Exploring Global Business Challenges from Multiple Perspectives
The Vietnamese Economy
THE VIETNAMESE ECONOMY’S CURRENT PHASE OF ECONOMIC DEVELOPMENT
February 24, 2021
Table of contents
Main Body 3
Economic growth is the measure of how the national income or output or expenditure, usually referred to as Gross Domestic Product (GDP) of a given country increases over time. GDP is the measure of the total volume of services and goods that are produced in an economy over a period of one year, usually known as a fiscal year. Economic growth is measured by the percentage change in the GDP over the given fiscal year. It is measured in terms of production, incomes, or expenditures (Gillis et al., 1992, p. 25). Economic development puts into consideration more statistics than just the economy’s GDP. It concerns itself with measuring how well of people are by encompassing the qualitative aspect of economic growth. It measures changes in the people’s standards of living as well as their economic freedom to enjoy the good living standards. Variables considered while measuring economic development include the people’s values, fashion, and tastes. It reflects the relative welfare of the people by measuring variables such as the ratio between health personnel, hospital beds, radios, newspapers, telephones, or TV sets and the population of the given economy. Life expectancy, adult literacy, as well as GDP per capita adjusted for inflation are fundamental variables in measuring economic development (Gillis et al., 1992, p. 47).
While economic growth can occur devoid of economic development, it is not possible to have economic development without economic growth. As discussed earlier, economic growth is one of the variables that are considered while measuring economic development. However, there are cases in which an increase in GDP does not translate into actual improvements in the standards of living of the people (Gillis et al., 1992, p. 60). First, economic growth could only benefit a small percentage of the population. For instance, if economic growth is as a result of growth in oil production of a given country, it may end up benefiting just the owners of the oil firms without necessarily benefiting the average worker. Secondly, in case the growth in the economy occurs in a country marred with corruption, the benefits may end up being siphoned into the political class bank accounts. Thirdly, economic growth that results in environmental problems does not make the lives of the people any better. In addition, increasing GDP as a result of higher military spending does not amount to economic development. Lastly, if economic growth results in externalities such as congestion, the living standard of the people is negatively affected (Gillis et al., 1992, p. 71).
One of the most widely used model of economic development is the Rostow’s Stages of Economic Growth. According to the model, economic growth follows five stages, of variant length and complexity namely traditional society, preconditions for take-off, take-off, drive to maturity, and age of high mass production. The traditional society stage is characterized by a rudimentary sector economy with limited technology and a rigid society that prioritizes stability. The Preconditions for take-off stage encompasses economic change driven by external demand for raw material and the commercialization of primary production sectors such as agriculture. It is also characterized by significant changes in the social structure of the society. The take-off stage is evidenced by an increase in urbanization and industrialization, as well as technological breakthroughs. In this stage, a shift occurs from primary production to secondary sector production such as the apparel and textile industries. The Drive to Maturity stage encompasses fundamental strides in transportation infrastructure as well as social infrastructure like schools and hospitals. In this stage, manufacturing is no longer in capital goods but for domestic consumption and in consumer durables. The Age of Mass Consumption is the last stage and is characterized by a domination of the industrial sector as well as widespread consumption of high value consumer foods such as automobiles. The disposable income of consumers in this stage is beyond all basic needs and can, therefore, be used to purchase other goods as well as for savings(Rostow, 1990, p. 30).
The national competitiveness of a country as measured by the Global Competitiveness Index (GCI) is closely linked to the country’s economic growth. There exists a strong unidirectional causality link between the two phenomena. The GDP growth of a country causes its global competitiveness, and not vice versa. The reason for the observation is that the parameters used to measure a country’s global competitiveness are components of economic growth (Gillis et al., 1992, p. 104).
Vietnam falls in the Take-off stage of the five stages of economic development. The economy of Vietnam is characterized by substantial increase in secondary sector employment which has led to rapid development within the country. The unemployment rate has fallen from over 50 percent a decade ago to less than 10 percent. Employment in the secondary production sector such as industrial production of textiles and value addition to primary output accounts for more than three quarters of the new employment opportunities created in the past two decades. Although the primary sector still accounts for more than half of the labor force, there has been considerable mechanization of the primary sector production including agriculture (Griffin, 2016, p. 117).
The economy of Vietnam is moving towards Drive to Maturity stage. A large proportion of the economic indicators point towards self-sustained growth of the economy. The economy is characterized by the emergence of a new class entrepreneurs undertaking investment in novel enterprises, mobilizing savings, and bearing uncertainties and risks. The savings and investment rates are attaining a magnitude enough to sustain automatic economic development. A large proportion of the disposable income of the people is either saved or spent on speculative demand. Government spending has shifted from recurrent expenditure to investment expenditure. As such, the economy is able to generate enough revenue to fund government projects (Rostow, 1990, p. 108).
Vietnam ranks 56 out of 140 in the overall Global Competitive Index (GCI) and 4.3 in the score of 1-7. In the basic requirements sub-index, Vietnam ranks 72 out of 140 and 4.5 in the score of 1-7. Under this sub-index, the institutions pillar ranks 85 and 3.7, the infrastructure pillar ranks 76 and 3.8, the macroeconomic environment pillar ranks 69 and 3.8, while the health and primary education pillar ranks 61 and 5.9. The efficiency enhancers sub-index ranks 70 out of 140 and 4.0 in the 1-7 score. The higher education and training pillar under this sub-index ranks 95 and 3.8, the goods market efficiency pillar ranks 83 and 4.2, the labor market efficiency pillar ranks 52 and 4.4, the financial market development pillar ranks 84 and 3.7, the technological readiness pillar ranks 92 and 3.3, while the market size pillar ranks 33 and 4.8. The innovation and sophistication factors sub-index ranks 88 out of 140, and 3.4 in the 1-7 score. The business sophistication pillar under this sub-index ranks 100 and 3.6 while the innovation pillar ranks 73 and 3.2. The ranks for the sub-indices reflect a relatively desirable global competitiveness for Vietnam compared to other economies falling in the middle-income category (Index, 2015, p. 366).
