Vietnam: Sustaining the Growth of an Asian Tiger

Group :
Ananda Fahri | Hanif Syaifullah|Nursyamsi Olina| Rahmadoni
COUNTRY BACKGROUND

Location : Southeast Asia

Capital : Hanoi
Largest City : Hồ Chí Minh City
Population: 87 million
Median Age : 26.9 years
Resources : Forest, Sea, Fossil
Energy
COUNTRY BACKGROUND

 Vietnam had a single-party socialist

system in which the Communist Party
of Vietnam (CPV) controlled the
executive, legislative, and judicial
systems.
 Decision processes were long and often
ended in compromise solutions rather
than decisive action.

1997 : Vietnam had joined the United Nations

1995: Association of Southeast Asian Nations
(ASEAN)
1998: Asia-Pacific Economic Cooperation (APEC)
forum
2007: Became a full member of the WTO
The Economic History of Vietnam
 Vietnam had been a Chinese province until AD939.
The economy was based on the cultivation of rice through an elaborate irrigation system of canals
and dikes.

 Vietnam became a colony of French 1885.

The North developed extractive industries that mined coal, iron, and other minerals.
The more fertile lands of the South were devoted to crops like rice and rubber.

 Ho Chi Minh proclaimed Vietnam’s independence from France

in 1945
The French agreed to a ceasefire in June 1954 that divided Vietnam
into a communist North and democratic South at the 17th parallel.
Unification in 1975, after the Vietnam War, which brought huge
damage to Vietnam’s economic.
The Economic History of Vietnam
 In 1978, Vietnamese troops invaded Cambodia
- The United States and other Western countries imposed a total economic
embargo on Vietnam after the invasion of Cambodia.
- Vietnam sought assistance from the Soviet Union and joined the Council
for Mutual Economic Assistance (Comecon) socialist trading block in 1978.
- Trade was primarily conducted through barter, with Vietnam exporting its
raw materials and low-cost consumer goods and apparel in exchange for
capital equipment, fuel, and other manufactured goods

 In 1980, Vietnam had become the ninth-poorest nation in the world

- The collectivized agricultural system yielded poor results, with declining
productivity due to adverse weather and resistance from South Vietnamese
farmers. An acute rice shortage resulted, forcing the traditional rice-exporting
country to import 400,000 to 800,000 tons of rice a year, while still experiencing
inadequate nutrition.
- Real GDP per capita had fallen by 7% between 1977 and 1980.
The Economic History of Vietnam
 Vietnam’s Reforms in Early 1980s
- The government adopted the “output contract system” allocated land to
individual households.
- Industries were allowed to operate in the open market, so long as they
fulfilled the quotas and sold at prices set by the state.
- The budget deficit soared to 36.6% of GDP in 1985. The government
resorted to expansionary monetary policy. Inflation, which was already very
high, escalated into hyperinflation, reaching 700% by one account.

 Vietnam started “Doi Moi” (Renovation) in 1986

- Individual farmers had land right through renewable and nontransferable
land use certificates, and free to sell all their output on the open market.
- Allowed full foreign ownership of greenfield projects in many industries and
guaranteed free repatriation of profits, capital and assets and no asset
expropriations.
- A major reorganization was initiated
The Economic History of Vietnam
 Second Stage Reform
- Industrial policy shifted in 1997 from export promotion to the creation of
industrial zones (IZs), with policy-makers focused on import substitution
industries.
- Tax system was reformed in 1999, with value-added and corporate income
taxes replacing sales and profit taxes.
- The Enterprise Law, passes in 1999 and implemented in 2000, unified all
previous legislation on private companies.
- The 2001 Public Administration Reform (PAR), implemented in 2004 and
2005, marked an effort to improve governance.

 Joining the WTO

- In 2006, Vietnam was admitted to the World Trade Organization (WTO).
- Between 2006 and 2008, exports continued to grow at around 20% annually,
before global trade collapsed in 2009. Exports shifted increasingly from natural-
resource related to manufacturing goods.
- Imports grew even more, pushing the trade deficit to more than 10% of GDP.
Strong FDI inflows helped to balance the capital account. Intel announced that
it would invest US$1 billion in an assembly and testing facility.
Vietnam’s Economy in 2010

 Since embarking on
major economic reforms
in 1987, Vietnam had
been one of Asia’s
fastest- growing
economies with an
average GDP growth of
5.5% over the last two
decades. Its GDP per
capita (PPP adjusted) had
reached $3,438 by 2010
Vietnam’s Economy in 2010
Vietnam’s Economy in 2010

 By 2010, Vietnam’s growth had

rebounded
 Vietnam’s total trade (exports plus
imports) accounted for roughly
150% of GDP, higher than in almost
all neighbouring Asian countries.
 The destination of exports had been
relatively stable over the last few
years, with 20% of exports going to
the U.S., 15% to ASEAN countries,
and 10% each of China and Japan
Major imports included refined oil
products, capital equipment, iron
and steel, textile materials, and
computer and electronic
components.
Vietnam’s Economy in 2010

 UNCTAD’s World Investment Prospects Survey 2009–2011 ranked Vietnam as one of the 15 most
FDI-friendly countries in the world.
Vietnam’s Economy in 2010

Vietnam ranked poorly on key indicators of macroeconomic policy, in part a

function of the government prioritization of high growth. The consumer
price index rose by 9% in 2010. The Vietnamese dong was under constant
pressure against the U.S. dollar and the dong had been devalued three
times in the recent past.

