Vietnam's future economic outlook hinges on export-led growth: economist

Looking back on nearly 40 years of Vietnam’s Doi Moi (renovation) reforms, he told Tuoitrenews his perspectives and recommendations for the country’s future development.

According to Pincus, the signing of the U.S.-Vietnam Bilateral Trade Agreement (BTA) signed on July 13, 2000 was a major milestone in Vietnam’s recent history.

The BTA, and the phasing out of the multi-fiber agreement which had limited exports of garments to the U.S., fired the starting gun on Vietnam’s export-led growth strategy.

The deal also paved the way for accession to the World Trade Organization (WTO) in 2007. Manufactured exports grew at an average annual rate of 24 percent from 2002-08, rising five times from just US$6.8 billion in 2001 to $34.1 billion in 2008.

Export growth of manufactured goods slowed during the Global Financial Crisis (2009) but recovered quickly from 2010, averaging a remarkable 20 percent per year until 2019.

During this second phase of export-led growth, Vietnam integrated rapidly into East Asia supply chains for electronic goods, including mobile phones and computer equipment but encompassing a wide range of other products.

The process was driven by high levels of foreign direct investment (FDI), attracted by relatively low labor costs and improving infrastructure and facilities.

Vietnam took full advantage of the era of trade liberalization, which dates roughly from the completion of the Uruguay round of the General Agreement on Tariffs and Trade (GATT) in 1994, which created the WTO.

Sustaining growth of manufactured exports over such a long period is a great achievement, and one that has brought Vietnam to the brink of upper middle-income status, created millions of jobs and earned trillions of dollars in foreign exchange.

It appears that the WTO era has come to an end with the imposition of unilateral tariffs by the U.S. on nearly every country in the world. But does the end of the WTO era mean an end to Vietnam’s export-led growth model? No, it does not.

Production was globalized not just because of reduced tariffs and quotas, but because it makes sense economically, and most countries, especially in Asia, realize this.

“We are likely to see regional and bilateral agreements become more important as the WTO rules are not enforced. But enough countries benefit from globalization that global trade volumes will not decline,” Pincus said.

Competition a key driver

“We have learned over many centuries that the main factor driving efficiency is competition. Companies that operate in a competitive market have to do things better to make a living,” the economist said.

Vietnam’s exports are competitive. This applies to agricultural exports, produced on domestic farms, and manufactured exports, which come mostly from FDI firms.

The FDIs have to compete against companies from all over the world, so costs have to be kept down and quality must achieve international standards. But competition in some domestic markets is restricted, which acts as a brake on productivity growth.

In the early days of export-led growth, economists expected technological spillover effects from foreign to domestic firms as local firms were integrated into export supply chains.

The idea was that domestic firms would figure out how to make inputs cheaper than imports, leveraging natural advantages like local knowledge and low labor costs. This has occurred in some industries, but not as much as hoped.

Vietnamese manufactured exports are still heavily dependent on imported inputs. The domestic content of exports is lower in Vietnam than in other ASEAN countries.

It turns out that it is difficult to compete against Chinese suppliers, who can realize economies of scale and have more advanced technology.

Therefore, Vietnamese firms have avoided these industries and instead crowded into domestic services and protected sectors like property and finance.

Vietnam could learn from other countries that have leveraged FDI to build domestic capabilities. Ireland, Poland, the Czech Republic and Estonia are examples of countries that have had success increasing domestic value added in exports by FDI industries.

These countries have built National Innovation Systems that help prepare domestic companies to take on foreign suppliers.