Of economic paradoxes and missed opportunities

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Economist Le Dang Doanh* looks back at 2013 and finds contradictions aplenty

Workers packing prawn crackers at a food factory in Ho Chi Minh City. Photo: Thanh Nien News

According to official statistics, growth for 2013 is estimated at 5.42 percent. While this is lower than the targeted 5.5 percent, it is higher than the 2012 growth rate of 5.25 percent. The Vietnamese economy thus can be said to have begun rising slowly from the bottom.

However, this growth rate is much lower than the average 7 or 8 percent of previous years, and lower than that of Laos (7.9 percent for 2012) and Cambodia (7.2 percent for 2012). At the same time, Vietnam's economy has been left further behind by more developed ASEAN economies like Indonesia and Malaysia.

The prime minister last December announced that GDP at current prices reached US$176 billion, and GDP per capita was $1,960. Meanwhile, Ha Quang Tuyen, a senior official at the General Statistics Office, said the GDP per capita for 2013 is estimated at $1,890.

 The macroeconomy has improved with the annual inflation recorded at 6.04 percent. The Vietnamese dong - US dollar exchange rate rose by just more than 1 percent, much lower than the rising consumer price index. The foreign exchange reserves of the country can afford three months of imports, which is the highest volume ever, although that is still very low compared with other regional countries. Bank rates decreased substantially.

Exports reached $132.2 billion, boasting a region-high year-on-year growth rate of 15.4 percent and playing an important role in the economic recovery. Imports are estimated at $131.3 billion.

Elusive truths

Despite optimistic indices that imply recovery, the economy has been mired in paradoxes that represent underlying problems.

Since exports and foreign investments make a significant contribution to the GDP growth, when foreign investors transfer profits back to their home countries, Vietnam's gross national income (GNI) will be lower than the published GDP.

The World Bank recorded 7.5 billion in foreign capital transferred abroad in 2012. The figure was VND171.9 trillion (more than $8 billion) in 2013, according to the GSO.

The economy expanded faster by 0.2 percentage points in 2013 than the previous year, but total investment made up just 30.4 percent of GDP, lower than the 33.5 percent of 2012. Investment from the private sector reduced significantly to 11.5 percent in 2013 from the average 15 percent between 2007 and 2010. The percentage of businesses that intended to expand their operations dropped to just 20.3 percent in 2012 from 74.3 percent in 2007, according to the VCCI.

Economic growth in Vietnam depends heavily - 56 percent - on capital. Total factor productivity (technological knowledge and efficiency) contributes just 25 percent, and labor makes up the rest. Therefore, the decrease in investments would inevitably slow the economic growth rate.

However, the economy apparently managed to expand faster at lower investments. This abnormality may be explained by assuming that investment efficiency has improved, possibly thanks to restructuring of public spending. Independent studies are needed to confirm this.

Growth fell significantly in the agricultural sector to 2.67 percent last year from the average 3.3 percent during the 2006-2010 period. This is worrying since agriculture has been a pillar of economic stability. Statistics from 22 out of 63 provinces/cities showed more farmers deserted their fields, and more farmers declared bankruptcy in 2013.

Another paradox is that in spite of the signs of recovery following the government's investment efforts, the economy is seemingly still stuck in a slowdown.

While annual loan rates dropped to 9-11 percent in 2013 from the 2011 rate of 21 percent, last year's credit growth rate was just 9 percent, not significantly higher than the 7.5 percent rate of 2012, which may imply that bad debts still hinder the economy's normal operation.

The real estate industry was crippled by high inventory, while debts incurred by state-owned enterprises continued to rise to VND1,360 trillion. If no breakthrough is made in these areas, the slowdown will not disappear on its own and achieving sustainable growth would be next to impossible.

Between 2009 and 2012, family spending rose by just 5.1 percent, compared with 8.9 percent during 2004-2008. The drastic fall in people's purchasing power showed in low sales. Industrial inventory in 2013 was 10 percent higher than 2012. GDP growth, therefore, has not improved the life of most people.

