Economic Growth and Future of Vietnam

Economic Growth and Future of Vietnam In the trend of globalization, economic integration and participation in the worlds organizations such as: Bilateral Trade Agreement (BTA), ASEAN Free Trade Area (AFTA) and World Trade Organization (WTO) are the opportunities Vietnam cannot ignore in order to absorb the essence of the world and reach the development objectives of the country. Although many judgments have been raised to disagree with the potential economy of Vietnam after joining those global organizations, we are still confident about the growth path of Vietnams economic development. In order to determine the growth rate, we have evaluated GDP rates in recent years (2007- 2010) to show the ability of sustaining financial crisis, and also the speed of recovering the economy after global economic recession. Besides, CPI rates and FDI rates also have been applied in our report which shows the ability of managing inflation or being an attractive investment country among Asian countries. From those reasons, Vietnam can be seen as one of the countries with the highest growth rate in the world, behind only China in the past decade, and this trend will continue to drive positive growth in the future. Moreover, concerning human resources, Vietnam has the advantage of a young labor force that is well- trained and has high educational levels. Also, the dynamics of information technology is on the rise in Vietnam. IT has been one of the highest growth industries in Vietnam over the period time from 1995 to 2008 since many famous software companies were launched into Vietnam. Besides, Vietnam is in the progress of industrialization and modernization in order to keep up with the level of other countries economies. And natural resources can be one of strongest weapons that Vietnam owns. Combined with a stable rise in the economy is the constant transferring of knowledge from multinational corporations, along with innovative ideas and technologies. Thus, it is believed that Vietnam has a high potentiality to become the next Asian tiger, after China and India. Contents page (Jump to) List of table and figures 1. Introduction 2. Main body 2.1 GDP of Vietnam 2.1.1 GDP definition 2.1.1 GDP rates 2.2 CPI of Vietnam 2.2.1 CPI definition 2.2.2 CPI rates 2.3 FDI of Vietnam 2.3.1 FDI definition 2.3.2 FDI rates 2.4 Labor force 2.5 IT industry 2.6 Industrialization and modernization 2.7 Natural resources 3. Conclusion List of table and figures: GDP- real growth rates 5 CPI rates in Vietnam 2009 7 FDI in Vietnam 2010 9 Top 10 investor FDI 2009 10 Labor force ranking chart 11 Introduction As we know Asia has been transformed since the World War II. A remarkable record of high and sustained economic growth has been produced and demonstrated by economic power .The first Asian country recovering from the World War II was Japan. And from Japan, to China, to India, and to Vietnam, sequentially the economic power of Asia has drawn the worlds attention. Each of Asian country has unique factors contributing to its respective economic success. At this time, the economy of Vietnam is a center of attention because it has a stable economy and high level of continuing to drive positive growth, and these are accompanied with strong development of science and technology. In fact, Vietnam has taken on a vigorous drive to reform its economy. The reforms are directed at developing major industries such as information technology (IT), telecommunications, financial markets and creating a good business environment for investors (FDI). And we can see that the results are a stable economy with rapid growth rates and the presence of many multinational companies in Vietnam. But most importantly, there is a substantial change in Vietnams economic structure after becoming a member of the WTO, which is to transform from an agricultural industry to industrial and service industries. If Vietnam remains economically stable and continues to drive positive growth. Vietnam is highly hoped to be the next Asian Tiger, and also can become one of the fastest growing economies in the world like China. Main body The economy of Vietnam has been growing year by year at a vigorous pace after becoming a member of the WTO since 2007. Many ideas have been raised to keep this continued growth path. But we still have some drawbacks to deal with in the coming years. In this report, we will focus on analyzing GDP, CPI and FDI rates and other factors, which provide us with an overview of Vietnams current position. GDP of Vietnam GDP definition GDP is the abbreviation for Gross Domestic Product, which shows the total value of goods or services produced in a country in a given year. Put simply, GDP is the total household spending, business investment, government spending plus the difference between exports and imports. GDP rates The percentage of Vietnams GDP can provide us with an overview of our current level of health and growth of economy. The chart above shows that in 2007 the GDP of Vietnam was 5.3 percent, and in next two years there was a sharp decline in GDP figures, only reaching 6.2 percent and 5.3 percent in 2008 and 2009 respectively. Here are a few reasons for this: The first reason was due to exports. Vietnam has been very successful in developing industries for export, but in the year of 2009 the demand for exports was significantly reduced. The exports of