Vietnam riding on the back of a tiger

Vietnam riding on the back of a tiger
Past, present and future
Edited by Dr. John Vong on 08 Oct 2010

In the last decade Vietnam has enjoyed significant growth, on average 7% per annum, and caught the investors’ attention both wide and far. The global financial crisis was felt in the slowing down of exports to major markets such as the US and EU. Despite the brief respite, the Internal Monetary Fund (IMF) forecasts that Vietnam will grow above 5% per annum in 2010-2011. There are some obvious signs that Vietnam will no doubt soar again given the statistics revealed in this paper.

The Recent Past

The pace of economic growth, policy reform and development in Vietnam in the past decade is dazzling. It deserved the attention of investors. By 2005, the country has branded itself as an emerging frontier market.

Notwithstanding the physical size, there are significant similarities between the evolution of the Vietnam and China, in terms of their pace of development, industry structure, legacy problems, and direction and pace of reforms. The investors who missed out investing in China in the 1980s are now directing their efforts to Vietnam to ride the wave of an imminent boom.

Figure1: GDP Growth and GDP per capita growth in Vietnam (2000 to 2010F)

Source: Asian Development Bank

There are three significant points to note about Vietnam. Firstly, the GDP growth over the past decade has been one the fastest in the region, from 6% to 8% per annum, during 2000 to 2007 (Figure 1). The per capita income reportedly crossed the US$1,000 milestone in 2008. The industry and services sectors have been the primary drivers of overall growth, with the agricultural sector displaying a more modest, but still sustained, pace of output growth (see Figure 2).

Figure 2: GDP Growth by Sector (2000-2008)

Source: Asian Development Bank

Secondly, like most of the world, Vietnam was adversely affected by the global economic crisis, especially in the slowing down of exports to US and EU, nevertheless there is much hope of a strong recovery and long term growth. The IMF estimates that, in 2010-2011, the GDP growth of Vietnam will be among the highest in the world, and is set to grow at above 5% per annum. See Figure 3.

Figure 3: IMF estimates average real GDP growth (2010-2011)

Thirdly, there is a key statistic that may reveal the growth potential: less than 20% of the Vietnamese population use banking services. That means 70 of the 88 million people, as yet do not have access to banking services. The number of “unbanked” people is telling, as there is a pent up demand somewhere for credit growth. Experience has shown that having access to finance is a key economic driver in Asia. Furthermore the Loans to GDP ratio is 63% (2005) is the lowest in Asia.

Vietnam engages in global commerce

Admittedly, Vietnam is gradually moving towards a more market-oriented model although it still wishes to retain some ‘positive’ features of the socialist model. The initial steps towards this shift were made since 1979, and became known as ‘doi moi,’ or renovation, where many privately-owned enterprises were permitted and later encouraged in commodity production. Vietnam has now adopted economic ‘doi moi’ for more than two decades of which many have regarded the renovation process as a significant success. The country has graduated from a less developed to a developing economy. From now on, it hopes to become a middle-income country by 2020.

Vietnam’s success story is birthed from its openness to engage with the regional and global markets. Through the global engagement, the foreign markets absorbed the agricultural commodities and processed manufactures that Vietnam’s nascent enterprise sector produced.

The domestic market, in recent years, has expanded considerably with the growing bulge of the middle class. In Asia, the growing middle class of the 1980s led to the rise of the Asian Tigers (for example, Singapore, Malaysia, Thailand and Taiwan). Some Asian tigers have languished in the middle income without rising to first world status because of policy makers of the day did not reform quickly enough to harness the energy of the middle-class to propel forward. We all hope that Vietnam learns from the lessons of others.

Thus far, the foreign markets remain important to the Vietnamese economy. The country imports from foreign suppliers and exports to foreign buyers. The country’s policy-makers were commendable having secured access to the world’s largest markets, the US and EU. The signing of the bilateral trade agreement with the US, and then gaining WTO accession, were important milestones for Vietnam. It marked 20 years of diligence in shifting from an integrated member of the (now defunct) socialist bloc to being an increasingly integrated member of the international business community. The international trade flow in the last 10 years is shown in Figure 4.

