Speech

By Christine Lagarde, Managing Director, IMF
National Economic University, Hanoi, March 17, 2016

As Prepared For Delivery

Good morning—Chào các bạn

I would like to thank Prof. Dr. Tran Tho Dat and the National Economic University for inviting me—and thank you, the students, for this wonderful welcome.

It is a great pleasure to be here at this prestigious flagship university—which has been central to Vietnam’s development over the past six decades. Today NEU graduates can be found in leading positions in both government and business.

These outstanding men and women have helped to achieve a remarkable transformation: in a single generation, Vietnam moved from being one of the world’s poorest nations to lower middle-income status, from a heavy reliance on commodities to manufacturing excellence, from economic stagnation to relentless dynamism.

This is a reflection of bold government policies and savvy business decisions. Above all, it reflects the incredible energy, ingenuity, and love of learning of the Vietnamese people.

As the great 15^th century scholar and poet, Nguyen Trai, once said: “Learning is the key for everyone, whoever he is, either a teacher or a worker.”¹

After a remarkable 30-year period, Vietnam is now facing another pivotal moment of transformation.

I would like to discuss this with you from three perspectives:

• First, what are the global challenges and regional opportunities for Vietnam?
• Second, what are the key ingredients of Vietnam’s next transformation?
• And third, how can your generation—and how can you personally—contribute?

1. Global Challenges and Regional Opportunities

Let us start with the big picture. Over the past three decades, Vietnam has become one of the world’s most open economies—a nation that has benefited tremendously from international trade and foreign direct investment that have helped drive growth and poverty reduction.

Greater openness, of course, means a greater sensitivity to external shocks. In fact, there are several major economic transitions that are on the minds of policymakers right now.

They include China’s move to a new growth model; the prospect of commodity prices remaining lower for longer; and the tightening of financial conditions in many countries due to rising U.S. interest rates and a stronger dollar.

Understandably, policymakers are concerned—because these transitions have contributed to rising financial market volatility and sharply decreasing trade flows. They have also held back global growth.

Earlier this year, the IMF cut its global growth forecast for 2016—to 3.4 percent—and our latest assessment shows once again a weakening baseline and a further increase in downside risks.

There is a similar picture here in Asia, where we project a further easing of economic growth this year. Of course, even with declining momentum, Asia remains the world’s most dynamic region, accounting for 40 percent of the global economy. Over the next four years, this region is expected to deliver nearly two-thirds of global growth.²

What does this mean for Asia’s economies? Can they sit back and enjoy the ride? I am afraid not.

China’s growth transition

Consider the profound impact of China’s shift from an investment-driven growth model to one that relies more on domestic consumption. This transition is necessary because it will lead to more sustainable growth and benefit both China and the world.

In the short run, however, it leads to slower growth. And this slowdown creates knock-on effects on other countries—through changing trade patterns, lower demand for intermediate goods and commodities, and increased volatility in currencies, equities, and bonds.

Some of Asia’s economies will be heavily affected. Think of machinery exporters, steel producers, and exporters of oil and other commodities.

Indeed, while you and your families are benefiting from cheaper petrol, Vietnam’s government is facing a widening budget deficit and growing public debt—partly because of lower oil revenues.

Vietnam can seize the day

The good news is that there are also huge opportunities.

For example, China’s continuing retreat from less sophisticated, labor-intensive manufacturing may create major opportunities for its neighbors in the Mekong region—including Cambodia, Lao, Myanmar, and Vietnam.

The IMF has been analyzing these regional effects—and we will soon be releasing a new report³ that shows what countries in the Mekong region can do to take full advantage of China’s transition.

For Vietnam, we see two big benefits: in addition to winning market share at the lower end of the value chain, Vietnam has a unique opportunity to sell more final goods, such as cell phones and computers, to Chinese consumers. Last year, for instance, Vietnam’s exports to China grew almost twice as fast as its total exports.

Still, with China accounting for only a tenth of Vietnam’s overall exports, the biggest prize is the global market. This is why the recently signed Trans-Pacific Partnership (TPP) could have a transformative impact.

According to some estimates⁴, this trade deal could lift Vietnam’s GDP by a cumulative 8 percent, and exports by 30 percent, over the next 15 years.

