* Tran Dinh Thien is a Research Fellow, Head of the Department of Macroeconomic Policies, Institute of Economics.
Phi Manh Hong is a Tutor , Economic Faculty, Hanoi National University.


Eliminating the danger of lagging too far behind in economic development is one of the main challenges facing Vietnam. Maintaining a durable high growth rate must be considered a matter of capital importance for the country over the coming decade. With a view to doubling the GDP within 10 years, as projected by the Government for the period 1991-2000, Vietnam's economy must continually attain an average growth rate of 7.2% per year during this whole period. It is of utmost necessity to obtain an average annual growth rate of 9.2% if we wish to double the GDP per capita within a decade. This is given that the actual population growth rate is kept at a constant level of 2% per year. This very high economic growth rate will not be easy to reach, especially when it must be the target for many consecutive years in the condition of the still low domestic accumulation capacity. However, if a lower economic growth rate was proposed for instance an average rate of 6% per year (even this projected rate could be obtained by very few countries for such a long duration) it would require at least 18 years for the economy to double the GDP per capita. But with this projected growth rate, it is easy to remark that the gap in economic development between Vietnam and other countries in the region will be widened with every passing day. That is both a challenge and a danger for Vietnam on its path of development.
Taking the GDP per capita as a basis for calculation, the majority of the countries in the region have already reached a level higher than that of Vietnam. For instance, 20-25 years of continual economic growth at the rate of 8% per year are needed to attain the level of economic development of Thailand. This gap is much wider still when compared with Singapore, South Korea, Taiwan, Malaysia. With regard to China, this gap in economic development is not that different (China's GDP per capita in 1990 was about 2.5 times higher than that in Vietnam), but mention should be made of the fact that in the past few decades, China has secured economic growth at a very high rate - nearly trebling its GDP within 20 years.
. However, the absolute gap in economic development between different countries constitutes only one measurement for comparative purposes and is not the most important one. It is worth noting that the countries in the region have the potential to maintain a constantly high growth rate during many consecutive decades. With a GDP growth rate of about 6-8% per year, those countries could either keep the gap at a constant level or widen it further, if Vietnam does not also secure a constantly high and durable corresponding growth rate. The danger of Vietnam lagging behind in economic development is all the more obvious if the population growth rate is also taken into account.

At present, Vietnam has a population growth rate much higher than it's neighbouring countries. According to the Far-East Economic Review, the annual population growth rate of China is 1.4%, that of South Korea 1.0%, Taiwan 1.1%, Thailand 1.5%. The corresponding time necessary for these countries to double their population is respectively 48, 70, 60 and 46 years. In the meantime, the corresponding indicators of Vietnam are 2.3% and 30 years (1). It means that in order to keep a real growth rate (per capita GDP growth) at about the same level as these countries, Vietnam must gain a GDP growth rate higher than that of those countries for many consecutive years. This development problem is clearly not easy to solve.

