#KYR: Vietnam - EconomyBy The Cove October 22, 2021
The ‘Know Your Region’ series is designed to support unit and individual professional military education on the South East Asian region. It’s important for all serving members of our military to have a foundational knowledge of the countries and issues in the Indo-Pacific.
VIETNAM – ECONOMY
On this page:
- Economy and GDP
- Trade Policies
- Trade with Australia
Vietnam has progressed quickly in the last few decades to have one of the fastest-growing market-based economies in Asia. The awakening of the economy is driven by export-oriented manufacturing, foreign direct investment, strong domestic demand, and making use of human capital. The first decade after reunification was characterised as isolationist and stagnant with a socialist industry. As one of the few communist states in the world, the People's Republic of Vietnam was sanctioned by the majority of the global economic community. After 1986 and the Đổi Mới period, Vietnam has made a shift from a highly centralised command economy to a mixed economy. It was only after entering the competitive global market and enacting systematic reforms that the country was able to achieve its high growth rate.
The Government has spearheaded ambitious structural reform to tackle economic challenges such as public debt, State-Owned Enterprises (SOE) equitisation, non-trade barriers as well as environmental sustainability, and social equity. However, the bureaucratic nature of Vietnam’s economy, frequently changing regulations, the importance of personal contacts and cultural particulars make a trusted local business partner a valuable asset. Hanoi’s ambitious plan for economic reform, known as the Vietnam 2035 Report, focuses on the country achieving upper-middle income status. The World Bank reports that since Vietnam initiated market reforms in 1986 it has lifted over 40 million people out of poverty. Over the last two decades, Vietnam has quadrupled median household income, improved life expectancy significantly, and increased opportunities for social mobility.
The labour force stands at 55 million with the majority in agriculture and diverse services, shifting from low value-added agriculture to high-tech agribusiness. Effectively moving up the value chain to avoid the middle-income trap and propelling the fourth industrial revolution, known as 'Industry 4.0', which prioritises the digitalisation of production processes. Despite the obstacles imposed by the COVID-19 pandemic, Vietnam has a very stable socio-political environment with an increasingly deregulated business environment. It has been named among the exclusive Next Eleven and CIVETS lists of favoured emerging markets that could become one of the world's largest economies this century. With a diverse and dynamic economy alongside an educated, young digital-adept generation with high mobile commerce penetration, Vietnam is in a strong position to maintain its growth development.
- The Diplomat | A Dream Deferred? The 'Equitization' of Vietnam's State-Owned Enterprises
- Vietnam Economic News | Vietnam's export growth depends on pandemic control
- Vietnam Investment Review | Around 21 million Vietnamese will join the middle class by 2030
- Vietnam Investment Review | Fast-growing, fast-aging Vietnam needs to close its retirement protection gap
Economy and GDP
Vietnam is a socialist-oriented market economy, with state intervention at a high level. It is the 37th-largest in the world as measured by nominal gross domestic product (GDP) and 23rd-largest in the world as measured by purchasing power parity (PPP) in 2020. Before the COVID-19 pandemic it was regarded as one of the fastest-growing of the world's economies, with a potential annual GDP growth rate of 5.1%, it was expected to be in the top 20 largest economies in the world by 2050.
Vietnam has been transitioning since 1986 from the rigidities of a centrally planned and highly agrarian economy towards a more industrial and market-based economy. The country exceeded its 2017 GDP growth target of 6.7% with growth of 6.8%, primarily due to unexpected increases in domestic demand and strong manufacturing exports. Applying both directive and indicative planning through five-year phases to oversee the availability of cost-competitive labour, ambitious portfolio of major infrastructure developments, and deepen international trade links. Vietnam has quickly established itself as a go-to destination for labour intensive and increasingly advanced manufacturing. Emerging as a manufacturing hub for electronics made by major companies such as Samsung, LG, and Intel. For up-to-date news on business see the online magazine, Vietnam Business Forum, run by the Chamber of Commerce and Industry (VCCI). Vietnam is presenting itself as an alternative to China in the diversification movement dubbed the 'China Plus One Strategy' explained in the video below.
