Economic Strategy: Developing

Economies
Vietnam: Sustaining the Growth of an Asian
Tiger

Prof. Sanjay K. Singh

Indian Institute of
Management Lucknow

Vietnam: An Overview
Located on the on the

eastern Indochina Peninsula

Vietnam's land is mostly
hilly (40%) and densely
forested (42%)
Rice cultivation (fifth largest
grower and second largest
exporter) is concentrated in
the fertile plains of the
northern Red river delta and
the southern Mekong river
delta.
Climate vary from place to
place because of differences
in latitute
Area: 332,698Km2
Pop (2015): 91.7 million
Pop density: 276/Km2
Fertility: 1.8/woman

In 2015, GDP: US$ 199 B; GDP/Cap: $2,073; GDP (PPP): $551 B; GDP/Cap
(PPP): $6,100; GDP by Sector (2105): Agriculture (17%), Industry (33.25%),
Services (49.75%); Inflation (CPI, 2015): 2.05%
Export (2015) (clothes, shoes, marine products, crude oil, electronics, ..):
US$162 B; Import (machinery, petroleum products, steel products, plastics,
automobiles, ): US$165.7B

A Brief History

Historically, North Vietnam had Chinese dominance and South

Vietnam had Indian dominance (Champa Kingdom, Indrapura (Da Nang)
as capital; relied heavily on maritime trade).
In late 19th century, Vietnam became a French colony.
As a colony of French Indochina, north developed extractive
industries (mined coal, iron, and other minerals) whereas south had
fertile lands and devoted to rice and rubber production.
In 1940, Germans defeated France; Japan took control; Japan
surrendered to British in South and nationalist Chinese in north
in August 1945 and left a power vacuum.
Vietnamese communist party (called Viet Minh; formed in 1930 by Ho Chi
Minh) took the control of most of Vietnam.
Minh declared independence on 2nd Sept., 1945 (ignored by great
powers).
British handed over control to French; French wanted to stay in
Vietnam; Guerrilla war started between them and the Viet Minh.
In 1954, French surrendered after a siege lasting 57 days.
In north, Ho Chi Minh introduced communist regime; in south,
Ngo Dinh Diem became leader of the democratic rule.
In 1959, north Vietnamese started a guerrilla war (they were called

A Brief History

US got involved in the war; they had supported Diem.

In 1964, two US ships were supposedly attacked by Vietcong.
US bombed north Vietnam.
By Dec. 1965, there were 183,000 US soldiers in Vietnam; by
the end of 1967, there were 500,000.
In Jan. 1968, Vietcong launched offensive in cities across
South Vietnam.
In Jan. 1973, they signed a ceasefire and Americans
withdrew from Vietnam.
South Vietnamese continued fight with Vietcong; resistance
could not last long; on 30 April, 1975, North Vietnamese
captured Saigon; Vietnam got reunited under communist rule.
Around 2 million civilian on both side, 1.1 million Viet Cong
fighters, 0.25 million south Vietnamese soldiers, and 58,200
members of US Armed Forces died in the war.
War devastated the economies of both north and south
Vietnam.
Many south Vietnamese left the country.

A Brief History

Vietnam adopted a single party (Communist Party of Vietnam)

socialist system which had control on executive, legislative,
and judicial system.
In practice, decisions were taken by consensus (democratic
centralism); decision process was long, often ended with
compromise solutions.
Vietnam joined the United Nations in 1977, the Association of
Southeast Asian Nations (ASEAN) in 1995, and the Asia-Pacific
Economic Cooperation (APEC) in 1998; In 1986, Vietnamese
Govt. introduced market reform (Doi Moi, Renovation) after
the death of secretary Le Duan.
In 1994, US lifted economic embargo. Diplomatic relations
restored in 1995.
A stock exchange opened in Vietnam in 2000.
In 2007, Vietnam became a full member of the WTO.
By 2010, Vietnam adopted friends to all diplomatic stance,
and had good relation with countries like Japan and the US.
In 2010, Vietnam was governed by CPV General Secretary
Nong Duc Manh; the PM, Nguyen Tan Dung; and President,

PPP Adjusted GDP per Capita Growth in

Selected Asian Countries (2011, US$);
Refer Exhibit 1

Vietnam economy grew

fast (5.5% during last two
decades)
Sign of overheating by
2008
Rising inflation, galloping
real estate prices, volatile
stock market

Basic economic indicators, selected Asian

countries, 2010

Poverty rate is one third of the rate a decade ago.

