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Vietnam’s Growth Model Losing Its Motive Power
Source: english.vietnamnet.vn
Source Date: Wednesday, December 01, 2010
Focus: ICT for MDGs, Knowledge Management in Government
Country: Viet Nam
Created: Dec 06, 2010

If Vietnam cannot go beyond the current growth model, the nation would be stuck in the “middle income trap” and it will have to face the competition from other lower income countries, experts have warned.
Meanwhile, the heavy reliance on outside capital sources to increase investments, which is the main force for growth, may generate dangerous macro imbalance and may lead to a crisis.

The warnings have been issued in the 2010 report on Vietnam’s competition capacity released by the Singaporean Asia Competition Institute in cooperation with Vietnamese Central Institute for Economic Management (CIEM), led by Professor Michael Porter from Harvard Business School, the father of the competitive strategy.

The report was released yesterday, November 30.

The three macro imbalances
The research team has pointed out that Vietnam is facing three serious macro imbalances.

First of all, the worries about trade deficit have become bigger. Though being considered as an export-oriented economy, Vietnam has been systematically importing more than exporting. Besides, there are worries about the capability to pay off the external deficit with the increasing public debts and decreasing foreign currency reserves, which will certainly affect the national economy’s prospect.

The research team also mentions the high inflation rates in Vietnam in the last years. The foreign capital flow plus the high credit growth have put hard pressure on inflation.

As the result, though Vietnam tries to keep the nominal exchange rate stable, the high inflation leads to the increase in the actual exchange rate, thus forcing Vietnam to devalue its currency.

These imbalances will bring bad consequences. At least, they will make investors think that they will have to face high risks when investing in Vietnam.

According to the report, when the confidence erodes, and foreign capital flows out of Vietnam, the nation will have to experience a very difficult period, and it will have to completely change the exchange rate policies, the public spending and it may negate the achievements it gained in the last many years.
New approaches required

According to the report, the polled enterprises still complain that they cannot find out qualified and skilful workers. The enterprises also complain about the technical infrastructure, logistics and electric? power.

While foreign direct investment (FDI) has been focusing on the real estate sector and the labour-intensive industries, the FDI sector still does not show positive impacts on domestic economy.

The difficulties partially show that the current growth model is losing its motive power

The macroeconomic policies have been cited as one of the weakest points in recent years. the fiscal policy has been hindered by the structure deficit of the state economic sector. Moreover, the continued pressure on the exchange rate, the high inflation rate and the rapid development of the finance market before the global financial crisis show the problems in the monetary policies.

Currently, the policies are focusing on increasing investments, especially in state owned enterprises and infrastructure to create growth, rather than aiming at increasing productivity and efficiency.

The current policies still focus on building state owned enterprises into the key economic groups of the nation, providing credit to separated enterprises, and building the areas with complete infrastructure.

Meanwhile, researchers believe that Vietnam needs a new approach to policymaking. It is necessary to concentrate on industries instead of separated enterprises. The aim of the policies should be increasing productivity instead of increasing profit of some companies. The Government needs to help enterprises improve their competitiveness instead of protecting them from the competition pressure.
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