2. Investment, savings and growth

A high GDP growth rate obtained in the condition of a low rate of investment in the GDP is a temporary and short-term phenomenon when the Incremental Capital Output Ratio (ICOR) is especially low. This has happened in Vietnam in the past few years. However, the fact that ICOR was low (at the level of 2-2.5) in the period 1991-1993 and is now rising gradually (in 1994 ICOR was approximately 3.0) shows that:
a/ Compared with several neighbouring countries, the capital investment effectiveness in Vietnam still remains at a high level (the ICOR in 1980s of China was 4.0, India 4.0, Indonesia 5.4, the Philippines 12.9, Thailand 3.4, South Korea 3.3, and Taiwan 3.0 (2).
b/ The favourable conditions of the previous years (the reform having permitted to make use more effectively the resources available, the investment projects prior to the reform with the aid of the former Soviet Union began to be operating at a profit) which permit the maintenance of ICOR at a low level, are now diminishing.
The reality shows that when Vietnam uses effectively the invested capital, it would be difficult to maintain ICOR at a level less than 3.0 Even in the best case (ICOR = 3.0) with a view to securing a GDP growth rate of 9-10% per year, the rate of investment in the GDP should be kept at the level of 27-30%. This is the level of investment that the countries with a rapid economic growth in Asia have attained. However, it is not for Vietnam to realize this rate as the funds accumulated inside the country are too limited and the rate of practical investment is still low in comparison with the potential available.
In practice, Vietnam's rates of domestic savings and investment in the GDP have continually increased in recent years. From a relatively low level (with indicators corresponding to 10.1% and 15% in 1991), these rates have risen to approximately 16.7% and 24% in 1994 (3). This tendency allows a forecast of an increase to the average level of 22% and 30% in the coming years. However, the question is whether it is possible or not to put into effect this capacity and more important still, to maintain these rates for a long period of time. It will greatly depend on the following:
a/ Increased rate of domestic savings (including savings from the government and the population).
b/ Economic institutions established to allow the population's savings to be directly transferred to investors when required by them.
c/ Favourable environment for making investment by both domestic and foreign investors.
According to the most cautious growth scenario of the Development Strategy Institute under the State Planning Committee, until the year 2000, Vietnam's GDP will attain 37,044 million US dollars. This is supposing that the average annual growth rate is 10.24% during the period 1995-2000. By 2010, GDP will have reached 118,493 million US dollars (the average growth rate during the period 2001-2010 is projected to be 9.52% per year). The volume of GDP in 1994 was to the tune of 15,478 million US dollars. The difference between the GDP in 1994 and that in 2000 is to the order of 21,566 million US dollars and between 2000 and 2010 is to the order of 81,449 million US dollars (4).
If during the period 1995-2000 ICOR could be kept at the level of 3.0 (which is a target possibly but one not easily attained), the volume of minimum invested capital must be 64,698 million US dollars (with ICOR at the level of 3.5, the necessarily available capital will be 75,480 million US dollars). During the period 2001-2010, with ICOR at the level of 3.5, the amount of available capital needed will be to the order of 285,070 million US dollars (if the ICOR averages 4.0, the needed capital will be 325,796 million US dollars).
Thus, if the invested capital is not used effectively, the pressure for more capital will be stronger and the provision of such capital will be nearly impracticable.
As mentioned above, savings during the past years have continually increased which resulted in an ever higher ratio of savings to the GDP in the country's economy. If this ratio increases to the level of 21-22% on average in the coming years, the volume of savings in the period 1995-2000 will be to the tune of 26-27 billion US dollars. As regards the period 2000-2010, supposing that the ratio of savings to the GDP will average 25%, the total volume of domestic savings mobilized will not go beyond 200 billion US dollars. Compared with the volume of capital investment needed for ensuring the fulfillment of the projected growth target and calculating according to a most optimistic ICOR, there will be a shortage of about 37-38 billion US dollars for the period 1995-2000 and of nearly 100 billion US dollars for the period 2001-2010.
This is a task laid down to the work of foreign capital mobilization for investment purposes. However, this does not consider savings being not used for practical investment. That is only a potential investment. In principle, the real amount of invested capital is usually inferior to the total savings. The level of closeness of the invested capital to the amount of savings depends on the capacity of mobilization of capital investment by the economic environment and mechanism.
It is easy to remark that the rapid increase in the volume of potential investment depends on: a/ the GDP growth rate; and b/ the ratio of savings to the GDP. It may be supposed that the ratio of savings to the GDP will continue to rise when the GDP per capita increases. However, with regard to Vietnam, as agriculture occupies a big proportion in the economy, if the growth rate of agriculture slows down, though the growth rate of the economy can be maintained at a rather high level, the rate of accumulation in the country will increase but at a slower pace. The above amount of 25-27 billion US dollars is the limit for the mobilization of invested capital inside the country (usually inferior to the potential level) no matter that the mobilization of capital is made through whatever channel (private or governmental, investment from one's income earnings or from credit loans). This shows that in the years ahead, the tempo of Vietnam's economic development depends a great deal on the attraction and absorption of foreign capital, though viewed from the angle of long-term development the domestic accumulation shall be of more importance. Therefore, it is of great necessity that the investment environment should be improved to such an extent as to make these two sources of capital contribute effectively to the economic growth.
Raising the proportion of investment in the GDP is always linked with an effective use of invested funds. Any ineffective use of capital will lead to one of the two following possibilities. First, this will create pressure to bear on the ratio of investment to the GDP. For instance, with ICOR rising to the level of 4.0, in order to secure a GDP growth rate to the tune of 9-10% per year, there must be a ratio of investment to the GDP of about 36-40%, a ratio proving to be among the highest ones in the world and not practicable in Vietnam. Second, it would diminish the economic growth and even nullify all the efforts tending to push up the growth rate. For instance, with ICOR at the level of 4.0, even when the ratio of investment to the GDP is maintained at the level of 30%, the growth rate will only stand at 7.5% per year. When ICOR rises further more, the tempo of growth shall dwindle accordingly.
The requirement of a durable high economic growth rate compels Vietnam control the increase of ICOR. The intermediate targets bearing a decisive character here is to maintain ICOR at the lowest level for a long period, the longer the better. This depends to a great extent on whether or not:
- there is the possibility to choose a rational structure strategy and the ability to put into practice that strategy;
- there is a combination of action from both the State and market.


