Economy of Vietnam

Economic growth

The 6^th National Party Congress in 1986 of the Communist Party of Vietnam marked a historical turning point in renewing thinking and economic development orientation, and replacing the centrally-planned economy with bureaucracy and a subsidy mechanism by a socialist-oriented market economy. After 20 years of reform, there have been impressive economic results.

Upon the completion of the five year plan in the 1986-1990 period, basic successes were the conversion of mechanism of the management and economic development, the restoration of production and trade, and the control of inflation. The average GDP growth is 4.4% per annum
After the five year period from 1991 to 1995, the economy basically overcame the sluggishness and depression and achieved high and comprehensive growth rate with average GDP growth rate of 8.2% per annum. In the 1996-2000 period, despite impacts of the financial-economic crisis in the region, the economy still maintained the economic growth rate of 7% per annum. The economy continued to achieve a positive rapid growth in the five year period of 2001-2005 with the average GDP growth of 7.5% per annum. In the years 2006-2007, with the available foundations and international economic advantages, Vietnam’s economic growth rate continued to rank 2^nd in Asia (the GDP growth rate is 8.2% in 2006 and 8.5% in 2007, equivalent to about 71.2 billion USD) The GDP per capita has ceaselessly risen from 289 USD in 1995 to 836 USD in 2007.

In these recent years, accumulation-consumption balance has been improved in the orientation of increasing the accumulation ratio for development investment with the average increase rate of the total accumulation fund of 9.5% in the 1996-2000 period and 11.2% in the 2000-2005 period. The national finance has been improved. The mobilization rate for State budget rose from 15.1% in 1990 to 24.4% in 2005, which is higher than the economic growth rate and price increase rate. The ratio of development investment in GDP increased rapidly from 17.3% in 1990 to 38.9% in 2005 and 41% in 2007, in which the highest growth rate was in the private sector. This shows the internal potential and the improvement of the business environment.

Infrastructure has also been considerably improved. To 2005, the total length of national roads was 17,300 km, and that of railway was 3,400km. The total capacity of ports has been increased by 880 million tons in the 10 year period from 1996-2005. The total capacity of air transportation reached 12 million pessengers per annum. Electricity sources and transmission systems achieved a comprehensive development with the total source capacity of 11,440MW, in which hydroelectricity accounts for 42.5%, thermoelectricity occupies 57.5%. The commodity electricity output reached 46 billion kWh in 2005. The irrigation systems have been upgraded in regions, which helps increase agricultural productivity. The rural infrastructure has been improved. Till now, almost 100% of communes have got grid electricity, roads to the center, telephones, health clinics, house of culture, and education system from nursery to secondary school. Material facilities for services such as tourism, postal service, telecommunication, transportation, finance, banking, insurance, retail distribution has developed rapidly.

Inflation has been relatively high in recent years (2004: 9.5%, 2005: 8.4%, and 2007:12.6%). This is mainly due to the fact that the Government has been pursuing growth objectives by large scale investment and has increased the monetary supply and that Vietnam’s economy is rather more open in comparison to the development level. As most of Vietnam’s imported goods are inputs for production (about 60%), the rising prices of production materials lead to considerable increase in the domestic price.

Foreign investment has drastically increased. Sines 1988, there have been 9,500 foreign investment projects with a total registered capital of 98 billion USD. 8,590 projects are still active with the implementation capital of 43 billion USD, accounting for about 16% of the annual total social investment capital.  The foreign investment sector which occupied about 17% of GDP, contributed more than 1.5 bilion USD to State budget in 2007, and attracted 1.2 million direct labors and millions of indirect labors. There has been a non-stop increase in the commitments of aid to Vietnam. To 2007, the international sponsorship community has commited to provide Vietnam with the ODA of 37 billion USD. 26.2 billion USD has been contracted and 17.9 billion USD has been disbursed. Besides, every year, there has been an increase in the amount of overseas national currency exchange officially transferred to the country from 285 million USD in 1995 to 5.5 billion USD in 2007. These capital sources have made great contribution to the development of the economy, the improvement of living standards and the increase investment among citizens.

