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Is Vietnam the new China?

Aggiornato il: nov 14

(by Nicolò Rizzo)

by Perry Tse

1. Introduction


After the Cold war, while Francis Fukuyama was proclaiming the “end of history” with the final victory of the capitalist block and the disintegration of the communist one, it was not difficult to envisage the upcoming fall of popular democracies.

At the end of the 1980s, in Europe and in Asia, the domestic and geopolitical environment of many of them appeared to be fragile. For example, in 1989, the Tiananmen Square protest broke out in Beijing. At that time, many analysts argued that the Chinese communist system was about to collapse, whereas this protest meant a gradual but resolute strengthening of the communist leadership of the People’s Republic of China (PRC), as a series of measures, such as the education reform, were adopted.

Meanwhile, Vietnam remained a poor country, with a GDP per-capita of barely $917 at purchasing power parity (PPP). The economy was devastated by the long conflicts throughout most of the 20th century, and the country was heavily dependent from USSR aids.

Yet, it is surprising that while experiencing tragic crises, the PRC and Vietnam were able to adopt reforms that challenged the widespread idea that economic openness necessarily leads to democracy and increased protection of civil and political human rights. In fact, Vietnam and the PRC are the only two examples of popular democracies that have managed to keep their political system almost unchanged, while partially liberalizing their economies. Other communist countries have not succeeded in this achievement or have not even tried: for example, North Korea still maintains a strict control over both the political and economic life of the country. Furthermore, Vietnam's growth has been so robust, especially following the outbreak of the trade war between China and the United States, that many commentators are wondering whether Vietnam will be able to replace China as the "factory of the world" or not.

To understand whether this guess is well founded or not, we will first present the evolution of Vietnamese politics since the Doi Moi reforms, before focusing on the current situation of the Vietnamese economy and on the determinants of its success. We will finally conduct a static analysis to examine the weaknesses of the Vietnamese economy, and a dynamic analysis that considers the strategic interactions between Vietnam, the US and the PRC.

2. Vietnam in transition: Doi Moi reforms


When the Communist Party of Vietnam (CPV) succeeded in reunifying the country in 1975, its leaders knew that much remained to be done. Already in 1948, Ho Chi Minh, the hero of the struggle for independence first against the French, then against the Japanese and again against the French and the Americans, stressed the need to win the battles against "poverty, illiteracy and the invaders".

Having beaten the invaders, in 1975 the IV Congress of the CPV adopted the first five-year plan (1975-1980) to reduce poverty and illiteracy. Faithful to the orthodox communist doctrine, the plan included measures such as the collectivization of land, the nationalisation of all productions and the priority of heavy industries. However, these measures did not lead to the desired results. Thus, after another failed five-year plan, the leadership was forced reconsidered the economic strategy, and the VI Congress of the CPV in 1986 adopted the "Doi Moi reforms", namely "renewal".

These reforms meant tolerance of small private economic entities, focus on light industry and on consumer goods, as well as openness to international trade and foreign direct investment (FDI), including those from the West. This approach was very similar to that promoted by Deng Xiaoping in the PRC since the Third Plenum of the 11th Chinese Communist Party Congress in 1978. In other words, Vietnam was transitioning to a socialist market economy. [1]

Such events necessarily have significant political repercussions. In fact, a precondition to attract foreign direct investments (FDI) from the West, was to cooperate with countries such as the United States, with which a bloody war had been fought until no more than 13 years earlier. At the same time, Vietnam had to be integrated into the international economy and politics, thus overcoming the binary logic of the blocs and its dependency on Moscow, to emerge from the isolation into which the country had fallen due to the occupation of Cambodia.[2]

The Paris peace agreements in 1991 not only normalised the relations between Hanoi and Phnom Penh, but they also fostered Vietnamese relations with the PRC and other regional and western countries. In fact, thanks to the agreements, the country could finally diversify its diplomatic relations by no longer flattening itself on the positions of Moscow, at a time when Russia was going through a period of transition and crisis.

Together with the improvement of the political and diplomatic context, the economy could really take off and start attracting FDI. As early as November 1991, Vietnam and the PRC re-established diplomatic relations and reopened their borders to trade. In 1995 Vietnam became a member of the Association of Southeast Asian Countries (ASEAN), and in 2007 it finally became a member of the World Trade Organization (WTO), two moves that meant a strong reduction in trade barriers.

