Vietnam has sustained high GDP growth over the last 30 odd years since it embraced a market economic system in 1986, locally known as Doi Moi. Its GDP grew from US$26.3 billion in 1986 to US$261.9 billion in 2019(1), a compound growth rate of 7.2% per annum over 33 years. Vietnam’s growth has been spearheaded by a foreign direct investment (FDI) model, particularly manufacturing FDI, which has been a path taken by many of its more advanced ASEAN neighbors over a decade earlier. For example, Samsung now manufactures about half (2) of its mobile phones in Vietnam and its combined products shipped out of the country accounts for about 25%(2) of Vietnam’s exports. To further illustrate how much Vietnam’s exports have grown, we can examine its share of global exports. Twenty years ago, it ranks last behind its neighbors Singapore, Malaysia, Thailand, Indonesia, and Philippines. Fast forward to today, Vietnam is second only to Singapore which still holds on to the top spot(3).
Diversification Strategy Enabled Strong Growth Despite COVID-19
Vietnam’s strong FDI inflow has been driven by government incentives, a relatively lower labor cost and foreign companies’ strategy to diversify geographical concentration risk of their supply chains. This diversification strategy has intensified over the last two years, catalyzed initially by the trade tensions between US and China and more recently by the COVID-19 pandemic. Vietnam, together with a few of its ASEAN neighbors, should be a prime beneficiary of the acceleration in this diversification trend.
FDI has created jobs and also raised personal income for many Vietnamese, which has fueled a growing middle class with higher disposable income. This in turn has driven strong growth in personal consumption of goods and services, including demand for property as the young population start families. With favorable demographics, growing income and low household debt, Vietnam’s consumption growth is expected to remain elevated in the foreseeable future.
Vietnam’s GDP growth has resulted in the accumulation of domestic capital, part of which has been ploughed back into the country in the form of fixed capital formation. Much of these have been in infrastructure assets like roads, airports, ports, logistics, industrial and commercial real estate etc. These assets were necessary to support Vietnam’s economic growth and have also enabled development to broaden out to other parts of the country. Infrastructure has also facilitated Vietnam’s growth in its tourism industry which is becoming an important contributor to the economy.
Innovation and Entrepreneurship Key to Maintaining Competitive Edge
In spite of its strong economic growth over the last three decades, Vietnam is still considered a frontier market where its GDP per capita is ranked 159th out of 229 countries(4) in 2017. Therefore, given such a low economic base and endowed with a young, motivated and sizeable population of about 100 million people, growth prospects for Vietnam should remain bright in the coming years. However, over the longer term, there are drawbacks in a FDI led growth model as can be seen in the experiences of Vietnam’s neighbors. As countries grow, costs also rise and this will eventually make them relatively less cost competitive. Vietnam therefore needs to move up the manufacturing value chain in order to stay relevant. Ultimately, and more importantly, Vietnam needs to also promote innovation and entrepreneurship so that indigenous enterprises can one day become corporate giants not just within the country, but that are also able to offer unique products and services that can be exported beyond its shores. Otherwise, Vietnam could suffer the middle income trap like some of its neighbors.
In conclusion, while Doi Moi has served Vietnam well and will likely continue to be a growth driver in the medium term, it needs to look beyond being an export hub for foreign investors if it wants to make the next leap forward
(1) World Bank, current US$, 2020
(2) Vietnam Investment Review, 13th August 2020
(3) CEIC, Haver, Morgan Stanley Research, 8th July 2020
(4) CIA World Fact Book, 2017, PPP US$
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