HAVING IMPRESSED the world by taming the virus last year, Vietnam is now in the middle of its worst outbreak of covid-19 by far. Parts of the country are in strict lockdown and a swathe of factories, from those making shoes for Nike to those producing smartphones for Samsung, have either slowed or shut down, disrupting global supply chains. Yet integration with global manufacturing has helped keep Vietnam’s economy humming during the pandemic. In 2020 GDP rose by 2.9% even as most countries recorded deep recessions. Despite the latest outbreak, this year could see faster growth: the World Bank’s latest forecasts, published on August 24th, expect an expansion of 4.8% in 2021.
This performance hints at the real reason to be impressed by Vietnam. Its openness to trade and investment has made it an important link in supply chains. And that in turn has powered a remarkable and lengthy expansion. Vietnam has been one of the five fastest-growing countries in the world over the past 30 years, beating its neighbours hands down (see chart 1). Its record has been characterised not by the fits and starts of many other frontier markets, but by steady growth. The government is even more ambitious, wanting Vietnam to become a high-income country by 2045, a task that requires growing at 7% a year. What is the secret to Vietnam’s success—and can it be sustained?
Vietnam is often compared to China in the 1990s or early 2000s, and not without reason. Both are communist countries that, shepherded by a one-party political system, turned capitalist and focused on export-led growth. But there are big differences, too. For a start, even describing Vietnam’s economy as export-intensive does not do justice to just how much it sells abroad. Its goods trade exceeds 200% of GDP. Few economies in the world, except the most resource-rich countries or city states dominated by maritime trade, are or have ever been so trade-intensive.
It is not just the level of exports but the nature of the exporters that makes Vietnam different to China. Indeed, its deep connection to global supply chains and high levels of foreign investment makes it seem more like Singapore. Since 1990 Vietnam has received average foreign direct investment inflows worth 6% of GDP each year, more than twice the global level—far more than China or South Korea have ever recorded over a sustained period.
As the rest of East Asia developed and wages there rose, global manufacturers were lured by Vietnam’s low labour costs and stable exchange rate. That fuelled an export boom. In the past decade, exports by domestic firms have risen by 137%, while those by foreign-invested companies have surged by 422% (see chart 2).
But the widening gap between foreign and domestic firms now poses a threat to Vietnam’s expansion. It has become overwhelmingly dependent on investment and exports by foreign companies, while domestic firms have underperformed.
Foreign firms can continue to grow, providing more employment and output. But there are limits to how far they can drive Vietnam’s development. The country will need a productive and efficient services sector. As living standards rise it may become less attractive to foreign manufacturers over time, and workers will need other opportunities.
Part of the drag on domestic enterprise comes from state-owned firms. Their importance to the country’s activity and employment has shrunk (see chart 3). But they still have an outsize effect on the economy through their preferential position in the banking system, which lets them borrow cheaply. Banks make up for that unproductive lending by charging other domestic firms higher rates. Whereas foreign companies can easily access funding overseas, the average interest rate on a medium- and long-term bank loan in Vietnamese dong ran to 10.25% last year. Recent research by academics at the London School of Economics also suggests that productivity gains in the five years after Vietnam joined the WTO in 2007 would have been 40% higher without state-owned firms.
To fire up the private sector, the government wants to nurture the equivalent of South Korea’s chaebol or Japan’s keiretsu, sprawling corporate groups that operate in a variety of sectors. The government is “trying to create national champions,” says Le Hong Hiep, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore, and a former Vietnamese civil servant.
Vingroup, a dominant conglomerate, is the most obvious candidate. In VinPearl, VinSchool and VinMec, it has operations that spread across tourism, education and health. VinHomes, its property arm, is Vietnam’s largest listed private firm by market capitalisation.
The group’s efforts to break into finished automotive production through VinFast, its carmaker, may be most important for the economic development of a country that is usually known for intermediate manufacturing. In July the company’s Fadil car, which is based on the design for Opel’s Karl make, became Vietnam’s best-selling model, beating Toyota. VinFast has grand ambitions abroad, too. In July it announced that it had opened offices in America and Europe and intended to sell electric vehicles there by March 2022.
Fostering national champions while staying open to foreign investment is not easy, however. VinFast benefits from a bevy of tax reductions, including a large cut in corporation tax for its first 15 years of operation. In August, local state media also reported that the government was considering reinstating a 50% reduction in registration fees for locally built automobiles that expired last year.
But the country’s membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and a range of other trade and investment deals, means that it cannot offer preferential treatment to domestic producers. It must extend support to foreign firms that make cars in Vietnam, too. (By contrast, China’s trade policy, which prefers broad but shallow deals, does not constrain domestic policy in quite the same way.)
