Vietnam’s economy and the unexpected forecasts

23-Mar-2017 Intellasia | Nhip Cau Dau Tu | 6:00 AM Print This Post

The report named “The long term view: how will the global economic order change by 2050?” released on February 7th 2017 by one of the leading professional services organisation in the world – PricewaterhouseCoopers (PwC) mentioned that in 2016, the economy of Vietnam ranked the 32nd in the world, and the Gross Domestic Product (GDP) at Purchasing Power Parity (PPP) reached 595 billion US dollars.

With average annual growth forecasted at 5.1 percent per annum in 2016-2050 period, the PwC predicted that Vietnam will hold the 20th position in the global ranking with GDP at PPP reaching 3.176 billion US dollars, surpassing Thailand, Malaysia, Canada, Australia, and only two steps behind South Korea.

This good news has been welcomed by a segment of the population. People believed that an economy with gloomy indicators (high public debts, high bad debts, and poor investment performance, etc.) would grow into a giant, just as they used to believe that the Trans-Pacific Partnership agreement (TPP) would help Vietnam’s GDP increase by 20-30 billion US dollars.

It can be seen that GDP in the PwC’s report was calculated at PPP, which means the ability to purchase a basket of commodities of different currencies, namely the dong against US dollar.

Considering the latest data, the nominal GDP of Vietnam in 2016 was about 198 billion US dollar, while it was 595 billion US dollars at PPP. It shows that the price level in Vietnam was about three-times cheaper than the global average price, or more accurately, it was three times depreciated. According to the PwC, this is the information that long-term investors should pay attention to when choosing low-cost production markets in order to maximise profits. In fact, Vietnam is the outsourcing workshop of many large technology and consumer corporations in the world.

Talking to Nhip Cau Dau Tu newspaper, Dr Le Dang Doanh, former Head of the Central Institute for Economic Management stressed that this ranking should not be confused with the real power of the economy. The forecast of PwC is only for reference, to know how the world think and expect from the economy of Vietnam.

From a statistical standpoint, economic expert Bui Trinh expressed more interests in the input data of the PwC’s report. He frankly pointed out that the 5.1 percent average GDP growth in the long-term until 2050 is unrealistic.

If considering the Incremental Capital-Output Ratio (ICOR), which shows how much investment is needed to increase a dong of GDP, the ICOR of Vietnam in 2010-2015 period was 4.57. Comparing to other regional countries, the ICOR of Vietnam in this period was only equivalent to Malaysia’s, and higher than Myanmar’s, the Philippines’, and Cambodia’s.

On the other hand, calculation of the coefficient of output elasticity of labour and capital from the inter-industry balance sheets in 2007 and 2012 showed that if the output is gross value added net (GVAN), the labour elasticity increased from 64 percent in 2007 to 78 percent in 2012, while the capital elasticity fell from 36 percent to 22 percent. Assuming the input costs remain the same, attaining growth now requires more capital than the past periods.

Meanwhile, according to report of the Research centre of the Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) in June 2016, the expenditure on investment development tended to decrease, particularly from 2013 until now. The burden of public debts and difficulties in cutting recurrent expenditure have shown that the situation is not easy to be changed.

The statistical expert frankly questioned how the 5.1 percent growth forecast should be interpreted, and whether the report based on such data is realistic. Trinh also pointed out another issue, which is what Vietnam benefits from this optimistic economic growth forecast. According to a study to be published, currently, the level of emissions to create a unit of GDP in Vietnam is higher than the world average, and even higher than China. Assuming that Vietnam’s economy grows at the current rate and pace, by 2030, the CO2 emissions will be approximately one billion tonnes (compared to the current 240 million tonnes). No one else, the Vietnamese people themselves will suffer this severe pollution.

No one can find the magic wand that could help Vietnam become a giant without any efforts. However, the opportunity is real, because the private sector is still contributing more than 40 percent of GDP despite not receiving much preferences. Moreover, Vietnam has a strategic geographic location for accessing major markets in the world such as China, India, and Northeast Asian countries such as Japan and South Korea, etc. The problem is that when Vietnam can really make changes?

In Dr Doanh’s point of view, the growth which based on exploiting resources and cheap labour advantage of Vietnam has become critical and Vietnam has no choice but to change. Dr Doanh added that according to the Provincial Competitiveness Index in 2016, enterprises still complained that state-owned and foreign firms received more privileges, while private firms remain the driving force of the economy.

Economist Trinh added that Vietnam should immediately give up the excitement with the achievement in export, which is actually the exports to firms with Foreign Direct Investment (FDI). The country called for investment of FDI firms, and invited them to sell goods in the market of 100 million people with consumer spending accounting for more than 60 percent of GDP.

In fact, despite having dominance in terms of scale, FDI firms in the past five years have not produced effects in terms of technology and management standards to domestic firms as expected. The failure of the automotive and supporting industries is a typical example.

At the macro level, Trinh said that the GDP sector composition, which is industry-service-agriculture oriented, is showing many limitations. Since industry requires high imports for input production, it has a high degree of spillover effect to the import. When industry increases by a unit of final product, it does not contribute to production and domestic income, but strongly affects import and increases trade deficit. At the same time, the shrunken agriculture of Vietnam is considered a contributing factor to the loss of agricultural land with thousands of rivers being filled to serve an industry which has increasingly become comprehensively outsourcing. This situation urgently needs to be changed.


Category: Economy, Vietnam

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