Economic structure

The economic sector structure has been gradually transformed towards industrialization, modernization. Comparative advantages of each sector, each region have been developed to improve the efficiency and quality of development. The ratio of agriculture, forestry and fishery to GDP has dropped from 38.7% in 1990 to 27.2% in 1995, 24.5% in 2000, 21% in 2005 and 20.2% in 2007, whilst that of the industry and construction has been up from 22.7% in 1990 to 28.8% năm 1995, 36.7% in 2000, 41% in 2005 and 41.6% in 2007. The service sector has changed from 38.6% in 1990 to 44% in 1995, 38.7% in 2000, 38% in 2005 and 38.1% in 2007.

Agricultural sector still plays an important role in Vietnam’s economy. Though there has been a non-stop decrease in the ratio of agriculture to GDP, 60% of population still works in this sector. The growth rate of agriculture, forestry and fishery was 2.4% in the 1991-1995 period, 4.3% in the 1996-2000 period and 3.8% in the 2001-2005 period. The greatest success of this reform is the reduction in the rate of poor households to below 15% by shifting rural economic structure, concentrating on diversifying sectors of high added and export value, and applying advanced science and technology. The productivity of plants and livestock has ceaselessly increased. Vietnam is now one of the world’s leading countries in exporting agricultural products such as rice, coffee, tea, pepper and cashew.

Industry has growed drastically in recent years with the average growth rate of 11.3% in the 1991-1995 period, 10.6% in the 1996-2000 period, and 10.2% in the 2001-2005 period. With this growth rate, industry has made a very important contribution to the general economic growth. This results from the fact that Vietnam has mobilized resources to develop industries with high potential and competitive advantages like agricultural and fishery product processing, textiles, footwear, shipping buiding, mechanic-electronic device assembling, means of transportation and wooden products, and so on, concentrated on developing infrastructure and energy industries such as electricity, oil, and coal, and so on, constructed a comprehensive system of industrial zones, export processing zones as well as encouraged different economic sectors to develop industry, attracting foreign investment.

Vietnam’s service sector has had some obvious changes in terms of both quality and quantity. Its growth rate was 7.2% in the 1991-1995 period, 5.8% in the 1996-2000 period, 7% in the 2001-2005 period. Being endowed by the nature, Vietnam concentrates on developing tourism as a key economic sector.  Despite certain objective difficulties, the average growth rate of foreign tourists to Vietnam was 10.7% in the 2001-2005 period. Tranportation and telecommunication and postal services have developed at high pace. In recent years, with a suitable legal framework in line with the roadmap of integration and market opening commitments finance, banking, insurance and stock market has thrived.

The regional structure transforms towards promoting comparative advantages. Regional economic role has been given more attention and there have been mechanisms to encourage the economic structural transformation within each region. Three key economic zones including the North, the Central and the South have initially developed their potential and advantages and have achieved a rapid growth. The contribution of key economic zones to the country’s GDP has risen from about 50% in the 1996-2000 period, to 63.2% in 2005. They have also contributed about 70% of the export turnover and 73% of State budget revenue. Difficult economic zones have little by little risen with the support from more developed zones.

The labor structure transforms towards reducing the labor rate in pure agriculture and increasing labor rate in industries and services. The ratio of labor in agriculture, forestry and fishery to the total social labor has dropped from 73.1% in 1990 to 71.3% in 1995, 65.1% in 2000, 57.2% in 2005 and 54.6% in 2007. Industrial labor has increased from 11.2% in 1990 to 11.4% in 1995, 13.1% in 2000m 18.2% in 2005 and 19.6% in 2007. Labor in services has risen from 15.7% in 1990 to 17.3% in 1995, 21.8% in 2000, 24.6% in 2005 and 25.9% in 2007. According to the preliminary report of 2007, the unemployment rate in urban areas stays at 4.64%.

Trade and payment balance

From the late 1970s to the early 1990s, Vietnam’s trade largely depended on Soviet Union and East European counterparts in the Council for Mutual Economic Assistance (SEV). When SEV separated, Vietnam started to carry out the trade liberalization process. International economic activies have gained some achievements especially opening export market to many regions around the world, participating in ASEAN, AFTA and APEC, normalizing the relations with the USA, signing the bilateral trade agreement with the USA and joining WTO, and so on.

