Overcoming the Middle-income Trap and Making the Growth Inclusive: The Case of Vietnam

LE Kim Sa, Ph.D. DANG Nguyen Anh, Ph.D. Vietnamese Academy for Social Sciences (VASS)

Paper for the Regional Workshop Social Inclusiveness in Asia's Emerging Middle Income Countries (MICs) Jakarta, Indonesia : 13 September 2011

The views expressed in this paper are those of the authors and do not necessarily represent those of the organization.

1. Background Since last two decades, especially from 2000, Vietnam has gained many significant achievement in socio-economic development. GDP per capita increased more than 10 times, from under 100 USD in 1990 to 1,040 USD in 2008 and about 1,200 USD in 2010. The poverty rate reduced from 58 percent in 1993 to 12.3 percent in 2009. Total investment increased almost 10 times compared to 1995, reaching 42.7 percent of GDP in 2009. Exports increased about 24 times compared to in 1990, to 57.1 billion USD in 2009. This impressive growth performance has enable Vietnam, among the poorest countries in Asia when its economic transformation began, to achieve the status of a low middle income country. However, the growth momentum built up under Doi Moi is in danger of losing steam. This is because of a confluence of both domestic and external factors, the latter gaining importance with Vietnams greater integration into the global economy. In general, Vietnams economic growth pattern is similar to the neighboring East Asian countries, include openness and regional integration, deepening trade and FDI, high saving and investment, dynamic transformation of industrial structure, urbanization and

rural migration as drivers of growth (Ohno, 2009b). However, several East Asian countries had grown quickly then slowed down when reaching the middle income level. This is a risk that late-comer countries now facing. Recently, there are debates on why many countries with abundant resources do not achieve high growth, and why several countries lost some or all of their growth momentum, why some countries were able to overcome this middle-income trap, and why others have not. To shift to higher income levels, countries have to concentrate on specific sectors that they could gain economic success and lead in technology. Moving from the middle income to high income is a long process, but it must be sustainable and requires significant policy and institution reforms. The history of development of the regional economies shows that in the last century, after Japan, it took about 25-30 years for the four Asian Dragons (Hongkong, Singapore, Korea and Taiwan) to be the high income economies while Malaysia, Thailand, Philippines reached the middle income level for about 3 decades or more, but now, they are still far from the high income level. So, can Vietnam overcome the middle income trap and make growth inclusive? The answer is not a simple one. Today, with the expansion of technology, open markets under globalization, and enhanced knowledge and capacity, countries certainly can shorten time to be prosperous. It is whether each country can use the right strategy and implement it effectively.
2.

A brief overview of Vietnams economic reform

The failure of the centrally planned model that Vietnam followed to develop its national economy after the national reunification in 1975 forced Vietnam to undertake economic reforms, with the first serious reform known as the Doimoi in 1986 and later the even more radical market-oriented reform of 1989 marked a turning point in the history of Vietnams economic development. As other economies in transition, Vietnam has had to deal with three key sets of reforms: liberalization and stabilization; institutional changes that support market exchange and shape ownership; and the establishment of social programs to ease the pain of transition (World Bank 1996). After some initial success, complacency built up andthe reform process in general slowed down during the period 1996 - 99, especially after the Asian crisis. However, since 2000 there have been renewed commitments to reform and some progresses have been achieved, especially in the development of private sector and trade liberalization.The privatization process has been accelerated when the Government allowed some large and
2

