More positive moves in living standards

Raymond Mallon, an economist based in Hanoi since 1991

The 13th National Party Congress has provided strategic directions for socioeconomic development for the five years of 2021-2025. This will be an especially challenging period for Vietnam as the domestic economy is being restructured at a time when the country faces socioeconomic challenges related to the impacts of the COVID-19 pandemic, the provision of public services and infrastructure, adjusting to changes driven by the Fourth Industrial Revolution, growing global and national environmental challenges, and increasing protectionism in some key international markets.

As income levels rise, Vietnam is moving into a new phase of development where technology, innovation, and non-economic aspects of well-being are likely to receive greater emphasis. During the next plan, there will be increased social demand for marked improvements in the quality of public services, public infrastructure, and the living environment.

Globally, COVID-19 has resulted in slumps in equity markets, travel, and tourism, disrupted global supply chains, lead to factory closures, and increased unemployment. Households dependent on these economic activities are also being adversely impacted. It has also dampened investor and consumer confidence, depressing investment, demand and sales. The International Monetary Fund recently estimated that global GDP declined by 4 per cent in 2020.

In this very challenging global situation, Vietnam still managed to record a relatively impressive economic growth rate of 2.91 per cent in 2020, one of the highest rates of economic growth in the world.

Economic outlook

Despite the negative impact of the epidemic on the global and national economy, there are sound reasons to remain positive about Vietnam’s economic prospects for 2021 and beyond.

Firstly, the Vietnamese policy responses have been remarkably effective in containing the spread of COVID-19. Containment is helping to ensure that disruptions to economic activity are kept to a minimum, and that public health and other services are not overburdened to the same extent as in those countries that have not effectively contained the virus. The Vietnamese government has also provided direct support and economic stimulus to ameliorate the worst economic impacts of the epidemic.

Secondly, while the pandemic will continue having negative impacts on global economic prospects into 2021 and beyond, the widespread roll out of vaccination programmes should result in a slowing in the spread of COVID-19 and a gradual easing of lockdowns from the first quarter of 2021. Hopefully, this will ensure the beginning of a global economic recovery in 2021, and a more broad-based global recovery from 2022 onwards.

Thirdly, the growing international recognition of Vietnam as a role model in managing the COVID-19 challenge leaves the nation well placed to benefit from the inevitable eventual recovery of global investment, tourism and trade.

Fourthly, the Vietnamese government has renewed its commitment to further reduce obstacles faced by businesses and to ensure that all businesses compete on a level playing field. Growth in the contribution of the domestic private sector to total employment, investment, trade, and incomes has accelerated markedly over the last five years. There have also been increasingly positive signs of other medium-term structural changes, including increased urbanisation, the growing participation by domestic businesses in regional production networks, and a move away from simply assembling products to more sophisticated manufacturing activities with an increasing share of economic output and exports coming from higher value-added production.

Fifthly, many global businesses will accelerate attempts to minimise future risks by reducing their dependence on single large markets for sourcing inputs for global production chains. International businesses were already acting to diversify sources of production inputs and final products prior to the epidemic. Foreign investors have been moving production bases from China, to Vietnam (and elsewhere in Asia), and are building stronger production linkages with increased numbers of domestic businesses. Vietnamese enterprises are increasingly integrating into global production chains boosting investment, technology transfer, productivity growth, and incomes. Recent regional and international economic cooperation agreements (for example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the EU-Vietnam Free Trade Agreement, and the Regional Comprehensive Economic Partnership) will help to further deepen such links.

Domestic and foreign businesses can be expected to look more to investing in information and communications technology, robotics, fintech and other emerging industries to facilitate new models of business activity (including e-commerce and online education, health, and entertainment services) that have the potential to boost productivity and reduce health risks. Vietnamese businesses are demonstrating an increasingly strong competitive advantage in innovating in such areas.

Finally, with relatively strong and equitably distributed economic growth, Vietnam’s rapidly expanding domestic middle class is contributing to accelerated growth in domestic consumer demand. Increasing domestic demand will gradually reduce past dependence on international trade as the primary engine of growth.

Given these positive elements, the prospects for Vietnam to return to strong sustained improvements in living standards over the 2021-2025 period are promising. While Vietnamese businesses will continue to face pressures to restructure and adapt, Vietnam is likely to emerge from the current global downturn with an even more competitive and productive economy by 2025. Nevertheless, ongoing support will likely be needed by those most adversely impacted by ongoing economic restructuring.

Risks and possible responses

Some of the biggest risks to economic outcomes are global factors beyond Vietnam’s direct control. These risks include slower than expected global recovery from the pandemic, the impacts of climate change, the potential negative impacts of international anti-globalisation campaigns, and growing protectionism in some countries, and potential instability in major markets. The economic recession and rising unemployment in 2020 have also exacerbated global concerns about the impacts of climate change, technology, automation/job loss, digital economy, low returns on savings, economic inequality, and rising debt. While these concerns undermine consumer and investor confidence, growing public pressures should ensure more concrete international actions to address these challenges.

Immediate domestic challenges include sustaining success in containing the COVID-19 virus, the roll out of a vaccination programme as soon as possible, and seeking further opportunities to reduce the potential for contagion in the workplace and elsewhere. Success in these areas may provide opportunities to begin relaxing restrictions on the movement of people into Vietnam. Ongoing public engagement on these issues remains an important priority.

It will also be important to continue monitoring the impact of economic change on employment, income, and business investment in different sectors. Further reforms and/or public support may be needed to facilitate the movement of workers out of industries adversely affected by ongoing economic restructuring and changes driven by the Fourth Industrial Revolution; continue improving the business environment to encourage sustained and equitable employment and income growth; continue efforts to reduce the risks of contagion in economic activities, and; build on recent success in reducing bottlenecks to efficient public investment and expenditure to further help stimulate business investment, employment growth, and improved living environments.

At the same time, better environmental management is an increasingly critical issue for the wellbeing of society, and also for attracting and retaining the best national and international expertise in national growth centres. There is also need for a renewed focus on building market institutions and an effective regulatory environment that encourages fair, equitable, and sustainable development. Finally, maintaining macroeconomic stability will be even more challenging given the need for increased spending to ameliorate the negative impacts of the COVID-19 pandemic.

While the pandemic continues to negatively impact global and Vietnamese economic growth prospects, international progress with rolling out vaccination programmes should mean that the worst impacts will soon be over. With ongoing domestic economic restructuring, new policies being introduced to help stimulate business investment and employment, and recent strong private sector performance, Vietnam is expected to emerge from the pandemic in a relatively better economic situation than most countries and will help ensure strong improvements in living standards over the 2021-2025 period.