ECONOMIC SOCIETY OF TANZANIAANNUAL CONGRESS

INDUSTRIALIZATION FOR INCLUSIVE DEVELOPMENT IN TANZANIADar es Salaam, 7 December 2018

Reform and Industrialization in Vietnam

Le Dang Doanh PhD

Member of the UN Committee for Development Policy

The Soviet-Style Central Planning Economy

- The central planning economy in Vietnam has been applied during the time of war until 1975 as an appropriate mean for this period, as Vietnam had to mobilize all resources for the fight but it has been continued after the national reunification and was clearly inappropriate. Emphasizing State-owned economy, restriction the private sector, lacking incentives for farmer, inefficient public investment were the main causes for negative growth rate.

- The extend and scope of the central planning was not comprehensive ( only 105 indicators and 338 products and services).

- Vietnam has early recognized the weaknesses of the model of central planning economy and started to elaborate a reform concept and applied experiences from other East European socialist countries since 1971 but hasn’t reached sufficient results.

- Industrialization by investing into state-owned enterprises, aiming to build an autarkic economic structure, emphasizing heavy industries. The attempt was highly inefficient, costly on time and money.

Year Socialist sector Private

sectorTotal State owned Cooperatives

1957 18.1 17.9 0.2 71.9

1960 66.4 37.8 28.6 33.6

1965 90.0 44.6 45.4 10.0

1970 91.4 40.3 51.1 8.6

1975 91.6 51.7 39.9 8.4

Socialist Reconstruction:

Ownership Structure in North Vietnam, 1957-1975 (%)Source: Tran Van Tho (2000)

Year State-owned sector Non-state sector

1976 27.7 72.3

1980 19.8 80.2

1985 28.0 72.0

1990 31.8 68.2

1995 40.2 59.8

Socialist Reconstruction in South Vietnam:

Ownership Structure in Reunited Vietnam, 1976-1985 (%) Source: Tran Van Tho (2000)

Unsuccessful Attempt of Central Planning and Collectivization

Sectoral GDP Growth Rates

chain-linked index, base year 1975

Year Total GDP Agriculture Industries Services

1977 105.3 100.7 113.2 104.9

1978 101.1 93.6 107.5 109.0

1979 98.2 103.3 95.4 92.4

1980 96.4 105.6 88.7 87.8

1981 102.3 104.3 99.9 100.7

Source: Dang Phong (ed.), Vietnam’s Economic History 1975-2000.

Combination between grass-root initiatives and renovation at the top level

• The long fight of Vietnam emphasized the importance of initiatives at the grass-root level.

• Grass-root experiments in agriculture in 1960s and 1980s provided practical experiences for new political decision at the Political Bureau.

• “Fence-breaking movement in the SOEs leaded to acceptance of market elements in planning.

The “Doi Moi” Process started in 1986 but strongly implemented…

• The collapse of the Soviet Union in 1990 has pressed Vietnam for reform.

• Limited “shock-therapy” in 1989: price liberalization, introduction of positive interest rate, canceling the dual price-system, compulsory procurement of agrarian products to low prices and stable supplying of foods according to coupons in urban regions. Immediate increase of rice production, export the very first 300000 tons of rice in 1989. Liberalization of crop trading for the private sector.

• The market incentives system could unfold the dynamism, creativeness and the saving of Vietnamese people.

• Financial autonomy and “hard budget constraints” for the SOEs. Some thousand small SOEs have been merged or dissolved in the period between 1990-92.

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Diversifying International Relations and Seeking Geopolitical Balance

Singapore

Brunei

Vietnam

Malaysia

Australia

New Zealand

Peru

Chile

Canada

Mexico

Indonesia

Philippines

Thailand

Cambodia

Laos

Myanmar

India

Hong Kong China

Chinese Taipei

Russia

Papua New Guinea

China

Japan

Korea

ASEAN

APEC (FTAAP?)

CPTPPREGIONAL CEP

Integration’s Process in Asia-Pacific

?