monopoly firms in banking, insurance, petroleum, and telecommunication sectors to be privatized since 2006. During the years immediately after the initiation of the economic reform, the focus was on macroeconomic stabilization and price liberalization. The implementation was successful resulting in relief in the fiscal burden and price stabilization. In 1989 inflation was under control and since then it has gradually stood at a low rate except for 2004 and 2008. Several measures to establish market institutions for the economy were introduced including the recognition of a multisector economy and property right. In agriculture, decollectivization took place with land being redistributed to households, and output-contracting were introduced, the farming household is recognized as a basic economic unit. A particularly important reform was the new Land Law in 1987 and later amended in 1993 which increased security of tenure and allowed transfer of landuse rights to others. In the industry and services sectors, together with the development of private sector stateowned enterprises are either being equitised or given more autonomy in business. Emergence of the private enterprise sector since the reforms is an important development. The 1990s also saw the emergence of the private sector thanks to first the introduction of the company law and private enterprise law in 1991 (later amended in 1994). These two laws together with the adoption of the new land law in 1993 and the labour code in 1994 provided the importance stimulus for the development of the private sector. However, the most significant reform in the development of the private business sector came in 2000 with the new Enterprises law. During 2000 2004, about 90,000 private enterprises were registered under the new Law, (doubling the number of companies registered during the 9 years of the two previous laws) with the total capital equivalent to about USD 13 billion. This sector is making rapid gains in terms of both its contribution to output growth and its growing freedom from the restrictions placed on it under central planning. The one-tier banking system was replaced by the two-tier banking system which allows the State Bank of Viet Nam to assume traditional central bank functions. Other major policy changes include elimination of price control, liberalization of foreign exchange, and the removal of barriers to the movement of labor and goods from one region to the others in Vietnam. Viet Nam has substantially liberalized its trade and investment policies since the late 1980s. During the early years of economic reform, Vietnam liberalized its trade regime through signing trade agreement with about 60 countries. It has also implemented
3

preferential trade agreement with the European Union since 1992. Later on, the country actively sought membership of regional and global organizations. International integration processes picked up from the early 1990s after the collapse of the Berlin wall and Vietnam lost its traditional markets in Eastern Europe and Soviet Union in the late 1980s. The US trade embargo against Vietnam was only lifted in 1994, and the relationship with the US was normalized in 1995. Another important achievement and event is that since 1993 Vietnam has basically opened development assistance resources (ODA) which have contributed to the substantial increase of financial resources for Vietnams development investment. Viet Nam has become a member of the Association of South East Asian Nations (ASEAN) since June 1995 and the Asia Pacific Economic Co-operation (APEC) since 1998. In 2000 Vietnam signed a historic comprehensive trade agreement with the USA to normalize the trade relation between the two countries. Recently, Vietnam has also joined regional integration clubs such as ASEAN - China Free Trade Area and ASEAN-Japan Comprehensive Economic Partnership. Most recently, in 2007 Vietnam became the latest member of the World Trade Organization. The Law on Foreign Direct Investment (FDI) was first promulgated in 1987 and later amended in 1990, 1992, 1996 and 2000 which helped Viet Nam to attract a large volume of foreign capital when domestic savings were not enough to meet the investment needs. By 1987, the private sector virtually did not exist in Vietnam. By allowing foreign direct investment, Vietnam in effect imported/implanted the private sector of its own for the first time after the unification of the country. Since then FDI has indeed become an integrated part of Vietnamese economy and an important factor in Viet Nams economic growth during the 1990s. In order to create a more level playing field and to ensure that its laws allowed for national treatment for FDI enterprises prior to Vietnams 2006 accession to the World Trade Organization, in 2006 Vietnam promulgated two important laws, the Investment Law and the new Enterprise Law creating a corporate law regime that applies to both foreign and domestic enterprises. Besides FDI, Vietnam also started to receive the ODA from international donors since 1993 and the amount committed and disbursed has been increasing since then. These capital sources constitute a positive assistance to infrastructural construction such as transport and communication, information, agricultural and rural development, public health, education and training, administrative reform, legislation, and structural reform.

