Learning from Vietnam’s Superb Export Performance
In 1976, when a post-war unified Vietnam emerged as a new nation, it was one of the poorest countries of the world with a per capita income estimated at around $101. The economy was completely shattered with infrastructure and livelihoods mostly destroyed. Agriculture was the main occupation. The economy sank further during the early years of unification owing to the disastrous economic policies of the second five- year plan (1976-1980) that sought to consolidate socialism in Vietnam. The focus of development strategy was to emulate the Russian model of collective agriculture and large-scale industrialization through command- and- control policies. Collective farming and command economy destroyed economic incentives for farmers and the private sector. Per capita income was estimated to have fallen to a mere $94 in 1981 and Vietnam required rice imports to meet its domestic food demand. The economy essentially was sustained through foreign aid and fiscal deficits. While some changes were made, the socialist policies continued well until 1986 and the economy remained in dire straits.
By1986, Vietnam fell into deep economic crisis with inflation in the 700% range and there was a massive shortage of food and other essential supplies. Large trade imbalances and fiscal deficits to prop up inefficient state-owned large-scale industrial enterprises rendered the macroeconomy unsustainable. Absence of private investment caused GDP growth to falter. The economic crisis ushered in deep-seated changes in economic policy making through the launching of the “Doi Moi” (renovation of the economy) strategy in December1986. The Doi Moi strategy essential saw a move to restore macroeconomic stability and spur economic activities by shifting away from a command- and- control economy towards a market economy based on incentives and use of market instruments. The implementation of Doi Moi was done pragmatically in phases to ensure buy in of the people and to avoid disruptions. The first phase of reforms was slow but steady that was implemented over the 1986-1989 periods. Following this initial first phase, the reforms gathered momentum since the 1990s. So, in essence, the emergence of modern Vietnamese economy dates to 1990. Stabilization and growth policies were combined with social policies to ensure that the benefits of economic recovery were shared equitably with the population.
Despite phased implementation, measures under Doi Moi constituted a comprehensive reform program where gains from the previous reform phase were consolidated in the next phase with new initiatives. The reforms were broad based and encompassed measures in the areas of monetary and financial sector policies, exchange rate and debt management, tax and fiscal policies, reforms of state-owned enterprises (SOEs), trade and investment policy reforms, agriculture and water management reforms, environmental reforms, infrastructure investments and trade-logistic reforms, technology adoption and R&D strategies, education and training reforms, health reforms and implementation of major social protection schemes. Of special note is the balance between investment, export, and growth-oriented policies with social policies to ensure that the benefits of growth are shared equitably.
A remarkable feature of the Vietnamese reform program was the focus on opening up the economy to foreign trade and investment. Early on, Vietnam decided to pursue aggressively an export-led growth strategy. To implement this, Vietnam removed most trade barriers, especially after its acceptance to the World Trade Organization in 2007, courted foreign direct investment (FDI) in all sectors but with emphasis on export-seeking FDI, and aggressively pursued bilateral and regional free trade agreements (FTAs). Through a combination of FDI and FTAs, Vietnam adopted an export production base that was strongly linked to the Global Value Chain (GVC). This link to FDI-supported GVC enabled Vietnam to quickly move into the sophisticated electronic market and within the space of 10 years Vietnam has now emerged as the world’s 2nd largest exporter of mobile phones and the 12th largest electronic exporter.
Early on, Vietnam decided to pursue aggressively an export-led growth strategy. To implement this, Vietnam removed most trade barriers, especially after its acceptance to the World Trade Organization in 2007, courted foreign direct investment (FDI) in all sectors but with emphasis on export-seeking FDI, and aggressively pursued bilateral and regional free trade agreements (FTAs). Through a combination of FDI and FTAs, Vietnam adopted an export production base that was strongly linked to the Global Value Chain (GVC).
Vietnam understands that the reform agenda is far from complete, especially in view of the dichotomy between the FDI-led enterprises and national enterprises. Within national enterprises, there is a duality among large capital-intensive SOEs and the multitude of small and medium enterprises (SMEs). Much of the export surge outside agriculture has been led by GVC-linked FDIs. Important spillover benefits of these FDI export enterprises for national enterprises are happening but Vietnam still has a long way to go to build domestic production capabilities, adopt modern technology, engage in R&D and product development, and build tech-savvy high-productivity skill base. Investments and reforms are underway in these areas, but more concerted longer-term efforts are needed. Nevertheless, Vietnam showed courage and far-sightedness in joining the high-tech global export frontier through a combination of FDI and GVC strategies despite limited domestic capabilities in R&D, production, and skills. The spillover benefits will bear fruit in the near future as Vietnam builds its own capabilities.
