An Investigation of Vietnams Barriers of Economic Growth and Development Essay Example for Free

An Investigation of Vietnams Barriers of Economic Growth and Development Essay Over the past few decades, Vietnam has made remarkable recovery from the damage of war and political reforms. Under Vietnams communist party, the countrys economy has transitioned from a centrally planned economy to a socialist-oriented market economy. Making it a multi-sectored commodity economy regulated by the people, whilst under state management and ownership. Numerous reforms, along with the modernization of the financial system, have led to rapid growth for Vietnam economically. In 2010, the Gross Domestic Product (PPP) of Vietnam was $275,639 million and ranked 40 out of 182 listed countries according to the International Monetary Fund. This is most likely due to rapid industrialization that has and is taking place. Industry and construction contributed approximately 40.9% of GDP in 2010 whereas the share of the agriculture sector has fallen to 21%. Although the rise in GDP has brought about a decline in poverty, larger school enrolment rates, bettered infrastructure, etc, this rapid growth rate has also brought with it negative factors that may hinder subsequent economic growth and development. For instance, Vietnam is facing large budget and trade deficits. In 2010, the current account balance (CAB) of Vietnam was -8.51 billion US dollars based on the International Monetary Fund, with the countrys trade deficits amounting to US$12.4 billion. CAB value, being a negative, shows that the amount spent on imports coming into Vietnam is higher than that earned from the countrys exports. The problem is that the imports are of a higher value than the exports and this is the consequence of relying on a narrow range of primary products (This point on low value exports will be elaborated on, under cultural factors). Similarly, the government is blowing its budget, causing the fiscal deficit to rise to 7.4% of GDP in 2010, which shows the extent at which the governments total expenditure has exceeded the revenue that it generates. This overshot the governments target of 6.2%. On one hand, the government expenditure on basic social and physical infrastructure is a necessity for any developing country. However, this continual over-spending can place the government in a state of debt, which may interfere with economic growth and development. Also, the corrupted state misspends and embezzles a good share of export earnings, foreign investment and revenue (To be covered later under political instability). In order to taper down trade deficits, the government has been forced to devalue the Vietnamese currency (dong) to the exchange rate of 17,961 dong : US$1. However, the dong is continually being devalued. According to Le Dang Doanh of the Economic College of Hanoi, devaluation might temporarily help to reduce Vietnams imports, but it will also boost inflation because the imported fuel will rise. Doanhs views are very apt as devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This will increase demand for exports whilst making imports more expensive. Hence, reducing the demand for imports. However, this devaluation has caused a rise in the inflation rate in Vietnam. In January 2011, the consumer-price index rose to 12.17%. This is higher than the 11.8% increase in December 2010. Bring about higher prices for education services, food, housing and building materials within the country. These high prices are not easily met by the poorer of the country. It is no surprise, therefore, that Vietnams per capita GDP (PPP) of $3,123 (ranked 128) by the International Monetary Fund, meaning that the average income of a person living in Vietnam is approximately $8.70 per day. This is equivalent to earning US$3.20 a day according to nominal per capita GDP. One reason for this is that Vietnams rate of growth of population is higher than that of its GDP. Vietnam, with a growing population of over 89 million, is the 13th most densely populated country in the world. The Human Development Index (HDI) re-illustrates Vietnams lower development and welfare. It weighs real national income per year, the adult literacy rate, average years of schooling, and life expectancy in ranking a country in terms of development. The closer the HDI value is to 1, the more developed the country is said to be. The 2010 HDI value of Vietnam is 0.572, ranking the country 113 out of 169 countries with comparable data. Having a HDI value between 0.5 and 0.8, Vietnam is said to have medium human development. However, this value still remains below the average HDI value of East Asia and the Pacific (0.650) and that of the world (0.624). On a scale from 0 1, the index for health is 0.869, education is 0.480 and income is 0.448. Additionally from the 2010 report, 21.45% of the population is living below US$1.25 per day and 25,632 per million of the population is affected by natural disasters. It appears that the prime reason for the relatively low HDI value of Vietnam seems to be due to the decline in infrastructure and income amongst its citizens. This brings us to the next section of my investigation. Along with the problems arising in Vietnam, its current economic situation could have been and still remains a result of the various factors below: Income Poverty The Vietnam government has made effective attacks on poverty, reducing the countries share of income poverty from 58% to 21.45% in 1993-2010. Due to industrialization and reforms, more jobs and opportunities were created. The rise in income for people working in industrial zones resulted in more than a third of the population being pulled out of poverty. However, the increasing number of people moving into the city areas has caused property demands, and hence prices, to rise. Additionally, inflation is increasing the prices of staples remarkably, making it difficult for low-income urban and rural residents. In fact, a study in 2006 by the Vietnamese Academy of Social Sciences concluded that even higher growth rates will be required than in the past as poverty is still deep and widespread, and the remaining millions of people vulnerable to poverty fall far below the poverty line. This prevalent income gap in Vietnam, particularly the income disparity between the rural and urban areas not only