Enhancing the quality of economic growth in Vietnam

Full Text

Introduction Despite the fact that Vietnam has achieved an annual average growth rate of 6.92% for the period of 1991-2020 [GSO 2020], the economy has been witnessing the sign of staying behind in comparison with regional countries because the growth model of Vietnam in the transition process is mainly resource-intensive which leads to low efficiency and quality of growth. In order to maintain long-term rapid growth in the context of Industrial Revolution 4.0 and the exponential development of the digital economy, the current problem for Vietnam is to improve the quality of growth through skills, technology and breakthrough in productivity. The growth that Vietnam has gained over the past 35 years is based on the impact of liberalization and purchasing power from other countries for Vietnam’s exports. Currently, with a systematic transition and the deepening global integration, Vietnam needs to build its internal value to continue economic growth and to avoid falling into a dilemma of a middle-income country. Vietnam has reached a stage of development where growth towards higher income levels cannot be guaranteed unless the policy-making process is significantly reformed. This article aims to analyze Vietnam’s economic growth, evaluate Vietnam’s growth quality and policy implications to improve Vietnam’s economic growth quality. Literature review Theoretically, the economic growth model is a basic expression of economic growth through economic variables and the relationship between them. Each growth model emphasized different inputs that are crucial to the growth. Harrod-Domar [Harrod 1939, Domar 1946] model always considers capital as a critical determinant of economic growth while Robert Solow [Robert Solow 1956] suggested that capital only plays a decisive role for growth in the short term, and technological advancement will play the most important role in the long term. Krugman and Obstfeld [Krugman and Obstfeld 1991] unanimously stated that developed countries have capital and technological advantages, while developing countries exhibit advantages in labor and resources. According to Samuelson and Nordhaus [Samuelson and Nordhaus 2001], economic growth can be divided into two types: (i) resource-intensive growth (based on the expansion of capital and labor) and (ii) in-depth growth (based on productivity). Lin [Lin 1994], Stiglitz [Stiglitz 2005], concluded that the quality of growth is concentrated on the following main criteria: (1) TFP is high, ensuring the continuity of long-term growth rate and avoiding external fluctuations; (2) growth must ensure economic efficiency and competitiveness of the economy; (3) growth is associated with sustainable environmental development; (4) growth supports a constantly evolving democratic institution, which in turn promotes economic growth at a higher rate; and (5) growth must reach the goal of improvement of welfare and poverty alleviations. The Economic and Social Commission for Asia and the Pacific of the United Nation (UN-ESCAPhighlights five key factors that affect growth quality: (1) inclusiveness in relation to environment, social and economic benefits; (2) efficiency and productivity in using natural resources, human capital and production capital; (3) structural transformation that promotes economic and social values; (4) balanced investment in all forms of capital; and (5) constraints in the economic, social and environmental sectors [UN-ESCAP 2013]. O.V. Maslennikov describes new approach to the issue of economic growth quality as an economic category, which is based on integration of structural, resource, ecological, social and psychological [Maslennikov 2016]. According to G.O. Kuranov with the exhaustion of extensive factors, the economic growth quality becomes the most important criterion and a condition for the consistent furthering economic development and social progress in Russia. The diversity and multidimensional nature of growth quality implies the need to consider it from different perspectives: both as a result of a target development directions and as a prerequisite for current and future progress [Kuranov 2019]. V.M. Mazyrin shows that Vietnam has achieved high growth rates in the past 25 years due to the shift of central planning to a market economy, trade liberalization, and FDI attraction. The growth boosted external economic activities and the possibility of strengthening cooperation with the Russian Federation [Mazyrin 2013b]. V.M. Mazyrin explores the concept of modernization which is carried out in Vietnam from the middle of the 1990’s, its main tasks, methods and stages, influence of the experience of new industrial states of East Asia. V. Mazyrin concluded that despite successes of “catching-up development” Vietnam continues to lag behind the advanced countries of the region and aspires