Consumption remained low despite the low consumer price index and many promotion campaigns, especially during the  Christmas and New Year holidays. Public confidence in the prospect of economic stability and growth has not been restored.

The number of businesses that announced bankruptcy or ceasing operation continued to rise, by 11.9 percent year-on-year, and about 65 percent of all businesses reported no profits. The once-dynamic private sector, which employed most workers, was badly hurt and unsure about when it can recover. As a consequence, unemployment in the banking and construction industries continued to rise during the last months of 2013.

Government revenues only reached 96.9 percent of the annual target. Notably, revenue earned from state-owned enterprises, many of which reported losses, was recorded at just 91 percent of estimates.

While exports soared in 2013, revenues from export taxes reached only 84.6 percent of estimates, because foreign owned enterprises, which made up 65 percent of export value, could enjoy various tax cuts and exemptions.

The government therefore had to seek the National Assembly's approval to raise the budget deficit cap in 2013 to 5.3 percent from 4.8 percent.

Another paradox is the inefficiency of the state-owned business sector. In 2011, excluding healthcare, education and administrative fields, the state-owned sector contributed just 32.1 percent in economic growth, but consumed up to 60 percent of total credits, and their total debts were disproportionately higher.

Restructuring and reform: a lost year

Many resolutions and instructions were issued in 2013, but they failed to deliver any breakthrough in economic restructuring or change in the growth model.

The government worked intensively on the pending problems, organizing many meetings, issuing many directions and legal documents but what was achieved is quite modest.

Bottlenecks remained in developing infrastructure and a high quality work force, not to mention improving institutional capacity. This is reflected in the World Bank's low ranking for Vietnam's business environment - 99 out of 187 economies.

The government's measures to restructure the economy have not been systematic and it has yet to clarify goals for certain periods. The common restructuring method applied to SOEs was that each of the heavily-indebted economic groups and corporations would work out a restructuring plan for its own - an effort analogous to one lifting himself by his own bootstraps.

The trial of leaders of the state-owned shipping group Vinalines in December 2013 demonstrated worrying weaknesses in the process of making and implementing decision related to investments.

It left unanswered questions about how many other wasteful SOE projects there were that have not yet been uncovered. And how would the huge debts incurred by SOEs be paid back? How would transparency be improved? As long as those concerns are not addressed and solved, the achieved goals are not clear and convincing.

The banking restructuring plan, meanwhile, failed to cover all the pending problems. Would merging two weak banks make a strong bank? The efficiency of the banking system and government monitoring was in doubt after it was revealed in November that seven banks had separately accepted the same fake coffee warehouse as collateral for making huge loans to a coffee company.

The Vietnam Asset Management Company (VAMC) was founded to buy bank bad debts, but it is not yet clear as to what it would do with the bad debts. Would foreign financial investors play any role in this? How effective would the financial leverages created by VAMC, with authorized capital of just VND500 billion, really be?

One the one hand, Vietnam is striving to be recognized as a market economy by 2018 but on the other, interference with market mechanism increased in 2013. The pricing system is seriously distorted, notably in the electricity and coal mining industries, while there are no efforts to control state-owned monopolies. The State Bank of Vietnam holds a monopoly in trading gold bars. The Vietnamese dong/US dollar exchange rate was fixed for the sake of economic stabilization - and at the expense of exporters - while in fact the dong should have been weaker due to inflation.

The country steadfastly pursues global integration but its statistics of bad debts, of unemployment and many others, as well as its standards for assessing commercial banks and SOEs, do not follow international standards.

The state mechanism continued to show its inefficiency in multiple fields, such as the feasibility of legal documents, the quality of public investment, the overseeing of environment pollution, and the fight against corruption. They all failed to meet the people's expectations.

* Le Dang Doanh is the former Director of the Hanoi-based Central Institute for Economic Management

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