3. Vietnam nowadays


Since the 1990s, following foreign policy measures and the adoption of the socialist market economy model, Vietnam has achieved outstanding results, confirming and strengthening its role as a major player in Southeast Asia. These results are all the more remarkable if we consider that they were achieved thanks to a heavy government intervention in the economy, in contrast with the principles of the Washington consensus recommended by the International Monetary Fund, which nevertheless assisted the country throughout the reform process.

According to World Bank’s data, during the 1990s the Vietnamese economy registered an annual GDP per-capita growth rate of 7% on average between 1990 and 1999, of 5,6% between 2000 and 2009, and of 5,2% between 2010 and 2019. In other words, the GDP per-capita at PPP jumped from barely $917in 1990 to $8373 in 2019, with a variation of more than 800% in just 20 years.



Figura 1. World Bank: Vietnam’s GDP per-capita at purchasing power parity (1990-2019)

Figura 2 World Banke: Vienam’s GDP per-capita growth rate at purchasing power parity (1985-2019)

Shifting from the GDP per-capita to the total GDP, we note that it increased from $6,4 billion to $261,9 billion, growing by 43 times. Moreover, in 2019 Hanoi registered a GDP growth rate of 7%, the second highest in the region for the second year in a row, right after Cambodia (7,1%) and before the PRC (6,1%).


Figura 3 World Bank: comparison of PRC and Vietnam’s annual GDP growth rate (1986-2019)

Such an impetuous economic growth has stimulated the curiosity of many economists and political scientists, who have investigated its causes and provided explanations. None of them can fully explain why Vietnam has grown at such a rapid pace. Nonetheless, each explanation identifies some determinants of this phenomenon:


1. Late developer advantage: derived from Gerschenkron’s argument according to which less developed economies can grow faster by using their technologies and by learning from past experiences of developed ones, to skip some development phases and optimise the use of national resources[3];


2. Confucian values: thanks to which countries already part of the Sino-centric system (Japan, South Korea, PRC and Vietnam) attach particular importance to education and share common institutions (traditions, written and unwritten laws that influence economic choices) particularly suited to foster stability and prosperity[4];


3. Gradualism: as an economy in transition, Vietnam has had the opportunity to better manage its opening process to international trade, unlike the economies of Eastern Europe and Russia, where the socialist system has collapsed, forcing governments to take drastic measures that in the short run led to recession and high unemployment rate;


4. Attraction of FDI: fostered by low wages and advantageous legislation;


5. Stable macroeconomic figures: low inflation rate (2,8% in 2019), stable exchange rate between the US dollar and the Vietnamese Dong, low unemployment rate (2% in 2019);


6. Participation in numerous commercial agreements: these guarantee a considerable degree of integration into the world economy and strengthen investors' expectations in the further opening of Vietnam. The latest trade agreement is the free trade agreement with the European Union, in force since July 31, 2020;


7. Stable domestic and regional political environment: the end of regional conflicts in Indochina contributed to the stability and prosperity not only of Vietnam, but also of other regional countries, including Cambodia and Laos.

4. Will Vietnam replace China in the global supply chain?


Recently, it seems that a new factor should be added to those listed above to explain Vietnam’s economic growth: the outbreak of the trade war between the United States and the PRC in 2018. Following the increase in tariffs on Chinese goods, the volume of trade between the United States and Vietnam has surged, from $ 58834.2 billion in 2018 to $ 77490.4 billion in 2019.

The COVID-19 pandemic then further exacerbated the Sino-American rivalry and reinforced rumors of a decoupling between Beijing and Washington and a new relocation of Western and Japanese companies, this time from the PRC to Vietnam. It is not uncommon to read articles listing Vietnam among the winners of the trade war. However, Hanoi has significant structural weaknesses, which make it difficult to replace the PRC.

4.1. Structural weaknesses of the Vietnamese economy


Undoubtedly, the most obvious difference between the economies of Beijing and Hanoi is the scale. Vietnam simply cannot match the size of the PRC: its workforce is 7% of China's. Consequently, Vietnam does not possess a large enough number of workers to host all foreign companies that own plants in the PRC. The size of the outlet market is also significant: Vietnamese consumers are "just" 96 million, compared to 1.3 billion beyond the Great Wall, and still have a low per capita income.

