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7/4/2011
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Vietnam and Economic Reforms:Achievements, Challenges, and Strategic
Implications
Dr. Vu Minh KhuongAssistant Professor
Lee Kuan Yew School of Public PolicyNational University of Singapore
PECC-USAPC-SINCPEC CONFERENCE ON“GROWING APEC ECONOMIES: NEW CHALLENGES AND APPROACHES”
29-30 June 2011
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Outline§ Introductionü Vietnam in a global pictureü Factors conducive to Vietnam’s economic reform (“Doi
Moi”)ü Reform Characteristics
§ Economic Reformsü Key success factorsü Major achievements
§ Prospects:ü Challengesü Strategic Implications
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§ Introductionü Vietnam in a global pictureü Factors conducive to Vietnam’s economic reform (“Doi
Moi”)ü Reform Characteristics
§ Economic Reformsü Key success factorsü Major achievements
§ Prospects:ü Challengesü Strategic Implications
Outline
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Vietnam in a Snapshot: Selected Indicators, 2009
Country
Land area
(sq. km)
Population (Millions)
GDP (Billions)
GDP Per capita
US$ PPP$ US$ PPP$ Brunei Darussalam 5,270 0.4 14.87 19.43 37,643 49,187 Cambodia 176,520 14.8 11.03 28.09 748 1,904 Indonesia 1,811,570 243.0 521 969.2 2,144 3,989 Lao PDR 230,800 7.0 5.788 15.07 828 2,155 Malaysia 328,550 26.2 209.8 381.1 8,020 14,568 Myanmar 653,520 53.4 26.83 56.92 502 1,066 Philippines 298,170 99.9 160.6 324.8 1,608 3,251 Singapore 697 4.7 165 235.7 35,098 50,138 Thailand 510,890 66.4 269.6 538.6 4,060 8,111 Vietnam 310,070 89.6 92.84 258.1 1,036 2,882 ASEAN-10 4,326,057 605.3 1,477 2,827 2,441 4,671 China 9,327,489 1,330.1 4.814 8.789 3,619 6,608 India 2,973,190 1,173.1 1.095 3.56 933 3,035
Source: World Factbook, 2010
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Vietnam in a Snapshot: Long-Term Prosperity Growth
Source: Groningen Growth and Development Centre and The Conference Board (2010)
GDP per Capita,
PPP adjusted in 1990
US$
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,50019
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
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1997: Asian Crisis
1986: Doi Moi Reform
CAGR: +2.47%
CAGR: +5.55%
CAGR: +5.00%
Current Financial Crisis
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Factors Conducive to Economic Reform: Vietnam vs. China
§ Receptivity
§ Crisis
§ Opportunity
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Outline§ Introductionü Vietnam in a global pictureü Factors conducive to Vietnam’s economic reform (“Doi
Moi”)ü Reform Characteristics
§ Economic Reformsü Key success factorsü Major achievements
§ Prospects:ü Challengesü Strategic Implications
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Conditions at the Inception of Reforms:Vietnam vs. China
Indicator Vietnam (1986) China (1978)Human capital*• Adult literacy (% of total) 89.2 67.1• Young adult literacy (% of total) 93.6 91.3• Calorie supply (kcal/day) 2,300 2,328• Median age 19.5 22.1• Life expectancy at birth, years 63 67GDP Per Capita • 2000 US$ 203 165• 2000 PPP$ 1,031 685GDP Structure, %• Agriculture 38.1 28.1• Industry 28.9 48.2• Services 33.1 23.7Rural economy• Share of rural population, % 80.3 81.3• Cereal yield (kg per hectare) 2,715 2,802Openness• Exports of goods and services (% of GDP) 6.6 6.6• Imports of goods and services (% of GDP) 16.6 7.1Infrastructure• Main line telephones per 1,000 people 1.3 2.0
Source: WDI
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Vietnam’s Economic Reform:Main Characteristics
1. Driving motivation: the need for survival (rather than a clear vision)
2. Gradual approach (with great concerns for political stability)3. Focus on resources mobilization and capital accumulation4. Fence-breaking and decentralization: bottom-up reforms and
the increasingly important role of local governments5. Outward-looking6. Heavily influenced by the reform approach and
implementation that have proved successful in China
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Key Success Factors1. Strategic Location2. Political stability3. Reform policy and efforts4. Human capital5. The agricultural sector
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Key Success Factors:Strategic Location
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Key Success Factors:Political Stability
Source: World Bank Governance Indicators
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Key Success Factors:Commitment to Reform
Reform Initiatives Major Events, Policy Documents, and Timeframe Time Lag VN - CN
China (CN) Vietnam (VN)
Reform Launching The Third Plenary Session of the 11th
Central Committee of the CPC, in which Deng Xiaoping became the core of the party leadership and announced the official launch of the Four Modernizations, the drivers of China’s reform, 12/1978.