Agriculture employ 52% of labor force; Agriculture: 21%, Industry: 41%;
Services: 38% of GDP ; Youth (20-29 years) unemployment :twice the national
average; wages: lower than Indonesia, China,..but higher than Cambodia

Basic economic indicators, selected Asian

countries, 2010

Productivity improved (due to rising capital intensity) though 40% lower than China; twothird improvement was due to reallocating employment towards higher-productivity sector
from agriculture to light industry and one-third was due to improvement of productivity
within sectors.
Trade: 150% of GDP; export: oil, gas, agricultural and fishing products, apparel, and
furniture; to US (21%), ASEAN (15%), China (12%), and Japan (10%) import: refined oil
products, capital equipments, steel, iron, textile materials, computer and electronic
components from China (30%), S. Korea (16%), and Japan (10%).

Basic economic indicators, selected Asian

countries, 2010

High inflation had put pressure on lower income residents.

Government reacted through one-ff cash subsidies to specific groups
and administrative measures trying to control inflation.

Vietnam ranked poorly in 2010 on

key indicators of macroeconomic
policy
Inflation (CPI): 9%
Dong devalued thrice in recent past
Fiscal deficit: 7% of GDP in 2010
Public debt (net debt of government): 36% of GDP in

2008 to 50% of GDP in 2010

75% of total debt denominated in foreign currency
$8 billion remittances, similar magnitude of net FDI
inflow, below market interest rate most foreign debt,
helping Vietnam, still
Low sovereign rating by international rating agencies
Corruption remained endemic problem (corruption
perception index rank, 116 out of 177 countries)

Vietnam's Emerging Economic Boom

Vietnam's Special Economic Zones

What
determines
prosperity
Productivity; productivity ultimately depends on improving the
growth?capability of the economy and the sophistication of
microeconomic

local competition revealed at the level of firms, cluster, and regions

Macroeconomic competitiveness sets the economy-wide context
for productivity to emerge, but is not sufficient to ensure productivity
Endowments, including natural resources, geographical location,
population, and country size, create a foundation for prosperity
arises from productivity in the use of endowments

Let us now focus on the case

(Socialist Republic of) Vietnam: is one of Asias

fastest growing economies; moved from low income
to lower middle income level ...
Let us analyze the case
What were the initial conditions (in 1975) in
Vietnam?
Assets
Location

Liabilities
(long coastline along major sea lanes Only 20% arable land
between Europe, Indian ocean, and northwest Asia )
Severely damaged
infrastructure (power
stations,
network, bridges,.. )

Large forest

ports, rail-road

Decimated agriculture and

livestock
Rich seas teeming with aquatic life Low skill base
Sizable reserves of coal, oil, and
Tension between south and
natural gas
north Vietnam
Fertile land for rice, rubber, coffee,
Farm land with
unexploded

Policy Evolution
Over Time
1975-1986
Key objective
Uniting the nation and building a socialist economy

