Vietnam's economic emergence

Visiting Vietnam last week for a meeting of the APEC Business Advisory Council (ABAC), my thoughts inevitably turned from a regional perspective to a local one – the impressive strides being taken by the Vietnamese economy. When Vietnamese officials were not talking about their recent achievements, the country was vividly showing them to us – in buildings under construction and economic activity humming everywhere.

Our meeting venue was in Danang, a former US Air Force base. As we drove to our hotel, we saw other resorts being constructed. Danang promises to be the foremost resort area in Vietnam. Our hotel was of 3.5-star quality but inching up to the coveted five-star rating. Despite the scorching heat of 36 degree celsius with 95 percent humidity, the occupancy rate indicated that the guests were satisfied with the ambience of the resort. 

The Vietnam War (1954-1975) seems a distant memory now. Economics is the national mantra today of state officials, entrepreneurs, managers, and the common people. Since 1986, when the country followed China in shifting from a centralized economy to a “socialist-oriented market economy”, Vietnam has emerged as an economic powerhouse in its own right. And to the chagrin of its neighbors, it nurses ambitions of rivaling and eclipsing them over the coming decade.

Addressing ABAC last August 25, Vice Minister Do Huu Hao said with pride: “Joining APEC for 10 years, Vietnam has experienced an ever dramatic growth thanks to the Vietnamese government’s consistent policies on pursuing international economic integration and accession to global and regional trade organizations. Vietnam’s GDP in recent years have reached a high level (over eight percent), ranking the third in GDP growth in 2007 in Asia, just following China (11.3 percent) and India (about nine percent) and the first among ASEAN members with the average growth of about 6.1 percent. Against the backdrop of global economic downturn, Vietnam still enjoyed the growth of 6.23 percent in 2008 and 3.9 percent in the first half of 2009, a meaningful figure as compared to other nations in the world.”

We Filipinos have heard the story before – about Vietnam threatening to spurt ahead of us in the economic race. Back in the 1990s, when Vietnam’s economic reforms encouraged the establishment of more than 30,000 private businesses and the inflow of foreign investments, its surge of growth had us worrying that another neighbor was about to overtake us. But then our stagnant economy spurted forward under President Ramos in that decade, and by the time of the 1997 crisis, we were a tiger cub in Asia. And our economy remained substantially bigger than Vietnam’s – up to now.

Many observers said then that although Vietnam’s economy was expanding at an annual rate in excess of seven percent (one of the fastest in the world), it was still growing from a low base. So the idea of its surpassing its capitalist neighbors was just a pipe dream

This time around, the challenge deserves a long, hard look.

In the face of the global recession, Vietnam’s performance during the first eight months of the year is creditable and promising. The economy is recovering well with a pickup in domestic demand and the gradual return of its export dynamism.

The driving force for economic development is foreign capital flowing into the economy. Foreign direct investments (FDI) in the first eight months of 2009 have reached $6.5 billion. Likewise, foreign portfolio investment has totaled some $5 billion in the same period.

On the production end, recent surveys have shown that many businesses have been able to recover production since getting preferential loans under the Government-initiated interest rate subsidy program. National productivity is now being supported by two factors, domestic consumption (which includes public spending) and exports.

Total goods and service turnover in the first eight months of 2009 reached $43.68 billion, an increase of 18.4 percent over the same period of last year.

Exports this year have reached $37.3 billion, a decrease of 14.2 percent in turnover in comparison with 2008, but many export items saw sharp increases in export volume, including coffee, rice, oil and rubber.

Overall, it’s not so much the numbers that are significant but where they are pointing. Just as Singapore became a first-world nation by consciously matching up with the most advanced countries of the world, Vietnam is consciously measuring itself against its more prosperous neighbors.

Will Vietnam surpass RP?

In an Asia Society meeting last May, Vietnam’s finance minister declared that his country would surpass the Philippines in per capita income within five years. Today, Hanoi has 3,000 five-star hotel rooms, as compared to Metro Manila’s 5,000 rooms. Within two years – with Intercon, among others, building 10 hotels in the country – Vietnam will catch up.

The confident talk is shadowed, however, by some caveats. From 2003 to 2005, Vietnam fell dramatically in the World Economic Forum’s Global Competitiveness rankings, largely due to negative perceptions of the effectiveness of government institutions. Official corruption is endemic, and Vietnam lags in property rights, the efficient regulation of markets, and labor and financial market reforms.

Then, too, Vietnam is still a new player in global trade. The July 13, 2000 signing of the Bilateral Trade Agreement between the US and Vietnam was a significant milestone for Vietnam’s economy. On November 7, 2006, Vietnam became the 150th member of the World Trade Organization, after 11 years of preparation, including 8 years of negotiation. But these milestones also bring serious challenges, requiring Vietnam’s economic sectors to open the door to increased foreign competition.

In sum, Vietnam’s economy is on the go, but with problems still to resolve. It is an advantage that decision-making is single-minded, with none of the wranglings that oftentimes stall policymaking in democracies. But this also produces rigidity in institutions that hampers economic performance.

Will Vietnam surpass the Philippines in five years, as its vice minister has proclaimed?  

In per capita income, probably – but only if we do nothing, and because of our ever growing population. In overall economic size, ours will remain much bigger than Vietnam’s.

But this is not the lesson that we should take from Vietnam’s story. The learning here is the power of reform in propelling economic growth, and the vital role that government can play in making economic change. That Vietnam has grown and changed since 1975 is beyond dispute. The only question that remains is whether it will, like China, spurt to the heights, while we in the Philippines watch in awe.