Vietnam—Gearing Up for the Next Transformation -- Speech By Christine Lagarde, Managing Director, IMF
IMF News, March 17, 2016
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- Authors: Christine Lagarde
- Published: March 17, 2016
Global Challenges and Regional Opportunities
- Vietnam has become one of the world’s most open economies, benefiting from international trade and foreign direct investment but more sensitive to external shocks.
- Major global transitions affecting Vietnam:
- China’s move to a new growth model.
- Prospect of commodity prices remaining lower for longer.
- Tightening of financial conditions due to rising U.S. interest rates and a stronger dollar.
- IMF global growth outlook and regional role:
- IMF cut its global growth forecast for 2016—to 3.4 percent.
- Asia accounts for 40 percent of the global economy.
- Over the next four years, Asia is expected to deliver nearly two-thirds of global growth.
- Impact of China’s growth transition:
- Short-run slower growth in China reduces demand for intermediate goods and commodities and increases volatility in currencies, equities, and bonds.
- Vietnam faces a widening budget deficit and growing public debt partly because of lower oil revenues.
- Opportunities for Vietnam:
- China’s retreat from less sophisticated, labor-intensive manufacturing can benefit Mekong neighbors, including Vietnam.
- Vietnam’s exports to China grew almost twice as fast as its total exports last year.
- China accounts for only a tenth of Vietnam’s overall exports; the global market remains the biggest prize.
- Trans-Pacific Partnership (TPP) potential impact:
- Could lift Vietnam’s GDP by a cumulative 8 percent over the next 15 years.
- Could lift Vietnam’s exports by 30 percent over the next 15 years.
- TPP could spur foreign direct investment and provide impetus for economic reforms, especially in state-owned enterprises.
Vietnam’s Next Transformation — Policy Recipe and Key Ingredients
- Current growth and demographic concerns:
- Current growth is projected to remain solid this year—at around 6.3 percent.
- Growth since 2008 has been slower than in the preceding two decades.
- Vietnam is on track to become one of the world’s fastest-ageing societies; the working-age population’s share has already started to decline.
- Four recommended policy ingredients:
1. Safeguard macroeconomic stability
- Make greater use of exchange rate flexibility to soften external shocks and build external reserves.
- Create a new monetary policy regime for a rising, more sophisticated economy; that could eventually include using inflation as a nominal anchor.
2. Generate higher government income by broadening the tax base
- Reduce tax exemptions and introduce a property tax.
- These measures would help reduce public debt—currently at about 60 percent of GDP—and create more fiscal room.
- A fuller public purse is needed to boost infrastructure investment in roads, bridges, and urban transport while protecting health and education spending.
3. Step up bank reforms
- Fully address the legacy of non-performing loans through comprehensive legal reforms to resolve bad loans and strengthen capital in viable banks.
- Bolstering bank balance sheets supports higher-quality credit growth and safer, sustainable medium-term growth.
4. Promote stronger, more inclusive, and more sustainable growth
- Accelerate restructuring of state-owned enterprises through governance reform, divestment of non-core activities, and increased private participation in ownership to boost labor productivity and potential growth.
- Key structural facts:
- Productivity in foreign-invested companies is five times higher than in state-owned enterprises and domestic private firms.
- Foreign-invested firms account for 70 per cent of total exports.
- Encourage technological innovation and learning by increasing investment in research and development—Vietnam is spending significantly less than its peers.
- Expand vocational training to address skills mismatches and help reduce youth unemployment.
- Social and inclusion priorities:
- Vietnam reduced its poverty rate from almost 60 percent in 1993 to 13.5 percent (2014 data, latest available figures).
- Disparities persist between urban and rural areas, within cities and rural areas, and across regions; two thirds of those in Vietnam’s ethnic minority groups are poor and often live in hard-to-reach areas.
- Reducing poverty and income inequality requires better infrastructure and greater access to education and health care; IMF studies show limiting excessive income inequality supports faster and more sustainable growth.
- Gender dimension:
- Vietnam has relatively low gender gaps but must empower women further by bringing more women into the formal workforce and improving access to higher education.
- For instance, only 40 percent of PhD graduates are female.
Your Next Transformation — Roles for Students and Young Professionals
- Individual skill development and innovation:
- Emphasize math, engineering, finance, and economics while embracing diverse experiences in literature, arts, and languages.
- Opportunities exist in smartphone apps, social media, e-commerce, software, and game development.
- Encourage ethical behavior and long-term standards of conduct; research indicates unethical behavior can become endemic in highly competitive industries.
- Global engagement and climate change:
- Vietnam is exposed to climate risks because of population density, geography, and rapidly growing urban centers.
- A massive increase in urbanization over the next 15 years could require global infrastructure investment of up to $90 trillion.
- Risk of locking in carbon-intensive infrastructure underscores need for sustainable urban planning and investment.
- Young leaders should connect globally to raise awareness and act on climate and other macro-critical issues.
- Engagement with the IMF:
- The IMF offers expertise in fiscal, monetary, and financial policies and focuses on macro-critical issues such as climate change, gender, and inequality.
- Students and professionals are encouraged to consider joining the IMF to support research, policy advice, and technical assistance to the Fund’s 188 member countries.
Key Statistics and Indicators (as stated in the speech)
- Global growth forecast for 2016—3.4 percent.
- Asia’s share of global economy—40 percent.
- Asia expected to deliver nearly two-thirds of global growth over the next four years.
- Vietnam growth projection this year—around 6.3 percent.
- Public debt—currently at about 60 percent of GDP (in 2015 public debt was at about 60 percent of GDP, up from about 40 percent in 2008).
- Productivity: foreign-invested firms are five times more productive than state-owned enterprises and domestic private firms.
- Foreign-invested firms account for 70 per cent of total exports.
- TPP potential impacts: GDP cumulative increase of 8 percent and exports increase of 30 percent over the next 15 years.
- Youth unemployment rate—7¼ percent; overall unemployment—2½ percent.
- Poverty reduction: almost 60 percent in 1993 to 13.5 percent (2014 data, latest available figures).
- Female PhD graduates—40 percent.
- Global infrastructure investment need for urbanization—up to $90 trillion.
Source: Vietnam—Gearing Up for the Next Transformation — Speech by Christine Lagarde, Managing Director, IMF, National Economic University, Hanoi, March 17, 2016.