to accelerate modernization process by changing character, rates and realms of development [Mazyrin 2013a]. In Vietnam, research on growth quality has been given special attention such as Nguyễn Văn Nam, Trần Thọ Đạt [Nguyễn Văn Nam, Trần Thọ Đạt 2003], Nguyễn Thị Tuệ Anh and Lê Xuân Bá [Nguyễn Thị Tuệ Anh, Lê Xuân Bá 2005], Nguyễn Kế Tuấn and Ngô Thắng Lợi [Nguyễn Kế Tuấn, Ngô Thắng Lợi 2006], Nguyễn Ngọc Sơn [Nguyễn Ngọc Sơn 2010]. In general, domestic researches have initially shed some light on growth and the economic growth quality, including the theoretical analysis, evaluation criteria as well as the situational analysis of growth quality in Vietnam. Improving growth quality means to improve socio-economic and environmental sustainability and efficiency of the implementation of growth targets [Nguyễn Kế Tuấn, Ngô Thắng Lợi 2007]. According to National Center for Socio-Economic Information and Forecast (NCIF) [NCIF 2020] although Vietnam experienced a positive economic growth rate, it is based on increasing the input factors. Particularly, while many policies to deal with COVID-19 are available, the resources to implement those are very limited. Economic growth stimulation based on increased capital and low-skilled labors cannot last too long. The economic growth quality can be considered either in a narrow view or a broad one. In the narrow view, the economic growth quality is an internal attribute of the economic growth process, channeled through the indicators reflecting the efficiency of achieving the quantity of growth and the ability to maintain itself in the long run. In the broader perspective, the of economic growth quality also considers spillover effects of growth, such as the impact of economic growth on restructuring economic sectors; the impact of income on the poverty reduction, equality, social justice and the impact of growth on the sustainability of environmental resources. In this paper, the approach of growth quality is expressed in a narrow view and measured through indicators of growth efficiency, national competitiveness, structure of growth inputs (contributions of capital, labor and TFP), as well as restructure of economic sector. Situational analysis of economic growth quality in Vietnam The determination to restructure the economy began to be evident from the 11th National Congress of the Party. The resolution of the Congress proposed the goal “to renew the economic growth model and restructure the economy with the direction changed from focusing the development in quantity to a reasonable development that combines both quantity and quality, improving quality and efficiency of the economy, ensuring rapid and sustainable development”. In order to concretize the Resolution of the Congress, the 3rd Conference of the 11th Central Committee issued 3 contents to emphasize on in the coming time: (1) restructuring national investment with a focus on public investment, (2) restructuring financial markets with a focus on the commercial banking system and financial institutions, (3) restructuring state-owned enterprises with a focus on the economic and state-owned corporations. On February 19, 2013, the Prime Minister issued Decision No. 339/QD-TTg approving the overall project of economic restructuring associated with the economic growth model transformation towards improving quality, efficiency and competitiveness in the period of 2013-2020. On the basis of evaluating the results achieved in the early stages of economic restructuring (2011-2015), the Resolution of the 4th Central Conference of Session 12 on continuing to innovate the economic growth model. On November 1, 2016, the 12th Party Central Committee issued Resolution No.05-NQ/TW with a number of major guidelines and policies to continue to innovate the growth model, improve growth quality, labour productivity and economic competitiveness. On November 8, 2016, the National Assembly issued Resolution No. 24/2016/QH14 on the Plan of restructuring the economy in the period of 2016-2020. Economic growth rate The average annual growth rate in the period of 1991-2020 in Vietnam was 6.92%, which is relatively high in comparison to the world’s average growth rate, just lower than the average annual growth rate of China in the respective period (Figure 1). The period of continuous economic growth of Vietnam has reached 30 years, surpassed the 23-year record of South Korea and ranked second behind the record economic growth of China. However, the growth rate of Vietnam in this entire period was still lower than the respective development stages of Korea, Singapore and Taiwan (China) in the period of 1960-1990 [Ohno, 2009]. Figure 1. GDP growth rate and GDP per capita (USD). Source: Synthesized from GSO 2019, 2020 The Vietnam economy is critically affected by COVID-19 but has showed its remarkable resilience compared to many other economies in 2020. Vietnam