Asian countries have fallen at the alarming rate because consumers in the U.S., Europe and other markets were cutting down on expenditures. The second reason was caused by consumer spending. With the unemployment rate increased (due to problems arising in areas of manufacturing exports) and reduced employees income due to high inflation in 2008 (22%), households spending money was cut down. The third reason was because of investment. Investment growth rates in recent years were resulted from cash inflows of FDI into Vietnam. But with the credit crisis and global economic recession, capital flows were affected severely. Those were some obstacles which occurred in a few years ago. As compared to other Asian countries, the economy of Vietnam had already recovered and improved much faster in overall of GDP performance by the end of 2009. And now we are in the process of developing the economy for 2010 and the years following. Vietnams GDP growth rate is forecast to be around 6.5 % and 6.8 % in 2010 and 2011, according to Asian Development Bank (ADB) in its latest report (2010). And the first signal of increasing GDP was exposed in the first quarter of 2010, according to Ministry of Planning and Investment(2010): The GDP growth rate in the first quarter of 2010 increased 5.83%, which was higher than for the same period in 2009. As a result, it is believed that the GDP of Vietnam increasing in next few months could be feasible. And we hope that the efforts of improving GDP rates of Vietnam will never stop in the coming years. 2.2 CPI of Vietnam 2.2.1 CPI definition CPI is the acronym for Consumer Price Index which is a measure the level of inflation. It measures change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation, over a given time period. And the CPI published monthly is also called the cost-of-living index. 2.2.2 CPI rates The chart above shows what happened to CPI in each month of 2009, we can see that the consumer price index increased to 1.38 %, the highest percent during the year. Inflation rate is a key driver leading to a high CPI rate. In 2008, there was a huge impact of inflation on consumer prices; CPI was 22%. However, this number was no longer repeated in 2009 because the government devoted more efforts to bring down the inflation level; as a result the CPI rate was 6.9% and much lower than the previous year. So, the CPI rate is largely dependent on the inflation rate. From that, we can have a deeper understanding of how the trend of CPI flows by analyzing the inflation rate. And an increasing inflation rate or CPI rate can be caused by some of following reasons: The factor which created the base of increasing CPI in 2009 was to increase fuel prices from 30 August. ( General Statistics Office) A variety of prices of construction materials increased over the year. Other factors pushing the price were higher price for some essential goods or services, such as: medicine, food, transportation, electricity, water and so on. Higher gasoline prices have also contributed to the increasing CPI rate. From the above reasons will form a picture of the variation of cost of living since then to help financial professionals recognize the potential for inflation to be at risk as a decline in the economy? So, one of the top priorities Vietnam has now is to manage to keep inflation rates within a special range or targeted level. According to ADB (Asian Development Bank) report (2009): the inflation rate in Viet Nam in 2010 is forecasted to be around 10%, and the government is applying a tight monetary policy to keep the inflation on target which is lower than 7%. Here are some current typical methods being applied: Increasing interest rates to encourage more deposits. Controlling credit lending activities to limit cash outflow. Tightening money in production and consumption. Limiting expenditures for the national budget. With those methods, the government is quite confident to forecast that in 2010 and 2011 the inflation rate will be 7.8% and CPI rate will be stable at 8.3%. 2.3 FDI of Vietnam 2.3.1 FDI definition FDI stands for Foreign Direct Investment which can be seen as a component of a countrys national financial accounts. Foreign Direct Investment is the investment of foreign assets into domestic structures, equipment, and organizations. However, it does not include foreign investment into the stock markets or bond markets. And FDI is thought to be more useful to a country rather than investments in equity of its companies. This is because equity investments or so called hot money which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. 