Too early to say Vietnam caught in middle-income trap, says economist

Monday, April 07, 2014 08:57

Vietnam has been a middle-income country for only three years and cannot be considered to have fallen into the middle-income trap until it is stuck there for several decades, economist Nguyen Minh Phong tells Vietweek.

At a recent meeting Japanese economist Kenichi Ohno, who has been studying Vietnam’s economy for many years, said the middle-income trap is no longer a distant risk, but has become a reality in Vietnam. What do you think about this?

Nguyen Minh Phong: According to Ohno, there are five pieces of evidence to prove that Vietnam is stuck in the middle-income trap. First, the country has seen an economic slowdown since 2006. Second, the efficiency in the use of investment is low. Third, wage rises in the country have outpaced the increase in productivity in recent years, pushing production costs higher. Fourth, the dong’s depreciation against the dollar at a rate of 5.5 percent fails to offset the 22.7 percent reduction in the economy’s competitiveness each year. Finally, there has been little improvement in competitiveness rankings.

However, there are two points to demonstrate that Vietnam has not yet fallen into the trap. First, Vietnam has been a middle-income country for only three years. A country would be considered as being in the trap only if it is stuck there for several decades. According to the World Bank, a country is considered to be in the trap if its average annual per capita income remains at US$4,000-6,000 for 42 years.

Second, Vietnam has slowed down its growth only to enable economic restructure and achieve more rapid economic growth in the medium term.

According to a forecast by the Organization for Economic Cooperation and Development last December, it may take Indonesia a few more decades until 2042 to develop into a high-income country from a middle-income one. Malaysia might do it by 2020; China, by 2026; Thailand, by 2031; and Vietnam, by 2058.

What should we do to accelerate economic growth?

No economy can become a high-income one if its industrial sector does not account for at least 18 percent of GDP. The middle-income trap is a big challenge when economies increasingly depend on overseas sources, especially for inputs and exports depend on foreign investors.

Vietnam needs to review its industrial plan, prioritizing development of information technology and supporting industries and reduction of natural-resources exports. The government needs to support enterprises with market research and exploration of niche markets, help small and medium-sized enterprises get bank loans, and increase value addition.

The country needs to expand negotiations and signing of bilateral trade agreements to boost trade and reform fields in which it does not have a competitive advantage. It should also reform education and training to foster high-quality human resources.

"[Developed economies like] Japan, Taiwan, Singapore, and South Korea… consider their private sector firms as being central to economic development and attach importance to international cooperation. Vietnam… should study their ways."  Economist NGUYEN MINH PHONG

To avoid being stuck in the middle-income trap, Vietnam should not rely on FDI and ODA. However, the development of the domestic private sector remains weak and many firms continue to shut down despite all the measures to support them. What do you think about the situation?

In theory, Vietnam says that it treats local and foreign firms equally. But the fact is that foreign and state-owned firms get more incentives from localities in terms of tax and land. Thus, these firms have better conditions for development than local private ones, and crush them. Local private firms are not facilitated and so still see development below their potential.

We should seek and properly use overseas capital sources like FDI, ODA, overseas remittances, and commercial loans. We should also enable the local private sector’s development. Last year Prime Minister Nguyen Tan Dung issued a circular on boosting private firms’ development, but it does not contain many specific measures. To overcome the middle-income trap, local private firms should be the spearhead of development. Without due attention to the sector, we will be stuck in the middle-income trap.

What are the experiences of other countries in coping with the middle-income trap that Vietnam can learn from?

Many economies, including Japan, Taiwan, Singapore, and South Korea have successfully overcome the trap. All of them consider their private sector firms as being central to economic development and attach importance to international cooperation. Their industrial sector contributes more than 18 percent of their GDP. Vietnam, in future, should study their ways for reference, but need not follow them. 

For example, we can focus on developing the services sector instead of industry since we do not have advantages in the field. It could take Vietnam 15-20 years to develop a modern industrial sector. That is too long. Besides, the sector’s development depends on technology transfer from foreign partners.

We should focus on boosting the service sector to overcome the middle-income trap since the sector could bring benefits quicker than industry.

