R4D Working Paper 2015/6

Exploring Vietnams progress in economic growth

Nguyen Thu Thuy

Nguyen Tu Anh
Hoang Truong Giang
Nguyen Dinh Chuc

Vietnams record on economic growth over the last two decades was remarkable. Does the economic
paradigm that Vietnam follows in the last two decades allow her to catch up with leading economies?
In this paper, we analyze Vietnams progress on economic growth overview since the Doi Moi
(Renovation) in 1986. Particularly, the paper focuses on contributing factors to economic growth.
Drivers of Vietnam economic progress, including factors enabling Vietnam to sustain its progress in
economic conditions, are identified. The analysis enables policy recommendations for the country to
maintain its economic progress

This research received financial support from the Swiss Agency for Development and Cooperation and the Swiss
National Science Foundation under the Swiss Programme for Research on Global Issues for Development. The
project Employment Effects of Different Development Policy Instruments is based at the World Trade Institute of the
University of Bern, Switzerland.
Table of Contents

TABLE OF CONTENTS ........................................................................................................ 2

LIST OF TABLES .................................................................................................................. 3
LIST OF FIGURES ................................................................................................................ 3
1 INTRODUCTION ........................................................................................................... 4
2 VIETNAM ECONOMIC OVERVIEW ........................................................................ 7
2.1 HISTORICAL BACKGROUND OF DOI MOI (RENNOVATION) IN VIETNAM...................... 7
2.1.1 The economy of Vietnam during 1976-1986 ......................................................... 7
2.1.2 Steps of implementing Doi Moi in the period 1986-1989 ..................................... 8
2.1.3 Initial resources for triggering off Doi Moi ........................................................ 11
2.2 VIETNAM AFTER THE RENOVATION .......................................................................... 12
2.2.1 International integration and economic growth ................................................. 12
2.2.2 Investment ............................................................................................................ 15
2.2.3 Quantitative evidence for the impact of international integration ...................... 18
2.2.4 Economic structure ............................................................................................. 19
2.2.5 Exposure to external shocks ................................................................................ 22
2.2.6 Technological progress ....................................................................................... 23
2.2.7 Productivity ......................................................................................................... 24
2.2.8 Human capital ..................................................................................................... 25
2.2.8.1 Human development index ...................................................................................................................... 26
2.2.8.2 Quality of labor ........................................................................................................................................ 27
2.2.8.3 Which skills are demanded? .................................................................................................................... 29
2.2.9 Income poverty and inequality ............................................................................ 31
3 DRIVERS OF VIETNAM ECONOMIC PROGRESS.............................................. 33
3.1 PREREQUISITES FOR VIETNAMS ECONOMIC PROGRESS ............................................ 34
3.1.1 Pragmatic leadership .......................................................................................... 34
3.1.2 Strong institutions and a broad foundation of infrastructure ............................. 34
3.1.3 Equitable initial investment in human development ........................................... 35
3.2 KEY FACTORS ENABLING VIETNAM TO SUSTAIN ITS ECONOMIC PROGRESS ............... 35
3.2.1 Successful combination of internal and external resources ................................ 35
3.2.2 Sustained reasonable land reform....................................................................... 36
3.2.3 Agriculture sector reforms .................................................................................. 36
3.2.4 Pragmatic and sequenced trade liberalization ................................................... 37
3.2.5 Continued investment in human development ..................................................... 37
3.2.6 Social solidarity and equity in policy and implementation ................................. 38
4 CONCLUSIONS AND POLICY RECOMMENDATIONS ..................................... 39
4.1 CONSTRAINTS IN TECHNOLOGICAL ACQUISITIONS .................................................... 40
4.2 POLICY RECOMMENDATIONS .................................................................................... 41
REFERENCES ...................................................................................................................... 42

2
List of Tables

Table 1: Foreign economic aid, 1976-1980 .............................................................................. 7

Table 2: Shares of East Asian partners export in Vietnam import: per cent of total ............. 13
Table 3: Share of East Asian partners import in Vietnams export: percent of total ............. 14
Table 4: Shares of FIEs (Foreign Invested Enterprises) in Vietnams employment, GDP,
industrial production, and total investment ............................................................................. 17
Table 5: GDP growth and its coefficient of variation in different periods.............................. 22
Table 6: Contribution to economic growth 1986-2007 (%) .................................................... 24
Table 7: Vietnam Human Development Index........................................................................ 26
Table 8: HDI in ASEAN-5 in year of 2012 ............................................................................ 27
Table 9: Changes in structure of occupation ........................................................................... 28
Table 10: New Poverty Estimates for 2010 by Region and Urban/Rural Areas ..................... 32

List of Figures

Figure 1: GDP growth and poverty reduction ........................................................................... 6

Figure 2: GDP of Vietnam with (actual value) and without (hypothetical value) Doi Moi ... 11
Figure 3: Growth of GDP, share of export and import of goods and services to GDP ........... 13
Figure 4: Share of capital goods and its components in total imports .................................... 13
Figure 5: Structure of non-oil exports 1987-2008 ................................................................... 15
Figure 6: The most important external sources: FDI, ODA and remittances, %GDP ............ 15
Figure 7: Growth of real implemented FDI and GDP 1991-2013 .......................................... 15
Figure 8: Share of accumulated registered FDI in the years 1988-2013, % of total ............... 16
Figure 9: Structural change ..................................................................................................... 20
Figure 10: Dynamic economic structure 1996-2012 ............................................................... 20
Figure 11: Share of labor working in formal sector, % ........................................................... 21
Figure 12: Structure of labor by skills ..................................................................................... 29
Figure 13: Proportion of workers claim the usefulness of education ...................................... 30
Figure 14: The importance of Job-related skills for white-collar workers (Score range: 0 5)
................................................................................................................................................. 30
Figure 15: Economic Growth and Poverty Reduction in Vietnam: Two Decades of Progress33
Figure 16: Estimates Income GINI Coefficients, 1993-2006.................................................. 38
Figure 17: GDP per capita in PPP of selected countries relative to United States (%)........... 39

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 Vietnams progress in economic growth

Abstract

Vietnams record on economic growth over the last two decades was remarkable. Does the economic
paradigm that Vietnam follows in the last two decades allow her to catch up with leading economies?
In this paper, we analyze Vietnams progress on economic growth overview since the Doi Moi
(Renovation) in 1986. Particularly, the paper focuses on contributing factors to economic growth.
Drivers of Vietnam economic progress, including factors enabling Vietnam to sustain its progress in
economic conditions, are identified. The analysis enables policy recommendations for the country to
maintain its economic progress.

Key words: Vietnam, economic growth, economic renovation, human capital, technological
improvement, drivers of economic progress.

1 Introduction
Vietnams achievements in economic development originated from the launch of Doi Moi
(renovation) program in 1986. The program represented an irreversible change in economic
management ideology of the Vietnams Communist Party. The change has not happened by chance
but by great pressure from economic suppress and depression accumulated since the unification of
the country in 1975. The unification of the country established another challenge: how to unify the
two different economies. In the north, a centrally planned economic system has been firmly
established. The state played as a major role in every sectors of the economy. In the south, the market
economy was developed under the old regime. Goods and services were freely distributed following
demand and supply of the market, and private sector was the main player in the economy. The 24 th
meeting of the Central Party Committee in 29th September 1975 decided to conduct the industry-
commerce transformation in the south to imitate the north economic system, which mainly meant
nationalization of private enterprises. Private industrial companies became under management of
management boards assigned by the government, small household manufacturing became
cooperative, wholesale businesses were eradicated (Dang Phong, 2009). The policy resulted in
significant difficulties to the economy and livelihood of the people.
In addition, Vietnams external relations at that time further worsened the country economic
condition. In the war time, the north received aids from Soviet countries while the south was heavily
supported by the U.S. These aids were heavily reduced or suspended at the end of the war. From 1977

4
to 1979, Vietnam was consecutively attacked by Cambodia in the south and China in the north. The
costs of damages and defense expenditures increased significantly, while the assistance from abroad
was limited due to the embargo applied by the U.S. against Vietnam since 1977. According to Tran
Dinh Thien (2011), the period 1979-1986 witnessed an extreme difficulty in economic condition of the
country. In 1983-1985, some Easter European socialist countries initiated economic reforms, most
prominent was perestrojka and glasnost in former Soviet Union. Vietnam also implemented two
price-wage-currency reforms in 1982 and 1985, but they failed to meet targets due to many
fundamental issues untouched. As a result of 1985 price-wage-currency reform, consumer price level
rocketed up by 774.7% in 1986 while the increase of wage lagged far behind (Tran Hoang Kim, 1995).
The public wage system failed to cover the cost of living for people, therefore on the edge of collapse.
These developments made Doi Moi in 1986 unavoidable.
The Sixth Party Congress in December 1986 publicly acknowledged the necessity to reform the
centrally planned economy model, and declared its intention to move toward a mixed market economy
(a multi-sector, market-oriented economy). The role of the private sector in the economy was
recognized and it was entitled to compete with the state in non-strategic sectors. This included
agreement on the need for policy reforms aimed at reducing macroeconomic instability and
accelerating economic growth, and that all economic levers (price, wages, fiscal and monetary policies)
were to be used to achieve these objectives.
However, significant changes in this direction occurred only sometimes after the approval of
the Doi Moi program by the Party Congress1. In March of 1989, Vietnam adopted a radical and
comprehensive reform package aimed at stabilizing and opening the economy, and enhancing freedom
of choice for economic units and competition so as to change fundamentally its economic
management system.
In parallel with economic reforms, the acceleration of international economic integration has
played a key role in expanding markets for exports, enlarging number of potential investors, enhancing
efficiency and promoting economic growth. So far Vietnam has engaged in trade relations with 224
countries and territories, signed more than 100 bilateral trade agreements and more than 50
agreements on encouragement and protection of investment.
The first Vietnams western trading partner is the EU whose trade agreement with Vietnam
was signed in 1992. Given her economic situation, Vietnam had no choice but opening the economy
to international markets, especially to neighboring countries and other super-powers such as the U.S,
Japan. Accordingly in 1995, Vietnam normalized their diplomatic relation with the U.S and joined
ASEAN in the same year with commitment of fully fulfilling the AFTAs agreement by 2006. Having
joined APEC in 1998, Vietnam and the U.S finally concluded the first ever bilateral trade agreement in
2000. The agreement came into effect in 2001 and immediately generated significant effect on
economic growth, export and investment booming. In five years later, both countries deepened their
trade relation when US granted Vietnam the status of permanent normal trade relation (PNTR).

