Vietnam - Nation works on a new growth pattern

"As Vietnam enters a new era, it needs accelerated thinking on reform involving various areas from institutional building, policy making and administrative structuring to developing a high quality workforce of qualified civil servants, businesspeople, scientists, technicians and workers."

Prof. Nguyen Mai, former vice chairman of the State Committee for Cooperation and Investment (now the Ministry of Planning and Investment), discusses how necessary a new economic growth pattern is for Vietnam to achieve its goal of becoming an industrialised nation by 2020.

The mid 1980s saw Vietnamese people successfully finding their way to get through a severe socio-economic crisis, steadily moving towards prosperity and wealth. The reform of thinking, primarily that of economic development, created a scientific theoretic foundation for the Vietnam Communist Party and the state to renovate domestic economic policies and mechanisms, plus integrating the nation into the global orbit.

The global socialist system’s crisis during this period negatively impacted on the psychology and confidence of people who had been well educated about the superiority of a socialist regime. But at the same time, it encouraged Vietnamese people to more independently and creatively find a way to move forwards in a world full of opportunities and challenges.

The Vietnam Communist Party’s Sixth Congress in 1986 marked a turnaround in the policymakers’ way of thinking by radically shifting the national economic growth model from a centralised and subsidised mechanism to a market driven one. The all-round reform policy has been pursued and developed by the subsequent Party congresses.

The power of reformed thinking

The reformed way of thinking has served as the foundation for the development of the economic legal system based on market principles, which states: “All companies and citizens can engage in doing business in sectors and industries not forbidden by the laws or within the boundaries permitted by the laws.” This has replaced the “ask-grant” mechanism according to which “companies and citizens can only do businesses allowed by state agencies”, thereby creating a multi-ownership economy where state-owned, collective, private, mixed and foreign invested sectors operate equally before the laws.

The reformed thinking has “untied” millions of people by returning their legitimate rights to “make fortune themselves and contribute to enriching the country”, which entails the society’s changed attitude towards the national and private wealth, honouring excellent businesspeople and who successfully turn into millionaires from their bare hands.

The reformed thinking functions as the basis for properly addressing the relationship between the “invisible hand” of the market where supply-demand information is crucial for manufacturers and traders, and the regulatory hand of the state which intervenes when needed for the sake of the whole society and solving the market’s distortion.

The reformed thinking has drastically liberalised production forces from all classes of citizens and stimulated the long-restrained innovative ideas among millions of people, resulting in faster economic growth and higher cost-effectiveness compared to previous times.

The reformed thinking has led to the nation making friends with other countries on the basis of respecting each other’s independence and sovereignty and mutual benefit. This is a right approach to a revolving world. Politically, the “two poles, two camps” world of the Cold War has shifted to a “one superpower, multi-pole” one of the post-Cold War with the predomination of the United States, the increasing role of new emerging economies typically represented by the BRIC (Brazil, Russia, India and China) countries, the 27-member European Union and the Asian “miracle”.

Economically, with globalisation spreading its full wings, individuals and nations worldwide are depending on daily movements of international commodities, financial and monetary markets. International integration is no longer a question of “yes” or “no”, but of how each nation can utilise its advantages in the globalisation course, particularly considering the burning issues of climate change, marginal growth, widespread diseases, “non-traditional security” in association with international terrorism which each individual country cannot solve by itself.

The reformed thinking has helped Vietnam expand its political, economic, trade and investment relationship to around 180 countries worldwide from the previous 12 former socialist nations during the Cold War period. International integration has served as a means to uphold the targets tailored in the national strategy for socio-economic development. 

The reformed thinking has not only changed the face of rural and urban areas, dramatically improved people’s living conditions and fought poverty. More significantly, it has changed the way of thinking among most of Vietnamese people and the nation’s production methodology and distribution and consumption behaviours towards adapting to other regional advanced economies.

