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Vietnam well placed to grow

Released at: 08:59, 18/08/2018

Vietnam well placed to grow

Professor Hidetoshi Nishimura

Professor Hidetoshi Nishimura, President of the Economic Research Institute for ASEAN and East Asia (ERIA), shares his thoughts with VET on Vietnam's economy past, present and future.

How would you compare Vietnam’s economic development with other countries in ASEAN and East Asia?

Vietnam has performed well compared with its neighbors. According to figures from the World Bank’s World Development Indicators, May 2018, GDP growth over the 2000-2016 period averaged 6.4 per cent annually, ranking an impressive fourth within ASEAN, behind only Myanmar, Cambodia, and Laos. 

If we take a longer-term view of GDP growth in Asia, from 1990 to 2016, Vietnam ranks second only to China. Further, growth of industry value-added (GDP-by-industry) has also risen, at a level in the middle of the range among ASEAN countries.

Notably, Vietnam has also been able to grow in an equitable and inclusive manner. The poverty rate is among the lowest in ASEAN countries, at 2.6 per cent in 2014, while the Gini index, a measure of economic equality, was 35 in 2014, the most recent year for which data is available and relatively stable compared with 35.6 in 2012. This compares with 40.3 in Thailand in 2012, 36.4 in Indonesia, and 42.2 in both the Philippines and China.

Vietnam’s impressive performance is the result of economic integration and domestic reforms. It could not have been achieved without strong political will and support from Vietnam’s dedicated professionals.

Are there any significant challenges facing Vietnam’s economic growth this year?

Overall, macroeconomic indicators for the first half of 2018 were healthy and give rise to optimism. First-half GDP grew 7.08 per cent year-on-year, compared to 6.8 per cent in the first half of 2017. Manufacturing output grew 13.02 per cent and services sector output 7 per cent. At the same time, strong exports and FDI inflows also continued to contribute to high economic growth. Exports grew a steep 19 per cent year-on-year and FDI 5.7 per cent.

Vietnam does face challenges over the medium term but is well-placed to tackle these effectively thanks to the determination, verve, and creativity of its politicians and citizens. One such challenge is the issue of low productivity, which is seen across State-owned enterprises (SOEs) and has been trending downwards in the private sector. In addition, linkages between domestic firms and FDI are insufficiently strong and are not giving rise to the desired levels of productivity spillover. Theoretically, FDI can help boost domestic firms’ productivity through, for example, technology transfer, the exchange of good business practices, and the purchase of inputs from the domestic supply chain. However, in the case of Vietnam, such an effect has not yet been seen in any robust manner.

Other obstacles to be tackled include the need to upgrade industry so that higher value-added activities can be developed and expanded, the strengthening of institutions, and improvements to public services and soft and hard infrastructure.

What should Vietnam do to improve its global competitiveness and productivity so that its enterprises can compete in new markets?

ERIA has conducted research on industrial location and linkages in Vietnam and the trade facilitation environment in ASEAN and has several initial insights.

First, ERIA recognizes that Vietnam has made significant improvements in recent years in reforming and improving the business environment, particularly in trade facilitation. It is crucial that these reforms continue. Notably, the National Steering Committee on Trade Facilitation and National Single Window has been established, and Vietnam performs particularly well in the simplification of customs procedures and in the publication of trade-regulated regulations.

However, further work is needed to ensure compliance costs are further reduced in order for Vietnamese exporters to increase their competitiveness abroad. Smoother coordination across ministries, better quality public services, and closer consultation with the private sector are desirable. In addition, improving the country’s infrastructure will enhance connectivity and reduce costs.

Vietnam has made great progress in eliminating trade tariffs and there are now almost zero such barriers to trade. Monitoring of non-tariff measures (NTMs), however, is an area that needs closer attention, because NTMs are increasingly adding to trade costs. The streamlining of NTMs should therefore be given serious consideration by relevant government bodies, although this can be a difficult task where it requires cooperation between these authorities. Together, ERIA and the United Nations Conference on Trade and Development (UNCTAD) have built a comprehensive NTM database covering all ASEAN countries, and this could assist Vietnam in monitoring NTMs.

Second, restructuring SOEs, strengthening linkages between FDI and the domestic private sector, and investing in human capital are essential to improving productivity. 

All encouragement should be given to accelerating the reform of inefficient SOEs. Successful restructuring has taken place over the last decade, but this has slowed lately. In 2017, 21 SOEs were equitized versus a target of 44. In the first half of 2018, five equitization plans were approved, while the full year target is 64.  