Figure 4: Imports-Exports (2000-Aug 2009, US$ m)

Figure 5: Export profile by industry as percentage of world’s output

The global engagement of the Vietnamese economy gradually increased from the 1990s. The Export to GDP ratio increased from 5% in the late 1980s to 48% in 2000, and then to 86% in 2006. Over the same period there was a shift in the composition of exports, away from primary products and resource-based manufacturing, towards labour intensive light manufacturing and more recently, component production and assembly.

There has also been a shift in the relative importance of external markets. Between 1995 and 2005, the share of Vietnam’s exports to Japan fell from 27%to 13.4%, while the US market share increased from 3.1% to 18.3% largely due to the bilateral trade agreement (BTA) with the US (see Figure 6).

Figure 6: Export Destinations of Vietnam (1995 vs 2005) (% of total merchandise exported)

However, despite rapid export growth over the last decade, it is reported that Vietnam still only accounted for less 1% of non-oil exports from developing countries, and that Vietnam’s share is the smallest among the six major ASEAN member countries.

Vietnam has been successful in attracting foreign direct investment (FDI) (see Figure 7). The inflows started about 1988 and leapt from 2005 and peaked in 2008. Recent
inflows saw an equal mix of new investors and existing investors wanting to expand their operations.

Direct foreign investment has contributed to the rapid growth in Vietnam’s exports. In 2006, researchers found that foreign owned enterprises accounted for 58 percent of Vietnam’s total merchandise exports. The foreign enterprises added to the domestic enterprise sector that is still in a nascent stage of development.

Poverty reduction

Vietnam’s economic transformation and rapid economic growth have been accompanied by a significant reduction in poverty and improving living standards across a range of indicators (See Table 8). The proportion of the population surviving on one dollar per day has fallen from 50 per cent in 1990 to just over 10 per cent in 2004. There is consistent progress moving towards the Millennium Development Goals in educational enrolment among other measures (Oxfam, 2006; World Bank, 2004)

Figure 7: FDI Inflows (1988 – 2005)

Figure 8: Vietnam’s Poverty Rate using International Standard

Present challenges of economic growth

The Vietnam economy is holding up well. The growth momentum remains strong. The pick-up in industrial activity is intact. The retail sales remain solid while foreign direct investment is still flowing in to power the economy.

Against the positive listings, there is also a list of negatives. The currency devaluation in the short term remains worrisome. There is trade imbalance and the government appears to be using devaluation as a tool for economic management. More has to done to correct the trade imbalance. The government will need to apply structural reforms to boost export competitiveness.

Inflation is slowing, but upside risks remains. The strong demand-side pressures and an expected rise in import prices will continue to feed inflation.


Research conducted by HSBC Global says, Vietnam’s growth momentum is set to strengthen in 2H2010, similar to the pattern shown in previous years. The research shows that year-on-year GDP growth has accelerated from 5.8% in 1Q to 6.4% in 2Q, and the government has already projected a 7.2% expansion in 3Q.

Because of the upbeat performance, the policymakers of Vietnam recently revise their 2010 GDP growth forecast up from 6.5% to 6.7%.

Total bank credit growth for the first eight months came in at 16.3% y-o-y but still far below the government’s ambitious annual target of 25%. The central bank has since urged commercial lenders to lower interest rates to stimulate demand for credit. Banks are also under instructions to focus on the manufacturing and trade sectors, and limit their exposure to speculative activities such as real estate and the stock market.

The recent pick-up in manufacturing output growth has not only been absorbed by domestic demand, as reflected in solid retail sales, but also supported by a sharp rebound in exports. While domestic spending is expected to remain solid on the back of strong credit growth, external orders may soon display early signs of fatigue, in line with data reported by some other Asian economies.

Production by foreign invested firms continues to noticeably outpace the state sector, highlighting the latter’s relatively low productivity. This underlines the need to reform state-owned enterprises (SOEs), which enjoy significant subsidies in their operations. The government is keen to help SOEs expand into conglomerates, so that they can compete with rivals that are well established overseas.

Trade imbalance

The trade imbalance has been a key policy concern for years. The government has set a trade deficit target of USD12bn and no more than 20% of total exports. For the first eight months, the trade shortfall of USD8.2bn was equivalent to about 18% of exports during the period. The annual targets seem achievable, though the government needs to remain watchful amid looming downside risks to exports and a potential surge in imports due to strong credit growth.

