In the second of a four-part series on Vietnam’s recently concluded 13th Party Congress, Dr Nguyen Dinh Cung assessed Vietnam’s economic development record and shared his insights on the new elements approved by the congress that will shape the country’s economic trajectory. Dr Cung also highlighted the challenges that lie ahead as Vietnam seeks to restore its economic growth momentum against the backdrop of domestic constraints and external geostrategic uncertainties.
VIETNAM STUDIES PROGRAMME WEBINAR
Tuesday, 23 February 2020 – The ISEAS – Yusof Ishak Institute organised a webinar on “Vietnam’s 13th Party Congress: Continuities and New Elements in Economic Development” on Tuesday, delivered by Dr Nguyen Dinh Cung. Dr Cung was Acting President and then President of the Central Institute for Economic Management (CIEM) from 2013 to 2019, and is a member of the Prime Minister’s Public Administration Reform Advisory Council and the Prime Minister’s Economic Advisory Group. This was the second of a four-part webinar series on Vietnam’s recently concluded 13th Party Congress.
Dr Cung noted that 2021 would mark 35 years of economic reforms in Vietnam, since doi moi was first initiated in 1986, and the implementation of three successive development strategies. This has resulted in relatively high, though gradually decreasing GDP growth rates – the first development strategy spanning 1991-2000 achieved an average annual growth rate of 7.56 per cent, the second from 2001-2010 at 6.61 per cent, and the third from 2011-2020 at 6 per cent. GDP growth at 2.9 per cent in 2020 was the lowest since 1991, but recovery is expected soon. Specifically, Dr Cung noted that the manufacturing sector is expected to fully recover in 2021 with an annual growth rate of about 12 per cent.
Investment makes up a very significant proportion of Vietnam’s GDP, at 34 per cent. One third of this is public investment, 21-22 per cent from FDI, and 45-46 per cent from the domestic non-state sector. Total investment grew on average by 9 per cent annually over the last five years, with FDI growing by 7.8 per cent and non-state investment by 13.3 per cent. While accounting for a much larger share of total investment than FDI, investment from the non-state sector – both implemented and newly registered – has gradually decreased over years. Newly registered FDI in 2020, for instance, dropped 25 per cent from 2019 while implemented FDI dropped 2 per cent.
South Korea is the largest source of Vietnam’s FDI, followed by Japan, Singapore, Hong Kong, and China, respectively. FDI from the United States, notably, is relatively small – while Vietnam has sought to increase its share of FDI from America, it has largely failed to attract US investors to its shores. FDI from Singapore, on the other hand, increased in 2020, accounting for 32 per cent of Vietnam’s newly registered FDI.
Import and export activities have seen strong growth over the last 10 years, with exports growing by an average of 14.8 per cent annually and imports by 11.7 per cent. The Covid-19 pandemic, however, has demonstrated that the Vietnamese economy is vulnerable to external shocks, as exports and imports shrank by about 11 and 18 per cent respectively in 2020.
Dr Cung noted that despite the significant effort the Vietnamese government has put in over the last five years to improve the business environment of the country and increase its competitiveness, Vietnam still lags behind other ASEAN nations in Ease of Doing Business rankings by the World Bank and World Economic Forum. Dr Cung explained that the critical problem with Vietnam’s economy is its inefficient resource utilisation. For instance, Vietnam has a much higher incremental capital output ratio (ICOR) than South Korea and Japan, and lags behind both in labour productivity. Lowering Vietnam’s ICOR from 6 to 4 might help stimulate greater GDP growth, Dr Cung noted.
Dr Cung also pointed out that the main economic initiatives laid out in the 13th Party Congress’ policy documents are focused on reforming the country’s resource allocation mechanisms. These reforms have the potential to increase economic growth and help the party achieve its economic development goals. The core spirit of these proposed reforms, Dr Cung emphasised, is a bold and consistent transition to a market economy according to international practices. He added that institutional reforms are a prerequisite condition for further economic development in Vietnam, and that the quality of the country’s institutions will determine the quality and speed of its economic growth.
Some proposed institutional reforms initiated at the party congress include the development of factor markets, especially markets of land use rights, to provide equal and competitive access to resources for all investors; and the development of market mechanisms to allocate public investment, to replace the current “ask-giving” administrative practice. Dr Cung also noted that Vietnam has to double down on efforts to improve the ease of doing business in country by simplifying state regulations and reducing legal risks and costs for businesses, especially informal costs. Vietnam also needs to further prioritise its digital transformation drive, infrastructure development, and development of economic growth regions such as the Red River Delta and the greater Ho Chi Minh City region.
The implementation of such reforms will be challenging, however, as they encroach on increasingly difficult and complex domains. Dr Cung pointed out that laws and regulations need to be fundamentally overhauled, and that new approaches and modes of thinking will be required. This will inevitably be met with resistance from public administration at all levels of governance. Without fundamental reform of the country’s resource allocation mechanisms, Vietnam may only manage growth rates of about 5.5-5.8 per cent for the next 10 years, Dr Cung noted.
The webinar concluded with a Q&A session that discussed issues ranging from innovation in the non-state sector, SOE reform strategies, prospects for further US FDI under Biden, digitalisation and Industry 4.0 in Vietnam, resistance to land use rights reform, as well as the anticipated effects of RCEP on Vietnam’s supply chain.