Author: Quang Truong, Maastricht School of Management
There was a time when Vietnam was generally seen as a rising star among the emerging economies and one of the most attractive destinations for foreign investment in Asia.
During 1991–2010 the country achieved a steady annual GDP growth rate of 7.7 per cent (second only after China in the region). This gradually increased Vietnam’s average income per capita from a scant US$98 after the end of the war in 1975 to US$1174 in 2011, and reduced the poverty level from over 58 per cent to 10 per cent.
These remarkable achievements are a result of the vital and timely decisions in 1986 that saved the country from virtual bankruptcy — which had resulted from the devastating effects of the systematic imposition of a strict Soviet-style command economy over the whole country — and the abrupt end to the provision of external assistance following the fall of the socialist bloc. In many respects, the Vietnamese experiment was inspired by, and therefore bears resemblance to, the Chinese experience of a decade earlier.
But after a period of steady growth, Vietnam is now standing at a critical crossroads as the effects of an endless economic crisis worldwide and an overheating economy at home take their toll.
Economic growth has been slowing down since the global financial crisis, and corruption as a result of ‘capitalist cronyism’ and related vested interests has become rampant, especially in the state-owned sector. Further, the living conditions of the people have worsened through soaring inflation due to lack of consistent monetary policies and poor governance — typically in the form of ‘Dutch disease’, ‘middle-income trap’ syndrome, and an inflexible implementation of Vietnam’s ‘collective ownership’ principle that prevents private ownership. The failed system needs a comprehensive and safe solution to prevent total economic collapse.
The quest for a new growth model for the next phase of development involves several questions that need to be answered. The ‘market economy with a socialist orientation’ model must be seriously re-considered. While it is generally believed to have steered Vietnam toward prosperity over the last few decades, the model is losing momentum and faltering. State-owned enterprises have also failed to perform as the ‘pillars of the economy’ against the growing and more dynamic private enterprises, which are smaller in size and scope and with far fewer privileges.
Additionally, the country’s relentless efforts to integrate into the global economy (especially after joining the WTO in 2007) do not seem to be paying off. This strategy was aggravated by Vietnam’s comparatively moderate capacity based mainly on low-cost low-tech manufacturing, with low local content and value addition; and also heavy reliance on both external resources, especially technology and R&D, and exports, with huge trade deficits and poor integration into global value chains.
Finally, the obsessive focus to achieving fast and high quantitative economic growth in the last two decades has become the main impediments towards achieving a more sustainable qualitative development for the country, and above all a tendency to rely heavily on China in many respects.
The challenges Vietnam is facing today do not have simple or immediate solutions. The survival tests for the country ahead will involve comprehensive changes, structural and strategic, which improve Vietnam’s competitiveness worldwide and unleash its full domestic potential. This will need to be done within a framework of ideological compromise and a developed and self-functioning civil society in tandem with good governance, underpinned by the rule of law at the macro level and effective management at the micro level.
Dr Quang Truong is Emeritus Professor at the Maastricht School of Management.