Economy’s quality on the uptrend

Friday, 2019-10-11 16:55:43
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Vietnam’s economy is witnessing improvements in growth quality and structure
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NDO - Despite ongoing external headwinds, Vietnam’s growth remains steadfast, with big ameliorations in growth quality and economic structure, making itself more resilient.

According to Nguyen Minh Cuong, principal country economist from the Asian Development Bank in Vietnam, in the first nine months of this year, he has seen a highlight in the Vietnamese economy, which is a strong increase in domestic consumption, reflecting the fact that Vietnam has been successful in transforming itself from a lower middle income nation to a middle income nation.

“This means that Vietnam has become less dependent on export markets. Goods produced are massively consumed domestically. Over the past years, almost all goods produced in Vietnam are for export,” Cuong said. “Furthermore, Vietnamese businesses have also been beefing up exports, mirroring the fact that they have been becoming increasingly stronger.”

The General Statistics Office (GSO) reported that in the first nine months of this year, the total revenue generated from retail sales and consumer services reached more than VND3.63 quadrillion (US$158 billion), up 11.6% on-year.

“This showed that the public’s consumption demand has strongly increased, and the consumption market has been expanded, with an ample goods supplies,” stated a GSO report on Vietnam’s nine-month economic performance.

Vietnam is now witnessing a strong change in its economic structure.

Specifically, according to the GSO, in the first nine months of this year, the ratio of this sector in the economy was 13.2%, while that of the industrial and construction, and the service sectors was 33.98 and 42.74%, respectively.

The respective ratios were 13.94, 33.5, and 42.51% in the same period of 2018, and 14.67, 32.5, and 42.65% in the first nine months of 2017.

In fact, Vietnam’s economy has been structurally transformed over the last few decades, as shown by a substantial reduction in agriculture’s employment share from 73% in 1991 to 43% in 2016. During the same period, employment shares of industry and services rose from 9 and 18% in 1991 to 23 and 35% in 2016, respectively.

“This would mean that the economy’s economic structure has been positively changed, with a reduction in the contribution of the agro-forestry-fishery sector, and an increase in that of the industrial and construction, and service sectors,” the GSO report said.

According to the GSO, in the first nine months of 2019, total export-import turnover of Vietnam hit US$382.72 billion, of which the export turnover reached US$194.3 billion, up 8.2% on-year. The export turnover of the domestically-invested sector was US$59.57 billion, up 16.4% on-year, and accounting for 30.7% of the economy’s total export turnover. Meanwhile, that of the foreign-invested sector was US$134.73 billion, up 5% on-year, and holding 89.8% of the country’s total export turnover.

“You see, the increase in the domestically-invested sector’s export turnover is far higher than that of the foreign-invested sector. Previously, the foreign-invested sector often saw a very high speed in exports. This reflects the fact that Vietnamese enterprises’ competitiveness and exports have significantly bettered, meaning that the economy’s quality has also improved,” said Cuong of ADB.

“On the demand side, prospects for domestic consumption continue to be positive. Private consumption should benefit from moderate inflation, robust employment, and strong growth despite moderation,” he said.

According to the Central Institute for Economic Management (CIEM), the incremental capital-output ratio (ICOR), which measures an economy’s growth quality as it indicates the additional unit of capital or investment needed to produce an additional unit of output, has improved over the past few years.

Specifically, the ICOR was 6.41 in 2016, and reduced to 6.11 in 2017, and 5.97 last year.

“The higher the ICOR, the lower the productivity of capital or the marginal efficiency of capital. Thus, in this government’s tenure since early 2016, the economy’s quality has significantly improved,” said CIEM’s former director Nguyen Dinh Cung. “The country’s growth has been less dependent on credit growth, meaning that the economy’s growth quality has also improved.

Specifically, the ratio of credit growth to economic growth reduced from 2.95% in 2016 to 2.68% in 2017, and 1.96% in 2018. By late June 2018, the ratio was 1.97%.

However, according to experts, one of the weak points of the Vietnamese economy is the low labour productivity, despite having seen some improvements seen recently.

Vietnam has been gradually narrowing the gap in labour productivity with regional nations which have a higher development level. Specifically, in 2011, the labour productivity of Singapore, Malaysia, Thailand, and Indonesia was 17.6, 6.3, 2.9, and 2.4 times, respectively, higher than Vietnam’s. However, the difference decreased to 13.7, 5.3, 2.7, and 2.2 times, respectively, last year, according to the Ministry of Planning and Investment (MPI).

At the Vietnam Reform and Development Forum recently organised in Hanoi, Pinelopi Goldberg, senior vice president and chief economist from the World Bank, stated that it is high time Vietnam improve its labour productivity to move up the global value chain for higher productivity.

“Low labour productivity may lead Vietnam to a low middle income trap,” Goldberg said. “Without a labour productivity improvement, Vietnam will not be able to ensure higher growth.”

Ousmane Dione, country director for the World Bank in Vietnam, also said that a labour productivity improvement will enable the country to better its growth quality.

“This decade is a critical time for Vietnam as it confronts new challenges and seeks to fulfill its ambition of becoming a high income economy by 2045,” he said. “How can Vietnam sustain high growth but with quality? How can Vietnam modernise its market institutions to create an environment where private sector firms, including domestic ones can flourish? What skills are needed for Vietnam’s workforce to be competitive not only in basic manufacturing but to move up the value chain, keep pace with fast changing technologies, and do so without leaving groups of people behind? How can Vietnam ensure its growth does not harm the environment while tackling severe impacts of climate change?

“Finding policy solutions to these questions will not be easy and implementing them probably even harder. But with the right mindset and strong determination and coordination both horizontally and vertically, I am convinced Vietnam can do it,” Dione said.