The post WWII economic history of Vietnam has been through many changes. These changes were due to the result of war, political ideologies, and natural resources. The most notable change was the division of North and South Vietnam. The economic division of North and South Vietnam had been in place since the colonial influences of France. Each division had its own economy with unique resources and industries. It wasn’t until 1954 that the North/South division became political – communist in the north and capitalist in the south (Spartacus Educational).
During the mid 1950s and into the late 1960s the Vietnamese Economy, which had been slated for heavy industrial production, suffered many major setbacks and losses. Most of these setbacks came as the result of war, when air-strikes destroyed a huge amount of infrastructure and manufacturing facilities. During the Second Indochina War, numerous acres of farmland were destroyed, shipping routes for raw materials were destroyed, and what was left of the labor force spent most of their time repairing bomb damage (Mongabay).
From the political division until the mid 1970s, South Vietnam relied mostly on foreign aid in order merely maintain an existence. This aid, most of which came from the US, developed a military, and constructed a large amount of infrastructure. Much like its northern counterpart, South Vietnam experienced extensive destruction during the Second Indochina War. Large amounts of farmland, forest, infrastructure, and cattle were destroyed along with an enormous human toll (Mongabay). The human toll for Vietnam was extremely significant. Vietnam lost about 1. million soldiers and civilians and lost another 1 million people who fled the country. Those who fled included many skilled workers and intellectuals. To further strain the economy of Vietnam, the Vietnam War left over 800,000 orphans, 300,000 people with disabilities who could no longer work, and nearly 1 million widows (The Vietnam War: Landrum Perspective). In response to the disheveled economy Vietnam’s communist party created a series of 5-year plans, the first beginning in 1976, which set economic strategies, goals, and plans for the country.
The first 5-year plan was developed for North Vietnam only, while the subsequent plans were developed for one unified communist Vietnam (Wikipedia). The second 5-year plan (1976-1980) set unrealistically high goals for agricultural growth, industry, and national income all with targeted rates between 10 and 20%. The VCP had a timeline of 20 years for full unified communist integration. This would give the company to develop both industrial and agricultural activities and provide the country with all resources necessary to run a communist country.
This plan proved to be too much for Vietnam to handle alone and required approximately $7 to $10 Billion in foreign aid from western countries, China, and Russia. During this period, Vietnam’s economy was dominated by small schedule capitalist production, and was deemed an overall failure (Wikipedia). When it came time to develop and implement the third 5-year plan (1981-1985), the failure of the preceding plan played a huge role. This plan was developed cautiously and it was implemented only one year at a time.
The leading objective of this plan was to develop agriculture by focusing on small scale production and “family” related economic policies. Additionally, the government gave individual families access to resources, science, and technology in order to cultivate their land in order to meet specific annual quotas. If the family came up short of the quota, they had to make it up in the next year, and if the family had a surplus, they could sell it on the open market. During this period, food production increased by 18% and investments in heavy industry increased by 17% (Wikipedia).
In 1986 Vietnam launched Doi Moi which was aimed at shifting from a centralized economy to a “Socialist Oriented Market Economy”. This eliminated agricultural collectives and allowed farmers to sell their products on the open market. It also encouraged the creation of private businesses and foreign investment, including foreign-owned enterprises (Wikipedia). While continuing to use 5-year plans, the VCP’s implementation of Doi Moi made solid progress. By the mid 90s, more than 30,000 private small businesses had been created, and the amount of people living in poverty had been cut almost in half.
Between 1985 and 2000, the economy of Vietnam was growing at a rate of about 7%, making Vietnam one of the fastest growing economies in the world. As a result of devastation and destruction related to war, Vietnam’s growth started in such a deep hole that it has taken decades to establish themselves as a viable and independently functioning country (Wikipedia). Current Economic System and Political System From 2000 to present, Vietnam has experienced exponential growth both in public and private commerce while substantially lowering poverty.