10

World Bank forecast for Vietnam by implementing CPTPP

Forecast for Products and Services

13

(ASC) (AEC) (ASCC)

ASEANPeace, Prosperity, People

Regional Production

Regional Market

Ref. Think ASEAN, by P. Kotler, H.

Kartajaya, H.D. Huan

A review of Vietnam industrial policy

• Before 1989: Soviet-Style central planning economy. The collapse of the Soviet Union deprived Vietnam huge material assistance and financial credit. Vietnam had to reform and diversify its international economic relations.

• 1989-2000: Market reform - a more diversified industrial structure and integrated economy

• Imported private sector by FDI with strong incentives.

• SOE - high cost and not competitive internationally

• Some selective industrial policy – the car manufacturing, motorbike industry, textile and garment (with some limited success) ….

A review of Vietnam industrial policy (continued)

• Since 2000: international integration combined with domestic reform.

• Bilateral Trade Agreement Vietnam-USA (2001), WTO (2007)

• Enterprise Law 1999 and amended 2005 encouraging the private sector, Investment law 2005

• WTO accession in 2007 changed the rules for industrial policy:

• Before: Export subsidies, tariff and non-tariff barriers to trade, compulsory localization, credit subsidies …

• Now: Focus on supply-side support. Domestic industry must be competitive on the Vietnamese market.

A review of Vietnam industrial policy (continued)

• Policies for FDI

• Special Economic Zones (EZ) since 1991 (EPZ, IZ …): 325 EZs with 95.000 ha land.

• Tax holidays and other privileges (land rent reduction)– to be reduced after WTO accession

• End of export subsidies

• But WTO accession greatly increased attractiveness for FDI

• HCMC: EPZ now only for high value products, no more garment

• Two Hi-Tech Parks to attract knowledge-intensive FDI, integrated concept incl. university linkages etc.; limited success as for now

• Poor spillover effect on technological upgrading (no evidence)

• Licensing & localization strategies:

• Automobile industry: Licenses for 11 carmakers + Localization policy to encourage local content → Unlikely to succeed (economies of scale, too many producers for a limited domestic market, supply-side constraints)

• Motorbike industry: Low-tech, large market. Successful localization, industry gaining regional market share

GDP Growth Rate of Regional Economies

Target and Vision

•Aiming to establish a “basically industrialized and modernized economy” in 2020, to reach a GDP/capita of 3000 USD/capita.

• In 2050 to reach the level of “an advanced economy” with GDP/capita by 10.000 USD.

•Vietnam needs to conduct fundamental reforms in institution, applying meritocracy, developing democracy and human rights, restructuring its economy, enhancing science and technology.

World Bank : Different scenarios for Vietnam 2035

Economic Structure and Projection: Vietnam continues the industrialization by trade liberalization

Share in Total Employment (%) Share in GDP (%)

Agriculture Industry + Mining Services Agriculture Industry + Mining Services

1990 73% 11% 16% 34.6 23.2 42.2

2000 68.2% 12.1% 19.6% 24.8 34.8 40.4

2013 48.8% 22.7% 28.5% 17.6 38.6 43.9

2025 32.1% 30.9% 36.9% 12.4% 39.9% 47.7%

2035 25.1% 37.2% 37.7% 8.9% 41.3% 49.8%

FDI share over 70% of total Export

Slow Changes in Economic Structure

Industries : food processing, garments, shoes, machine-building, mining,

cement, chemical fertilizer, glass, tires, oil, coal, steel, paper

Agriculture - Products : paddy rice, corn, potatoes, rubber, soybeans, coffee, tea,

bananas, sugar; poultry, pigs; fish Aquaculture, particularly

shrimp and catfish farming,

Structure of the Economy: slow growth of industry

1995 2001 2002 2003 2004 2005 2006 2007 2008

GDP (current prices) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Agriculture, Forestry &

fishery27.18 23.24 23.03 22.54 21.81 20.97 20.40 20.34 22.10

Industry and construction 28.76 38.13 38.49 39.47 40.21 41.02 41.54 41.48 39.73

Manufacturing 14.99 19.78 20.58 20.45 20.34 20.63 21.25 21.26 21.10

Services 44.06 38.63 38.48 37.99 37.98 38.01 38.06 38.18 38.17

Major Economic Indicators, Viet Nam, 2006-2009, %

Item 2006 2007 2008 2009

GDP Growth 8.229% 8.48% 6.152 % 5.32

GDP (Current Prices, US

Dollars)US$ 60.933 Billion

US$ 71.13 BillionUS$ 89.829 Billion

NA

GDP Per Capita (PPP),

US Dollars

US$ 2,357.02 US$ 2,602.48 US$ 2,783.75

Inflation (End of Year

Change %)

