Vietnam a factual state-of-the art (Part II)
The second part of TextileFuture series on Vietnam will familiarise our readers with a factual state-of-the art in view to economic, political and social facts of that emerging country. As announced, there will be a third part containing facts of possible development until 2035 and the latest textile news and aspects
Shaking off the legacy of colonization and long, brutalizing conflicts is hard—and forging an uninterrupted pathway to modernity, perhaps even harder. Only a handful of nations have succeeded at both. Their winning formula? Usually some combination of strong leadership and good governance, a sense of common purpose and future orientation, a reliance on markets to allocate resources, and active engagement with the world on trade, investment, and knowledge flows. Since the launch of the Đổi Mới (eco- nomic renovation) reforms in the late 1980s—to move from a closed, cen- trally planned economy to a globally integrated, socialist-oriented market economy—Vietnam has deployed these ingredients to good effect.
The success story
To any external observer, Vietnam is a major development success story. One of the world’s poorest countries at the onset of the reforms, it has, in a single generation, leapfrogged to middle-income status, while achieving social outcomes typically seen at much higher incomes. Vietnam’s economic growth since the early 1990s has been among the fastest in the world, and its pace of poverty reduction almost un- precedented. The Vietnamese people, keenly aware of the big challenges left, are not yet ready to declare success. As for countries as for people, success needs to be measured not only against ability, effort, or even the performance of peers, but also against ambition.
The Vietnamese people have always set a high bar for success. The 1992 constitution exemplified this early on by setting forth the goal for the state to build “a prosperous life for its people, a strong country, and an equitable, democratic, and civilized society, ensuring the well-being, freedom, and happiness of all citizens as well as conditions for their all-round development.” Success thus defined was both multifaceted and aspirational. There is also the strong sense that the journey may be just as important as the destination. The tenets of thrift, discipline, and hard work are cherished means to higher living standards in the Vietnamese value system, not to be diluted or lost along the way. So are societal values of equity, compassion, filial responsibility, respect for social norms and the rule of law, and the authority of elders and teachers.
The motivations that fuel Vietnam’s ambitions are both external and internal. Externally, the driving force is Vietnam’s neighbourhood—the world’s most dynamic region. Vietnamese mind-sets are steeped in the rapid as- cents of Japan and the East Asian Tigers. They not only serve as powerful examples, but also stoke fears of being permanently left behind. Internally, there is pride in a rich past justifiable for a society with one of the world’s longest continuous histories and civilizations. As recently, as the early 19th century, Vietnam was a regional powerhouse, with a much larger economy than those of Thailand, Malaysia, or the Philippines. The drive to reclaim the country’s place in the community of nations is accordingly strong.
Energized by past success but by no means content, Vietnam now aspires to modernity, industrialization, and a higher quality of life. The aspirations reflect an emphasis on clean water and clear blue skies; a healthy, secure, learned, and equitable society; and an effective state accountable for improving material welfare.
Achieving these aspirations will require bold and decisive action, both to grasp the opportunities and to manage risks. The notable opportunities are an emergent domestic middle class, proximity to a rapidly rising China, and megaregional trading agreements— particularly the Trans-Pacific Partner- ship (TPP), in which Vietnam is the only lower-middle-income member. The major risks are the rapid aging of the population, the less hospitable global economy, and the threat of climate change, to which Vietnam is heavily exposed. Global technological and business innovations, powered by the information revolution, will remain disruptive, and presenting more opportunities and risks, with Vietnam’s net benefits depending on its responses.
The country’s aspirations and the supporting policy and institutional agenda thus stand on three pillars: balancing economic prosperity with environmental sustainability, promoting equity and social inclusion, and bolstering the state’s capacity and accountability. The rapid growth needed to achieve these aspirations will only be sustained, if it stands on faster productivity growth and reflects the costs of environmental degradation. Productivity growth, in turn, will benefit from measures to enhance the competitive- ness of domestic enterprises, scale up the benefits of urban agglomeration, and nurture a creative and innovation- led economy. Maintaining the record on equity and social inclusion will re- quire lifting marginalized groups and delivering services to an aging and urbanizing middle-class society. To fulfil the country’s aspirations, the institutions of governance will need to become modern, transparent, and fully rooted in the rule of law.
