Exceeding expectations: Liberalisation policies are resulting in sprightly growth rates

Stretching along the eastern coast of the Indochinese Peninsula in South-east Asia, the Socialist Republic of Vietnam has risen to become one of the region’s success stories, following a remarkable post-war economic recovery. Its vast coastline, rolling highlands, dense jungle and abundance of natural resources have supported rapid industrial development, while ongoing economic liberalisation and government initiatives to semi-privatise a number of state-owned enterprises (SOEs) have proven highly effective in attracting foreign direct investment (FDI).

The country has witnessed sharp improvements in its macroeconomic fundamentals: GDP per capita has grown more than a hundredfold since 1989, while annual GDP growth has not fallen below 5% since 1999. The country’s strong performance in recent decades is largely the result of ongoing liberalisation, rising investment and surging exports, which are expected to help keep growth on a strong upwards trajectory.

Overview

Vietnam boasts 3260 km of coastline, as well as a 1281-km border with China in the north, a 2130-km border with Laos in the east, and a 1228-km border with Cambodia in the south-east. Approximately three-quarters of the country is made up of mountains and tropical forest, and the majority of its population lives in the flatlands, notably in the “rice bowls” of the northern Red River and southern Mekong River deltas.

Vietnam’s geographical location is a major advantage: the South China Sea is the world’s second-busiest shipping lane, accounting for roughly 25% of total international traffic, and operating as a vital link between the Pacific and Indian Oceans.

Vietnam is also rich in natural resources, including sizeable maritime fishing grounds, an estimated 270m tonnes of crude oil reserves, 36bn cu metres of natural gas, 8bn tonnes of coal, 10,000 MW of hydropower potential and minerals including bauxite, iron ore, copper, gold, granite, marble and clay.

Vietnamese is the official state language. Popular second languages include French, Chinese, English and Khmer. Vietnam’s currency is the dong, which was trading at 21,750 to one US dollar in early July 2015.

Geography

Spanning 1650 km from north to south, Vietnam is both a temperate and a tropical country, and its weather is heavily influenced by seasonal monsoons. The north is generally cool and dry between November and April, and the entire country is hot and rainy between May and October, with temperatures ranging from 17°C in January to 29°C in June.

Vietnam is densely populated, and has a population of 93.4m, according to 2014 figures. An estimated 33% of the population lives in urban areas, and the median age of the populace is 29.2 years. With 7.1m residents, Ho Chi Minh City in the south is the country’s largest urban area, while the northern capital city Hanoi has 3.47m residents, followed by Can Tho and Haiphong, with just over 1m residents each.

History 

Archaeologists have found evidence of human settlement in Vietnam dating back over 500,000 years, and primitive agriculture began as early as 7000 BCE. In the second century BCE, Chinese invaders conquered the country, marking the beginning of 1000 years of Chinese rule. During this period the country became a key port of call between China and India, witnessing an influx of international traders and visitors, who brought with them scientific, medical and agricultural knowledge. This knowledge transfer led to the establishment of rice paddy cultivation, which remains the cornerstone of Vietnamese agriculture today.

Vietnam was liberated from Chinese rule in 938 CE, and formed the first of a series of dynastic states. French colonial forces invaded Vietnam in 1858, gradually eroding its independence until it formally became part of French Indochina in 1887. While an independent state was declared at the close of the Second World War, Vietnamese autonomy was to remain in dispute until 1954, when French forces withdrew from the country following defeat by the Viet Minh. That year, the Geneva Accords split the country into Ho Chi Minh’s communist north and Bo Dai’s anti-communist south.

Vietnam War

US economic and military aid to the south rose rapidly in the following years, as the government sought to curb the spread of communism in Asia, leading to a protracted occupation in which 2.7m US soldiers served alongside the South Vietnam army against the forces of North Vietnam, including its guerrilla army, the Viet Cong. Defeated US forces withdrew in 1973, and in 1975 the North Vietnamese army invaded the south and unified Vietnam under the framework of a single-party socialist republic, a political system that remains in place to this day.