As a result, after 20 years of reform, Vietnam has put in place the fundamentals of a market economy and opened up the economy to international flow of capital and trades in goods and services. The emergence of the market-based economy with appropriate institutions, stable macroeconomic environment and the support of the government for business development have allowed Vietnam to (i) unlock the potential of the agriculture sector, turning Vietnam from a food-hunger country to the world third largest rice exporter; (ii) encourage the development of a vibrant domestic private sector; (iii) attract a large amount of foreign investment; (iv) realize its comparative advantages and gain more benefits from international trade. These factors underlie the economic success that Vietnam has been achieving since the early 1990s. Since its the 1989-reforms, Vietnam has recorded remarkable achievements in terms of GDP growth, macroeconomic stabilization, export expansion, and poverty reduction. It is now generally recognized that Vietnam is among the best developing countries in terms of achieving relatively high economic growth and reducing poverty incidence. Over the period 1990-2008, Vietnams GDP growth rate averaged at over 7% per year. Still, today Viet Nams growth rates remain among the highest in the region (second only to China). Except for the first two years (1990 and 1991) after economic reform where the GDP growth rate was around 5%, from 1990 to 1997, the GDP growth rate stayed at around 8 percent per annum on average. The GDP growth rate, however, went down between 1997 and 1999, partly because of the Asian financial crisis, and partly because of the dissipation of reform effects. Since 2000, the economy has regained its momentum growing at 7% per year, reaching 8.5% in 2007, before dropping back to an estimated 6.2% in 2008 due to the impact of the global economic recession. High and continuous GDP growth rates and successful economic development over the period has resulted in overall improvement of peoples welfare and significant poverty reduction. 3. Avoiding the middle income trap Vietnams objective is not to just become a middle-income country. Attaining the status of a middle income country is just the stepping stone for the country to actualize (higher-income) its stated goal of becoming an industrialized country by 2020. Clearly, for Vietnam, advancing to high-income status requires sustained growth of income. But the advance is far from guaranteed. Many countries that had shown early potential for growth or has reached middle income status were locked into low growth trajectories and hence unable to elevate themselves into high income countries. Gill and Kharas (2007) referred to this as the middle income trap. A general explanation of why

such a trap exists for middle income countries arises from the increasing complexity of their economies which make management difficult while at the same time, their institutions have not yet to capacity cope. Major factors explaining such failure include economic crises that resulted from economic mismanagement, low human capital, a low level of technological capability, environmental degradation, high income inequality and poverty. This risk is heightened in East Asia, including Vietnam, where rapid economic growth has outpaced institutional deepening which takes time. East Asia is a victim of its own success. Asia is rich with examples both of success and of failure. For example, South Korea, on one hand, with rising technological capacity supported by human capital depth, exportdriven growth, and a major role played by industrial policy, broke out of the trap, was in danger of falling back into it during the Asian Financial Crisis, but reemerged as an even more robust economy after that Crisis ended, thanks to major economic and institutional reforms. On the other hand, the Philippines, characterized by low savings and investment and weak fiscal mangament combining to produce fiscal management combining to produce fiscal and external deficits, and with institutions infected by pervasive corruption, was trapped in a low growth trajectory even while it was only a lower middle income country. These weaknesses had their roots in the capture of the state by powerful vested interests. Intermediate examples of countries that might face a middle income trap are Malaysia and Thailand. Malaysia, half-way up the middle income group, is seeing its progression to high income retarded by low private investment and a shortage of human capital. Thailand, a little lower than Malaysia along the income scale, if facing the same constraints, but also rising income disparities that culminated in the March 2010 street protests in Bangkok. Lessons of transition can be drawn from both successes and failures. As South Koreas case shows, for success to be sustained, the complementary roles played by the state and market, supported by strong institutions backed by strong political will and decisive leadership. The lessons of failure are equally important. The middle income trap does not set in only when countries reach the high end of the middle income range. Countries can be stuck in a low-growth trajectory even at low levels of income. As the case of the Philippines shows, this can occur even when countries have high growth potential. There are a number of specific factors that put countries into trap, including the destructive role of interest groups in the Philippines, the dominant economic role played by Bangkok at the expense of the countryside, and the upper classes against the lower, that led to the rupture manifested by the recent political turmoil, and the shortage of human capital