State owned organizations continue to produce 40% of the GDP, while the share of exports related to agriculture continue to decline (currently at 22%) (Central Intelligence Agency). Heavy industry exports have expanded to 40% and total exports have been growing by about 30% annually. Although the economy has been making great strides in these areas, the country has been devalued in recent years due to the view of political policies in the global economy, and instability due to the perception of corruptness in state administration (Central Intelligence Agency). Macroeconomics
Trends in Inflation From 1996 through the end of 2007 the inflation rate ranged from 0 to 10 percent. In 2008 this number peaked reaching a record high of 28. 2% in August of that year. The inflation rate has since declined falling to 8. 34% in May of 2012. This reflects that prices for Vietnamese consumers have increased by 8. 34% so far in 2012. In comparison, as of May 2012 the United States had an inflation rate of 1. 7%, to put these numbers into perspective (Trading Economics, 2012). Unemployment Since 1998, the highest unemployment rate recorded for Vietnam was 4. % which is viewed as relatively low. As of 2011, the unemployment rate was 2. 3%. Comparatively, the United States’ unemployment rate as of May 2012 was 8. 2% (Trading Economics, 2012). Demographics of Workforce Vietnam’s workforce is approximately 42 million, of which around 45% are younger than 35 years of age. The labor force is growing an average of 3. 5 – 4% a year with an average population growth of 1. 4% per year. Every year, 1. 3-1. 5 million new workers enter the market. Labor slowly continues to shift from agriculture to industry and service.
The Vietnamese workforce is known to have a strong work ethic, high literacy rate, and respect for those in authority. However, even with a high literacy rate of about 93%, there is a lack of training in the workforce (CIEM-DANIDA Project, 2009). Economic Growth Over the past few decades, Vietnam has been trying to better their economy and become more competitive internationally. Every year, their labor force is increasing by at least 1 million people, which is difficult to keep up with. In 2011, Vietnam began to shift its focus away from economic growth to stabilizing its economy by tightening fiscal and monetary policies.
The Vietnamese Government has found it difficult to stabilize the economy, while promoting economic growth. Vietnam’s weak foundation must be established before it can be built upon (Central Intelligence Agency). Gross National Product (GNP) As of 2005, the Gross National Product (GNP) of Vietnam was 51. 68 billion dollars (Students of the World, 2005). In other words, in 2005 the total value of the goods and services that Vietnam’s citizens produced was 51. 68 billion dollars. In contrast, Gross Domestic Product (GDP) for 2005 was 45. 4 billion dollars. In 2011, the GDP was 103. 71 billion dollars, therefore this number increased by 58. 17 billion dollars in 6 years (Trading Economics, 2012). While GDP and GNP are closely related, they differ because GDP does not include goods and services produced outside of a nation’s boundaries by that nation’s citizens and/or firms (CliffsNotes, 2012). Gross National Happiness (GNH) Every nation has its own perspective on happiness and what makes their people happy, how happy they are, and what can be changed. The Kingdom of Bhutan, for example, believes that society should not only be measured by materialistic factors, but by the happiness and fulfillment of the people.
According to the Happy Planet Index (HPI) developed by the New Economics Foundation, Vietnam ranked second place with an HPI score of 60. 4. Due to the economic conditions in Vietnam, it is safe to say that the HPI may be more of a reflection of the optimistic views of the Vietnamese people (VTP Editor, 2012). The Human Development Index (HDI) however, which considers health, education, and income as the main components of human development, ranked Vietnam 128 out of 187 countries worldwide, with a score of 0. 593 in 2011. This number has increased over time, which shows progress. In comparison, the United States had an HPI score of 37. (New Economics Foundation, 2012). The United States also had a HDI score of 0. 910 and ranked fourth place out of 187 countries (International Human Development Indicators, 2011). Social Economics of Vietnam Literacy Rate The literacy rate is defined as having the ability to read and write by the age of 15. Vietnam has a literacy rate of 94%.
Males rate moderately higher with 96. 1% versus 92% of the female adult population (Central Intelligence Agency). To add perspective the literacy rate of Vietnam, the United States has a literacy rate of 99% while Vietnam’s neighbor Cambodia has a literacy rate of 76. % and Thailand holds a literacy rate of 94. 1% (Unicef, 2010). Supporting this relatively high literacy for a developing country in a region where neighboring countries literacy rate is 18 points lower is the government investment in education at 5. 3% of its GDP in 2008. This ranks the country 49th in the world for government spending on education and equates to an average school life for males of 11 years and 10 years for females (Runckel, 2011). Income Distribution Vietnam’s income distribution by household has the highest 10% of the population earning 30. % of the wages while the lowest 10% of the population garners only 3. 2% for the year 2008 (Central Intelligence Agency). This has created an economic disparity with a concentration of the wealth near the top. For the same time period, the United States top 1% accounted for 24% of the US income. The bulk of the US income growth has gone to the top 10% with the lower 90% gaining little or shrinking from 2000-2007 (CIEM-DANIDA Project, 2009). The US is heavily skewed among demographics with blacks and Hispanics making up the majority of the low end wage earnings (Noah, 2012).