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 As a member of ASEAN, Vietnam also engaged in many FTA signing between ASEAN and
trading partners such as ASEAN - China Free Trade Area (2002), and ASEAN-Japan Comprehensive
Economic Partnership (2003), ASEAN - South Korea FTA (2005), FTA on goods with India in 2010 and
Agreement on liberalizing service and investment sector in 2013. Recently Vietnam has signed
agreement on comprehensive partnership with Japan in 2008, FTA with Chile in 2013.
These movements have created a huge market access for Vietnamese entrepreneurs and
played a key role in booming of exports which is the main engine for growth in Vietnam. These
macroeconomic reforms have created opportunities and new motivations to Vietnams economy.
Opening international markets created significant vent for surplus of cheap labors, agricultural
products. As a result, Vietnam has consecutively enjoyed two-digit growth of exports and foreign
investment in flow since then. The hyper-inflation in 1986-1988 was curved down in 1989 and
stabilized most of the time in one-digit level from 1992 on2.
The reforms have brought about high economic growth and rapid poverty reduction (Figure 1)
in period 1990-2012. Successful economic development has resulted in overall improvement of
peoples welfare and significant poverty reduction. The total headcount poverty incidence declined
from about 70% by the end of the 1980s to 58 percent in 1993, 29 percent in 2002. The proportion of
households that live under poverty lines declined sharply from 19.5% in 2004 to 9.6% in 2012. Vietnam
has also achieved notable results in human development. There has been a significant increase in
Vietnams human development index (HDI) (from 0.623 in 1994 to 0.689 in 2001 and to 0.617 in 2012)
(UNDP, 2013).
Figure 1: GDP growth and poverty reduction

Source: various Statistical yearbooks from 1990 to 2013 for GDP growth and reports by Ministry of
Labors, Invalids and Social Affairs. Poverty index (PI) from 1990 to 2004 is the headcount index, from
2005 on the index is shifted to household index.
Achievements of Doi Moi are mainly attributed to: (i) institutional changes toward market-
friendly economy, allowing private sector to play increasing economic roles; (ii) and pro-active
international economic integration, consecutively expanding markets for imports and exports and
capital flows. The sources for economic growth in Vietnam, according to Arkadie et al. (2010), include
agricultural growth, export growth, investment, and private sector as presented by entrepreneurship.
Foundations of these sources of economic growth are expanding inputs of capital and labor. These
expansions of production factors, however, were not accompanied by technological progress (Nguyen
Tu Anh and Nguyen Thu Thuy, 2009). Capital expansion in Vietnam was attributed to foreign
investment, remittance by Vietnamese abroad (Viet kieu), and accumulation of capital during high
growth period. The expansion of labor is mainly migration of labor from rural areas to urban area as
predicted by A. Lewis model of development.

6
 Recently, Vietnam has reached the limitation of expansion-input model and lost its growth
momentum. Having recognized these limitations, Vietnam has launched out the restructuring program
that aims to improve the allocation and technological efficiency in using resources.
In this paper we first examine Vietnam economic progress since 1986 and then identify the
role of international integration, expanding labor and capital and technological progress in economic
growth in Vietnam in the same period. Finally, policy recommendations for the country to maintain its
economic progress will be proposed.

2 Vietnam economic overview

2.1 Historical background of Doi Moi (Rennovation) in Vietnam

2.1.1 The economy of Vietnam during 1976-1986

After the war with the US ended in 1975, Vietnam was reunified. In December 1976, the sixth
congress of the Vietnam Communist Party determined the development policy for the unified country:
[to move] directly from small-scale production to large-scale production without passing through the
capitalist stage, to give priority to heavy industry, and to turn Vietnam into a socialist country with
modern agriculture and industry within twenty years. (Pham et al, 2007:6)

The US aids to the South stopped in 1975 and aids from Soviet block to the North were cut
down gradually accompanied by tense political conflicts between two countries until 1978.
Nevertheless, a large socialist transformation program was tightly implemented all through the South.
The commerce and industry were nationalized, whilst agriculture was collectivized. Human capital also
faced a serious lost due to the leaving of hundred thousands of people to other countries. The
motivation system and benefit division of the new regime directly had bad effects to the economy.
Productivity promptly reduced, outputs in agricultural sector went down, industry idled and commerce
immobilized.

During this tough period, investment resources, which were up to 65 percent of state
investment annually, were sent to the heavy industry, whose products did not satisfy the needs of the
people at that time. In addition, the government budget was mainly reliant on external sources, almost
all of these sources came from the Soviet Union (Table 1).

Table 1: Foreign economic aid, 1976-1980

1976 1977 1977 1978 1979

Foreign grants and loans

(% of Budget Revenues) 44.8 34.5 32.9 40.8 40.6

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 Source: Tri, N. V. (1990: 101)

The socialist transformation programme to the South, accompanied by the drive of the
socialist relation of production all over the country had a disappointed impact to the economy,
particularly in agricultural sector. Because Vietnam was characteristically a country with comparative
advantages in agriculture (by that time more than 80% of population were farmers), the decrease in
agricultural outputs had a straight and bad impact to the majority of the countrys living standard
(Pham et al, 2007:6). State budgets burdens of the war with China in 1979 became tremendously
heavy to a poor economy which had just got out of a long war.

In mid-1980, when poverty rate was increasing nation-wide, the first trials of agricultural
reforms took place in small scale in Northern Province of Hai Phong. The idea of making end-product
contract with households were not accepted by the top leaders, who insisted that it is harmful for the
the communist ideology. Yet, changes in incentive system had increased the productivity and efficiency
radically (Kompas, 2002). The case achieved considerable direct success so it motivated the authorities
to enlarge it to other provinces. Until early 1981, Party Secretariat issued the Directive No 100CT/TU
to recognize the idea. Nonetheless, only until April 1988 when the Party launched the Politburos
Resolution No.10/NQTU on the Renovation of economic management in agriculture, the
reformation in agricultural sector was accepted officially.

2.1.2 Steps of implementing Doi Moi in the period 1986-1989

This section shows the historical background of the Doi Moi (Rennovation) in Vietnam,
especially in the most important reform years from 1986 to 1990. The positive performance of the
economy of Vietnam in the period 19921997, was promoted by policy reforms, comprising
enhancements in private property rights, macroeconomic stability, and an ongoing change from
central planned to market mechanisms as instruments of economic development.

Until 1986, Vietnam experienced a sharp economic downturn. In spite of the state price
controls, market inflation rate reached more than 700 per cent annually. Total exports were about
US$500 million, imports - US$1,221 million and the level of per capita trade was very small (Arkadie
and Mallon, 2004). Government incomes were small, the fiscal deficit was large and continuing, and
some fields were considered to be on the verge of scarcity. Budget reserves were injured owing to high
military spending and support provided to unprofitable state-owned enterprises. There was almost no
foreign investment, the technology gap between Vietnam and other countries in the region was
becoming larger, visits by Vietnamese nationals to market economies were infrequent and, on top of
a few diplomats and aid workers, there were limited foreigners from market economies operating in
Viet Nam (Mallon, 1999). Some private economic activities existed, but were generally in black market,
so were very uncertain and unsafe. There was a growing development gap between Vietnam and other
countries in the region.
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 Doi Moi was formally approved by the Sixth Party Congress which was held in December 1986.
This programme comprised agreement on reformation of policy in order to stabilizing macroeconomic
and speeding up economic growth. To attain these targets, all the economic levers were utilized. The
Sixth Party Congress decided to eliminate the system of bureaucratic centralised management based
on state subsidies, and to shift to a multi-sector, market-oriented economy with a higher role of private
sector. Investment resources were directed to develop agriculture sector, to expand production of
consumer products, and to improve trade and foreign investment. The policies approved at the Sixth
Party Congress in December 1986 represented a breakthrough from earlier policies and were the
conclusion of internal argument about the breakdown of the previous system to result in tangible
effects to the happiness of the Vietnamese people (Arkadie and Mallon, 2004).

Whereas the Sixth Party Congress implemented significant crossroads in policy reforms, there
were few details presented about the certain policies that would be implemented to lead to the
desired reform. The specific plan of Doi Moi was considered in a series of Party meetings after the
Party Sixth Congress, and documents from the Third and Sixth Plena undoubtedly stated the demand
to change from state control towards indicative planning and macroeconomic policy levers
(Communist Party of Vietnam 1991a, 1991b).

Before the end of the Sixth Party Congress, several resolutions were made on the family
economy and the importance of the cooperative, private, and state sectors in the agriculture area.
Resulting from the Sixth Party Congress, a slow lessening of the administrative barriers was applied to
private sector and to domestic trade. In 1987, many of the barriers were diminished in order to
facilitate domestic trade, and private markets for agricultural products developed speedily.

Though many observers concentrate on the reforms introduced since 1989, significant micro-
level reforms were implemented since 1986 that brought about a strong supply response that
significantly developed the environment for the effective implementation of the following macro level
reforms. In the year 1987, considerable price reforms were implemented with the formal price of non-
essential consumer products being increased to meet the market prices and the scope of controlling
being considerably diminished. Simultaneously there was a significant devaluation of the Dong
(Vietnams currency).

An important reform was the transformation of concentration on the role of the state in
modernisation and industrialisation processes. The mission of the state was to focus on building the
necessary premises for the acceleration of socialist industrialisation in the subsequent stage
(Communist Party of Vietnam, 1987). The reform was extremely significant because while
industrialisation was reaffirmed as a necessary task, the basic content of industrial policy was confined
to creating the premises for industrialisation at a subsequent stage (Vo Dai Luoc, 1994:23).
9
 The Foreign Investment Law was approved the National Assembly late1987, and put in
implementation in 1988. A few years later, large inflows of foreign direct investment came to Vietnam
and by 1992 it became the main source of investment.

A Law on Land was also approved in 1987 then enacted in 1988. Although land was still owned
by the State, the law recognised private land-use rights. Even though it was a key stage towards the
implementation of property rights, this law did not permit the transference of land-use rights in spite
of the presence of an active informal market for land-use rights (World Bank, 1993).

The Renovation in 1988 created important development of incentive structures, comprising

steps towards elucidating property rights. A resolution of the Communist Party was issued in 1988,
giving more rights for individuals and private firms in agricultural area. Farmers were provided with
rights to land in the long-run, centrally planned targets were ended, and farmers were no longer be
forced to join cooperatives, and they were permitted to sell their products in the open market.

The Party Resolution No.10, approved in 1988, presented an analytically significant reform,
completely improving the rights of rural households, and lessening the legal authority of commune
cooperatives. Though primarily varied viewpoints came from external commentators on the effects of
Resolution No. 10, the Party Secretary-General claimed that this was a turning point in agricultural
development (Do Muoi, 1995). Actually, some commentators said that it was considered one of the
main crossroads in the whole Doi Moi process. Provided property rights for farmers, together with
price and trade reforms, contributed to sustainable development in agricultural sector since 1988.
Gradual growth in agricultural sector in 1989 (6.9 per cent) was significant in counterweighing the
worst effects of the tight monetary policies introduced in 1989 to reduce inflation while industrial
output decreased by 4.0 per cent that year (Arkadie and Mallon, 2004).

Although Vietnam made important progress in the Doi Moi process, the World Bank
considered that in 1990 there was no well-defined clarification of property rights at this time, nor was
there a legal framework to assure and apply these rights. As a result, there is large uncertainty about
what was allowed at that moment and what would be allowed in the future. Consequently, that
uncertainty delayed productive investment (World Bank, 1990:5556).

In a study of Le Thanh Nghiep and Le Huu Quy (2000), the hypothetical value of GDP (without
Doi Moi) and actual value of GDP (with Doi Moi) of Vietnam in the period 1989-98 are shown in Figure
2. There appears a large gap between actual and hypothetical GDP in the given period. The GDP gap

10
started from 3% in 1989 and increased as high as 42% equivalent to 161 trillion of rate of 7.2% in the
period 1986-1998, the annual growth rate was only 4.2% in the hypothetical case in the same period.

Figure 2: GDP of Vietnam with (actual value) and without (hypothetical value) Doi Moi

Source: Le Thanh Nghiep and Le Huu Quy (2000)

2.1.3 Initial resources for triggering off Doi Moi

At the time of Doi Moi, the resources for development in Vietnam were constrained but not
exhausted. State owned enterprises, cooperatives and even households processed some kind of
capital. The problem of Vietnams economy at that time is that those resources were poorly used and
markets were isolated. Vietnam has no advantages in heavy industries but for long time Vietnam
devoted its rare resources for development of heavy industries and import-substituted goods. This
direction of industrial policy wasted resources with low effectiveness on the economy.

