Overcoming Middle Income Trap in Vietnam
Vietnam’s Middle-Income Trap – Why is Vietnam stuck in the middle-income trap?
Developing economies in Southeast-Asia have achieved remarkable progress in recent decades. With an average growth of 6.4% GDP per capital p.a, the improvement of life expectancy from 71 to 76 years in the just 20 years, and the rise of 6% in university enrolment rate in the 2000s, Vietnam has successfully secured her position as one of the fastest growing economies in the world. However, with an ageing population, dependence on the primary sector of the economy, and application of a relatively backwards urbanisation-planning model, economic growth has been severely inhibited, leading to her fall into the middle-income trap. This essay will explore the causes of the current trap, the different perspectives on it, as well as offer some possible solutions.
Demographic
Facilitated by the strong economic growth, Vietnam is approaching the ‘golden population stage’. She is forecasted to enjoy a dependency ratio of less than 50, where every 2 economically active people only financially support one dependent. 25% of her population is aged between 10 and 24; with a median age of 29, Vietnam is afforded with the abundance of a young and skilful labour force, thus expanding the capacity of economy’s potential growth. Some researchers predict the country will stay in the stage for 30 years. However, in the long term, the proportion of Vietnamese over 65 will double from 7% to 14%; by 2050, a quarter of her population will be over 60. This has serious implications for its economy, including a shrinking labour force, an aggregating burden on government’s finances for pensions, greater spending on healthcare etc. Consequently, assuming the government retains the current tax rates combined with the already-fragile infrastructure, Vietnam may face further challenges with the decline in tax revenue. Even if the government opts to raise taxes, disincentives to work and investments in firms will be created, leading to a fall in productivity and growth. In order to ensure utilisation of the optimal population structure, the government must enhance job opportunities in the expanding manufacturing and service sectors in order to promote value-added job opportunities and social mobility. Only with policies that improve the infrastructure and long-term labour quality can growth be sustained, aiding Vietnam with the potential of escaping the middle-income trap.
Relationship with surrounding countries
Other than the responsibility of the government herself, it is also crucial to consider Vietnam’s relationship with other countries in order to offer a balanced perspective on the reasons of being trapped. One main issue is that Vietnam is heavily reliant on foreign direct investment (FDI) from developed countries, for example the setup of the South Korean multinational Samsung Electronics branch, Thai Beverage, Microsoft, Coca Cola in Vietnam just to name a few. Growth created is therefore artificial and relatively unsustainable. This is because there is a possibility that powerful multinational companies (MNCs) may exploit this heavy reliance on FDI and use their financial clout to influence local politics so to gain favourable laws and regulations. For instance, the rise of manufacturing is not the best for Vietnam’s environment, but in order to please the Western powers and stabilise growth, the country persists to invest in industry which is causing serious environmental degradation. The doubling of coal power plants has risen estimates of excess deaths by 20,000 per year by 2030 due to coal pollution, which is a fivefold increase from that of 2011’s 4,252. Moreover, it could be questioned whether Vietnam is receiving substantial benefits from these investments because MNCs usually gain ownership of raw materials with little evidence of wealth distributed throughout the locals. To add to that, respectable organisations such as Greenpeace have also written about the use of human trafficking in the Vietnamese fish farming industry, implying that the country still has a long way to go to solve its social issues before it can reach full economic subsistence and escape the middle-income trap.
The dual-sector model - "the Lewis model"
The Lewis model suggests Vietnam to focus on improving labour transition between the capitalist and subsistence sector in order to fully utilise the value-added, higher-skilled sector of the economy. The main problem of Vietnam at the moment is that it remains heavily based on the agricultural sector; it accounts for 46.9% of employment in 2013, whilst the industrial and service sector only account for that of 21.1% and 32.0%. It is not bad to have a dualistic economic model that focuses on both rural agriculture as well as urban manufacture; however, the reason why Vietnam remains stuck in the middle-income trap is because profits are often retained by the capitalist entrepreneur at the expense of workers, regardless of local firms of MNCs. As a result, income never trickles downwards to the workers. It could also be argued that urban expansion may have been driven by increases in capital rather than labour. This means the Vietnamese economy is becoming increasingly capital-intensive rather than labour-intensive. While it is expanding, less and less workers are required, thus inhibiting the growth in income and possibly even raising unemployment rates. Although urbanisation in targeted-economic districts can be beneficial, the lack of infrastructure has resulted in diminishing economic gains. In this case, the large floods of internal migrants have led to overcrowding in major industrial centres in Haiphong and Da Nang, Ho Chi Minh City. The rise of illegal slums and shanty towns that lacks sanitation or clean water and are vulnerable to landslides, which is significantly problematic for the country’s development. This is a sign of poor urban planning and significantly inhibits Vietnam’s transition from a middle-income country into a developed economy.
Considering the current hurdles, the most effective way for Vietnam to escape the middle-income trap is to promote rapid and sustainable economic development. Since labour productivity contributes about 89% to economic growth in 2017, it would be beneficial to allocate resources to match the demand and supply of labour as well as ensure enterprises can take advantage of technological transfers, so that structural changes such that labour market efficiency and productivity are improved. More precisely, both the government and entrepreneurs need to strengthen technical education and vocational training to global standards in order to utilise the effects of existing technological and scientific infrastructure. With government’s continued commitment to reforms, it is hopeful that economic growth will flourish and lead Vietnam out of the middle-income trap.