The total export turnover has risen rapidly. The average annual growth rate was 17.8% in the 1991-1995 period, 22.1% in the 1996-2000 period, 17.9% in the 2001-2005 period and 22.3% in two years 2006 and 2007. The total export turnover was 17.2 billion USD in 1991-1995, 51.8 billion USD in 1996-2000, 110.8 billion USD in 2001-2005, and 88.4 billion USD in 2006 and 2007. Vietnam’s main export goods are crude oil, rice, processed seafoods, rubber, coffee, ready-made garments, footwear, and so on. Some of Vietnam’s agricultural products have taken leading positions in the world. In recent years, many industrial and handicraft products have been mentioned in the list of products with high export turnover such as wooden products, electronics, electric wires and cables, bicycles and spare parts, arts and handicraft products . The ratio of export value to GDP has risen from 18.9% in 1988 to 68.2% in 2007.

Together with the economic growth rate, the import value is also at a high growth rate. However, Vietnam has achieved certain success in controlling the import growth. The average annual growth rate of the total import turnover has dropped from 24.3% in the period of 1991-1995 to 15% in the period of 1996-2000, 19% in the period of 2001-2005 and risen to 30.8% in 2006 and 2007. The total import turnover was 22.7 billion USD in the period of 1991-1995, 61.6 billion USD in the 1996-2000 period, 130 billion USD in the 2001-2005 period, and 107.6 tỷ USD in the 2006-2007 period. Vietnam’s main import goods are machines and equipment, petrol and oil, iron and steel, fertilizers, cars, motorbikes, plastic, fabrics, garment and textile accessories, leather, chemicals and medicine, and so on. The deficit of Vietnam’s trade balance was 5.5 billion USD in the 1991-1995 period, 9.8 billion USD in the 1996-2000 period, 19.1 billion USD in the 2001-2005 period. There has been an increase in the deficit of the two recent years, making it equivalent to that of 5 years ealier (19.2 billion USD).

According to statistics, the current total foreign debts of Vietnam is about 14-18 billion USD. Both the absolute debt and the rate between debts and GDP have decreased in comparison with the year 2000 as reimbursement is being done by the Government. At present, about 90% of these debts is ODA, the commercial debts are very low. The ratio of debts to GDP was 39% in 2000 and decreased to 37.4% in 2001. This ratio was 34% in 2002, 2003, 35.8% in 2005, 36.6% in 2006. The average ratio in the five year period from 2001 to 2005 was 35.6%.

Economic management

The renovation in the State’s economic management in the last 20 years started with the change in perceptions and application of economic rules, awareness of developing economic models for the transitional period, i.e, the socialist-oriented market economy, the delopment of an open market, and the State’s managing role. During the 20 years of renovation, the State of Vietnam has gradually perceived and implemented the tasks of orientating development, providing and sustaining the legal framework for the economy, providing services and infrastructure for economic and social activities, sustaining the stability of macro-economy, doing re-distribution to ensure the combination of economic growth and social equality, the economic development and ecological conservation, and supervising to ensure the legal obedience and encouraging a healthy development of the market.

With a sound orientation in the social stability and economic development plan in 1991-2000, Vietnam basically overcame the socio-economic crisis which last for years. The economy has gradually been changed from being centrally-planned to being planned based on value added measures, trade balance, foreign investment, international payment balance, budget deficit solution and market demands. State owned enterpsises take initiative in developing business plans. Development programs for sectors and regions are comprehensively created with detail objectives and implementation sources.

Being aware of the role of the legal system on the economic development and international economic intergration, after 1986, the Law on Foreign Investment was enforced in 1988. Especially after the enforcement of the new Constitution (1992), a number of important legal documents were enacted including Labour Code (1995), Civil Law (1996), Cooperative Law (1996), State Budget Law (1996), State Bank Law (1997), Credits Organization Law (1997), Trade Law (2005), Enterprise Law (2005), and Investment Law (2005) and so on.

One of the basic changes that the reform has brought about is the guidline and policy to develop a multi-sector economy, in which the private ownership is legally acknowledged (together with state and collective ownership), to restructure the economy with many equally-developing sectors, to reorganize and reform state-owned enterprises, to encourage the development of the private sector in many forms, to create good conditions to attract foreign investment, to encourage the joint-venture between domestic and foreign investors. The sectors that used to restrict the participation of individuals or foreigners have been lessened. To date, every economic component can do business in almost all agricultural, industrial and service sectors.

Source: Ministry of Planning and Investment, General Statistics Office of Vietnam

Tags: Vietnam economy, Vietnam investment consultancy