The analysis of Vietnam’s stellar export performance clearly demonstrates that this was no magic but instead it was anchored in strong policy reforms. Therefore, many important lessons of the Vietnam experience can be learned, and associated policies can be implemented in Bangladesh. Indeed, Vietnam’s rapid transformation of the export sector, from a low value primary product dependent sector to a high value, high performance, dynamic and diversified export sector that became the engine for rapid sustained GDP growth in the span of 30 years or so is an indication that economic development based on a modern economy is an achievable goal. Bangladesh itself has done well in many aspects of the development front, including on exports. Yet, in recent years, the export performance is facing major sustainability challenges, primarily owing to the strong dependence on a single commodity group (RMG) and few concentrated markets. With the LDC graduation knocking at the doors, there is an added element of urgency to diversify the export base and export markets and regain export growth momentum. Vietnam offers many useful lessons for Bangladesh in this matter. The main lessons from Vietnam in relation to Bangladesh summarized as follows.
1) Unfaltering commitment to export-led growth strategy
Since the early days of the adoption of the Doi Moi reform over 1986-1990, Vietnam put unwavering commitment to implementing an export-led growth strategy, with no ifs and buts. Once the strategy was adapted, there was no looking back. Policies, investments, and institutions were adapted appropriately to pursue this progressively. By and large, Bangladesh adopted and pursued an export -led growth strategy since the early 1990s. However, a closer review of progress in trade openness indicates tapering of liberalizing policies since the turn of the century, leaving Bangladesh with a relatively high degree of trade restrictiveness today primarily arising from the tariff regime.
2) Strong commitment to trade openness
Vietnam recognized that the successful pursuit of an export led growth strategy can only co-exist with a trade policy that lowered trade restrictions and avoid trade policy related anti-export bias. Accordingly, most export restrictions were removed and import duties were cut substantially upon WTO accession in 2007, and subsequently by entering into several regional and plurilateral FTAs that required staggered reduction of tariffs approaching 0-5% for members. These reductions engineered commensurate reductions in MFN tariffs as well. Overall, most export restrictions were removed and import duties were cut. Consequently, Vietnam has amongst the most liberal trade policy regime in the developing world.
3) Welcoming foreign investment without conditions
As a part of its export-oriented growth strategy, Vietnam adopted a very liberal foreign investment policy without setting significant local content requirements. It welcomed foreign investment in all sectors of the economy (agriculture, manufacturing, construction, and services). It took comprehensive policy reforms to improve the investment climate for foreign investment by reducing cost of doing business. Bangladesh also has a fairly liberal foreign investment regime with minimum of sector reservations and liberal facilities for income and profit repatriation. But the high cost of doing business as reflected in the low ranking of the WBG Ease of Doing Business rankings, weak inter-agency coordination in the delivery of investment related services, and even some local resistance to foreign investment in Bangladesh’s leading export sector (RMG), all together creates an overall investment climate that is not congenial to promoting FDI.
Bangladesh also has a fairly liberal foreign investment regime with minimum of sector reservations and liberal facilities for income and profit repatriation. But the high cost of doing business as reflected in the low ranking of the WBG Ease of Doing Business rankings, weak inter-agency coordination in the delivery of investment related services, and even some local resistance to foreign investment in Bangladesh’s leading export sector (RMG), all together creates an overall investment climate that is not congenial to promoting FDI.
4) Importance of participating in Global Value Chain
Vietnam took steps to get rapidly integrated in the global economy production process by participating in global value chains. This was facilitated by a proactive pursuit of FTAs and courting of FDIs. Vietnam is a relatively recent entrant to the GVC market around the late 2000. But its entry was strategic and targeted the hugely prospective electronics market that reached an estimated global export value of $2.5 trillion in 2019. Vietnam is now a leading manufacturer and exporter of electronics and in 2019 it was globally ranked as the 12th largest exporter of electronics. GVCs can be broken down further into three parts, upstream, midstream, and downstream activities. Vietnam presently is mainly integrated in the midstream part with lower value added. These include subassemblies, such as displays and special parts, and finished products such as consumer electronics, communications, and computers. This was a strategic decision forced on Vietnam by the various constraints it faced including skills, low domestic production capacities of parts and components, and various logistic and infrastructure constraints. But by taking advantage of the GVC chain and using the experience and knowledge gained through partnerships with FDI, Vietnam is now well placed to move up to the GVC upstream (R&D, design, retail, marketing).