economy suffered large shocks from both supply and demand sides. GDP growth declined to just 2.91% compared to the pre-crisis forecast of 6.5%-7% [NCIF 2020]. The growth target for the 2016-2020 period has not been achieved. However, Vietnam’s economy is still considered a resilient economy thanks to a balance between maintaining economic activities and controlling disease. Economic growth is still positive, while most macroeconomic and financial indicators are well controlled. The GDP growth rate over the past few decades has made GDP per capita in Vietnam at current prices reach about USD 2779 in 2020 [GSO 2020b]. With that income, Vietnam was grouped into Lower-middle income countries (LMIC). However, compared to other Newly industrialized states Vietnam’s per capita income is only half of Indonesia, China, one-thirds of Thailand, one-seventh of Malaysia and one-twentieth of Singapore. For Vietnam, the debate on middle income trap began in 2008. At this point, the middle-income trap is a long-term affair for Vietnam, because the country has just reached a low average income and there is a long way to go before it falls into the trap. But today, the middle-income trap is no longer a distant future. Many manifestations of the middle-income trap have become evident in Vietnam [Ohno 2009] (Figure 2). Figure 2: The Increase of GDP per capita in Asian countries. Source: [World Development Indicators 2019] Growth quality The effect of economic growth • Labor productivity Increasing labor productivity is the core element to ensure growth quality; labor productivity at current prices in 2019 is estimated at VND 110.3 million per labor (equivalent to USD 4760 /labor per annum) [GSO 2020a]. Vietnam’s labor productivity has remarkably increased 5.02% per annum in the period of 2011-2019 [MPI 2019]. However, Vietnam’s labor productivity is still very low compared to that of other countries in the region. According to PPP (2011) price, Vietnam’s labor productivity in 2019 reached USD 12017 equivalent to 8.6% of Singapore’s productivity; 23,6% of Malaysia’s; 40.7% of Thailand’s; 57.3% of countries continues to grow (Figure 3). Figure 3: Labor Productivity of Vietnam and Selected Countries (USD, PPP). Source: https://www.conference- oard.org/data/economydatabase/index.cfm?id=27762 Capital efficiency Vietnam’s high economic growth during the past period has been associated with a sharp increase in investment, reflected through the continuous increase in the ratio of investment to GDP, from 18.1% in 1990 to 42.43% in 2010, and the ratio of investment to GDP reached the highest at 45.7% in 2007 [Nguyễn Ngọc Sơn 2010] (Figure 4). In the period of 2011-2020, the ratio of investment to GDP decreased, but still remained at 32.5%. This is also a high rate compared to that of some countries in the region, only lower than China’s. The low investment efficiency in Vietnam is more clearly shown by the high level of ICOR, averaged at 5.75 for the period of 2001-2010, much higher than that in 1991-2000 and 6.2 in 2011-2019. It is worth noting that the ICOR in Vietnam is much higher than that of some NICs in the takeoff period from 1961 to 1980, such as Taiwan (2.7), Korea (3.0) or some countries in regions such as Thailand (4.1 from 1981 to 1995) and China (4.0 from 1990-2006) [Nguyen 2010]. The low capital efficiency is a bottleneck in Vietnam’s economic growth. National competitiveness According to the World Economic Forum (WEF), ranking of Vietnam’s global competitiveness significantly improved compared to 2018, ranked 67 over 141 economies [WEF 2019]. The GCI 2019 reported that Vietnam is the country with the highest growth score at the global scale, located in the Asia-Pacific region with the highest competitiveness in the world, becoming the champion in the race to improve competitiveness ranking. Vietnam’s competitiveness rankings and index have continuously improved from 2012 to 2019. Figure 4: ICOR and GDP growth rate in Vietnam Source: Synthesized from GSO 2019, 2020 In Southeast Asia, Vietnam’s competitiveness surpasses the Philippines to be ranked 6, lagging behind 5 countries: Singapore (3rd), Malaysia (23rd), Thailand (32nd), Indonesia (36th), Brunei (46th), and in the higher half of the rankings [WEF, 2019]. Although Vietnam’s competitiveness ranking has improved, the gaps on most of the pillars (indexes) of Vietnam compared to other countries are quite large (Figure 5). Figure 5: Vietnam’s Competitiveness Rankings compared to other selected ASEAN Countries. Source: [Global Competitiveness Report 2019] The growth input structure in Vietnam The growth input structure is expressed through the contribution of capital, labor and TFP. The contribution to Vietnam’s GDP growth in the period of 2001-2010 is mainly the resource-intensive factors including capital and labor, accounting for 75.8%, while the contribution of TFP factor in economic