Revitalising the Vietnam Economy

By Sarkaritel November 23, 2022 07:21

In recent years, Vietnam has emerged as one of the fastest growing economies in South East Asia. This, despite the fact that Vietnam with its war torn past went through severe socio-economic and political turmoil including 30 years long economic sanctions by US, some of which continued till early 2000s. Up until ĐổiMới reforms were initiated in 1986, Vietnam was one of the poorest countries in the world with an annual GDP growth of 2.8% and inflation rate of 378%.

Thirty-six years down the line, the ĐổiMới reforms have transformed Vietnam into one of the fastest emerging economies in the world. Since 2015, Vietnam has been positioning itself as a manufacturing hub. Initially, ittargeted basic assembly line jobs through which itdeveloped capacity and necessary infrastructure build up intense manufacturing units especially for the global electronic, textile and footwear markets directly competing with global manufacturing giants such as China.

An analysis by World Bank-Brookings (2018) highlighted that Vietnam has been able to achieve such manufacturing competitiveness due to four specificreasons i.e.,signing multiple bilateral and multilateral trade agreements with various countries, leveraging its human capital by improving demographic standards through education and skill development, focusing on improving ease of doing business in the country, and building necessary infrastructure such as power and connectivity. The currentpolitical leadership in Vietnam envisages that Vietnam will be a developing nation with modern industry along with upper middle class income status by 2030 and further transform to a developed high income socialist oriented nation by 2045.

Unfortunately,similar to the rest of the world, Vietnam too was affected by the global pandemic in 2020. Although, Vietnam successfully managed the first wave of COVID-19, it suffered critical blows during the consecutive waves since April 2021impacting all economic activities of Vietnam, resulting in halting of production lines and affecting exports. To counter the slowdown in the economy and attract foreign investments, Vietnam undertook a slew of economic policy reforms.

Vietnam issued Resolution No. 11/NQ-CP in January 2022 aiming to optimise economic growth through stabilising economy and ensuring social security for its people. Resolution No. 11/NQ-CP allowed reduction of VAT, corporate income tax, environmental protection tax, land rent, registration fee; adjusting of EXIM duties; extension of tax payment deadline for individuals and businesses; and increasing spendings in heath, medicine, social security, labour, employment, business support and infrastructure. Such reforms fructified andVietnam displayed visible signs of recoverywith a YoY GDP growth rate of 13.67% for Q3 2022 compared to 7.72% in Q2 2022.

In Q3 2021, YoY GDP growth rate for Vietnam had contracted by more than 6%. Vietnam exported goods and services worth USD 311.67bn till October 2022.In September 2022, NIKKEI Asia ranked Vietnam second in terms of dealing well with the pandemic.Vietnam was also ranked 70 among 190 countries in theWorld Bank’s Doing Business Report of 2021. Concomitantly, the ongoing geo-political power tussle between US and China, which further heightened due to the disruptions in global value chains in the post pandemic era created an opportunity for Vietnam. With the spread of the pandemic, China replaced its erstwhile business friendly policies with strict regulations, triggering mass FDI pull-outs by corporates of foreign origin.

Reports suggest that more than 11000 foreign firms cancelled their registration in China to move out to more business-friendly destinations such India, Vietnam and Thailand.With itslow-cost labour, well-developed infrastructure and business friendly regulations, Vietnamwas successful inattracting major investment from companies including Foxconn, Apple, Google and Microsoft among many others.Vietnam’s recenteconomic reformsandhigh inflow of foreign investment haveturned it into the fastest growing economyoutperforming major Asian economies. The net FDI inflow for first nine months of 2022, as reported by the Government of Vietnam, jumped by 16.3% from USD 13.3bn in September 2021 to USD 15.4bn in September 2022. It is to be noted that this is the highest level of net inflow of FDI in Vietnam in the last five years. In August 2022, the World Bank estimated that the Vietnam economy will expand by 7.5% in 2022, from its earlier forecast of 5.2%. In September 2022, IMF predicted that Vietnam is expected to grow by 7% in 2022 compared to its earlier estimate of a 6% growth.

