Recently, the International Monetary Fund altered Vietnam’s economic growth forecast for 2022, revising it upwards by 6-7%. It was the only significant upward revision among Asian economies, and larger than other major regional economies such as India, Japan and China, whose projections were all cut by 0.7. at 1.1%. This week, the World Bank also revised its economic growth projection for Vietnam from 5.3 percent to 7.2 percent, the highest figure of any country in East and Southeast Asia.
Although surprising to many, this was predictable to those who have followed Vietnam closely over the past few decades. Quietly, Vietnam has gone from one of the world’s poorest economies to one of the most vibrant, while heightened great-power competition between China and the United States has only fueled its recent growth.
After the US Army retirement of Vietnam in 1975, the country’s economy experimented serious development problems resulting from the inefficiencies of a planned economy, the residual effects of war and the low rates of productivity that made it dependent on imports. Meanwhile, Vietnam invasion of Cambodia in 1979 to overthrow the Khmer Rouge government compounded these economic difficulties by redirecting resources to the war effort while making Vietnam vulnerable to international pressure, including the United States. punishments and the Chinese invasion in retaliation. These economic shortcomings and global tensions succeeded Vietnam’s economy is one of the poorest in Asia, with a GDP growth rate of 2.8% in 1985 and an inflation rate of 378% in 1986.
However, in 1986, the Vietnamese Communist Party (VCP) set out to transform its economy from a centralized model to one that uses market forces to allocate resources. The reforms, known as owe me, encouraged private industry, recognized private land rights and abolished collective farming. These changes, along with Vietnam’s military withdrawal from Cambodia in 1989, set the country on the path to one of the fastest and most impressive periods of economic development in world history.
When the CPV first implemented the reforms, Vietnam was one of the poorer countries in the region, with a poverty rate above 70%. In 2020, this rate had decreases to 5%, and more than 10 million people were lifted out of poverty in the 2010s alone. The country’s GDP per capita has also increase increased almost tenfold, from less than $300 in the 1980s to $2,800 in 2020.
As Vietnam’s economy has grown rapidly and because its labor standards have remained low, it has become a more attractive location for investment. It has also become a key part of the global supply chain for textiles, footwear and electronics manufacturing: textiles and footwear consist 18 percent of its exports in 2018, while electronic and electrical equipment accounted for 40%. Big companies like Adidas, Nike and Samsung, among many others, now have a manufacturing presence there. Unsurprisingly, Vietnam’s foreign direct investment (FDI) has grown up more than 200 times since 1986, rising from $40,000 in 1986 to approximately $15.8 billion in 2018. Meanwhile, its exports increase by 19% between 2020 and 2021.
More recently, Vietnam has benefited from great power competition between the United States and China regarding FDI. As tension between the United States and China increases, the Chinese Communist Party has adopted a less business-friendly posture, and China’s COVID-19 policy has become draconian and seemingly permanent, companies have begun to seek to diversify their supply chains to mitigate any disruptions. In 2021 alone, at least 11,000 foreign companies canceled their business registration in China, a stark contrast to the net increase of 8,000 foreign companies registered in 2020. Among others, companies like Apple, Samsung and Hasbro, which have large and longstanding manufacturing operations in China , decided to reduce their operations in the country.
Vietnam has benefited as large companies have moved their manufacturing there to take advantage of low costs, developed infrastructure, favorable business environment and success in mitigating the economic effects of COVID-19. For example, Foxconn, the prominent electronics maker that contracts with all the big tech companies, including giant Apple, announcement it would invest $300 million in a new factory in northern Vietnam. Google recently announced its intention to gap up to half of its Pixel phone production in Vietnam, while Microsoft used Vietnam for some of its Xbox production. A few years ago, these companies would have exclusively produced these items in China. Overall, Vietnam’s FDI increase 8.9% between January and June this year compared to the same period in 2021.
Yet Vietnam faces serious obstacles to its future growth. The most limiting factor is the size of the country’s population, which will never be more than a fraction of that of China. Similarly, Vietnam’s labor force is relatively unskilled, its energy supply struggles to keep up with demand, and although the country has made significant progress in infrastructure development, it remains ranks 47th out of 160 countries in this regard.
Nonetheless, Vietnam has made incredible economic gains over the past 40 years, making it an attractive destination for FDI. Moreover, given that the consequences of the growing divide between China and the United States negatively affect the ease of purchasing goods, and given Vietnam’s role as an attractive investment destination for China, we We should expect the country’s economic outlook to evolve increasingly positively in the years to come.