According to the World Bank, the story of Vietnam’s growth in the last three decades is a story that can be translated into an ‘economic miracle’. Today, Vietnam is one of the most successful and fastest-growing economies in Asia. In East Asia, it could be considered second only to China in terms of economic growth. During the US-China Trade War, many companies decided to relocate to Vietnam, and the same is expected to happen as a response to the Coronavirus crisis. It is difficult to believe that this small, war-torn communist country would enjoy such stellar economic growth and development. In this article, we try to understand how Vietnam has been successful in transforming itself from an extremely poor country into a very successful middle-income economy, through various reforms like the Doi Moi, or even the bold step to compete in a global market.
Vietnam has had a very troubled history with wars, the recent ones being with the Cambodian, the French, and the Americans in the 19th and 20th centuries. These wars had effectively damaged the country’s economy and pushed an entire population in poverty. The Vietnam War (or ‘American War’ in Vietnam) ended in 1975 with the Communist forces of the north taking control over South Vietnam and forming the Socialist Republic of Vietnam. The country had suffered a lot during the war and had hardly seen any sort of economic prosperity.
The new government established following the unification was Communist and believed in a State-controlled and centrally-planned economy. The Communist system of ‘Five-year plans’ focused on the collectivization of agriculture and industrial production. There was a One-party system in the country and the Communist Party of Vietnam (CPV) exercised complete control over the political and economic affairs in the nation. The policies taken by the CPV ignored the principles of the free market and individual self-interests. The result was scarcity in consumer and agricultural productions, poor standards of living, a stagnated economy, and huge debts. The per capita GDP was stuck between a dismal $200 and $300. In 1986 hyperinflation had reached 775%. The pathetic state of affairs called for radical change. Vietnam took many steps that led to the economic miracle in the country, some of them include the Doi Moi, global trade integration, and investing in human capital.
Doi Moi (Economic Reforms 1980s-1990s)
Responding to the terrible state of the economy and mounting public pressure, the Communist Party of Vietnam announced ‘Doi Moi’ (which roughly translates to renovation or reform) policies in 1986. Economic reforms that favored the free-market economy and reduction of the role of government in businesses were introduced by the government. There was no major political or ideological change, Vietnam still remained a committed single-party Socialist state.
However, the economic reforms were like a ‘twilight zone’ between Stalinism and Capitalism. The leaders supported entrepreneurial ideas and the same was reflected in their economic planning, implementation, and policy formulation. Agricultural and Industrial cooperatives were not encouraged, and so the farmers had to work on their private lands. In 1990, the government introduced a law that favored the establishment of private businesses. There was de-regulation of business, domestic reforms to reduce the cost of business, and effective trade liberalization in the country. It also opened its economy externally to build a strong export sector. This has continued to be the secret sauce of economic miracle in Vietnam.
The government formulated policies to address the problems of rising inflation, poor living standards, and mounting debt. This was done by investing in infrastructure, greater dependence on the private sector, reducing the budget deficit, increasing the output of agriculture, and consumer goods. Like China, Vietnam also built an export-oriented economy by increasing its production while keeping the costs low. The reform-ideology was spearheaded by the party’s general secretary Nguyen Van Lin and by a new Prime Minister Vo Van Kiet who took office in 1992. Though he did not advocate for the total abolition of state-run enterprises, only two such state-owned companies operated during his tenure which lasted till 2006. A new Constitution was adopted in 1992 based on the market-oriented goals of the Doi Moi. Vietnam’s agricultural produce increased substantially, and it became the third-largest rice exporter by 1989. This was a remarkable growth for a policy that was launched just three years ago and it truly proved to be an economic miracle for Vietnam.
Global Trade integration
As mentioned earlier, Vietnam’s leaders also realized the importance of globalization and worked on Economic integration on a global level. The United States lifted its trade embargo on the country in 1994 and a year later established diplomatic relations with the country. This was the beginning of Vietnam’s integration in geo-politics but more importantly, the global economy. Vietnam signed many free trade agreements with other countries to ensure stable trade relations. Vietnam joined the ASEAN free trade area in 1995.
In 2000, it signed a free trade agreement with the US, and in 2007 it joined the WTO. It has gained a strong foothold in Asia by signing further ASEAN agreements followed by China, India, Japan, and Korea. Then in 2018, the amended Trans-Pacific Partnership went into effect. These agreements meant lower tariffs on both exports and imports. Since the foreign investment was first allowed in the country in 1986, consecutive governments have eased the restrictions and made regulations pro-investing. The results can be noticed in Vietnam’s global rankings: it jumped from 77th place in 2006 to 55th in 2017 in WEF’s Global Competitiveness Index, and consequently for WB’s Ease of doing business Vietnam secured 70th place in 2019.
In today’s world, Vietnam is deeply integrated with the global world and had to bear the brunt of the coronavirus crisis. Yet, the World Bank and WEF do not expect ‘Nam’s economy to break down. It is this faith in Vietnam’s economy that could be one of the reasons why industries that wish to leave China would probably move to Vietnam. This is because of its robust manufacturing sector and export-friendly environment, contributed by the relatively low labor wages in Vietnam as compared to China. Everything from Nike Sportswear to the latest smartphones is manufactured here.
The shift from a primarily agricultural economy to a manufacturing one has brought in more investment in the country. The investments have only increased in the country since 1986. It observed a 7.8% increase in 2019 from 2018 as FDI grew to US$38.2 billion.
Gains of Human Capital
In 2019, Vietnam ranked 47 out of 157 countries in the Human Capital Index (for reference India’s rank is 115th). It is also the highest among middle-income countries. Following China’s growth formula Vietnam also invested heavily in Human Capital: Education, infrastructure, public health, etc. According to the World Bank, a child born in Vietnam today would be 67% as productive as the child would be when they grow up enjoying full education and complete healthcare. Its education sector is doing generally well, receiving high ranks from PISA in 2012 and 2015, exceeding scores of many OECD countries. The government also has a good record in public health with generally low mortality rates over the years. It also has the highest life expectancy rate in the region- 76.3 years.
The statistics concerning infrastructure services are also remarkable. Almost 99% of the houses in this ASEAN country use electricity as the main source of lighting. Access to clean water has reached over 95% in urban areas and 70% in rural areas. This increase has happened within 30 years, in 1993 access to clean water in Vietnam was only 17%. The governments’ focus on urbanization and industrialization are responsible for these numbers. Furthermore, poverty rates have also dropped significantly in the country.
The rise in the standard of living, the presence of proper infrastructure, educated population, and market-friendly policies contributed to making Vietnam a hub for investment and manufacturing. By 2017, the Financial Times reported, Viet Nam was the largest exporter of clothing in the region and the second-largest exporter of electronics (after Singapore). The GDP growth has been over 5% for the last ten years and was around 7% in 2018. One of the most important points about the economic miracle growth story of Vietnam has been its inclusivity and sustainability. Men and women have equally enjoyed the benefits of this growth, though some ethnic minority communities have faced certain difficulties. But Vietnam continues to be a Communist state, with its strict one-party system and suppression of Civil liberties while it has embraced liberal economics, and its story is no short of an ‘economic miracle’.