Cambodia’s top 10% of the population earns 30% of the wages, making it similar to neighboring Vietnam. The Gini coefficient is a measure of inequality where higher value represents greater intra-society inequality and lower mobility within a country. For the US in 2008, the Gini coefficient rose to 34 while Vietnam had a Gini Index of 37. 6 in 2008 indicating within Vietnam, it is more difficult for the next generation to be more prosperous than the previous as compared to the United States. Again however, Vietnam ranks higher than its regional neighbor Cambodia, who has a Gini coefficient of 41. (Central Intelligence Agency). Income distribution for Vietnam is similar to neighboring SE Asia countries and slightly more balanced than the US, although still skewed toward the top 10% of wage earners (Trung, 2002). Poverty Rates With Vietnam’s skewed income distribution, approximately 14. 5% of the population lived below the poverty line in 2010 (Central Intelligence Agency). It should be noted that despite not being considered poverty level, 43. 4% of Vietnam’s population survives on less than $2 USD per day; therefore, a large percentage of the population is not thriving from an economic standpoint.
Compared to the regional poverty level of 35% in Cambodia and Thailand at 9. 6%, Vietnam’s poverty level is of median level for the SE Asia region. The US poverty level of 15. 1% is only slightly higher than Vietnam’s published rate. With agriculture labor force being the largest occupation of choice at 48%, farmers contribute a higher level of workers to the poverty rate than the next two occupations of industry (22. 4%) and services (29. 6%) (Central Intelligence Agency). The country is highly dependent on its agricultural resources although a strengthening manufacturing sector is emerging.
Despite the poverty level observed today, it is noted that Vietnam has reduced its poverty substantially over the past two decades. The number of citizens living on less than $1. 25 USD per day fell from 64% in 1992 to 21. 5% in 2006. During this period of improvement, the country met the Millennium Development Goals to eradicate extreme poverty ahead of schedule (CIEM-DANIDA Project, 2009). Safety Nets To support the poverty dynamics, the Vietnamese government implemented social welfare programs. The welfare program in Vietnam primarily supports victims f the Second Indochina War (1954–75), such as individuals disabled in combat or by toxic chemicals and the families of fallen combatants. Beyond that, Vietnam has legally passed a social insurance system for citizens of old age, disability, and death; sickness and maternity; and work injury. The coverage is mandatory for state employees, non-state enterprises with more than 10 employees, and foreign-invested enterprises. These programs are considered to be on a smaller scale than the US social safety nets which may contribute to the higher percentage of Vietnamese living on less than $2 USD per day (Library of Congress, 2005).
Healthcare and Educational Systems While Vietnam is in the middle of major programs of poverty reduction and economic growth, the healthcare system is also in the midst of a transformation. Twenty years ago it was controlled completely by the Ministry of Health (public government) but today, the growth of the private sector and ongoing process of decentralization has led to a healthcare system more in line with the United States. Currently, the Vietnam government spends 7. 2% of GDP on its country’s healthcare. This is half as much compared to neighboring Cambodia (Susan J. Adams, 2005).
Despite the low GDP public spending, the balance is contributed through private sector expenditures which now make up 75% of Vietnam healthcare expenditures. The government spending for healthcare is relatively low for the region, placing Vietnam in the bottom quartile for government spending on healthcare (Susan J. Adams, 2005). The educational systems of the United States and Vietnam are similarly divided into five segments: preschool (pre-K to K), primary school (1-5), secondary school (6-9), high school (10-12) and higher education.
A focus of Vietnam for the last two decades has been to internationalize the education system and provide English as the primary business language. Competitiveness in being admitted to higher education is high with only about 20% of the students qualifying (Jones, 2006). Despite this competitiveness for higher education, educational attainment is less successful at the early stages. Although five years of primary school education are considered mandatory and 92% of eligible children were enrolled in primary school in 2000, only 2/3 completed the fifth grade (Library of Congress, 2005).