A record of strong and equitable growth, with emerging concerns
Vietnam is a major development success story. Its per capita GDP growth since 1990 has been among the fastest in the world, surpassed only by China. Growth has also been remarkably stable and inclusive, which, with major gains on human development, has contributed to impressive progress in alleviating poverty and improving non-income dimensions of welfare. But declining productivity growth, insufficient progress in including marginalized groups in the country’s development (ethnic minorities in particular), and degradation of the environment call into question the durability of the current development model. Vietnam’s governance structure could also be at an inflection point. The institutions that were adequate to carry the country to its lower-middle-income level are now exposing gaps that, unless ad- dressed with boldness and urgency, are likely to impede the journey to upper- middle-income status.
In 1986, an impoverished Vietnam, on the brink of an economic crisis, embarked on a path of economic renovation (Đổi Mới). It was an explicit recognition that the “fence-breaking” reforms of the previous decade— opportunistically initiated to test the limits of central planning—had shown promise and that the situation was dire enough to demand a more systematic approach. Annual inflation was running at more than 400 %, the real economy on a downward slide and heavily dependent on foreign aid, food in short supply, the budget chronically short of resources, and the vast majority of the population in poverty.
Thus Đổi Mới began a process of macroeconomic stabilization, unshackling the economy from state controls and gradually but steadily integrating with the global economy. More durable foundations for a market economy were built over time. And in competently managing the transition from a planned to a market economy structure, Vietnam succeeded where many countries that had been part of the former Soviet Union have failed.
Four aspects of the approach to re- forms proved most effective. First, Vietnam chose to be pragmatic and flexible, both in the sequencing and the pacing of reforms. Reforms were introduced incrementally, after extensive consensus building, and wholesale shock therapies were avoided. If internal or global experience suggested course correction, the system proved adaptable. Second, Vietnam played to its strengths by focusing on labour-intensive production and agriculture. Third, the emphasis on building human capital was early and effective. Vietnam already had relatively high levels of literacy and life ex- pectancy.9 The human-capital base was further expanded following Đổi Mới, enhancing the returns on the market- oriented reforms that followed. Fourth, where a domestic consensus was harder to forge, Vietnam used its commitments under external trade agreements to good strategic effect, particularly to usher in some of the more complex enterprise reforms. Each of these four aspects of the approach remains important for the next generation of reforms—a subject of this report.
Less than three decades after the start of the Đổi Mới reforms, Vietnam has built up an impressive record of strong economic growth that has also been equitable and (figure O.1). GDP growth per capita has averaged 5.5 % a year since 1990 (panel a), yielding a three-and-a-half- fold increase in average income. Only China performed better. Growth has benefited from its remarkable stability (panel b) and a strong external orientation of the economy. External trade has been a major driver (panel c), much of it powered by strong foreign direct investment, with the stocks standing at more than USD 250 billion, sourced from a diverse group of more than 100 countries. Growth has been inclusive, as seen in a fairly small increase in the Gini coefficient (panel d) and the faster income growth of the bottom 40 per- cent (panel e). As a result, poverty has fallen rapidly (panel f).
