ASEAN Economic Bulletin26Vol. 26, No. 1, April 2009
generally uncompetitive, and policies andinstitutions remain very weak by East Asianstandards.From the mid-1980s to the mid-1990s, growthwas stimulated by the incentive and reallocationeffects of internal economic liberalization (
). Subsequently, from the mid-1990s to thepresent, growth has been supported by new tradeopportunities as well as large inflows of foreignfunds. Industrial activities — especially manu-factured exports — continue to be dominated byforeign firms, and value creation by local firmsand workers has been limited. Now that Vietnamis nearing the final stages of systemic transitionand global integration, productivity breakthroughis needed to climb further. Future growth must befuelled by skill and technology rather than a mereinjection of purchasing power.Growth statistics presented in Table 1 areconsistent with this interpretation. Until the mid-1990s, the incremental capital-output ratio (ICOR)was low and the contribution of total factor productivity (TFP) to growth was high, whichindicates that growth was achieved throughimproved efficiency — albeit from a very lowlevel of planning years — without muchinvestment.
In the latter period, ICOR rose, TFP’scontribution to growth declined, and capital’scontribution increased significantly. That is anindication of investment-driven growth with lowefficiency in capital use.The “Washington Consensus” policy packageprescribed by the World Bank and theInternational Monetary Fund such asliberalization, privatization, legal reforms,macroeconomic stability, and so on, may achievemiddle income if they are properly executed, butthat is not enough for continued growth to higher income. Vietnam’s growth pattern basicallyfollows the past experiences of East Asianneighbours whose features include openness andregional integration as an initiator of growth;deepening intra-regional trade and foreign directinvestment (FDI); high savings and investment;dynamic transformation of industrial structure;urbanization and rural-urban migration; andgrowth-generated problems such as income andwealth gaps, congestion, pollution, financialbubbles, and so on. At the same time, a number of new elements for Vietnam, such as faster integration than ASEAN-4, must also beacknowledged.Within this dynamic East Asian context,Vietnam must successfully conduct three crucialpolicies to sustain growth, namely: (i) generationof internal value; (ii) coping with new socialproblems caused by rapid growth; and (iii) effectivemacroeconomic management under financialintegration. The first promotes drivers of growthwhile the second and the third prepare politicalstability and social support without whichindustrialization and modernization cannot besustained. By 2008, the risks of social problemssuch as traffic congestion and environmentaldestruction as well as macroeconomic imbalancesuch as asset bubbles and price instability hadbecome evident in Vietnam. Management of industrialization in this broad sense must beinstalled to face new challenges, or the entireprocess of industrialization may stall (Murakami1992, 1994). While all three tasks are important,the present analysis focuses on the first issue of internal value creation while leaving the discussionof the remaining two to other occasions.
II.The Middle-Income Trap
A low-income country which has gone through awar, political turmoil, socialist planning, and severeeconomic mismanagement is usually characterizedby a fragile economic structure. It relies heavilyon extractive resources, monoculture export,subsistence agriculture, or foreign aid. Internalvalue created by traditional industries such asmining and agriculture is small, but the absence of vibrant manufacturing activities makes them loomlarge in production and trade shares. This is stagezero on a long road to industrialization.From the East Asian perspective, economictake-off starts with the arrival of a sufficient massof manufacturing FDI firms that perform simpleassembly or processing of light industry productsfor export such as garment, footwear, andfoodstuff. Electronic devices and components may