New context, new perspective
Scholars previously thought that free trade agreements such as the Trans-Pacific Partnership (TPP) with strong commitments would create momentum and pressure for Vietnam to reform its economy. That is why many felt disappointed when US President Donald Trump announced that the US would withdraw from the TPP soon after his election.
However, from an optimistic point of view, the demise of the TPP could be a driver to help the Vietnamese economy choose a clearer direction in its own path of integration ahead.
Previously Vietnam needed rapid growth to quickly achieve the goal of bringing prosperity to the people but data has shown that Vietnam’s economy is slowing down. The fear of lagging behind other countries is no longer a major concern while the process of restructuring the economy and renewing the growth model to find new growth drivers remains to be occurring at a very slow pace.
Vietnam also faces many questions that are yet to be answered such as if it is true or not as to whether free trade agreements and integration commitments have not yet created enough pressure for domestic restructuring.
A look at the recent wave of foreign investment in Vietnam and foreign companies’ relocation of their manufacturing facilities to Vietnam indicate that this sector is acting as an important driver of growth. But it should be frankly admitted that foreign investors come to Vietnam to capitalise on advantages of origin and costs when Vietnam’s integration commitments with the world’s largest economies such as the US, the EU and Japan come into effect, not because of the appeal of Vietnam’s business environment. Therefore this shift is not an accurate measure of domestic reform.
Another question that is yet to be answered is when growth relies too much on foreign-invested resources, will Vietnam fall into a double-speed economy with a clear divide between foreign and domestic sectors, state and private enterprises, urban and rural areas? The answer is yes when it has been pointed out that only foreign enterprises are able to take advantage of Vietnam’s commitments when joining the World Trade Organisation or entering into trade agreements with Japan, the Eurasian Economic Union or the Republic of Korea.
It can be concluded that if Vietnam only waits for external pressure from free trade agreements to reform its economy, the country will be unable to achieve what it envisages.
In early November 2016, the Party Central Committee issued two important resolutions, one on renewing the growth model and one on enhancing the effectiveness of integration. Immediately after that the National Assembly also approved a resolution on restructuring the economy during the 2016-2020 period.
It is the path that Vietnam must follow in order to further enlarge the economy. It not only depends on trade agreements but also requires a change in mind-set to realise the above-mentioned determination and consensus.
Pressure to reform from within
It must be reiterated that the core of economic restructuring is reallocating resources and streamlining the use of such resources. Figuratively speaking, the economy is like a lake that nurtures life while investment resources are flows of water coming from rivers and streams into the lake. The lake can only be useful when its water is clean and pure. The question is after five years of economic restructuring, does the lake of the Vietnamese economy still have any room left for new flows? Or said in another way, what advantages does the Vietnamese economy have when entering 2017 and the years thereafter?
In terms of investment, Vietnam has mobilised huge investment but its productivity is not commensurate with its size. In China during its period of rapid growth from 1991 to 2003, the ratio of investment to GDP was 39.1% and the average growth rate was 9.5%. For Japan, the corresponding figures during 1961-1970 were 32.6% and 10.2%. As for Vietnam during the 2011-2015 period, the ratio of investment to GDP was 31.8% but growth only averaged 5.9%.
Foreign direct investment is also high at about 26-28% of total social investment. At this time, there is no denying the increasingly greater role of the foreign sector in industry, accounting for half of industrial output and 70% of export value. But if such growth continues, the foreign sector’s dominance over other domestic sources of investment will be a cause of great concern.
In addition, while the State sector’s performance has not seen much improvement, the domestic private sector is losing ground as seen in the increasing number of loss-making enterprises and closing businesses. Such phenomena are indications that if this situation continues, the economy will struggle to attract more capital.
In order to boost resources for national prosperity, the restructuring process should concentrate on re-allocating resources, or more accurately speaking, changing the way resources are allocated. Furthermore, it is necessary to establish markets of production factors by operating the land and financial markets efficiently to gradually replace the “ask-give” mechanism in the allocation of resources with a market-driven mechanism.
For banking restructuring, the focus must be on resolving bad debt quickly and drastically so that the financial market can operate properly. Economic restructuring must also be included in socio-economic development plans instead of being placed on the fringe.
It is time for Vietnam to change its mind-set and ways of renewing the growth model as only when the sectoral and local interests are put aside can Vietnam’s economy can grow from its small size to realise its overall goal of prosperity.