The Sixth Congress of the CPV elected a new leadership with a liberal reputation and launched Vietnam’s economic reform, dubbed as “Renewal,”12/1986.
8 years
I. Fundamental changes
Nation-wide introduction of the “household contract responsibility system.”
CPC Central Committee’s Resolution on “further strengthening and improving the agricultural production responsibility system”, 1980.
Resolution 10-NQ/TW of the CPV Politburo on agricultural sector management reform, 1988.
8 years
Legalizing the development of the private sector
Constitutional amendments making the private economy a “supplement to the socialist economy,” 1982.
“The law on private enterprises,”1990.
8 years
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Key Success Factors:Commitment to Reform
Reform Initiatives Major Events, Policy Documents, and Timeframe Time Lag VN - CNChina (CN) Vietnam (VN)
II. SOE and “level playing field”reforms
Phase 1: Giving SOEs increasing autonomy through eradication of the command economic system; implementing experimental privatization.
1979-1984 1987-1993 8 years
Phase 2: Restructuring SOEs, establishing the legal framework for SOEs to operate in a market economy.
1985-1993“Interim regulations on revitalization of large and medium-sized state owned enterprises” (State Council), 1985.“Regulations on deepening reform and invigorating state owned enterprises”(State Council), 1986.The first SOE Law, 1988
1994-1998"Transformation of selected SOEs into Joint-Stock Companies" (Government Decree No. 28-CP), 1996.The first SOE Law, 1995
10-11 years7 years
Phase 3: Leveling the playing field and speeding up privatization
1994 onwardsThe first Company Law, 1994The revised Company Law, 2005, taking effect on Jan. 1, 2006NA
1999 onwardsThe first Enterprise Law, 1999The revised Enterprise Law, 2005, taking effect on Jan. 1, 2006.Investment law, 2005, taking effect on July 1, 2006.
5 years0 yearsNA
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Key Success Factors:Commitment to Reform
Reform Initiatives Major Events, Policy Documents, and Timeframe Time Lag VN - CNChina (CN) Vietnam (VN)
III. Embracing globalization
Attracting FDI Law on Sino-foreign joint ventures, 1979 Foreign Investment Law, 1987Law on Industrial Zone and Export-Processing Zone, 1994.
8 years
Signed the bilateral trade agreement with the US
1979 2000 21 years
Admitted to the WTO 2001 2006 5 years
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Key Success Factors:Commitment to Reform
Reform Initiatives Major Events, Policy Documents, and Timeframe Time Lag VN - CNChina (CN) Vietnam (VN)
IV. Financial reforms
Banking sector reform “Decision of state council on reform of the financial system,” 1993
“Law on State Bank and Law on Credit Institutions,” 1997.
4 years
Introduction of VAT Tax “The Provisional Regulation of the People’s Republic of China on Value-added Tax,” 1993
“Law on Value-added Tax,” 1997 4 years
Unifying the corporate income tax code for all sectors and reducing the corporate tax rate to 25%
“(New) Corporate Income Tax Law,”2007, taking effect on Jan. 01, 2008
Introduced in 2008. 1 year
Opening of the stock market Establishment of the Shanghai Stock Exchange (SSE), 1990.
