VietNamNet Bridge - In the mid-1980s, at the start of renovation (1986), Vietnam was an agricultural country. About 70% of workers were involved in agricultural production but the country still lacked food and had to import rice. Industry was also weak.

Developmentalizm and the breakthrough for Vietnam

The current challenges of Vietnam

Because of poor production and low incomes, Vietnam was unable to save. The ratio of investment to GDP was very low (11.7% in 1986) and Vietnam was completely dependent on foreign aid. The majority of the population was poor and until 1990, up to nearly 70% of the population lived below the poverty line (according to the World Bank).

Thanks to the Doi Moi (renovation) policy, which was launched in 1986, the situation has changed completely.

Vietnam began exporting rice in 1989. The percentage of people below the poverty line gradually declined, to only 11% by 2010 and per capita GDP in real terms grew by 3.5 times between 1986 and 2011.

The economic structure significantly shifted from agriculture to industry. The ratio of agriculture in total employment dropped from 75% in 1985 to around 50% in 2010. The ratio of industrial products in total exports was only 20% by the end of 1980, but it increased to 65% in recent years.

No one can deny the achievements of Renovation but compared to the experience of Asian countries and considering the potential of Vietnam, the result of our development is very limited.

1. Development is not rapid and the performance is poor

In development economics, there is a famous thesis of the benefits of a latecomer and a related hypothesis is the shortening and narrowing of the industry development process.

The core of this thesis is the latecomer has the advantage of being able to take advantage of technology, business knowledge and management experience from developed countries so they should be able to shorten the development process and the process of industrialization.

The world has gone through five times of industrialization. The first age took place in the UK and the second was in the US and Western European countries (France, Germany, etc.). These countries were the pioneer of technology, but it took them a lot of time for exploring and researching so their development speed was not high.

Japan was in the third time, after the Second World War, and it took advantages of the achievements and lessons of developed countries to make miracles with average growth rates of 10% annually within a period of 18 years.

In the fourth era of industrialization, Taiwan also grew 10% annually in many years in the period 1962-1989. Korea also achieved similar results in the period of 1966-1988.

In the fifth era of industrialization, China developed stronger (although with less efficiency than Japan and South Korea), with an average growth rate of 10% for nearly 30 years. Vietnam is also in the fifth stage of industrialization (or the sixth, depending on perspective) of the world but it has slowly developed.

Since the Renovation period started, Vietnam has never achieved 10% economic growth rate and it obtained 8%-9% in only nine years (1992-1997 and 2005-2007).

The past three or four decades are the stage of golden population structure of Vietnam but the country did not take advantage of the element. It should be added that the fifth generation of industrialization in Asia, particularly in Thailand, Malaysia and China, took place rapidly while Vietnam performed Renovation.

2. The objective of industrialization, modernization is still far away

Vietnam has set a target of basically becoming a modern industrialized country by 2020. But that goal is very far even though we view it from many criteria.

As classified by the World Bank, the countries with per capita income from $1,000 to $12,000 are called middle-income nations and high-income countries if their per capita income is over $12,000. Therefore an industrialized country must have per capita income of over $12,000. That of Vietnam is currently nearly $2,000 and it may be around $3,000-$3,500 by 2020.

Regarding foreign trade, the export structure must shift from labor-intensive industries to industries with high levels of capital and technology.

In addition, the balance of foreign trade must shift to export surplus and gradually the balance of payments must switch to trade surplus, too. To do this, the industrialized countries must have many industrial goods with high capital and technology content to be able to compete on the world market.

Looking at the composition of exports and trade balance of Vietnam, we cannot expect that by 2020 Vietnam will become a modern industrialized country.

The high-tech products like machinery recently increased thanks to FDI but the rate is almost 30%, much lower than that of the neighboring countries. In addition, Vietnam's imports in these sectors still exceed exports.

For example, JETRO’s data showed that in 2013, in the group of industrial machinery and components, Vietnam exported $6 billion but it imported up to $18.7 billion, and in computers and components, the country exported $10 billion but it imported $17.7 billion.