Key policies
Nationalization of all business (in the South) and collectivized
agricultural production (more than one million well educated and
well off people left the country).
Joined Comecon (council for mutual economic assistance) socialist
trading block in 1978.
Barter trade; exporting raw material and low cost consumer goods
and apparel; importing capital equipments, fuel and other
manufacturing goods; became Soviet Unions largest trading partner
in Asia.
Agriculture productivity fell; shortage of rice; manufacturing sector
struggled due to limited FDI (diplomatic isolation due to its
Cambodia invasion in 1978); per capita GDP fell by 7% between
1977 and 1980.
In 1981, introduced output contract system for agriculture; land
was allocated to households, they received inputs, gave output
quota, and retained surplus.
Similar scheme for industry; excess output was allowed to be sold in
the market; excess capacity was allowed to be utilized from the
inputs procured from the open market.
Between 1981 and 1985, GDP growth: 6.4%, agriculture output:

Policy Evolution Over Time

1986-1997

Key objective
Transforming the economy (Doi Moi (Renovation))

Key policies
State owned enterprises were given autonomy to set their own
production targets and charge market price on most products.
Government stopped providing inputs and subsidies.
In 1988, farmers were given user rights through renewable and
nontransferable land use certificates (land ownership remained with
state).
Agricultural cooperatives were reduced; households were allowed
to pursue private agriculture activity.
In 1992, drafted a new constitution; affirmed commitment to a
market economy with a socialist orientation.
In 1993, farmers were granted rights to sell, exchange, inherit,
mortgage, and rent land use rights. Farmers were allowed to sell all
their output in the open market.
Agriculture production improved; Vietnam became major rice
exporter. Reduced its dependency on weakening Soviet Union.
In 1989, unilaterally withdrew from Cambodia.
In 1990, established diplomatic relations with EU, followed by

Policy Evolution
Over
Time
1986-1997
Key policies
In late 1980s, State Bank of Vietnam (SBV) was reorganized to focus
on central banking function; private credit cooperatives were
legalized;
Tax system was introduced in early 1990s; sales and profit tax in
1990, personal income tax in 1991, natural resource tax in 1992, land
and housing tax in 1993,
First export processing zone was established in 1991and first
industrial zone in 1994.
In 1991, dong became partially convertible; in 1987, FDI with full
foreign ownership in Greenfield projects in many industries was
permitted.
Restructuring of SOEs (state owned enterprises); few weak ones
were allowed to liquidate; some smaller SOEs were merged into
larger units.
By 1994, 18 General Corporations (under central government) and
64 Special Corporations (under provincial authorities) were
established. In 1995, they were granted full autonomy over business
decisions including the use of capital and after tax profits.
In 1994, US trade embargo (in place since 1975) was lifted.
In 1995, joined ASEAN (Association of Southeast Asian Nations).
In 1994, adopted a bankruptcy law and labor law; in 1995, civil code

Cluster Portfolio Evolution

1986-1997
over
ApparelTime
(in and around Ho Chi Minh City and Hanoi)
Footwear (since mid-1990s in and around Ho Chi Minh City and Dong Nai
province)

Fishing and fishing products

Agricultural products
Furniture
Motorcycle (cluster emerged with entry of Taiwan based SYM in 1992,
Suzuki (1996), Honda (1997), and Yamaha (1999))

Oil and gas

(mainly offshore; export crude production and import fuel

and petrochemical products; opened a refinery in Dung Quat (central Vietnam)
far away from production location)

Coal and Briquettes

Policy Evolution Over Time

1997-2010

Key objective
Becoming a socialist oriented market economy

Key policies
1997 Asian financial crisis; Vietnam let dong slide, adopting a
crawling-peg system; export growth declined; companies suffered
from debt burden on foreign currency loans; many firms became
unprofitable; banks that had lent to firms also suffered;
SBV received expanded authority to supervise the banking sector;
enacted restructuring plan for the sector in 1999.
Shift in industrial policy; creation of industrial zones rather than
export promotion.
Tax reform in 1999; sales and profit tax got replaced by value-added
and corporate income tax, respectively; in 2003, corporate tax rates
were unified for both domestic and foreign companies at the rate of
28%; in 2004, income tax structure changed (widening of tax
brackets, reduction of highest marginal tax rate,)
Enterprise law passed in 1999, implemented in 2000; abolished
around 150 business licenses and permits, introduced ease of doing
business,
Between 2000 and 2005, 160,700 new enterprises with a total

