Wednesday, February 21 2018

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Domestic demand to fuel Việt Nam economy in 2018

Update: January, 25/2018 - 09:00
Sebastian Eckardt
Viet Nam News

Growth prospects for Việt Nam this year are bolstered by strong domestic demand and prospects of a global economic revival.  However, protectionism, fiscal deficit, public debt and low productivity raise questions about a possible middle-income trap - and the means to overcome it. Sebastian Eckardt, the World Bank’s leading economist in Việt Nam, speaks to Việt Nam News reporter Phương Uyên on the country’s medium-term economic progress.

What is your take on the Vietnamese Government’s inclusive and sustainable growth policies?

I applaud the Government’s idea of establishing an institutional environment for domestic firms to support their growth. Once these firms prove to be productive, innovative with access to capital, land and labour, State bureaucracy should facilitate instead of hindering by imposing all sorts of unwanted conditions on them.

Broadly, I agree with the Government’s directions, especially education-related regulations. If we look at the driving force behind Việt Nam’s growth and prosperity, we will find that it is the people. The fact that the country has a relatively well-educated workforce on relatively low wages also means it must improve its skills level as it moves up the value chain. The Vietnamese labour force must be continuously upgraded to achieve higher added value, so I think the Government’s priority is aptly placed in boosting education and labour skills.

To give a more concrete example, when South Korea was at the same level of development and income as Việt Nam is now, barely half their students finished high school, and today, virtually everybody there has a high-school degree. The exact same situation is now playing out in Việt Nam, so investing in secondary and tertiary education is a good stepping stone towards building a qualified, competitive workforce with relevant skills.

What challenges do you think Việt Nam is facing?

Strictly speaking, short-term economic goals are easy to achieve for Việt Nam, due to its geographic advantage, cheap workforce and a general rise in the global economy propelling overall growth. So barring any major systematic shock, the Vietnamese economy can expect to grow at least 6 to 7 per cent in 2018.

I think the country has done quite well so far, but as it keeps growing, the obstacles will keep piling higher and higher. This is because lots of the initial benefits, which have made Việt Nam the low-hanging fruit, will become obsolete on the nation’s way up. (Low hanging fruit - an American term which in this case implies businesses requiring little from investors, including multi-national companies with large capital and strong technological resources.)

In all honesty, I expect the country’s road to progress to become steeper. In the beginning, cutting down on these inefficiencies and incongruities is easy, but as the nation advances, policy-makers must be more focused on goals in the longer run.

The challenges are therefore more medium-term, once the competition in ASEAN countries and Asia increases beyond low-income nations, such as Laos or Myanmar. Việt Nam is moving up, like China once was, and it will require a collective effort across all sectors, from human resources and capital to infrastructure for the country to rise.

The Government has clearly focused on streamlining procedures, reducing administrative burdens on firms. It has made distinct progress, but after talking to businesses, I think Việt Nam still has a lot to do to achieve its economic targets in the medium run. There are faults in much legislation for firms, including basic functions such as tax-paying. It will take much effort to close such gaps between Việt Nam and other countries in the region, Malaysia for example.

Furthermore, most of the country’s production is dependent on foreign-direct-invested (FDI) firms, so it is crucial that there is a playground for Việt Nam’s own firms to create, expand and generate employment. In the short run, Việt Nam’s biggest challenge will be to fully exploit current growth patterns and to capitalise on the benefits of FDI inflows.

Do you have any suggestions for Vietnamese policy-makers?

Basically, I estimate Việt Nam’s 2018 growth dynamics in the medium term will remain unchanged, although domestic demand and consumption will continue to increase. Việt Nam needs to boost successful sectors, such as electricity, credit and export.

The Government should promote the development of private-sector operations, as 96 per cent of local firms are extra small, small and medium. They often lack the technology, skills and management capabilities to be able to connect and participate in global value chains.

According to the WB’s assessment, FDI will be the main driver of growth for the Vietnamese economy for at least the next five years. Thus, the biggest challenge for the Government is how to create a favourable environment that enhances the contribution and position of local firms while making good use of FDI. This would create spillover effects from FDI enterprises to local firms in terms of management, market access, and technology.

Additionally, Việt Nam should promote more in-depth equitisation to offset budget deficits. It should also rebuild its policy buffer zones so that fiscal consolidation and public-debt reduction can be strengthened to achieve medium- and long-term goals.

Becoming a middle-income country means fewer incentives for capital. Thus, more than ever, Việt Nam should make full use of the capital markets to help expand business and improve the health of the economy against external shocks.

With public debt reduced to 61 per cent, the country’s fiscal position is obviously improved. However, if credit-based economic growth becomes risky due to rising bad debts, financial policy should be re-adjusted to suit the Vietnamese economy’s evolution.

Nonetheless, credit growth in Việt Nam has not really had much effect in promoting and strengthening asset management and risk management by banks and financial institutions. That is why I think the country needs more cautious approaches to managing credit growth, and how such growth is regulated by the free market.

Slow structural reforms can also have an impact on the current recovery process, especially when investment growth is weakening. Thus, strengthening macro-economic resilience and structural reform is a way to increase Việt Nam’s growth potential in the medium term. — VNS

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