Rebound

In the decade following the war, Vietnam recorded marginal economic growth, due in part to a mass exodus of South Vietnamese businesspeople and suspended diplomatic and trade relations with the US.

However, in 1986 the Communist Party of Vietnam (CPV) launched the Doi Moi“renovation” reforms, with the aim of creating what the government terms a “socialist-oriented market economy”. The reforms emphasised economic liberalisation, taking measures to increase competitiveness and bolster exports. GDP growth has soared in the years since, rising from 2.79% in 1986 to a high of 9.54% in 1995, before averaging 6.4% annually between 2003 and 2013, according to the World Bank. GDP per capita has also skyrocketed, rising from $97.16 in 1989 to $1910.51 in 2013.

Hit by the global financial crisis, GDP growth fell from 7.13% in 2007 to 5.4% in 2009, although it rebounded to 6.42% and 6.24% in 2010 and 2011 respectively. Runaway growth drove inflation to 22.16% by July 2011, the highest level in Asia, with GDP growth sliding to 5.42% in 2013 as a result of government measures to promote macroeconomic stability.

Economic expansion has gathered pace again in recent years, and in 2014 GDP growth reached 5.98%, outpacing government targets of 5.8%. Vietnam’s economy has continued to exceed expectations in 2015, with the Ministry of Planning and Investment (MPI) reporting that GDP growth reached 6.28% during the first half of the year, up from earlier estimates of 6.11%.

Industrial Shift

Although agriculture comprised 25% of total economic output in 2000, its role has diminished in the years since, while industry has thrived. According to the General Statistics Office of Vietnam’s “2014 Statistical Yearbook”, services comprised 43.3% of GDP in 2013, followed by industry and construction at 38.3%, and agriculture, forestry and fishing at 18.4%.

Competitive labour costs have enabled its textiles industry to become one of the success stories of Vietnam’s export market, which was valued at a record $150bn in 2014. The country is now set to rival major regional players such as Indonesia for supremacy in the textiles and electronics manufacturing segments, with the government also actively incentivising segments including automotive, shipbuilding, food processing, steel, petrochemicals and software.

Growth Strategy

The government’s growth strategy has recently returned to liberalisation following moves to tighten fiscal control in February 2011. In 2012 the CPV unveiled a three-pillar economic reform programme aimed at restructuring SOEs and reforming public investment and the banking sector, while in June 2015 the MPI announced that the state would remove restrictions limiting foreign ownership of locally listed companies to 49%. Efforts to privatise SOEs, which account for 40% of GDP, are also ongoing, although progress on this front has been slower: Prime Minister Nguyen Tan Dung announced in April 2015 that of a planned 289 privatisations targeted during the year, just 29 SOEs had been privatised since January.

Boosting foreign trade remains a priority. Vietnam joined the World Trade Organisation in 2007, and in 2010 the country became an official negotiating partner in the Trans-Pacific Partnership, a proposed free trade agreement between 12 Asian and North American countries including the US, Canada, Australia, Japan, Malaysia, and Singapore. Vietnam has also been a member of ASEAN since 1995, with the association planning to integrate into a single trading bloc, the ASEAN Economic Community, by the end of 2015.

Rising Investment 

Rising FDI inflows can be largely attributed to these liberalisation efforts. According to a 2014 report published by the US Commercial Service, Vietnam’s FDI jumped by 36% in 2013 to reach $22bn, while The Financial Times reports that 241 inward investment projects worth £13.1bn were launched in 2014, compared to 118 new projects worth £10bn in 2013.

The Financial Times also adds that Vietnam was the Asia-Pacific region’s second-most popular investment destination after China in 2014.

Recent growth has been even more promising, and in June 2015 the MPI’s Foreign Investment Agency reported that the total amount of FDI rose by 9.6% during the first half of the year, reaching $23bn. The majority of funds were channelled into the processing and manufacturing sectors, though real estate and retail also received sizable investment. Driven by surging exports, ongoing liberalisation and rising FDI figures, current growth projections are positive, with both the government and the Economist Intelligence Unit projecting that real GDP growth will reach 6.2% in 2015.