The Vietnam Model

In a dynamic new world order, change is the only constant. With the centre of gravity of world politics shifting, albeit modestly, towards Asia-Pacific, it is worth looking at one country in south-east Asia that has been on a growth trajectory since the beginning of this millennium, Vietnam. It has been growing constantly, so much so that it emerged as one of the fastest-growing countries in Asia (and the world), achieving a growth rate of 7% in 2018. This country with a single-party government had a modest period of 20 years to achieve this feat; that is probably why it is worth talking about. Plagued with the socialistic approach of the state and heavy sanctions from the US, the country was one of the poorest economies in Asia until the 1990’s. Various factors nudged the country to open itself up to the world economy and so did the country.

The story began in 1986. It was a rough year for the country with food shortages, scarcity of goods, rising foreign debts, and inflation rose over 700%, thanks to the communist policies practised by the country. The worsening domestic economy coupled with the trade embargo sanctions by the US, due to the Vietnam war, further degraded the country’s economic stability. A crisis, in a way, serves as both sufficient and necessary condition for a country to bring about path-breaking reforms and transform itself. That is what happened in Vietnam. It shed the Soviet model and embraced free-markets to become a ‘socialist-oriented market economy.’ The country abruptly transitioned from socialism to capitalism. Under the Doi Moi policy, which translates to ‘renovation’, the country granted property rights on land to the farmers, rolled back on price controls, put an end to the agricultural and industrial cooperatives, shut the inefficient government monopolies and the government brought laws that cleared the way for the establishment of private businesses. The reforms yielded positive outcomes soon. They bolstered the transition of a low-income country into a middle-income country. Per-capita income which was $200 in the 1980’s, rose to $2566 in 2018. Then came the second wave of decisions that furthered the growth of the country. In 2001, it signed a bilateral trade treaty with the US and joined the World Trade Organization in 2007. All these measures ensured a consistent annual growth rate of 5% for Vietnam. In 1994, foreign direct investments into the country reached 10% of the country’s GDP.

Though the country had increasing growth since 2006-07, the biggest turn in its favour probably came with the election of Donald Trump as the President of the United States. Trump, looking at everything from a prism of profit maximisation – for he is a businessman, after all – engaged in a trade war with China as an attempt to reduce the ballooning trade deficit that the US has with China. The increased tariffs imposed by the Trump administration made the goods coming out of China relatively expensive. Vietnam’s proximity to China, especially to the southern region where most of the manufacturing is concentrated, resulted in minimal costs to move out of China. This made Vietnam the destination for businesses that wished to move out of China. In fact, many Chinese firms too moved out of their country to escape the US tariffs. Some businesses that could not afford to completely move out, moved parts of their production processes to Vietnam. Today, Vietnam is a manufacturing hub, particularly for electronics, garments and automobile components.

In May 2019, the total registered foreign capital was $350.5 billion. The biggest investor of all is Samsung, with an investment of $17 billion in the country. As Vietnam transitioned into the middle-income category of countries, its middle class contributed to a surge in consumer demand in the country. A population of 95 million provided an attractive market for many foreign firms. The total revenue generated from retail sales and consumer services in Vietnam in 2018 reached $191 billion, up 11.7% compared to 2017. However, the model that Vietnam followed was one that was similar to China - export and investment-led model. This is evident from the fact that exports are 105% of its GDP (which suggests that Vietnam is an export-oriented economy). All in all, Vietnam has emerged as the winner out of the US-China trade war. In 2018, exports to the US had increased by 34.8% (over 2017) and two-way trade with the US is now worth a massive $60 billion (it enjoys a surplus of $46.98 billion with the US). The country recorded a trade surplus of $11.12 billion (from trade with the world) in 2018. The country is also signing free trade agreements aggressively, mainly to diversify its export options, and thereby cushioning the impact of unforeseen external shocks. It has recently signed free trade agreements with the European Union and the United Kingdom.

There are, on the other hand, some constraints that might pose a problem to the country in the future. First and foremost is its excess dependence on the US and China. 30% of the required components for its electronic industries are imported from China. Vietnam also has a trade deficit of $34.04 billion with China, which also happens to be its largest trading partner. China, being a hegemon, is already engaged in border disputes with Vietnam over the South-China sea. Second, the country is still dependent on agriculture in terms of providing employment to its citizens. Over 40% of the population is still employed in agriculture which contributes only 14.7% to its GDP. Third, there are speculations juxtaposing Vietnam with China concluding Vietnam can become the world’s factory, occupying China’s spot. This is quite difficult to achieve. For one, the population of China is almost 15 times larger than that of Vietnam. Vietnam clearly lacks the human resources that China has. Also, Vietnam has a serious dearth of resources – imports as a percentage of the GDP is 102.47% for the country (for China this is 14.47%) – which clearly is a hindrance for the country. On top of all these reasons, Vietnam is an export-oriented economy and relies heavily on exports for its domestic growth. Such heavy reliance on external economies is always a risk that entails the huge surplus from the external trade. The coronavirus shock is a case in point. It remains to be seen as to how the country actually overcomes these major hindrances in its way.

All in all, despite its success from the early 2000’s, there is a huge amount of uncertainty about Vietnam in the long run because of the resource constraints the country faces and the huge dependence on external factors that it has. How Vietnam transforms the massive potential it has to be a global manufacturing hub and eventually a superpower is the real question. Will it be yet another case of ‘what (it) could have been’ or will it actually prove its mettle at the global stage?


Kartik Balaji Kundeti

A low-key individual with keen interest in Economics and Policy making. Currently pursuing Economics from SRCC, University of Delhi.

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