Too early to say Vietnam caught in middle-income trap, says economist

By Bao Van, Thanh Nien News (The story can be found in the April 4 issue of our print edition, Vietweek)

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Footwear sellers and repairers sit waiting for customers on the sidewalk of a street in Hanoi
Vietnam has been a middle-income country for only three years and cannot be considered to have fallen into the middle-income trap until it is stuck there for several decades, economist Nguyen Minh Phong tells Vietweek.

At a recent meeting Japanese economist Kenichi Ohno, who has been studying Vietnam’s economy for many years, said the middle-income trap is no longer a distant risk, but has become a reality in Vietnam. What do you think about this?
Nguyen Minh Phong: According to Ohno, there are five pieces of evidence to prove that Vietnam is stuck in the middle-income trap. First, the country has seen an economic slowdown since 2006. Second, the efficiency in the use of investment is low. Third, wage rises in the country have outpaced the increase in productivity in recent years, pushing production costs higher. Fourth, the dong’s depreciation against the dollar at a rate of 5.5 percent fails to offset the 22.7 percent reduction in the economy’s competitiveness each year. Finally, there has been little improvement in competitiveness rankings.
However, there are two points to demonstrate that Vietnam has not yet fallen into the trap. First, Vietnam has been a middle-income country for only three years. A country would be considered as being in the trap only if it is stuck there for several decades. According to the World Bank, a country is considered to be in the trap if its average annual per capita income remains at US$4,000-6,000 for 42 years.
Second, Vietnam has slowed down its growth only to enable economic restructure and achieve more rapid economic growth in the medium term.
According to a forecast by the Organization for Economic Cooperation and Development last December, it may take Indonesia a few more decades until 2042 to develop into a high-income country from a middle-income one. Malaysia might do it by 2020; China, by 2026; Thailand, by 2031; and Vietnam, by 2058.
What should we do to accelerate economic growth?
No economy can become a high-income one if its industrial sector does not account for at least 18 percent of GDP. The middle-income trap is a big challenge when economies increasingly depend on overseas sources, especially for inputs and exports depend on foreign investors.
Vietnam needs to review its industrial plan, prioritizing development of information technology and supporting industries and reduction of natural-resources exports. The government needs to support enterprises with market research and exploration of niche markets, help small and medium-sized enterprises get bank loans, and increase value addition.
The country needs to expand negotiations and signing of bilateral trade agreements to boost trade and reform fields in which it does not have a competitive advantage. It should also reform education and training to foster high-quality human resources.

"[Developed economies like] Japan, Taiwan, Singapore, and South Korea… consider their private sector firms as being central to economic development and attach importance to international cooperation. Vietnam… should study their ways."
To avoid being stuck in the middle-income trap, Vietnam should not rely on FDI and ODA. However, the development of the domestic private sector remains weak and many firms continue to shut down despite all the measures to support them. What do you think about the situation?
In theory, Vietnam says that it treats local and foreign firms equally. But the fact is that foreign and state-owned firms get more incentives from localities in terms of tax and land. Thus, these firms have better conditions for development than local private ones, and crush them. Local private firms are not facilitated and so still see development below their potential.
We should seek and properly use overseas capital sources like FDI, ODA, overseas remittances, and commercial loans. We should also enable the local private sector’s development. Last year Prime Minister Nguyen Tan Dung issued a circular on boosting private firms’ development, but it does not contain many specific measures. To overcome the middle-income trap, local private firms should be the spearhead of development. Without due attention to the sector, we will be stuck in the middle-income trap.
What are the experiences of other countries in coping with the middle-income trap that Vietnam can learn from?
Many economies, including Japan, Taiwan, Singapore, and South Korea have successfully overcome the trap. All of them consider their private sector firms as being central to economic development and attach importance to international cooperation. Their industrial sector contributes more than 18 percent of their GDP. Vietnam, in future, should study their ways for reference, but need not follow them.
For example, we can focus on developing the services sector instead of industry since we do not have advantages in the field. It could take Vietnam 15-20 years to develop a modern industrial sector. That is too long. Besides, the sector’s development depends on technology transfer from foreign partners.
We should focus on boosting the service sector to overcome the middle-income trap since the sector could bring benefits quicker than industry.
We should focus on international services to earn big profits. For example, Vietnam could become an international gastronomy or resort center of the world.
There is an opinion that Vietnam should review its industrial and agricultural structures, and work out a specific plan to develop them, but the government’s failure to do so is affecting our economic growth…
I don’t think so. We have developed an overall economic restructure plan which envisages the marine economy accounting for half of the GDP and prioritizes high technology and supporting industries for development. The orientation is OK. However, the plan has not been implemented well. We have not yet achieved an institutional breakthrough, improved business environment, or created a level playing field for local and foreign firms.

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