Despite economic achievements there exist three key issues that could cause an economic slowdown. First, automation in manufacturing may see factories move out of the country. Next, the middle class is growing fast, currently accounting for 13% of the population it is expected to reach 26% by 2026, but the population is ageing rapidly putting pressure on the labour markets and pension system. Lastly, environmental stress is increasing and requires policy responses. In recent years, Vietnam’s physical capital investment as a percentage of GDP has been among the lowest in the ASEAN region. The country's infrastructure fails to meet the needs of an expanding middle class – just one example is the tripling of electricity consumption over the past decade. This will create challenges for continued growth of modern infrastructure services required for the next phase of growth. Vietnam’s public debt to GDP ratio is nearing the government mandated ceiling of 65%.
Vietnam enjoys a long list of natural resources; however, rapid growth and industrialisation have had detrimental impacts on the environment and non-renewable assets. Just over a third of the land is suitable for agricultural usage, the Mekong Delta – nicknamed the nation's rice basket – alone sustains the south's economy and millions of livelihoods. Unsustainable exploitation of natural assets such as sand, fisheries, and timber could negatively affect prospects for long-term growth. The CPV is working to lower the environmental footprint of the country’s growth and effectively mitigate and adapt to climate change. Key strategies and plans to stimulate green growth and sustainable use of its natural assets are in place. Such as the Mekong Delta Region Urban Upgrading Project and Vietnam Industrial Pollution Management Project. The following video details the impact of urbanisation and climate change is having on the Mekong Delta, as well as the consequences for human health and the economy.
- Vietnam Business Forum | Digital Economy: Vietnam's Path to Future
- CNA Insider | What's The Secret To Vietnam's Rise?
- Global Economics | Why India Lags Behind Vietnam's Manufacturing?
- Vietnam News Agency | Dinh An economic zone – driving force for Mekong Delta region
- Asia Society | Vietnam's Economic Rise
- CNA Insider | Savouring Vietnam's Food & Beverage Potential | The Millennial Investor | Full Episode
- Global Economics | The China Plus One Strategy!
In the 21st century, Vietnam is currently considered a lower middle-income country in a period of integration into the global economy. It has become a leading agricultural exporter and served as an attractive destination for foreign investment in Southeast Asia. The country joined the World Trade Organisation (WTO) in January 2007 and now has a total of 13 trade agreements, such as the Korean Free Trade Agreement and the Eurasian Economic Union Free Trade Agreement. Vietnam recognises the need to further integrate its economy into global value chains.
The Vietnamese Government is gradually liberalising foreign investment and the legal system is also undergoing major change to better align commercial statutes with international norms. Recent participation of foreign companies into leading state-owned enterprises showed the government’s determination to accelerate a plan to reduce holdings in state-owned firms. The country has emerged as a manufacturing hub for electronics, garments, and footwear. The following video provides an insight into Vietnam’s key import and export partners and goods.
In 2017, Vietnam successfully chaired the Asia-Pacific Economic Cooperation (APEC) Conference with its key priorities including inclusive growth, innovation, strengthening small and medium enterprises, food security, and climate change. Seeking to diversify its opportunities, Vietnam also signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018 and continued to pursue the Regional Comprehensive Economic Partnership. The CPV is committed to continuing to deepen its global and regional economic integration. Vietnam is a significant export manufacturer and its export-oriented economic model has remained resilient in the face of weak global trade. Over 70% of the Foreign Direct Investment (FDI) is represented by the technology manufacturing sector which indicates that Vietnam is indeed being looked at as the new manufacturing hub for Asia.
- Council on Foreign Relations | Vietnam Looks To Be Winning Trump's Trade War
- Vietnam Economic News | CPTPP helps increase Vietnamese produce exports to Japan
- Vietnam Economic News | Vietnam, Asia and Europe seek to forge global partnership
- Vietnam Economic News | Vietnam, Laos consolidate ties, mull new highway
- Vietnam Economic News | Rice industry ups production to take advantage of export opportunities
Trade with Australia
Australia and Vietnam are strategic partners and so share a vision of a stable, prosperous and inclusive Indo-Pacific region. Vietnam considers Australia a significant economic partner, with bilateral trade increasing just over 12% a year over the past five years. Underpinned by strong people-to-people links, the total two-way trade between Vietnam and Australia equalled AU$10.5 billion in 2016. There are two Free Trade Agreements (FTAs) currently in place: the 2010 ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) and the 2019 CPTPP. Australia and Vietnam have agreed to develop the Enhanced Economic Engagement Strategy to become top 10 trading partners and double investment. Development of the strategy is on track for completion in 2021.