Having recognized these weaknesses the Sixth Party Congress guided a strategy of three
arrows to upgrade economic performance: (i) improving allocative efficiency by reallocating resources
out of heavy industries to three big economic programs: production of food and foodstuff,
consumption goods, and export goods; (ii) creating vent-for-surplus by removing market barriers,
generating market opportunities for idle resources; (iii) enlarging resources by calling for private and
foreign investment.

These policies worked well in Vietnam and resulted in impressive achievements. Production of
food and foodstuff increased from 18 million tons in 1986 to 21.5 million tons in 1989, and from a rice-
imported country Vietnam started exporting rice in 1989 and now is the second largest rice exporter
in the world3. Success in agricultural production helped the economy to accumulate capital for further
growth. Moreover, some cooperatives transformed successfully to private companies and they utilized
fruitfully their assets for development, i.e. USD million-valued Kinh Do Company has developed from
a small bakery, Da Lan Toothpaste Company has developed from a cooperative that produced
chemicals, and many other examples.

In period 1986-1990, the total investment increased by 18.6% in comparison with previous
period 1981-1985, despite investment from state budget declined by 6%. This means that non-state
capital increased sharply and replaced well the state ones. The law on foreign investment started

11
implementing in 1988 and at that year there were 37 projects licensed with registered capital of USD
366 million; in 1989 licensed 70 projects with USD 539 million registered capital, and 1990 the licensed
projects increased to 111 with USD 803 million4.

Hence, at the initial stage of development, Vietnam improved allocative efficiency of her
limited resources and encouraged private and foreign investments successfully. These resources
positively interacted each other, meaning the expansion of FDI encourage expansion of private
investment and vice-versa.

In parallel with encouraging private and foreign investment, Vietnam took advantage of
membership of IMF and WB. In 1993, Vietnam successfully negotiated with lenders in Paris Club to
solved Vietnams outstanding loans at IMF then paved the way for Vietnam to access to IMF and WB
loans. From 1993-1996 Vietnam negotiated with private lenders in London Club to reduce the
outstanding loans to 50% and prolong the period of repayment. The successful negotiation opened the
access for Vietnam to international private lenders and ODA from Japan, European countries, and so
on.

The assistance from WB, IMF, Japan, European countries, etc. played an important role in
upgrading Vietnams infrastructure, and hunger eradication and poverty reduction. These surely help
further encourage private and foreign investment in Vietnam.

2.2 Vietnam after the Renovation

2.2.1 International integration and economic growth

Doi Moi has helped Vietnam gain significant successes in a number of socio-economic aspects
in period 1986-2013. The GDP growth accelerated, from almost 3.6 percent in 1987 to the peak of 9.54
percent in 1995, and then slowed-down to the trough of 4.7 percent in 1999. The slowdown in this
period crucially attributed to the Asian crisis in 1997. Having escaped from the crisis, Vietnams
economic growth rebound again in period 2000-2007 with average growth is around 7% annually.
Unfortunately, the successful period does not last long partly due to global crisis in 2008. Tough
external conditions have induced internal weaknesses to expose and ignited the restructuring process
in 2011. The economy has undergone low economic growth in period 2008-2013 with average growth
rate of 5.73 percent (Figure 3).
As depicted in Figure 2, Vietnams trade has also expanded continuously during the period of
1990-2013. The GDP growth seems being driven by international trade. It evidenced that Vietnam has
increasingly integrated into the international economy since 1990; both exports and imports have risen

12
at impressive paces, with the annual average growth rates during period 1990-2013 are 16.2% and
14.6% respectively.

Figure 3: Growth of GDP, share of export and import of goods and services to GDP

Source: CEIC, GSO and World Bank Development Indicator 2013 for GDP growth, Import and export in
current USD.
In the period 1986-2013, the shares of imports and exports of goods and services to GDP show
steadily increasing trend. However, the contribution of international trade to economic growth in
period 1986-1997 is much stronger than that in period 1998-2013. Exports and imports remain
growing fast in second period, while the economic growth rate slowed down. It may imply that when
the share of international trade (imports and exports of goods and services) exceed GDP, the
contribution of international trade to growth become less and less effective.
Vietnams imports also show the same pattern as FDI: East Asia is the dominant import market
for Vietnam (Table 2). The shares of these economies in Vietnams import in the years 1998-2012 range
from 75.98 percent to 79.19 percent of the total import. ASEAN as a whole has been the largest market
for the whole period; their shares range from 18.30 percent to 29.44 percent, outdistance the runners-
up whose shares are around 11 13 percent. Japan, Taiwan and South Korea, are also in the dominant
group, with around 10 percent for each.
Table 2: Shares of East Asian partners export in Vietnam import: per cent of total
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

ASEAN 29.44 28.03 28.45 25.73 24.15 23.56 24.3 25.37 27.95 25.32 24.25 23.53 19.34 19.59 18.30

Taiwan 11.98 13.34 12.02 12.39 12.79 11.54 11.57 11.71 10.75 11.02 10.36 8.74 8.22 8.02 7.50

South
12.36 12.65 11.21 11.63 11.54 10.4 10.51 9.78 8.71 8.5 8.75 9.59 11.50 12.34 13.65
Korea

Hong
4.85 4.3 3.82 3.31 4.08 3.92 3.36 3.36 3.21 3.09 3.26 3.03 1.01 0.91 0.85
Kong

Japan 12.88 13.78 14.71 13.46 12.68 11.81 11.11 11.08 10.47 9.84 10.21 9.77 10.63 9.74 10.20

China 4.48 5.73 8.96 9.9 10.93 12.43 14.37 16.05 16.46 19.92 19.39 22.03 23.81 23.29 25.52

East Asia 75.98 77.83 79.19 76.42 76.18 73.65 75.22 77.35 77.55 77.69 76.23 53.17 55.18 54.30 57.73

Source: Statistical Yearbooks in various years, GSO.

This period saw the rapid growth of imports from China. In 1998, the share of imports from
China is only 4.48 percent, but rose dramatically to nearly 25.52 percent in 2012. The rise of Chinese
share has gradually crowded out shares of the three East Asian economies and ASEAN economies. Even
though these economies remain claim lion shares in total Vietnams import.
Figure 4: Share of capital goods and its components in total imports
Source: GSO and CEIC.
The salient characteristic of Vietnams import is the domination of capital goods. In prior crisis
period (1986-1997) capital goods accounted for a fairly stable share of around 85 percent of the total
13
imports. In post-crisis period Vietnam increased its import of capital goods to more than 90 percent
(Figure 4). It should be noted that the expansion of imports of capital goods in the whole period 1986-
2008 is crucially ascribed to the expansion of imports of fuels and raw materials. It evidences that
Vietnam has not improved its capacity to produce inputs for production since 1986 and increasingly
depends on imported inputs for production. Vietnams economy has grown in width not in depth since
Doi moi. Data in Table 2 also imply that Vietnam has imported mainly capital goods from East Asia.
In contrast to import, share of East Asian economies import to Vietnam total export steadily
decreased from 55.45 percent in 1998 to 32.56 percent in 2012 (Table 3). The ASEAN continued to be
an important market; they absorb around 16% of total Vietnams exports. South Korea, Taiwan, and
China to some extent, exported largely to Vietnam in the years 1998-2012, however they absorbed
quite small share of Vietnams exports. Fortunately, the declining of East Asias share has been offset
by the increase of the US market. Thanks to Vietnam-US bilateral trade agreement, which came into
effect in 2001 the USs share increased steadily from 5.06 percent in 2000 to 20.8 percent in 2007 and
slightly went down to 17.17 percent in 2012. Other important markets for Vietnams exports include,
but are not limited to, Australia, the Netherlands, Germany, France, UK,
Table 3: Share of East Asian partners import in Vietnams export: percent of total
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

ASEAN 21.56 21.79 18.07 16.98 14.57 14.65 15.28 17.7 16.64 16.09 16.22 15.52 14.42 14.11 15.25

Taiwan 7.16 5.91 5.22 5.36 4.89 3.72 3.36 2.88 2.43 2.35 2.23 1.96 2.00 1.90 1.82

South
2.45 2.77 2.43 2.7 2.81 2.44 2.3 2.05 2.12 2.58 2.84 3.64 4.28 5.02 4.87
Korea

Hong
3.4 2.04 2.18 2.11 2.04 1.83 1.44 1.09 1.14 1.2 1.4 1.81 2.03 2.28 3.24
Kong

Japan 16.18 15.48 17.78 16.7 14.59 14.44 13.37 13.38 13.16 12.5 13.58 11.10 10.70 11.45 11.41

China 4.7 6.47 10.61 9.43 9.09 9.35 10.95 9.95 8.14 6.91 7.21 9.46 10.72 11.98 11.21

East
55.45 54.46 56.3 53.29 47.98 46.43 46.69 47.04 43.63 41.63 43.48 27.99 29.72 32.63 32.56
Asia

Source: GSO
In the years 1997-2008 also saw the gradual expansion of exports of manufacturing and semi-
manufacturing (Figure 5). The share of manufacturing and semi-manufacturing production increased
from 31.64 percent and 15.38 percent in 1997 to 48.35 percent and 24.26 percent in 2008 respectively.
At the same time, the share of mining declined sharply from 15.94 percent in 1997 to 1.61 percent in
1998 and then stabilized around 1.5 percent in the following years. The share of agriculture and
services in export of non-oil products also show declining trend in the period. This implies that
Vietnams services industry is losing its international competitiveness in comparison with
manufacturing industry.
The dominants of exports are low-tech products such as wearing apparel, metals and metal
products. Vietnam also exports some high-tech products like machinery used for broadcasting,
television and information activities, and other electrical machinery and equipment however as shown
in next section, these products depend heavily on imported inputs and Vietnam just to conduct low-
14
tech steps in the total value chain. It is also worth noting that these main exports are also of advantages
neighboring economies such as China, Thailand, the Philippines, etc.

Figure 5: Structure of non-oil exports 1987-2008

Source: GSO.

2.2.2 Investment
On the investment side, foreign capital also plays an important role in Vietnams economy
since Doimoi (Figure 6). The net FDI inflow as percentage of GDP increased sharply from 0.06% in 1989
to the peak of 11.94% in 1994, then dropped down to 8.6% in 1995 before recovered in 1996. The
annually average growth rate of net FDI inflow (in current USD) in 1989-1996 is as high as 148.7%. The
other source that plays important role for Vietnams economy at initial stage is ODA. Thanks to opening
policy, the ODA from western countries started flowing-in in 1989 and kept on increasing. FDI and ODA
in period 1989-1996 is really a necessary big push for the economy that helped the economy escape
from vicious circle at very low level of development. Both FDI and ODA accounted for 2% of GDP in
1989, and this ratio continued rising to 13.51% in 1996. These external sources of capital effectively
helped the economy grow at more than 8% annually in this period.

Figure 6: The most important external sources: FDI, ODA and remittances, %GDP

Source: WDI, World Bank.