6.99% 12.631 % 19.891 % 6 -7 %

Unemployment Rate 2.40% 2.00% 4.30%

Budget Balance (% of

GDP) -3.8 -6.9 -5.1 -7.3

Current Account Balance

(% GDP)

-0.269 % -9.83 % -9.384 % -11.5%

http://www.economywatch.com/economic-statistics/country/Vietnam/

-

5

10

15

20

25

30

35

40

Cambodia China H Kong Indonesia Korea Malaysia Philippines Singapore Taiw an Thailand Vietnam

2000 2005 2007

Source: UNIDO's INDSTAT

Manufacturing value added as percentage of GDP for Vietnam and comparators, %, 2000, 2005, 2007

Vietnam industrial performance

. GDP Structure and Growth by Type of

Ownership in Vietnam 1995-2011

Share of GDP (1994 prices) Annual Growth Rates

1995 2005 2011 2005/1995 2011/2005

GDP (b. dongs) 195 568 393 031 584 073 7.2 6.8

Per cent 100.0 100.0 100.0 - -

STATE 40.0 40.7 36.5 7.4 4.9

NON-STATE 53.2 47.3 49.9 6.0 7.8

Collective 9.7 6.4 5.8 4.0 3.1

Private 7.6 9.7 12.2 9.9 11.0

Households 35.9 30.4 31.8 5.1 7.7

FDI 6.7 12.0 13.6 13.7 9.0

Source: Elaborated by the authors from Statistical Yearbook of Vietnam 1998 (Table 13) and Statistical Yearbook of Vietnam 2011 (Tables 17, 31 and 162)

Number of Active Enterprises on 31 December in

2005 and 2010

2005 2010

Number Per cent Number Per cent

TOTAL 112 950 100.0 291 299 100.0

STATE 4 086 3.6 3 283 1.1

NON-STATE 105 167 93.1 280 762 96.4

Collective 6 371 5.6 12 003 4.1

Private 34 646 30.7 48 009 16.5

Limited 52 505 46.5 163 980 56.3

Joint stock (with state) 1 096 1.0 1 712 0.6

Joint stock(without state) 10 549 9.3 55 058 18.9

FDI 3 697 3.3 7 254 2.5Source: Statistical Year of Vietnam 2011 (Table 94)

2005 2006 2007 2008 2009 2010 2011 2015

Total 100 100 100 100 100 100 100 100

Share of Economic Sector

State Sector 37,6 36,7 35,3 35,1 34,7 33,5 32,7 35,69

Non-State Sector 47,2 47,2 47,7 47,5 48,0 48,8 49,3 49,3

Collective Sector 6,6 6,3 6,1 5,9 5,8 5,3 5,2 5,0

Private Sector (registered) 8,5 9,0 9,7 10,2 10,5 10,7 10,9 7,88

Household Sector 32,1 31,9 31,9 31,4 31,7 32,8 33,2 31,33

FDI 15,2 16,1 17,0 17,4 17,3 17,7 18,0 20,1

Shares of Economic Sectors in GDP (in% ):

High share of Household Sector Source:GSO

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Vietnam World East Asia

Source: UNComtrade

Trends in manufactured trade as percentage of total trade for Vietnam, East Asia and the World, %, 2000- 2008

Vietnam industrial performance

Vietnam industrial performance

Industrial capacity and growth... Manufacturing value added for and comparators, 2000-2007