Thirdly, a country called an industrialized nation must shift from importing capital to export capital, at least according to the criteria of net exports, which means that it can still import capital but export more than import.

To do this, Vietnam must have many strong domestic companies to invest abroad and the annual investment turnover must be greater or equal to FDI in Vietnam. Currently, Vietnam's overseas investment is almost negligible. Related to this point is the reception of foreign preferential loans or foreign aid (ODA). A country with modern industry is no longer receiving ODA, but it must become the provider of ODA for the less developed countries.

3. Increasing economic dependence on China

Given the size of the population and the rapid growth that lasted for nearly 30 years, China's economy has made a strong impact on the world economy in many ways.

In East Asia, Japan, South Korea and ASEAN countries have become aware of the rise of China to both give more efforts to consolidate their existing advantages and to exploit opportunities from the Chinese market.

As a neighboring country of China, Vietnam is in a weak position and at a lower level of development. Therefore, it economically depends on China in many aspects. The biggest sign of this phenomenon is that Vietnam’s exports are increasingly dependent on imports of intermediate goods from China.

The structure of trade between the two countries is growing unusually and detrimentally for Vietnam. Vietnam's trade deficit is not only increasing but also the nature of trade is changing between an underdeveloped country and a developed country (export of raw or semi-processed materials and import of industrial goods).

In addition, Chinese enterprises have won most of the major projects in important sectors of Vietnam and this is also an abnormal phenomenon.

Information about the number of Chinese laborers working in Vietnam is also worrying. Usually in FDI projects or infrastructure projects implemented by foreign contractors, foreigners can only hold the position that Vietnamese could not undertake (experienced engineers or senior managers with special capabilities related to the projects) and after a certain period of time, these positions must be transferred to the natives.

4. Dependence on FDI

The reception of FDI is an art of strategy and policy which requires the capacity and the national spirit of the leaders and officials to enlist the resources of foreign countries in order to accelerate the process of industrialization in the way that the economy is not dominated by multinational companies (MNCs), not to be divided into the two independent sectors of domestic and foreign capital.

In receiving FDI, sometimes there is a clash between the national interests of the countries that need FDI and the global business strategy of MNCs, and national interests depend on wisdom and capability of the leaders and officials in increasing the bargaining power to MNCs.

For a latecomer, utilizing resources from the developed countries can help shorten the development gap in the short term. However, in the long run, the countries that succeeded in attracting FDI often have the following things in common:

Firstly, FDI must be placed in a complete economic development strategy which stipulates the sectors and the areas that need to attract FDI. Normally, countries call for foreign investment in the industries that domestic enterprises are unable to invest in, but they have the dynamic comparative advantage (comparative advantages in the future) and those with the growing world market.

Secondly, encouraging and creating favorable conditions for FDI projects in the form of joint ventures with domestic companies. Joint ventures will create favorable conditions for local companies to have direct access to technology and business knowledge of MNCs, and later they will be able to master technology and business.

Thirdly, to have the spread of technology and business knowledge of MNCs from FDI projects into other areas of the economy, there should be policies to promote vertical linkages between FDI with domestic companies. This means that Vietnam has to encourage FDI projects to use local materials and supporting products, thereby MNCs will transfer technology, knowledge and management experience to domestic firms so that these companies can supply quality products at appropriate costs.

FDI has been flowing into Vietnam but mainly in labor-intensive industries as textile-garment and footwear. Those sectors don’t need much capital or high-tech so local companies ought to have invested in or at least made joint ventures with foreign countries in the first phase and then gradually reach masterly completely. Moreover, these sectors still depend on imports of intermediate products such as fabrics and fiber from China.

Fourthly, the link between FDI and domestic enterprises is very weak. To be linked with foreign firms, Vietnamese enterprises must be able to provide supporting industrial products with sufficient quality and competitive prices. But in Vietnam, officials and experts are still discussing why the supporting industries have not developed. Japanese companies still see this element as something that makes the investment environment of Vietnam less attractive.

Prof. Tran Van Tho

Waseda University (Japan)