Establishment of Ho Chi Minh City Stock Exchange (HOSE), 2000.
10 years
The first major state-owned bank is listed on the stock market
Industrial and Commercial Bank of China (ICBC), 2006
Vietnam Commercial Bank (Vietcombank), 2007
1 year
Source: Vu (2009)
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Key Success Factors: Human Capital
Indicator Vietnam Indonesia Philippines Malaysia Thailand China India
Life expectancy at birth (years) 74 71 72 74 69 73 65
Child mortality rate under 5 (per 1,000 population) 15 31 28 11 7 22 72
School enrollment, secondary (%) 76 63 85 76 71 74 56
School enrollment, tertiary (%) 16 17 28 32 43 20 11
Internet penetration (per 1,000 population) 210 111 60 557 200 161 72
Students studying in the US (per 100,000 population) 15 3 <10 22 13 7 9
Source: WDI, IIE
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Key Success Factors: Human CapitalThe Case of Internet Penetration
Source: ITU
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Key Success Factors:The Agricultural Sector
§Large share in the economy: in 1986, over 80% of the population lived in rural areas.
ü The reallocation of resources (labor, land,…) from the agricultural sector to industrial and service sectors is a major driver of growth.
§Great advantages (soil, climate, weather, and proximity to sea ports): Vietnam enjoys excellent condition for producing and exporting agricultural and aquaculture products.
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The Milestones of Vietnam’s Reforms§ Launched “Doi Moi”: 1986§ Introduced “Law on Foreign Investment”: 1987§ Signed the bilateral trade agreement with the US:
2000§ Establishment of Ho Chi Minh City Stock Exchange
(HOSE): 2000§ Accession to the WTO: 2006§ Exited the low-income group to join the low-middle
income group: 2009
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Major Achievements: Key Figures
Indicator Average Growth Rate (%), 1986-2008
GDP 7.0%
GDP per capita 5.2%
Productivity 4.6%
Exports of goods and services * 16.5%
Note: * - The growth of exports is for 1990-2008
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Major Achievements: Key Figures
Source: WDI, UNTAD
Indicators 1986 2008Exports of goods and services (US$ billions) 1.20 62.70 Share of the Industrial sector in GDP (%) 28.30 43.20 FDI Stock (US$ billions) 1.50 48.30 Per capita income (constant 2000 US$) 203 647 Poverty headcount ratio at $2 a day (PPP) (% of 85.70 (1993) 48.42 (2006)Urban population share (% of population) 19.74 27.84 Telephone lines per 100 inhabitants 0.13 34.32 Internet uses per 100 inhabitants 0.00013 (1996) 24.17
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FDI: Key FiguresAccumulated FDI, 1988-2009
Number of Projects
Registered Capital (Mill. USD)
Materialized Capital (Mill. USD)
12,575 194,429 66,945
Source: GSO
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Major AchievementsGlobal Integration: Vietnam vs. Asian Peers, 2008
China
India
Malaysia
Philippines
Thailand
Vietnam
Indonesia
0%20%40%60%80%
100%120%140%160%180%200%
0% 10% 20% 30% 40% 50% 60%
FDI Stock (% of GDP)
Trad
e (%
of G
DP)
Sources: WDI, UNTAD
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Outline§ Introductionü Vietnam in a global pictureü Factors conducive to Vietnam’s economic reform (“Doi
Moi”)ü Reform Characteristics
§ Economic Reformsü Key success factorsü Major achievements
§ Prospects:ü Challengesü Strategic Implications