The effect of Asian crisis 1997 was evidenced in the growth rate of FDI in period 1996-1999.
The growth rate of FDI slowed down from 4.3% in 1996 to -24.85% in 1998 and -2.8% in 1999. The GDP
growth declined steadily to 4.77% in 1999.
Figure 7: Growth of real implemented FDI and GDP 1991-2013

12

10

6 FDI Growth %

4 GPD Growth

0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

-2

Source: GSO in various issues, and the authors use USs GDP deflator (World Bank 2009) to calculate
real number. FDI growth is referred to left axis, GDP growth is referred to right axis.

15
 The years 2000-2003 saw FDI inflows to Vietnam being recovered but quite stagnant. The
decreasing trend stops in 1999 and slightly recovered in 2000 with growth rate of 1.18%. Declining of
FDI is partially offset by the steadily increasing ODA, and the emerging of remittances. The total capital
inflows (FDI, ODA, remittances) as percentage of GDP keep on growing from 1999 to the peak of 2007,
even though FDI and ODA did not show a clear trend.
The recovery of FDI observed in period 2004-2007. The growth rate steadily increased from
11% in 2004 to 179% in 2007, then slightly slowed down to 42.9% in 2008 and stayed at 6.3% in 2013
(Figure 7). The high increase in FDI inflows in this period could be attributed to the improving of
investment environment in preparing for WTO accession in 2007, some important laws have been
revised in comply with governments commitments to WTO: Foreign Investment Law5, and the
Governments permission for foreign investors to invest in some previously-Government-monopolized
industries e.g. electric supply, insurance, banking, communication.

Figure 8: Share of accumulated registered FDI in the years 1988-2013, % of total

Other, 19.47 ASEAN, 20.21

China, 3.23
EU, 7.51

US, 4.57
Japan, 15.03

Taiwan, 11.97

HongKong, 5.35S. Korea, 12.67

Source:
Statistical yearbook 2013; EU include France, UK, Germany, Switzerland, Netherlands, Denmark,
Luxembourg; ASEAN include Singapore, Malaysia, Indonesia, Thailand, and the Philippines.
Furthermore, the years 2004-13 also witnessed greater efforts by Vietnam to promote
investment inside and outside Vietnam. The GDP growth rate sturdily recovered since 2000 and
reached the peak of 7.13% in 2007 before slowed down to 5.66% in 2008 due to effect of subprime
crisis and decreased to 5.42% in 2013.
Figure 8 depicts the shares of accumulated registered FDI inflows into Vietnam in the years
1988-2013 by economies and region. The main source of FDI inflow into Vietnam over the past 25

16
years is from East Asian economies, which accounted for 68.45 percent of the total. Japan and four
economies of first tier NIEs: Taiwan, S. Korea, Singapore and Hong Kong SAR, all accounted for lion
shares in total FDI into Vietnam. Respectively, the shares of these economies are 15.03%, 11.97%,
12.67%, 12.8% and 5.35%. Two most advanced economies of second tier NIEs, Malaysia and Thailand
have also taken significant part, the share of these two countries together is 7.16%%, alike those of
EU.
It should be noted, a larger part of investment from ASEAN countries, and from Tax heavens
such as British Virgin Islands, Solomon, Cayman, are actually from industrialized countries such as US,
EU. Taking this problem into account, the rankings would be dramatically different. For example, the
joint study by MPI/FIA and USAID/STAR in 2005 figured out that taking actual origin of capital will bring
the US to the first place, as much of the investment capital from the US were channeled to a third
country before reaching Vietnam.6
The majority of FDI projects and registered capital concentrated in industry and construction,
whilst those into agriculture-forestry-fishery were very limited. Accumulatively up to 2008, 68 percent
of FDI projects, and 65 percent of FDI registered capital. Meanwhile, the agriculture-forestry-fishery
only attracted 7 percent of FDI projects and 4 percent of FDI registered capital. Furthermore the share
of FDI to agriculture-forestry-fishery sector decreased from 2008 to 2013: the agriculture-forestry-
fishery only attracted 3.14 percent of FDI projects and 1.43 percent of FDI registered capital of the
total that accumulated up to 2013. In the same period, the share of number projects and registered
capital of industry-construction sector slightly decreased to 62.61% and 64.17% respectively. It implies
that in period 2008-2013 the service sector got more attractive to foreign investors. The shares of
number projects and registered capital of service sector increased from 25% in total projects, and of
31% in total registered capital in 2008 to 34.25% and 34.39% respectively in 2013. This situation will
expectedly change in a dramatic way over the forthcoming years, as Vietnam is set to open up its
services sector to fulfill its WTO commitment. Specifically, more FDI projects in the services sector,
particularly ones with high value added and profitability, will be expected.
The agriculture-forestry-fishery sector has been relatively disadvantaged in attracting FDI
inflows. Notwithstanding its important role in Vietnams socio-economic development, the sector and
their farmers/workers appears to enjoy relatively less benefits from FDI attraction than those in other
sectors. The main obstacle in attracting investors to agriculture is the fragmented land in Vietnam;
every household has land right use over number of small pieces of land. This situation hinders farmers
from applying technology and enjoying economy of scale. The foreign investors who are interested in
agriculture usually need a single area of land that is large enough to apply efficiently new technology
in cultivation, plantation, irrigation, fertilization, harvest, etc. Unfortunately these conditions rarely
exist in Vietnam.

Table 4: Shares of FIEs (Foreign Invested Enterprises) in Vietnams employment, GDP,

industrial production, and total investment7

17
 Unit: Percent

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Employment* 11.52 12.44 14.84 16.62 18.11 20.08 22.01 23.31 23.02 22.02 21.93 23.41 24.54

GDP current
10.82 10.85 10.86 11.18 11.56 12.07 12.75 13.29 13.48 13.42 17.69 18.05 18.09
prices

Industrial
output (at 1994 41.3 41.6 41.6 43.1 43.7 43.7 44.2 44.7 44.6 43.2 42 44.6 47.2
prices)

Investment 18.00 17.60 17.40 16.00 14.20 14.90 16.20 24.80 29.80 25.56 25.84 24.54 21.64

Source: Statistical Yearbooks in various years, GSO.

* The share of FIEs employment in this table is calculated on total employment in all working
enterprises.
Together with their increasing presence, the FIEs are undertaking a greater role in Vietnams
economy (Table 4). The share of FDI in gross investment went up from 18.0 percent in 2000 to 29.8
percent in 2008 and slightly decreased in period 2009-2012 due to economic slowdown. As mentioned
above, most of FDI focused on industry and construction sector. The increase in FDI also reflects in
increasing contribution of this sector to industrial output in period 2000-2008. From 2008, service
sector became more attractive, hence the share of FIEs industrial output declined consecutively in
two years 2009 and 2010, then sturdily rebound in three year 2011-2013.
The most important contribution of FIEs is job creation. Over 13 years from 2000 to 2013 the
share of jobs in FIEs in total jobs in all enterprises that are working in Vietnam more than double: from
11.52% to 24.54%. Hence FDI not only play important role in moving labor out of agriculture but also
play key role in shifting workers from informal sector to formal sector8.

2.2.3 Quantitative evidence for the impact of international integration

The current literature on Vietnam economic growth presumes that foreign capital and exports
promote growth of GDP. However, the relationship between these variables is not necessarily
unidirectional causality from FDI and exports to GDP. The causality relation may take place in opposite
direction. Recent empirical literature shows that the causality relations vary with the period studied,
the econometric methods used, treatment of variables (nominal or real), one-way regression or two-
way causality, and the presence of other related variables or inclusion of interaction variables in the
estimation equation. The results may be bidirectional, unidirectional, or no causality relations.

18
 In this section we examine the causality among three variables: foreign capital, exports and
GDP in Vietnam economy in period 1988-2008. Nguyen Tu Anh and Nguyen Thu Thuy (2009) show that
there is a strong unidirectional causality from foreign capital to exports, unidirectional causality from
foreign capital to GDP and a rather weak unidirectional causality from exports to GDP. These two
causality relations indicate that exports and foreign capital inflows join together to bring up the growth
in GDP. These findings support the export-led growth and the FDI-led growth in Vietnam.

Furthermore, the authors also show that the effects of foreign capital and export on GDP
are independent: FDI does not cause export and vice-versa. This implies that FDI inflow to
Vietnam mainly to exploit domestic market not for foreign markets. The hypothesis that FDI
does not help export cannot be rejected. On the other hand, high growth rates of export in the
last 20 years have not been promoting factor for FDI inflow.
Nguyen Tu Anh and Nguyen Thu Thuy (2009) find quantitative evidence that GDP did
not cause foreign capital inflow and export in Vietnam from Doi Moi until 2008. This implies
that in general, the steady economic growth in Vietnam during period 1988-2008 is not
endogenized. The inflow of foreign capital and exports during the period are crucial factors for
economic growth, while economic growth seems not be a factor to promote exports and inflow
of foreign capital. These unidirectional causalities may indicate that the economic growth in
Vietnam in period 1988-2008 has not been based on productivity improvement but on resources
such as cheap unskilled labor and low-tech activities. Because if economic growth is based on
incremental productivity, high economic growth means the economy is getting more
productive, hence attract more foreign capital and exports become more competitive. If it was
the case in Vietnam in period 1988-2008, the directional causality from GDP to foreign capital
and exports should be evidenced. As far as these resources are exhausted, the fly-in foreign
capital would cease, export would get stagnant, and as a result the economic growth would be
halted. In short, the quantitative evidence implies that the economic growth in Vietnam cannot
be sustained if Vietnam fails to improve its production capacity.
In general, Vietnam is following a similar economic pattern experienced by other East Asian
economies, flying geese, but still is at an earlier stage of regional integration. Firstly, the East Asian
economies began their growth relying strongly on exports of labor- intensive products but they have
gradually gained a comparative advantage shift to increasing capital and technology-intensive
products. At present, Vietnams manufacturing exports are concentrated in labor-intensive products
such as textiles and garments, footwear, and furniture with low value added in the production value
chains. Secondly, East Asia has become the largest source of Vietnams imports of capital goods for
industrial production. However East Asia does not serve as main market for Vietnams exports, a
majority of the markets for the final products is still extra-regional. The significantly increasing role of
the EU and the US as important destinations for Vietnams exports can also be observed. China has
played an increasing role as a trade partner, especially in intermediate goods and components in East
Asia. China has also become a key trade partner of Vietnam, but with characteristics of the North
South trade and a huge deficit on Vietnams side.

2.2.4 Economic structure

The economic growth in Vietnam has restructured the economy away from agriculture. The
share of agriculture-forestry-fishery sector went down continuously from over 40.56 percent in 1986
19
to 18 percent in 2013. On the contrary, the share of the industry-construction sector as a whole
decreased from 28.36 percent in 1986 to the trough of 22.67 percent in 1989 and kept on increasing
since then to about 38 percent in 2013. The share of the services sector, meanwhile, kept on going up
from 31.08 in 1986 to the peak of 44.06 percent in 1994 then has been relatively stable around 40
percent from that on (Figure 9).

Figure 9: Structural change

50.00
45.00
40.00
35.00
30.00
Agriculture
25.00
20.00 Industry

15.00 Services
10.00
5.00
0.00
2004
1986
1988
1990
1992
1994
1996
1998
2000
2002

2006
2008
2010
2012

Source: Calculated from GSO 2013 and CEIC data base.