Policymakers have devalued the dong three times since November 2009, with the latest move being a depreciation of 2% on 18 August. The reason cited was to improve the trade balance by making exports more appealing on the price front. Having depreciated the dong by about 10% since November 2010, the government is aware of strong import-led inflation. To contain price growth, policymakers are going to implement price controls on selected items sold by foreign and private firms, effective 1 October. This move may help control the pace of inflation, but it will certainly come with side effects, namely damage to business sentiment. However, as a significant number of imported components are needed in manufacturing and export prices may have to be raised accordingly, thus limiting the intended benefit of the devaluation.

It is thought that a more effective is to focus on structural issues instead. Reforming the way SOEs are managed (perhaps by exposing them to greater market competition) would boost efficiency and thus reduce unnecessary consumption of imports.


Controlling inflation is another long-existing policy challenge. The recent downward trend in y-o-y CPI growth showed that the government is making progress. Inflation moderated for the fifth straight month, coming in at 8.18%, which was also the slowest pace since February 2010.

Although the government appears on track to meet its annual inflation target of 8%, upside risks remain. Seasonally adjusted data show that inflationary pressures have in fact intensified in recent months, with the CPI up 0.5% m-o-m in August (compared to a 0.1% rise in July). A recent tropical storm damaged rice fields and crops and food prices may continue to rise in the coming months. This makes the government’s task of keeping inflation in check more difficult.

The fight against inflation is likely to remain an important item on the policy agenda in the near term. Not only does high inflation upset macro stability, it also weighs on the country’s economic prospects by hurting investor confidence.

High inflation is partly responsible for the low savings rate in Vietnam. Policy rates in Vietnam tend to lag behind inflation, with real rates often in negative territory, which discourages savings. Low savings is in turn a concern, as investment still predominantly has to be funded by foreign sources, making the economy particularly vulnerable to external developments.

Vietnam’s trade and inflation concerns will not go away just yet. Their impact on the current account and the dong will continue to be closely monitored by both policymakers and market watchers. Nevertheless, the government seems keen on addressing existing economic shortcomings to improve the country’s growth prospects.

The economy’s long-term outlook therefore remains positive so long as policymakers continue to prevent trade blowouts and inflation from running high, both of which remain the biggest risks facing Vietnam.

The future for economic growth

The two previous social economic development plans (of 1991-2000 and 2001-2010) of Vietnam have helped the country considerably. It rose from a poor, agricultural-based, less developed economy, isolated from the global economy for decades, to become a more complex and affluent developing economy, integrating into regional and global markets, and a growing middle class.

Vietnam is currently preparing its socio-economic development strategy for the period 2011-2020 (SEDS 2011-2020). This strategy will serve as a roadmap for the country’s development in the coming decade. It aims to be a middle income industrialized nation by 2020.

It is understood that this target cannot be achieved easily. Considerable obstacles and challenges are in the way. The obstacles come from the domestic front, which can be managed to a certain extent, and external forces that may be difficult to overcome. The external environment is increasingly important as Vietnam now lives in an open world. Consideration must also be given to the global and regional institutions that may be reconfigured in the years to come as they recover from the global financial crisis.

Social and economic development is a perennial work in progress, and the task of making yet further progress only gets harder over time, as the initial benefits of reforms have already been enjoyed. If reforms are not pursued further, and with vigour, then the law of diminishing returns dictates that the pace and extent of Vietnam’s social and economic development will lessen, and it may end up only as a middle-income country.

In this evolving and uncertain environment, what is clear is that Vietnam cannot simply seek to emulate the past strategies of other countries when at a similar stage of development. It is thought that what worked for a regional peer in the 1980s, for example, may not work for Vietnam.

Although there are many perspectives on the main socio-economic challenges confronting Vietnam in the next decade, there are five that are considered important. Firstly, is the need to strike a better balance between the speed and quality of growth. A blind pursuit of high economic growth is most certainly not sustainable in the long-run, and will likely bring about adverse social and environmental impacts that could undermine future economic growth. The toll being placed on Vietnam’s environment and natural resource stocks, for example, are becoming increasingly apparent.