2.3.2 FDI rates According to a survey conducted by the Asian Business Council, Vietnam was ranked third for investment attraction among Asian nations in the 2007-2009 periods, after China and India. And in 2010, the general rate is still good in the first quarter. In the chart we can see that there are many multinational companies investing FDI in Vietnam in 2009. So, lets take a look at 2009. Total capital of FDI was about 21.48 billion USD, in which 16.34 billion USD was for newly licensed projects (76% contribution, 839 projects). The top three provinces attracting FDI in Vietnam were: Vung Tau, Quang Nam, and Binh Duong. Ho Chi Minh City and Hanoi were ranked number #7 and #8 accordingly. However, the number of licenses granted by those major economic hubs of Vietnam was almost 537 licenses (64% of total new licenses granted in Vietnam). According to the CEO of ANZ bank (2010): FDI always finds a way to somewhere investors feel safe, in recent years Vietnam has been a country where FDI flow is increasing steadily and highly. In 2010, FDI target is forecasted to increase by 10% compared with 2009, according to the Foreign Investment Department. Thus, we can see that Vietnam is still capable of attracting outside investments at a very high level after the global economic recession (2008), especially in FDI. 2.4 Labor force China 807,300,000 India 523,500,000 United States 154,300,000 Indonesia 112,000,000 Brazil 93,650,000 Russia 75,700,000 Bangladesh 70,860,000 Japan 66,500,000 Nigeria 51,040,000 Pakistan 50,580,000 Vietnam 47,410,000 Labor force ranking chart Vietnam is considered a country with a huge number of workers. According to the figures above, we can see that Vietnam is in a position, which is nearly within the top ten highest countries in the world. As you know, one of the major attractions for manufacturing industries to come to Vietnam is the labor force. Because Vietnamese workers have met both the quality of a labor force, which is well educated and hard-working. In addition, wages that companies pay them are lower than by 30% compared with China and India. Thus, Vietnam has the advantage of a labor force, which is well-trained and cheap. However, after joining WTO there are some challenges in human resources when foreign companies have launched into Vietnam: There is more competition forcing local companies to be more proactive and consistent in making any actions or decisions. Getting a better remuneration package at foreign companies has attracted better skilled workers. This forces local companies to adjust their remuneration scheme. Getting more flexible time at foreign firms has enabled people to work more comfortably and efficiently. Thus, this also forces local companies to adjust their time- table to keep workers away from transferring to foreigner companies. Moreover, in the context of the current globalization in businesses, Vietnam is still facing a major problem which is the lack of a higher level of human resources, such as CEO, CFO, CIFA, so on. Of course, the Vietnamese Government understands the importance of these issues which need to be overcome as soon as possible. According to Deputy Prime Minister Nguyen Thien Nhan (2009): There are several reasons why the qualifications of Vietnamese laborers are still quite low. And he also stressed that: The act of disregard for vocational training is a great barricade for educational development in Vietnam. Therefore, the policies of government support in promoting its human resources are being conducted more extensively, such as improving quality of education, especially for tertiary education and vocational training. So as a result, in the next few years, hopefully Vietnam will have a higher number of workers with high- quality skills in order to attract more and more foreign companies investment, and also be able to compete with skilled and knowledgeable foreigners working in Vietnam. 2.5 IT industry IT is always considered as the most interesting and dynamic industry, so Vietnam wants to strengthen its impacts. The value of IT for developing countries can be seen as an important tool to accelerate the process of international integration and help the government have more capacity in governance. Also, people in that country can have an easy access to information and knowledge from all around the world. Local businesses can definitely reduce costs and improve their operational performance by using modern technology. According to Prime Minister Nguyen Tan Dung (2009) :The Government of Vietnam promises to support multinational IT corporations in the way of building and developing their brand names in Vietnam, at the same time to encourage the application of IT in all parts of social life to create a dynamic IT market. Information Technology in Vietnam has accelerated rapidly in recent years. In 2008, IT market growth still remained strong, reaching 23%. And in 2009, it was estimated at over 20%, equivalent to $ 6.26 billion (in 2008 it was $ 5.22 billion). In particular, sales in the electronic industry and hardware industry were estimated at 4.68 billion dollars, up by 14%. And the software industry also had an estimated growth rate of about 30% with total revenue of $ 880 million. The numbers above show that the IT industry could still remain at a very high level even though it was strongly affected by the economic recession in 2008. Besides, with the participation of many big companies in various parts of IT, for instance: Intel, ADM, Dell, Sony, and Samsung, combined with the development of local IT companies such as FPT, HIG or CMC. Vietnam hopes that its IT industry can be soon become a core economic industry, which plays an important role to enhance economic performance. 