Vietnam hews its own path to growth

ALTHOUGH torrential rains and overflowing rivers have wreaked the worst flooding in decades to Vietnam in recent days, the country is in fact doing rather well economically. Vietnam is on the brink of becoming a middle-income country. It will become one when it attains a per capita income of US $1,000 in 2010. This will be a huge achievement for the formerly war-ravaged country. The per capita income of the Vietnamese population rose from US $250 in 1995 to US $835 last year, according to the World Bank. Vietnam achieved these huge gains for its population after retaining its position among the best-performing economies in the world for the past 10 years. The Vietnamese economy grew at 7.3 per cent annually from 1995-2005, and its per capita income grew 6.2 per cent a year.

Yet, there is a lingering misperception that Vietnam was among on the list of least developed countries (LDCs) in the years following the end of the Vietnam War in 1975. At that time, Vietnam had narrowly avoided appearing on the United Nations' list of LDCs, a roster on which Cambodia, Laos and Myanmar still figure. In an attempt to correct the wrong impression, the United Nations Conference on Trade and Development (UNCTAD) said in June 2003 that Vietnam was never an LDC. There are three core criteria for determining which countries can be considered 'least developed'. These are low income, economic vulnerability, and human capital weakness.

In 2003, Vietnam met the first criterion of being considered an LDC because its per capita income was under US $750. The country did not wholly satisfy the second criterion of economic sustainability. However, Vietnam managed to escape classification as an LDC because it performed well in the third criterion, which measures a score on the 'Human Assets Index', which is an indicator of nutrition, health and education.

Vietnam's large population also helped it escape the LDC label. For countries to be added to the list of LDCs, their population must not exceed 75 million. In 2003, Vietnam's population was 80.2 million, which makes Vietnam a large developing country. UNCTAD argues that large developing countries, although still prone to poverty, are better able to create development strategies than small low-income countries, which are more vulnerable to external shocks and face a greater risk of remaining poor.

For Vietnam, the LDC label would have been a severe drawback in its effort to present itself to foreign investors as a dynamic developing country, and not a basket-case economy. The dubious LDC status does bring some benefits such as substantial duty-free and quota-free access to US markets, and those of other rich countries. But the very perception of an LDC as a basket-case tends to put foreign investors off.

Vietnam is on the threshold of becoming a middle-income country in just two years from now. The reason for this extraordinary success was the realisation by the ruling Communist Party of Vietnam that it must withdraw from business and open the economy to foreign investment. As a result of that policy, the government has reduced its involvement in manufacturing from 52 per cent in 1995 to 35 per cent in 2006. But the withdrawal of the state from business is not a complete explanation of the country's remarkable success. Alongside the adoption of market reforms, the government encouraged participation of the domestic private sector, and began welcoming foreign investments as early as 1986. Vietnam is earning rich dividends from those early reforms. Even before the country joined the World Trade Organisation (WTO), exports were the principal driver of its economic growth. When the country did eventually join the WTO in January 2007, it did so on the basis of solid, all-round economic performance.

So, if the Vietnamese economy is showing some signs of slowing down this year, it does not indicate that the growth saga is ending. Vietnam's gross domestic product growth for the first half of this year was about 6.7 per cent, according to Vietnamese government figures. Should Vietnam maintain the momentum, it can achieve its target of 7 per cent economic growth in 2008. This may be possible because of its efforts to curtail inflation and the trade deficit. Vietnam grew at 8.5 per cent last year, marking the third year of above 8 per cent growth. However, the Economist Intelligence Unit has revised downwards its forecast for real economic growth to 6.2 per cent in 2008 and 6 per cent in 2009, the slowest pace of growth in a decade. This is because growth in consumption is expected to be slow this year as bank credit is tightened and incomes are battered by inflation. However, Vietnamese industrial production has expanded rapidly, rising by 16.5 per cent in the first half of this year.

In any case, major foreign investors seem to agree that in spite of short-term economic worries in Vietnam, the country's longer-term prospects are still attractive. For instance, the Japan External Trade Organisation said recently that Vietnam was likely to be the best production site in Asia over the next five to 10 years. Nine out of 10 Japanese businesses in Vietnam say they would expand their operations in the country in the next one to two years. Little wonder that the country received foreign investments worth US $31.6 billion in the first half of this year, 3.7 times the amount committed during the same period of 2007. However, actual disbursements are often slow, especially for large infrastructure projects.

The World Bank says that to do better, the Vietnamese government must, first, completely reform the banking sector. Secondly, it must establish regulations to govern infrastructure development and fill shortfalls in the supply of power, water and transportation. A third priority would be to create a social security system for healthcare, pensions, and unemployment benefits, and improve the quality of education. Fourthly, Vietnam must provide better protection of the environment. Fifthly, the public administration must become transparent, efficient, and accountable. And finally, Vietnam must enforce the Anti-Corruption Law. The Vietnamese government is not expected to fulfill all these difficult tasks before 2010. But, Vietnam must begin to act on all the tasks in order to show that it is implementing meaningful, and not cosmetic, reforms.

All said, Vietnamese growth has been extraordinary. In the early years of reforms, the country reconstructed entirely on its own effort and without much multilateral development assistance. Even though more bombs were dropped on Vietnam during the 1960s and 1970s than in Europe during World War II, Vietnam was not the beneficiary of any funding package such as the Marshall Plan, under which the US poured billions of dollars to help the Europeans. War-ravaged Vietnam has scripted an entirely Asian way to growth. With Asian social, corporate, and family values intact, it has shown that its most important resource is its people, who are hungry for a better life and are willing to work hard to get it. (By Harish Mehta, The Business Times Singapore, 19 August 2008)