For many years the government had a fiscal deficit: in 2010 the deficit was
at roughly 7% of GDP. Government’s net debt had jumped by 14% of GDP
between 2008 and 2010 to reach 50% of GDP. Two thirds of the debt was
owed to external creditors and about 75% of total debt was denominated in
foreign currency. International rating agencies had downgraded Vietnam’s
sovereign rating. There were concerns about unrecorded outflows of capital,
as Vietnamese tried to shelter their assets from inflation by buying gold and
foreign currency.
Business Environment
The literacy rate at 93% was higher than for many comparable countries. Total
spending on education amounted to 19.8% of government expenditure and 5.3% of
GDP. The overall quality of education was perceived as low, with higher education the
weakest.
Vietnam’s financial sector remained relatively underdeveloped. Only about 10% of
the population had opened bank accounts. A rapid increase in bank lending had,
however, pushed the overall level of outstanding loans above 100% of GDP, much
higher than in other ASEAN countries.

 The 2010 Provincial Competitiveness Index (PCI) showed

significant differences in business environment conditions across
Vietnam.
 Import barriers remained relatively high, with average tariff rates
above the level of regional peers, ranked 127 among 179 countries.
 R&D spending was low. In 2004, the latest year for which
comparable data was available, R&D accounted for 0.19% of GDP,
versus 1.44% for China and 0.26% for Thailand.
Business Environment
 In the World Bank’s “Doing Business 2010” analysis of business regulations
across 178 countries, Vietnam ranked 88th, below China, but above the
Philippines, India, and Indonesia.
Composition of the Vietnamese Economy

Agricultural
 Benefit from natural condition
 The fifth-largest grower of rice in the
world, and the second-largest
exporter after Thailand
 The second-largest producer and
exporter of coffee after Brazil
 The world largest exporter of cashew
and pepper
 The world fourth-largest exporter of
rubber
 By 2010, agricultural products
accounted for 7% of Vietnamese
exports and 9% of Vietnamese GDP
Composition of the Vietnamese Economy

Oil and Gas

 The world’s 35th-largest oil
and 46th-largest natural gas
producer
 Oil and gas production was
predominantly offshore
 Vietnam traditionally
exported all crude production
and imported fuel and
petrochemical products
Composition of the Vietnamese Economy

Apparel and Footwear

Cluster
 After Vietnam opened up,
many East-Asian companies
established garment factories
in Vietnam to take advantage
of the country’s export quotas
and low labour costs
 Over 2,000 companies with
more than 2 million workers
 Apparel exports accounting
for 14% of total exports
 The fourth-largest footwear
supplier globally
Composition of the Vietnamese Economy

Furniture Cluster
 Exports of $4.0 billion in 2010
with the U.S. its largest
market
 About 80% of wood material
was imported
 The world’s largest importer
of hardwood
 Had around 2,000
manufacturers, 15% of which
were export-oriented with 60
foreign firms
Composition of the Vietnamese Economy

Motorcycle Cluster
 Emerged with the entry of Taiwan-
based SYM in 1992, followed by
Suzuki (1996), Honda (1997), and
Yamaha (1999)
 Competition intensified after 2000
with the formation of over 50
domestic companies
 Cheap domestic suppliers
 Motorbike Industry Development
Strategy contemplated an increase
in motorcycle production to 31
million by 2015
Composition of the Vietnamese Economy

Electronics
 Intel’s chip assembly and testing
facility, opened in Ho Chi Minh
City in 2010, had attracted other
companies, like contract
manufacturers Foxconn and
Compal
 Finding skilled employees had
proven to be a challenge
 Improve training by Higher
Engineering Education Alliance
Program
A New Strategy for Vietnam
In July 2010, Prime Minister Nguyen Tan Dung released the draft Socio-Economic
Development strategy for 2011-2020, setting out “rapid and sustainable
development” as the theme of coming decade.

Based on assessment that “our achievements have not been commensurate with our
potential,” the strategy emphasized the need to restructure the economy to achieve
“deep growth” and knowledge-intensive (rather than labor- and resource-intensive)
development. It identified institutions, skills, and infrastructure as three critical areas
on which policy should focus.
Porter’s Diamond Model
Porter’s Diamond Model
Factor Condition

 Logistic
 Starting new business  Communications
 Capital market
 Research and development
Porter’s Diamond Model
Demand Condition

 Environment regulation  Advanced technology product

Porter’s Diamond Model
Related & Supporting Industries

 Technologies
 Local supplier  Local supplier
 Machineries  Cluster development dan policy
 Research and training services
Porter’s Diamond Model
Firm Strategy, Structure & Rivalry

 Investor protection
 Competition  Employment
 Intellectual property protection  Technology transfer
 Capital flows  FDI rules
 Local competition