How can this be achieved? By boosting Vietnam’s exports to key markets, such as the United States and Japan, and by encouraging further strong inflows of foreign direct investment.

More broadly, TPP could provide critical impetus for much-needed economic reforms, especially in state-owned enterprises. Stepping up these reforms will not only allow Vietnam to meet its TPP requirements, but it will be essential for its future prosperity.

2. Vietnam’s Next Transformation

This brings me to my second topic—the policy recipe for Vietnam’s next transformation.

To my mind, it is fitting to use the word “recipe” in a country that has the world’s best cuisine. My personal favorite is a fragrant serving of Phở—a dish so iconic that it seems to capture Vietnam’s joie de vivre in a single bowl.

Why is this relevant right now? Because managing an economy is akin to preparing a perfect serving of Phở—both require a well-balanced mix of ingredients.

Indeed, Vietnam has now reached a point where new powerful ingredients are needed to safeguard macroeconomic stability and lift tomorrow’s growth and living standards.

Yes, current growth is projected to remain solid this year—at around 6.3 percent. But growth since 2008 has been slower than in the preceding two decades. This means that Vietnam has not been able to match the growth in per capita income that East Asia’s most successful countries experienced at a similar level of development.

Without a big reform push, Vietnam will find it extremely difficult to catch up.

Why? Because Vietnam is on track to become one of the world’s fastest-ageing societies, with a working-age population whose share in the overall population has already started to decline. This demographic shift could become an additional drag on growth.

A strong policy recipe

So with this in mind, let me highlight four new ingredients that can be added to the recipe.

First—safeguard macroeconomic stability. This means, for example, making greater use of exchange rate flexibility to soften the impact of external shocks and help build external reserves.

It also means creating a new monetary policy regime for a rising, more sophisticated economy. That could eventually include using inflation as a nominal anchor for monetary policy.

Second—generate higher government income by broadening the base for revenue collection. This means, for instance, reducing tax exemptions and introducing a property tax. These measures would help reduce public debt⁵—currently at about 60 percent of GDP—and would help create more fiscal room for maneuver.

A fuller public purse is needed to boost critical infrastructure investment—in roads, bridges, and urban transport—while protecting spending on health and education.

Third—step up bank reforms by fully addressing the legacy of non-performing loans. More comprehensive legal reforms are needed to resolve bad loans, combined with a strengthening of capital in viable banks.

By bolstering bank balance sheets, policymakers can help support higher-quality credit growth—which leads to safer and more sustainable economic growth over the medium term.

Fourth—promote growth that is stronger, more inclusive, and more sustainable. In other words, increase the size of the bowl to accommodate a larger serving of Phở—with everyone sharing the benefits.

One way to accomplish this is to accelerate the restructuring of state-owned enterprises—through governance reform, divestment of non-core activities, and increased private participation in ownership. This would help boost overall labor productivity and potential growth.

It is worth remembering that productivity in foreign-invested companies is five times higher than in state-owned enterprises and domestic private firms. This helps explain why foreign-invested firms account for 70 per cent of total exports—and it shows the huge scope for improvement.

Another way to boost growth and living standards over the long term is to encourage greater technological innovation and learning. This requires more investment in research and development—where Vietnam is spending significantly less than its peers.

Greater efforts are also needed in education. To be clear: Vietnam can be proud of the fact that it ranks well above most developed countries in basic science, math, and reading skills.⁶ But expanding vocational training, for example, will be key to address skills mismatches. This would also help reduce Vietnam’s relatively high youth unemployment rate.⁷

Likewise, Vietnam can be proud of its track record in reducing its poverty rate—from almost 60 percent in 1993 to 13.5 percent⁸ today. This a remarkable accomplishment by any standard. But disparities persist between urban and rural areas, within cities and rural areas, and across regions⁹.

Reducing poverty and income inequality requires better infrastructure and greater access to education and health care. In fact, IMF studies have shown that countries that have managed to limit excessive income inequality have enjoyed both faster and more sustainable growth.

Let me highlight another achievement that Vietnam can be proud of: its relatively low gender gaps, which have supported growth and development. But as Vietnam moves further up the income ladder, it will be important to empower women even more—by bringing more women into the formal workforce, and by improving access to higher education¹⁰.