that condemned Malaysia to heavy reliance on foreign labor while those educated seek greener pastures elsewhere through emigration. Viewing it from the Vietnamese context, the above country experiences need to be examined in relation to their relevance, given the specific circumstances applicable to each country. WHile they offer broad lessons, Vietnam also needs to deal with risks qnique to its economic situation. A long term risk is that the demographic dividend Vietnam is reaping, in the form of a large proportion of young people of working age who could save and a low dependency ratio, together with a slow pace of urbanization, will eventually come to an end. For these reasons, it is not too soon to adapt and endogenize lessons learned from other countries in developing a new model for growth if it were to achive its ambitious objective of becoming a developed economy by 2020. 4. Finding a new driver for Vietnams economy However, Vietnam still confront uncertainties in its efforts to sustain a high growth rate of growth in long run. The local firms remain generally uncompetitive, and policies and institutions remain very weak by East Asian standards (Ohno, 2009b). Economic growth since 1990, has been mainly based on the increase in inputs, including credit expansion. While labour supply rose, the quality of human capital did not improve. Vietnam also has relatively high contributions of investment in GDP growth. The total investment as ratio of GDP has increased considerably since 2000. However, the efficiency of the high level of investment has been questioned by various scholars when comparing Vietnams incremental capital-input ratio (ICOR) to other neighboring East Asia countries (See David et al., 2008). Recently, growth is dependent on investment and export while the economy is facing twin deficit. A direct consequence of adopting an investment-based growth strategy is the increasing the investment-saving gap. The domestic saving rate in Vietnam is moderate, about 30 percent. Combined with a high rate of investment, the gap reached 9.8 percent in 2007 and 2008. Because of this gap, the current account has been in deficit from 2000. In addition, the government also run a large fiscal deficit. Vietnams economy is still dependent on natural resource intensive and mining industries or cheap labour intensive ones. The economic structure changes slowly toward high-tech, and remained dominated by low-tech industries. The state enterprises have not played their leading role while the private sector is still small, far reaching the driving force for the economic growth. Vietnam is just in the first stage of industrialization and development. Production is still directed by foreigners.
7

Recently, Vietnam has been struggling with a number of problems and been shown up by its vulnerabilities. In late 2007 and early 2008, Vietnam was confronted with economic overheating resulting from huge credit expansion and massive capital inflows. In 2008, for the first time, the government publicly admitted the trade-off between economic growth and macroeconomic stability. Vietnam experienced a huge credit expansion in 2007, which together with rising world energy and food prices has led to amounting inflationary pressure. In addition, in response to the huge capital inflow (both FDI and portfolio investment), the government inappropriately attempted to absorb this capital inflow while maintaining a fixed exchange rate. All of these forced the government to shift their priorities from economic growth to stabilization in 2008 with the measures as a tight monetary policy and cutting back public spending. The policy worked and brought down inflation, stalled the housing market and even busted the financial bubble (Nguyen, et al., 2010). The recent economic growth had its roots of economic opening policies of which trade liberalization is at the center stage in the last decades. Since joining the World Trade Organization (WTO) in 2006, tremendous economic changes and fluctuations have been observed in Vietnam. Having received great amount of FDI and presumably technology transfer, given cheap labor cost and abundant natural resources, Vietnam products and services is still less internationally competitive due to high transaction costs. For many researchers and policy-makers in Vietnam, the economic reform based on traditional trade liberalization theories seem is running out of steam as most of the tariff and non-tariff barriers removal have already been made.