5) Participation in bilateral and regional free trade agreements
Along with FDI and GVC, Vietnam’s aggressive pursuit of FTAs has been a core element of the open economy approach to development. Vietnam understood that an export development strategy cannot fully succeed without opening up more and having better access to the world’s leading export markets. Access to FTAs were further facilitated by Vietnam’s willingness to rapidly reduce barriers to access to its own market. The removal of most trade barriers to its own market lowered production costs and provided strong incentives for multinationals to invest and set up production centers in Vietnam. FTAs then ensured that Vietnam exports could enter leading export markets without high trading costs.
6) Sustaining sound macroeconomic management
Vietnam took strong measures at early stages to stabilize the macroeconomy and took steps to preserve macroeconomic stability at all stages of the development process. When Vietnam faced global crisis (East Asian crisis of 1997-98; global food and fuel price crisis of 2006-07; global financial crisis of 2008-09), it took swift measures to stabilize the domestic economy. While Bangladesh on balance has also maintained sound macroeconomic management, it is yet to address the simmering banking sector problems and the deepening fiscal crisis owing to tax revenue constraint. Tax revenue as a share of GDP has now fallen to 7.8% of GDP in Bangladesh, one of the lowest tax performances globally, as compared with 26% of GDP in Vietnam. This meager Bangladeshi tax effort clearly cannot sustain the long-term development momentum or even support the diversification of the export base owing to public investment needs in human development, R&D, infrastructure, and other trade logistics.
7) Instituting proper exchange rate management
Vietnam’s experience suggests the importance of maintaining proper export incentives by maintaining a flexible exchange rate and avoiding sharp appreciation in real terms. On balance Vietnam has managed its exchange rate flexibly and has succeeded to keep its exchange rate at a level that supported its export competitiveness. There has been a mild appreciation in recent years, but it has been induced by productivity improvements in the tradable sector (Balassa-Samuelson effect). In contrast, Bangladesh has let its exchange rate appreciate substantially in real terms since 2006. The appreciation of the real exchange rate between 2012-2020 has been particularly damaging for export incentives.
8) Securing improvements in trade logistics
Since the early years, Vietnam recognized the importance of efficient and low-cost trade logistics. It invested strongly in infrastructure (transport including ports and power) and reformed trade facilitation institutions. As a result, there was substantial improvement in all areas of trade logistics including customs clearances, port facilities, power supply and inland transport. Solid progress with trade logistics as indicated by the scores of LPI played a major role in facilitating Vietnam’s export growth. Thus, in the 2018 LPI ranking Vietnam is ranked at 39 out of 144 countries whereas Bangladesh is a distant 100 suggesting the huge performance gap in this area. Breaking down the LPI into its 6 components, the Bangladesh performance gap is substantial in all components, indicating that broad-based efforts will be needed here.
9) Strengthening innovation and technology adoption
Closely related to GVC, Vietnam’s strategic decision to enter the global electronic market is being supported with a policy drive to strengthen innovation and technology. While much of the production and exports in high-tech industries is based on FDI, domestic capabilities are being built up taking advantage of spillover effects from FDI. Investment in R&D is picking up steam to support innovation and technology development, skill base is improving through large investments in education and training, and a strong focus on ICT is enhancing knowledge acquisition, knowledge transfer, skill development and labor productivity.
10) Strengthening human capital and skills development
Strong investment in human capital is another critical factor for the growth of exports in Vietnam. Vietnam has historically been conscious of the importance of education. Even before the adoption of Doi Moi, investment in education and low gender bias were important aspects of social development. Following adoption of Doi Moi in 1986-1990 and the stabilization of the macroeconomy over the 1990-95 periods, Vietnam scaled up its human development program through large public investment in health, education, training, and social protection. Vietnam spends a massive 12% of GDP on human development as compared with 3.4% of GDP by Bangladesh. This is a massive difference in development policy management in general and export development in particular between Vietnam and Bangladesh. Progress on the human capital front has made it possible for Vietnam to rapidly train and deploy the labor force to work with multinational companies to acquire technology as well as high-end skills. While Vietnam still has a way to go, the platform has been laid for the buildup of the labor force to go into high-tech production activities.
In conclusion, Vietnam has demonstrated a more aggressive form of export-led growth based on the belief that its future prosperity towards high-income status depends on maintaining superior export performance. To the earlier paradigm of export-led growth (Korean and Chinese models), Vietnam has invoked the strong nexus of FDI-FTA-GVCs to leverage the world market for sustained rapid growth. There are strong policy lessons for Bangladesh no doubt.