The results of gradual transformation
Vietnam in 2015 is an unrecognizably transformed, dynamic, middle- income economy. Social outcomes have improved dramatically across the board. Using a variety of international and national poverty lines, poverty has fallen rapidly since the launch of Đổi Mới. The USD 1.90-a-day poverty rate fell from 50 % in the early 1990s to 3 % today. Not only are incomes higher, the Vietnamese population is better educated and has a higher life expectancy than most countries at a similar per capita income. In recent international tests, Vietnamese students outperformed the average for countries in the Organisation for Economic Cooperation and Development (OECD), with remarkably little variation across income groups and urban–rural locations. The maternal mortality ratio has fallen below the upper-middle-income country average, while under-five mortality has fallen by half, to a rate slightly above that average. Access to basic infrastructure has also improved substantially. Electricity is now available to almost all households, up from less than half in 1993. Access to clean water and mod- ern sanitation has risen from less than50 percent of all households to more than 75%.
In some areas, however, Vietnam has fallen short. Labour productivity (output per worker) growth has been on a declining trend since the end of the 1990s, seen across most industrial subsectors, as well as in mining, finance, and real estate. In agriculture, labour productivity has grown robustly, but its level is still lower than in most of the region’s middle-income countries. With almost half the workforce still engaged in agriculture, Vietnam has too many workers on its farms. Remedies include consolidating agri-cultural landholdings (which are too fragmented and small) and moving farmers to the more productive industry and service sectors. It does not help that job creation in manufacturing has plateaued at a relatively low level and that services involve mostly informal activity.
Although Vietnam has avoided the large increases in inequality in other fast-growing countries, the differences between rich and poor are still significant. While members of ethnic minorities have experienced gains in welfare since the early 1990s, they face a growing gap relative to the majority population. With 15 % of the population, they now make up half the poor. In recent years, progress for ethnic minorities has stalled on poverty reduction, child mortality, and nutrition. Many ethnic minority citizens remain largely disconnected from the country’s larger economic success.
Growth has to a large extent come at the cost of the environment. Vietnam’s greenhouse gas emissions have grown the fastest in the region, while the environmental quality of its air, land, and water has deteriorated considerably. Water and air pollution have reached serious levels, especially near Hanoi and Ho Chi Minh City, posing major health risks. In addition, a large part of Vietnam’s protective mangrove forests has been destroyed, while overfishing has seriously depleted the nearshore fisheries, posing threats to livelihoods. Removing natural forests in some up- land areas has contributed to more frequent and severe flooding of lower altitude farms and human settlements. Finally, Vietnam is one of the world’s most vulnerable countries to climate change, with adaptation challenges accordingly severe, especially in the Me- Kong Delta. With almost all large-scale hydropower potential tapped, and with limited development of other renewable sources, greater reliance on coal is a growing threat to environmental sustainability, and to energy security.
Last but not least, Vietnamese institutions have failed to keep up in important ways with the needs of an increasingly demanding market economy and rising aspirations of a growing middle-class society. In particular, the country’s unique history has produced public-sector institutions that are commercialized and vertically and horizontally fragmented and that face insufficient scrutiny by citizens. Despite reforms, the state is still strongly engaged in economic activit, directly through state-owned enterprises (SOEs), and indirectly through very close links with an exclusive segment of the domestic private sector. State fragmentation arises from the lack of clear hierarchy and assignment of roles and responsibilities both within the central government and between the centre and the provinces. The absence of a merit-based management of public servants exacerbates the gaps in public institutions. Election processes and mechanisms for engaging citizen organizations are not robust enough to provide true citizen representation, and Vietnam lacks a system of effective checks and balances between the three branches of government.
Opportunities and Risks
Global megatrends and external risks and opportunities
Vietnam’s location on the eastern- most edge of the Indochinese pen- insula makes it a vital link between East, Southeast, and South Asia. The physical connection to these Asian regions and the maritime connections to the rest of the world have shaped Vietnam’s history and will remain crucial for its future. Geography very likely will not be destiny in the same way that it was in the past. After all, the hyper-connectivity of the modern world (which Vietnam has signed on to) overcomes many of the binds of geography. Moreover, future opportunities and risks are projected to be largely supraregional. That will require geopolitical and economic outreach well beyond the neighbourhood.