The cost of tuition, books, and uniforms and the need to supplement family income are the two main reasons for dropping out. As observed in other countries, there is a disparity between rural and city students. In some rural areas, up to 15% of the children are not enrolled beyond third grade, whereas nearly 96% of pupils in Ho Chi Minh City complete fifth grade. It is a continued goal of the government to increase educational access and Vietnam has demonstrated its educational focus through budget expenditures. Currently, education is 20% of all state budget expenditures, accounting for 5. 5% of the GDP (Runckel, 2011).
Comparative Advantage of Vietnam Natural Endowments The tropical climate provides productive growing seasons that support Vietnam’s agricultural focus. Flat land for farming in the south combined with hilly and mountainous regions up north create diversity in land and natural capabilities. Of Vietnam’s land, 20% is arable and can be used for growing crops while 73% is designated for cities. A second component linked to agriculture, timber harvesting and hydropower contribute to the natural endowments of the country but have also contributed to issues with excessive deforestation, soil degradation and water pollution.
In 2004 agriculture and forestry accounted for 21. 8% of Vietnam’s GDP (Library of Congress, 2005). Despite the historical agricultural focus of the country, natural resources of phosphates, coal, manganese rare earth elements, bauxite, and chromate are available to be mined. In additional to mainland mining, offshore oil and gas deposits have been identified, although some of the oil reserves are in contested waters with surrounding countries claiming drilling rights as well (Library of Congress, 2005).
Finally, with 3,444 km of coastline, not included islands, tourism is an important natural endowment to the local economy (Central Intelligence Agency). Available Labor Supply In 2011, the population was 91. 5 million people which ranked Vietnam 14th in the world. The age distribution is 0-14 years (25. 2%), 15-64 (69. 3%), and over 65 years (5. 5%). Of this total population, the labor force is estimated in 2011 to be 46. 5 million citizens; which ranks Vietnam 13th in the world for available labor. Additionally, the median age of the citizens is relatively young at 27. years. This supports Vietnam’s current agricultural labor requirements which are heavily manual and is attractive to growing the manufacturing segment evolving from international corporations setting up plants in Vietnam. Historically, the immigration level has been flat (-. 34 per 1,000 in 2011) indicating that labor resources must come from within (Central Intelligence Agency). Capital Stock & Labor Productivity The annual growth rate of the aggregate Vietnamese capital stock for the 10 year period ending in 2005 was 7 to 8 % per annum (James A Giesecke, 2008).
This annual growth rate has largely been contributed to the manufacturing and service sectors growing. In 2011, the GDP of Vietnam was 40% industry, followed by 38% services and 22% agriculture (Central Intelligence Agency). The growth that Vietnam has experienced is not correlated to labor productivity but rather an expanding labor pool and the structural shift away from agriculture has contributed to 2/3 of Vietnam’s GDP growth. One challenge that must be faced in the immediate future is that if the growth is to continue, Vietnam must increase the labor productivity by more than 50% to maintain its current growth rate.
Productivity in Vietnam is one half that of China and significantly lower than that of the mature United States workforce (Runckel & Associates, 2011). The labor productivity is increasing fast but considering a very small starting base, much progress is still required. From the three GDP contributors, industry is observing the greatest productivity gains while agriculture and service are still very manual and have experienced small gains in productivity (CIEM-DANIDA Project, 2009). Education Levels & Wage Trends
The government has made significant investments in education with city residents benefiting the most from those programs in place. Despite the investments and long-term educational goals, Vietnam has further progress to be made. In the region as a whole, higher education beyond middle and high school is not common, as the average school life for males is 11 years of education and for females it is 10 years (Central Intelligence Agency). For Vietnam, this produces a labor pool that is poorly educated, especially when compared to the United States, where in 2007, 70% of high school graduates began college the following year.
The low educational rates in Vietnam have nonetheless improved over the past 20 years since government investment and educational restructuring took place (Runckel, 2011). To coincide with the lower education rates, Vietnam is largely a poor developing country with a labor force that is willing to work for wages slightly above subsistence. This labor force is similar to its neighbors, Cambodia and Thailand. In Vietnam, minimum wage rates are adjusted yearly and currently range from $830,000 VND to $1. 55 VND million depending on the location of the employee (Runckel & Associates, 2011).
