Vietnam stuck in middle-income trap, Japanese expert warns

By Tran Tam - Nguyen Nga, Thanh Nien News

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A Japanese expert on Vietnam has warned that the country is getting mired in a middle-income trap, which refers to a slowing down of growth from a rapid to sluggish pace after reaching middle-income status.
In 2008 Vietnam's income per capita reached US$1,070, making it a “lower middle-income” country as the World Bank classifies those with an average income of $1,036-4,085.
At a recent conference in Hanoi to discuss motivation for economic growth, Professor Kenichi Ohno, who has been studying the Vietnamese economy for 20 years, said warnings about the trap have been raised by local analysts since then but they failed to raise awareness among local businesses and the government who were happy with the growth rate of the economy.

The earlier robust growth was due to the rise in the housing and stock markets, not an increase in labor productivity, he said.

The ongoing slump with the growth rate falling below 6 percent in the past three years indicates that the country has fallen into the trap, he said, noting that it is a crisis for an emerging economy to grow under 6 percent.

Ohno also pointed to the faster pace of wage growth compared to productivity, high input costs, and the lack of capacity to make structural adjustments in the economy as among indications of the trap.

According to the bank, a typical middle-income trap occurs when a country's GDP per capita cannot exceed $4,000-6,000 for 42 years after entering the middle-income bracket.

The Organization for Economic Co-operation and Development, or OECD, has forecast that it would take Vietnam 44 years from now, until 2058 that is, to shift to the upper middle-income level of $4,086-12,615.

Tran Tho Dat, deputy head of the Hanoi-based National Economics University, estimated that the country, still with a per capita income of less than $2,000, would need to grow at 7.2 percent annually over the next decade to more than double it.

With the economic outlook not improving much, the government targets 6 percent growth this year and next.

Dat said Vietnam has run out of room for growth driven by cheap labor and natural resources.

Last year foreign investment rose by nearly 36 percent to $22.35 billion, still far from its peak of $64 billion in 2008.

Analysts are also concerned over foreign firms' meager contribution to economic growth, and blame it on the lack of "connections" between them and domestic private firms.

These links should be strengthened and the quality of FDI improved to achieve rapid and sustainable growth, enabling the country to avoid the middle-income trap that many nations are getting stuck in, Dat said.

Economist Bui Kien Thanh said despite the government’s attempts to loosen monetary policies and lower credit interest rates, businesses are losing faith due to unstable policies and corruption. 

Worse still, cheap labor would no longer be an advantage after the next few years, which would make the business environment less competitive, he said, adding that many foreign investors are already complaining that costs are increasing at a faster pace in Vietnam compared to other countries in the region.

Pham Chi Lan, another economist, said Vietnam is unlikely to escape from the trap if it does not industrialize by 2020.

The government has set this goal for 2020 but is “not specific” about the criteria for industrialization, she said, lamenting that there has been little progress toward achieving the target.

But the country could still avoid the trap if it changes policies to make it a level playing field for all participants in the economy.

Medium-sized and small private businesses receive less support from the government than state-owned, larger private, and foreign firms though they create the most benefit for society, she added.

Economist Nguyen Minh Phong said that of the 113 countries that have reached middle-income status since 1960, only 13 have been able to rise to the high-income bracket. They include Japan, Singapore, and South Korea.
The OECD has forecast that Indonesia, also a middle-income country, will enter the high-income club by 2042.

The Philippines will do so in 2051, Vietnam in 2058, and India in 2059.

Malaysia, China, and Thailand are expected to become high-income nations much earlier -- respectively in 2020, 2026, and 2031.

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