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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




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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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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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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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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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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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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Trade Deficit

Source: EIU

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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

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H um an Capital Go verna nce

Thr

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Custo

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Stra

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c po

sitio

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Ope

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iven

ess

Stra

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c Ef

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iven

ess

Free

Mar

ket

Polic

y de

liber

atio

n

Visio

n an

d com

mitm

ent

Soci

al p

artn

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ip a

nd

Nat

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Mac

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onom

ic m

anag

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t

Busin

ess e

nviro

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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.