Productivity in the private sector, where companies are small and financially-constrained, could also be improved. Vietnam has been successful in attracting FDI, and increased technology spillover from this is the next step to work towards, as is the need to boost the country’s ability to absorb technological knowledge. 

Reform of the educational system, with more emphasis placed on vocational training and practical skills, especially in the era of the digital economy, is also important. Foreign investors in Vietnam want to employ a Vietnamese workforce and it is imperative that workers are ready.

Vietnam has proven it can attract global multinationals, including Samsung and LG. However, FDI at the moment generally focuses on labor-intensive manufacturing and, as wages continue to gradually increase, its comparative advantage of low labor costs may be eroded. Consequently, it needs to build on other elements, thus improving the business environment and developing the capacity of domestic firms. 

How can Vietnam take advantage of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and FTAs to enhance its competitiveness and develop its economy?

Vietnam has been successful in developing international trade through FTAs. Within ASEAN and East Asia, it is on par with Singapore regarding the number of FTAs signed, having agreed to 16 bilateral and multilateral FTAs. Among these are agreements with large trading partners such as the US, the EU, Japan, ASEAN, and South Korea. 

Under the CPTPP, Vietnam has committed to significant institutional reforms that will boost the economy. Such commitments include simplifying regulations related to business activities, increased regulatory transparency, and a more competitive services sector. These reforms will provide further momentum for a stronger investment climate and a more competitive economy. 

The CPTPP is a particularly important deal in other ways, as it pulls together eleven economies totaling 13.5 per cent of global GDP and a population of 500 million. Thus, crucially, Vietnam will gain access to a larger export market and to imports of intermediate inputs and is also expected to see an increase in FDI. Vietnam has among the lowest labor costs of CPTPP economies and is therefore likely to see an increase in its exports of labor-intensive goods, such as food and beverages, garments and textiles, leather, and electronics. 

Further, Vietnam’s manufacturing sector depends heavily on imported intermediate inputs, and the CPTPP will give the country better access to advanced technology embedded in foreign inputs, especially for imported capital goods. It will also benefit from opportunities for knowledge sharing.

How will ERIA support Vietnam in terms of regional economic integration, especially in preparing for the ASEAN Chair 2020?

Support within the sphere of regional economic integration has already begun, for example through the high-level dialogue that has taken place so far. In 2017, at the request of the Ministry of Foreign Affairs, ERIA arranged a bilateral meeting between Prime Minister Nguyen Xuan Phuc and myself, a roundtable with Deputy Prime Minister Vuong Dinh Hue and ERIA economists, and a seminar for domestic private companies on the ASEAN Economic Community (AEC).

As regards the ASEAN chairmanship and economic integration, ERIA acts as a “Sherpa” to the chair, providing support, research capabilities, and technical expertise where necessary. ERIA is ready to support Vietnam up to and throughout its 2020 chairmanship, to ensure the enduring success of the grouping’s goals, including integration and the work towards AEC 2025. Preparatory work will begin in October at a second high-level dialogue with Vietnam.

ERIA is in discussions with the Ministry of Foreign Affairs over co-organizing a high-level dialogue in Hanoi, hopefully in the fourth quarter. What will the main theme be?’

Productivity in Vietnam’s private sector is a key theme for the upcoming high-level dialogue, as we know this is an area that needs to be developed if Vietnam is to maintain and improve its economic standing. The focus will be on enhancing the productivity of domestic private firms, while looking also at industrial location and linkages.

AEC 2025 is also on the agenda, building on work begun at the 2017 high-level dialogue organized by ERIA and the Ministry of Foreign Affairs. This aimed to increase awareness among Vietnamese businesses about the opportunities in the AEC and was attended by over 200 delegates from Vietnam’s private and public sectors as well as academics and trade experts.
The meeting also aims to encourage local private companies to better utilize FTAs. This latter subject will be the focus of a half-day seminar. 

Professor Hidetoshi Nishimura graduated from the Faculty of Law at the University of Tokyo and obtained a Master’s Degree in International Development and Economics from Yale University. He joined Japan’s Ministry of International Trade and Industry in 1976. Professor Nishimura assumed the position of Executive Director of ERIA in 2008 and was subsequently appointed as ERIA’s first President in 2015. In 2018 he was re-appointed President of ERIA by the Governing Board for a third five-year term.
The Economic Research Institute for ASEAN and East Asia (ERIA) is an international organization based in Jakarta. Since its founding in 2008, ERIA, through its research, supports the regional economic integration process among ASEAN member countries.

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