Academic journal article Journal of Southeast Asian Economies

Avoiding the Middle-Income Trap: Renovating Industrial Policy Formulation in Vietnam

Academic journal article Journal of Southeast Asian Economies

Avoiding the Middle-Income Trap: Renovating Industrial Policy Formulation in Vietnam

Article excerpt

I. Entering a New Era

The Vietnamese economy has grown rapidly with the average growth rate of 7.6 per cent in 1991--2008. In 1990, Vietnam was among the world's poorest countries with GDP per capita of US$98 (ADB data). By 2008, with the GDP per capita of US$1,024, Vietnam has already reached the status of a lower middle-income country by the World Bank classification method. (1) The growth has been broad-based and touches virtually everyone's life and generates profound social changes in the entire country. This is quite different from the experiences in Latin America or Sub-Saharan Africa where growth occurs in limited sectors and benefits only few people while poor farmers see little improvement in their lives. However, Vietnam's achievements up to now have been driven mainly by one-time liberalization effects and external forces associated with global integration rather than internal strengths. Despite impressive growth records and reform efforts in the last one-and-half decades, local firms remain generally uncompetitive, and policies and institutions remain very weak by East Asian standards.

From the mid-1980s to the mid-1990s, growth was stimulated by the incentive and reallocation effects of internal economic liberalization (doi moi). Subsequently, from the mid-1990s to the present, growth has been supported by new trade opportunities as well as large inflows of foreign funds. Industrial activities--especially manufactured exports--continue to be dominated by foreign firms, and value creation by local firms and workers has been limited. Now that Vietnam is nearing the final stages of systemic transition and global integration, productivity breakthrough is needed to climb further. Future growth must be fuelled by skill and technology rather than a mere injection of purchasing power.

Growth statistics presented in Table 1 are consistent with this interpretation. Until the mid-1990s, the incremental capital-output ratio (ICOR) was low and the contribution of total factor productivity (TFP) to growth was high, which indicates that growth was achieved through improved efficiency--albeit from a very low level of planning years--without much investment. (2) In the latter period, ICOR rose, TFP's contribution to growth declined, and capital's contribution increased significantly. That is an indication of investment-driven growth with low efficiency in capital use.

The "Washington Consensus" policy package prescribed by the World Bank and the International Monetary Fund such as liberalization, privatization, legal reforms, macroeconomic stability, and so on, may achieve middle income if they are properly executed, but that is not enough for continued growth to higher income. Vietnam's growth pattern basically follows the past experiences of East Asian neighbours whose features include openness and regional integration as an initiator of growth; deepening intra-regional trade and foreign direct investment (FDI); high savings and investment; dynamic transformation of industrial structure; urbanization and rural-urban migration; and growth-generated problems such as income and wealth gaps, congestion, pollution, financial bubbles, and so on. At the same time, a number of new elements for Vietnam, such as faster integration than ASEAN-4, must also be acknowledged.

Within this dynamic East Asian context, Vietnam must successfully conduct three crucial policies to sustain growth, namely: (i) generation of internal value; (ii) coping with new social problems caused by rapid growth; and (iii) effective macroeconomic management under financial integration. The first promotes drivers of growth while the second and the third prepare political stability and social support without which industrialization and modernization cannot be sustained. By 2008, the risks of social problems such as traffic congestion and environmental destruction as well as macroeconomic imbalance such as asset bubbles and price instability had become evident in Vietnam. …

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