growth only accounts for 24.2%. The contribution of TFP to economic growth tends to increase in the period of 2011-2020. In 2016, the contribution of TFP was about 21.53%, increased to 43.22% in 2018 and is estimated to be 44.35% by the end of 2020. Despite the increase in the contribution of the TFP, based on the input structure, the economic growth momentum of Vietnam in recent years has still been based on the resource-intensive growth factors (accounting for over 50%), of which capital is still the most important driving force (Table 1). Table 1. Contribution of production factors to GDP growth Year Contribution of Capital Contribution of Labor Contribution of TFP TFP growth 2011 52.92 25.55 21.53 1.34 2012 56.61 24.31 19.08 1.00 2013 52.83 16.90 30.27 1.64 2014 49.41 10.88 39.71 2.38 2015 45.59 1.11 53.30 3.56 2016 50.86 8.46 40.68 2.53 2017 47.91 6.62 45.47 3.10 2018 46.18 8.62 45.20 3.20 2019 46.35 7.54 46.11 3.24 Estimated for 2020 47.56 8.82 43.61 2.97 Estimated for 2011-2020 49.33 11.37 39.30 2.45 Estimated for 2016-2020 49.33 8.01 44.29 2.91 Source: Calculated from GSO data; Number for 2019 and 2020 are estimates The contribution of TFP has increased but is still low compared to other countries in the region and remains insustainable. In the region, many countries have the contribution of TFP factor to economic growth over 50% (Korea at 55.5%, China at 52%, Thailand at 53%) [MPI 2019]. Economic restructuring The GDP structure has been experiencing the shift in the right direction and estimated to reach the desired targets, but the structure of the economic sector is still outdated. By 2019, the proportion of Vietnam’s agriculture in GDP has decreased sharply from 38.74% in 1990 to 14.85% in 2020, while the proportion of the industry and construction increased from 22.67% to 33.72%, and services increased from 38.59% to 41.63 in 2020 (taxes accounted for 9.8%) [GSO 2020b]. Compared to South Korea and Taiwan, from the beginning of the economic restructuring process, it took them only 20 years to reduce the proportion of agriculture from over 30% to under 10%. Meanwhile, after 35 years of renovation, the proportion of Vietnam’s agriculture only decreased from 38.1% to 13.63% (Figure 6). Figure 6: Vietnam’s Economic Structure from 1990 until 2020. Source: Calculated from GSO data The cause of Vietnam's economic growth challenges The above shortcomings and limitations of Vietnam’s economic growth quality are due to a number of causes: Firstly, the world economy of last decades contained many uncertainties. A number of important political events had a strong impact on the global economic development. Secondly, Vietnam is one of the countries that are heavily affected by the increasing impacts of climate change and the emergence of diseases. Thirdly, the common cause of the above limitations is due to the incomplete institutions and policies which lead to the disability to get the best out of the strength of the whole political system in terms of management, exploitation and use of resources of the economy. Fourthly, the quality of human resources is generally low, not meeting the market requirements. Fifthly, science and technology contribute largely to the results of the development process of each industry and economic sector, but the capital investment in science and technology in Vietnam is still very low. Sixthly, the openness of the Vietnam economy is large and rapidly increasing. Thus, it is highly dependent on and be easily affected by fluctuations in the world economy and politics. Seventhly, although the restructuring process has made important steps forward, it still has not meet the expectation. Restructuring speed is still slow and has not shown a breakthrough. Implications for enhancing the quality of economic growth in Vietnam Reform of Vietnam’s economic growth model From the mid-1990s until now, growth has been strengthened by many new trade opportunities as well as large inflows of capital from foreign countries, mainly from the influx of FDI. Future growth must be backed by skills and technology, rather on cheap labor, raw product exports and outsourcing. Firstly, Vietnam needs to transform its growth model towards increasing resource efficiency, green development, environment-friendly and transition to stages 2 and 3 of the development process (see Figure 7). High economic growth of Vietnam must lead towards improving the quality of growth and competitiveness of the economy. Secondly, Vietnam needs to take the shift to an industrialized model that promotes dynamic comparative advantages, based on the capabilities and advantages that Vietnam can have the access. Therefore, up to 2030, Vietnam needs to turn to high-level competitive advantages and pay special attention to develop high-quality human resources, combine labor-intensive with capital-intensive technologies and develop basic support industries. Comparative