Growth of the industry-construction sector has always been the fastest, on average the annual
growth rates of Agriculture, Industry, and Service during period 1986-2013 are 3.67%, 8.23 and 7.08%
respectively (World Bank, 2013)9. Hence, since Doimoi Vietnam has not only consecutively archived
high growth rate of GDP but also has changed its economic structure towards to a more industry-and-
service-led one. In which the industry-construction sector has always been the driver of growth and a
positive shifter of economic structure over the period.
The economic structure changing is also observed in terms of labor. In 199610 the proportion
of labor that working in agriculture is 70% (of total working labor) and the ratios for industry and
service sector are 10.6% and 19.4% respectively. After 18 years there are only 47.4% of total working
labor are still in agriculture and the ratio for industry and service sector are 21.1% and 31.5%
respectively (Figure 10).

Figure 10: Dynamic economic structure 1996-2012

20
 120

100
19.40 23.70 22.30 23.30 24.80 28.20 28.40 29.60 31.50
80
10.60
11.60 12.40 14.70 17.40
60 20.20 19.30 20.90 21.10

40
70.00 64.80 65.30 62.00 57.90
51.70 52.30 49.50 47.40
20

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Employment in agriculture Employment in industry Employment in services

Source: WDI 2014, and Statistical Yearbook 2013.

The data show an obvious trend of moving out of agriculture sector and the expanding of
industry and service sectors. The service sector seems expanding faster than industry sector, and this
trend is different from those observed from industrialized economies. All the industrialized economies
underwent a period of industrialization when industry growing fastest and leading other sectors.
Hence the current trend of economic structure shifting in Vietnam may show the fact that industry in
Vietnam is not competitive enough to lead the economy and to absorb large part of labor moving out
of agriculture.
Labor are not only moving out of agriculture but also moving out of informal sector to formal
sector during the course of development. In 2000 there are only 9.4% of total working labors working
in enterprises, formal institutes, and in 2012 the figure is 21.56%. The non-state sector plays the most
important role in this trend. In 2000 there is only 2.28% of total labor working for non-state enterprises
(excluding cooperatives), and this number increased to more than 13% in 2012; while the number for
SOEs gradually declined from 5.55% of total labor in 2000 to 3.12%. The non-state enterprise sectors
and FIEs are dominant over SOEs in terms of generating jobs and formalizing jobs in the course of
development of Vietnam.
Vietnam still at low level of development with nearly 50% of labor force working in agriculture
and nearly 80% of total working labors is still working in informal sectors (household units, and others
without labor contracts). However over the last 15 years, Vietnam has shown a quick shifting from
agriculture to industry-construction and service sector and, formalizing jobs. These movements help
increase labor productivity and quickly enlarge the opportunity of having higher income for working
people.

Figure 11: Share of labor working in formal sector, %

21
 25.00

20.00
5.07 5.29
4.40
4.02
15.00 3.94
3.73
2.85 3.29
2.51
2.12
10.00 1.75 13.27
1.27 12.20 13.14
1.08 9.52 10.48
3.92 4.66 5.57 6.59 7.32 8.37
2.28 3.05
5.00
5.55 5.48 5.72 5.58 5.41 4.76 4.32 3.90 3.65 3.76 3.45 3.31 3.12
0.00
2000 2001 2002 2003 20004 2005 2006 2007 2008 2009 2010 2011 2012

SOEs Non-state enterprises FIEs

Source: Statistical yearbooks in various years, GSO

2.2.5 Exposure to external shocks

Interestingly, though Vietnams economy deeply integrated into international economy and
export and import are quite volatile, the GDP growth is rather stable during the period 1986-2013.
More specifically, during the period of 1986-2013 the coefficient of variation of growth rate of GDP,
export and import are 0.24, 0.88 and 1.1 respectively. In the same period, its neighboring economies
Thailand, Indonesia, Malaysia and S. Korea also faced high volatility of export growth, especially
Indonesia and S. Korea. The volatility of Vietnams export is even higher than Thailands and Malaysias.
However, Vietnams GDP growth is much more stable than its neighboring economies (Table 5).
It is worth noting that, before the Asian crisis 1997, the performance of these economies is
much better than Vietnam: higher growth and more stable (Table 5). After having escaped from crisis,
since 1999 these economies have not yet gained their previous level of growth rates and they also
suffer from more volatility in growth. Interestingly, although in the post-crisis period Vietnams
economy has integrated into the international economy much more than it did in pre-crisis period, its
growth rate in the later is higher and more stable in the former. This partially due to prior 1997
Vietnams economy was still in the initial stage of integration into the international economy; hence it
was less affected by the crisis. In the post-crisis period Vietnam have made used of the regions
recovery momentum and gained high growth rate. Table 5 also shows that the more stable, the higher
the economy grows.
Table 5: GDP growth and its coefficient of variation in different periods
Periods Vietnam Thailand Indonesia Malaysia S. Korea
6.53 5.40 5.39 6.03 6.14
Growth
1986-2013
0.24 0.89 0.74 0.64 0.62
C.V.
6.74 9.13 7.51 8.32 8.56
1986-1996 Growth

22
 0.35 0.26 0.17 0.33 0.22
C.V.
7.19 4.74 4.71 5.54 5.27
Growth
1999-2007
0.16 0.32 0.34 0.38 0.45
C.V.
5.72 2.92 5.9 4.31 3.17
Growth
2008-2013
0.09 1.55 0.13 0.77 0.68
C.V.

Source: World Bank Development Indicator 2013

However, in the period 2008-2013 Vietnam lost its growth momentum, the average growth
rate declined to 5.72% which was lower than that of Indonesia and other neighboring countries such
as Cambodia. The slowdown of growth in Vietnam is mainly due to internal problems in the economy
rather than to external shocks.

2.2.6 Technological progress

Nguyen Tu Anh and Nguyen Thu Thuy (2010) show that Vietnam has kept moving from low-
tech output economy to high-tech output11 one, but the progress has been slow. The output and the
value added of low-tech industries accounted for more than 70 per cent of the totals. This means that
Vietnams economy had been still dependent on the low-tech production. Furthermore, for those high-
tech industries, Vietnams share of value added was as low as 10 per cent, and lower than the share of
valued added in low-tech industries. This implies the so-called high-tech industries are not real ones.
The contribution by native labors was even lower than in low-tech ones, for example in garment
industry, Vietnam enjoyed around 35 per cent of value added, while in mobile phone production, the
share was around 10 per cent.

The reasons for the above tendency were three-fold: (i) the high-tech industry sector was
mostly dominated by foreign investors, (ii) the supporting industries for those high-tech industries
were absent, and (iii) there exists a very weak linkage between native enterprises and foreign invested
firms. Consequently, Vietnam imports almost everything for production and the value creation mostly
comes from labor.

The study by Nguyen Tu Anh and Nguyen Thu Thuy (2010) reveals that the tendency of
lowering value added contribution of both high-tech and low-tech industries from 1999 to 2007
becomes even stronger. This tendency has consequently resulted in the recession in economic growth
and macroeconomic instability of Vietnam during 2008-2013. In 2011, Vietnam launched out the
economic restructuring program to improve the efficiency of investment and labor productivity. The
outcome of this ambitious program has been modest so far, but it shows an optimistic trend for the
economy. The ICOR index slowly decreases from the peak of 6.5 to below 6.0. Many transnational

23
corporations (TNCs) started investing in large scale into high-tech industries in Vietnam, such as
Samsung (with USD 9 billion), Intel (with USD 1.5 billion), Foxconn, Nokia (Microsoft), LG group, etc.

2.2.7 Productivity
Theoretically, capital and labour are two main inputs of production. The technology combining
these two inputs is however mostly important in defining the competitive advantage of a firm, an
industry, or an economy to another. Using variable elasticity of substitution (VES) production function,
Nguyen Tu Anh and Nguyen Thu Thuy (2009) show that Vietnam economic growth in period 1986-2007
is not led by improvement in productivity but essentially driven by high rate of capital accumulation.
Using the models that incorporate learning-by-doing and other exogenous contributors in
establishing technological progress proxied by total factor productivity, their study shows that there is
no evidence of effectiveness of learning-by-doing in Vietnam between 1986 and 2007. In average, the
total factor productivity (TFP) contributes negligibly to economic growth in the whole period (Table 6).

Table 6: Contribution to economic growth 1986-2007 (%)

Year GDP growth Capital Labor TFP

1986 2.79 4.99 1.29 -3.49

1987 3.58 5.70 1.38 -3.49

1988 5.14 5.11 1.42 -1.39

1989 7.36 4.42 1.88 1.06

1990 5.10 3.64 1.90 -0.45

1991 5.96 4.26 1.03 0.67

1992 8.65 4.66 1.22 2.76

1993 8.07 6.70 1.33 0.05

1994 8.84 6.59 1.42 0.83

1995 9.54 6.74 1.34 1.46

1996 9.34 6.51 0.15 2.68

1997 8.15 6.17 1.18 0.81

1998 5.76 6.15 1.17 -1.56

1999 4.77 5.42 1.15 -1.80

2000 6.79 5.39 2.47 -1.08

2001 6.89 5.13 1.38 0.39

24
 Year GDP growth Capital Labor TFP

2002 7.08 5.27 1.33 0.48

2003 7.34 5.33 1.47 0.54

2004 7.79 5.29 1.36 1.14

2005 8.44 5.28 1.23 1.93

2006 8.23 5.30 1.04 1.88

2007 8.48 6.08 1.05 1.36

Source: Nguyen Tu Anh and Nguyen Thu Thuy (2009)

Vietnam seems to repeat the growth story of newly industrialized economies (NIEs) in period
1965-1986 which described by Krugman (1997) "it (high growth rate) was due to forced saving and
investment, and long hours of works...". Krugman's (1997) interpretation of these results is very
pessimistic since, according to him, the lack of technical progress will inevitably bound the engine of
growth as a result of the diminishing returns affecting capital accumulation. However, these signals
should be taken as a warning not a worrying. Up to 1986 TFP contributes nothing to growth in NIEs.
But Lau and Park (2003) find firm-level evidence of positive contribution of TFP to growth in these
economies in longer period. "It is possible that the potential to adopt knowledge and technological
from abroad depends on a country's stage of development. Growth in the early stages may be primarily
associated with physical and human capital accumulation, and significant potential for growth through
catch-up may only emerge once a country has crossed some development threshold" (Collins and
Bosworth, 1996).
Cuong Le Van et al (2010) show that the productivity of the sector of consumption goods in an
economy largely depends on the sector of new technology and the involved skilled labour in producing
the new technology, i.e. depending on education as well. The findings of this study confirm that a
countrys economic growth stages should go from importing physical capital and new technology for
consumption goods to investing in education and training to improve labour skills. The specific
implication for Vietnam is that in this initial stage of economic development, the limited TFP
contribution to Vietnams economic growth can be justified. Nevertheless, in order to maintain the
sustainable growth, Vietnam should pay much more attention to improving training and education,
enhancing the countrys human capital & technological advances through investing into research and
development.

2.2.8 Human capital

Since Doi Moi in 1986 Vietnam has followed a successful policy of modernization of the
economy that has produced impressive results in terms of economic growth and poverty reduction.
However, the growth rates slowed down over the last 5 years. Three key pillars that have been
recognized as bottlenecks to economic growth are: poor infrastructure, underdeveloped human
resources, and poorly-functioned market institutions. The National Congress of the Communist Party
in 2010 designated the urgent necessity of breaking-through these bottlenecks.