Economic reform: Unfinished agenda? The recent economic growth had its roots of economic opening policies of which trade liberalization is at the center stage in the last decades. Since the membership of the World Trade Organization in 2006, tremendous economic changes and fluctuations have been observed in Vietnam. Having received great amount of FDI and presumably technology transfer, given cheap labor cost and abundant natural resources, Vietnam products and services is still less internationally competitive due to high transaction costs. Vietnams WTO accession and membership is neither the beginning nor the end of the countrys international integration. But the question is: Is traditional trade liberalization and openness policies are still driving and ensuring the national growth in the time to

come? For many researcher and policies makers in Vietnam, the economic reform based on traditional trade liberalization theories seem running out of its momentum as most of the tariff and non-tariff barriers removal have reached the bottom. Finding a new fuel for growth is a high priority for Vietnam. This is even more valid in the crisis time when the economy hardly finds its competitiveness and advantages among its trading partners as well as competitors. The following challenges, old and new, are still facing Vietnam in the post-crisis era: Infrastructure limitations: The absence of good infrastructure could potentially obstruct the countrys economic growth. One of the most pressing issues would be a potentially serious power shortage, where the national electricity system may not be able to cope with the increased power consumption in the near future. The need for a more skilled workforce: Slow human development can put an end to fast economic growth. The domestic supply of skilled labour continues to be a constant challenge. One of the reasons behind the lack of skilled labour is that the education system is not up to the task with generally out-of-date curricula, which does not meet thepresent working equirements. Macroeconomic stability and crisis: Crisis is very costly for long-term growth and development. Macroeconomic stability is very important in diverting potential crisis. Vietnam macroeconomic indicators are not good at the moment. Although inflation remains lower at the moment, once the world economy recovers inflation can get out of control. Trade deficits have recently been a recurrent problem of Vietnam and over time reached critical unsustainable levels. Although most of the growth in the trade deficit is from purchases of intermediate goods and capital equipment, many imported items were semi-finished products and luxury consumption goods. The government has continued to operate at a budget deficit for many years. In 2009, the budget deficit may increase due to the implementation of the economic stimulus package. More worrying is the substantial off-budget spending in Vietnam. The volatile inflow of hot money into real estate and 20 stock markets is also a cause of concern. Another problem is the weakness in risk management and financial capacity supervision in many companies and financial institutions. The system of gathering and analysis of information on financial market fluctuations and a reasonable roadmap for capital

account liberalization are challenges for Vietnams policymakers. Source: Nguyen, et al., 2010

5. Looking forward: What Challenges Lie Ahead? As noted above, Vietnam has become a lower middle income country and sets an ambitious objective of becoming a largely industrialized country in 2020 and avoiding the so called middle income trap thereafter. Although the country has got off the list of the poorest countries, the poverty agenda is still far from finished. Broad-based economic growth has brought improvements of well-being of almost its entire people. The General Statitics Office has estimated that the poverty rate fell from 58% in 1993 to 14.5% in 2008. Approximately 30 million people were lifted out of poverty over last two decades, which has kept Vietnam on a firm track to achieving one of the most important Millennium Development Goals and therefore has been widely appraised by the international community. Other social indicators such as access to basic social services and infrastructures (education, health, electricity, road, water and sanitation etc.) also confirm this very positive trend
Poverty Rate in Vietnam, 1993-2008 (%)
70 60 50 40 30 20 10 0 1993 1998 2002 2004 2006 2008

Source: General Statistics Office. Looking forward, however, Vietnam is likely to face numerous challenges. First, although all groups of the population benefited from rapid economic growth, the degree of

