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.
AS INDIA GOES to the polls, Narendra Modi, the prime minister, can boast that the world’s largest election is taking place in its fastest-growing major economy. India’s GDP, at $3.5trn, is now the fifth biggest in the world—larger than that of Britain, its former colonial ruler. The government is investing heavily in roads, railways, ports, energy and digital infrastructure. Many multinational companies, pursuing a “China plus one” strategy to diversify their supply chains, are eyeing India as the unnamed “one”. This economic momentum will surely help Mr Modi win a third term. By the time he finishes it in another five years or so, India’s GDP might reach $6trn, according to some independent forecasts, making it the third-biggest economy in the world.
But India is prone to premature triumphalism. It has enjoyed such moments of optimism in the past and squandered them. Its economic record, like many of its roads, is marked by potholes. Its people remain woefully underemployed. Although its population recently overtook China’s, its labour force is only 76% the size. (The percentage of women taking part in the workforce is about the same as in Saudi Arabia.) Investment by private firms is still a smaller share of GDP than it was before the global financial crisis of 2008. When Mr Modi took office, India’s income per person was only a fifth of China’s (at market exchange rates). It remains the same fraction today. These six books help to chart India’s circuitous economic journey and assess Mr Modi’s mixed economic record.
Breaking the Mould: Reimagining India’s Economic Future. By Raghuram Rajan and Rohit Lamba. Penguin Business; 336 pages; $49.99
Before Mr Modi came to office, India was an unhappy member of the “fragile five” group of emerging markets. Its escape from this club owes a lot to Raghuram Rajan, who led the country’s central bank from 2013 to 2016. In this book he and Mr Lamba of Pennsylvania State University express impatience with warring narratives of “unmitigated” optimism and pessimism about India’s economy. They make the provocative argument that India should not aspire to be a manufacturing powerhouse like China (a “faux China” as they put it), both because India is inherently different and because the world has changed. India’s land is harder to expropriate and its labour harder to exploit. Technological advances have also made services easier to export and manufacturing a less plentiful source of jobs. Their book is sprinkled with pen portraits of the kind of industries they believe can prosper in India, including chip design, remote education—and well-packaged idli batter. Both authors regret India’s turn towards tub-thumping majoritarianism, which they think will ultimately inhibit its creativity and hence its economic prospects. Nonetheless this is a work of mitigated optimism.
New India: Reclaiming the Lost Glory. By Arvind Panagariya. Oxford University Press; 288 pages
This book provides a useful foil for “Breaking the Mould”. Arvind Panagariya took leave from Columbia University to serve as the head of a government think-tank set up by Mr Modi to replace the old Planning Commission. The author is ungrudging in his praise for the prime minister and unsparing in his disdain for the Congress-led government he swept aside. Mr Panagariya also retains faith in the potential of labour-intensive manufacturing to create the jobs India so desperately needs. The country, he argues in a phrase borrowed from Mao’s China, must walk on two legs—manufacturing and services. To do that, it should streamline its labour laws, keep the rupee competitive and rationalise tariffs at 7% or so. The book adds a “miscellany” of other reforms (including raising the inflation target, auctioning unused government land and removing price floors for crops) that would keep Mr Modi busy no matter how long he stays in office.
The Lost Decade 2008-18: How India’s Growth Story Devolved into Growth without a Story. By Puja Mehra. Ebury Press; 360 pages; $21
Both Mr Rajan and Mr Panagariya make an appearance in this well-reported account of India’s economic policymaking from 2008 to 2018. Ms Mehra, a financial journalist, describes the corruption and misjudgments of the previous government and the disappointments of Mr Modi’s first term. The prime minister was exquisitely attentive to political threats but complacent about more imminent economic dangers. His government was, for example, slow to stump up the money required by India’s public-sector banks after Mr Rajan and others exposed the true scale of their bad loans to India’s corporate titans. One civil servant recounts long, dull meetings in which Mr Modi monitored his piecemeal welfare schemes, even as deeper reforms languished. “The only thing to do was to polish off all the peanuts and chana.”