Moving Vietnam from the Take-off stage to the Drive to Maturity stage will require stringent policies aimed at performing an analysis of the current state of the economy versus the desired condition. Presently, foreign investment is Vietnam’s main stimulus for more investment. Foreign investors are taking advantage of the economy’s low wage rates to venture into industrial investment. The economy is being opened up to trade blocs within the region to foster foreign direct investment. International economic integration is at the center of Vietnam’s development agenda as evidenced by the numerous free trade agreements signed with international bodies such as the European Union, Eurasian Economic Union, Trans-Pacific Partnership, and South Korea. Vietnam is also a signatory of the ASEAN Economic Community which was established in December, 2015 (Griffin, 2016, p. 135).
In addition, the services industry has made strides over the last two decades. The service sector is the main driver of economic modernization as evidenced by the significant structural transformation in administration. There has been substantial push for the privatization of government enterprises especially in the services industry such as telecommunication. The allocation of land and capital is skewed towards promoting the development of the services industry. The government has enacted numerous laws and legislation aimed at encouraging investment in the services industry such as tax holidays as well as subsidies (Griffin, 2016, p. 143).
The structure of the economy of Vietnam is continually experiencing rapid changes. The existing key industries that characterize the economy’s present Take-off stage are rapidly decelerating as a result of diminishing returns. However, the economy continues to grow at the same average rate instigated by the rapid growth of new sectors and a new set of key sectors. There has been radical changes in the structure of the foreign trade sector to integrate free trade agreements. There has also been substantial decrease in the proportion of Vietnamese population engaged in rural pursuits and agriculture. Economic policy makers have shifted their attention to addressing the challenges being faced in the Take-off stage to propel the economy to the self-sustaining growth stage (Griffin, 2016, p. 149).
Given the above observations about the current state of the economy, policies to steer the economy to self-sustenance would be the best strategy to propel the country to the Drive to Maturity stage. First, to open up the economy to foreign investment, which is a requisite condition for self-sustenance, the policy makers must incorporate international economic integration into the strategic plans for economic growth forthwith. The government must adopt formal measures to ensure that the economy is opened up to the international community at all levels of production. The constitution of Vietnam must be amended to allow free movement of goods and services, as well as people within the trade blocs in which Vietnam is a signatory. Doing so will substantially reduce the cost of labor and capital which will in turn encourage direct foreign investment (Gillis et al., 1992, p. 201).
Secondly, the economic policy makers in Vietnam must adopt policies aimed at developing the services sector. While there has been significant effort to this end, the actualization of proposed policies has been a big challenge. One of the fundamental policy instruments in this respect is the privatization of government enterprises. Even though some enterprises in the service sector such as the health services sector must remain under government administration, poorly performing firms should be privatized. The greatest impediment to the privatization process has been conflicting political interests among the political elite. Economic policy makers must, therefore, work towards entrenching the privatization agenda in the constitution to cushion it from political interference (Griffin, 2016, p. 162).
Inclusive growth refers to economic growth that is aimed at reducing poverty, eradicating inequality, and benefiting the most marginalized in the society. It encompasses equitable opportunities for every section of the society during the process of economic growth. Where inclusive growth has been entrenched, there is a direct link between the micro and the macro determinants of economic growth. In the microeconomic front, growth is evidenced through structural transformation. On the macroeconomic front, growth is evidenced by changes in aggregates such as GDP, GNP, factor inputs, and total factor productivity. It involves ensuring that the growth process includes all people regardless if their gender, economic class, disability, sex or religion (Ali and Son, 2007, p. 79).
Measuring inclusive growth is not only a complex process but also one that is marred with different standards and parameters varying from one international body to another. The most widely used parameters for measuring inclusive growth are those outlined by the Organization for Economic Cooperation and Development (OECD) framework. The framework outlines three indicators namely poverty reduction, inequality eradication, and benefit to the marginalized as the parameters to measure the level of inclusive growth in an economy. As such, to measure the level of inclusive growth in Vietnam the following pointers that fall under the three indicators can be used.
First the rate and extent of investment in human capital experience during the growth process informs the extent of inclusive growth achieved. Secondly, the rate if job creation reveals the degree of inclusive growth. The level of progressive tax policies is yet another indicator of inclusive growth. Social protection instituted in the growth process also points to the degree of inclusive growth of the economy. Finally, social inclusion, participation, as well as non-discrimination are also measurable aspects of inclusive growth within an economy (Ali and Son, 2007, p 81).
Ali, I., Son, H.H., 2007. Measuring inclusive growth. Asian Dev. Rev. 24, 11.
Gillis, M., Perkins, D.H., Roemer, M., Snodgrass, D.R., others, 1992. Economics of development. WW Norton & Company, Inc.
Griffin, K., 2016. Economic reform in Vietnam. Springer.
“The Global Competitiveness Report 2015-2016,” Klaus Schwab (ed.), World Economic Forum.
Geneva, Switzerland. Rostow, W.W., 1990. The stages of economic growth: A non-communist manifesto. Cambridge University Press.