2.6 Industrialization and modernization Becoming a member of WTO in 2007, Vietnam has been taken a substantial change in its major structure, which is to transform from agricultural industry to industrial and services industries. Or put in another way, Vietnam is in the process of industrialization and modernization. It began to implement the process of industrialization from 2001 and will be finished in 20 years (2020). In the past, Vietnam was just an agricultural country, the percentage of agricultural contribution accounted up to 90% in total GDP. In the 80s and 90s, a new wave of industrialization in Asian countries rose dramatically, especially in Southeast Asian countries, such as Singapore, Thailand. It created a new appearance of the economy in Asia. From that reason, Vietnam is now actively opening door to get more exchanges and more cooperation with foreign countries, trying to implementing industrialization and modernization in order to keep up with the economy of other countries, and also make a dream of becoming the next Asian tiger. A good example of the industrialization is that Vietnam is conducting to narrow the scope of the agricultural sector, traditional agriculture is gradually declined in its scale, replaced by modern agriculture (machinery is used more in agriculture production). Here are some major accomplishments have been achieved from 2001 to 2010: In 2008, the proportion of GDP was changed rapidly in its structure (the percentage of agriculture industry was only for 22%, industrial industry was 39.9% and service industry was for 38.1%). Applying science and technology into the agriculture and aquaculture production has been gradually improving. Rural development in Vietnam has been acquired positive levels, such as infrastructure, health and education. As a long- term goal, Vietnam aims to basically become an industrial country which has the modern technical facilities, high standard of living and high quality of products and services in 2020. 2.7 Natural resources With a favorable geographical position, various topography and long coastline (3600km), Vietnam has many various kinds of natural resources, which can be seen as an advantage of the economic development. The natural resources of Vietnam can be divided into seven categories: Land resources: Helping for the agriculture of rice production in promoting its strength. Vietnam is the largest rice exporter in the world only behind Thailand, and also has a suitable land condition to plant high value crops such as coffee, rubber. Vietnam is the third largest coffee exporters in the world after Brazil and Columbia. Vietnam exported rubber approximately $ 1 billion in 2009. Water resources: There is much underground water and mineral water which is suitable for natural mineral production. Marine resources: The number of seafood export is forecasted to reach $4.1billion, increased by 6.8% comparing to 2009. Forest resources: It is important part of ecological environment, Vietnam is trying to protect its forests to keep the air fresh and regulate the climates. Biological resources: Vietnam has a diversity of flora and fauna which can help to produce food, medicine and oil. Besides, Vietnams flora also has some rare wood used for exports. In 2010, Vietnam will try to increase the number of wood exports by 8%- 10%, as compared to 2009. Mineral resources: It is spread across the country to be convenient for the exploitation, but the mining policy should be appropriate to maximize the advantages of each type of resource. Tourism resources: There are many beautiful and exciting destinations in which local and foreign visitors can visit. In 2008, the tourism industry generated revenues up to $ 4 billion, showing the importance of tourism contribution in the economy of Vietnam, according to reports Vietnam Tourism Industry Forecast to 2012. In general, Vietnam can take advantage of those resources to create a good business environment for itself and attract more investments from other countries. However, the Vietnamese government has not managed them well yet, so the natural resources cannot be utilized completely its functions. In order to maximize the natural resources benefits to the countrys economic development, all resources need to be used or utilized efficiently and effectively. 3. Conclusion The growth of Vietnams economy in recent years has attracted much attention of multinational companies, especially in IT fields, including: Intel, Samsung, Sony, Dell, and Cannon, etc, putting their establishment in production facilities and creating a dynamic IT industry. So, Vietnamese companies have a higher chance in absorbing the essence of many innovative ideas and technologies from them. In 2010, Vietnam aims to reach 6.5% in GDP. The change in a positive number of GDP can tell us that Vietnam is on the way of improving the health and growth of the economy after the global economic recession (2008). In contrast, the government is trying to keep the CPI rate stable at 8.3%, and also bring the inflation rate down up to 7%. Moreover, the government also has some plans to create a business environment for investors in order to increase FDI; the more investments in projects, the more our countrys assets will be developed. In the meantime, taking into account the labor force can be thought as much essential as enhancing well-being of economy. And the factor of natural resources also plays an important role in Vietnams economic development. In general, Vietnam is in progress of recovering the economy and getting ready to deal with any obstacles in the future. Now, nothing can stop Vietnam from becoming stronger and stronger; especially since it has been successfully gotten through all of the challenges in 2008 and 2009. So, there is no doubt that Vietnam will be a potential candidate for the next Asian tiger in the coming years.