From Poverty to Prosperity: Vietnam's Economic Transformation Through the Years

Michelle Nguyen

AP Macroeconomics

Part I Semester Research Paper

Global Connections: Vietnam

Introduction

Since the launch of the policies under Doi Moi in 1986, Vietnam has seen rapid growth and development. Over the past 30 years, Vietnam’s economy has experienced a robust growth in jobs and aggregate output, rapid demographic and social change, improved provision of basic services like education, a narrowing gender gap, and increased access to household infrastructure.1 With $214 billion of exports in 2017, Vietnam is currently the 28th largest export economy in the world.2 Economic and political reforms within the country have transformed Vietnam from one of the world’s poorest nations to a lower, middle-income society.

Political History

In the early 1980s, Vietnam started a process of reforms known as doi moi (renovation) which converted a centrally planned economy to a mixed economy that is coordinated by market forces.3 In 1994, US President Bill Clinton lifted the 30 year trade embargo on Vietnam.4 In 1995, Vietnam was driven to become a full member of the Association of Southeast Asian Nations (ASEAN) because of strategic reasons that would induce economic growth, political independence, and as a way to overcome the identity crisis and political isolation post-Cold War.5 In 1997, The Asian Financial Crisis economically impacted most of East Asia due to the accessibility of money in Asia, the lack of proper credit standards, and the high leverages.6 In order to promote recovery and to maintain the macroeconomy, the International Monetary Fund (IMF) created programs and loans to East Asian countries affected by the financial crisis.7 The Vietnam-U.S. Bilateral Trade Agreement (BTA) was implemented in 2001,8 which provided Vietnam’s goods and companies access to the U.S. market.9

In 2006, US President Bush and US Congress passed a bill that granted permanent normal trade relations with Vietnam.10 After 12 years of negotiations, on January 11, 2007, Vietnam became the 150th member of the World Trade Organization (WTO), which ensured further growth of the domestic market, sustained increases in Vietnam’s exports, and inflow of foreign direct investment (FDI).11 In February 2007 the Prime Minister of Vietnam approved a $55 billion proposal for the construction of a high-speed rail connecting Hanoi in the North to Ho Chi Minh City in the South.12

Soaring inflation in 2008 caused a proliferation of labour strikes by thousands of Vietnamese who left rural farming communities to seek work in new industrial zones in Hanoi and Ho Chi Minh City, only to see the buying power of their wages decrease significantly.13

In 2018, World Bank Group provided $24 billion in grants, credits, and concessional loans to Vietnam. Vietnam’s development of programs in partnership with the World Bank Group has made a positive and significant impact on the growth of Vietnam’s economy — the Inland Waterway Transport helped the economy with its low cost and environmentally friendly mode of transport, the School Readiness Promotion Project expanded educational opportunities that were linked to future job growth, the Ho Chi Minh City Environmental Sanitation Project has helped improve sanitation and reduce flooding, the Third Rural Transport Project has helped the poor and marginalized living in rural areas get access to roads and infrastructure, along with many more programs that have benefited the quality of life in Vietnam and its economic growth.14

Demographics

In July of 2017, the population in Vietnam was estimated to be 96,160,163, with a growth rate of 0.93 percent. Out of the 54 ethnic groups recognized by the Vietnamese government, main ethnic group is the Kinh, or Viet, which makes up 85.7 percent of the population. In 2009, 81.8 percent of the population did not have a religion, 7.9 percent were Buddhist, and 6.6 percent were Catholic. The age structure consists of 23.55 percent between 0 and 14 years, 16.23 percent between 15 and 24 years, 45.56 percent between 25 and 54 years, 8.55 percent between 55 and 64 years, and 6.12 percent 65 years and older.15 The average life expectancy was 73.7 years. The total infant mortality rate was 17.3 deaths per 1,000 births. In terms of population, Vietnam is the 15th largest country in the world.16

Economic and Business Sectors

Because of its young population, stable political system, commitment to sustainable growth, stable currency, and relatively low inflation, Vietnam has shown a strong economic growth. Vietnam’s GDP was estimated to be $647.4 billion in 2017, with a GDP per capita of $6,900. The real growth rate of GDP in 2017 was 6.8 percent, which is an increase of 0.6 percent from the year before. The three main sectors of Vietnam’s economy are agriculture, industry, and services. The industry sector makes up 33.3 percent of the GDP and includes food processing, garments, shoes, machine-building, mining, coal, steel, cement, chemical fertilizer, grass, tires, oil, and mobile phones. The agriculture sector makes up 15.3 percent of the GDP and includes products such as rice, coffee, rubber, tea, pepper, soybeans, cashews, sugar cane, peanuts, bananas, pork, poultry, and seafood. In 2017, Vietnam exported $214 billion dollars worth of commodities such as clothes, seafood, crude oil, rice, and machinery. The United States purchased 20.1 percent and China purchased 14.5 percent of those exports. The total value of Vietnam’s imports in 2017 was calculated to be $211.1 billion.17

