Vietnam—Gearing Up for the Next Transformation Part 1 of 2
By Christine Lagarde, Managing Director, IMF
National Economic University, Hanoi, March 17, 2016
As Prepared For Delivery
Good morning—Chào các bạn
I would like to thank Prof. Dr. Tran Tho Dat and the National Economic University for inviting me—and thank you, the students, for this wonderful welcome.
It is a great pleasure to be here at this prestigious flagship university—which has been central to Vietnam’s development over the past six decades. Today NEU graduates can be found in leading positions in both government and business.
These outstanding men and women have helped to achieve a remarkable transformation: in a single generation, Vietnam moved from being one of the world’s poorest nations to lower middle-income status, from a heavy reliance on commodities to manufacturing excellence, from economic stagnation to relentless dynamism.
This is a reflection of bold government policies and savvy business decisions. Above all, it reflects the incredible energy, ingenuity, and love of learning of the Vietnamese people.
As the great 15th century scholar and poet, Nguyen Trai, once said: “Learning is the key for everyone, whoever he is, either a teacher or a worker.”1
After a remarkable 30-year period, Vietnam is now facing another pivotal moment of transformation.
I would like to discuss this with you from three perspectives:
First, what are the global challenges and regional opportunities for Vietnam?
Second, what are the key ingredients of Vietnam’s next transformation?
And third, how can your generation—and how can you personally—contribute?
1. Global Challenges and Regional Opportunities
Let us start with the big picture. Over the past three decades, Vietnam has become one of the world’s most open economies—a nation that has benefited tremendously from international trade and foreign direct investment that have helped drive growth and poverty reduction.
Greater openness, of course, means a greater sensitivity to external shocks. In fact, there are several major economic transitions that are on the minds of policymakers right now.
They include China’s move to a new growth model; the prospect of commodity prices remaining lower for longer; and the tightening of financial conditions in many countries due to rising U.S. interest rates and a stronger dollar.
Understandably, policymakers are concerned—because these transitions have contributed to rising financial market volatility and sharply decreasing trade flows. They have also held back global growth.
Earlier this year, the IMF cut its global growth forecast for 2016—to 3.4 percent—and our latest assessment shows once again a weakening baseline and a further increase in downside risks.
There is a similar picture here in Asia, where we project a further easing of economic growth this year. Of course, even with declining momentum, Asia remains the world’s most dynamic region, accounting for 40 percent of the global economy. Over the next four years, this region is expected to deliver nearly two-thirds of global growth.2
What does this mean for Asia’s economies? Can they sit back and enjoy the ride? I am afraid not.
China’s growth transition
Consider the profound impact of China’s shift from an investment-driven growth model to one that relies more on domestic consumption. This transition is necessary because it will lead to more sustainable growth and benefit both China and the world.
In the short run, however, it leads to slower growth. And this slowdown creates knock-on effects on other countries—through changing trade patterns, lower demand for intermediate goods and commodities, and increased volatility in currencies, equities, and bonds.
Some of Asia’s economies will be heavily affected. Think of machinery exporters, steel producers, and exporters of oil and other commodities.
Indeed, while you and your families are benefiting from cheaper petrol, Vietnam’s government is facing a widening budget deficit and growing public debt—partly because of lower oil revenues.
Vietnam can seize the day
The good news is that there are also huge opportunities.
For example, China’s continuing retreat from less sophisticated, labor-intensive manufacturing may create major opportunities for its neighbors in the Mekong region—including Cambodia, Lao, Myanmar, and Vietnam.
The IMF has been analyzing these regional effects—and we will soon be releasing a new report3 that shows what countries in the Mekong region can do to take full advantage of China’s transition.
For Vietnam, we see two big benefits: in addition to winning market share at the lower end of the value chain, Vietnam has a unique opportunity to sell more final goods, such as cell phones and computers, to Chinese consumers. Last year, for instance, Vietnam’s exports to China grew almost twice as fast as its total exports.
Still, with China accounting for only a tenth of Vietnam’s overall exports, the biggest prize is the global market. This is why the recently signed Trans-Pacific Partnership (TPP) could have a transformative impact.
According to some estimates4, this trade deal could lift Vietnam’s GDP by a cumulative 8 percent, and exports by 30 percent, over the next 15 years.
How can this be achieved? By boosting Vietnam’s exports to key markets, such as the United States and Japan, and by encouraging further strong inflows of foreign direct investment.
More broadly, TPP could provide critical impetus for much-needed economic reforms, especially in state-owned enterprises. Stepping up these reforms will not only allow Vietnam to meet its TPP requirements, but it will be essential for its future prosperity.
2. Vietnam’s Next Transformation
This brings me to my second topic—the policy recipe for Vietnam’s next transformation.
To my mind, it is fitting to use the word “recipe” in a country that has the world’s best cuisine. My personal favorite is a fragrant serving of Phở—a dish so iconic that it seems to capture Vietnam’s joie de vivre in a single bowl.
Why is this relevant right now? Because managing an economy is akin to preparing a perfect serving of Phở—both require a well-balanced mix of ingredients.
Indeed, Vietnam has now reached a point where new powerful ingredients are needed to safeguard macroeconomic stability and lift tomorrow’s growth and living standards.
Yes, current growth is projected to remain solid this year—at around 6.3 percent. But growth since 2008 has been slower than in the preceding two decades. This means that Vietnam has not been able to match the growth in per capita income that East Asia’s most successful countries experienced at a similar level of development.
Without a big reform push, Vietnam will find it extremely difficult to catch up.
Why? Because Vietnam is on track to become one of the world’s fastest-ageing societies, with a working-age population whose share in the overall population has already started to decline. This demographic shift could become an additional drag on growth.