Asia’s ‘other communist dynamo’ – Vietnam and economic transformation

Moneyweek magazine recently ran a piece extolling the virtues of the Vietnamese economy and pinpointing it as an emerging market worth investing in. Perhaps as an unintended consequence of Trump’s trade war, Vietnam may benefit from US-China tensions as production and exports shift away from China to some extent. However this outcome remains highly uncertain, since Vietnam itself may also become a victim of US tariffs.

The story of Vietnam since it began its own version of China’s ‘opening up’ and path of development as a ‘socialist-oriented market economy’, called Doi Moi, literally meaning ‘renovation’, has to date been pretty successful. This began in 1986, and since 1990 the country “has notched up the world’s second fastest growth rate per person after China”. This has led to dramatic falls in poverty as wages have kept up with or exceeded productivity, which has itself grown fairly rapidly.

The historical record shows that sustained and rapid poverty reduction requires widespread increases in productivity and wages. This in turn depends upon a successful process of economic and social development involving economic transformation as industrialisation. It is important to distinguish between GDP growth (or episodes of it) and structural transformation which involves the increasing production of higher value added and more technologically intensive goods and services.

The typical pattern of industrialisation involves a shift in the composition of national output and employment away from agriculture and towards industry and services. This pattern has been evident in the experience of Vietnam.

Such success has not been down to a simple policy of liberalisation along the lines of the neoliberal Washington Consensus. One of the legacies of communist rule has been a fairly centralized state, which has intervened extensively in the economy and attempted to implement an industrial policy, inspired not only by China but also by the original wave of fast-growing East Asian economies such as South Korea and Taiwan.

The Vietnamese state has been pragmatic and experimented with a variety of growth-promoting policies, adopting a gradualist approach to reform more akin to the Chinese experience as opposed to the ‘shock therapy’ undertaken by the Soviet Union and other transition economies. The key resultant characteristic has been an export-oriented industrial production of consumer goods, such as textiles, footwear and seafood, for global markets.

There has been a gradual increase in the autonomy of State Owned Enterprises (SOEs) and a reduction in their subsidies, and although their numbers have fallen they remain significant actors in the economy overall. The state has encouraged an opening up to Foreign Direct Investment (FDI) in export-oriented manufacturing, initially in joint ventures with SOEs, alongside growth in domestic private business.

Vietnam has benefited from the regional division of labour, as its low labour costs have made it an attractive site for FDI from richer East Asian economies. It can be characterised as an emerging manufacturing hub, importing intermediate goods from regional economies in East Asia and exporting finished goods, largely to the US and EU.

Nevertheless, the success of the state’s industrial policy has been limited despite rapid structural change and growth in manufacturing output. Some of this has been due to powerful vested interests connected with the SOEs. In particular the state has been unable to provide the kind of disciplining incentives to firms which would encourage the acquisition of increasingly advanced technological and managerial knowledge.

It has thus been unable to copy this aspect of industrial policy implemented by Japan, South Korea and Taiwan in their rapid growth phases. In its reliance on FDI for investment and exports, it is more akin to Singapore but has, again, been unable to fully ape the latter’s success in creating widespread technological spillovers to indigenous firms.

This has prevented the kind of industrial transformation and upgrading into higher value-added sectors, potentially leaving Vietnam ‘stuck’ in producing in labour-intensive sectors. This leaves it vulnerable to the ‘middle-income trap’, lacking the level of competitiveness which would enable exporters to compete with higher technology producers in richer countries, and at the same time facing competition from lower-cost producers in poorer countries as its own average wages rise.

In particular, Vietnam’s long term potential for industrial transformation, the key to successful continued development, may not be too good, despite its success to date. As already mentioned, there have tended to be poor ‘linkages’ and ‘spillovers’ from foreign investors to indigenous producers. Exporting firms rely heavily on imports rather than stimulating the production of domestic inputs.

Industrial policy has in fact lacked coordination by central government in terms of sector specific, trade and macroeconomic elements. There has been insufficient learning by firms from foreign investors to ensure continued rapid catch-up growth in the future and the possible achievement of rich country status.

Industrial policy has benefited the SOEs through some degree of protectionism and this has sustained an industrial base, but in general they remain relatively inefficient and uncompetitive. Growth has been based on the rise of the private sector around industrial SOEs, but in contrast to the North East Asian developmental states, in Vietnam the state has had relatively little leverage over the private sector, and the country has been overly dependent on FDI for investment.

There has been a high rate of firm formation in the private sector but a limited emergence of large domestic private industrial firms. Most indigenous private firms are SMEs, leaving a duality in terms of the country’s industrial structure, formed between large SOEs and the SME sector.

A successful industrial policy needs to encourage increased linkages between domestic, regional and global producers and exporters, a gradual rise in the use of newer technologies, supporting industries, and industrial clusters.

In the early stages of development and catching-up, policy should focus on stimulating learning-by-doing processes so that firms learn how to use already existing technologies and acquire rising organisational capabilities. As the country becomes richer and wages and productivity rise, continued success requires innovation and the increasing generation and use of new technologies.

Historically, these processes have not occurred by simply leaving things to the market. Successful late developers which have managed to grow rapidly and catch-up with the rich country ‘club’ have relied on pragmatic experimentation and the evolution of interventionist policies.

Vietnam does have a large, young, well-educated population, so the potential is there for continued growth. But if it does not succeed in encouraging economic transformation via a more successful industrial policy, then it will struggle to create sufficient employment with rising wages for the mass of population and continue to reduce poverty and achieve greater prosperity along its own path of development.

References

Altenburg, T. and Lütkenhorst, W. (2015), Industrial Policy in Developing Countries, Edward Elgar

Gray, H. (2018), Turbulence and Order in Economic Development, Oxford University Press

Masina, P. (2012), Vietnam between Developmental State and Neoliberalism: The Case of the Industrial Sector, in C. Kyung-Sup, B. Fine and L. Weiss, Developmental Politics in Transition, pp.188-210, Palgrave Macmillan

Nguyen Thi Tue Anh, Luu Minh Duc, and Trinh Duc Chieu (2016), The Evolution of Vietnamese Industry, in C. Newman, J. Page, J. Rand, A. Shimeles, M. Söderbom, and F. Tarp, Manufacturing Transformation, pp.235-256, Oxford University Press

One thought on “Asia’s ‘other communist dynamo’ – Vietnam and economic transformation

  1. Pingback: Can Vietnam escape the middle income trap? | The Political Economy of Development

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