HAVING IMPRESSES the world by taming the virus last year, Vietnam is now in the midst of its by far worst Covid-19 outbreak. Parts of the country are tightly locked and a number of factories, from those making shoes for Nike to those making smartphones for Samsung, have either slowed down or closed, disrupting global supply chains. However, integration with global manufacturing kept the Vietnamese economy buoyant during the pandemic. In 2020 GDP rose 2.9% despite deep recessions in most countries. Despite the recent outbreak, this year could grow even faster. The latest forecasts from the World Bank, released on August 24, point to an expansion of 4.8% in 2021.
This performance points to the real reason to be impressed with Vietnam. The country shares its openness to trade and investment GDP per capita of just $ 2,800, an important link in supply chains. And that, in turn, has resulted in a remarkable expansion. It has been one of the five fastest growing countries in the world for the past 30 years and has beaten its neighbors by far (see Figure 1). Its balance sheet is not marked by the beginnings of many other frontier markets, but by steady growth. The government is even more ambitious and wants Vietnam to become a high income country by 2045, a task that will require 7% growth per year. What is Vietnam’s secret of success – and can it be sustained?
Vietnam is often compared to China in the 1990s or early 2000s, and for good reason. Both are communist countries that, led by a one-party political system, became capitalist and focused on export-oriented growth. But there are also big differences. First of all, even the description of Vietnam as export-intensive does not do justice to sales abroad. Its commodity trade exceeds 200% of GDP. Few national economies, with the exception of the most resource-rich countries or city-states dominated by maritime trade, are or have been as trade-intensive.
Vietnam differs from China not only in the level of exports, but also in the nature of the exporters. In fact, it makes it seem more like Singapore due to its deep connection to global supply chains and high levels of foreign investment. As of 1990, Vietnam has had an average of 6% foreign direct investment inflows GDP more than twice the global level every year – and far more than China or South Korea have ever recorded over a long period of time.
As the rest of East Asia developed and wages rose there, global manufacturers were lured by Vietnam’s low labor costs and a stable exchange rate. That triggered an export boom. Over the past decade, domestic company exports have increased 137%, while foreign company exports have increased 422% (see Figure 2).
But the widening gap between foreign and domestic firms now poses a threat to Vietnam’s expansion. It has become overwhelmingly dependent on investment and exports from foreign firms, while domestic firms have underperformed.
Foreign firms can continue to grow and create more employment and production. But there are limits to how far you can advance Vietnam’s development. The country needs a productive service sector. As the standard of living rises it may become less attractive to foreign manufacturers and workers will need other options.
Part of the burden on domestic companies comes from state-owned companies. Their importance for total activity and employment has decreased (see Figure 3). Nevertheless, their privileged position in the banking system, which enables them to obtain cheap credit, has an overwhelming effect on the economy. Banks offset this unproductive lending by charging other domestic firms higher interest rates. While foreign companies can easily access financing abroad, the average interest rate on a medium or long-term bank loan in Vietnamese dong was 10.25% last year. Research by scientists from the Center for Economic Performance at the London School of Economics also suggests that productivity gains would have been 40% higher in the five years since Vietnam joined the World Trade Organization in 2007 had it not been for state-owned enterprises.
To boost the private sector, the government wants the equivalent of South Korea chaebol or Japan keiretsu, large groups of companies operating in a wide variety of sectors. The government “is trying to create national champions,” says Le Hong Hiep, senior fellow at the ISEAS-Yusof Ishak Institute in Singapore and former Vietnamese civil servant.
Vingroup, a dominant conglomerate, is the most obvious candidate. In VinPearl, VinSchool and VinMec it has activities that span tourism, education and health. VinHomes, its real estate division, is Vietnam’s largest publicly traded private company by market capitalization.
The group’s efforts to move into finished automobile production through VinFast, its automaker, could become important to the economic development of a country normally known for intermediate manufacturing. In July, the company’s fadil, based on the design of the Opel brand Karl, became the best-selling model in Vietnam, beating Toyota’s Vios. VinFast also has great ambitions abroad. In July it announced that it had opened offices in America and Europe and intends to sell electric vehicles there by March 2022.
However, promoting national champions while remaining open to investment is not easy. VinFast benefits from a number of tax breaks, including a large corporate tax cut for the first 15 years of operation. In August, state media also reported that the government is considering cutting registration fees by 50% again on locally built cars that phased out last year.
However, the country’s membership in the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership and a number of other trade and investment agreements means that it cannot give preferential treatment to domestic producers. It must also support foreign companies that manufacture cars in Vietnam. (In contrast, China’s trade policy, which favors broad but shallow deals, does not restrict domestic policy in quite the same way.)
Vietnam may also be hoping for another source of growth. The economic boom has encouraged its enormous diaspora to invest or even return home. “There aren’t many economies that experience something like Vietnam,” says Andy Ho of VinaCapital, a $ 3.7 billion investment firm. In 1977 his family moved to America, where he trained and worked in consulting and finance. In 2004 he returned to Vietnam with his own family. “If I were Korean, I might have returned to the 1980s, if I were Chinese, I might have returned in 2000.” Its successful diaspora makes Vietnam one of the largest recipients of remittances in the world; US $ 17 billion flowed in last year, or 6% of the GDP.
Aside from the Covid-19 backlash, it may seem hard not to be rosy about a country that appears to be in the early stages of emulating an East Asian economic miracle. But no country got rich through remittances alone. As Vietnam develops, it is becoming increasingly difficult to maintain rapid growth through exports of foreign companies, and the tension between being open to foreign investment and promoting national champions is growing. All of this makes domestic private sector and financial system reform of paramount importance. Without them, the government’s lofty goal of getting rich quick may prove unattainable. ■
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An early version of this article was published online on August 30, 2021
This article appeared in the Finance & Economics section of the print edition under the heading “The special sauce”