VIETNAM'S SOCIO-ECONOMIC DEVELOPMENT No.2

RAPID ECONOMIC GROWTH POLICY IN VIETNAM

TRAN DINH THIEN
and PHI MANH HONG
* 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—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, 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 its 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. 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.

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). 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. 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: 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 volume of GDP in 1994 was to the tune of 15,478 million US dollars. If during the period 1995-2000 ICOR could be kept at the level of 3.0, the volume of minimum invested capital must be 64,698 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.

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. Savings during the past years have continually increased. 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. Compared with the volume of capital investment needed for ensuring the fulfillment of the projected growth target, 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. The tempo of Vietnam's economic development depends a great deal on the attraction and absorption of foreign capital. Therefore, it is of great necessity that the investment environment should be improved to such an extent as to make both domestic and foreign 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. The requirement of a durable high economic growth rate compels Vietnam to control the increase of ICOR. 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.

1/ Maintaining the macroeconomic stability (Curbing inflation)

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. 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 after having been reduced to the level of 5.2% in 1993 testifies to the danger of a recurrent inflation outburst. The most important factor defining inflation is the outcome of budgetary balance. The reality in the past years shows the relationship between budgetary balance and inflation (See table).

Source: Development Strategy Institute (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 higher price index in the first quarter of 1995 is certainly a direct consequence of the large budget deficit 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. 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. 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: a) rigorously controlling the spending, especially the current expenditures of government; b) encouraging the population and businesses to save their money; c) reorganizing state-owned enterprises to make them operate at a profit; d) making government investments in infrastructure appropriate with the extension of investments in business sectors. A rigorous control over the credits granted to economic sectors is an aspect to the curbing of inflation.

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. According to official data of General Population Census in 1989, the ratio of unemployed labour in Vietnam was 6% of the total work-force. According to another study of the rural economy, about 30% of rural labourers (more than 6 million persons) were without work or totally unemployed. Moreover, every year there are about 1.2 million young people reaching the labour age. 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. Vietnam has made a lot of progress in this direction. A series of laws and legal documents have been newly promulgated or rearranged. 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. Stabilization and growth are two aspects of development process. Growth should be an objective taking priority over stabilization from the angle of development strategy.

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. 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. The mobilization of all the sources of domestic savings in order to turn them into investments may be realized directly by investors but may also be done indirectly through financial organizations. Mobilization of savings is considered here to be a process of attracting funds to raise the ratio of investment to the GDP.

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. Vietnam's Population Census 1989. Sample Results. Central Census Steering Committee. 1990.
7. 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.