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Development Prospects: ChallengesImmediate challenges§ Macroeconomic concerns§ Public policy: issues on
quality and implementation effectiveness
§ Ineffective control of corruption
§ Shortages of skilled labor
Fundamental issues§ Commitment to the free
market principles§ Formulating an effective
development Strategy§ Building good governance§ Cultivating and mobilizing
human capital
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Development Prospects
Source: ADO, April 2011
Table 1 Growth rate of GDP (% per year) Table 2 Inflation (% per year)
Subregion/economy 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Southeast Asia 4.2 1.2 7.8 5.5 5.7 8.6 2.5 4.0 5.1 4.2
Indonesia 6.0 4.6 6.1 6.4 6.7 9.8 4.8 5.1 6.3 5.8
Malaysia 4.7 -1.7 7.2 5.3 5.3 5.4 0.6 1.7 3.0 3.0
Philippines 3.7 1.1 7.3 5.0 5.3 9.3 3.2 3.8 4.9 4.3
Singapore 1.5 -0.8 14.5 5.5 4.8 6.6 0.6 2.8 3.2 2.0
Thailand 2.5 -2.3 7.8 4.5 4.8 5.4 -0.9 3.2 3.5 3.0
Viet Nam 6.3 5.3 6.8 6.1 6.7 23.0 6.9 9.2 13.3 6.8
China, People’s Rep. of 9.6 9.2 10.3 9.6 9.2 5.9 -0.7 3.3 4.6 4.2
India 6.7 8.0 8.6 8.2 8.8 8.7 2.1 9.2 7.8 6.5
§ Short-term Outlook is still optimistic, but it tends to mask strategic concerns
§ASEAN6+2
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Vietnam’s Determinants of Competitiveness
Source: The diagram is from Michael Porter
Current Status
Underdeveloped
Weak
Excellent
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Immediate Challenges: Macroeconomic concerns
Inflation
Source: EIU
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Immediate Challenges: Macroeconomic Concerns
Budget Deficits
Source: EIU
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Immediate Challenges: Macroeconomic concerns
Trade Deficit
Source: EIU
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Immediate Challenges: Macroeconomic concerns
Stability of Local Currency
Source: EIU
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Immediate Challenges: Macroeconomic Concerns
Sovereign Ratings
Notes: * as of January 10, 2008; ** as of March 1, 2011. Sources: Data from ADB Asia Bond Online
Country S&P Moody’s
2008* 2011** Change 2008* 2011** Change
Vietnam BB/Stable BB-/Negative Worse Ba3/Positive B1/Negative WorseChina A/Positive AA-/Stable Better A1/Stable Aa3/Positive BetterIndonesia BB-/Stable BB/Positive Better Ba3/Stable Ba1/Stable BetterMalaysia A-/Positive A-/Stable Slightly Worse A3/Stable A3/Stable UnchangedPhilippines BB-/Stable BB/Stable Better B1/Stable Ba3/Positive BetterSingapore AAA/Stable AAA/Stable Unchanged Aaa/Stable Aaa/Stable UnchangedThailand BBB+/Stable BBB+/Stable Unchanged Baa1/Stable Baa1/Stable Unchanged
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Immediate Challenges: Government Effectiveness and Regulatory Quality
Source: World Bank Governance Indicators
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Immediate Challenges: Government Efficiency
Source: GSO
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Immediate Challenges: Quality of Public Policy
Note: 1=very poor; 2=poor; 3=average; 4=good; 5=excellent. The respondents are government officials (n=265). Source: LKYSPP.
Policy Quality Evaluation, 2009-2010
2.1
2.2
2.3
2.3
2.5
2.5
2.6
2.6
2.8
3.1
3.1
3.3
3.4
3.7
1.00 2.00 3.00 4.00 5.00
Urban planning and management
Control of corruption
Environmental protection
Quality control (products, construction w orks, import goods, etc.).