Four global megatrends will be important for Vietnam to consider in the next two decades: geopolitical, economic, technological, and climatic.
The current shift in the world’s economic and geopolitical axis from west to east and from north to south will define the coming decades. The rise of China is particularly significant.
The geopolitical shifts will, however, be even more complex. Other regional power, including developed economies such as Japan and the Republic of Korea, and emerging powers such as Brazil, India, Mexico, the Russian Federation, and Turkey—are also likely to try to expand their own spheres of influence.
The emergence of a multipolar world order would give rise to multiple possibilities, among them more such collaborations as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank of the BRICS states (Brazil, Russia, India, China, and South Africa). There could also be tensions or even conflicts among the rising powers, or among rising and existing powers.
Cooperative relations with a rising China will remain essential. Vietnam is one of the signatories to and founding members of the AIIB. Its infrastructure financing needs over the next several decades will run into tens of billions of USD a year. With most bilateral partners reducing their presence in Vietnam, the AIIB could cover some of the emerging financing gap.
Of the geopolitical risks particularly relevant for Vietnam are maritime issues with China that go beyond just territorial concerns. The maritime waters have considerable economic and strategic value, containing a wealth of fish stocks and energy and mineral re- serves. They are also critical for ship- ping and communications. With the Middle East in turmoil, the geopolitics of energy will also have implications for Vietnam both as a producer and exporter of crude oil and as a rap- idly growing consumer of petroleum products.
In the midst of this fast-evolving world order, Vietnam will need to continue building its alliances judiciously with a clear eye on its long-term economic and political interests.
Global economic megatrends
The global economy is projected to grow at an average of 3.2 % annually between 2015 and 2035, with continuing expansion in trade integration, urbanization, and technological advances the main drivers. The rise of China, India, and members of the Association of Southeast Asian Nations (ASEAN) matched by the (relative) decline of the United States, Europe, and Japan would be the most apparent shift in the global economic structure in coming decades. China clearly is the biggest part of this story. In this report’s projections, it would over- take the United States as the world’s largest economy (in market prices) around 2032. It has been the world’s largest exporter since 2009, and the second-largest importer of goods. It is set to become an important source of investment financing for emerging economies, particularly regionally.
Trade with China already accounts for 20 % of Vietnam’s total, up from 10 % in 2000. The significant flow of foreign direct investment coming into Vietnam is linked, in part, to a shift in low-wage production from China. As real wages in China continue their sharp rise, many of its production bases will continue to look south- ward in search of lower wages—the “China+1 strategy.” Vietnam’s proximity to southern China, home to many of these production networks, gives it a meaningful competitive edge. Producers can benefit from its low wages and from being part of the Chinese supply chains at the same time, a highly attractive combination. The agglomeration of a nascent electronics-industrial cluster in the north-central parts of Vietnam (around Hanoi) is an early sign of these possibilities. Moreover, with a rapidly emerging middle class, the Chinese consumer market (the world’s fastest growing) will be increasingly attractive for Vietnamese producers.
Growth prospects in East Asia also will be underpinned by the ongoing shift toward multilateral (often regional) trade agreements. The ASEAN integration, starting with the ASEAN Economic Community that became a functioning trading bloc in 2016—can bring considerable economic benefits. Estimates for Vietnam range from a one to three percent cumulative increase in national income. Even so, ASEAN integration is seen in Vietnam as a stepping stone for locking in even more promising partnerships beyond the region. Especially noteworthy is the TPP. Also significant are the Free Trade Area of the Asia-Pacific and the Re- gional Comprehensive Economic Partnership, each in less advanced negotiations than the TPP.
The TPP agreement includes the world’s largest and third-largest economies (the United States and Japan), with TPP countries accounting for 36 % of world GDP and more than a quarter of all world trade. Vietnam is well positioned to benefit. According to this report’s analysis, implementing the TPP could add a cumulative 8 % to Vietnam’s GDP by 2035. Others have estimated double-digit gains for Vietnam, many times larger than for any other TPP country. Vietnam could also usefully leverage commitments under the TPP to lock in policy reforms that might otherwise be politically harder to carry out.
