Vietnam’s record of development over the past 30 years has been remarkable. Economic and political reforms under the policy known as Doi Moi, which translates to ‘renovation’, have led to rapid economic growth which has transformed Vietnam from one of the world’s poorest nations to a lower middle-income country today with great potential for the future. How did Vietnam get to where it is today and what is in store for its economy moving forward?
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Politically, the Socialist Republic of Vietnam, or Vietnam, remains one of only four one-party socialist states along with China, Laos and Cuba that are officially communist. Although the Vietnamese state is socialist, its economy is capitalist much like that of its northern neighbour China. The Communist Party of Vietnam (CPV) holds the monopoly on power and is currently led by General Secretary Nguyen Phu Trong, the top-ranking member of the party who takes the lead on strategic matters such as defence and foreign affairs.
The CPV recently appointed Nguyen Xuan Phuc as Prime Minister, whose government was formed in April 2016. A major mandate of the new government is to balance the continued strengthening of Vietnam’s economy with important restructuring that places the economy on a more sustainable and innovation-driven model of growth.
A sustainable trajectory of development is vital for an aspiring population of more than 95 million which is only approximately 34% urbanised, indicating a society that is still undergoing modernisation and urbanisation. The main driver of this modernisation process has been the impressive growth in GDP per capita that Vietnam has experienced since the 1990s; GDP per capita growth averaged 6.4% a year in the 2000s. The proportion of the population living below the national poverty level decreased from 60% in 1993 to 13.5% in 2014, a drop of more than 40 million people.
Despite uncertainties in the global environment, Vietnam’s economy remains resilient, supported by GDP growth of 6% in 2016. The World Bank deems the medium-term outlook of the economy to be favourable. GDP growth has been coupled with significant growth in international trade; from 2011 to 2015, export turnover grew by 18.5% annually, reaching US$16 billion in 2015.
A Change in National Trajectory: ‘Renovating’ the Economy
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A transformative turning point in Vietnam’s history that led to a redesign of its economic and social policy and set it on the path to growth occurred in 1986. The CPV took the decisive step of abandoning the central planning model of socialism and adopted a “market-oriented socialist economy under state guidance” through the process of Doi Moi. This laid the foundation for an upturn in prospects for Vietnam’s economy and society illustrated by the economic statistics previously highlighted. Doi Moi also facilitated Vietnam’s integration with the regional and global economic system, exemplified by it joining Asean in 1995, and the World Trade Organisation in 2007.
Staying the Course: Strategy for Reform
Despite the success experienced since the adoption of Doi Moi, the powers-that-be recognise that reform needs to be continually adapted if Vietnam is to continue its ascent in a fast-changing and competitive global landscape. The 2011-2020 Socio-Economic Development Strategy (SEDS), part of Vietnam’s regular series of 10-year plans, highlights the need for structural reforms, macroeconomic stability, environmental sustainability, and social equity. The SEDS set socio-economic targets such as increasing GDP per capita from $2116 in 2016 to between $3200 and $3500 by 2020. It also targets to reduce poverty rates by 1% to 1.5% every year.
Three major reform priorities for the government of PM Nguyen Xuan Phuc, a legacy he inherited from the previous administration of Nguyen Tan Dung, are: bolstering a weak banking sector, improving underperforming State-owned Enterprises (SOE), and creating a better business environment in Vietnam.
The government has changed its thinking and approach when it comes to banking reform. Since 2015, the State Bank of Vietnam (SBV) has undertaken bold consolidation measures by overseeing mergers between domestic banks to reduce the number of commercial banks from 42 to 34, nationalising three bankrupt banks, and working to reduce bad debt in the banking system.
SBV plans to continue trimming the bloated banking sector by reducing the number of domestic banks to between 15 and 17 by 2020, although it is undoubtedly a complicated process that will take time. It is not clear how the cleaning up of remaining bad debt, which is thought to be higher than official figures stated, will proceed. The government is also said to be considering closing down weak performing banks and selling recently-nationalised underperforming banks to foreign investors.
SOEs are a common feature in Southeast Asian economies such as Indonesia, Thailand and Malaysia. In Vietnam, they comprise about a third of the GDP in industries including utilities and infrastructure, but have a reputation for being inefficient and laden with corrupt personnel and practices. Reforming this large portion of the economy is an urgent task for the Vietnamese government, which, like Indonesia, has taken to partially privatising or divesting its stakes in SOEs.
