The current challenges of Vietnam

VietNamNet Bridge - The current challenges show that Vietnam does not have much time left. If it does not urgently develop appropriate strategies, the country will fall into prolonged stagnation, a kind of middle-income trap.

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professor tran van tho, Waseda University, vietnam renovation, doi moi, vietnam

Vietnam has about 10 years before the stage of golden population structure ends.

1. The risk of getting old before getting rich

The issues of narrowing the gap of development, avoiding the risk of falling behind neighboring countries, have been discussed for a long time. But another matter that has not been well identified, as it proceeds quietly, slowly, is the change of population structure towards aging. This problem is taking place slowly but it is much harsher than many other issues because once it becomes reality, it is very difficult to cope with it.

Before the aging period of the population is the stage of golden population. During this stage, if Vietnam does not have strategies on promoting development robustly and get rich before the population structure changes, it will surely face the tragedy of getting old before getting rich. Vietnam is facing this challenge.

How does the golden population stage emerge?

Typically the change of the population of a country consists of four stages. At the early stage, both the birth and the death rates are high so the population barely increases or increases very slowly.

In the second stage, the death rate falls but the birth rate keeps high so the population grows rapidly. The characteristic of this stage is the percentage of young population (under 15 years old) is very high. Due to underdeveloped economy and very low per capita income, the country must pursue family planning to keep the population from quickly increasing in order to accumulate to start the development process.

In the third period, the birth rate reduces and the population grows less. The number of people who were born in the second stage becomes the workforce. During this period the percentage of people in the working age (15-65 years old) is very high while the ratio of people whose lives rely on others is low because the proportion of young population (0-14 years old) is lower, and the proportion of the elderly (over 65 years old) is also not high. This is the ideal stage for economic development so it is called “demographic gift” or “demographic bonus”, or we can call it the golden population structure.

In the 4th stage, the golden population structure passes and the aging population period begins (the percentage of the elderly (over 65 years old) rises highly). Now the ratio of people of working age gradually decreases and the number of dependent people increases, and the social welfare burden falls on the people of working age.

Due to the rule of changes of the population structure, the right development path of a country is that from the second stage; it has to prepare the preconditions for strong development in the third stage, for example, quickly popularizing basic education, building infrastructure, and perfecting the legal framework.

In the third stage, it should have a full employment policy, taking comparative advantages is labor-intensive industries. This period is quite long (about 50 years in Vietnam) so it is needs to promote education at higher levels to gradually shift the comparative advantage from labor-intensive industries to sectors that use highly skilled workers.

This is also the phase of preparation to welcome the 4th stage, for example, preparing the welfare schemes for the elderly, promoting research and popularization of science and technology to increase labor productivity, shifting economic structure to the higher level. Thus the economy will continue developing when the proportion of population of working age decreases.

Where is Vietnam on the ladder of population structure?

In early November 2013, the 90 millionth person in Vietnam was born. According to the United Nations (UN), Vietnam's population will reach 100 million in the second half of the 2020s, reaching the peak of 105 million in 2040 and decrease thereafter.

Currently, Vietnam ranks 14th in the world for the population scale. In the world, there are not many countries like Vietnam, which has a big population with the high unification of culture and language. If it has good institutions and strategies, Vietnam will certainly become a rich and powerful country.

Vietnam’s percentage of the population of working age started increasing in 1970 (51%) and will reach the peak (71%) in 2020. The ratio of the dependent population on the working population began reducing also in 1970 and will reach the bottom in 2020, then rise again from 2020. Therefore it can be said that Vietnam's golden population stage is from 1970 to 2020 (about 50 years), or even to 2025. Vietnam has only 10 years left.

Looking at the change of population structure, we will feel regret for Vietnam. Looking back at the history of Vietnam in the phase of golden population structure (1970-2020 or 2025), Vietnam has lost most!

In the wartime (1970-1975) and the pre-renovation period (1975-1985) Vietnam lost almost all in the sense of not taking advantage of the golden population structure for development.

In the first ten years of renovation (1986-1995), besides recovering agricultural production, Vietnam just started building the prerequisites for market economy institutions and integration.

In the next 10 years (1995-2005), the economy was relatively developed but not strong, (7%-8% annually compared to 9%-10% of many Asian countries in the stage of golden population structure), and the development quality (environment, income distribution etc.) also had many problems.

