Vietnam’s Economic Growth: Encouraging signs

Historical background

In the year 1975, Vietnam reunited after a lengthy period of war and division, but faced severe economic challenges as one of the world's poorest nations. To address this, the government swiftly implemented a socialist centrally planned economy in 1976, which favoured state and collective ownership over private ownership. However, this approach resulted in neglecting the agricultural and light industries in favor of heavy industries, leading to stagnation in the economy from 1977 to 1978.

Several factors further contributed to this stagnation, including inherent flaws in the socialist centrally planned economy model, lack of incentives in the agriculture sector, natural disasters, excessive state investment, economic mismanagement, administrative inefficiency, and bureaucratic inertia. Furthermore, conflicts with Cambodia and China in 1978 and 1979 worsened the situation, causing negative GDP growth and an economic crisis period.

In response, the government implemented various measures such as allowing greater private ownership, introducing new economic policies, reforming agriculture, suspending forced collectivization, granting more autonomy to state-owned enterprises, and providing incentives to improve productivity. These steps led to an improvement in the growth rate and agricultural output.

However, in the mid-1980s, deep structural issues resurfaced, undermining the positive effects of previous reforms. The government continued to defend socialist disciplines, and the economy remained predominantly centrally planned. Collectivization resumed in South Vietnam, and premature reforms in prices and state workers' wages resulted in hyperinflation. As a result, the agricultural and industrial sectors experienced a slowdown, leading to another macroeconomic crisis from 1985 to 1986.

To address this crisis, the government introduced a comprehensive reform program called Doi Moi in 1986. This program emphasized the development of the private sector, changed the strategy of decentralization, prioritized light industries over heavy industries, encouraged exports and foreign direct investment, and reduced the role of state-owned enterprises. These reforms brought immediate and positive results, but the collapse of the USSR in 1989 affected Vietnam's manufacturing sector, resulting in a slowdown in GDP growth.

In response, the government implemented more radical and comprehensive reforms in 1989, leading to the recovery of the economy. From 1989 to 1997, Vietnam entered a new development phase with sustained positive growth rates. However, the Asian financial crisis in 1997 had some impact (in 1998, the GDP growth rate fell to 6%, further declining to 5% in 1999) causing a temporary decrease in GDP growth.

Vietnam gradually shifted towards a more market-oriented economy while maintaining government control over the banking sector and foreign trade. Exports increased significantly, accounting for 40% of GDP in 1999. Starting from 2000, Vietnam's economy showed positive signs, achieving continuous real GDP growth rates of at least 5% each year. The country signed the Bilateral Trade Agreement (BTA) with the USA in 2000, and the Communist Party of Vietnam approved a 10-year plan in 2001 that increased the role of the private sector. By 2003, the private sector accounted for over a quarter of all industrial output.

In 2005, Vietnam achieved a GDP growth rate of 8.4%, making it the second-largest in Asia after China. Vietnam's accession to the World Trade Organization (WTO) in 2007 freed it from textile quotas and further boosted its economy. However, the 2008 financial crisis, bad debts in banks, bankrupt state-owned enterprises, inflation, and economic mismanagement presented challenges. To overcome these challenges, the government-initiated reforms such as increasing foreign ownership and partially privatizing state-owned enterprises, which had positive effects on the stock market. By 2013, the government aimed to privatize a significant portion of these enterprises.

In 2019, Vietnam's first-quarter GDP growth rate was 6.8%. However, the COVID-19 pandemic caused a decline in GDP growth rate to 3.8% in the first quarter of 2020. Despite this, Vietnam emerged as an "economic star" by effectively managing the pandemic and maintaining one of the highest growth rates compared to other Asian countries.

In 2021, Vietnam faced another challenging year due to global economic shutdowns, resulting in a GDP growth rate of 2.6%. However, during this period, its trade surplus with the USA declined significantly, easing tensions between the two countries. The value of Vietnam's dong also increased slightly compared to the USD, making imports cheaper but exports more expensive.

Current situation

Recently, the World Bank released a report titled 'Making Public Investment Work for Growth', highlighting the economic situation in Vietnam. It stated that in 2022, Vietnam's economy experienced a robust growth rate of 8 percent in real GDP. However, in the first half of 2023, there was a significant slowdown in economic growth. This slowdown was primarily caused by a decrease in external demand, which dropped by 12 percent compared to the previous year. Since Vietnam heavily relies on exports, this decline had a substantial impact on the overall economic performance. Additionally, domestic demand also weakened due to various factors such as the fading effects of the post-COVID rebound and decreasing consumer confidence. As a result, the growth in consumer spending slowed down significantly in the first half of 2023 compared to the previous year. Despite resilient foreign direct investment and a slight increase in public investment, the total investment growth also declined due to weak private domestic investment.

The slowdown in economic growth, as per the report, also affected the production side of GDP. The industrial sector, which includes manufacturing and exports, contributed less to overall growth during the first half of 2023 compared to the same period in the previous year.

Looking ahead, the report stated that Vietnam's economy is projected to grow by 4.7 percent in 2023, with a gradual recovery to 5.5 percent in 2024 and 6.0 percent in 2025. Given the constraints posed by weak aggregate demand and the significant deviation from potential growth, active policy support is necessary. The report suggests that fiscal policy should play a leading role, utilizing the available fiscal space and ensuring better implementation of the investment budget for 2023. Accompanying fiscal policy support, monetary policy should continue to be accommodative, although the room for further loosening is limited. To address the increased financial risks and vulnerabilities in the financial sector, reforms are needed to enhance bank capital adequacy ratios and strengthen the institutional framework for prudential supervision, early intervention, bank resolution, and crisis management, taking into account Vietnam's level of development.

To conclude, Vietnam's economic journey has been characterized by challenges and successes, transitioning from extreme poverty after the war to becoming one of the fastest-growing economies in the region. Through various reforms and adjustments, Vietnam has overcome obstacles and achieved sustained growth, although external factors like global financial crises and the recent pandemic have posed challenges. Hence, it will be interesting to see what new reforms the country will bring to tackle the new challenges.

Pic Courtsey-Vietnam News Agency

(The views expressed are those of the author and do not represent views of CESCUBE.)