These rates rose 11. 5% in 2011, higher than some regional neighbors but lower than those wages raises observed in China. Over the past two decades, incomes have risen while poverty has been reduced (Library of Congress, 2005). Undoubtedly, the progress is slower than desired but measurable improvements are noted. In comparison to the US, wage trends are substantially lower in Vietnam and other SE Asia countries, making the region attractive to international firms manufacturing plants (CIEM-DANIDA Project, 2009). Government Policy.
Vietnam is a densely populated developing country that has faced many challenges over the last 30 years. Recovering from war and losing financial support from the Soviet Bloc has tested the economic stability of this country (Encyclopedia of the Nations, 2012). Vietnam has a centrally-planned economy that can be inflexible. This economy remains subjugated by state-owned enterprises, which still produce about 40% of gross domestic product (GDP) (Central Intelligence Agency). The Vietnamese Government has committed to increasing economic liberalization and international integration.
They have also implemented structural reforms needed to modernize the economy and to produce more competitive export-driven industries (Encyclopedia of the Nations, 2012). Following a decade long negotiation, Vietnam joined the World Trade Organization in January 2007. In 2010, Vietnam became an official negotiating partner in the developing Trans-Pacific Partnership trade agreement. This free trade agreement is a multilateral effort to further liberalize process within the Asia-Pacific Economic Cooperation, or APEC, consistent with its goals of free trade and investment.
The original objective was to eliminate 90% of all tariffs between member counties by January 1, 2006 and reduce all trade tariffs to zero by 2015. However, many argue that the initiatives are too restrictive because of intellectual property restraints beyond those already existing (Wikipedia, 2012) The economic reform process in Vietnam known as Doi Moi, or renovation, was initiated in order to shift the economy from a bureaucratic, central planning model to a more market-oriented, decentralized system.
Doi Moi reforms led to the development of what is now referred to as the Socialist-oriented market economy. Under the Socialist-oriented market economy the Vietnamese Government retains firm control over the state sector and strategic industries, but allows for private-sector activity in commodity production (Martin, 2011). This helped Vietnam establish diplomatic relationships with the capitalist in West and East Asia in the 1990s (The State Bank of Vietnam). Integral to the Doi Moi economic reforms was a downsizing of the government sector of the economy.
There was a substantial demobilization of the Vietnamese army, particularly after the end of the Cambodian conflict. By 1991, employment by Vietnam represented only 6. 2 percent of all employment in that country. Employment by the Vietnamese Government is no longer a large part of the economy and no longer able to generate new employment (Encyclopedia of the Nations, 2012). The Doi Moi process has led to the continuing deregulation of most prices and wages in Vietnam.
However, the Vietnamese Government maintains controls over key prices, including certain major industrial products such as cement, coal, electricity, oil and steel, and basic consumer products such as meat, rice, and vegetables. Recently the Vietnamese Government has tightened controls on various products to reduce inflationary pressure (Asean-China Free Trade Area, 2009). The Vietnamese government also maintains control over various wages. Government workers are paid according to a fixed pay scale, and all workers are subject to a national minimum wage law.
Workers for private enterprises, foreign-owned ventures and state-owned enterprises receive wages based largely on market conditions (The World Bank, 2012). Vietnam’s recent inflation has caused wages to rise. The Vietnamese Government is battling these wage increases with anti-inflation policies that will put a limit on future wage increases. The Vietnamese Government asserts that most of the prices and wages in Vietnam are market determined, especially the prices of goods exported to the United States. Vietnamese xports face strong competitive pressure from other Asian nations, such as Bangladesh, China, Malaysia, and Thailand. (Martin, 2011). Vietnam continues to move from agriculture to industry in terms of economic output. Agriculture decreased by 3% from 2000 to 2011 and industry increased by 4% in the same time frame (Asean-China Free Trade Area, 2009). Deep poverty has declined significantly, and Vietnam is working to generate jobs to keep up with a growing labor force (Martin, 2011). The global recession has hurt Vietnam’s export-oriented economy, with GDP in 2009-11 growing less than the 7%.