Apart from quantitative problems, it is impossible to ignore the qualitative problems of Hanoi’s workforce, which generally has low skills, and for this very reason attracts FDI especially in labor-intensive sectors, which nevertheless are less profitable. Obviously, profits are not the only problem. In fact, as workers' wages grow, the prices of goods produced in the country will also rise, compelling the Vietnamese authorities to rethink the development strategy to position the country at the top of the global value chain. To this aim, Vietnamese government should promote the growth of capital-intensive sectors. Only in this way will Hanoi be able to compete with other economies in the long term, given its relatively high openness to international trade and its participation in various free trade agreements.

4.2. Vietnamese economy’s weaknesses: its relations with Washington


The dynamic analysis must be added to the static analysis, since the latter considers only the structure of the Vietnamese economy and assumes that other countries do not change their behaviour: a hypothesis that is difficult to verify in reality. In particular, it is necessary to take into account the interaction of Hanoi's economy with the top 2 world economies: the United States and the PRC.

The United States is the first market for Vietnamese exports, but Washington's trade deficit with Hanoi has been steadily increasing since 1997. In 2019, it reached the peak of $55.8 billion dollars, attracting the attention of President Trump. In May 2019, Hanoi was included in a list of countries suspected of manipulating the exchange rate by the US Treasury Department, while at the G20 in Osaka in June 2020, President Trump defined Vietnam "the single worst abuser of everybody", threatening hefty tariffs. The Vietnamese government has responded to these threats in a conciliatory manner so far, signing a memorandum of understanding with Washington on imports of liquefied natural gas and allowing greater investments in the country.

However, it is not excluded that frictions of an extra-economic nature may arise. Indeed, Washington continues to criticise the human rights situation in Vietnam. In 2019, the US Congress passed the "Vietnam Human Rights Act", requiring that the trade policy pursue the expansion of the information sector in Vietnam. In this case, the link between trade and politics is particularly evident.

Moreover, history plays an important role in geopolitics. Given that victory in the war against the United States is part of Vietnam's identity and national pride, it is likely that Hanoi’s authorities will try not to be overly compliant to Washington's demands, if they threaten to undermine national interest or prestige. This raises the question of how to secure full support from the United States in the strategic field to contain the assertiveness of the PRC in the South China Sea, while preventing any divergence on trade from having a negative impact on defense matters.

4.3. Vietnamese economy’s weaknesses: its relations with Beijing


Despite the ideological affinity, various geopolitical reasons may push the PRC to thwart the Vietnamese economic growth, if it does not meet the exigencies of Beijing. In particular, it is not in China’s interest to overshadow the possibility that even one country could benefit from the Sino-American trade war. Chinese diplomacy has always been clear and consistent in stating that "cooperation between Beijing and Washington benefits the world": the emergence of winners would weaken the Chinese government's discourse.

Beijing has a range of economic levers at its disposal to hinder the country's growth. For example, Vietnam is heavily dependent on the influx of raw materials and semi-finished goods from the PRC, imported to be processed and re-exported as finished goods. Not to mention tourism: a decrease in tourist flows from China would certainly damage the Vietnamese economy, as Chinese tourists represent an important source of revenues for the sector.

ASEAN membership could hypothetically increase the country's weight in negotiations with China. However, two obstacles remain. On the one hand, the ASEAN is not and has never been a compact political bloc. This holds true especially after its post-Cold War enlargement, which has changed the ASEAN’s nature as an anti-communist bulwark in the region. It is not surprising that Vietnam, a socialist state, is now one of its members.

Furthermore, we must consider the wise Chinese diplomatic work. While ASEAN member States share concerns about Beijing's assertiveness in the South China Sea, it is undeniable that a number of initiatives, such as the Belt and Road initiative, play a key role both in creating internal divisions within the ASEAN, and in bringing some members of the organisation (particularly Laos and Cambodia) closer to the PRC. As a consequence, the ASEAN encounters increasing difficulties in adopting a common position vis-à-vis Beijing, thus undermining the usefulness of membership in the organisation as a negotiating card for member States.

