It is time to hammer out appropriate policies and institutions to restructure the economy, cultivate intensive growth, strengthen social security and protect the environment
Over the past 10 years, the flaws of Vietnam’s extensive growth model have been increasingly evident. The economy has expanded considerably, but such development is far from consistent and sustainable. Worse still, growth quality is dismal, with the competitiveness of most sectors falling short of sustainability benchmarks.
In 2006-2010, Vietnam’s economy was led mainly by investment, which accounted for over 42% of the country’s gross domestic product (GDP) and suffered from increasingly appalling efficiency. The incremental capital output ratios for 2007, 2008, 2009 and 2010 were 5.2%, 6.6%, 8.0% and more than 8.4%, respectively. The main culprits were foot-dragging projects, especially in the fields of power supply and transport infrastructure. Investment was scattered and inefficacious, not least in the case of Vinashin. Another testament to Vietnam’s woeful growth quality during this period was the slow pace of economic restructuring, as well as the economy’s limited competitiveness.
Also worrisome was the consumer price index (CPI), which hit 12.6%, 19.8%, 6.5% and 11.7% in 2007, 2008, 2009 and 2010, respectively. The figure for 2011 is estimated to jump by 18% year-on-year, adversely affecting the worth of the local currency. Besides, such statistics indicate Vietnam has encountered the most formidable inflation rate in the region in recent years.
Several reasons account for Vietnam’s low growth quality. Inefficient use of human resources, capital and energy is mainly to blame. Vietnam’s labor productivity growth for 2001-2010 was merely 5.1%. In comparison, China’s, Thailand’s, Malaysia’s and Korea’s were over two times, about 4.5 times, 12 times and 23.5 times higher, respectively.
Vietnam’s growth recipe has been underpinned largely by expansion of capital, exploitation of natural resources and use of cheap labor instead of focusing on intensive growth, manifested in productivity, quality and efficiency. Other problems relate to growth inputs, environmental impacts, growth elasticity of poverty and inequality.
It is worth noting that agriculture grew steadily in 2001-2011 (4.2% per annum on average) and contributed significantly to the economy’s recovery. Unfortunately, investment in this sector has been severely inadequate. While agriculture claimed 52.6% of the workforce, it received just over 6% of investment and took up only 20% of GDP in 2006-2010. Meanwhile, the expansion of industries and services has not been sufficient to absorb unemployed rural jobseekers. Endeavors to transform Vietnam’s economic profile, with priority given to industry and services, also leave much to be desired.
Doubt must be cast on the current emphasis on exploiting large quantities of natural resources and capital at the expense of efficiency. It is inadvisable to keep relying on natural resources, renewable or otherwise, as a means of earning foreign currencies and fostering growth. If anything, the current growth strategy has given rise to a big group of low-income people, who struggle just to make ends meet.
Just as problematic is the excessive dependence on State-owned enterprises, especially conglomerates and corporations. In 2010, State-owned enterprises accounted for some 70% of fixed assets, 30% of total investment, 60% of the credit offered by commercial banks, 50% of budget spending and 70% of official development assistance. Despite such privileges, these businesses made up only 37-39% of GDP and about 4.4% of the workforce, their productivity trailing that of the private sector by 10-14%.
Lackluster business efficiency, limited labor productivity, pathetic returns on investment and piling debt have haunted many State-owned firms. In particular, according to a government report presented to the National Assembly on November 1, 2010, 81 of 91 State-owned conglomerates and corporations incurred debt of about VND813.435 trillion. If Vinashin’s debt, which the Ministry of Finance puts at VND86 trillion, is included, State-owned enterprises’ debt as of late 2009 had been approximately 54.2% of that year’s GDP — even then, there are still nine corporations and conglomerates whose debt in 2009 remains uncertain and has therefore been excluded from the calculation. Again, these data shed light on the problems arising from dependence on State-owned enterprises for growth.
A growth formula for 2011-2020
The State has emphasized the need to strike a balance between economic growth and such factors as social justice and ecological sustainability. It is time to enhance economic restructuring, so that there will be enough skilled labor to undertake sophisticated tasks with high added value and accelerate growth in both quantity and quality. Wages will also jump as a result.
Tackling the shortcomings of the extensive growth model, which focuses on exploiting natural resources, exporting raw agro-products and depends hugely on foreign loans, is another important task. The Government will also do all what it could to cultivate a level playing field for all firms, including small and medium enterprises, to boost economic development and improve social equity at the same time. Resources should be allocated according to productivity, efficiency and contribution to the production chain as the most efficacious factors of production will provide the strongest pillar of growth.
Effective planning that fairly distributes investment to various localities is vital. While growth drivers should receive abundant capital, it is important to pay due attention to remote regions and agriculture as well. Efforts to narrow the urban-rural development gap and make growth more equitable will arguably be a step in the right direction.