Inf rastructure development
Health care
Education
Good governance building
OVERALL ASSESSMENT OF ALL AREAS
Strengthening of market mechanism and facilitation of fair competition
Encouragement of national pride and citizens’ responsibility
Economic development
nternational cooperation and integration
Control of crimes and social security protection
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Fundamental ChallengesBuilding Good Governance:
The Government’s Over-Expansion
Sector
China Vietnam 1995-2000
2000-2005
1995-2000
2000-2005
The Economy [E] 5.9% 5.2% 13.9% 13.6% The Public Sector (Government, Party, and SOEs) (P) -21.1% -17.0% 15.2% 22.9% Public sector expansion (+) or reduction (-) relative to the economy (P-E) -27.0% -22.2% +1.3% +9.3%
Source: Kaufmann D., A. Kraay, and M. Mastruzzi 2009: Governance Matters VIII: Governance Indicators for 1996-2008.
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Immediate Challenges: Shortages of Skilled Labor
Difficulty in Recruitment: Vietnam vs. ASEAN Countries, 2007
23.4
27.6
7.4
11.3
22.2
25.5
42.9
51.9
30.2
70.4
25.5
36.7
29.6
37.7
63.0
0 10 20 30 40 50 60 70 80
Malaysia
Thailand
Indonesia
Philippines
Vietnam
Firms that reported difficulty in recruitment (%)
General Workers Middle Managers Engineers or technicians
Source: JETRO’s survey “Japanese-Affiliated Manufacturers in Asia”. The figures are reproduced from Mori et al (2008).
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Immediate Challenges: Shortages of Skilled LaborDifficulty in Recruitment: Vietnam, 2003-2007
22.2
10.4
14.5
70.4
65.7
59
54.1
53.8
63
55.2
50.6
44.7
37.2
0 10 20 30 40 50 60 70 80
2007
2006
2005
2004
2003
Year
Firms that reported difficulty in recruiting workers (%)
General workers Middle managers Engineers or Technicians
Source: JETRO’s survey “Japanese-Affiliated Manufacturers in Asia”. The figures are reproduced from Mori et al (2008).
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Reform Challenges: Overcoming the current shortcomings to formulating an effective development strategy
Current Shortcomings:
1. Conflicting visions
2. Lack of commitment to market economy and strategic principles
3. Heavy reliance on foreign resources (aid, FDI, workers’ remittance)
4. Inadequate efforts to invest in and exploit human capital, making it the main engine of development
5. Limited knowledge of global economic trends and their opportunities and challenges. Knowledgeable of External
Environment•Opportunities
•Challenges
Direction & Motivation
•Vision•Commitment
•Principles
Strategy
Mindful of Self•Core Competencies
•Vulnerable Weaknesses•Available resources and
constraints
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Reform Challenges: Cultivating and Mobilizing Human Capital
Vision
Education reforms
Human resource development policy
Organizational strengthening
Institutional reforms
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Strategic Implications:
It is urgent for Vietnam to adopt a catch-up framework for formulating and implementing its development strategy in the decades to come
Ten
Exe
cutio
n C
once
pts
H um an Capital Go verna nce
Thr
ee P
rem
ises
Custo
mer
focu
s
Stra
tegi
c po
sitio
ning
Ope
ratio
nal E
ffect
iven
ess
Stra
tegi
c Ef
fect
iven
ess
Free
Mar
ket
Polic
y de
liber
atio
n
Visio
n an
d com
mitm
ent
Soci
al p
artn
ersh
ip a
nd
Nat
iona
l coh
esio
n
Mac
roec
onom
ic m
anag
emen
t
Busin
ess e
nviro
nmen
t
Infr
astru
ctur
e
Prag
mat
ism a
nd ad
apta
bilit
y In
vesti
ng in
peop
le
Source: Vu (2009)
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Conclusion
§ Vietnam has a bright prospect in the long-term.
§ However, profound reforms are critical for the country to overcome its development challenges and unleash the nation’s great potentials. Without fundamental improvement in development strategy and institutional building, the country will likely face serious setbacks in economic development the medium-term.
§ The country should embrace a catch-up framework to formulate and implement its development strategy and policy.
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