Policy Evolution Over Time

1997-2010
Key policies
In 2000, bilateral trade agreement with the US (share of
Vietnamese export to the US jumped from 5% in 2000 to 20%
in 2003).
USAID (US Aid Agency) launched the support for trade
acceleration (STAR) project and VNCI (Vietnam National
Competitiveness Institute)
In 2002, VNCI recommends cluster-specific improvements of
the business environment and regulatory and administrative
reforms.
In 2004 and 2005, public administration reform got
implemented.
In 2003, state capital investment company (SCIC) was formed
to manage the government stake in SOEs.
In 2004, eight economic groups were established in strategic
sector.
Capital market restrictions were gradually lifted; bank
regulations were made at par with international standards;

Policy Evolution Over Time

1997-2010
Key policies
In 2006, Vietnam was admitted to the WTO.
In 2007, government identified 71 state owned companies to
partly privatize them by 2010.
Export grew fat till 2008; export shifted from natural resources
to manufacturing goods; import grew even more; trade deficit
increased (>10% of GDP); FDI inflow ensured capital account
balance (e.g., Intel announced investment of $1 billion in
assembly and testing facility)
2008 crisis, expansionary fiscal policy, budget and trade
deficit, weak regulation in real estate and stock market fuelled
overheating of economy; inflation peaked at 28% led to labor
strikes
In 2009, to maintain growth momentum, expansionary
monetary policy, temporary reduction in in tax, loan interest
subsidies for SMEs, infrastructure spending, and social
spending were introduced.
Inflation further increased; pressure on dong; forex reserve

Cluster Portfolio Evolution

1997-2010
over
ApparelTime
(started from 1880s when French built Indochinas most modern

textile plant in Nam Dinh; by 2010, 2000 companies with 2 million workers
located in and around Ho Chi Minh City and Hanoi; imported most raw
material, raw cotton, synthetic yarn, woven fabric, ) constitute 14% of total
export

Footwear (since mid-1990s; fourth biggest footwear supplier, exporting

90% of its production; 700 companies with 750,000 employees produce sport
(Nike, Adidas, and Reebok) and leather shoes; cluster mainly in Ho Chi Minh
City and Dong Nai province)

Fishing and fishing products

(aquaculture has grown faster

than agriculture; export in 2010 reached $5 billion with the EU, US, and Japan)

Agricultural products

(second largest exporter of rice after

Thailand; fifth largest grower of rice; second largest producer and exporter of
coffee after Brazil; largest exporter of cashew and pepper; and fourth largest
exporter of rubber) constitute 7% of Vietnamese export

Furniture

(export of $4 billion in 2010; imported 80% wood material,

largest importer of hardwood; cluster is in and around Hanoi (traditional
furniture for domestic market) and Ho Chi Minh City (for export); 2000
companies, 15% are export oriented, 60 foreign firms)

Motorcycle

(cluster emerged with entry of Taiwan based SYM in 1992,

Suzuki (1996), Honda (1997), and Yamaha (1999))

Quality of the national business environment

indicators

Quality of the national business environment

indicators

Quality of the national business environment

indicators

Quality of the national business environment

indicators

Vietnam structure of investment by

ownership

Foreign owned companies now account for 14% of GDP, 22% of employment, 26%
of investment, 50% of profits, and 55% of exports.
Domestic private firms are small; big ones are only in real estate and financial
services.

FDI in Vietnam

Composition of inward FDI flows

World Bank Doing Business Rankings

A New Strategy 2011-20

In July 2010, PM, Nguyen Tan Dung, sets goal
for rapid and sustainable development
Emphasized to restructure the economy deep
growth and knowledge intensive development
Institutions, skills, and infrastructure are the
three critical areas of focus
Vietnams long-term growth prospects?
Current macroeconomic challenges?

Thank You