While the global economic slowdown presented challenges, the long-term outlook for Australia-Vietnam trade and business relationships remains positive. There are many opportunities in industries for both countries such as agribusiness, defence, and tourism. Austrade has a positive outlook on Vietnam's market profile, highlighting the innovative ecosystem and the diverse digital health opportunities, such as e-commerce. While the Vietnam Government regards Australia as being modern and technologically advanced, with a strong reputation in education, agriculture and food exports.
The bilateral aid program positions Australia as a trusted economic reform partner with a strong track record. Australia has pivoted development assistance to respond to the evolving impacts of COVID-19 in Vietnam. Recovery efforts will be bolstered by a new whole-of-government Australia-Vietnam Enhanced Economic Engagement Strategy. Complemented by the Vietnam COVID-19 Development Response Plan to support recovery by harnessing all of the diplomatic, security, and economic partnerships managed by Australian Government agencies represented in Vietnam. For example, the Australian Government's Centre for International Agricultural Research runs 26 ongoing projects in Vietnam ranging from food safety to climate change.
In the 1980s, some Vietnamese students and workers began to migrate to allied communist countries, including the Soviet Union, Czechoslovakia, Bulgaria, and East Germany. The vast majority returned home following the fall of communism in Eastern Europe in the early 1990s. Since that time, Vietnamese labour migrants instead started to pursue opportunities in Asia and the Middle East. They often perform low-skilled jobs under harsh conditions for low pay and are vulnerable to forced labour, including debt bondage to the private brokers who arrange the work contracts. Despite Vietnam’s current labour surplus, the country has in recent years attracted some foreign workers, mainly from China and other Asian countries.
The Vietnamese were one of the first Asian populations allowed Australian permanent residence in mass after the abolition of the White Australia policy in 1973. Thus, they are one of the most well-established migrant populations in Australia. Many Vietnamese arrived as refugees in the 1970s and 1980s after the 'American War'. According to the 2016 census by the Australian Bureau of Statistics, the Vietnamese community comprises approximately 500,000 people and is the fifth-largest immigrant population. The community largely derives from two sources: political refugees after 1975 and their descendants, as well as economic migrants who stayed on after completing their studies. More recently, Vietnamese have tended to immigrate for better economic and educational opportunities in Australia. Many arrive as skilled migrants or under the family stream of the Migration Programme.
There is still a need for the Government of Vietnam to reconcile with the diaspora. The negative attitudes of the Vietnamese community in Australia used to present a major obstacle to closer bilateral ties but the younger generation mean new people-to-people diplomatic initiatives at the grass-roots level are growing.
- In the last 35 years, Vietnam has gone from one of the poorest in the world to the poster child for economic development. Over the same period poverty rates declined sharply from over 70% to below 6%. What economic reforms helped Vietnam turn it all around? Are there any detriments to this success story?
- Before the COVID-19 pandemic, Vietnam was considered by economists to be one of the fastest-growing in the world. The CPV aspires to make the jump from lower-middle income country to upper-middle income status by committing to the economic vision in ‘Vietnam 2035’. Identify the internal and external challenges that might slow or prevent this achievement. Do you think they will be able to do this by 2035?
- Vietnam is regarded as an exporting superstar with exports of goods and services tripling over the last decade, from US$84 billion in 2010 to US$256 billion in 2019. Signing over a dozen FTA’s and becoming a champion for free trade-based development economics. Do you think continual progressive trade liberalisation will benefit Vietnam? What are the risks of deep integration in the global market? How will continual investments in human capital safeguard Vietnam’s economic future?
- Australia and Vietnam are looking to enhance our close economic partnership and mutual strategic vision for the Indo-Pacific. Considering our military history, do you think such economic ties should be deepened? How influential is Australia’s aid program in boosting trust between the countries? Could the Government of Vietnam do more to improve relations with the Vietnamese diaspora in Australia?