Learning lessons for Vietnam's future prosperity

Vietnam has reaped impressive economic successes in 2019 and is expecting a bumper crop this year.

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Raymond Mallon, senior economic advisor to the Australia-Vietnam Economic Reform Programme, analyse these achievements and discusses priority actions needed for Vietnam to become a more prosperous nation in the coming decades.

Vietnam’s growth of 7.0 per cent in 2019 was led by 11.3 per cent growth in the manufacturing sector. Total in­dustrial sector output grew by 8.9 per cent, services by 7.3 per cent, and agriculture by 2 per cent.

Growth has been achieved with macro-economic stability, including an inflation rate below 3 per cent and increased foreign reserves. Vietnam's ratios of trade and foreign investment are amongst the highest in the world and continue to grow,

Vietnam's economic perfor­mance last year was especially Impressive, given global uncer­tainties and the slowdown in world trade and economic growth, but it has been the transformation in the sources of growth in Viet­nam that is truly remarkable.

Whereas earlier decades of economic growth were driven by large inflows of foreign investment and public expen­diture, recent growth has been increasingly driven by domestic consumption and private investment.

Global experience suggests that a strong domestic private sector competing and in­novating in a globally integrated and competitive economy, to­gether wilh an effective system 01 public administration, provide a strong foundation for sustained economic growth.

Private domestic investment increased by more than 17 per cent in 2019, with 2.6 per cent growth in state investment and 7.9 per cent growth in foreign di­rect investment (FDI).

Growth in exports by domestic firms also increased sharply (17.7 per cent) in 2019, while growth in exports by foreign-invested enter­prises (FIEs) was a more modest 4.2 per cent. Nevertheless, FIEs still contributed 69 per cent of Vietnam's total exports in 2019, while domestic businesses ac­counted for 31 per cent

Further sector developments

Another striking trend in 2019 was the rapid growth in IT-based services and the knowledge econ­omy, Use of cashless payments systems jumped sharply. Most customs and tax payments are now being conducted through bank account transfers, and most formal businesses have regis­tered for electronic lax payment systems, Rapidly growing num­bers of people are paying power, telecoms, and water bills using non-cash systems. This promotes efficiency and transparency, and reduces opportunities for corrup­tion and tax avoidance.

The economy has recorded sharp increases in the amounts of investment capital raised for digital startups and expansion, including for agriculture, e-commerce, and financial technology. The National Digital Transfor­mation Plan targets Vietnam to be among the top-four ASEAN digitalized economies by 2025,

Tourism is another increas­ingly important sector. After sev­eral decades of sustained growth, tourism is now a major contribu­tor to national employment and income growth, Importantly, the economic benefits of tourism arc reaching people in rural areas that tend to benefit less from the development of industry and other services.

Farmers had a more difficult year because of the impacts of the African swine fever, climate change, saltwater intrusion in the Mekong Delta, and droughts in some regions. Nevertheless, there have also been some positive signs in agriculture with the development of new domestic and export markets for some higher value-added agriculture products with improved packaging and quality standards.

Rural workers also have increas­ing access to higher income earning opportunities in non-ag­riculture sectors and the share of the agriculture sector in total GOP and employment continues to decline in line with the ongo­ing restructuring of the economy. Urbanization rates are expect­ed to continue to increase. This should help reduce rural-urban gaps in labour productivity, but there will be social costs during this transition.

Recent years have also been a turning point in terms of the more substantive actions taken to address the adverse impacts of pollution and climate change on people's lives in Vietnam.

While still much more needs to be done, accelerated growth in re­newable energy is encouraging, Vietnamese people appear to be increasingly prepared to take ac­tion against environmental deg­radation in their communities.

Looking forward

Recent domestic private sec­tor performance provides a strong foundation for future success. The key now is to learn from and build on recent successes. The govern­ment should continue to work with business and other stake­holders to identify remaining bot­tlenecks to productive business investment and to take actions to address these bottlenecks.

Recent efforts to target ASE­AN-4 levels in the Doing Busi­ness Index and World Competitiveness Index under Resolution No,02!NQ-CP on the continued implementation of key tasks and solutions to improving the domes­tic business climate and nation­al competitiveness in 2020 has helped ensure that government agencies are held accountable for delivering on reforms agreed between business and the government.

Plans to establish a special working group to boost reforms and further simplify business procedures during 2020-2025 has a potentially important role to play in future success.

Vietnam also needs to focus more on the remaining institutional barriers to a competitive market economy. It is encourag­ing to see that land law reform is again on the national reform agenda.

Current complexity and lack of transparency in markets for land use rights (especially ag­riculture land use rights) create inefficiencies and opportunities for corruption. There is a need for stronger and more transpar­ent systems for property rights protection, including contract en­forcement and economic courts.

Stronger regulators that are inde­pendent of commercial interests are needed to enforce competi­tion policy, to ensure standards (for example for health, educa­tion, and safety), and to oversee network industries (transport, power, and communications).

Sustained efforts are also needed to accelerate human re­source development and infrastructure development to better meet the changing demands of society and Vietnam's increas­ingly knowledge-based market economy. Efficient public sector institutions are needed to ensure the provision of more relevant education and health services and to build the infrastructure needed to encourage increased investment in the emerging busi­nesses that will generate more productive and higher-income employment.