Value of manufacturing value added

(US$ billion constant 2000)Global MVA share Annual growth rate

2000 2005 2007 2000 2005 20072000-

20052005-2007 2000-2007

Cambodia 0.6 1.1 1.4 0.01% 0.02% 0.02% 13.8% 13.1% 13.6%

China 382.7 641.2 788.0 6.63% 9.81% 11.89% 10.9% 10.9% 10.9%

Hongkong 8.7 6.4 6.4 0.15% 0.10% 0.10% -6.0% 0.1% -4.3%

Indonesia 44.6 56.9 60.8 0.77% 0.87% 0.92% 5.0% 3.3% 4.5%

South Korea 134.4 185.5 214.0 2.33% 2.84% 3.23% 6.7% 7.4% 6.9%

Malaysia 29.4 36.2 42.7 0.51% 0.55% 0.64% 4.2% 8.6% 5.5%

Phillipine 17.2 21.1 21.9 0.30% 0.32% 0.33% 4.2% 1.9% 3.5%

Singapore 23.9 28.9 33.2 0.41% 0.44% 0.50% 3.9% 7.2% 4.8%

Taiwan 76.5 95.5 113.2 1.33% 1.46% 1.71% 4.5% 8.9% 5.8%

Thailand 42.4 59.1 63.4 0.73% 0.90% 0.96% 6.9% 3.6% 5.9%

Vietnam 5.7 9.8 11.9 0.10% 0.15% 0.18% 11.6% 10.3% 11.2%

Source: UNIDO’s INDSTAT

Large Economic SOE-Groups as Major Component of Industrial Policy

Monopolies of State-Owned Enterprises

Industry Market Share (1999,%) Market Share (2003, %)

Electricity 94 92

Coal 97 98

Paper 50 70

Cigarettes 63 N/A

Cements 59 55

Steel 64 52

Chemical Fertilizers N/A 90

Rubber N/A 69

Petroleum Products N/A 100

Basic Chemicals N/A 99

Gasoline N/A 100

Rail Transportation N/A 100

Air Transportation N/A 90

Commercial bank credit 70 65

Exports 30 25.3

• Garment and Textile Group:Number of companies: 5,982

Private84%

FDI,15%

Stateowned,

1%

Textile andApparel Companies

Private FDI Stateowned

• " Capital Structure

• Comprehensively diversified with

involvement of multiple economic sectors;

• Only 1% of companies are state owned and

they are in the process of equitization;

• The mother holding company of Vinatex will

also be equitized by the middle of 2013;

• About 60% of textile and garment export

turnovers come from FDI companies.

• Vinatex:Number of companies: 5,982

Spinning6%

Weaving17%

Dyeing4%

Apparel70%

SupportingIndustry3%

Spinning Weaving Dyeing Apparel SupportingIndustry

Textile &Apparel Companies ByCategories Companies by location:

" Northern provinces: 30%

" Central& highland provinces : 8%

" Southern provinces: 62%

About 3,500 SOEs represent 40% of GDP

2007: 82 SOEs were equitized (21% planned)

2008-2010: Planned to rearrange 1,535 SOEs

Of which, 948 will be equitized

2008: Most equitizations were delayed

Explanation: Decline in stock market

June 2009: IPOs with reasonable starting price

2009: Plan to equitize some large banks, corp.

The State will retain ownership in:

•100% - Public utilities, power transmission, oil and gas, aviation and railways

•50% - Energy, mining, telecoms, infrastructure, cement and steel production, sanitation and water supply, and banking and insurance.

According to the Ministry of

Finance, the number of SOEs

equitized decreased from 724 in

2005 to 640 in 2006, 150 in 2007,

and 73 in 2008.

Equitization of State - Owned Enterprises

High Internet Penetration (53%->90%)

• 53% of population use Internet, it should increase to 80-90% in the time to come.

Digital Evolution Index of Vietnam in 2017 (Tufts University)

Digital Evolution Index (DEI) 2017, Vietnam ranks at 48/60 economies, score 2.19/5 (Tufts University)

E. Government: Vietnam ranks at 89/193 economies UNPAN (2016)

Doing Business Ranking 2019 ranks at 69/190 economies

Thank you!