However, Vietnam’s economic growth in the past years has primarily relied upon extensive investment and labour while technology, productivity and management played a humble part. Smuggling, tax fraud, corruption and wastefulness are prevailing and social inequality is rising.

International economic integration, while opening new chances for Vietnam to keep pace with other nations, also sets forth great challenges given the economy’s underdevelopment status, low competitiveness and a workforce remaining unable to respond to the requirements of sustainable development.

Last year marked a milestone in Vietnam’s economic development with gross domestic product (GDP) in comparative prices doubled from 2000 and increased five-fold from 1991. In real price, the GDP per capita reached $1,160 in 2010, bringing Vietnam into the group of low medium-income nations.

A new approach for a new era

As Vietnam enters a new era with emerging issues related to domestic economic development and international integration, it needs an accelerated thinking reform involving various areas from institutional building, policy making and administrative structuring to developing a high quality workforce of qualified civil servants, businesspeople, scientists, technicians and workers.

Lessons learned from the world’s history have shown quite a few countries have failed to continue boosting growth after joining the group of low middle-income countries because they have pursued the economic growth model based merely on natural resources, labour and capital. Vietnamese policymakers need to be alert to the “middle-income trap”, a long story for dozens of nations around the world, is there for Vietnamese policymakers to be alerted to.

Just look at South Korea and Taiwan, two east Asian economies which had a starting point in the 1950s similar to Vietnam.

Despite following different growth models, South Korea and Taiwan had achieved great outcomes, rapidly turning into new industrialised economies (NIEs) from their underdeveloped status within just about two decades. The two economies had flexibly shifted from the import-substitution based industrial production model in the 1960s to export-oriented industrialisation in the 1970s with incentive policies adopted to encourage exportation and subsidise exports. To boost exports, South Korea devalued its currency by 50 per cent while Taiwan built export processing zones. They both focused investment on developing infrastructure synchronously, including power supplies, transport systems, seaports, airports and communication networks.

While the South Korean government supported giant corporations, widely known as chaebols, to build six key industries including steel, machine manufacturing, metallurgy, shipbuilding electronics and petrochemical, the Taiwanese administration provided financial incentives for small- and medium-sized enterprises and simultaneously encouraged foreign direct investment (FDI) and called on Chinese-national people’s capital and intellect.

The South Korean government played a vital role in mapping out strategic guidelines and amending policies towards agreeing with each development period. For example, in 1973, it pushed for the shift of production focus from garment and textiles to heavy industry and adopted export encouraging policies on capital-intensive and high value-added production sectors instead of labour-incentive industries. As the result, within five years, South Korean steel manufacturers outran American ones and its shipbuilding industry left Sweden behind.

Meanwhile, Taiwan has a market economy more developed than South Korea’s in view of the administration’s role. For example, in late 1950s, Taiwan set up the Industrial Development and Investment Committee to steer economic development with policies on foreign trade, investment and credit. In the early 1960s, it refocused to manufacturing exports and adopted the policy on competing overseas and protecting domestic production. During the 1980s, the island encouraged its businesses to shift to the semi-conductor and computer manufacturing industries.

Since the early 1990s, South Korea and Taiwan have emerged as quite successful economies in terms of technology advancement and they are rapidly moving towards knowledge based bones widely applying electronic and information technologies in administrative areas and particularly in research and development (R&D) activities. Today, South Korea and Taiwan are leading the world in semi-conductor, electronics and telecommunication industries.

The general lessons learned from the successes of South Korea and Taiwan are that development models and policies must be revised to adapt to new situations, and each economy has to find its own development way and methodology agreeing with its own specific natural, social and cultural features and people’s knowledge level.