We should focus on international services to earn big profits. For example, Vietnam could become an international gastronomy or resort center of the world.

There is an opinion that Vietnam should review its industrial and agricultural structures, and work out a specific plan to develop them, but the government’s failure to do so is affecting our economic growth…

I don’t think so. We have developed an overall economic restructure plan which envisages the marine economy accounting for half of the GDP and prioritizes high technology and supporting industries for development. The orientation is OK. However, the plan has not been implemented well. We have not yet achieved an institutional breakthrough, improved business environment, or created a level playing field for local and foreign firms.

Bao Van

Thanh Nien News (The story can be found in the April 4 issue of our print edition, Vietweek)

 Vietnam Shines as Neighbors Await Export Bounce

The Wall Street Journal: One of the burning questions about Asian economies is why their exports remain so weak despite the synchronized recovery in the United States, Europe and Japan.

Leave Vietnam out of that question.

Vietnam’s exports massively outperformed its peers’ over the 12 months through January, growing 15% on-year at a time when shipments from many members of the Association of Southeast Asian Nations were falling. Vietnam’s trade data for March is due out this week.

“Vietnam is benefiting from a lot of regional themes right now,” HSBC economist Trinh Nguyen said.

Low wages are attracting manufacturers looking for cheaper locations than China, where labor costs are rising quickly. Vietnam’s demographics are promising and literacy rates are relatively high, producing a workforce with the drive and skills for factory labor.

And as neighboring Thailand implodes, Vietnam appears a beacon of stability by comparison. Say what you will about the political or economic management skills of Vietnam’s Communist rulers, but the party’s grip on power appears secure.

“If you’re a foreign firm trying to offshore your production, one of your considerations is whether or not the people in power, the decision-makers, will stay the same,” Ms. Nguyen said.

Domestic demand in Vietnam has suffered in recent years as authorities tightened monetary policy to fight inflation that had soared above 20%. That has made exports a more important driver of growth, just as massive investments by the likes of Intel, Samsung and others have boosted Vietnam’s role in the electronics supply chain.

Vietnam has especially benefited from two trends in electronics production, ANZ Bank economist Devika Mehndiratta said. For one, while demand from the United States and Europe has generally been weak, electronics sales are soaring in China.

Despite concerns about China’s economic slowdown, “so far it has proved to be at least a small support factor for Asean exports because of its strong demand for electronics,” Ms. Mehndiratta said. Just under 9% of Vietnam’s exports go to China, according to ANZ.

Second, even in the United States, where overall electronics imports were flat last year, imports of telecom equipment were a growth area – and handsets are one area where Vietnam has specialized. The U.S. takes nearly 14% of Vietnam’s exports — the highest rate in Asia — putting it just behind the European Union as one of Vietnam’s largest trading partners.

“Vietnam just happens to be in the sweet spot in terms of electronics,” Ms. Mehndiratta said. “In the last five or six years, from pretty much nothing, that has taken off hugely.”

Vietnam’s electronics exports jumped nearly 68% in 2012, and another 35% in 2013. Exports of phones grew by 85% and 67% in those two years.

Of course, given the high statistical base that’s been established, that pace is sure to fall. And plenty of challenges remain: Vietnam is just beginning to clean bad loans out of its banking system, a process that will take years. And given the government’s struggles to keep the economy on an even keel in recent years, it wouldn’t come as a great shock to see inflation spin out of control again.

Still, Vietnam seems likely to grab an ever-greater export share as the search for cheaper alternatives to China gathers pace. HSBC’s manufacturing PMI for Vietnam shows output rising and inventories at low level, meaning new orders should quickly feed through to production. The bank expects Vietnam’s exports to grow by 20% this year.

With a population of about 90 million who don’t yet earn enough to support a thriving domestic market, “the way for Vietnam to grow in terms of income and productivity is to supply goods to richer countries,” Ms. Nguyen said. “As you’ve seen in China that strategy can’t go on forever, but for the next decade at least it can continue.”

(http://blogs.wsj.com/economics/2014/03/25/while-most-of-asia-waits-for-export-bounce-vietnam-pushes-ahead/)