Overcoming the Middle-income Trap and Making the Growth Inclusive:

The case of Vietnam

LE Kim Sa, Ph.D. DANG Nguyen Anh, Ph.D. Vietnamese Academy for Social Sciences (VASS)

Structure

Background A brief overview of Vietnams economic reform Avoiding the middle income trap Finding a new driver for Vietnams economy Looking forward: What Challenges Lie Ahead? Towards an inclusive-growth strategy in Vietnam Concluding remarks

Background

Since last two decades, Vietnam has gained many significant achievement in socioeconomic development From the poorest to the low middle income country The growth momentum of Doi Moi is in danger of losing steam The existence of middle-income trap Can Vietnam overcome middle-income trap and make growth inclusive?

A brief overview of Vietnams economic reform

The first serious reform known as the Doimoi in 1986, market-oriented reform, marked a turning point in the history of Vietnams economic development. Several measures to establish market institutions for the economy were introduced Many laws has been established as Land Law (1987, 1993, 2004), Enterprise Law (2000), FDI Law (1987, 1990, 1992, 1996, 2000) Liberalized trade and investment policies since late 1980s and became member of ASEAN (1995), APEC (1998), WTO (2007) and had trade agreements with US, Japan, AFTA

A brief overview of Vietnams economic reform

After 20 years of reform, Vietnam has the fundamentals of a market economy and opened up the economy. This has allowed Vietnam to
(i) unlock the potential of the agriculture sector, turning Vietnam from a food-hunger country to the world third largest rice exporter; (ii) encourage the development of a vibrant domestic private sector; (iii) attract a large amount of foreign investment; (iv) realize its comparative advantages and gain more benefits from international trade.

As a result, Vietnams GDP growth rate averaged at over 7% per year and still remain among the highest in the region

Avoiding the middle income trap

Vietnams became a middle income country but its objective is not to just become one However, its far from guaranteed due to middle income trap Asia is rich with example both of success and failure
- South Korea: human capital depth, export-driven growth, and a major role played by industrial policy, broke out of the trap - Phillippines: low savings and investment and weak fiscal mangament, corruption, was trapped in a low growth trajectory - Malaysia: low private investment and a shortage of human capital - Thailand: rising income disparities that culminated in the March 2010 street protests in Bangkok

From the Vietnamese context, lessons should be learnt given the specific circumstances

Finding a new driver for Vietnams economy

Vietnam still confronts uncertainties in its efforts to sustain a high growth rate in long run. The local firms remain generally uncompetitive, and policies and institutions remain very weak Economic growth since 1990, has been mainly based on the increase in inputs, including credit expansion. Growth is dependent on investment and export while the economy is facing twin deficit Vietnams economy is still dependent on natural resource intensive and mining industries or cheap labour intensive ones. Recently, Vietnam has been struggling with a number of problems and been shown up by its vulnerabilities: high inflation, housing market, financial bubble

Finding a new driver for Vietnams economy

Economic reform based on traditional trade liberalization theories seem is running out of steam as most of the tariff and non-tariff barriers removal have already been made. Challenges, old and new, are still facing Vietnam in the post-crisis era: - Infrastructure limitations - The need for a more skilled workforce - Macroeconomic stability and crisis

Looking forward: What Challenges Lie Ahead?

Although the country has got off the list of the poorest countries, the poverty agenda is still far from finished. The poverty rate fell from 58% in 1993 to 14.5% in 2008. Approximately 30 million people were lifted out of poverty over last two decades Although all groups of the population benefited from rapid economic growth, the degree of their participation in the development process has varied, resulting in the currently large disparities in well-being. Uneven progress in poverty reduction can be been quite clearly, causing to inequality traps.

Looking forward: What Challenges Lie Ahead?

As the group of hard-core poor become progressively smaller, further reduction in poverty will be more costly The share of population on the margins of poverty has not really changed. Vietnams WTO accession has heightened both opportunities and vulnerability for Vietnamese households. For instance, farmers and migrant workers, the largest proportion of the population, are exposed to risks given the limited coverage of the formal social security system.

Towards an inclusive-growth strategy in Vietnam

Strengthening Social Protections : consists of three main components - The social security component, play a role of automatic stabilizers - The social assistance component targets beneficiaries comprising of
regular group

Poverty Reduction and Program 135, to support poor households - Outside the formal social security system, the existing informal safety net, including informal credit and community support, has worked quite well until recently Improving Labor Mobility: A way to enable people from poorer rural provinces to adequately participate in the growth process Raising agricultural productivity. Accelerated transition from agricultural to non-agricultural employment does not only help those who move out of agriculture to raise their incomes and associated remittances to home village

- The area-based programs include the National Targeted Program for

Concluding remarks

The circumstances facing Vietnam over the next decades will require changes to deliver sustainable and equitable growth over the long term. Getting out of poverty to become a middle income country is a hard process that is affected by many incidental factors, but many countries, including Vietnam, have succeeded Although having some vulnerabilities, Vietnam economy still has many strengths

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