10

their participation in the development process has varied, resulting in the currently large disparitires in well-being. Despite overall impressive achievements, progress in poverty reduction has been uneven across different groups of the population. Although all groups of the population benefited from rapid economic growth sustaining over the last two decades, the degree of their participation in the development process has varied, resulting in considerable disparities in poverty reduction and in well-being as measured by per capita expenditure across different segments of the society. Uneven progress in poverty reduction can be been quite clearly from Table. As reflected in the changed poverty profile, the largest difference in progress in poverty reduction has been observed between the Kinh/Hoa group and ethnic minorities, with poverty rate declining fast from the former (from 53.9% in 1993 to only 9% in 2008), but sustantiallly slower for the latter (from 86.4% in 1993 to 50.3% in 2008). This implies that as compared to 20 years ago, when the tide lifted all boats, are required in order to avoid the so called inequaility traps. Disparities in Poverty Reduction (%) 1993 Whole Vietnam Urban-Rural Disparities Urban 25.1 Rural 66.4 Ethnicity Disparities Kinh/Hoa 53.9 Ethnic Minorities 86.4 Source: General Statistics Office. Second, as the group of hard-core poor become progressively smaller, further reduction in poverty will not only be more costly in terms of investments and/or economic growth. In other words, if Vietnam cannot improve considerably the efficiency of its social investment, it would require a higher rate of economic growth with associated larger 31.1 75.2 23.1 69.3 13.5 60.7 10.3 52.3 9.0 50.3 9.0 44.9 6.7 35.6 3.6 25.0 3.9 20.4 3.3 18.7 51.8 1998 37.4 2002 28.9 2004 19.5 2006 16.0 2008 14.5

11

investment requirements. Hence, to sustain fast poverty reduction, it is critical for Vietnam to not only increase efficiency of investment, both economic and social, but also improve pro-poor pattern of economic growth. The latter can be partially achieved by raising efficiency and effectiveness of social expenditures and institutions, promoting labourintensive sectors and samll and medium term enterprises in order to create more jobs and income for low skilled workers, and at the same time, improve working conditions and worker safety. Third, the share of population on the margins of poverty has not really changed. This implies that protecting the near poor from falling back into poverty is becoming increasingly important, and justifies the recent shift in government targeted policies and programs to also cover the near poor. Specificaaly, policies to enlarge income earning opportunities and to reduce vulnerability may be more critical for this group to permanently get out of poverty. Forth, Vietnams WTO accession has heightened both opportunities and vulnerbility for Vietnamese households. This is because of changes at the border as reduction in import tariffs and removal of non-tariff barriers to trade, beyond the border as greater access to overaseas markets and to the WTOs dispute settlement mechanism, and behind the border as the opening of service sectors, changes in legal and regulatory frameworks. Indeed, the economys problems since WTO accession have heightened the vulnerability of specific groups. For instance, farmers and migrant workers, who together make up the largest propotion of the population, are exposed to risks given the limited coverage of the formal social security system. While the existing informal safety net, including informal credit and community/family support, have worked quite well until recently, it will come under increasing stress as rising urbanization accelerates the changes in family structure towards the nuclear family. 6. Towards an inclusive-growth strategy in Vietnam Both opportunities and risks have considerably heightened in the new economic context in Vietnam. While the net impacts of the accession on economic growth and poverty reduction are expected to be positive, and that all the behind the border changes and policies play the most important role in dertermining the final outcomes in an inclusive growth strategy. Strengthening Social Protections: In the context of increased vulnerability to economic, natural and other types of risk as Vietnam accelerates market reforms and integration into the world, becoming the low middle income country and sustaining
12

impressive achievements in poverty reduction requires strenthening social protection, which helps to lessen impacts of idiosyncratic and systemic risks due to the role of automatic stabilizers being played by a number of component of this system. In Vietnam, the system of social protection currently consists of three main components, which are social security, social assistance and area-based programs ordered by their significance in terms of fiscal costs. In 2009, Governments expenditure on social security accounts for 47%, followed by social assistance with the proportion of 34% and area-based programs (17%). For the social security component, which play a role of automatic stabilizers by taking contributions in good times and making payment in challenging times and therefore is highly relevant to address dynamic poverty, there are reasons that explain its low covergare. The specific strucutre of employment in Vietnam is one of the reasons. Specifically, the agriculture and non-agricultural informal business sectors make up exppoximately 50% and 24% of total employment respectively, accroding to data of 2007 the labor force survey. The overwhelming majority of laborers in these sectors are excluded from mandatory social security and only few, if at all, participate in the voluntary scheme. Expansion of voluntary social security to these sectors seems to be rather difficult for two reasons. First, laborers in agriculture and non-agricultural informal business sector are normally low-income earners and therefore contributing to social insurance based on their low-income level would provide them with low pension that is not adequate to cover their living costs in the late phase of their life cycle. Second, the requirement of 20 years of contribution itself is a barrier to the coverage expansion, for the fact that many cannot be eligible for pension. The social assistance component targets beneficiaries comprising of regular group, including the elderly aged over 85, or living alone, disabled, metal patients, single parents, orphans and others, and occasional group of victims of natural disasters and epidemic diseases. The beneficiaries of regular social assistance component represent only 1.2% of population, which is much lower than the coverage rate of 2.5-3% in other countries in the region. The baseline for the level of subsidies, which is just equivalent to less than 33% of the poverty line, cannot allow the beneficiaries to afford even minimal living standards. Social assistance will become a burden to the society in future, with increasing amount of beneficiaries that are casted aside by given the weak social security system. The area-based programs essentially include the National Targeted Program for Poverty Reduction 2006-2010 and Program 135, group together various policies and programs to support poor households as well as their communitys economic development.
13