5. Conclusion


While the pandemic rages and continues to claim victims throughout the world, the attention of the public continues to be directed to East and Southeast Asia, where countries seem to have contained the pandemic in a particularly effective way. Among these, Vietnam has amazed not only with its effectiveness in controlling the pandemic, but also with the ability of its economy to continue to export and attract FDI.

However, the static analysis shows that structural weaknesses exist in the Vietnamese economy. These, when combined with the dynamic analysis of the country's interactions with other actors, confirm the conclusion that it is impossible for Vietnam to replace the PRC in the global supply chain.

The country's economic achievements are still fragile and leaders in Hanoi are called upon to strike the right balance between the needs of economic and trade policy, which require a strengthening of cooperation between countries, and the political and geopolitical needs that do not necessarily push in this direction. As the only country to have defeated both the US and the PRC, the Vietnamese public is proud of its identity and remains wary of the assertiveness of the PRC in the South China Sea, as it awakens memories of an ancient domination, most recently in the Sui and Tang times (602-907), and questions the solidarity between the two communist parties.


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References [1] THAYER, Carlyle A., Vietnam’s Sixth Party Congress: An Overview, Contemporary Southeast Asia, vol.9, n.1, 1987, pp.12-22 [2] THAYER, Carlyle A., The Evolution of Vietnamese Diplomacy Under Doi Moi, 1986-2016, in Hong Hiep LE, Anton TSVETOV (edited by), “Vietnam's Foreign Policy under Doi Moi”, Singapore, pp.23-46, 2018

[3] GERSCHENKRON Alexander, Economic Backwardness in Historical Perspective, a book of essays, Cambridge, Massachusettes, Belknap Press of Harvard University Press, 1962 [4] Nawrot, Katarzyna Anna, Does Confucianism promote cooperation and integration in East Asia?, International Communication of Chinese Culture, vol. 7, pp.1-30, 2020

Bibliography

1. GERSCHENKRON Alexander, Economic Backwardness in Historical Perspective, a book of essays, Cambridge, Massachusettes, Belknap Press of Harvard University Press, 1962

2. FUKUYAMA Francis, The End of History and the Last Man, New York, Free Press, 2006

3. NAWROT Katarzyna Anna, Does Confucianism promote cooperation and integration in East Asia?, International Communication of Chinese Culture, vol. 7, pp.1-30, 2020

4. THAYER, Carlyle A., Vietnam’s Sixth Party Congress: An Overview, Contemporary Southeast Asia, vol.9, n.1, pp.12-22, 1987

5. THAYER, Carlyle A., The Evolution of Vietnamese Diplomacy Under Doi Moi, 1986-2016, in Hong Hiep LE, Anton TSVETOV (edited by), “Vietnam's Foreign Policy under Doi Moi”, Singapore, pp.23-46, 2018

Sitography

1. https://theaseanpost.com/article/vietnam-overtake-singapore-decade

2. http://www.globaltimes.cn/content/1159854.shtml

3. https://www.cnbc.com/2019/10/29/trade-war-can-vietnam-replace-china-as-a-global-manufacturing-hub.html

4. https://www.scmp.com/comment/opinion/article/3065240/why-vietnam-will-not-replace-china-any-time-soon-worlds

5. https://www.china-briefing.com/news/vietnam-overtaking-china-us-export-manufacturing/

6. https://carnegieendowment.org/2020/06/18/is-vietnam-eating-into-china-s-share-of-manufacturing-pub-82094

7. https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locations=VN

8. http://tapchiqptd.vn/en/theory-and-practice/ho-chi-minh-–-an-exemplary-model-in-the-practice-of-patriotic-emulation/12013.html

9. https://www.peaceagreements.org/viewmasterdocument/252

10. https://en.nhandan.org.vn/business/item/8458502-us-remains-vietnam’s-largest-export-market-in-first-two-months.html

11. https://www.census.gov/foreign-trade/balance/c5520.html

12. https://www.theguardian.com/business/2019/jun/27/trump-warns-china-is-ripe-for-new-tariffs-and-suggests-vietnam-could-be-next

13. http://vietnamembassy-usa.org/news/2019/10/vietnam-us-establish-comprehensive-energy-cooperation-partnership

14. https://fas.org/sgp/crs/row/IF11107.pdf

http://www.gov.cn/guowuyuan/2020-08/06/content_5532729.htm

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