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Economic Growth and Development in Vietnam

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Vietnam is a fast-growing lower middle income country that has received considerable inward investment in recent years. This revision webinar for A-level Economics looks at the contextual evidence on Vietnam and compares and contrasts their current growth with China. It analyses some of the key growth drivers and evaluates barriers to growth including environmental challenges and vulnerability to external economic shocks.

Published in: Economy & Finance
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Economic Growth and Development in Vietnam

  1. 1. Growth and Development in Vietnam A Level Economics 2017
  2. 2. The State shall guarantee and promote the People’s right to mastery; to recognize, respect, protect, and guarantee human rights and citizens’ rights; and to pursue the goal of a prosperous people and a strong, democratic, equitable, and civilized country, in which all people enjoy an abundant, free, and happy life and are given conditions for their comprehensive development. Article 3 of the 2013 Constitution of the Socialist Republic of Vietnam
  3. 3. Vietnam’s Growth/Development Model • Đoi Moi reforms (renovation) launched in 1986 – aimed to create a socialist-oriented market economy • Vietnam has made a transition from low to middle- income country – the $1.90-a-day extreme poverty rate fell from 50 percent in the early 1990s to 3 percent today • Per capita income in Vietnam has gone from around $100 in the 1980s to about $2,100 in 2015, PPP is >$5,000 • Vietnam remains a one-party socialist state run by the Communist Party but embracing free-market policies • Strongly export-oriented – free trade deals with South Korea, TPP signatory, EU FTA due in 2018, TTP signatory • Growth model built on heavy inward investment and rapid transition away from farming and low value textiles
  4. 4. Fastest growing countries in 2016 10.3% 8.07% 7.98% 7.62% 7.48% 7.17% 6.99% 6.92% 6.64% 6.59% 6.5% 6.49% 6.4% 6.1% 6.03% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Iraq Myanmar Côte d'Ivoire India Lao P.D.R. Tanzania Cambodia Bangladesh Senegal China Djibouti Ethiopia Philippines Vietnam Bhutan GDP growth compared to previous year
  5. 5. Real Economic Growth Rates 0 2 4 6 8 10 12 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Annual % change in real national output (GDP), Source: IMF China Gross domestic product, constant prices Vietnam Gross domestic product, constant prices
  6. 6. Progress in raising GNI per capita (PPP)
  7. 7. HDI Progress
  8. 8. HDI Progress
  9. 9. Can Vietnam be the next China?
  10. 10. Is Vietnam following the Chinese model? • China’s ”authoritarian capitalist model of development” – a hybrid form of capitalism • Builds on earlier, state-centered Asian models of development such as in South Korea and Taiwan 1. Emphasis on gradual reforms rather than shock therapy 2. 5 year plans to set priorities / send signals – establish a blueprint for development and changes in growth drivers 3. Control of the exchange rate / capital controls 4. Government ownership/control of strategic industries 5. Heavy investment in primary education 6. Focus on cutting extreme poverty / rural/urban divide 7. Favourable environment for inward foreign investment 8. Special Economic Zones / export driven growth
  11. 11. Is Vietnam different from China? • A socialist-oriented “market economy” • Country has maintained more of their pre—communist traditions / cultures • Higher ratio of domestic consumption / GDP • More willing to operate a floating currency • Significantly higher export/GDP ratio • Strong connections with the United States (biggest export partner + military ties) • Suggestions of deeper entrepreneurial culture • Slower than China to privatize state-owned businesses
  12. 12. Growth Drivers Inward FDI Trade surplus Rising per capita incomes Emerging middle class of consumers Favourable demographics Increasing factor productivity Investment in tourism State investment in infrastructure Rapid urbanization Key Drivers of Growth in Vietnam
  13. 13. Capital Investment (% of GDP) 0 10 20 30 40 50 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Gross Investment at constant prices as % of GDP, Source: IMF China Total investment Vietnam Total investment Vietnam has large infrastructure needs – capital investment probably has to rise to 30-35% of GDP but this will require an increase in the national savings rate
  14. 14. FDI into the Vietnamese Economy Two examples: LG Display in Hai Phong ($1.5 billion), Samsung R&D Centre ($300 million)
  15. 15. Human Capital
  16. 16. Health Spending (% of GDP)
  17. 17. Vietnam: Urbanization from 2005 to 2015 27.28% 27.89% 28.5% 29.13% 29.76% 30.39% 31.03% 31.67% 32.31% 32.95% 33.59% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Share of total population
  18. 18. Vietnam: Demographics Vietnam is the world’s 13th most populous country, with a population of over 90 million people with a median age of 30. 24.5 23.6 21.8 19.1 18.1 18.3 19 20 21 22.2 24.2 26.4 28.5 30.4 32.6 0 5 10 15 20 25 30 35 Medianageinyears