Top-down multilateral trade integration is likely to be complemented by important sub-regional collaborations, including that within the Greater Mekong Sub-Region. Dwindling and increasingly unpredictable water sup- plies along with a rising demand for water and energy will require greater regional cooperation for energy and water security.
New technological and business megatrends
Technological innovations, fuelled and supported by the information revolution, will disrupt production and trading patterns across the world. Advances in digital technologies ranging from three dimensional (3D) printing, programmable microcontrollers, and second-generation computer numeri- cal control milling and routing make it easier and less expensive to manufacture customized high-quality products. Major advances in renewable energy (particularly solar) are posing a growing challenge to conventional and usually environmentally more damaging energy sources. Next-generation genome sequencing and other advances in the biomedical field are set to open a trillion-dollar industry in the next de- cade, enhancing and extending human life. Advanced robots are being deployed on shop floors, at an exponential rate, boosting productivity and driving costs down.
The information revolution is also enabling major disruptive innovations in business models. The Internet eradicates many of the information advantages of colocation and costsharing. Raw materials and other inputs to various degrees of pre-processing are available for sourcing on the Inter- net. Online platforms such as Alibaba.com, Etsy, and Maker’s Row make it possible for manufacturers to search for customers without having to spend a lot on advertising and distribution. Crowdfunding sites such as Indiegogo and Kickstarter can aid in attracting finance.
For the most part, these trends bring upside opportunities. Some unintended consequences have to be managed. Skill-intensive and labour-efficient technology is set to eliminate the more routine middle-income vocations, while complementing highly skilled and thus higher-income jobs. Already, new technologies have displaced handicraft producers in numerous industries ranging from textiles to metalworking. The progress of technology may also increase inequality in society, as those leveraging technology gain higher in- comes. The gap between labour productivity and wages may also widen. Some even raise the spectre of premature deindustrialization in the developing world, partly because of automation. Vietnam, with its well-deserved reputation as a dynamic and adaptable economy, can view these disruptive innovations with optimism (box O.1). To maximize the benefits, long- term investments will have to upgrade the technical skill sets of the next generation, and the domestic business environment will have to be the focus. Some technologies will have associated risks that require careful management.
Global climate change
Climate change is among the most con- sequential global issues. Greenhouse gas emissions are on a path to a 3.5 – 4.0 degrees Celsius (°C) warmer planet by the end of the century. Climatic conditions, heat, and other weather extremes considered highly unusual or unprecedented today could become the new normal. The impact of global cli- mate change is already being felt, with the number of category 4 and 5 storms having risen sharply over the past 35 years. The Arctic Sea’s ice has shrunk to its lowest on record, and global sea levels have risen about 10–20 centimetres (cm) in the past century, with an accelerating rate of shrinking. Rising sea levels increase the risk of storm surges and the fluctuations in precipitation.
Vietnam has been ranked among the five countries likely to be most affected by climate change. A high proportion of its population and economic assets are in coastal lowlands and deltas. Temperature increases in Vietnam have averaged about 0.26°C per decade since 1971, twice the global average. On current trends, annual average temperatures will (depending on the location) be 0.6–1.2°C higher by 2040 relative to 1980–99. The pre- dictions show intensified heat and cold waves, and 28–33 centimetre increases in sea level around Vietnam’s shores. Seasonal variability in precipitation is also projected to increase, with the wet season getting wetter and the dry sea- son drier. Extreme rainfall and flooding would also become more likely, particularly in the northern region, including Hanoi, with increased risk of landslides in mountainous areas. A southward shift has been seen in the typhoon trajectory in the past five decades. If this continues, Ho Chi Minh City would be at greater risk of being directly hit. Coastal erosion and salinity intrusion are other unfolding risks likely to accelerate.