25
 Vietnam is now enjoying the golden population structure in which the working age population
is nearly double the dependent population, however labor productivity is low and slowly improved.
According to Asian Productivity Organization (APO)12, Vietnams labor productivity in 2010 is equal
23.3% of Malaysias, or 37% of Thailands, or 69.9% of the Philippines. Furthermore, the annual growth
rate of productivity decreased from 5% in period 2002-2006 to 3.4% in period 2007-201113.
Poor labor market outcomes and low productivity are often attributed to workers either
lacking the skills or having limited opportunities to enhance their skills and productivity through
training. This is a major challenge for Vietnam to be able to strengthen its competitiveness in the global
economy. Therefore, education and training is recognized in Vietnam as a priority area of development
intervention.

2.2.8.1 Human development index

In period 1990-2012, the success of economic renovation has resulted in impressive
improvement in human capital development in Vietnam: life expectancy increased by nearly 10 years;
average number of year of education received in a life-time by people aged 25 and older increased by
1.5 year; GNI calculated in constant USD in 2005 by PPP increased more than 3.5 times (Table 7: ); and
the general HDI value increased 40.55% the highest rate within ASEAN-5. In this period the growth rate
of HDI in Vietnam is the highest within ASEAN-5 countries.
Table 7: Vietnam Human Development Index
Life expectancy Expected years Mean year of GNI per capita HDI value
at birth of schoolings schoolings (2005 PPP$)

1990 65.6 7.9 4 845 0.439

1995 69.5 7.9 4.2 1217 0.48

2000 72 10.4 4.5 1578 0.534

2005 73.8 11.1 4.9 2120 0.573

2010 75 11.9 5.5 2757 0.611

2011 75.2 11.9 5.5 2859 0.614

2012 75.4 11.9 5.5 2970 0.617

26
Source: UNDP, Human development report 2013, The Rise of the South: Human Progress in a Diverse
World. In this report, UNDP changes the underlying data and methods for calculating these indexes. It
could be misleading to compare values of these indexes with those previously published reports.

Even Vietnam has made good improvement in HDI in period 1990-2012; the general HDI in
Vietnam is still low in relative to other countries: in 2012 Vietnam ranked 127 out of 187 countries in
database and remains at bottom within ASEAN-5. However, in terms of the Inequality Adjusted HDI
(IHDI)14 Vietnam ranked before Indonesia and the Philippines. This may imply that Vietnams potential
HDI is lowest among ASEAN-5; the country makes its actual human development even better.
Table 8: HDI in ASEAN-5 in year of 2012
HDI IHDI LEB EYS MYS Growth HDI Rank out of
1990-2012 (%) 187

Indonesia 0.629 0.514 69.8 12.9 5.8 31.32 121

Thailand 0.690 0.543 74.3 12.3 6.6 21.27 103

Philippines 0.654 0.524 69.0 11.7 8.9 12.56 114

Malaysia 0.769 n.a. 74.5 12.6 9.5 21.1 64

Vietnam 0.617 0.531 75.4 11.9 5.5 40.55 127

IHDI: inequality adjusted HDI, LEB: life expectancy at birth, EYS: Expected year of schoolings 15, MYS:
mean year of schoolings.

Source: UNDP, Human development report 2013, The Rise of the South: Human Progress in a Diverse
World

It should be noted that, Vietnams MYS is lowest within ASEAN-5 and the pattern of school
enrollment in over last 3 years almost unchanged. This resulted in no improvement in EYS, and
consequently, the gap of MYS with other countries is getting wider.

2.2.8.2 Quality of labor

The structure of labor market in Vietnam has changed rapidly since Vietnam entered WTO in
2007. The elementary occupations decreased sharply from 61.7% of total to 39.98% with annual
decreased rate of 5.89% (Table 9: ). The demand for unskilled labor declined quickly. All other kinds of
occupations show increases in their shares. However, occupations that require simple and medium
skills, such as Service workers and shop and market sales workers, Skilled agricultural and fishery

27
workers, Plant and machine operators and assemblers have much greater growth rates than other
occupations that require higher skills. Vietnam is gradually changing from labor-intensive economy to
skills-intensive one.

Table 9: Changes in structure of occupation

Structure 2007 2010 2011 2012 Growth

Legislators, senior officials and managers 0.6 0.9 1.1 1.05 14.73

Professionals 4.5 5.1 5.3 5.52 6.93

Technicians and associate professionals 2.9 3.7 3.6 3.48 6.44

Clerks 1.2 1.4 1.5 1.67 9.68

Service workers and shop and market sales

7.3 14.6 14.9 16.07 20.20
workers

Skilled agricultural and fishery workers 5.7 15.5 13.9 12.74 20.55

Craft and related trade workers 12.5 12.6 12.1 11.96 1.75

Plant and machine operators and assemblers 3.3 7.1 7 7.27 20.22

Elementary occupations 61.7 39.1 40.4 39.98 -5.89

Source: GSO, Report on survey on labor and employment in 2010, 2011 and 2012

However, the supply of skills does not meet rapid changes of demand for labor. From 2007 up
to present, the proportion of untrained labor changes quite slowly: from 83.7% to 83.15% (Figure 12:
). This seems contradict with the movement of structure of jobs in (Table 9: ). The contradiction can
be explained by a large portion of untrained labor is trained at work by enterprises themselves16. This
fact may imply that official education and training institutions do not meet requirements for labor
markets; employers have to recruit unskilled labor and then trained them at work. Employers can only
use this kind of labor training for simple skills that can be trained shortly, massively, and cheaply. For
complicated skills that requires comprehensive syllabus, costly facility and customized learners
enterprises are not willing to supply at work because of high cost and risk of learners quitting jobs after
train. The failure of supplying medium skills by formal education and training institutions may put an
obstacle on Vietnam economic growth path.

28
 The movements of proportion of labor graduated from vocational training17 and vocational
education18 institutions in Figure 12: also support our argument. Proportion of labors that have
certificates from these institutions has not increased since 2007. Fortunately, the proportion of labor
with tertiary education steadily increased to fill up increasing demand for occupations such as
professionals, Legislators, senior officials and managers, technicians, etc.

Figure 12: Structure of labor by skills

90 9

80 8

70 7

60 6 Untrained
50 5 Skilled

40 4 Vocational training
Vocational education
30 3
Tertiary education
20 2

10 1

0 0
2006 2007 2010 2011 2012

Source: GSO, Report on survey on labor and employment in 2010, 2011 and 2012

In recent survey conducted by CIEM under support from World Bank19, also indicate mismatch
between supply and demand of skills. Around 47% of firms claim that education system does not meet
skill needs of their workplace; in subsample of international firms 66% of them claim this mismatch;
36% of local firms claim so.

2.2.8.3 Which skills are demanded?

The CIEM-World Bank survey 2012 shows that education for higher educated workers and
white-collar workers are more likely to think that education are useful for their jobs.

29
 The survey also shows that the more educated, the more useful education bring about.
However, since more than 83% of labors in Vietnam are still untrained, hence proportion of labor think
education useful is still low and lower than 50%.

Figure 13: Proportion of workers claim the usefulness of education

90
80
70
60
50
40
30
20
10
0
Primary Lower Upper Higher Higher Blue collar White Average
ISCED 1 secondary Secondary education education collar
ISCED 2 ISCED 3 ISCED 4 ISCED 5

Source: Vietnam STEP Employer Survey 2012

For white-collar workers, employers highly appreciate job-specific technical skills, problem
solving skills, and leadership. These skills are scored more than 2.5 out of 5. For professionals, nearly
87% questioned persons responded that they have to interact with non-colleague in their jobs, 79%
have to make presentations at work and 72% have to supervise others. The numbers for technicians
to conduct these tasks in their jobs are 84.6%, 66.7% and 53% respectively. These tasks require
additional cognitive skills such as behavioral, adaptive, problem solving skills, etc. Data in Table 9:
indicate a steep up trend of jobs: managers, professionals, technicians, etc., in Vietnam labor market.
Hence the demand for job-related skills and cognitive skills must be increasing in the coming time.

Figure 14: The importance of Job-related skills for white-collar workers (Score range: 0
5)

30
 3.5

2.5

1.5

0.5

Source: Vietnam STEP Employer Survey 2012

Theoretically, the technical skills are provided by technical & vocational education and training
(TVET) and higher education schools or partially by training on jobs, on the other hand other cognitive
skills such as leadership, problem solving, communication, etc., are established at initial state of
education of secondary and primary schools. Therefore, in order to narrow down the mismatch
between supply and demand for skills, Vietnam need to focus on two arrows: improvement of TVET
and higher education schools, and enhancing the education of cognitive skills in secondary and primary
schools.
In short, the success of renovation policies has effectively promoted human resource in
Vietnam. However, since the country started at low level, the current human resource of Vietnam is in
urgent need to improve to meet demand for development. The current education and training
institutions do not meet requirements from the labor market and enterprises now sharing the burden
of training labor. This approach will not help Vietnam to upgrade into a more competitive and
productive economy in long-run. Instead, Vietnam needs to comprehensively improve the education
and training system to provide market-demanded skills and then reduce the mismatch between supply
and demand of skills.

2.2.9 Income poverty and inequality

High growth rate of Vietnam economy has created considerable progress for the country;
however this progress has not been fair for all groups of people although its starting point is rather
equitable. Share in economic progress of the poorer groups, rural inhabitants and ethnic minorities
have slightly declined. Income growth has focused mostly at the urban areas and in with export-
oriented economic regions. Growth in the Northwest and Central Highlands regions is much slower
than in large cities. Income inequalities have been quickly exacerbated. The income share held by the

31
 richest fifth of the population has increased from 43 percent in 1993 to 45 percent in 2006; that of the
poorest fifth decrease from 8 percent to 7 percent (Vandemoortele and Bird, 2011).
In the meantime, the Gini coefficient increased from 33 in 1993 to 43 in 2008 (ADB, 2009). The
inequality between metropolitan and countryside and the income gaps have enlarged (Table 10).
Table 10: New Poverty Estimates for 2010 by Region and Urban/Rural Areas

WB-GSO Poverty Estimates

Official Poverty
Poverty Extreme Poverty Estimates

Poverty Contribution Poverty Contribution Poverty Contribution Population

rate (%) (%) rate (%) (%) rate (%) (%) Shares (%)

All Vietnam
(national) 20.7 100 8 100 14.2 100 100

Urban 6 9 1.5 6 6.9 6 30

Rural 27 91 10.7 94 17.4 94 70

Red River Delta

(Hanoi) 11.4 12 2.8 8 8.4 13 22

East Northern
Mountains 37.3 21 17.9 26 24.2 20 11

West Northern
Mountains 60.1 9 36.5 14 39.4 9 3

North Central
Coast 28.4 16 9.7 15 24 20 12

South Central
Coast 18.1 7 5.9 6 16.9 10 9

Central
Highlands 32.8 10 17 13 22.2 9 6

Southeast
(HCMC) 8.6 7 3.1 7 3.4 4 18

Mekong Delta 18.7 17 4.8 11 12.6 17 19

Source: World Bank (2012), Vietnam Poverty Assessment, Well Begun, Not Yet Done: Vietnams
Remarkable Progress on Poverty Reduction and the Emerging Challenges.
32
 Poverty reduction in Vietnam experienced a sharp decrease in absolute terms. Derived from
the Governments poverty line, poverty rate in Vietnam has fallen down to 14.5 percent in 2008 from
that of 58 percent in 1993 the average annual rate was recorded at 3 percent (Figure 15).
Nevertheless, the pattern of poverty reduction has played a role in widening inequality
between ethnic groups and areas (Baulch et al., 2010). In rural regions, poverty rate decreased to 3.2
percent meanwhile this rate in the metropolitan stays at only 1.5 percent
annually. Nonetheless, disparity between rural and urban regions has been widening. The poverty rate
recorded in rural regions in 1993 was 2.6 times greater than it was in urban regions, and until 2008,
the rate increased to 5.7 times bigger. The Central Highlands and Northeast are the regions with
highest poverty rate, where about one third of the population living under the national poverty
standard. In absolute terms, poverty rate in Central Highlands and Northeast has decreased more than
in other regions, but inequalities has increased much faster than other regions of the nation from 1993
to 2006. The commonness of poverty amongst minority ethnic groups in comparison to that rate
amongst the Kinh group extended from a factor of 1.6 up to 5.1 from 1993 to 2006 an unusual rise
in inequality. Ethnic minority groups, including about 13.5 percent of the countrys population,
comprise 44 percent of the poor (Vandemoortele and Bird, 2011).
Figure 15: Economic Growth and Poverty Reduction in Vietnam: Two Decades of Progress

Source: World Bank (2012), Vietnam Poverty Assessment, Well Begun, Not Yet Done:
Vietnams Remarkable Progress on Poverty Reduction and the Emerging Challenges

3 Drivers of Vietnam economic progress

This section identifies the basis for economic development and reforms that happened
from 1990 to 2010, which were the main causes for sustaining economic progress in Vietnam. The
distinction is related to the case of Vietnam since the crossroads in the countrys economic
improvement was in the beginning of 1990s.

