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Vietnam plays catch-up with China’s successful reforms

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In Brief

Economic reforms in Vietnam and China have produced remarkable results over the past several decades. The average GDP growth rate between 1986 and 2012 was 7 per cent for Vietnam, while it exceeded 9.5 per cent for China between 1978 and 2012.


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At the same time, the two countries have transformed themselves from closed economies into highly attractive destinations for FDI, and they have become vibrant centres of global production and trade.

Reforms in both countries have been strikingly similar, and the circumstances leading to these reforms were characterised by three common factors: receptivity (society longed for change after decades of suffering caused by Soviet-style economic management), crisis (the economy was in severe difficulty) and opportunity (the demise of long-serving autocratic leaders enabled the emergence of new leaders). The two countries were also at a similar level of development. For China in 1978, per capita GDP was approximately US$200 (in 2005 prices), 81.4 per cent of the population lived in rural areas, and the export-to-GDP ratio was 6.6 per cent. For Vietnam, these figures in 1986 were US$240, 80.3 per cent and 6.6 per cent, respectively.

In addition, the two countries adopted similar frameworks for policy development and implementation, which included four key components. First, giving farmers more freedom of choice about their land use, legalising the development of the private sector and accepting, to a certain extent, market principles. Second, embracing globalisation, which promotes exports and inward FDI. Third, reforming the state-owned sector and levelling the playing field for all economic players. And, fourth, modernising the financial sector.

Despite these similarities, performance has diverged greatly between the two countries. In fact, the gaps between Vietnam and China on GDP per capita and labour productivity have been rapidly widening in the past two decades. In particular, Vietnam’s GDP per capita, which was slightly higher than China’s in 1985, is now just about one third of China. This performance gap was even more pronounced for labour productivity. It is projected that if this pattern continues, the difference in per capita income between Vietnam and China by 2050 will resemble what we see today between Mexico and the United States.

The key factors underlying the disparity in economic performance between any two comparable countries can be grouped into three categories: openness, human capital and governance. It is clear that Vietnam does not lag behind China in openness or human capital. In 2011, the trade-to-GDP ratio was 165 per cent for Vietnam, compared with 50 per cent for China, while the FDI stock-to-GDP ratio was 62 per cent versus 10 per cent, respectively.

Vietnam is also comparable to China, on most indicators for human capital, including life expectancy, internet penetration and the number of students studying in the United States per 1000 population. Specifically, the  results achieved by Vietnam in the recent OECD’s Programme for International Student Assessment (PISA) test, which were higher than the OECD average on all the three test subjects – Mathematics, Science, and Reading,  can serve as a piece of evidence on the strength of Vietnam’s human capital.

With regard to the quality of governance, Vietnam outperforms China on political stability, while the two are fairly comparable in their support for the rule of law, voice and accountability, and in battling corruption. Vietnam, however, is notably worse than China on government effectiveness and regulatory quality. This suggests that Vietnam’s underperformance has been driven by leadership-related factors rather than a disparity in institutional settings or the quality of human capital.

There are historical reasons for such limitations. First, there is an important distinction between the Communist Party of Vietnam (CPV) and the Communist Party of China (CPC), and their approaches to maintaining power. The CPV relies heavily on its past legacy, in having led the country to victory over France and the United States. The CPV tends to look for the good things they enjoyed in the past to rely on in order to overcome the problems they are facing at present and in the future. Vietnam’s recent deepening of its alliance with Russia is an example. In contrast, the CPC, inspired by the East Asian miracle, now believes that the transformation of China into a prosperous nation is the only way to strengthen the party’s legitimacy.

Second, the CPV has been more reactive than proactive in its decision making and policy formulation. As a result, Vietnam has tended to passively follow China’s model, while being reluctant to experiment and find its own path. In contrast, right from the early years of reform the CPC has made an effort to ensure the strength of its leadership, who can boldly launch experiments to blaze the country’s trail to the future.

Third, an abundance of natural resources and foreign aid has been something of a curse for Vietnam. The country has relied too heavily on foreign aid, workers’ remittances and foreign investment, while neglecting the development of its indigenous economic prowess. The inflow of external resources has given Vietnam the false impression that development is a process of capital accumulation and infrastructure modernisation, rather than a process in which the leadership and society have to constantly rise to new challenges with robust innovation efforts and bold experimentations.

These identified shortcomings need not be considered as such a negative. Vietnam still has the opportunity to create change in the years to come — once its leadership embraces the necessary reforms to meet the aspirations of its people. Indeed, no one should underestimate the strength of the Vietnamese as a nation when they come together in unity to pursue their thousand-year dream: independence, peace, and prosperity.

Vu Minh Khuong is an Assistant Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.

2 responses to “Vietnam plays catch-up with China’s successful reforms”

  1. I believe that the CPV is an obstacle for Vietnam to really want to develop its country. They are a bunch of selfish crooks. They do not want the country to move forward with a rapid pace. If that trend does become materialized; their grip of power on the country would be jeopardized. Therefore, they only wanted changes to occur with the pace that is controllable. It took almost $30 of innovation process to raise GDP from 240 to $1000. That is a very sad figure. But the CPV is very proud of this figure. CPV leadership is a disaster for the country. We need to transform our country with the people that possess the knowledge not with the people that belong to the CPV.

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