Vietnam may also hope to rely on another source of growth. The economic boom has encouraged its enormous diaspora to invest, or even to return home. “There aren’t a lot of economies that are experiencing the sort of thing that Vietnam is,” says Andy Ho of VinaCapital, an investment firm with $3.7bn in assets. His family moved to America in 1977, where he was educated and worked in consulting and finance. He returned to Vietnam with his own family in 2004. “If I were Korean, I might have gone back in the 1980s, if I were Chinese I might have gone back in 2000.” Its successful diaspora makes Vietnam one of the largest recipients of remittances in the world; $17bn flowed in last year, equivalent to 6% of GDP.
The setback from covid-19 aside, it might seem hard not to be rosy about a country that appears to be in the early stages of emulating an East Asian economic miracle. But no country has become rich through remittances alone. As Vietnam develops, sustaining rapid growth from exports of foreign companies will become increasingly difficult, and the tension between staying open to foreign investment and promoting national champions will become more acute. All of that makes reforming the domestic private sector and the financial system paramount. Without it, the government’s lofty goal of getting rich quick may prove beyond its reach.
MONCTON – Dialogue NB CEO Nadine Duguay-Lemay says the business community has an integral place in a conversation about building a more equal and just New Brunswick.
That very conversation will take place on September 27 in Moncton with Dialogue Day 2021.
“When we talk about anti-racism, notions of equality, diversity, acceptance and inclusion and all those notions we celebrate, it’s not something we can do on our own,” said Duguay-Lemay.
“The business community actively needs to participate, if anything, because those topics concern them. That’s why you see so many business support the event.”
The volunteer-led non-profit organization plans to host an inclusive conversation on Monday at Moncton’s Crowne Plaza and virtually, online.
Dedicated to building social cohesion in New Brunswick, the sold-out event will feature discussions about racial justice in the workplace, rethinking the economy as it recovers from the pandemic and how to be a better ally to Indigenous people.
The event, which has sold out of in-person seats, will feature Jeremy Dutcher, a Wolastoq singer, songwriter, composer, musicologist and activist from Tobique First Nation, as its keynote speaker.
The mandate of the discussions is to ensure everyone feels heard, valued and that they belong, making diversity an asset – something Duguay-Lemay considers imperative to a functional economy.
“What I’ve found is that people don’t like to go into uncomfortable discussions. Some people want to embrace social cohesion but don’t know where to start, or are afraid of saying the wrong thing. This is our expertise – we’re good at the art of dialogue and multiple viewpoints at one table,” she said.
“We need a lot of different voices and perspectives at the table to rethink the system for the wellbeing of all. These discussions shouldn’t be happening in isolation.”
Duguay-Lemay said New Brunswick faces many economic challenges, noting a diverse workforce will help recover from those challenges.
She stressed that the business community needs to work toward a goal of truth and reconciliation, and in a call with Huddle, rebutted the metaphor of everyone being on the same boat during the pandemic.
“I’d argue we’re all facing the same storm, but not in the same boat. Some people are in yachts and some are in little boats about to capsize,” she said.
Other voices are emerging – female and Indigenous, for example – looking to address poverty and wage inequality and unfairness, employment access, systemic racism and environmental degradation, noted Duguay-Lemay, adding that the province’s 4,418 non-profits need more recognition as an economic partner.
“Inclusion is embedded in our DNA as Canadians. We’re already a country and province that abides by those laws, so it’s important to look at inclusion,” she said.
The conversations will also focus on racial justice in the workplace, how the pandemic hurt Indigenous and black Canadian employment, versus non-minorities, access to employment – and the social barriers that exist for racialized workers.
“I invite all organizations, employers, public and non-profits to look at their practices in place and ask if they walk the talk for truth and reconciliation. We’re all treaty people – how do we uphold this?” said Duguay-Lemay.
“We want to at least demonstrate to Indigenous people in New Brunswick that we hear their plight and are serious about truth and reconciliation.”
Greater social cohesion is the best step forward, Duguay-Lemay noted, adding that real dialogue can build an economy that works for everyone.
She said matters of racial justice in the workplace – and specific matters, such as owners objecting to the declaration of September 30 as a statutory holiday, contending that they can’t afford it – will be among the economic issues for which solutions will be sought.
The conversation will also focus on how the province’s recovery from the pandemic has exposed inequalities in the economy.
Duguay-Lemay stressed the need to learn from the way the pandemic exposed inequalities, and rethink a system that works for everyone.