33
3.1 Prerequisites for Vietnams economic progress

3.1.1 Pragmatic leadership

Strong leadership was a factor of development merely when it supports the implementation
of efficient and suitable policies. A crucial basis for economic progress in Vietnam was pragmatic and
non-dogmatic leadership by the Government, without outstanding individual leaders (Vandemoortele
and Bird, 2011). There was an overarching purpose in the Government to decide the way for economic
development and growth. Therefore, internal discussion and policy improvement were supported and
a trial-and-error method had come to an agreement. Moreover, after coming to consensus, all
members of the party will support for the final decision, with responsibility mechanisms developing
from decentralized power structures. These democratic forces allowed the approval and realization
of efficient policies during the Doi Moi that were vital to economic development (Vandemoortele and
Bird, 2011).
Following are main factors strengthening this pragmatic and efficient leadership. The first
factor is the arrangement of an insular goal to increase living standard for all Vietnamese citizens by
means of both economic and social development and growth and an open-minded
goal to lessen income and human disparities between Vietnam and other developed nations in East
Asian (Kokko, 2008). The targets rooted from the urgent demand of the government to retain peoples
sincerity during post-war period, when economic performance was disappointed and peoples living
conditions were very low, its consistency was shaky.
The second factor is the long-standing practice in Vietnam to make decision basing on
consensus of the collective (Rama, 2008), in order to evade personal political mistakes. This
requirement is obvious in the governments capability to prevent disagreements within the Party in
order for Party disintegration avoidance (Rama, 2008). This, in addition to the approval for a trial-and-
error method to progress, led to the fence breaking experimentation at several districts to be
implemented and developed to nationwide reforms (Vandemoortele and Bird, 2011).
The third factor is firm political support of approved policies that were a factor of the
operational reforms. Rama (2008) illustrates the severe democratic centralism of the Communist
Party, through which if the common opinions are obviously supporting a new policy, other members
of the party would get into formation with no further resistance and would completely support for
implementing the new policies.

3.1.2 Strong institutions and a broad foundation of infrastructure

During the 1990s, Vietnam had an extensive network of institutions crossways the country. In
the past, as resources flow from central government were very low, province levels had
to organize resources on their own with the purpose of funding their work. This practice for
resources mobilization at the regional level implied that infrastructure was frequently developed by
local institutions, improving a sense of responsibility and ownership, which played a role in the
sustainability. It also resulted to local stratification, through which the most developed areas obtained
better infrastructure: a cross-regional transfer system is at this time ready (Rama, 2008).
The decentralized government also implied that extensive ranges of services, essential infrastructure
and institutions were obtainable nationwide.

34
 Thus, institutions and essential infrastructure were ready for implementing reformation in
economic and to accept and spread new ideas and technologies. The wide influence of institutions and
the essential arrangement of infrastructure allowed the dissemination of opinions and agricultural
innovation that was a key factor of the flow in output (Vandemoortele and Bird, 2011).

3.1.3 Equitable initial investment in human development

During pre-1990, the Government left an inheritance of even-handed investments in social
and human development, particularly in education and healthcare system. Improved and equitable
education system in Vietnam was a very important factor contributing to the economic progress of the
country (Bernab and Krstic, 2005).
Nguyen and Nguyen (2007) indicate that Vietnams ability to attract FDI inflows is remarkable,
thanks to Vietnams comparatively high level of education and labors quality, among many other key
advantages that enable Vietnam to attract FDI.
Due to reasonable investment, Vietnam has improved its education system which is
considering one of the main aspects leading to sustainability of the economic progress and ability
to attract more FDI (Nguyen and Nguyen, 2007). This enhancement could also be enlightening by
strong demands from civil society.

3.2 Key factors enabling Vietnam to sustain its economic progress

3.2.1 Successful combination of internal and external resources

At the beginning of Doi Moi process, Vietnam correctly determined to reform the internal
economy in parallel with the opening of the economy to the global market. The external resources
from private, government and non-government sectors played a crucial role in improving
infrastructure, poverty reduction and encouraging the private sector inside the economy to invest and
improve their production capacity. The positive interaction between internal and external resources
has been evidenced since Doi Moi.
Opening the economy for international markets has helped Vietnam to have vent for idle
surplus of resources. Vast cheap labor has been put into production for the international markets and
gained foreign exchange to import necessary technologies to improve the production capacity of the
economy. Furthermore, by exposing to international competition, domestic firms have had chance to
learn and develop. And now some domestic firms have become successful investors in international
markets, such as Viettel Group, FPT Group, Hoang Anh Gia Lai Group, Petrolimex, etc.
Besides, ODA was a cheap and essential source of funding for Vietnam to help the economy to
overcome the initial bottlenecks of infrastructure and human capital underdevelopment. This
assistance was extremely important at the time when Vietnam economy was very poor. It acted as a
big push from outside for the economy to move forward. Vietnam recognized the importance of this
precious source of capital and has been utilizing it efficiently.
More importantly, the international integration process has also put positive pressures on
Vietnam to reform its internal institutions towards a market economy. The more Vietnam integrates
into the global market, the less differentiation between Vietnams institutions and the international
standards. As a result, Vietnams business environment has been gradually upgraded and the costs of
doing business in Vietnam have been lowered.

35
3.2.2 Sustained reasonable land reform
The democratic redeployment of agricultural land, along with the liberalization of buying and
selling in commodities, mostly contributed to the improvement of living conditions in the countryside
and reduction of poverty in Vietnam (Rama, 2008). The issuance of a numbers of land laws and
the survival of an effective unofficial for trading land-use rights resulted to a determination in 1988,
which decollectivised farmland and approved property rights to individuals although in very
few amount. The implementation happened in an extremely democratic system (Klump and Bonschab,
2004). The 1993 Law on Land commenced a market for land, permitting for land inheritance and
transfer of using right. Until 2000, there were around 11 million issued titles. This has balanced
targeted investment in the agricultural industry and then impacted to substantial rise of incomes for
farmers. From a net importer in late 1980s, nowadays Vietnam has become the worlds second
largest rice producer and exporter. Those reforms also resulted to excessively reducing poverty for
farmers, since they increased incomes for people in rural regions (Klump and Bonschab, 2004; Rama,
2008).
Sustained reasonable land reform started since the beginning of 1990s has been a main factor
contributing to the sustained economic development. A good purpose of land reforms then led to a
land reconsolidation by the rich people or enterprises (Vandemoortele and Bird, 2011). In Vietnam,
however, efficient land reform, that spread the properties of production quite justifiably, and firm
rules on consolidation to avoid reconsolidation of land by rich people in following years.

3.2.3 Agriculture sector reforms

Agriculture was the main part in the case of economic growth in Vietnam since over than 80%
of the Vietnamese population worked in this area. The reformation in agricultural sector in 1988
offered more roles and rights for Vietnamese farmers and private enterprises. Other improvements
comprised of the elimination of central planned targets and prices, an alternative choice for farmers
to separate from cooperatives and approval for them to buy and sell the products in a competitive
market. According to Levinson and Christensen (2002), concurrently state-owned enterprises were
restructured in order to diversify the economy and budget transferred from heavy to light industries.
In late 1988, foodstuff production rose significantly and nowadays, Vietnam has become the second
largest rice exporter in the world. Nevertheless, growth has been more gradual in Central Highlands
and Northwest areas.
The reforms continued growth in agricultural sector properly in the 2000s. In agricultural
sector, growth has been sustained by investing in light manufacturing and right of entry to enhanced
agricultural technological innovation covering new inputs, in addition to infrastructure and
machinery, for example irrigation and transportation (Vandemoortele and Bird, 2011). Vietnam has
expanded the domestic crop production as well as moved into new markets and is now one of the
most important participants in those fields, for example coffee and rice.
The growth in productivity of agricultural labor together with high domestic and international
demand for agricultural products experienced an increase in the majority of income of
disadvantaged people. It then raised local need for non-agricultural products made by disadvantaged
people. Then this growing local and foreign demand for low-skilled informal products resulted in
higher income chances for employees in agricultural sector and decreased poverty rate. According to

36
Bernab and Krstic (2005), growing non-agricultural gains more demand for
agricultural products, building a good circle to develop economic development and reduce poverty.

3.2.4 Pragmatic and sequenced trade liberalization

From late 1980s, Vietnam has followed a two-track approach to reforms. According to UNDP
(2003), the country participated in government trading, continued monopolies in import and
maintained quota limits and high tariffs at 50% on industrial imports and 30% on agricultural imports.
In spite of high trade barriers, the country has integrated deeply and speedily into the global and
regional economy. In contrast to economic orthodoxy, the strategies have remarkably
increased trade to double-digit rates annually and attracting considerable FDI (Vandemoortele and
Bird, 2011).
Policies to attract FDI intended for increasing investment capital, transferring technology and
management skills, and creating employment. The first Law on Foreign Investment was approved by
the Vietnam Parliament in 1987. The law was then revised several times, in 1992, 1996 and 2000, and
in 2007 (Nguyen and Nguyen, 2007). The slow liberalization targeted to eliminate barriers for foreign
investors operating in Vietnam, whereas protecting the domestic industries, promoting industrial
upgrading and maintaining management and manufacturing skills domestically. For instance, early
inflows of FDI focused on labor-intensive areas which offered an opportunity to reduce poverty for low
skilled workers (Rama, 2008).
Vietnam has faced a specific problem from 2003 as it followed pro-cyclical macroeconomic
policy. Loosening of monetary and fiscal policies has enabled substantial inflows of FDI and fast credit
growth (Vandemoortele and Bird, 2011). The fiscal deficit has increased owing to major growths in
public investment and lending to state-owned corporations. But in late 2000s, FDI faced a transfer
from manufactured products to real estate, instead of focusing in essential value-creating areas (Hanh,
2010). This endangers Vietnam to opportunistic and risky investors.