GDP Breakdown

In 2017, Vietnam’s GDP broken down in terms of sectors included 15.3 percent in agriculture, 33.3 percent in industry, and 41.3 percent in services. Household consumption comprised 68.5 percent of Vietnam’s GDP, while government consumption made up 6.6 percent. Investment in fixed capital constituted 24.8 percent and investment in inventories made up 2.9 percent. In 2016, military expenditures made up 2.44 percent of the GDP.18

Business Cycle

Between 1993 and 1996, the economy in Vietnam was in an expansionary phase. GDP was growing at a high pace between 8-9 percent 19 each year due to the policies instituted under Doi Moi: the expansion of exports and the shift away from a Soviet-style of central planning which caused stagnation and macroeconomic instability.20 Vietnam’s shift to a mixed economy saw the positive impacts on GDP during the 1990s. High GDP growth was also caused by the US trade embargo lifted by US President Bill Clinton and the accession of Vietnam into the Association of Southeast Asian Nations (ASEAN), which helped maintain peaceful relations with surrounding countries and a factor in economic growth.21 Unemployment rates were steady and normal around 2 percent. Inflation also increased and spiked in 1995 up to 16.5 percent,22 indicating a period of hyperinflation. All three indicators show the economy in an expansionary phase in the business cycle.

Between 1997 and 2007, the unemployment rate, GDP growth, and inflation in Vietnam indicate that the economy was still in an expansionary phase. Unemployment growth fluctuated between 2.3-2.9 percent 23 which is higher than the unemployment rate during the mid 1990s, but is still within the range of the Natural Rate of Unemployment. Between the year 1997 and 1998, Vietnam saw a 3 percent drop in GDP growth due to the Asian Financial Crisis which caused an economic slump in East Asia.24 However, from 1999 to 2003, GDP growth was steady at around 6 percent each year due to structural and economic reforms within the country. Vietnam was able to recover from the Asian Financial Crisis due to the International Monetary Fund’s (IMF) intervention in the Southeast Asian economy by loaning money which restored the financial market stability.25 One of the factors of the stable GDP growth was the implementation of the Vietnam-U.S. Bilateral Trade, which has increased from $1.5 billion in 2001 to $10 billion in 2007.26 Vietnam’s entry as a full member into the World Trade Organization (WTO) in 2007 was crucial as it helped sustain increases in Vietnam’s exports and inflow of foreign direct investments.27 GDP growth was also spurred by increase in government spending, an example was when the government approved of a $55 billion plan to construct a high-speed rail in the country.28

Between the year 2008 and 2009, there was a small contractionary phase, which is indicated by the 5 percent GDP growth, 2 percent fall from the past years.29 This downturn was a result of the global financial crisis in 2008 as well as the short-term currency crisis, which was when the dong depreciated dramatically, and the weak financial system in Vietnam.30 Although import spending was increased, the export earnings were not enough to support the widening trade deficit.31 In 2008, Vietnam experienced a hyperinflation of 23.1 percent.32 The cause of high inflation in Vietnam was due to the sharp increases in money and credit supply, a large increase in minimum wage, the rise in international commodity prices, and the rigid exchange rate management. As fuel and food prices inflated significantly, there was a proliferation of labour strikes in Vietnam, an indicator that the country needs to implement policies to temper inflation. As a result, inflation rate in 2009 fell to 7.1 percent.33 Unemployment in 2008 and 2009 was stable at 2.4 and 2.6 percent, respectively.34

Between 2010 and present 2018, Vietnam saw a healthy and stable economic growth in an expansionary phase. In these years, unemployment varied at a relatively healthy rate from 1.8-2.6 percent.35 Inflation rate fluctuated the most, with the highest in 2011 at 18.7 percent.36 This was a direct result of the State Bank of Vietnam in 2010, who initially and temporarily tightened monetary policy to control inflation, but reversed its monetary stance and loosened monetary policy.37 In 2012, inflation dropped to 9.1 percent, a consequence of accommodative domestic policies adding to higher commodity prices.38

Despite high inflation rates, Vietnam’s economy is still growing at a high and stable pace due to strong trade performance and the programs being developed in the country. Vietnam’s export performance continues to be strong in the late 2010s and is supported by robust export-oriented foreign invested manufacturing output and improved external demand.39 With the support and loans of $24 billion from the World Bank Group, Vietnam has been able to develop programs such as the Inland Waterway Transport, the School Readiness Promotion Project, and the Ho Chi Minh City Environmental Sanitation Project, which helps GDP grow from increased government spending and also provides jobs that keep the unemployment rate low. For example, programs like the Third Rural Transport Project has helped Vietnam lead Asia, as the country with the highest investments in roads infrastructure, averaging 4.5 percent of GDP investment.40 These government programs help build and ensure that the economy and its people continue to flourish.