3. Your Next Transformation

So what can you do about all this? How can you become a powerful ingredient in this recipe for economic transformation?

Start by transforming yourself and your environment. What do I mean by that?

Think of the incredible technological progress we are seeing right now—in robotics, genetic engineering, 3-D printing, quantum computing, and artificial intelligence. Earlier this week, for example, the world champion of Go, the ancient board game, lost a five-game match to a computer that uses a process called “deep learning”.

Yours is a world in which individuals, companies, and institutions are measured by their creativity and innovation. It is essential to have a good grasp of math, engineering, finance, and of course economics. But I would also encourage you to embrace a diversity of experiences—including in literature, arts, and languages.

Consider using the entire range of your skills to create products and services that resonate here at home and abroad. Smartphone apps, social media, e-commerce, and software and game development: these are only some of the sectors where Vietnamese entrepreneurs are unleashing their creative energy. You can make your mark, too.

You will also have a chance to create sustainable ventures that are firmly grounded in mutual trust and strong ethical behavior. New research¹¹ shows that unethical behavior can become endemic in any industry that is highly competitive. But there are long-term gains from doing the right thing. You can help set the right standard for yourself and your community.

Connect with the world

At the same time, your community is looking to you for leadership on one of the most pressing global issues—climate change. Vietnam is exposed to climate risks because of its population density and geography. It is also home to large and rapidly growing urban centers.

In fact, we are likely to see a massive further increase in urbanization in many emerging and developing economies over the next 15 years. This could require global infrastructure investment of up to $90 trillion.¹²

Just think about the risk if this investment is done in the wrong way—for example, if it locks in carbon-intensive energy and transportation structures in these mega-cities. This could radically affect the quality of life on the planet—for all of us.

On this and other issues, you have the opportunity to become global citizens. Connect with your friends, your colleagues, and your peers around the world to raise awareness.

Connect with the International Monetary Fund! Many of you will know that the IMF has a world-class expertise in fiscal, monetary, and financial policies. But we also focus on what we call macro-critical issues such climate change, gender, and inequality.

I encourage you to consider joining the IMF—to help us address the needs of our 188 member countries with research, policy advice, and hands-on technical assistance. Help us promote the global public good of economic and financial stability—which has been the Fund’s raison d'être for more than 70 years.

Conclusion

Let me conclude.

Here in this room, I see future policymakers and business leaders. I see a generation that will have a unique opportunity to lead Vietnam’s next transformation. What an exciting prospect! But also, what a great responsibility!

What do you do when you contemplate your future? On Tết holidays, many students—including some of you—come to Văn Miếu, the Temple of Literature, where calligraphists write wishes in beautiful Hán characters.

My wish for this year—and the next 30 years—is that you succeed in putting together a strong recipe for transformation—for yourself, for Vietnam, for the world.

Thank you—Cảm ơn

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¹ Nên thầy nên thợ bởi có học.

² IMF Regional Economic Outlook. Asia and Pacific: Stabilizing and Outperforming Other Regions, April 2015

³ Forthcoming report: China and the CLMV: Integration, Evolution, and Implications.

⁴ The Peterson Institute, WP 16-2 The Economic Effects of the Trans-Pacific Partnership: New Estimates, January 2016.

⁵ In 2015 public debt was at about 60 percent of GDP, up from about 40 percent in 2008.

⁶ Latest OECD Programme for International Student Assessment (PISA) survey of 15-year olds.

⁷ Youth unemployment rate: 7¼ percent, compared to 2½ percent overall.

⁸ 2014 data, latest available figures.

⁹ For example, two thirds of those who belong to Vietnam’s ethnic minority groups are poor and often live in hard-to-reach areas.

¹⁰ For instance, only 40 percent of PhD graduates are female.

¹¹ Rotterdam School of Management, Erasmus University: Research paper by Desmet, P.T.M., Hoogervorst, N. & Dijke, M.H. van: “Prophets vs. profits: How market competition influences leaders’ disciplining behavior of ethical transgressions.”

¹² Global Commission on the Economy and Climate (GCEC), 2014, Better Growth, Better Climate: The New Climate Economy Report (Washington); Blog by Nicholas Stern.