From the above analysis it is easy to remark that the factors ensuring a durable rapid growth are also those needed for increasing the amount of invested capital and using it effectively. These factors may be attributed to the following:

1/ Maintaining the macroeconomic stability.
The most important yardstick for measuring the macroeconomic stability is the level and impetus of inflation. Soaring inflation will nullify all the efforts tending to secure economic growth. In such an environment, prices become wrong indicators and are difficult for any projection. From that, the distribution of resources cannot be effective, long-term investment bear a high risky character, and it would be difficult to mobilize savings. For that reason, control of inflation is a prerequisite for securing a durable rapid growth. Vietnam has achieved successes in curbing inflation in the past years. However, the fact that inflation has returned to the level of 14.4% in 1994 (5) after having been reduced to the level of 5.2% in 1993 testifies to the danger of a recurrent inflation outburst, which may bring disastrous consequences to gaining a macroeconomic stability.
The most important factor defines inflation as the outcome of budgetary balance. The reality in the past years shows the relationship between budgetary balance and inflation (See table).






Budget deficit (% of GDP)






Inflation rate (%)






Source: Development Strategy Institute (The State Planning Committee).

As regards the year 1994, though official data is not yet available, there is enough foundation to say that budget deficit was much higher than that of 1993. The government could not pay back the money it had borrowed from the Central Bank and was compelled to issue more banknotes in order to compensate for the budget deficit in 1994 (6).
The table shows that the relationship between the two above mentioned variables were contrasting, that is to say if in the previous year the budget deficit could be reduced, the next year the inflation rate will also have to be reduced and vice versa. The general tendency of lag in the impact of money issue and budgetary expenditures on inflation is quite obvious. The increased inflation rate in 1994 as compared with 1993 was the direct consequence of the budget deficit in 1993 as compared with 1992 and of a part of increased budget deficit in 1994. The higher price index in the first quarter of 1995 is certainly a direct consequence of the large budget deficit in 1994. According to this tendency, it is possible to forecast that the inflation rate for the whole year 1995 will be somewhat higher than that in 1994.
A conclusion may be drawn from that: the objective to curb inflation can only be attained when the control of budget deficit is effective, that is to say a strong cut in budgetary expenditures.
Thus, for many reasons, a large budget deficit will always threaten to raise the rate of inflation when it creates a pressure for an increase in money supply.
A budget deficit may temporarily not create inflation if it receives enough financial aid by way of domestic borrowings or foreign loans. However, to borrow money from inside the country means that the funds used to finance economic sectors will be considerably curtailed. For that reason, this may hinder the investments to be made by businesses if domestic savings do not increase rapidly. Foreign loans in the form of foreign currency would not lead to an increase in the money supply inside the country and not create a pressure for inflation, if the spendings of the money borrowed are to be made on outside markets.
Attention should be given to the fact that any financing of budget deficit by credits granted by the Central Bank is another form of financing by way of issuing additional banknotes to be circulated in the economy, unless these credits are derived from domestic savings. But mobilizing savings from the population is originally not a function of the Central Bank.
Keeping the budget over-expenditure at the level of less than 5% of GDP without affecting the government's investment in order to upgrade and develop the infrastructure aimed at reaching a higher economic growth is a problem for Vietnam now. A feasible scheme consists of the following:
a/ to rigorously and frequently control the spending, especially the current expenditures of government, on the basis of reform of administration in order to secure and reduce expenditure and an increase of incomes in state budget;
b/ to encourage the population and businesses to save their money;
c/ to reorganize more vigorously state-owned enterprises to make them operate at a profit for reducing subsidies from the state budget and enlarging budget receipts from this sector;
d/ to make government investments in infrastructure appropriate with the extension of investments in business sectors and to raise the effectiveness in the use of the state's invested capital.
In the future, the economy will have to cope with the inflation resulting from an increase in investment. This is an unavoidable phenomenon because Vietnam is compelled to increase investments for securing high growth rates. The matter to ponder here is the acceptance of a certain inflation rate so that it would not create a "overheating" situation engendering economic instability harmful to the process of durable growth. The experience of several Asian countries shows that it is quite possible to secure a durable high economic growth while maintaining the inflation rate at a relatively stable low level (less than 10%). The main measure to be taken to this end is to stimulate domestic savings and ensure the level of investments in proportion to that of savings.
A rigorous control over the credits granted to economic sectors is an aspect to the curbing of inflation. Motivated by the need of growth and obstructed by the difficulty in converting domestic savings into bank credits in the context of a not clearly defined structure of two-tier banking system, the excessive expansion of credits is usually started by the rapid increase in money supply from the Central Bank. This is a reason engendering the instability in price. In this sense, the required durable high growth is now laying down urgent demands for continued banking reforms.

