In just two decades Vietnam’s exports have skyrocketed. In the same time period, their GDP per capita also took a big jump from from $390 dollars in 2000 to $2,800 dollars in 2020.
And, this is probably the only nation in Southeast Asia whose economy remained in a good shape despite the pandemic.
So, how does Vietnam achieves so much growth and is it possible to say that it can gain success like China?
To understand the economic growth of Vietnam better, we need to dig back into the history.
Similar to many Asian countries, things in Vietnam were not good because of the colonial rule. The French ruled Vietnam for many years and whatever economic progress the country made under the French after 1900 benefited the French and a small class of wealthy Vietnamese.
Even after getting the independence, Vietnam remained a war zone of both superpowers at that time which was the USSR and the United States along with their allies. Basically the country was divided between North and South while adopting different economic ideologies. The North was communist and South was capitalist.
Further during the 1954-1975 Vietnam war, much of the country’s economic growth came to a halt. It slowed the large-scale construction considerably as labors were diverted to repair war damages.
By the end of 1966, serious strains developed in the North’s economy as a result of war conditions. Interruptions in electric power, the destruction of petroleum storage and industrial facilities along with labor shortages led to a slowdown in industrial and agricultural activities.
Also, the disruption of transportation routes due to bombing further slowed the distribution of raw materials and consumer goods. At the end communists took over the country defeating the United States.
After that, Vietnam’s post reunification economy was in a period of transition to socialism. However, since reunification in 1975, their economy has been plagued by enormous difficulties in production; like imbalances in supply and demand, soaring inflation rates, rising debt problems, governmental corruption, and few more.
This is one of the few countries in modern history which experienced a sharp economic decline in a post-war reconstruction period. Its peacetime economy was one of the poorest in the world and had shown negative to very slow growth in agricultural and industrial production and also in total national output as well.
The country’s Gross Domestic Product (GDP) in 1984 was valued at $18.1 billion dollars with per capita income between $200-$300 dollars per year. If you consider this figure in today’s world, then Vietnam could be the poorest nation hypothetically.
Reasons for this poor economic performance were adverse climatic conditions that afflicted agricultural crops, bureaucratic mismanagement, elimination of private ownership, and many more. Then from 1986, things started to change.
In 1986, Vietnam launched a political and economic innovation campaign called Doi Moi that introduced reforms intended to facilitate the transition from a centralized economy to a “socialist-oriented market economy.”
Doi Moi combined government planning with free-market incentives. This was similar to what China was doing at that time.
At first, the program abolished agricultural collectives, removed price controls on agricultural goods, and enabled farmers to sell their goods in the marketplace. Secondly, it encouraged the establishment of private businesses and foreign investment, including foreign-owned enterprises.
By the late 1990s, the success of the business and agricultural reforms under Doi Moi was incredible. More than 30,000 private businesses had been created, and the economy was growing at an annual rate of more than 7%.
From the early 1990s to 2005, poverty declined from about 50% to 29% of the population. However, progress varied geographically, with most development concentrated in urban areas.
While the country has shifted towards a more market-oriented economy, the Vietnamese government still continues to hold a tight rein over major sectors of the economy, such as the banking system, state-owned enterprises, and areas of foreign trade.
You see, from the last 20-30 years, Vietnam invested a lot in its human capital and infrastructure. They made large public investments in primary education. This was necessary, as a growing population also means a growing need for jobs.
Alongside, Vietnam also invested heavily in infrastructure. And those investments paid off. With the necessary infrastructure and with market-friendly policies in place, Vietnam became a hub for foreign investment and manufacturing in Southeast Asia.
Many Japanese and Korean electronics companies and countless European and American apparel makers have set up their facilities in the country. In fact, by 2017, Vietnam was the largest exporter of clothing in the region and the second largest exporter of electronics.
Along with these, the energy sector in the country too saw a major growth in recent years. Despite being a newcomer in the oil industry, the country is the third largest Southeast Asian producer.
Yet despite gaining industrial success, Vietnam’s agricultural sector is still a major pillar of the economy.
Agriculture represents 14% of GDP and employs 36% of the total workforce in 2020. Whereas the industrial sector contributed 34.5% of GDP and employed 28% of the total workforce. Service sector represented 41.6% of GDP and employed 35% of the total workforce.
Now if you look at the trade, China is Vietnam’s leading trading partner with a total import and export value of $106.7 billion dollars, making up 22.2% of the country’s total imports and exports.
Apart from China, South Korea and the United States combined makes 26% of total trade; which value’s $120 billion dollars.
The International trade agreements of the country plays a good role in this. In 1995, Vietnam joined the ASEAN free trade area. Then in the year 2000, they signed a free trade agreement with the United States, and in 2007 joined the World Trade Organization, while having trade agreements with China, India, Japan and Korea. And we can’t forget the recently amended Trans-Pacific Partnership.
These agreements are helping the country to climb up in the global value chain. It has also helped Vietnam to become a preferred destination for companies looking for plus one for China. Also known as the China+1 strategy.
Vietnam is making tremendous progress but it is still far away from becoming a high-income country and like every other economy, they too have some challenges.
One major challenge is the aging population. Any developing country is dependent on its young workforce for economic growth and productivity. But unfortunately, Vietnam has one of the fastest aging populations. It is estimated that the country’s aging population could go from 7% to 14% by 2035 and then it could officially be an aged society.
Next, is Vietnam trade surplus with the United States. This has gained a lot of negative attention and the United States even put Vietnam on the currency manipulator list in 2020.
Another bothering thing here is the government’s approach to human rights and privacy. Press freedom is one of the worst in the world. Citizens are increasingly surveilled online and human rights activists are not welcome. This is not good for the future economic growth of the country.
Finally, we can say that, in the past 30 years Vietnam has achieved tremendous growth and it is still one of the fastest growing economies. And even with all these challenges, Vietnam has potential to join the club of the high income status. And who knows, someday they could possibly get near the ranks of China.