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Keywords:

  • F14;
  • F15;
  • F21

With almost uninterrupted growth for nearly two decades, Vietnam has emerged from the status of a poor agro-based transition economy in the early 1990s to a young industrial country with a lower middle income. However, growth up to now has been largely factor-driven without significant improvements in local productivity or competitiveness. In the last few years, a consensus has formed among Vietnamese policymakers and researchers that this quantity-driven growth cannot take Vietnam to a higher level unless more domestic value is created to replace the massive use of cheap labor or a huge inflow of foreign capital relative to gross domestic product. This view is widely shared by the official drafters of the Ten-Year Socio-economic Development Strategy 2011–2020 as well as such foreign observers as Ohno (2009), Ketels et al. (2010), and the World Bank (2010). Vietnam's challenge is to discover and implement concrete policy actions to overcome a middle income trap which may occur in the future.

With this background, the in-depth analysis of the two drivers of current growth – trade and investment – by Thanh and Duong (2011) is highly welcome. Starting from descriptive narratives of the two variables, the authors show a decomposition of Vietnam's export growth and revealed comparative advantage analysis from 1997 to 2008 and indices of trade complementarity, trade intensity, and export similarity from 2004 to 2008. They also estimate simultaneous equations for export demand and export supply for 1995–2009 to explore the trade–foreign direct investment (FDI) nexus. The authors find that the major contributors to the rapid export growth of Vietnam have been global trade expansion and the “unexplained residual” which is regarded as liberalization effects and improvements in competitiveness combined. Another important finding is that FDI inflows have a positive, significant, and lagged effect on exports. Moreover, FDI also has a positive effect on the export performance of local firms. The paper reports numerous other results derived from a close examination of subsectors and subperiods. These data-intensive results provide us with much food for thought. However, some care must be taken in interpreting the major findings.

First of all, the most important driver of Vietnam's export growth remains unexplained. The large residual of the export decomposition contains both liberalization effects and improved competitiveness. As the authors admit, separation of the two is difficult. This is unfortunate because the two would lead to entirely different assessments of the quality of growth. In any transition economy which opens up to global markets, growth occurs naturally and without effort as previously suppressed trade and investment rise to normal levels. Vietnam's economic relations were normalized in steps through the Association of Southeast Asian Nations Free Trade Area, the World Trade Organization, and bilateral and regional Free Trade Agreements and Economic Partnership Agreements. This process has not yet come to completion. For this reason, much of the unexplained residual likely reflects ongoing liberalization effects rather than improvements in competitiveness.

Another important issue is who among local private firms, state-owned enterprises (SOEs), and foreign-affiliated firms are the main exporters. In East Asia's latecomer countries, industrialization usually starts when foreign firms come to assemble labor-intensive products on a large scale by importing most inputs and exporting all output. Vietnam's FDI-led industrialization since the 1990s also took this form. However, this should be understood as the quantitative use of unskilled labor, which is factor-based, rather than rising competitiveness of local private firms, which is productivity-based. When SOEs increase their exports, we must be sure that their achievement does not come from explicit or hidden subsidies. Export expansion carries different implications for national competitiveness depending on who achieved it and how it is done.

The authors' discovery that the existence of FDI firms has a positive spillover effect on the exports of local firms is surprising. Channels through which this occurs need to be explained more convincingly because this too carries important bearings on FDI's contribution to Vietnam's growth. One possible channel is that local firms become the suppliers of parts and components to FDI manufacturers, which provides an opportunity for learning. Another possibility is competitive pressure from FDI firms which compels local producers in the same sector to do better. But both channels appear thin in Vietnam as many industrial surveys and testimonies by local and foreign businesses indicate.

These caveats do not invalidate the analyses of the paper, but make us slightly less optimistic in interpreting the results. Despite remarkable dynamism in the volume and structure of trade and investment analyzed by Thanh and Duong (2011), there is no convincing evidence that the competitiveness of Vietnamese firms is rising rapidly or that local productivity is greatly stimulated by economic integration.

References

  1. Top of page
  2. References
  • Ketels C., Cung N.D., Anh N.T.T. & Hanh D.H. (2010). Vietnam competitiveness report 2010. Central Institute for Economic Management and Lee Kuan Yew School of Public Policy, National University of Singapore.
  • Ohno K. (2009). Avoiding the middle-income trap: Renovating industrial policy formulation in Vietnam. ASEAN Economic Bulletin, 26 (1), 2543.
  • Thanh V.T. & Duong N.A. (2011). Revisiting exports and foreign direct investment in Vietnam. Asian Economic Policy Review, 6 (1), 112131.
  • World Bank (2010). Avoiding the middle-income trap: Priorities for Vietnam's long-term growth. A paper presented at Senior Policy Seminar, Hanoi, August.