  19. 19. Vietnam – an increasingly open economy Trade for Vietnam accounts for roughly 180% of national output, more than any other country at its level of per-capita GDP.
  20. 20. Rapid Growth of trade for Vietnam -5 0 5 10 15 20 25 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Annual % change in volume of exports and imports of goods/services Vietnam Volume of Imports of goods Vietnam Volume of exports of goods
  21. 21. Vietnam - Manufacturing Competitiveness • Ranked 18th/40 countries for manufacturing by Deloitte in 2016, forecast 12th by 2020 • Labour costs per hour: $1.96/hour • Labour productivity: $8,935.90 GDP/person • Manufacturing exports (2014) $107.9bn equivalent to 72% of total Vietnamese exports • Vietnam’s geographical location favours regional supply chain integration (proximity matters a lot in trade!)
  22. 22. Manufacturing Competitiveness Ranking
  23. 23. Regional Manufacturing Clusters
  24. 24. Vietnam’s Goods Export Structure
  25. 25. Pattern of Vietnamese Goods Exports
  26. 26. The Rapid Growth of Tourism Tourism is a key part of their growth strategy
  27. 27. Vietnam: Most important export partners in 2015 21.2% 13.3% 8.4% 5.5% 4.1% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% United States China Japan South Korea Germany Shareintotalexport
  28. 28. Vietnam’s Current Account • Current account surplus adds to AD • Strong net inflows of remittances from Vietnam’s diaspora • High levels of FDI into Vietnam help explain negative investment income • Strong trade surplus in goods – the result of export oriented growth
  29. 29. Official currency (managed float) and black market exchange rate!
  30. 30. Short & Long Run Barriers to Growth in Vietnam
  31. 31. Vietnam remains a small economy! 0.00 5,000.00 10,000.00 15,000.00 20,000.00 25,000.00 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Value of annual GDP, PPP adjusted China Gross domestic product based on purchasing-power-parity (PPP) valuation of country GDP Vietnam Gross domestic product based on purchasing-power-parity (PPP) valuation of country GDP
  32. 32. Environmental Challenges
  33. 33. Barriers to Doing Business (WEF)
  34. 34. Dual economy – low productivity farming Vietnam
  35. 35. South China Sea Tensions
  36. 36. Vulnerability to climate change Exposure to slowdown in US, China, Japan and South Korea Under-developed land and capital markets Robotics & future of manufacturing Low productivity agriculture (a clear dual economy) Over-reliance on FDI (Mexican Effect) De-globalisation / rising protectionism
  37. 37. Middle Income Trap Middle Income Trap Growth rates may slow significantly before a nation transitions to high income • Productivity slowdown • Limits to factor input driven economic growth • Institutional reforms take too long • Demographics start to bite • Higher inflation and financial instability • Countries fail to move to productivity and innovation driven growth • High inequality can dampen domestic consumption / internal growth and hamper innovation & investment
  38. 38. Growth and Development in Vietnam A Level Economics 2017
  39. 39. Economic Growth and Development in Vietnam Key Macro Data Latest annual GDP Growth (%) 6.7% GDP or GNI per capita (US $, PPP) $6,558 Inflation (%) 4.6% Unemployment rate (% of labour force) 2.2% Fiscal balance (% of GDP) -5.5% Govt debt (% of GDP) 58.3% Yield on 10-Yr Govt Bonds (Per Cent) Investment (% of GDP) 28% Gross national savings (% of GDP) Background Information Currency unit Dong Exchange rate system Semi- Fixed Policy interest rate 6.5% Member of a Regional Trade Agreement ASEAN & TPP WTO Member Joined 2007 Corporate tax rate (Per Cent) 20% Competitiveness rank 56th Corruption Perception Ranking 113rd Ease of Doing Business Ranking 82nd External Debt (% of GDP) Aspects of Development Latest HDI ranking 115th Income inequality HDI ranking Gender inequality HDI ranking 71st % of population living in extreme poverty Life Expectancy at birth (years) 73M / 77F Gini coefficient (Latest published estimate) 0.36 Inward FDI (% of GDP) 5.2% Remittances (% of GDP) Aid (% of GDP)
  40. 40. Contextual Background on Vietnamese Economy Economic Structure Share of GDP by value added (% of GDP) Primary: 17% Industrial: 33% Services: 50% Main export industries (+ major firms) Textiles, apparel Mobile phones (20% of exports in 2016) Television screens, tourism Key drivers of economic growth 13th most populous country, with a population of over 90 million people with a median age of 29 High inward investment + rapid productivity gains Emerging middle class – driving consumption Development and Growth Issues / Policies 3 factors limiting development progress Inefficient state-owned enterprises Fragile banking system, fast-growth of debt Environmental challenges 3 policies used to improve the supply-side Privatisation of state-enterprises Continued high spending on education & health Public Private Partnerships for infrastructure I Long term challenges facing this country Avoiding the middle income trap Raising productivity in the farm sector Vulnerability to the effects of climate change

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