Taking Stock, December 2011 : An Update on Vietnam's Recent Economic Development

Abstract

Prospects for the global economy have become less certain in the second half of 2011, with significant increase in downside risks. Developing countries in East Asia are growing faster than developed countries, but they too are facing challenges due to a combination of reasons including: slower expansion in demand in developed countries; the impact of global uncertainty on investor sentiments; natural disasters; and the withdrawal of stimulus policies. Vietnam's growth slowed in 2011 compared to 2010, though it is still expected to reach around 5.8 percent. The external sector has remained relatively stable. The current account deficit declined in 2011, as export performance outpaced imports and remittances grew robustly. Both import and export values saw a dramatic rise, mostly because of higher commodities prices. External debt remains sustainable, as the current account deficit was more than covered through medium-term capital inflows that are largely non debt-creating (foreign direct investments) or contracted on concessional terms (official development aid). Foreign direct investment inflows continued at a steady pace, although new commitments declined. International reserves increased in the first half of the year while the Vietnamese dong benefitted from a period of relative calm. In the last quarter of the year, however, exchange rate fluctuations increased due to volatility in gold prices, deepening uncertainties and the seasonal increase in demand for foreign currency as the year end approaches. In the longer run, Vietnam's ambition to maintain high growth into the next decade will require as bold a set of reforms as the one adopted with Doi Moi. The challenge is arguably more difficult than the previous one, and few countries in the world have accomplished it. Vietnam is endowed with a young and hard-working labor force. This is a vital asset to meet the country's ambitious goals, if the country manages to equip itself with relevant skills, and match it with necessary capital. It also needs a level-playing field to maximize its potential. As people become more educated and production becomes more sophisticated, demands for predictability, trust and a level playing field will grow. Transparency is a critical element in this. Concentration of economic power in a small number of large firms undermines efforts at creating a level playing field. Large firms and industries that circumvent rules to their advantage are promoting corruption, and undermining efficiency, which damages the country's potential. The governance challenges are complex, but Vietnam's medium term outlook will be much better if they are addressed sooner rather than later.