2/ Gradually solving the employment problem.
A rapid increase in population and labour force together with a high rate of unemployment would also create a situation of instability for economic growth. Viewed from the angle of stabilization, this problem has not been properly tackled. According to official data of General Population Census in 1989, the ratio of unemployed labour in Vietnam was 6% of the total work-force in the whole country (1,776,000 persons) (7). This was indeed a rather low figure in comparison with the reality as in it were not counted temporarily jobless workers and structurally unemployed persons, especially in rural areas where 70% of the total work-force were to be employed. According to an another study of the rural economy, about 30% of rural labourers (more than 6 million persons) were without work or totally unemployed (8). Moreover, every year there are about 1.2 million young people reaching the labour age and are added to the number of unemployed.
Several policy-makers hold the view that with regard to Vietnam, full employment requires much time and it can be properly solved when the country draws to the end of the process of industrialization. However, our opinion is not the same. If the process of economic reform could not gradually reduce this pressure, it would not receive the support of the majority of the population. Besides, it should be counted with the state of discontent and dissatisfaction rapidly spreading among the population due to high unemployment.
In the context of a high potential unemployment and an ever increasing number of jobless in rural areas, the natural environment shall be damaged and possibly destroyed by millions of unemployed who need to earn a meager income. Spontaneous migration of people into urban areas would make the situation in cities worse. Not to mention other aspects which cause hindrance to economic growth such as a low living standard among the rural population, high unemployment exerts a negative impact on the rapid growth policy. In that sense, the problem becomes one of the many important factors defining the choice of an appropriate economic growth strategy which consists in the rapid creation of enough jobs for the population.. For that reason, the development of agriculture and the rural economy should be given preferential treatment at the first stage of maintaining a durable high growth rate.

3/ Stabilizing the institutional environment.
Stabilization of the institutional environment constitutes a prerequisite for economic growth. In this direction, in the past years Vietnam has made a lot of progress. A series of laws and legal documents have been newly promulgated or rearranged which have improved the economic environment and created favourable conditions for business activities. However, the easy to change character of the legal rules, regulations and of economic policies (especially tax policy) is now hindering long-term investments. It is of utmost necessity to work out a comprehensive program of economic reforms, which include reform and development of institutions. Only when the long-term reform orientations are clearly asserted, can the character of the reform be remedied and the perfection and development of economic institutions be effected
Stabilization and growth are two aspects of development process. Stabilization is necessary to growth, but it makes sense when it serves the goal of securing a rapid and durable growth. On the other hand, it is the high growth maintained for a long duration which is the real guarantee for stabilization. For instance, the stabilization of the socio-economic environment during the first stage depends a great deal on the steady growth of agriculture and the rural economy, because that growth is connected with the living standard of the major part of Vietnam's population. For that reason, viewed from the angle of development strategy, growth should be an objective taking priority over stabilization.
Such a viewpoint will surely rule over the settlement of concrete problems, for instance the problem of inflation. Though stress has been placed on curbing inflation, our point of view is that it is not necessary to curb inflation by any means, but mainly through the control of the budget deficit and money supply by the Central Bank. Originating from the reason of curbing inflation, the control of the nominal exchange rate even when the real value of domestic currency is raised too high, compared with foreign currencies, would seriously diminish the competitive capacity of exported goods as well as the competitive prices of domestic commodities. This is harmful to long-term growth.

1. Far East Economic Review. Yearbook. Asia 1993.
2. D.H. Perkins, D.D. Dapice, J.H. Haughton (Eds.) - Vietnam's Economic Reform: In the Direction of Flying Dragons. National Politics Publishing House. Hanoi, 1994, p.160.
3. Development Strategy Institute (State Planning Committee) - Macroeconomic Indicators 1990-1995. February 1995.
4. Development Strategy Institute - Long-term Economic Development Forecast. February 1995.
5. Report of the Government on the VII meeting of the National Assembly in March 1995.
6. Report of the Government on the VII meeting of the National Assembly in March 1995.
7. Vietnam's Population Census 1989. Sample Results. Central Census Steering Committee. 1990.
8. Pham Van Thuc (Project leader) - Research project on "Sources and channels of credit transfer, and relationship between capital supply and economic growth in rural areas". In State Research Program on "Policies, Measures to Supporting and Encouraging Development of Rural Economy" (Central File: KX-08-03). February 1995
4/ Pushing up accumulation, encouraging internal investment and attracting foreign capital.
A stable economic environment constitutes by itself a favourable condition for accumulation and investment. However, the promotion of accumulation and investment is still related to other problems. The problem of financing for growth comprises several aspects: accumulation (savings), attraction and use of capital. Capital can be obtained from households, businesses and the government. It is used in the economy through investments made by businessmen or by the government. The mobilization of all the sources of domestic savings in order to turn them into investments may be realized directly by investors but may be also done indirectly through financial organizations.
It would be quite easy to note a close relation between the above mentioned aspects. However, the effectiveness of capital use and the state policy in this field should be examined separately outside the framework of this paper. Mobilization of savings is considered here to be a process of attracting funds to raise the ratio of investment to the GDP.
Notes and References.