Secondly, is the need to pursue a more holistic approach towards rural and urban development. Pressures are now on a limited stock of rural and urban land. The livelihoods of people resident on this land need to be addressed in a more equitable manner. In an agricultural-based country like Vietnam, current industrialization and urbanization policies do not support the rural economy to modernize and to link to urban development. Rural infrastructure and other public services lag behind those provided to the cities, leading to unbalanced rural and urban development, rather than mutually reinforcing one another.

Thirdly, is the increasingly urgency to resolve a set of domestic capacity bottlenecks that limit future investment and growth. Persistent inadequacies in Vietnam’s human capital, physical infrastructure, various institutions and the domestic enterprise sector may slow economic growth if not addressed.

Indeed, some leading indicators suggest that Vietnam is already limited in growing, as the country struggles to advance further up the value chain and develop larger and more competitive domestic business entities. Foreign investors and others are becoming increasingly vocal in citing host country bottlenecks that are becoming a disincentive to greater future investment.

Domestic enterprises seem to lack the entrepreneurial skills and innovation that would allow them to be more internationally competitive and plug into Asia’s vibrant cross-border supply chains. There is now a fairly large network of private sector SMEs. There is a need to nurture these enterprises into a more robust and internationally competitive corporate sector.

Job creation by Vietnamese companies is likely to come from increasing domestic content in processing, manufacturing and services, and bringing more of the ‘value chain’ onshore. Tackling that particular challenge, largely one of stimulating greater entrepreneurship and innovation, is likely to be a key theme of business sector development in Vietnam in the coming decade.

Fourthly, is in the coordination of various public sector agencies. Different types of challenges now confront Vietnam, as it enters its third decade of economic reform. The issues are not the ambit of any single public sector agency with a single competency.

For example, tackling climate change requires many ministries to pool their efforts together. A coordinated approach is required that brings together an effective mix of core competencies. With the economy becoming increasingly advanced in nature, and enterprises embracing higher levels of technology, there is a need for State agencies to keep pace, if they are to perform adequately their primary roles in providing policy direction and regulation/enforcement. But there are some signs that the capacities of government agencies are falling behind those of their private sector peers, and if not addressed, could serve as a constraint on future economic growth.

Finally, there is the issue of State-society relations. This is really three-part issue. Part 1 is the role of the state. In Vietnam this has necessarily changed over the years as the country made its momentous shift from a planned economy to a market-oriented one. As Vietnam seeks now to go beyond the poverty alleviation agenda to become a modern nation with sustainable middle income status, what is the proper role of the State to guide and support that process and what would be much more efficient to be left to the private domain, will be one of the most critical issues for Vietnam to consider.

What can we expect from Vietnam in the coming decade?

There could be a more effective integrated urban-rural development strategy, linking relevant policies, such as industrialization, urbanization and land use. This can effectively support the modernization of the agricultural sector, and provide employment in rural areas as the rural labour force. It could also improve both rural infrastructure and public services to narrow the rural-urban gap.

Institutional reform in the education sector is long overdue. The reform will aim at moving towards a knowledge-based economy. It will also improve vocational training to provide the employment skills necessary for ongoing industrialization needs in Vietnam.

There is likely to have an improvement in the regulatory framework to regulate property rights and protect intellectual property. This will support a knowledge-based economy.

Institutional capacity of enterprise sector to improve social responsibility could develop further. This is especially true in the implementation of safe and equitable industrial relations.

Private public partnerships will start to appear and adopted for investments in crucial infrastructure and energy projects.

There will be continued support for an enabling environment for private sector development, particularly with the goal of moving from a small-scale business model to one that can better compete in regional and international markets, as well as a more liberalized domestic market.

There will be push for improving trade logistics, including customs and port handling, to facilitate export growth.

Citizens will voice their want of good quality, affordable health care, particularly in areas where demand will increase disproportionately as result of industrial development and concentration.

Firstly there is a young, healthy and growing population. The population of Vietnam as at 2008 is 85 million which is 14% of ASEAN’s 581 million. An estimate of the population 2010 is about 88 million of which 26 million live in the urban areas (or about 30% of total population). In comparison, Thailand has 33.8% urban population. The urban population is growing rapidly. For the past 15 years, on average half million people, migrates to the cities from the rural areas. Chances are that all the overseas students will come from the urban areas. Thus whatever happens to the urban zones will influence positively or negatively to study abroad.

