Can Vietnam be the new Singapore?

Summary

The discussion centers around Vietnam's economic evolution, focusing on its relationship with the US under Trump's tariffs and its shifting domestic policies. Vietnam's export-led growth model, heavily reliant on foreign direct investment, faces challenges due to rising labor costs and the potential impact of tariffs. The country's private sector is expanding, but domestic businesses remain largely excluded from the growth. The conversation delves into the broader question of how Vietnam can transition from a low-middle-income to an upper-middle-income economy, examining the difficulties of climbing the development ladder and the evolving role of manufacturing and services in the country's economic future.

Takeaways

• 😀 Vietnam is facing challenges due to its dependence on the export-driven economic model, particularly with the U.S. tariff issue under Donald Trump's administration.
• 😀 A major portion of Vietnam's GDP (about 30%) relies on exports to the U.S., making it vulnerable to the impact of tariffs and international trade policies.
• 😀 Vietnam's General Secretary, Tolam, has introduced significant domestic reforms, aiming to make the bureaucracy more efficient and less risk-averse, encouraging innovation and private sector growth.
• 😀 Vietnam is shifting its focus from state control to greater private sector participation, with ambitions to increase the private sector's contribution to GDP from 50% to 70%.
• 😀 The export-oriented economy has been built on low labor costs, but as wages rise and labor costs become more competitive, this model is beginning to lose its effectiveness.
• 😀 The growth model, which has relied on rural labor moving to urban factories, is losing steam as agricultural job destruction slows and wages rise, making it harder to maintain the same pace of development.
• 😀 Vietnam's economic growth, while impressive, may have reached its peak, and the country faces challenges transitioning to higher-value-added industries to maintain progress.
• 😀 Unlike China, Vietnam struggles with a smaller domestic market, which limits its ability to rely on internal consumption for growth, making it more reliant on foreign direct investment.
• 😀 The government has been actively incentivizing foreign investment with tax breaks, land access, and low-cost labor to boost industrial production, though this has resulted in minimal involvement of local businesses.
• 😀 The future of Vietnam’s economic growth will depend on its ability to shift towards higher-value industries and services while finding ways to absorb the labor force that is no longer needed in traditional manufacturing jobs.

Q & A

Why is Vietnam particularly interesting in the context of its relationship with the U.S. under Donald Trump's administration?

Vietnam's relationship with the U.S. is important because of its vulnerability to U.S. tariffs, particularly under the Trump administration. The U.S. is a major export market for Vietnam, with approximately 30% of its GDP tied to exports to America. Vietnam has skillfully navigated this relationship, ensuring its economic growth despite potential threats like tariffs.

What is the potential impact of U.S. tariffs on Vietnam's economy?

If the U.S. imposes tariffs, especially the proposed 46% on Vietnam, it would severely disrupt the country's export-driven economic model. This would threaten its foreign direct investment (FDI) and manufacturing sector, which relies heavily on assembling goods for export to the U.S.

How has Vietnam's leadership under Tolam differed from previous administrations?

Tolam, the general secretary of the Communist Party of Vietnam, has made significant changes by restructuring the Vietnamese bureaucracy. He has shifted away from a focus on strict control and stability, instead promoting innovation, risk-taking, and a greater role for the private sector in the economy.

What is the key difference between Tolam’s approach and previous leadership in terms of bureaucracy and private sector involvement?

Under Tolam, there is an increased tolerance for bureaucratic mistakes and a focus on innovation and entrepreneurship. This contrasts with the previous leadership's focus on control and stability, as well as its tough anti-corruption campaign that made it difficult for businesses to operate smoothly.

How has Vietnam's export-driven model benefited from foreign direct investment (FDI)?

Vietnam's export-driven model relies heavily on FDI, with many foreign companies assembling goods in the country using cheap labor and low production costs. This has allowed Vietnam to leverage tax breaks, land access, and other state incentives to attract global multinationals looking to use the country for the final stages of manufacturing.

What challenges does Vietnam face with rising labor costs?

As labor costs rise in Vietnam, its advantage in low-cost assembly is diminishing. The country is no longer as competitive compared to other low-income nations, such as Bangladesh or Cambodia, which could threaten its economic model that relies on cheap labor to assemble products for export.

How does Vietnam's domestic market size limit its economic growth potential?

With a population of around 100 million, Vietnam's domestic market is relatively small. Unlike China, which has a much larger population, Vietnam cannot rely on a massive internal market to drive economic growth. This limits its ability to transition from an export-driven economy to one based on domestic consumption.

Why is it difficult for Vietnam to achieve upper-middle-income status by 2045?

Achieving upper-middle-income status is challenging because Vietnam's export model, based on low labor costs and assembly, is starting to lose steam. The country faces competition from other low-cost labor markets, and its ability to transition to higher-value industries or domestic consumption is still uncertain.

How does Vietnam's experience compare to other Asian economies like China and Singapore?

Vietnam's situation is similar to China in terms of political model but differs in its smaller domestic market. Unlike China, which can rely on its domestic market, Vietnam is more dependent on foreign direct investment and exports. It's more akin to Singapore in this regard, focusing on attracting global capital and high-value investment.

What role can advanced manufacturing and services play in Vietnam's economic future?

As the traditional export-driven model loses momentum, Vietnam may need to focus on developing higher-value industries such as advanced manufacturing, robotics, and services. This could provide employment for its population, but it remains unclear whether these sectors will be able to absorb a large portion of the labor force, especially with the rise of automation.