Few economies, if any, had a better 2020 – or seem better positioned to thrive in 2021 – than Vietnam’s.
As governments from Washington to Tokyo struggle to contain second and third waves of Covid-19 infection, Hanoi is winning accolades for a sage and nimble pandemic response. Though criticized early on for harsh social-distancing dictates, Prime Minister Nguyen Xuan Phuc’s government avoided the growth-killing lockdowns seen elsewhere in Southeast Asia.
What’s more, Vietnam’s 97 million people avoided the ghastly body counts, overwhelmed hospitals and national bickering about economic growth tradeoffs. Vietnam’s 35 official deaths on roughly 1,550 cases explain how it managed to expand a China-beating 2.91% last year.
Covid-19 isn’t Vietnam’s only 2020 triumph. It also emerged as a rare winner from Donald Trump’s trade war with China, a brawl that has devastated Asian supply chains. No country in Asia has been more proactive – and successful – in luring factory jobs fleeing the mainland than Vietnam.
Yet does Vietnam have what it takes to make a go of this breakout moment?
This question has rarely mattered more than it does this week as Vietnam’s Communist Party holds its 13th Congress. There, delegates will select the nation’s leaders for the next five years: the party’s next chief, state president, prime minister and National Assembly chair. Party bigwigs also are debating socioeconomic targets for 2025 and the years beyond.
Hanoi can make the most of this once-in-a-generation window for change by remembering “continued emphasis on structural reforms is needed to boost productivity and reduce economic imbalances,” says Era Dabla-Norris, the International Monetary Fund’s mission chief to Vietnam.
Vietnam can do just that by prioritizing three areas of reform.
1: Minding the extremes
Vietnam’s smokestack economy, communist politics, dense population, low labor and land costs, 7% average annual growth rates over the last 10 years and physical proximity makes it something of a “mini-China.”
This familiarity dynamic gave Vietnam a big leg up in Southeast Asia as US President Trump’s tariffs and bans on companies drove factories out of Asia’s biggest economy.
Yet Vietnam also brings some complicated baggage to the table. Few doubt Vietnam is destined for middle-to-upper-income status. Investors fully get how Hanoi will get there – by emulating China’s export-led model and its heavy reliance on big state-owned enterprises.
In its haste to move upmarket to capitalism, though, Vietnam is still too prone to “pendulum economics.” Investors oscillate between irrationally bullish to wildly negative on the country’s prospects. As a result, the $262 billion economy tends to crash every five to seven years as foreign capital flees even faster than it arrived. Reducing the amplitude of these swings must be a key focus for policy shifts heading toward 2025.
Part of the problem: Hanoi’s unhealthy preoccupation with exchange rates. The State Bank of Vietnam’s obsessive management of the dong earned Hanoi a place on Trump’s enemies list. In December, on the way out the door, Trump’s Treasury Department slapped Vietnam with a “currency manipulator” label.
“Vietnam,” says Francesco Pesole of Dutch bank ING, “has indeed been one of the key beneficiaries of the re-routing of Chinese products to dodge US tariffs and the US stance on Vietnam and its currency can be considered as a good gauge of how much the US is willing to expand its tough trade stance on China to the broader Asian region.”
Yet efforts to hold down the dong can lead to economic overheating that causes the pendulum to swing anew.
Oddly, the trade war acted to accelerate Vietnam’s increasing global presence since 1986, when Hanoi launched its “Doi Moi” reform process. The package of free-market upgrades tilted Vietnam away from its former Marxist command economy.
That drive transformed Vietnam from one of the world’s poorest countries into today’s lower-middle-income status. The momentum it generated, according to the World Bank, increased per capita income nearly three-fold from 2002 to 2018 to roughly $3,000, lifting more than 45 million people out of poverty.
Now, though, party officials gathered in Hanoi this week face a serious fork in the road. One key directional indicator may be whether Prime Minister Phuc, 66, retains his command control of economic change and regional integration.
It’s vital for Hanoi to signal it is “roughly going to continue with economic opening,” says analyst and Vietnam expert Murray Hiebert of the Washington-based Center for Strategic and International Studies.
2: Shrinking the state sector
As 2021 begins, economists are laying out bullish projections for GDP. Case in point: Standard Chartered Bank’s Tim Leelahaphan forecasts 7.8% growth as the manufacturing sector stages a V-shaped recovery. “The recovery is steady,” Leelahaphan says. “In the last decade, Vietnam’s economic growth rate was one of the fastest and we expect this trend” to continue.
The service sector – and its ability to pull in foreign investment – will drive growth over the next few years and beyond. But there is a catch. Phuc’s team has acted slower than hoped to diversify growth engines away from factories.
This transition, says IMF economist Dabla-Norris, is the key to Vietnam reaching its true potential.
“Reforms to reduce economic dualism between the domestic and FDI sectors and lift productivity are crucial to support robust and inclusive growth,” she says.
“Continued efforts to remove structural distortions and improve the business climate are welcome. Priority should be given to reducing the regulatory burden faced by domestic private firms, improving access to land and financial resources, particularly for SMEs, and reducing corruption.”