Vietnam has a reasonable population growth rate at Vietnam is 1.1% (2008) compared to 0.6% of Thailand and 1.96% of ASEAN in the same period. The reason for a healthy population growth rate is that Vietnam is a ‘young’ nation. A 26.5% of total population (or about 22.5 million) are below 14 years old, compared with 17% of Singapore and 22% of Thailand.

% Distribution of the world’s population (2008)

Secondly, there is a growing middle class in Vietnam, a key driver in Asia for successful emerging economies. While there are many definitions of middle class, we shall use an absolute definition of per capita daily consumption of $2–$20 (as according to Asian Development Bank). With this definition, Vietnam’s middle class comprises of 52% of the total population. This is a positive sign for overseas education providers.

% Population of Middle Class

Thirdly, there is a commitment to primary education. Unless the overseas students have basic education it could be difficult for them to study overseas. The completion rate of primary education in Vietnam is 96.4% (2004) compared to Thailand’s 87.5% (2007) and Singapore’s 98%.

Fourthly, income levels are rising. It is well-accepted that overseas students will usually come from families that have higher income levels. The statistic to note is that of the income ratio between the highest 20% and lowest 20%. In Singapore and Thailand where the source of overseas students is well-accepted has income ratios of 9.7 times (1998) and 8.1 (2004). Vietnam is catching up at 6.4 (2006).

Gross National Income per capita 2008 (US$)

Patience is of virtue. The Gross National Income per capita in Vietnam is still low at US$890 (2008) compared with Thailand’s US$ 3760 and Singapore’s US$ 34,670. But it is the top 20% of society is most likely to send their children abroad. It is the same top 20% who is usually the first to benefit and take advantage of the economic activity.

Foreign Direct Investments 2008 (USD mill)

The foreign direct investments per capita, international tourism receipts and exports are continuing to surge. The stock market will see quantum leaps in market capitalization as it is starting from a low base. For the general population and particularly the top 20% of the society, an overseas education for the children becomes compulsory.

% Stock Market Cap of GDP


The policy makers have much to do to guide Vietnam to be a middle income country by 2020. The private sector will continue to grow as there are still many enterprises yet to be corporatized. This means the stock market capitalization will expand, which is usually a ‘home ground’ of the top 20% of society. The bulge of middle class is very likely to expand which in turns fuels economic development even further.

Vietnam: Key Statistics

  1. Population (2008)
    VN: 85 million; ASEAN 581 million
  2. Pop Growth Rates (2008)
    VN: 1.1; Singapore: 3.1; Thailand: 0.6; ASEAN: 1.96
  3. % Urban Population (2008-2009)
    VN: 29.6; Singapore: 100; Thailand: 33.8; ASEAN: 49.2
  4. % Pop below 14 years old (2008)
    VN: 26.5; Singapore: 17; Thailand: 22
  5. Income Ratio (Lowest 20% vs Top 20%)
    VN: 6.4 (2006); Singapore: 9.7 (1998); Thailand: 8.1 (2004)
  6. % Primary Education Completion Rate
    VN: 96.4 (2000); Singapore: 98; Thailand: 87.5 (2007)
  7. GNI per capita (2008) US$
    VN: 890; Singapore: 34670; Thailand: 3760
  8. % FDI inflow (US$ mill) (2008)
    VN: 9579; Singapore: 22724; Thailand: 8570
  9. Exports (US$ mill) (2009)
    VN: 57,096; Singapore: 268,900; Thailand: 150,493
  10. International Tourism Receipts (US$ mill) (2009)
    VN: 3050; Singapore: 9187; Thailand: 15899
  11. % Government Expenditure on Education to GDP (2008)
    VN: NA; Singapore: 3.1; Thailand: 4.0
  12. % Fiscal balance to GDP (2008)
    VN: - 1.9; Singapore: 7.6; Thailand: - 0.6
  13. % Stock Market Cap (2009) (USD mill)
    VN: 21199; Singapore: 310766; Thailand: 138189
  14. Time required to Start Business (2009)
    VN: 50 days; Singapore: 4 days; Thailand: 32 days
  15. Internet Users per 100 Persons (2008)
    VN: 23.92; Singapore: 73.02; Thailand: 23.89

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