“We need to think differently and it really shouldn’t be based on the interests of the privileged,” said Duguay-Lemay.
“As employers are looking to attract and retain talent, we hear about skill shortages all the time. This becomes a matter of attracting talent, whether from newcomers or tapping into Indigenous communities, how can we make our workplaces more equitable and inclusive?
The event will feature an “eclectic” round table of specialists, artists, activists and experts from numerous sectors, and identities in New Brunswick, with opportunities for networking, inspiration for change with concrete examples and skills to help become a social leader.
Kenneth Rogoff, a former chief economist of the International Monetary Fund, is professor of economics and public policy at Harvard University.
With the disastrous U.S. exit from Afghanistan, the parallels between the 2020s and the 1970s just keep growing. Has a sustained period of high inflation just become much more likely? Until recently, I would have said the odds were clearly against it. Now, I am not so sure, especially looking ahead a few years.
Many economists seem to view inflation as a purely technocratic problem, and most central bankers would like to believe that. In fact, the roots of sustained inflation mainly stem from political economy problems, and here the long list of similarities between the 1970s and today is unsettling.
In the United States, following a period in which the president challenges institutional norms (Richard Nixon was the 1970s version), a thoroughly decent person takes office (back then, Jimmy Carter). Abroad, the U.S. suffers a humiliating defeat at the hands of a much weaker, but much more determined adversary (North Vietnam in the 1970s, the Taliban today).
On the economic front, the global economy suffers a lingering productivity slowdown. According to the Northwestern University economist Robert Gordon’s magisterial account of innovation and growth, The Rise and Fall of American Growth, the 1970s marks a turning point in U.S. economic history, thanks to a sharp slowdown in meaningful economic innovation. Today, even if productivity pessimists grossly underestimate the phenomenal gains the next generation of biotech and artificial intelligence will bring, a large body of work finds that productivity growth has been slowing in the twenty-first century, and now the pandemic looks to be inflicting another heavy blow.
The global economy suffered a massive supply shock in the 1970s, as Middle East countries massively hiked the price of oil they charged the rest of the world. Today, protectionism and a retreat from global supply chains constitute an equally consequential negative supply shock.
Finally, in the late 1960s and 1970s, huge increases in government spending were not matched by higher taxes on the wealthy. The spending increases stemmed in part from president Lyndon Johnson’s “Great Society” programs in the 1960s, later amplified by the soaring cost of the Vietnam War. In recent years, first the Trump tax cuts, then pandemic-related catastrophe relief, and now progressive plans to expand the social safety net have hit the federal budget hard. Plans to fund these costs by raising taxes only on the rich will likely fall far short.
It is true that despite all these similarities, today’s independent central banks stand as a bulwark against inflation, ready to raise interest rates if inflation pressures seem to be getting out of hand. In the 1970s, only a few countries had independent central banks, and in the case of the U.S., it did not act like one, fuelling inflation with massive monetary expansion. Today, relatively independent central banks are the norm across much of the world. It is also true that today’s ultralow global real interest rates provide rich-country governments a lot more room to run deficits than they had in the 1970s.
On the other hand, the challenges of providing for aging populations has become vastly more difficult over the past five decades (at least in advanced economies and China). Underfunded public pension schemes arguably are a much larger threat quantitatively to government budget solvency than debt. At the same time, social pressures to increase government spending and transfers have exploded across the world, as inequality becomes more politically salient for many countries, and improving growth less so. And confronting climate change and other environmental threats will almost certainly put additional pressure on budgets and slow growth.
Sharply rising government debts will inevitably make it more politically painful for central banks to raise nominal interest rates if global real rates start turning upward. High debts are already a reason why some central banks today will hesitate to raise interest rates if and when postpandemic normalization occurs. Private debt, which has also soared during the pandemic, is perhaps an even bigger problem. Widespread private defaults would eventually have a huge fiscal impact via lower tax collection and higher social safety net costs.
Today’s economic challenges are certainly solvable, and there is no reason why inflation should have to spike. Leading central bankers today such as Jay Powell of the U.S. Federal Reserve and Christine Lagarde of the European Central Bank are a far cry from pliable Fed Chair Arthur Burns in the 1970s. They both have superb staffs to support them. Yet all central banks still face constant pressures, and it is hard for them to stand alone indefinitely, especially if politicians become weak and desperate.
America’s humbling defeat in Afghanistan is a big step toward recreating the perfect storm that led to slow growth and very high inflation of the 1970s. A few weeks ago, a little inflation seemed like a manageable problem. Now, the risks and the stakes are higher.
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