The Billionaire Raj: A Journey Through India’s New Gilded Age. By James Crabtree. Oneworld Publications; 416 pages; $7.97
For a closer look at those corporate titans, turn to the “Billionaire Raj” by James Crabtree, formerly of the Financial Times. The prologue describes the mysterious late-night crash of an Aston Martin supercar, registered to a subsidiary of Reliance, a conglomerate owned by Mukesh Ambani, India’s richest man. Rumours swirl about who was behind the wheel, even after an employee turns himself in. The police tell Mr Crabtree that the car has been impounded for tests. But he spots it abandoned on the kerb outside the police station, hidden under a plastic sheet. It was still there months later. Mr Crabtree goes on to lift the covers on the achievements, follies and influence of India’s other “Bollygarchs”. They include Vijay Mallya, the former owner of Kingfisher beer and airlines. Once known as the King of Good Times, he moved to Britain from where he faces extradition for financial crimes. Mr Crabtree meets him in drizzly London, where the chastened hedonist is only “modestly late” for the interview. Only once do the author’s journalistic instincts fail him. He receives an invitation to the wedding of the son of Gautam Adani. The controversial billionaire is known for his close proximity to Mr Modi and his equally close acquaintance with jaw-dropping levels of debt. The bash might have warranted its own chapter in this book. But Mr Crabtree, unaccustomed to wedding invitations from strangers, declines to attend.
Unequal: Why India Lags Behind its Neighbours. By Swati Narayan. Context; 370 pages; $35.99
Far from the bling of the Bollygarchs or the ministries of Delhi, Swati Narayan’s book draw son her sociological fieldwork in the villages of India’s south and its borderlands with Bangladesh and Nepal. She tackles “the South Asian enigma”: why have some of India’s poorer neighbours (and some of its southern states) surpassed India’s heartland on so many social indicators, including health, education, nutrition and sanitation. Girls in Bangladesh have a longer life expectancy than in India, and fewer of them will be underweight for their age. Her argument is illustrated with a grab-bag of statistics and compelling vignettes: from abandoned clinics in Bihar, birthing centres in Nepal, and well-appointed child-care centres in the southern state of Kerala. In a Bangladeshi border village, farmers laugh at their Indian neighbours who still defecate in the fields. She details the cruel divisions of caste, class, religion and gender that still oppress so many people in India and undermine the common purpose that social progress requires.
How British Rule Changed India’s Economy: The Paradox of the Raj. By Tirthankar Roy. Springer International; 159 pages; $69.99
Many commentators describe the British Empire as a relentless machine for draining India’s wealth. But that may give it too much credit. The Raj was surprisingly small, makeshift and often ineffectual. It relied too heavily on land for its revenues, which rarely exceeded 7% of GDP, points out Tirthankar Roy of the London School of Economics. It spent more on infrastructure and less on luxuries than the Mughal empire that preceded it. But it neglected health care and education. India’s GDP per person barely grew from 1914 to 1947. Mr Roy reveals the great divergence within India that is masked by that damning average. Britain’s “merchant Empire”, committed to globalisation, was good for coastal commerce, but left the countryside poor and stagnant. Unfortunately, for the rural masses, moving from rural areas to the city was never easy. Indeed, some of the social barriers to mobility that Mr Roy lists in this book about India’s economic past still loom large in books about its future.
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The Federal Reserve is stuck in a mode of forecasting and public communication that looks increasingly limited, especially as the economy keeps delivering surprises.
The issue is not the forecasts themselves, though they’ve frequently been wrong. Rather, it’s that the focus on a central projection — such as three interest-rate cuts in 2024 — in an economy still undergoing post-pandemic tremors fails to communicate much about the plausible range of outcomes. The outlook for rates presented just last month now appears outdated amid a fresh wave of inflation.
A 26% plunge in coal mining weighed on Poland’s industrial output in March 2024, casting a shadow over the expectations that the biggest emerging-market economy in Europe would grow by the expected 3% this year.
Coal mining output slumped by 25.9% year-over-year in March, contributing to a 6% decline in Poland’s industrial production last month, government data showed on Monday. This was the steepest decline in Poland’s industrial output since April 2023, per Bloomberg’s estimates. It was also much worse than expectations of a 2.2% drop in industrial production.
The steep drop in the Polish industry last month raises questions about whether the EU’s most coal-dependent economy would manage to see a 3% rebound in its economy this year, as the central bank and the finance ministry expect.
Still, it’s too early into the year to raise flags about Poland’s economy, Grzegorz Maliszewski, chief economist at Bank Millennium, told Reuters.
“I wouldn’t radically change my expectations here, because there are many reasons to expect a continuation of economic recovery, as domestic demand will increase and the economic situation in Germany is also improving,” Maliszewski said.
Meanwhile, Poland’s new government has signaled it would be looking to set an end date for using coal for power generation, a senior government official said.
“Only with an end date we can plan and only with an end date industry can plan, people can plan. So yes, absolutely, we will be looking to set an end date,” Urszula Zielinska, the Secretary of State at the Ministry of Climate and Environment, said in Brussels earlier this year.
Last year, renewables led by onshore wind generated a record share of Poland’s electricity—26%, but coal continued to dominate the power generating mix, per the German research organization Fraunhofer Society.
Poland’s power grid operator said last month that it would spend $16 billion on upgrading and expanding its power grid to accommodate additional renewable and nuclear capacity.