Though there are many ways to get there, Dabla-Norris stresses that “establishing an expedited SME-specific insolvency regime would help unlock capital and prevent unnecessary liquidations. Reducing labor skill mismatches, increasing human capital and technology access would also boost labor productivity.”
Economist Vo Xuan Vinh at the University of Economics Ho Chi Minh City views increasing the role of private enterprise as a Trojan horse of sorts. “The development of the private sector is putting strong pressure on Vietnam’s government to be more transparent and effective,” he says.
That, Vinh adds, has “forced the government to encourage greater private sector participation in the provision of public services and infrastructure investment. As a result, public bidding documents and planning information – previously confidential – are now more accessible.”
It helps, too, Vihn says, that foreign groups Hanoi is keen to win over – including the American, British and European chambers of commerce – are “pressuring the government to speed up institutional reforms and improve the business environment.” In other words, Vinh says, there’s no turning back for Vietnam.
The worry is that economic strains from the trade war or Covid-19 could reduce Hanoi’s appetite for disruption. “Globalization and global integration are on the right track, but they are met with the rise of extreme nationalism, strategic competition and trade wars,” declared Communist Party General Secretary Nguyen Phu Trong, the nation’s most powerful leader.
Only time with tell if these over-the-horizon issues will derail the reform process. Any hints about Hanoi’s commitment to reducing subsidies and preferential treatment for the state sector will be especially instructive.
3: Making unicorns the dominant species
As Trump’s 25% taxes on nearly $400 billion of Chinese goods savaged Asian supply chains, Vietnamese factories suddenly found themselves with a surge in orders to produce electronic home appliances, furniture, garments, shoes, smartphones – you name it.
During the first 11 months of 2020, Vietnam saw a nearly 25% jump in exports to the US to $69 billion. It’s expected to result in a record trade deficit between the two, perhaps raising hackles on Capitol Hill and at President Joe Biden’s Treasury Department.
Yet this dynamic is also creating allies in Washington. Among them: the National Retail Federation, which argues that Vietnam is now a vital ally in efforts to curb China’s dominance in Asia.
“It’s important that this relationship not only continue, but expand as the global economy continues to recover,” argues David French, senior vice president at the federation. New US tariffs on Hanoi, he says, “will further harm US companies and result in higher costs for consumers.”
Yet the next step must be boldly and transparently making space for private enterprise, particularly in the tech space. That means diversifying growth engines away from cheap exports toward services, innovation and tech startups that grow into $1 billion-plus valuation unicorns.
Bangladesh, another clear trade war winner, is gunning for garment factories relocating out of China. The South Asian growth tiger also is undercutting Vietnam on labor costs. All the more reason for Vietnam to let Bangladesh take orders from Uniqlo, The Gap and Zara while it prioritizes manufacturing goods for Apple, Intel and Toyota Motor.
Hanoi must up investments in education and training to increase productivity. It also must learn from some of China’s biggest mistakes in the Xi Jinping era. Exhibit A: President Xi’s counterproductive clampdowns on the media and the internet.
Love Facebook or not, Vietnam clamping down on social media outlets is a losing proposition in the information age. It’s hard to argue, seven years on, that Xi’s “Great Firewall” helped Beijing achieve any of its economic objectives. For all his pledges of epochal reform, a top Xi legacy is muddying China’s waters, styming the information flows markets need to function efficiently.
It’s worrisome that the lead-up to this week’s Congress in Hanoi has been accompanied by harsh crackdowns on dissent targeting Vietnamese social media users who critique the government’s performance, according to Amnesty International.
At present, Vietnam is too reliant on cheap labor and exports at the expense of policies that would create better-paying jobs and raise living standards.
Thankfully, around the nation, but particularly around Ho Chi Minh City, young Vietnamese are displaying promising flashes of entrepreneurial energy in technology and services. The challenge is to nurture such industries by simplifying a byzantine tax system, reducing graft and reducing barriers to starting new businesses.
Moving upmarket and supporting the creation of new job growth from the ground up is vital to avoiding the “middle-income trap.” That’s when a developing nation stalls out near $10,000 per capita. The odds strongly favor Vietnam beating it but there is no telling what the next group of leaders have in mind reform-wise.
Even so, Vietnam’s successful 2020 makes it more role model than cautionary tale.
“Several elements of Vietnam’s development success could serve as an example to other countries,” says IMF economist Anja Baum. “Some factors, such as a long coastline, supporting exports, are country-specific, but others could be replicated in other countries.”
Baum advises prioritizing broader education reforms that reach all children, both urban and rural, and social safety nets to soften the blow to labor markets as Vietnam moves from lower-income manufacturing to more innovation-driven growth.
Yet as China, India, Indonesia and other developing growth stars demonstrate, epochal change is never a given. It requires steady and targeted policy upgrades to raise living standards and validate investors’ optimism.
Change, meantime, is made harder at a moment when Vietnam faces pressure to decide whether to cozy up to the US or integrate more closely with China.
Vietnam has proved its skill at beating the odds and rising above adversity. But whether it can continue this run in 2025 and beyond will owe much to what party bigwigs decide this week at their Congress.