lowers the basic standard of living in the country due to inequitable development, but also reduces consumption. This drop in consumption, coupled with the investment fever of the higher income-earners, might cause deflation. Although deflation may seem to help lower-income citizens to purchase more goods, price drops will hamper profits of firms and, hence, the overall economic growth of Vietnam. This will lead to even lower income distributed to workers, and even retrenchment, as companies would need to cut down costs. As a result, economic development is hindered, as the government will not have sufficient funds to spend on improving infrastructure in the country. Therefore, the basic standard of living subsequently drops. Vietnams capital, Hanoi, is already feeling the negative effects of this lack of infrastructure due to the poverty cycle as it is constantly plagued by power blackouts (See lack of infrastructure below). Political Structure/Corruption To date, the government continues to maintain control of the largest and most important firms in the country. The government recently issued new limitations for state-owned enterprises (SOEs) on the extent at which they can diversify away from their core business. Conversely, policy changes tend to take a long time to be put into effect and SOEs will take an equally long period of time to respond to such directives. One way to overcome this conservatism, the minimal or gradual change in society, is if the government gives up political control of the economy and diminishing the bureaucratic nature of commerce in Vietnam. However it is unlikely that the Communist leaders will allow this to happen. Additionally, Vietnam relies heavily on SOEs to generate wealth for the nation. Under each company, workers enjoy the same share of benefits from growth despite any disparity in productivity. Therefore, there is no incentive for workers to perform better at their job and the economy will not be able to reach high growth rates or attract foreign investors. Public officials and state employees, thus, resort to getting extra money any way they can. The current state structure creates loopholes for corrupt people to plunder state budget. Already, there have been cases where government officials have been arrested for squandering a significant share of investments that come into the country. The 2010 Corruption Perceptions Index placed Vietnam 116th out of 178 countries, with a transparency score of 2.7. Corruption and lack of political transparency causes citizens to lose confidence in their leaders and weakens national unity. Possible uprisings may occur and instability hinders national construction and defense (Continued in lack of infrastructure below). Lack of infrastructure Vietnams energy-generating capacity is not at a high enough level yet to support its production in industrial zones. However, at the moment the government budget is not enough to solve the electricity supply problem. First of all, if fewer goods are produced due to lack of electricity to operate machinery efficiently, economic growth will decrease. Furthermore, power surges disrupt the everyday lives of citizens, transportation, etc. Lowering the standard of living in Vietnam. As mentioned above, the bureaucracy of official procedures stops the country from building the roads, power stations and other public works due to the slow speed at which such changes take effect. These factors are needed to maintain efficient production of goods and services and, hence, growth rate. Particularly, the lack of road systems hinders economic development, as it is difficult for citizens to gain access to different areas of the country. Cultural Factors Initially an agriculture-based economy, Vietnam depends on seafood and rice as main exports for the country. Many of these low-value products are the livelihood of people living in rural areas. The school attendance is much lower in rural areas as compared to urban areas and this lack of education leads to the lack of skills necessary to carry out jobs in industrial zones. Therefore, their focus on agriculture has translated to the country over-depending on primary products as its main exports. This narrows the range of products, which can be purchased through international trade. This negatively impacts potential economic growth. On the other hand, an increasing number of people living in urban areas own cars and factories are producing goods constantly in order keep up with the ambitious growth targets of Vietnams Communist leaders. The emissions from choking traffic and constant construction are starting to take a toll on the environment. The pollution, therefore, impedes the economic development of the developing country. In conclusion, we can see that despite Vietnams improving economic growth, numerous debts accumulating in the country and the devaluation of currency can hinder further potential growth rates. These factors overlap with the Communist Partys political control of the economy and the slow change of economic policies, lack of infrastructure to support capital production and exporting low-value products, which in turn hinder economic growth. Additionally, over-population, growing income gaps between rural and urban areas, inefficient building of infrastructure and environmental damage created by excessive and rapid industrialization, have impeded on economic development by lowering the basic standard of living of the country. In order for Vietnam to grow and develop economically in the future, the political structure needs to allow a more efficient change in both social and economical policies. More importantly, the country needs to stop prevalent corruption and give firms incentives to generate more economic growth and, thus, attract more foreign investments for the country. Sources -http://siteresources.worldbank.org/INTPOVERTY/Resources/WDR/English-Full-Text-Report/ch2.pdf -http://www.arcadia-asia.com/commentaries/201003-Arcadia%20Market%20Commentary.pdf -http://www.viet-studies.info/kinhte/vietnam_OxfordAnalytica.pdf -http://siteresources.worldbank.org/INTPRS1/Resources/383606-1106667815039/gov_spending_vietnam.pdf -http://www.economist.com/node/11041638?story_id=11041638 -http://www.icsead.or.jp/7publication/workingpp/wp2006/2006-18.pdf -http://www.economywatch.com/economic-statistics/country/Vietnam/