Vietnam was an economic star in 2020 as it managed to contain the COVID-19 pandemic while maintaining one of the highest growth rates in the world. While GDP growth was only about 3 percent, about half the normal growth rate of 6 to 7 percent, most countries were dealing with declining production levels.
But the government — perhaps convinced that its testing, track and quarantine measures could continue to contain the virus — has been slow in getting vaccines. When the Delta variant proved to be more transmissible and not as easy to administer, there was a battle to obtain vaccines. This effort became more important after Omicron emerged.
###: Vietnam is expected to become a new production center of the world
As a result, 2021 was a difficult year as closures made life difficult and GDP slowed to 2.6 percent. The increasing supply of vaccines eventually fueled more normal activity in the last few months of 2021. Vietnam’s GDP contracted 6 percent in the third quarter before rebounding in the fourth quarter.
The trade surplus, a source of past tensions with the United States, halved in 2021 to a modest $4 billion. The nominal exchange rate of the Vietnamese dong against the US dollar appreciated modestly and foreign exchange reserves grew to four months of imports. Inflation was less than 2 percent.
The big question now is whether these developments will tarnish Vietnam’s hard-won reputation as a reliable supplier and alternative to China for manufactured exports? Despite plant closures, exports rose 19 percent to an astonishing $336 billion in 2021 — while GDP was just $271 billion in 2020 and grew only slightly in 2021. † The rapid increase in vaccinations – about 60 percent fully vaccinated by early 2022 – suggests that plant closures in 2022 will be modest.
But labor shortages could be a bigger problem as workers fear another round of factory closures and travel restrictions. Even in 2019, there were problems with hiring as the growth of the workforce slowed. Global pressure to reduce risk and increase supply chain resilience is another headwind. While the momentum of past FDI pledges will keep export growth high in 2022, questions remain about later years.
A side effect of Vietnam’s rapid export growth is a lag in domestic value added in exports. Much of the work was simple montage rather than developing a dense network of supply industries that would make foreign direct investment “stickier” as wages rise and labor supply tightens. Progress in this area has come from FDI suppliers following their “parent” companies, not local ones.
The COVID-19 pandemic slowed progress on this front as fewer new ventures were opened and many more were temporarily closed. Many companies that are still in business are financially weaker and will need time to gather resources to improve machines, training and marketing. On the other hand, domestic companies managed to increase investment nominally by 7 percent, while government and foreign direct investment fell. This is surprising given the 1.2 percent real growth in services activity and the 4 percent real growth in manufacturing.
The prospects for 2022 are good. As factories and services approach normalcy, production will increase, much like in China in early 2021. Most forecasts are for real GDP growth of 6 to 7%. Tourism should start to recover from the drop of more than 95 percent from 2019 levels. Exports should grow by about 15 percent and the trade balance will remain modestly positive. Inflation will remain low and the dong will continue to rise slightly against the US dollar. This projection assumes that border closures in China will ease, allowing for more normal trade flows than in 2021.
While economic relations with the United States have improved, continued crackdowns on independent journalists and online commentary could cause tensions. This could affect future FDI flows and prompt Vietnam to diversify from its reliance on simple assembly FDI – a trend driven by labor shortages and rising wages. It could also limit the influx of high-tech FDI, allowing Vietnam to transform its economy into “Industry 4.0” and improve productivity.
The quality of FDI will have to be central, along with increased efforts to improve education and training. Reliance on larger and well-connected domestic companies is likely to increase, with uncertain results. While management at the top is dynamic, there is a risk of taking on more than is easy to digest. Vulnerability to cyber-attacks is another pressing issue.
Another point is the ongoing adaptation of PDP-8, the new plan to expand power production. It has moved from a balanced approach with more renewable energy to a strong proponent of coal. Plans to increase transmission have been scaled back and this will hurt any foreign direct investment in green energy – indeed, solar growth is limited in 2022. This change is inconsistent with Vietnam’s COP26 statements.
Vietnam’s GDP per capita in PPP terms was over $11,000 per capita in 2021. This is a huge gain from 2000, but it is still poorer than most of the larger ASEAN economies and faces significant environmental problems in the Mekong Delta and cities. Rising wages relative to productivity, pressure to restore exports and falling technical ratings for its employees pose medium-term challenges for Vietnam.
Through David Dapice†
David Dapice is a senior economist in the Ash Center for Democratic Governance and Innovation at the John F Kennedy School of Government, Harvard University. This article was first posted here†