asian financial crisis had an adverse impact on capital flows to Vietnam, however the trend is again toward increasing FDI inflows.   On the other hand, FDI in Thailand nearly doubled over the two-year period after 1997 and is currently four times that of Vietnam.   While Vietnam clearly lags behind Thailand in the volume of FDI inflows, the gap between the two countries has decreased from fourteen times to four times the FDI of Vietnam.  

Flying from the Imperial City to Saigon, the unofficial seat of commerce in Vietnam, I recall reading an article in the Viet Nam News that underscored the government’s commitment to increasing FDI inflows and foreign investment in general.   The article chronicles a decision by current Prime Minister Phan Van Khai that permits foreign investors to acquire up to a thirty percent stake in Vietnamese public sector companies.   The decision to allow partial foreign ownership of State enterprises in Vietnam, Prime Ministeral Decision 36/2003 states, is to promote “foreign expertise and management methods as well as foreign technology and capital in order to gain influence and competitiveness.”   Clearly, continued government encouragement of FDI positively affects Vietnam’s prospects for economic growth and development.

Export Structure by SITC

In the analysis of international trade, products are grouped according to Standard International Trade Classifications, or SITCs.   These categories allow for cross-border comparison of other countries by specific trade group.   The following table, compiled from data provided by the UN Statistical Division and the UN Conference on Trade and Development, illustrates the top ten STIC groupings for Vietnam by their level of exportation.   Included for its piercing insight into the state of Vietnam’s economy from a microanalysis of export trends, the export data in the following table supports the conclusion that Vietnam is slated for positive near-term economic growth.  

The value of the ten STIC group exports accounts for 70 percent of all exports from Vietnam.   In contrast, the corresponding leading STIC group exports for Thailand comprise only 61 percent of its exports in terms of a percentage of total value.   Thus, the lower remainder for Vietnam versus Thailand indicates a relatively low degree of export diversification.   While limited diversification can indicate a high degree of specialization suggestive of capitalism, it also subjects the country to greater economic fluctuations.   Regarding the individual product categories, rice production is crucial not only to Vietnam’s export economy but to the world as well, for Vietnam is eclipsed in rice production only by Thailand.   Additionally, Vietnam is the world’s second largest coffee exporter.   While both industries have grown dramatically over the last few decades in Vietnam, the increase in production did not necessarily have a positive impact on the average Vietnamese farmer.   Prices for both products are at historic lows due in large part to an excess of production relative to demand.   While the situation is not promising and has been one of the forces driving urbanization in recent years, the Vietnamese Government is helping farmers by providing low-interest loans with the goal of increasing export diversification at the level of the local farmer.  

In eight out of Vietnam’s top ten SITC export groups, overall export growth rates for developing countries are much higher than for developed countries.   This comes as no surprise; however, the far right column in the table illustrates the crucial point that these higher rates of export growth for developing countries are continuing to increase or remain the same in all ten groupings save one.   In other words, Vietnam’s top ten SITC exports are continuing to grow at ever increasing rates over the period 1990-1998.   Although the Asian financial crisis and the subsequent global recession hampered Vietnam’s export growth at the turn of the century, the trend is again toward an economy increasing reliant on export income.  

Summary and Conclusions

While many scholars familiar with Vietnam conclude that great economic growth is in store for the socialist republic in the near-term, empirical support for this position is complicated by a number of simultaneously catastrophic and exceptional global events.   From the Asian financial crisis of 1997 to the worst global recession in four decades exacerbated by the terrorist attacks on the US in September of 2001, indicators of economic growth must be carefully scrutinized and their interpretation adjusted to account for such unique circumstances.   In general, then, the overall outlook for Vietnam’s economy is cautiously positive.   The recent increase in domestic private investment indicates that the Vietnamese likewise have confidence in their economy.   Furthermore, foreign investment is again gradually returning to Vietnam, and the recent increase in ratings by foreign rating agencies illustrates that support from abroad is growing, too.   With an eye toward reform and development, the Vietnamese Government, coupled with renewed foreign interest, is poised to lead Vietnam into a new era of stable economic growth.    

Works Consulted

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Litvack, Jennie I.   Dennis A. Rondinelli.   Marlet Reform in Vietnam.   Westport, CT: Quorum Books, 1999.

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Rodan, Garry, Kevin Hewison, and Richard Robison.   The Political Economy of South-Wast Asia.   South Melbourne, Australia: Oxford University Press, 1997.

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http://www.worldbank.org/data/countrydata/countrydata.html 5 April 2003.