Steering clear of the middle income trap

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As Vietnam prepares to draw up its development roadmap for the next decade, it should remain wary of the "middle-income country traps," according to Ayumi Konishi, Vietnam country director for the Asian Development Bank.

Unless smart choices are made right now, Vietnam runs a huge risk of being squashed under the weight of its own growth, Konishi warns.

Thanh Nien Weekly: In your opinion, what is the "middle income trap"?

Ayumi Konishi: As a developing country's economy grows, several pressing issues emerge. Infrastructure bottlenecks and supply capacity can constrain the country's further growth. Without addressing these issues effectively, the growth will be derailed hence the term "trap."

Developing infrastructure is not that easy with a substantially larger economy. It is not something the government alone can do. Such growth requires far more financial resources than the government can make available; so, private sector participation in infrastructure development is essential.

A question there may be: does the country have the appropriate legal or regulatory framework to encourage or facilitate private sector financing of infrastructure? Is there a clear principle on "profit sharing" between the public and private sector?

We cannot expect private sector participation unless there are opportunities for the private sector partners to make due profits.

Administrative inefficiencies can also constrain growth.

We very much appreciate the initiative led by Prime Minister Nguyen Tan Dung through "Project 30" to cut down on government procedures. But is that going to be enough? Are Vietnamese enterprises (both private and state-owned) efficient enough to participate in the global and regional value chains? Can Vietnamese enterprises improve efficiency and corporate governance fast enough to ensure their continued viability?

Widening income disparities can cause social problems, and the question is whether Vietnam can reach out to the remaining poor to arrest the widening disparities, not just in terms of financial incomes, but also access to social services.

Growth also puts more pressure on the country's natural resources. A larger economy can damage an environment more easily. Is Vietnam's environmental management framework robust enough to cope with increasing pressure on its natural resources?

Vietnam needs to move toward becoming a higher value-added economy. But how? Can enterprises successfully move up the technological ladder? What will make "innovation" possible? Is the country's education system strong enough to produce the human resources required to effectively run the larger economy and promote innovation? All of the challenges that arise from the country's rapid growth (and, in turn, hinder further growth) can threaten Vietnam's sustainable development and be considered "traps".

How likely is it that the country will fall into such a trap?

If the country squarely faces these challenges and takes proactive measures to address them, Vietnam can certainly prevent itself from falling into these traps.

At the same time, if these issues are not appropriately addressed well in advance, it will become more and more difficult to avoid them. So the key to avoiding these "traps" is in Vietnam's own hands. It is not a question of "likelihood" or "possibilities." It is a matter of being prepared and determined enough to avoid them.

Can you elaborate on what Vietnam should do to avoid the trap?

We should recognize the fact that as the country's economy becomes larger, a number of associated problems will arise, and the "business as usual" approach will push the country further into these traps.

So there should be a clear understanding that what used to be acceptable for a less-developed country can possibly become unacceptable or inappropriate as Vietnam becomes a middle-income country.

It is also essential to accept the fact that, as an economy grows, it begins to face a whole other set of issues. There is also a growing need to understand and appreciate a country's integration into the global economy, which is changing fast.

I often raise the fact that the Free Trade Agreements between China and India came into effect starting in January this year. China itself is transforming from being the "factory of the world" to the "largest consumer market in the world."

The ASEAN Economic Community is going to be established in 2015, which is only five years from now. But do we know what Vietnam should be producing, say in five, 10 and 20 years from now, in relation to what will be produced by other countries in ASEAN? Do we have any idea what Vietnam should be importing and exporting in five or 10 years?

In order for Vietnam to move to a higher value-added economy what does this country need to do? What kind of industrial strategies is Vietnam going to pursue in relation to other countries to ensure a high efficiency of regional value chains? Careful planning, pro-activeness and broader thinking are essential if Vietnam wants to avoid the middle-income trap.

Vietnam is gathering public response to a draft of its decade-long development plan themed "rapid and sustainable development." What are your impressions of this draft?

The Socio Economic Development Strategy 2011-2020 will be a very important policy framework; it needs to present the vision and roadmaps for Vietnam to avoid "middle-income country traps" and to sustain its socioeconomic development over the next decade. The hope is that Vietnam will choose to transform itself into an efficient, socially inclusive, environmentally sustainable, and globally integrated industrialized economy by 2020.

It will also be critical for the new development strategy to win support from the Vietnamese business community as well as the general public. Vietnam should keep in mind the sad irony of economic development: with increased income levels, people become more occupied with their own economic gains and less interested in the well-being of society as a whole.

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