During the ASEAN Business and Investment Summit (ABIS) held in Phnom Penh, Cambodia, on November 10, 2022, the Hon’ble Prime Minister of Vietnam Mr Pham Minh Chinhreiterated that Vietnam’s priorities lie in maintaining socio-political and macro-economic stability and removing bottlenecks in the economy and in legal institutions, infrastructure and human resources; developing better supply chains by reducing transaction costs, especially logistic and administrative costs; creating a stable business environment,developing efficient policies with exercise transparency and accountability; cooperating with businesses to promote digital infrastructure connectivity towards developing a sustainable digital ecosystem; and shouldering with other ASEAN regions and partner countries in creating the best conditions to make the most of business and investment opportunities.

PM Chinhalso stressed on the need to implement the Comprehensive Recovery Framework approved by ASEAN leaders at their 37th summitfocusing on recovery, digitalisation, sustainability, and stepping up the application of science and technology to promote green recovery; the ASEAN Consolidated Strategy on the Fourth Industrial Revolution; and the ASEAN Agreement on E-Commerce to accelerate digital transformation and investment in digital infrastructure, and facilitate regional connectivity and economic recovery. PM Chinh’ message strongly indicates that Vietnam is determined to achieve its objective of becoming a high-income economy by 2045.

Indo Vietnam Cooperation

India and Vietnam recently celebrated 50 years of bilateral diplomatic relations. It is no surprise that India and Vietnam share an exceptionally friendly relationship considering both countries share several similarities including their common historical struggle for independence from foreign rulers to more recently sharing a common less friendly neighbour. India granted Vietnam the “most favoured nation” status way back in 1975, signed the firstbilateral trade agreement in 1978 and the Bilateral Investment Promotion and Protection Agreement in 1997. India and Vietnam closely cooperate in various regional forums such as ASEAN, East Asia Summit, Mekong-Ganga Cooperation (MCG) framework, and Asia Europe Meeting (ASEM) besides UN and WTO.

India is one of only three countries (with Russia and China) with which Vietnam has a Comprehensive Strategic Partnership. On the other hand, Vietnam is a key pillar to India’s Act East Policy. In recent years, economic, trade and strategic cooperation between India and Vietnam have grown exponentially. For example, under the MCG framework, India has been undertaking Quick Impact Projects (QIPs) for development of community infrastructure in different provinces of Vietnam, each costing USD 50,000. According to Vietnam’s Foreign Investment Agency, as of April 2021, India has a total investment of USD 909.5mn in 299 valid projects focussed on energy, mineral exploration, agro-processing, sugar, tea, coffee manufacturing, agro-chemicals, IT and auto components and ranks 26th among countries and territories investing in Vietnam. On the other hand, Vietnam has six investment projects in India with a total estimated investment of USD 28.55mn, primarily in the areas of pharmaceuticals, information technology, chemicals and building materials.Moreover, bilateral trade between India and Vietnam reached USD 14.14bn between April 2021 and March 2022, growing at 27% over last year.

In July 2022, a shipping route linking Central Vietnam and India was started to remove bottlenecks in sea route logistics between the two countries. India and Vietnam also work very closely on maritime, counter terrorism and terror financing, trafficking of illegal arms, smuggling and many other security related issues amid China’s aggressive stance in the Indo Pacific region.

With the power of axis shifting from the west to the east, it is increasingly becoming evident that Asia is going to emerge as the new leader of the free world. However, this responsibility must not be left to China alone, considering its aggressive trade and diplomatic stance with other Asian countries. Hence, it is imperative that countries like minded nations such as India and Vietnam come forward to shoulder the responsibility of making Asia a super power through cooperation in trade and diplomacy. Both countries can emulate best trade and policy practices from each other, share technological advancement, increase bilateral and multilateral trade and investments and thus complement each other’s economy, making Asia a true liberal and a model leader of the free world.

Views are personal. Arindam Goswami is a Research Fellow at Pahle India Foundation. His interests are financial sector, sustainability, domestic trade and tourism

By Sarkaritel November 23, 2022 07:21