Asiasnexttiger

Goodafternoon,Vietnam
Havingattainedmiddleincomestatus,Vietnamaimshigher

Aug6th2016|HOCHIMINHCITY| Fromtheprintedition
WHENJonathanMorenoscompanywaslookingfor
alocationforanewfactoryin2009tomakeits
medicaldevices,itruledoutmuchoftheworld.
EuropeandtheAmericasweretooexpensive,India
wastoocomplexandintellectualpropertyrightsin
Chinatoopatchy.Intheend,Vietnamwastheone
candidateleftstanding.Itstillseemedriskyasthe
countrywasjustemergingasadestinationforforeign
investors.Sevenyearson,MrMorenosurveysthesceneemployeesassembledelicatediagnostic
probesinaroomthatresemblesalaboratoryandhasnodoubtaboutwherehiscompany,
Diversatek,willexpandnext.Totheback,thereandthere,hesays,pointingtoeitherside.
Itisfarfromalone.ForeigndirectinvestmentinVietnamhitarecordin2015andhassurgedagain
thisyear.Dealsreached$11.3billioninthefirsthalfof2016,upby105%fromthesameperiodlast
year,despiteasluggishglobaleconomy.Bigfreetradeagreementsexplainsomeoftheappeal.But
somethingdeeperishappening.LikeSouthKorea,TaiwanandChinabeforeit,Vietnamispiecing
togethertherightmixofingredientsforrapid,sustainedgrowth.
Vietnamalreadyhasastrong,oftenunderappreciated,record.Since1990itsgrowthhasaveraged
nearly6%ayearperperson,secondonlytoChina.Thathaslifteditfromamongtheworlds
poorestcountriestomiddleincomestatus.IfVietnamcandeliver7%growthforanotherdecade,its
trajectorywouldbesimilartothoseofChinaandtheAsiantigers(seechart).Butthatisnosure
thing.Shouldgrowthfallbackto4%,itwouldendupinthesameunderwhelmingorbitasThailand
andBrazil.
PerhapsthebiggestfactorinVietnamsfavourisgeography.ItsborderwithChina,amilitary
flashpointinthepast,isnowacompetitiveadvantage.Noothercountryisclosertothe
manufacturingheartlandofsouthernChina,withconnectionsbylandandsea.AsChinesewages
rise,thatmakesVietnamtheobvioussubstituteforfirmsmovingtolowercostproductionhubs,

especially
ifthey
wantto
maintain
linksback
toChinas
well
stocked
supply
chains.
A
relatively
young

populationaddstoVietnamsappeal.WhereasChinasmedianageis36,Vietnamsis30.7.Soon
enough,itwillstartageingmorerapidlybutitsurbanworkforcehasmuchscopetogrow.Sevenin
tenVietnameseliveinthecountryside,aboutthesameasinIndiaandcomparedwithonly44%in
China.Thereservoirofruralworkersshouldhelpdampenwagepressures,givingVietnamtimeto
buildlabourintensiveindustries,anecessityforanationofnearly100mpeople.
Manyothercountriesalsoboastyoungworkforces.Butfewhavehadaseffectivepoliciesas
Vietnam.Sincetheearly1990sthegovernmenthasbeenveryopentointernationaltradeand
investment.Thishasgivenforeigncompaniestheconfidencetobuildfactories.Foreigninvestorsare
responsibleforaquarterofannualcapitalspending.Tradeaccountsforroughly150%ofnational
output,morethananyothercountryatitslevelofperpersonGDP.
InvestorshavealsotakenheartfromthestabilityofVietnamslongtermplanning.LikeChina,it
hasusedfiveyearplansasroughblueprintsfordevelopment.ButalsolikeChina,itsgovernance
allowsscopeforinnovation:its63provincescompetewitheachothertoattractinvestors.Amodel
ofdevelopingindustrialparkswithforeignmoneyandmanagersbeganinHoChiMinhCityin1991
andhassincebeenreplicatedelsewhere.
AndVietnamsworkforceisnotjustyoungbutskilled.Publicspendingoneducationisabout6.3%