3.2.5 Continued investment in human development

Thanks to the economic growth, the government has more budgets to spend in social
improvement. Advancements in education system have been very remarkable. The National Education
for All Programme in 2003 led to a 20 percent rise in the budget for education of the government
(Oxfam, 2006). Thus, the primary net enrolment ratio is more than 95 percent.
Regarding health care issues, Vietnam has continued an extensive health care system.
For instance, in 1998, the Program 135 was launched out to provide financial support for poorest
communes particularly in mountainous regions. The support has also been used for the construction
of irrigation and schools (Klump and Bonschab, 2004). Also in 1998, The National Hunger Eradication
and Poverty Reduction Programme (HEPR) was created to provide free medical treatment and school
fees exemption, such as poor household certificates and health insurance cards, (Klump and Bonschab,
2004). The investment has contributed to Vietnams literate and flexible labor force (Le, 2006).
Nonetheless, facts show that public investment stays limited and inadequate to deal with
increasing disparities and those out-of-pocket expenses in high school education and in health
care create a challenge for majority of the population (Kokko, 2008). For instance,
unpredicted expenses for health care are considered to be the major cause that put people
in poverty (Kokko, 2008).

37
3.2.6 Social solidarity and equity in policy and implementation
Equity is extremely important in Vietnam. According to Rama (2008), Vietnams success in
adopting comprehensive reforms is also associated with the determination to avoid creating losers
from a material point of view. This was proved in policy planning targeted to increase living
standards, reduce poverty and narrowing income gaps. Inequality as presented by Gini coefficients is
lows in Vietnam. This help to increase the social solidarity and hence contribute to maintain the
momentum for development.
Figure 16: Estimates Income GINI Coefficients, 1993-2006

0.45 0.42
0.39
0.4 0.37 0.36
0.34
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
1993 1998 2002 2004 2006

Source: GSO statistical yearbooks, various years.

Nevertheless, there is an upward trend of inequality during the course of development in

Vietnam. This is due to the fact that, economic growth is always the focus of the government policy.
In 2000s, price stability and economic growth was always the most important objectives of
macroeconomic management of the country (Kokko, 2009).
Instances of policies that targeted to retain equity vary from the democratic land distribution
at the early periods of Doi Moi, to directed investments in disadvantaged areas, and reduce tuition
fee and health care costs for poor people. But this sense of solidarity has many disadvantages
(Vandemoortele and Bird, 2011) since there exist groups of people that do not deserve to be poor and
some groups of people deserve to be poor, according to the society rules on the hardworking and
contribution.
To maintain the solidarity and equity of the country, the government and its social policies play
a critical role. The government, not only creates favorable conditions for economic growth and market
operation, but also intervenes to repair the failures of the markets for its people welfare. Its social
policies may include labor market policies, social protection policies, and targeted material supports
to needed people and communities. Even though labor market does not function very well given the
abundance of labor and lack of capital in the economy, but social policies has been conducted relative
well to maintain the support of the people to the government. Targeted programs have been created
and operated to target disadvantaged and vulnerable groups. The coverage of social insurance is
growing rapidly so that one in ten households receives some forms of pension income. The social
insurance system has the potential to grow into a core component of Vietnams welfare mix. Still a
challenge facing Viet Nam over the next ten years is to extend coverage of this welfare scheme (Arkadie
et al, 2010).
38
4 Conclusions and policy recommendations
Vietnams economy has gained fairly high growth rates over the last twenty years. The relative
GDP per capita to US has shown slightly upward trend (Figure 17). However, in terms of catch-up, in
23 years from 1990 to 2013 Vietnam only upgraded its relative GDP per capita to United States from
4.06% to 9.96%. At the same time, South Korea increased its figure from 35.98% to 62.36%. Malaysia
and Thailand also show big leap forward: from 27.46% and 17.22% to 43.84% and 27.08%. Vietnams
performance slightly outweighs the performance of Indonesia.
Figure 17 also shows that, except for South Korea, Vietnams neighboring economies seem
getting stuck in middle-income trap for long time. The movement of Vietnam and its neighboring
economies indicates the orderly progress of the flock of East Asian economy: the whole flock moves
forward, individual economy hardly move relatively to others members.
Figure 17: GDP per capita in PPP of selected countries relative to United States (%)
100.00

90.00

80.00

70.00
Indonesia
60.00
Japan
50.00 Korea, Rep.

40.00 Malaysia
Thailand
30.00
Vietnam
20.00

10.00

0.00
1992

2008
1990
1991

1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

2009
2010
2011
2012
2013

Source: Calculated from GDP per capita, PPP (current international $), World Bank 2013.
The economic integration has been evidenced to strongly help economic growth in Vietnam.
In the course of catching-up Vietnam, with no doubt, needs integrating deeper into international
economy. However, Vietnam economic growth based crucially on expansion of inputs and depended
heavily on imported capital goods (machinery, instrument, accessories, and raw materials). There is no
evidence of technological improvement in Vietnam over the last two decades. In regional integration
Vietnam mainly serves as an importing market and an assembling factory for other East Asian
economies, in contrast, these economies imported limitedly Vietnams commodities. This is opposite
with what advocators of flying geese paradigm propose for less developed economies. The paradigm
proposes that the international relocation of production of a particular product from a national
economy must coincide with gradual reduction of its domestic products. The original exporting
economy will transfer gradually production process to the importing economy and eventually import
that product. In reality we witness continuously that the production in original exporting economy

39
does not decline, the transnational corporations (TNCs) from these economies only move simple parts
of production (assembling) to followers (like Vietnam) to enhance the competiveness of their exports
by taking advantages of cheap labor and other inputs (energy, fee of environmental protection, etc.,)
in less developed economies. Hence trade is increasingly a flow of goods within production networks
that are organized globally rather than nationally. Whether any territory is included in or excluded
from global networks depends on decisions of private actors. States can try to make their territory
attractive but cannot dictate the structure of goods production networks. Consequently, the TNCs
control almost everything such as technology, marketing network, production structure and they
account for a lion share in total value-added that created by the production chain. The followers only
benefit a tiny share of value added, as the case of Vietnam.
In Vietnam, economic growth has been largely and heavily contributed by FDI and export.
However, we do not find evidence to show that GDP growth may have improved FDI inflow or exports
since the last two decades of Doi Moi, implying that Vietnam has been mostly exploiting the resources
of cheap labor and raw materials while not yet creating comparative advantages of technological
advances and productivity of capital and high skilled labor. Due to the law of diminishing marginal
productivity, the economic growth of Vietnam would soon slowdown and vanish if no dynamic
comparative advantage happens. As a consequence, Vietnam would face the adverse risks of lagging
behind in the process of global and regional economic integration. In brief, Technological upgrading
and human capital development are the essential factors to sustain economic growth of Vietnam.

4.1 Constraints in technological acquisitions

Obviously, those economies with poor resources that are related to R&D (including highly
educated and skilled human resource, accumulations of knowledge, strong and large industrial
foundation, etc.) can hardly generate technology and technological upgrading. A new technology is
typically firstly invented in a developed economy, and then it is partially or largely applied to produce
for domestic customers needs for initial experiment and later modification. At this first stage of
production, price is inelastic due to both power of monopoly and lack of standardization and
information. In the second stage, the products in maturation of domestic market will be exported to
those economies with similar levels of income and taste. The super profit in monopoly markets induces
competitors racing for or imitating that technology. Under increasingly tougher competition, the
inventing firm needs standardizing their initial products and then moving certain parts of production
process to importing economies to decrease their costs of production and also to ensure their
competiveness. At this third stage, the less developed economies, including Vietnam, are likely to be
able to acquire this kind of technology. However, due to the standardization of products, the crucial
part of production costs now is actually marketing costs. Less developed economies are usually in lack
of strong and wide distribution networks and sufficient market relations, and hence they can hardly
beat developed economies in the competition, even when they are able to obtain and absorb the
mentioned technology.
The experience of Vietnam also confirms the fact that technological transfer through FDI by
transnational corporations does not occur automatically or for granted. This is in alignment of the
evidence provided by previous empirical analysis finding limited positive effects of productivity
spillovers from FDI. For example, Hill and Athukorala (1998) show that spillover is positively related to
competition, but negatively associated with the productivity gap between foreign and domestic firms.
In addition, the increasing level of technological complexity makes the technological acquisition
40
become even more difficult due to many elements including higher start-up costs, more complicated
know-how requirements, steeper learning-curve and more intensified specialization. As mentioned
before, TNCs are generally reluctant to transfer technology, and as a result the original exporting
economy may have the pressure to increase their trade barriers in order to protect their declining
industries at home.

4.2 Policy recommendations

In general, it is inevitable that Vietnam should further integrate into the global and regional
economy. However, given the limited resources of the country, Vietnam is obliged to determine and
apply an appropriate integration roadmap to fit its context. As a member of ASEAN, the economy
should definitely keep supporting and promoting ASEAN integration, especially the realization of the
ASEAN Economic Community (AEC), as well as East Asian integration in which ASEAN has been playing
a crucial role. Nevertheless, Vietnam should not lock itself only in the regional production and value
chain network. Without the interaction and competition with firms in various developed countries
around the globe who possess high and advanced technological capacity, it is very difficult for Vietnam
to obtain the necessary technologies needed for its economic development. Vietnams FDI policies
should definitely looks globally, providing more priority for attracting more and more firms from
advanced economies, including United States, EU, Russia, Japan, Korea, etc..
Another direction is to look at the collaboration between Vietnam and China. China has
obviously been growing very rapidly, and becoming one of the strongest economies in the world, and
an important traditional partner with Vietnam. However, Vietnam should still choose to adopt a more
appropriate policy to position itself in the game, so that to keep not only China as a partner, but also
other regional ones in the regional production network, to take the full advantages of the opportunities
ahead, and to avoid the low cost labor trap. Considering the huge size of Chinas market with high
growth rate of consumption, foreign investors are coming closer and closer to China and consequently
looking at Vietnam as a potential investment destination with high growth prospects. Many foreign
firms are increasingly fond of the China + 1 strategy in their investment portfolio.
Over nearly 30 years since Doi Moi, Vietnam has been enjoying quite high economic growth
rate. At the same time, a significantly big amount of capital has been accumulated within the economy.
The securities market has been further developed, creating a better channel for fund raising for
domestic firms. However, there are still bottlenecks in the economy that needs to be solved to enhance
the overall efficiency and productivity of Vietnam. The immature overall financial-banking sector, the
limited choices of financial assets, and some inappropriate policies are all together force the
accumulated capital stock to find their way into more vulnerable bubble markets such as real estate
market, gold market, and sometimes even stock market. It is necessary to put more emphasis on the
acceleration of financial sectors development to efficiently absorb the accumulated capital stock to
create higher productivity. Another point is that more transparency and better control in the real
estate sector is a crucial pre-requisite to reduce unhealthy speculative activities and reverse the capital
to more productive activities, to technological upgrading and to R&D.
The bottleneck of education should also be paid more attention. More autonomy for education
establishments should be introduced to actively enforce the productivity and quality of training and
education in Vietnam. Vocational training is the right field to receive better policies to attract adequate
investment. Education and R&D activities should go in line with the needs, expectations, and

41
participation of business sector so that all have better mutual understanding and contribute
substantially to overall sustainable economic growth.
Finally, small and medium-sized firms in Vietnam clearly are not capable enough to create new
technologies. In the long-run, Vietnams government should have proper strategies to acquire some
significant TNCs, or to push and enlarge the SMEs into big firms, to overcome the obstacle of lacking
core technologies and efficient marketing networks. Therefore, in the medium-term, Vietnam should
do things to encourage domestic entrepreneurs to accumulate capital, to upgrade and enlarge
themselves to gradually achieve the goals.

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