Academic journal article Journal of Southeast Asian Economies

Why Doesn't Vietnam Grow Faster? State Fragmentation and the Limits of Vent for Surplus Growth

Academic journal article Journal of Southeast Asian Economies

Why Doesn't Vietnam Grow Faster? State Fragmentation and the Limits of Vent for Surplus Growth

Article excerpt

1. Introduction

Economists should learn to be wary of telling development success stories. Today's economic miracles reappear as tomorrow's underperformers with depressing regularity, not least for those of us who study the economies of Southeast Asia. In the 1950s the Philippines was one of the richest countries in Asia and was widely seen as the region's rising star, an economy with far greater potential than that notorious "bottomless pit" of American aid, South Korea (Woo 1991, p. 46). Indonesia had its turn as the donors' favourite developing country in the latter half of the 1980s, when the Suharto government responded to the fall in global oil prices with market-friendly policies that by 1993 had earned the country inclusion among the East Asian miracle countries of the World Bank's eponymous study (World Bank 1993). Alas, the collapse of 1997 was just around the corner.

Now it appears to be Vietnam's turn. From "one of the most successful cases in economic development in recent times", or as one World Bank mission chief put it rather inelegantly, the "poster child" for economic reform, Vietnam is now "A Tiger Tamed" (The Economist, 2 February 2013) that "faces a risk of a prolonged period of slow growth" (World Bank 2013a, p. 15). The optimism--bordering on euphoria --surrounding Vietnam's accession to the World Trade Organization (WTO) in 2007 has drowned in a sea of bad debt, falling asset prices and corporate collapse.

However dramatic these shifting fortunes may appear on the surface, it is important to keep them in perspective. Talk of the "middle-income trap" is all the rage among donor agencies and some academic observers of Vietnam (Ohno 2009) as it is for the region as a whole (OECD 2013). Countries are said to fall into the trap when they have exhausted labour-intensive growth but are unable to move into more technologically and managerially demanding industries (Eichengreen, Park and Shin 2013). As building institutions and education systems can take decades, countries can find themselves priced out of low-tech exports for many years before they can penetrate markets for higher value-added goods. This scenario is not one that has immediate relevance to Southeast Asia. As shown in Figure 1, since 1960 none of the large countries in the region has endured a long period of less than 2 per cent growth of GDP per annum. Even the Philippines, the worst performer among these countries, posted low growth rates in only seven of the last fifty-three years, and only once for three years in succession.

What sets the Philippines apart is not the time that it has spent in a slow growth trap but instead the comparatively few years in which the economy grew at extremely rapid rates of 8 per cent or more. Singapore, at the other end of the spectrum, has had its share of bad years, but it has also posted growth rates of more than 10 per cent in seventeen of the last fifty years. At its most basic level the transformative power of double-digit growth is reflected in the arithmetic fact that an economy growing at 10 per cent per annum will double in size every seven years. Nicholas Kaldor's second law of growth, generally known as Verdoom's Law, provides a deeper explanation. Kaldor finds at least three reasons for the positive relationship between the rate of growth of manufacturing output and labour productivity growth. First, the presence of surplus labour in the rural sector means that labour can be redeployed from agriculture to higher productivity industrial jobs without decreasing agricultural output. Second, manufacturing is uniquely capable of delivering economies of scale through specialization and technological learning. Finally, rapid growth of output stimulates the development of downstream industries that process manufactured goods (for example, sewing cloth into garments) and upstream industries that produce capital goods (the production of textile machinery). (1) Concentrating on the demand side, he sees rapid output growth as a stimulus to large-scale investment and technological learning. …

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