advantages of Vietnam up to 2030 is: i) abundant, skilled labor and golden population structure; ii) dynamic business community; iii) deep participation in global value chains; iv) the implementation of new-generation FTAs; v) political stability and attraction to international investors. Figure 7. Stages of development process Source: Author bases on M. Porter's model • Economic restructuring Vietnam has significantly been changed for 30 years of renovation with a high growth record and made progress in achieving the millennium goals. This success is partly due to the liberation of production forces, FDI attraction, exportation, and regional and global integration. To create a premise for sustainable growth in the long term, Vietnam needs to restructure the economy to create new incentives for growth like in the early years of the renovation period. • Improving the quality of institution Continue institutional reform and improve the business environment are the core and most important factors that create new driving force for economic growth. Strengthening institutions of market mechanism, revising laws and policies to free the bounded resources in order to effectively mobilize them in line with the socialist-oriented market economy of Vietnam; Strictly applying the principles of publicity and transparency in the processes of management, exploitation and use of the country’s resources; Enhancing the capacity of creation and national governance as well as the autonomy and innovation capacity at the firm level; Reforming and improving the quality of socio-economic development strategies and planning on the basis of improvements in the abilities of analysis, evaluation and forecasting in all fields; Focusing on transparency, equality and democratization of socio-economic life; Better control the authority and power, promoting accountability and public ethics. Develop and strictly impose strong sanctions that help prevent actions towards authoritarianism and monopoly, the ask-for-the-given mechanism, group benefits; Better crack down on corruption, strengthening the trust of investors, businesses and the whole society. • Improving the quality of human resources Human capital development is the most important factor to ensure long-term economic growth and poverty reduction. Therefore, there should be solutions to improve the quality of education and training as follows: The key solution is to renovate and improve state management capacity in education and training. Comprehensive education reform aims to bring the education system in line with the country’s economic development requirements. Increasing investment in education through various sources, of which investment from the state budget should increase; at the same time, mobilize more by promoting educational socialization and build a learning society. Support and accelerate digital transformation in the business sector through policy breakthroughs. Take advantages of Industry Revolution 4.0 to promote science and technology development, innovation and labor productivity. • Improving the capital efficiency In order for the economy to grow, Vietnam not only needs to increase investment but also use capital effectively. Therefore, on the one hand, it is necessary to promote the investment ability of the people and the private sector, attract more foreign direct investment. On the other hand, it is necessary to improve the efficiency of the use of state investment, prevent ineffective investment, fraudulent investment. Conclusion The period after Economic Reform has attained impressive achievements in both quantity and quality of economic growth in Vietnam during the past 35 years. However, there are concerns about the quality and sustainability of such growth achievements. Experience from the leading countries shows that the high growth rate does not necessarily create a strong and prosperous economy. High growth is only a prerequisite, it is far from being “sustainable”. In order to break the growth’s bottlenecks as well as the middle-income trap, countries need to pay more attention to the quality aspect of growth through strengthening institutional reforms, investing in human capital, as well as restructuring the economy. Although Vietnam has attained very encouraging economic development achievements in the period of 1991-2020, it is still growing below its potential and is currently facing many quality-related shortcomings in the medium and long term. Therefore, removing bottlenecks on both quantity and quality growth is essential for Vietnam to close the development gap with other countries in the region and the world.

About the authors

Ngoc Son Nguyen

National Economics University

Email: sonnn@neu.edu.vn
Ph.D. (Economics), Associate Professor, Dean of the Faculty of Planning and Development, ORCID: 0000-0002-9904-8017 Vietnam

References

Supplementary files