Vietnam’s economic resiliency: a symptom of strength or weakness?

Guest Author: Long S. Le, University of Houston

11.07.09 – Vietnam’s economy is showing resiliency. The country’s GDP has rebounded to 5.76 per cent in the third quarter, whereas the economy grew 3.9 per cent in the first half of this year. Opportunely, the Vietnamese government forecasts that the economic growth in the fourth quarter will be more than 6.5 per cent, meaning that an annualized GDP growth of 5.2 per cent is attainable for 2009.

Although the Asian Development Bank (ADB) has recently adjusted its annual growth forecast for Vietnam from 4.7 to 4.5 per cent, the ABD forewarns that the Vietnamese government needs ‘to strike a balance between stimulating growth through demand-side measures and safeguarding macroeconomic stability.’

That is, without the government’s fiscal stimulus package valued at 8.6 per cent of the GDP – which is bigger than most countries’ packages except for China – economic growth could have been as low as 2 per cent. But at the same time, according to government statistics, trade balance is deteriorating: as of August export shipments are falling by 18.9 per cent and import growth is rising 5.1 per cent year on year; new FDI pledges between January and September have plunged 85.7 per cent from a year before; equity flows between January and July were at only one-fourth of 2008 levels; and export growth has been forecasted to decline from 30 per cent in 2008 to 13 per cent in 2009.

Therefore the cost in continuing demand stimulus policy for the rest of this year means the country’s budget deficit as a per cent of GDP may reach well over 10 per cent while its public debt as a percentage of GDP may rise above 50 per cent, compared to 4.1 per cent and 38 per cent for 2008, respectively. In turn, such fiscal unsustainability along with a steady fall in the dong and the possible return of high inflation is likely to constrain economic growth for 2010.

Meanwhile, officials from the Prime Minister’s office are predicting that economic growth for 2010 will accelerate to 7 per cent, reassuring foreign investors and its young population that Vietnam is well on the way to recovery. Perhaps such excessive optimism is a necessity. Economic growth of 5 per cent may only create about 1.4 million additional jobs, while 1.7 million new people will enter the labor force annually. And not having one of the fastest growing economies in Asia with one of the most stable political systems may tarnish the country’s sales pitch to foreign investors for doing business in Vietnam.

Notwithstanding, even if Vietnam is able to recover ahead of the world economy, the apparent resiliency may actually be a symptom of weakness, specifically the country’s current economic paradigm, which has started to produce a shift in the country’s geopolitics.

By most accounts, the Vietnamese [government] is united on the need to renovate the country via the socialist-oriented market economy but divided on what socialist orientation means in practice at any given time. Within the central committee there are currently three broad coalitions: one represents the state leading society in which SOEs and the military are defenders of the socialist regime (led by the general secretary); the second group represents the country’s integration with the global economy in which foreign investment and entrepreneurship are vital to economic growth (led by the prime minister); and the last represents the country’s integration with the global community in which investment in human resources and development of new industries requires meeting international standards (led by the president).

Despite recent rumors of intra-party controversy, the above coalitions are becoming more interdependent and practical than ever.

For example, Prime Minister Nguyen Tan Dung’s emphasis on internationalizing the economy has not been achieved at the expense of SOEs. In fact, since 2006, there has been a reversal in SOEs equitization – equitization typically targets small SOEs so the state will hold the controlling share of large equitized SOEs. Moreover, from 2006 to the first half 2008, the average wage of an SOE employee has increased from $2,633 to $3,530 compared to the increase of $1,488 to $1,860 in the non-state sector, according to a study by Nguyen Hai Huu.

In the post-1997 regional financial crisis, Vietnam’s export economy and its geopolitics gradually shifted to the US and the EU, while maintaining good relations with China, Hong Kong, ASEAN, and Japan. Predictably (but more quickly than a decade ago), when exports to Japan dropped nearly 35 per cent in the first half of this year, along with exports to the US which are expected to drop nearly 20 per cent for 2009 to 2010, Vietnam has shifted back to ASEAN. Exports to ASEAN countries were worth $11 billion in 2008, which was 41 per cent more than in 2007.

For the central committee, Vietnam’s potential to achieve a ‘V-shape’ economic recovery lies largely with China – and its relatively outward FDI and import growth.

On the one hand, China has been Vietnam’s largest trade partner for the last five years –total export-import turnover was over $20 billion in 2008 and Vietnamese exports to China increased nearly 35 per cent from 2007 to 2008. On the other hand, Vietnam has an extremely large trade deficit with China, reaching over $11 billion in 2008 which is 57 times larger than it was in 2001. However, given a shared border and a broadly shared ideology, Vietnam is renegotiating its special relationship in order to have a more privileged position in China’s outward FDI and import growth.

There is an expectation from the Vietnamese government that exports to China will increase to $6 billion in 2010 from $4.6 billion in 2008. In addition, China will be among the top-five countries which support FDI in Vietnam (China is currently ranked 16 out of 84 countries), according to Vietnam’s Ministry of Planning and Investment. Importantly, for the Vietnamese leadership, the above shift does not implicate Vietnam’s policy of being friendly with everyone. For example, Vietnam signed a comprehensive economic partnership agreement with Japan in late 2008 to stabilize its falling exports. Vietnam has also welcomed US involvement in its higher education, resulting in it becoming the 13th leading sender of students to U.S. campuses in 2008, up from 20th in 2007.

To be sure, there are costs involved in Vietnam’s hedging strategy. In particular, Vietnam will, to some extent, need to cede its ‘sovereignty’ in order to have a special position with China. This may include contracts given to Chinese companies without competitive bids from other foreign companies; not requiring Chinese companies to adhere to international environmental practices in industries such as mining; or reaching a cooperative agreement in which it more or less supports China’s claims to the Spratly islands or the entire South China Sea in order for the latter to explore for oil and gas.

In many ways, Vietnam’s predicament is the result of having neither a consensus nor incentives within the central committee to develop a new model of economic growth: one that creates impressive demand-side growth to complement net exports. But not until an ‘L-curve’ economic slowdown emerges, such as the one leading up to the 1986 doi moi economic reforms, will there be incentives for a second round of structural reforms. That is, reinvigoration of agricultural entrepreneurship, household businesses, SMEs, and modernization of large and inefficient SOEs. These measures are more likely to improve economic efficiency and create domestic consumption.

In the meantime, a ‘W-shape’ economic boom and bust will likely continue in Vietnam.

Long S. Le is Professor and Director of International Initiatives for Global Studies at the University of Houston, and co-founder and lecturer of Vietnamese studies courses.

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