However, the progress of reforms has fallen below official targets, prompting PM Phuc in June 2016 to call on authorities to speed up the reform agenda. The opaque nature of SOEs lends to the enterprises being susceptible to graft and mismanagement. To address this, the government has conducted an anti-corruption campaign under the guidance of CPV General Secretary Trong himself, reflecting the importance of corruption reforms. The campaign targets “interest groups” in SOEs to reduce resistance against reforms within SOEs and improve efficiency, transparency and accountability. Indeed, anti-corruption measures have yielded results as a former Minister of Industry and Trade and senior SOE executives fell victim to the campaign.
Improving the ease of doing business is a key priority area in which Vietnam has made progress: in the World Bank Doing Business 2017 Report, it rose nine spots from 91 to 82 out of 190 countries worldwide. Boasting a business-friendly environment that attracts foreign investors and technology is, however, a competitive enterprise. With Southeast Asian countries like Indonesia and the Philippines also showing improvement in their rankings, Vietnam will have to continue pushing for reforms if it is to boost its reputation and capabilities. In that vein, Vietnam has improved in areas such as customs and trade-related reforms related to the import and export of goods, scaling the World Economic Forum’s Enabling Trade Index by 14 places to attain 73 out of 136 economies.
Vietnam’s leadership has set out numerous targets to continue this positive momentum. In May 2016, the government issued an ambitious resolution on developing 1 million Vietnamese enterprises by 2020. Regardless of whether that number is achieved, the aim of the resolution is to increase the private sector’s share of the GDP to between 48% and 49%, and the private sector’s share in total social investment to 49%. Crucially, it sets the target of having 30% to 35% of Vietnamese enterprises engaging in innovation-related activities annually, in line with developing an innovation-driven economy.
PM Phuc’s new government and other officials have frequently used the term chính phủ kiến tạo, meaning facilitating government, as a guide for its reform agenda. Such an approach runs parallel to the increasing trend of network- and partnership-based governance by many administrations worldwide instead of a top-down approach. To better facilitate trade, for instance, tax and customs regulations have been continuously streamlined in response to industry feedback.
Challenges beyond the Horizon
According to a joint study by the Vietnam government and the World Bank on future growth, Vietnam’s version of Doi Moi in the 21st century needs to be driven by productivity and innovation. Four elements were identified in this long-term reform agenda. First is creating an enabling environment for domestic enterprises. Although reforming SOEs will remain important, the economy also needs home-grown companies which are independent of the government. Long-term efforts to foster such an environment should look at strengthening the institutional foundations of the market economy with an emphasis on protecting property rights and enforcing competition policies for a fair competitive marketplace.
Spurring learning and innovation is a qualitative change that would help Vietnam move up the economic value chain and be able to better compete with other emerging economies. Currently, neither enterprises nor research institutions are thought to be motivated sufficiently to focus on this agenda. A national innovation system has been proposed to improve the situation, though this should only be considered a partial solution as innovation yields the best results when it occurs organically from the bottom-up.
As Vietnam becomes increasingly urbanised, it is imperative to guide urban policies and investments to ensure optimal benefits for the economy and society. In line with global trends, Vietnam’s cities need to become hubs that nurture business and innovation initiatives, support the growth of industrial clusters able to tap into global value chains, and attractive destinations for the agglomeration of talent. Urban policies and investments need to be put into action in and around metropolitan areas such as Ho Chi Minh City, Hanoi, Hai Phong and Da Nang, as well as a network of secondary cities. Functioning land markets, coordinated urban planning and improved infrastructure will be priority areas in this ambitious reform agenda.
Partnering the Lion City
Singapore, with its experience in creating a business-friendly environment, learning and innovation, and urban development, would be well-poised to offer Vietnam its expertise in many areas of reform. Bilateral ties between the two countries are in excellent shape and were elevated to a Strategic Partnership in 2013 to mark the 40th anniversary of relations. Singapore already has a notable presence in Vietnam; it is the third largest investor in Vietnam with cumulative investments of approximately $39 billion in about 1800 projects.
There are currently five Vietnam-Singapore Industrial Parks spread across Vietnam with another two in development. As Vietnam moves up the economic value chain, the joint developments have also evolved from traditional industrial parks to what Singapore PM Lee Hsien Loong has called “integrated townships” that suit Vietnam’s urbanisation needs and attract skilled talent. Such joint projects have the potential to be the foundation for deeper bilateral cooperation as Vietnam continues its journey of Doi Moi in the fast-changing 21st century.