ofGDP,twopercentagepointsmorethantheaverageforlowandmiddleincomecountries.
Althoughsomegovernmentsspendevenmore,Vietnamsexpenditureshavebeenwellfocused,
aimingtoboostenrolmentlevelsandensureminimumstandards.Inglobalrankings,15yearolds
inVietnambeatthoseinAmericaandBritaininmathsandscience.Thatpaysdividendsinits
factories.AtSaitex,ahighenddenimmanufacturer,workersmusthandlecomplexmachinery
fromlaserstonanobubblewashersalltoproducethewornjeanssopopularintheWest.
Ontopofthissolidfoundation,Vietnamisreapingbenefitsfromtradedeals.Itissettobethe
biggestbeneficiaryoftheTransPacificPartnership(TPP),a12countrydealthatincludesAmerica
andJapan.WithAmericanpoliticsturninghostiletotrade,thereisariskthattheTPPwillfail.But
evenifthathappens,Vietnamwilldowell.TheTPPhasalreadyhelpedtoadvertiseitscapabilities.
Andthereareothermajoragreements:afreetradepactwiththeEUisintheworks,andonewith
SouthKoreawentintoforceinDecember.
YetVietnamalsofacesaseriesofchallenges,anyofwhichcouldimpedeitsrise.Speculative
excessesinthepasthelpedfuelapropertybubble.Itburstin2011,saddlingbankswithbaddebts.
Vietnamcreatedabadbanktohousethefailedloansandhasstartedcleaningupitsbanks.
However,ithasbeenslowtoinjectnewcapitalintoitsbanksandhesitantaboutmodernisingtheir
operations.
InonecrucialareaitcomparespoorlywithChina:gettingthemostoutoftheprivatesector.Private
Chinesecompaniesgenerateabout1.7yuanofrevenueperyuanofassets,morethandoublethe0.7
ratioforstateownedenterprises(SOEs).InVietnamprivatesectorproductivityhasslumpedover
thepastdecadetothe0.7level,thesameasSOEs,saystheWorldBank.Onereasonisthatlarge
groupsinVietnamsprawlacross6.4separateindustriesonaveragethoseinChinaoperateinjust
2.3,accordingtotheOECD.
Furthermore,althoughVietnamhasbenefitedfromforeigninvestment,only36%ofitsfirmsare
integratedintoexportindustries,comparedwithnearly60%inMalaysiaandThailand,according
totheAsianDevelopmentBank(ADB).InsomecasesVietnamhasgonetoohighend.Muchhas
beenmadeofSamsungsplanstoinvest$3billioninmobilephoneproductioninVietnam,but
domesticsuppliersprovideitwithlittleexceptplasticwrapping.VuThanhTuAnh,directorofthe
FulbrightEconomicsTeachingPrograminHoChiMinhCity,saysthegovernmentneedstohelp
buildupsupplychainsforexample,trainingcompaniesintextileproductiontosupportthe
apparelsector.
Therearegroundsforcautiousoptimism.TheMinistryofPlanningandInvestmentteamedupwith
theWorldBanktolayoutastrategyforchangeearlierthisyear.Theirjointreport,Vietnam2035,
detailshowthecountrycanmakeSOEsmorecommercialandreinvigoratetheprivatesector.
Weakenedpublicfinancesthefiscaldeficitissettobemorethan6%ofGDPforthefifthstraight
yearin2016areputtingpressureonthegovernment.Tobolsteritsrevenues,itsoldsharesinmore
than200SOEslastyear,thebiggestannualtallyever.TheseweremostlysmalldealsbutinJulyit
tookabolderstep,scrappingaforeignownershiplimit(previously49%)onVinamilk,thecountrys
maindairycompany.Investorsarehopefulthiswillserveasatemplateformoresuchreforms.

Afteryearsofsolidgrowth,Vietnamhasnearlyreachedamilestone.Nowitisclassifiedasamiddle
incomecountry,itisabouttoloseaccesstopreferentialfinancingfromdevelopmentbanks.In2017
theWorldBankwillstarttophaseoutconcessionallending.ForVietnamitisamomenttoreflect
onhowfarithascomeandalsoonthetrickierpathahead.IthasachancetobeAsiasnextgreat
successstory.Itwilltakecouragetogetthere.

Fromtheprintedition:Financeandeconomics