Vietnam's Growing Painsby Long S. Le
Posted May 19, 2009
Vietnam’s economic performance in the first quarter of this year suggests the country’s short-term risks are indeed on the downside. According to the Central Institute for Economic Management, a research arm of the Ministry of Planning and Investment, the GDP growth rate was 3.1% in the first quarter—the slowest pace in at least a decade. This was a significant fall from the 7.4% in the first quarter of 2008. Unfortunately for Vietnam, such downside may be just beginning. Because the country is more dependent on the global economy than 10 years ago, it is also more vulnerable to the global economic downturn.
In past years the country’s exports accounted for up to 70% of its revenue. However, Vietnam’s key export markets, the European Union, the U.S. and Japan, are forecast to have minus 2% growth rates this year—in the case of Japan, minus 5%. By some accounts, imports for these markets are expected to plunge by 52% and, thus, Vietnam’s exports will be hit hard. As such, the Economist Intelligence Unit in mid-March predicted a gloomy scenario: Vietnam’s GDP growth rate will be just 0.3% this year, down from 6.2% in 2008 and 8.48% in 2007; recovery isn’t expected until mid-2010 when the growth rate is expected to climb to 2%.
By contrast, although the IMF and the World Bank have recently downgraded Vietnam’s growth forecast to 4.7% and 5% respectively, they believe the government’s slashing of interest rates and lowering banks’ reserve requirements as a response to last year’s overheating has put the country in a position to weather the crisis. To be sure, it is hard to underestimate Vietnam’s economy. According to a recent Nielson’s report, “Vietnam – Boom or Doom in 2009,” Vietnamese consumers overall appear to be more confident compared to other countries, citing inflation and unemployment are the result of global economic crisis and not greed.
Meanwhile inward remittances (which in 2007 equals 10% of GDP) from the 3.5 million Vietnamese overseas are likely to be buffered by cultural obligations. In other words, overseas Vietnamese will help family members in Vietnam regardless of economic conditions. Furthermore, overseas Vietnamese with capital are more likely to become investors during the slowdown, especially if new laws are in place that treat all overseas Vietnamese the same (i.e., those in the West versus those in Eastern Europe).
Therefore it is likely that Vietnam in the short run will avoid a crisis, but its leaders will find it very difficult to achieve their goal of a 5% economic growth rate for 2009. China’s relatively robust economy may not be of much help to Vietnam—Vietnamese exports to China are still small and often used as inputs for Chinese products shipped to the West. In fact, the Ministry of Industry and Commerce in late April had to adjust the country’s export target growth for 2009 from 13% to 3%.
Still, Vietnamese leaders seem to be in denial over the country’s economic woes. This February the prime minister said the nation would be able to achieve a growth rate of 6.5% for the year. A month later the prime minister had to revise the country’s forecast to 5%-5.5%. But his office remains optimistic that Vietnam’s labor force and domestic markets "will certainly" push the country back to pre-global crisis growth levels by the end of this year.
This is not helped by the fact that Vietnam’s equitization rate is reversing. According to the Ministry of Finance, the number of SOEs equitized decreased from 724 in 2005 to 640 in 2006, 150 in 2007, and 73 in 2008. Even though evidence suggests that most companies that have equitized have made profits and paid high dividends after equitization, the state will hold on to strategic industries indefinitely. This includes telecommunications, banking and financial services, and education and training in order to safeguard the socialist order.
So that “when leaders here say they want a socialist market economy, they really mean it," says economist Jonathan Pincus. Not surprisingly, party interest is clearly highlighted in the government’s stimulus package. Of the first $1 billion been distribute about 75% are reserved to SOEs, 20% for SMEs, and 5% for housing projects for low-income earners. This is despite the known inefficiency of SOEs, which do not create employment for the country. The second stimulus package underway will also largely benefit SOEs and do little to address unemployment rates, which will likely double from 4.7% in 2008 to 8.2% for this year (not including the informal sector).
The indictment that what will hold back Vietnam is politics and not know-how has been highlighted by a report by Harvard Vietnam Program. The report’s verdict published in January 2008 was that for Vietnam “success is a choice” but in practice it was “no different from a soccer coach who starts his weakest players in the championship match.”
Until that changes Vietnam will continue to experience growing pains.
Long S. Le is a professor and director of international initiatives for Global Studies at the University Houston, where he is also a co-founder/lecturer of Vietnamese studies courses.
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