Working on Vietnam’s development model

The achievement of Vietnam’s dual targets set for 2011-2020 needs a development model built upon the modern way of thinking about development in combination with experiences drawn from the country’s 20 years of building a market economy and international lessons. Such a development model must view the economy of scale as the driving engine because in a modern world, winners and losers are primarily decided by the scales of industries and products on which they rely to compete in both domestic and international markets. Therefore, particular industries must be selected for building to attain economies of scale and soak up considerable international market shares. The building of such industries must be based on the country’s dynamic comparative advantages. It must not be done by distributing investment capital to all industries and products, an action seen as a Vietnam’s major shortcoming in developing its industries.

The economies of scale enable renewing technologies, saving costs and improving competitiveness on domestic and international markets. Some traditional sectors like petrochemical, cement and steel production and such modern industries as biotechnology, electronics, computer, communications and marine technologies should be short-listed.

The selected industries will be weighted in terms of the necessary scales and efficiency for focused investments over a considerable period to create the country’s spearhead industries.

Vietnam’s development model must pay more respect to innovative ideas than investment capital increments. During the first decade of the 21st century, the ratio of Vietnam’s total development investment to GDP exceeded 40 per cent and the incremental capital-output ratio (ICOR), a measure of the inefficiency with which capital is used, increased to 8 currently. The reality has shown that the investment efficiency will get higher if innovative ideas are encouraged and supported to be applied in business and production.

The power sector is a typical example. Vietnam has to spend two units of investment capital for power development to attain one unit of economic growth, about 1.5-1.8 times more than the world’s average. Under the pressure of saving energy, many enterprises have taken initiatives to reduce power consumption, helping to ease the need for building new power plants.

The new development model must respect innovative ideas and creativity, build a democratic and free environment for the new ideas and inventions are quickly applied in reality, and invest more than 2 per cent of the country’s GDP in R&D with a structure of capital contributions similar to successful patterns in many countries, meaning 60 per cent of the R&D investment come from the business community, 20 per cent from the government and 20 per cent from research institutions.

Vietnam’s development model demands the radical reform of the educational system not only to enrich the country’s human capital, but also promote people’ acceptability of reforms, particularly the drastically new ways of thinking. Gone are the days Vietnam can boast its advantages of rich human resources and low wages, which on the other hand should no longer be retained once Vietnam has every condition to build a high quality workforce being able to absorb and invent modern technologies. The national education system must be drastically reformed to be able to satisfy emerging demands for higher quality, quantity and qualifications.

The new development model must address the contrast between GDP growth and income distribution to enable savings for development investment, improving people’s living conditions and maintaining a reasonable gap in the incomes of different classes. On one hand, the model continues to be based on the efficient mobilisation and use of domestic and foreign investment. On the other hand, policymakers should pay more respect to new ideas related to the “social capital”, a new term used by many economists to refer to an increasingly important resource for industrialisation.

This social capital does not only involve qualified human resources, but also the participation of people in the development process through codes of conducts to address the state-citizen relationship in a civil society and through the cooperation and interrelation between groups and individuals in the society, thereby building combined strength for the nation and a democratic environment where state management is undertaken dynamically, openly and transparently, and the society voluntarily participate in the process.

Economic institutions and policies need to be reformed to adapt to the development model. Fiscal, credit, interest and exchange rate policies should pursue long-term guideline to secure stabilisation and predictability for investors and businesspeople. Policies on trade, investment, labour and salaries must be tailored towards creating a healthy environment to stimulate business and production under the new development model.

The experiences of developing countries have clearly suggested that development requires more than privatisation, liberalisation and stabilisation. Its approach needs a more comprehensive basis with greater understanding of goals and means. Benefit-stemmed motivations should also be noted because once the economy develops into a certain level, there appear “benefit groups” of people sharing common benefits. Such groups are born to place pressure on policymakers, civil servants and social forces to achieve each group’s goals. Normally, each group’s benefits contradict society’s and the nation’s. Therefore, when one benefit group controls the policy making process, then the whole society’s benefits may be reduced. Policymakers should pay due attention to benefit-stemmed motivations and benefit groups when pursuing the new development model.

Prof. Nguyen Mai - vir.com.vn

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