In 2011, exports increased by more than 33%, year-on-year, however the trade deficit remained high, prompting the government to maintain administrative trade measures to limit the trade deficit. Vietnam’s currency continues to decline due to an unrelenting trade imbalance. Since 2008, the Vietnamese Government has devalued it’s currency, the Dong, more than 20% (The State Bank of Vietnam). Vietnamese law provides for prohibitions and boundaries on foreigners working in certain business sectors and also provides for caps on maximum foreign involvement for shareholdings.
Foreign investors can only own up to 49% of shares in listed or public companies, except for in the banking sector, where the foreign ownership is limited to 30% (Asean-China Free Trade Area, 2009). Foreign investors or foreign-invested enterprises can apply for approval to invest in import-export operations. Vietnam allows legal imports of foreign goods and domestic goods, commission agents, wholesale, retail and other services, however with joint venture partners, the share of foreign capital must not exceed 49%.
In order to engage in import, export and distribution of goods of foreign investment, examination and approval are required to perform periodic reports to the financial situation. Investment approval departments must report quarterly to the Ministry of Industry and Trade to cancel, add, or modify investment permits (Asean-China Free Trade Area, 2009). Monetary Policy The Vietnam National Bank was established in 1950 by the Communist Party of Vietnam after a successful Revolution to free Vietnam from the French ran, Indo China Bank. The Vietnam National Bank was tasked with issuing anknotes, retrieving poor quality banknotes, managing state treasury to help increase revenue and reduce expenditure, unifying fiscal management, develop banking credit to serve commodity production and circulation, and to enhance state–owned economic sectors (The State Bank of Vietnam). The post Vietnam War era triggered a 10 year economic recovery and the need for a new unified banking system to replace the old banking system. The Vietnam National Bank of South Vietnam was nationalized and unified with the system of the State Bank of Vietnam.
The State Bank of Vietnam issued new banknotes for the Socialist Republic of Vietnam and revoked the old banknotes of both the South and the North (The State Bank of Vietnam). In May 1990, the Ordinance on the State Bank of Vietnam and Ordinance on Banking, Credit Cooperatives and Finance Companies, were enacted, shifting the operation means of the banking system of Vietnam from one-tier to a two–tier system. The State Bank of Vietnam manages currency trading, credit, payment, foreign exchange and is the only bank authorized to issue banknotes.
The State Bank of Vietnam administers monetary policy, by stabilizing currency value, and governing specific management policies of the second-tiered commercial banks (The State Bank of Vietnam). Vietnam’s exchange rate policies have varied from a system of multiple exchange rates, to a single fixed rate. Currently the exchange rate system incorporates an official rate that is adjusted daily to mirror the current market. The country’s exchange rate policy is implemented and administered by its central bank, the State Bank of Vietnam (NGUYEN, 2009).
The modern State Bank of Vietnam is a ministerial agency of the Government undergoing continuous reform in order to facilitate construction and further economic development. Vietnam’s growth-oriented economic policies have caused high inflation rates, reaching as high as 23% in August 2011 and averaging 18% for the year (Central Intelligence Agency). Although the shift in economic policy has led to rapid growth, it has also brought many of the traditional problems of market-oriented economies. Vietnam has struggled with inflation, fiscal deficits, trade imbalances, and other recurring economic phenomena familiar to market economies.
Vietnam is also facing a rising income and wealth disparity that is fueling discontent among Vietnam’s poor and lower income populace (Martin, 2011). In February 2011, Vietnam shifted its focus away from economic growth to stabilizing its economy by tightening fiscal and monetary policies. Vietnam’s economic priorities during 2011 were to stabilize economic growth at 6. 5% and contain inflation (The World Bank, 2012). In early 2012 Vietnam unveiled a “three pillar” economic reform program, proposing the restructuring of public investment, state-owned enterprises and the banking sector (The State Bank of Vietnam).
The State Bank of Vietnam has set objectives to bring State social policy credit sources into unity, reduce poverty, improve human resources and secure social protection. The State Bank of Vietnam’s development strategy is based on the orientation of the socio-economic development of the country, especially that of the social protection program. The State Bank of Vietnam is focusing on a developing a strategy in combination with the implementation of national targeted programs to build new rural areas and expand the coverage of beneficiaries in line with the further economic development of the country (The State Bank of Vietnam).