As for the current period (2006-2015), the growth rate fell (around 5.5%) and the performance was poor. Vietnam is struggling to renew the growth model, and restructure the economy, but these efforts are progressing very slowly.

Vietnam has about 10 years before the stage of golden population structure ends.

When the stage of golden population structure ended, the per capita income (based on 2005 prices) was $30,000 in Japan, $20,000 in South Korea and only $4,000 in Thailand and China.

Japan and South Korea developed fast in the stage of golden population structure so when they entered the aging population stage, they already were rich.

China and Thailand reached middle class status when they began getting old. They have to try hard in the later period to address the issues of an aging society.

How about Vietnam? The per capita GDP in 2013 was just $1,900 (if it is calculated based on prices in 2005, it will be only $1,000). From such a very low level, when the stage of golden population structure passes, what will be Vietnam’s per capita income?

If selecting 2020 as the landmark for the end of the stage of golden population structure and we suppose different development scenarios, we will see that even for the good scenario (from now to 2020, per capita income grows by 7% per year on average, or economic development growth rate is 8%), per capita GDP in 2020 (based on the prices in 2005) will be only $1,600.

If the stage of golden population structure ends in 2025, that figure only rises to $2,000, equal to 1/2 of China and Thailand, 1/10 and 1/15 of Korea and Japan.

The above analysis shows that Vietnam is facing an enormous challenge, which is the risk of getting old before getting rich.

To cope with this situation, it requires extraordinary efforts of responsible people. There is not much time left for Vietnam.

The only way to reduce the risk of "getting old before getting rich" is to urgently perform comprehensive institutional reform to mobilize resources (capital, land, labor) and efficiently use resources, so that Vietnam will soon enter the phase of sustainable and high development.

The policy of renewing the growth model and restructuring areas like public investment, state-owned enterprises and the banking system is the right direction, but it must be quickly and thoroughly implemented.

2. FDI can lead to a risk of economic division

Vietnam's economy is highly dependent on foreign direct investment (FDI), not only in terms of industrial production (FDI accounts for 50% in 2014) or exports (70% in 2014), but also ownership structure by enterprises with foreign capital (now mostly 100% foreign capital; the foreign joint venture projects with local investors are few, only 17% of the total number of FDI projects by the end of 2014) and very weak linkages between FDI and domestic enterprises.

The main reason causing the phenomenon is that domestic enterprises are too weak, and they cannot become partners of foreign firms. They are unable to supply components and intermediate goods for FDI businesses.

Another reason is the Vietnamese state has no policy to choose FDI matching, with the long-term development needs of the country.

If this situation does not change, the economy of Vietnam will be split into two separate areas. The FDI and the domestic sector, which are not unified to make the entire national economy. Technology and business knowledge of the FDI sector does not spread to the entire economy. These are some of the major challenges of the Vietnam economy at present.

3. Challenges of the low middle-income trap

Per capita income of Vietnam surpassed $1,000 in 2008 (currently about $2,000) so Vietnam has become a low middle-income country according to the standards of the World Bank (WB).

In fact, by definition, the average income has a very wide range, from $1,000 to $12,000, but the researchers when discussing the middle income trap usually surveyed the countries with per capita income of $5,000 or higher.

In other words, if the middle-income countries are divided into two sub-groups, the matter of the middle-income trap has so far involved only the upper middle-income countries. So how is it for the countries of the sub-group of low middle-income like Vietnam? Could these countries continue to grow to the level of high middle-income without having to worry about the middle income trap? Or can the trap come soon and the economy will stagnate in the long term at the level of $2,500 or $3,000? These questions are very important to Vietnam today.

We can say that without strong reform, especially if Vietnam does not adequately address corruption, Vietnam may fall into the low middle-income trap.

In the recent renewal period, the markets of production factors such as the capital market, the labor market and the land market developed slowly or developed badly, and the reform of state-owned enterprises (SOEs) took place slowly and not thoroughly.

Many small SOEs have been equitized or privatized, but the large SOEs were reorganized into economic groups and turned into interest groups which are protected and enjoy many privileges such as priority access to capital, land and investment information.

Meanwhile, private enterprises, especially SMEs, is difficult to have access to capital and land to build production facilities. The distribution and implementation of resources for public investment are also distorted by corruption and interest groups.

Prof. Tran Van Tho

from Waseda University (Japan)

professor tran van tho, Waseda University, vietnam renovation, doi moi, vietnam