Table of Contents

Conclusion

Over the past 30 years, Vietnam has experienced a significant GDP growth with stable unemployment rates. Although there were a few inflation flare-ups, structural reforms and monetary policies implemented by the government have been able to relieve them. Vietnam’s economy has benefit from trade relations from diplomacy and the accession of the Association of Southeast Asian Nations (ASEAN) and the World Trade Organization (WTO). In the coming years, Vietnam’s economy is expected to have a positive outlook and will continue with high GDP growth. Real GDP in Vietnam is projected to expand by 6.8 percent in 2018, 6.6 percent in 2019 and 6.5 percent in 2020. There is a slight decrease in the coming years due to the envisaged cyclical moderation of global demand; however, GDP growth still remains high and inflation is to remain around the government’s target of 4 percent. It is predicted that there will be some tightening of the monetary stance in Vietnam to counter rising global commodity prices and price pressures originating from domestic input price pressures. Fiscal consolidation is also expected to contain the country’s debt. Overall, Vietnam has had positive economic growth and will continue to do so in the future.

Charts and Graphs

Graph/Chart 1: Vietnam’s Unemployment, GDP Growth, and Inflation in Percentage from 1993-2017

Source: The World Bank. World Development Indicators. Washington, D.C.: The World Bank Group. http://databank.worldbank.org/data/home.aspx. Accessed: 21 September 2018.

Notes

“Overview,” (World Bank, https://www.worldbank.org/en/country/vietnam/overview#3).

The World Factbook 2018, (Washington, DC: Central Intelligence Agency, 2018. https://www.cia.gov/library/publications/the-world-factbook/index.html).

Hop, Duy To. "Some Characteristics of the Changing Social Structure in Rural Vietnam under "Doi Moi"," (Sojourn: Journal of Social Issues in Southeast Asia 10, no. 2 (1995): 280-300. http://www.jstor.org/stable/41056915).

"Timeline: US-Vietnam Relations," (Contemporary Southeast Asia 32, no. 3 (2010): 350-53. http://www.jstor.org/stable/25798862).

Nguyen, Tung Vu. ("Vietnam's Membership of ASEAN: A Constructivist Interpretation." Contemporary Southeast Asia 29, no. 3 (2007): 483-505. http://www.jstor.org/stable/25798849).

Hormats, Robert. "Reflections on the Asian Financial Crisis." (The International Lawyer 34, no. 1 (2000): 193-99. http://www.jstor.org/stable/40707516).

"Recovery from the Asian Crisis and the Role of the IMF — An IMF Issues Brief," (International Monetary Fund: June 2000, https://www.imf.org/external/np/exr/ib/2000/062300.htm).

Dosch, Joern. "VIETNAM IN 2008: Foreign Policy Successes but Daunting Domestic Problems," (Southeast Asian Affairs, 2009: 373-88. http://www.jstor.org/stable/27913393).

“Bilateral Trade Agreement,” (U.S. Embassy and Consulate in Vietnam, https://vn.usembassy.gov/our-relationship/policy-history/bilateral-trade-agreement/).

Brown, Frederick Z. "Rapprochement Between Vietnam and the United States," (Contemporary Southeast Asia 32, no. 3 (2010): 317-42. http://www.jstor.org/stable/25798860).

Tran-Nam, Binh. "VIETNAM: Preparations for WTO Membership," (Southeast Asian Affairs, 2007, 398-412. http://www.jstor.org/stable/27913343).

Malesky, Edmund, Paul Schuler, and Anh Tran. "VIETNAM: Familiar Patterns and New Developments Ahead of the 11th Party Congress." (Southeast Asian Affairs, 2011, 339-63. http://www.jstor.org/stable/41418652).

Nguyen, Thi The Hang. "Macroeconomic Determinants of Vietnam's Inflation 2000-2010: Evidence and Analysis." (Vietnam Institute for Economic and Policy Research, United Nations Development Programme. http://www.undp.org/content/dam/vietnam/docs/Publications/24590_InflationFinalReport-E-formatx.pdf).

“Overview,” (World Bank, October 2018. https://www.worldbank.org/en/country/vietnam/overview#3).

“Vietnam.” (The World Factbook 2018, Washington, DC: Central Intelligence Agency, 2018. https://www.cia.gov/library/publications/the-world-factbook/index.html).

Ibid.