Agriculture, particularly rice production, is projected to be hit hard, most severely around the Mekong Delta, where much of the land area is less than two meters above sea level. Climate change could reduce annual rice production by 3–9 million tons by 2050, and highly productive areas of coffee plantations may become unsuitable for the purpose. The marine ecosystems in Vietnam are also likely to be severely affected. Climate change impacts are also likely to have adverse health consequences, including water- and vector-borne diseases and diarrheal illnesses. Flooding would compound the risks. The poor and elderly would be especially vulnerable to heat extremes, compounded by the rapid increase in Vietnam’s elderly population.
Domestic trends, risks, and opportunities
Over the past two decades, Vietnam cashed in its “demographic dividend”. The economic growth boost generated by a bulge in the share of the population of working age. The dividend is now nearly spent: The working-age share peaked in 2013 and is now in de- cline. Based on United Nations (UN) projections, the absolute number of people of working age will start to fall soon after 2035. More important, Vietnam reached a turning point in the size of its older population in 2015 and will become one of the world’s fastest- aging societies. The number of Vietnamese older than 65 years will grow from 6.3 million today to 15.5 million. The share of the population older than 65 years will rise from 6.7 percent in 2015 to 14.4 percent in 2035 (figure O.2), transforming it from a young to an aged society.
This demographic transformation has stark consequences. First, the decline in the working-age population will mean that a key driver of Viet- nam’s rapid per capita growth will diminish, making human capital deepening and other sources of productivity growth even more vital for sustaining robust growth. Second, serious fiscal challenges will be driven by the rising burden on the pension and health systems. Third, institutional arrangements for the provision of care to the old-age population will quickly be- come a major concern.
Vietnam’s emerging middle class Vietnam’s rapidly emerging middle class, also increasingly more urban, will offer another significant opportunity. Vietnam is a country of 90 million people, the 14th most populous on the planet. Its USD 200 billion economy is likely to be close to the trillion dollar mark (in 2015 prices) by 2035 with more than half the population projected to join the ranks of the global middle class, with consumption of USD 15 a day, or more, in 2011 purchasing power parity (PPP) terms (figure O.3), compared with 11 % today, giving new potency to the domestic market, as a driver of growth.
In addition to being a major opportunity, a rising urban middle class will shift expectations and bring new challenges. The majority of that population will aspire to formal jobs and will want to gain high-quality skills through tertiary education. The expansion of wage employment without well- functioning industrial relations institutions will expose the economy to the risk of substantial worker-employer conflict, evident in the large increase in strikes since 2006. The urban middle class will also demand greater political openness and more accountable government, which the existing system would struggle to meet.
Unfinished economic modernization agenda and rising political economy challenges
Perhaps the biggest and most important opportunity, necessary for all other opportunities, and to mitigate risks, lies in completing the unfinished economic modernization and structural transformation agenda. Part of this relates to maximizing the gains from the ongoing structural transformations that have been a major contributor to growth since the early 2000s. With agriculture still accounting for almost half the labour force, and with significantly lower labour productivity than in the industry and services sectors, future gains from structural transformation could be substantial.
The transformation from state to private ownership of the economy is even less advanced. The state-owned enterprises and commercial banks continue to inhale too much oxygen out of the business environment, undermining economy-wide efficiency and crowding out the productive parts of the private sector. The state also wields too much influence in al- locating land and capital, giving rise not only to opportunities for corruption by handing over arbitrary power to officials but also to heavy economy-wide inefficiencies. Thus, adjusting the role of the state to support a competitive private sector–led market economy remains a major opportunity. While global integration has advanced well, with Vietnam embed- ding itself in global value chains, the benefits are constrained by the absence of linkages with domestic firms. Many policy actions to grasp these opportunities are well known. What has been mostly lacking is follow-up action. It may well be that the political economy of some of the needed reforms has become a binding problem. Reforms are l