A street food vendor walks past an HSBC ATM booth and a KFC restaurant in downtown Hanoi. Interest from overseas investors continues to be strong but experts said Vietnam needs to improve its business
Vietnam took a giant leap on a global ranking of the most competitive economies last year, but the success may be short lived as experts say ineffective and unpredictable policies hinder business competitiveness here.
The country fell six places to the 65th spot on the latest World Economic Forum’s competitiveness rankings announced last week. The dip came after a stride of 16 spots in 2010.
The index covers 12 categories, including infrastructure, market size and financial market development. The local economy lost ground in 10 of the categories, with only one significant improvement in macroeconomic environment.
Le Dang Doanh said the fall in the ranking was a worrying sign.
“It showed that Vietnam could not catch up with other countries in terms of reforming and restructuring the economy,” he said.
Doanh said the challenges pointed out by the World Economic Forum are not new. In fact, the country has been warned about the same issues for years and any policymaker can clearly see what the problems are, he said.
Other experts also believed that although Vietnam’s business environment has been improving gradually, efforts to push for significant changes were not strong enough. Many problems were thus left unsolved, hindering economic development, they said.
According to the World Economic Forum, the challenges going forward are “numerous” for Vietnam. To name a few, the 2010 budget deficit was too large, at 6 percent of GDP, and inflation was at high levels. Infrastructure, strained by rapid economic growth, remains a major challenge for the country, where the quality of roads and ports are often brought into question.
Economist Bui Kien Thanh said the problem of strained infrastructure in particular is a result of ineffective investment and poor management of government spending.
He said unsound policymaking tends to have a long-lasting impact on the economy. For instance, the decision to provide interest rate subsidies during the economic downturn in 2008 was a “mistake” that led to many unintended consequences and high inflation is one of them, he said.
“I had never seen any country use its state budget to pay banks in order to bring down lending interest rates before,” Thanh said.
“A large amount of credit was released, overflowing to non-manufacturing sectors and fueling inflation.”
Lawyer Tran Huu Huynh, head of the legal department of the Vietnam Chamber of Commerce and Industry, said many other market interventions did not pay off either.
In a recent attempt to rein in inflation, around half a trillion dong was spent for a scheme to stabilize prices in Ho Chi Minh City and Hanoi. However, the markets are just too big for such spending to make an impact, he said.
“The government should support the market by helping it overcome its weaknesses instead of intervening,” Huynh said. “Ineffective interventions will only cause the market to either cool down or heat up abruptly and the economy cannot grow in stability in those conditions,” he said.
The World Economic Forum said its survey found that the three most problematic factors for doing business in Vietnam are inflation, access to financing and policy instability.
Economist Doanh agreed that inflation has affected Vietnam’s business environment and undermined its competitive edge.
When the price of materials and input costs are high, products made in the country will not be able to compete on the global market, he said.
Doanh told Thanh Nien that making matters worse were unpredictable economic policies that caused even more difficulties for businesses.
Economist Hoang Tho Xuan of the Industry and Trade Ministry’s research institute said a series of off-the-cuff policies recently issued to narrow the country’s trade deficit had caught many businesses unprepared. Meanwhile, efforts to control inflation focused too much on tightening money supply, not on the roots of economic problems, he said.
“I just think many policies only tried to deal with the situation at hand. Of course, short-term solutions for turbulent circumstances are necessary, but they just don’t transition to the long term.”
With its new position in the competitiveness ranking, Vietnam is now quite far behind many of its neighbors including Malaysia (21st), China (26th), Thailand (39th) and Indonesia (46th). Singapore maintained the lead among Asian economies, moving up by one place to the second position.
But the Economic Intelligence Unit said earlier this month that despite concerns about the quality of Vietnam’s business environment and a recent downturn in planned foreign invested projects, interest from overseas investors continues to be strong. It added that although global economic growth will slow in 2011, demand for Vietnamese goods is likely to hold up, and the manufacturing sector is expected to ramp up production.
Japanese electronics giant Panasonic Corp. last week announced plans to build manufacturing plants in Vietnam to make washing machines, refrigerators and resin boards used in smartphones, positioning Vietnam as its core base for Southeast Asia.
“Electronics makers and other foreign manufacturers are finally starting to make inroads into Vietnam, and its economy has ample room to grow,” Japan’s newspaper Nikkei cited Minako Iida, a strategist at Barclays Capital Japan Ltd., as commenting.
The Asahi Shimbun reported last weekend that even small Japanese businesses are moving to Vietnam as they want to capitalize on the cheap labor costs here and use the market as a gateway to other countries. Inquiries about investing in Vietnam have increased 1.5 times between April and July this year, the report said, citing the Japan External Trade Organization.
Economist Bui Kien Thanh said foreign investors are watching Vietnam closely as an investment destination.
“So it will be good if the economy is highly rated. Otherwise investors will be cautious,” he said.