These policies/programs develop infrastructure in poor communes and districts and facilitate poor and ethnic minority households access to credit, health insurance, education, housing, clean water, agricultural extension services and so on. Outside the formal social security system, the existing informal safety net, including informal credit and community/family support, has worked quite well until recently, as evident by its important role in the current global economic crisis. It will however come under increasing stress as rising urbanization accelerates the change in family structure towards nuclear family. Therefore, it is important to strengthen the formal social security system with a focus on broadening coverage and improving enforcement so that old persons and those effected by unforeseen circumstances are protected from falling into poor. Improving Labor Mobility: Broad-based economic growth is arguably the most important factor that contributes to fast poverty reduction in Vietnam over the last two decades. Looking forward, sustaining past impressive achievements in poverty reduction requires that the pro-poor pattern of growth or inclusive growth should be consistently pursued and enhanced. To this end, it is important to facilitate movement of laborers out of agriculture towards sectoers with higher productivity and promote better paid jobs there. For people who still stay on to work in agriculture, it is important to raise agricultural productivity as an important way of raising rural incomes. A way to enable people from poorer rural provinces to adequately participate in the growth process, which is geographically unbalanced for economic reasons is to improve geographic labor mobility and make the most out of rural urban migration as a key channel of rural-urban linkage. More importantly, this trend is bound to continue into the future, as Vietnams further integration into the world economy continues to produce the so called agglomeration effects in favour of big cities located closer to ports. So will continue the concentration of employment and associated income earning opportunities there. Studies (VASS 2009, Oxfarm 2009) show evidence that migrant poor still find it difficult to access social services, particular education at the lower and upper secondary levels, nor can thay access benefits under the targted programs. The existence of these barriers lowers spillovers from urban based growth to poverty reduction in rural areas. Furthermore, many low-skilled migrant and non-migrant laborers work in SMEs and household enterprises, and the latter continue to play an important role in employment generation in Vietnam for many years to come (Cling et al, 2009). They therefore need to

14

be supported, in the first instance by removing distortions and biases in favor of big SOEs at their expense. Raising agricultural productivity. Accelerated transition from agricultural to nonagricultural employment does not only help those who move out of agriculture to raise their incomes and associated remittances to home village, but also those who stay on the farm, thus magnifying its effect on rural development in general and rural poverty reduction in particular. The main reason is that Vietnam is arguably short of arable and productive land for agricultural production, and whatever can help to raise land per labor ratio would help to increase agricultural productivity. The rural-to-urban migration thus facilitates this efficiency-enhancing process in an equity-preserving manner, as land concentration in a country with the prevalence of land fragmentation helps to raise agricultural productivity. 7. Concluding remarks The changed circumstances facing Vietnam over the next decades and beyond will require an economy that can adapt quickly to change and economic model of growth to be inclusive that can deliver sustainable and equitable growth over the long term. A later-comer country can always learn experiences from the early-mover countries to shorten the development process and avoid the traps that block development. Some countries has been successful in reducing the catch-up time but others have failed. Getting out of poverty to become a middle income country is a hard process that is affected by many incidental factors, but many countries, including Vietnam, have succeeded. However, it is much more difficult to move to prousperity. Although having some vulnerabilities, Vietnam economy still has many strengths. It is important for Vietnam to have a catch-up strategy. This strategy will be different from that for moving out of less developed status. Perhaps, the fundamental difference is in development thinking, the development vision and the institution for development.