However, Vietnam’s economy continues to face challenges from low foreign exchange reserves, an undercapitalized banking sector, and high borrowing costs (Central Intelligence Agency). Trade Policy Vietnam is still relatively new to the global trade environment. For many decades, Vietnam had assumed a more protective roll regarding its foreign trade policy. During the years prior to and after the Vietnam War, Vietnam remained a closed command economy. It was not until 1986 that the Vietnamese Congress decided to open up trading opportunities in an attempt to improve Vietnam’s economy.
In the early 1990’s, Vietnam began implementing trade liberalization measures in an attempt to increase their imports and exports with other countries and become an open market economy. Now that Vietnam has opened its markets to other countries, Vietnam has experienced an incredible growth rate since adopting a new economic strategy (Athukorala, 2005). As a result of opening up their markets, Vietnam has witnessed their GDP increase by an average of 7% per year since the mid 1990s.
The top export destination for Vietnam’s exports of crude oil, textiles, footwear, seafood, coffee, rice, rubber, and coal were the United States, Japan, China, and Switzerland. Since this country is limited on land and other natural resources, they require imports from other countries to enhance their country’s increasing standards of living. Vietnam relies on importing machinery parts, refined petroleum products, pharmaceuticals, textile inputs, plastics, and chemicals in order to enhance economic development (Austrailian Government ).
Vietnam’s open market trade policy has revolutionized their economy, and made Vietnam a competitive force within the global economy. Comparative Advantage (regarding trade) Vietnam possesses many comparative advantages that allow their country to be competitive producing goods and services throughout the world. According to the article “Vietnam’s international trade regime and comparative advantage”, the country has a large comparative advantage compared to the rest of the world with the production of cereals, coffee, crude oil, fish, hides, rubber, and wood.
Additionally, Vietnam is becoming more productive at manufacturing consumer products such as furniture, textiles, clothing, and travel goods (Trung, 2002). Location is another comparative advantage for the country of Vietnam. Since Vietnam is located in area where most countries are witnessing a dramatic increase in economic growth, Vietnam is positioned to reap the benefits of developing strategic alliances with the many developing economies within Southeast Asia (Asia-Pacific Economic Cooperation, 2012). Vietnam’s lower employee wages are also a comparative advantage compared with many westernized countries.
For example, many foreign companies are hiring Vietnamese laborers to build products for their company in an attempt to increase corporate profits. In order for Vietnam to remain competitive, Vietnam needs to ensure its comparative advantages remain strong due to their limited resources (Vietnam Trade office in the USA, 2008). Additionally, Vietnam must continuously compete against rival ASEAN and APEC countries in the immediate area for selling goods and services on the global market (Association of Southeast Asian Nations, 2012). Trade Organization Memberships
Vietnam has only recently become a member of globally recognized trade organizations. In 1995, Vietnam joined the Association of South East Asian Nations (ASEAN) and the ASEAN Free Trade Area (AFTA) (Athukorala, 2005). The ASEAN trade organization includes Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. This trade agreement between these countries is similar to the NAFTA between the US, Canada, and Mexico. This agreement benefits the member countries due to the close proximity each country shares with each other.
Furthermore, these ASEAN member nations are becoming more competitive with respect to producing high quality products at low costs to businesses; therefore, they are able to put pressure on countries within this region that have had a monopoly on low cost labor for many years such as China (Association of Southeast Asian Nations, 2012). Vietnam is also a member of Asia-Pacific Economic Community (APEC). Vietnam joined APEC in November 1998, and became the 21st member of this trade organization (Asia-Pacific Economic Cooperation, 2012).
This trade organization exposed Vietnam to a larger market for their products where they could export and import goods, especially since this organization included almost every major nation along the Pacific Ocean. The APEC organization accounts for approximately 40% of the world’s population and approximately 54% of the world’s GDP (Wikipedia, 2012). In 2001, Vietnam signed a Bilateral Trade Agreement with the United States. This agreement has affected Vietnam dramatically and helped the country to develop and become more prosperous. In 2002, one year after the agreement was signed Vietnam exports to the United States totaled $2. 7 billion, in 2010 that number increased to $18. 6 billion. This is over a 500% increase in exports as a result of signing this agreement with the United States. As a result of being in this bilateral agreement with the United States, the United States has become the second largest customer for Vietnamese exports (U. S. Department of State, 2012). Vietnam was recently authorized to join the World Trade Organization (WTO). On 11 January 2007, Vietnam became the 150th member in the WTO. As a member of the WTO, Vietnam has equal rights to take other member countries to court for unfair business practices.