Reference Abramovitz, M. (1986). Catching Up, Forging Ahead, and Falling Behind. Journal of Economic History 46 (2): 385-406 Azariadis, Costas and Allan Drazen (1990). Threshold Externalities in Economic Developments. Quarterly Journal of Economics 105 (2): 501-526

15

Barro Robert J. (1991). Economic Growth in a Cross Section of Countries. Quarterly Journal of Economics 106 (2): 407-43 Chanda V., Osorio-Rodarte I., Primo Braga C (2009). Korea and the BICs (Brazil, India and China) Catching Up Experiences. Policy Research Working Paper 5101. World Bank. Commission on Growth and Development (2008). The Growth Report: Strategies for Sustained Growth and Inclusive Development. Cuong Le Van, Katheline S. and Tu Anh Nguyen (2009) With Exhaustible Resources, Can A Developing Country Escape from the Poverty Trap?. Unpublished. David Dapcie et al. (2008). Choosing Success: The Lessons of East and Southeast Asia and Vietnams Future. Cmabridge: MA: Harvard Vietnam Program. Fujimoto, Takahiro (2004). Japans Monozukuri Philosophy. Nihon Keizai Shimbunsha. Gill, I., and H. Kharas (2007). An East Asian Renaissance: Ideas for Economic Growth. Washington D.C. World Bank. Jan Eeckkout and Boyan Jovanovic (2007). Occupational Choice and Development, NBER Working Papers, 13686 Le, Sa Kim (2010). Avoiding Middle Income Traps: International Experiences and Implications for Vietnam. VASS. Lucas, Robert Jr. (2000). Some Macroeconomics for the 21st Century, The Journal of Economic Perspectives. Vol. 14, No. 1. Winter, pp. 159-168. Montiel, Peter and Serven Luis (2008). Real Exchange Rates, Saving, and Growth: Is There a Link?. Commission on Growth and Development. Nguyen Ngoc Anh, Nguyen Duc Nhat, Nguyen Thang (2010). Current Global Crisis, Fiscal Stimulus Package and Implication for Vietnam. Depocen Working Paper. Ohno, Kenichi (2009a). The Middle Income Trap: Implications for Industrialization Strategies in East Asia and Africa. GRIPS Development Forum. Ohno, Kenichi (2009b) Avoiding the Middle Income Trap: Renovating Industrial Policy Formulation in Vietnam. ASEAN Economic Bullentin Vol. 26, No. 1, pp.25-43 Oxfarm GB and ActionAid (2009). Participatory Monitoring of Urban Poverty in Vietnam: Sysnthesis Report. Hanoi, April.

16

Pincus Jonathan (2009). Vietnam: Sustaining Growth in Difficult Times. ASEAN Economic Bulletin Vo. 26, No. 1, pp.11-24. Vietnamese Academy of Social Sciences (2009). Participatory Poverty Assessment 2008: Synthesis Report. Hanoi, Feburary. Vietnamese Academy of Social Sciences (2010. Rapid Impact Monitoring of Global Economic Crisis: Reports for Various Rounds. May 2009, March 2010 and September 2010. Vietnamese Academy for Social Sciences and the World Bank in Vietnam (2010) Vietnam in the Next Decade and Beyond: Key Strategic Issues. Hanoi, October. World Bank (2009). Doing Business: Malaysia. World Bank (2005), Thailand Investment Climate, Firm Competitiveness and Growth Study as commissioned by the NESDB.

17