In fact, at the time of this writing, Vietnam is filing suit against the United States for anti-dumping of frozen warm water shrimp exported from Vietnam. This case has not been settled; however, Vietnam’s acceptance and trade practices have increased dramatically over the past two decades as a result of Vietnam opening up its markets and joining local and global trade organizations (World Trade Organization, 2011). Protection Policies Since converting its economy structure from a closed command economy to an open market economy, Vietnam has reduced its protectionism instincts.
During the years after the Vietnam War, this reclusive country remained unaffected by the changing world around them for many years. Now, Vietnam has opened up its borders to promote free trade with other nations in an attempt to grow their economy and enhance the standards of living for its citizens. Even though Vietnam promotes free trade, it still has programs implemented in an attempt to protect their own economy from outside imports. For example, Vietnam has import quotas in place to limit the amount of imports coming into the country that might compete against indigenous businesses (Athukorala, 2005).
In addition to the import quotas, Vietnam also rewards local businesses with tax breaks if the business exports. As a result of this tax, many local businesses that export products abroad are rewarded, while at the same time, businesses that produce for the domestic market are punished with a higher corporate tax rate. According to Athukorala (2005), firms exporting 50-80% of production are taxed at 20% for 12 years, while businesses that export 80% or more are taxed at a rate of 15% for 15 years. Vietnam has been proactive with respect to establishing import quotas and tax benefits.
This has resulted in self imposed trade barriers for countries trying to import goods into Vietnam (Athukorala, 2005). Current Trade Account Balance According to the Vietnam Office of Statistics (2012), Vietnam typically runs a trade deficit. At the end of calendar year 2011, Vietnam had a trade deficit of $9. 5 billion. During 2011, they had exports that totaled $96. 26 billion and imports that totaled $105. 77 billion. Vietnam’s proactive protection policies should slowly increase their exports over the next decade, while at the same time reducing their dependence on imports from other countries.
The Vietnam Statistics office describes how Vietnam’s exports growth rate has increased by approximately 33% over the last year, and their imports have decreased by 25% (2011). It will not be long before Vietnam incurs a trade surplus if Vietnam can maintain this type of export growth rate, while at the same time reducing their dependence on imports. Conclusion Since the recommencement of trade relations in the 1990s, Vietnam has quickly risen to become an important trading partner for the United States. Bilateral trade has grown from about $220 million in 1994 to $18. billion in 2010. Vietnam is the second-largest source of U. S. clothing imports, and a chief source for footwear, furniture, and electrical machinery. Shifting to a market oriented economic system has lead to this brisk economic growth. However, along with the growth of bilateral trade, a number of issues of common concerns have emerged. Workers’ rights, enforcement of intellectual property rights laws and regulations, and the countries exchange rate policies have all been points of contention between the Vietnam and the United States.
Vietnam does have extensive natural resources that have sustained and grown the GDP of the country historically; however, to continue that growth, the country must increase worker productivity as the economy shifts to industry and services driven GDP. The country does have a growing labor force that is relatively young to support this needed productivity shift. Additionally, 20 years of government driven education reform has resulted in some success, especially in the citizens of larger Vietnamese cities.
The Vietnamese government wants to promote productive and equitable employment, rewarding higher wage increases to those higher educated employees. From a social economic perspective, Vietnam has made substantial improvements to its literacy rate, income distribution, and poverty rates through their continued efforts in education. When compared to regional countries, the level of improvement and current ranking of its citizens from literacy to poverty, it can be stated that Vietnam is improving faster than its neighbors in these educational and wage earning metrics.
The largely privatized healthcare system provides a balance of Eastern and Western medicinal treatments that has shown improvement in functionality. Vietnam is an emerging country and will have disparity and setbacks along the way. With an openness and dedication to the importance of education and globalization, Vietnam seems poised to continue its social economic trends in a positive direction.
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