Over the last decades, Vietnam has transitioned from being a conflict-ridden post-war nation to one of the most promising emerging markets of the South East Asia region. Since the introduction of market-oriented reforms in the 1980s, the Doi Moi Reforms, and the lifting of a US embargo in 1994, the Vietnamese economy has grown rapidly. Now, it is quickly becoming one of the most attractive investment destinations in Asia, and has, since 1983, boasted an annual per capita growth of 5.3%, closing in on its Chinese neighbor (World Bank, 2019).

Vietnam’s economic progress is impressive, and its current growth rate is telling for what the future might hold for the South East Asia nation, but there are a number of challenges ahead that have to be considered, and addressed, if Vietnam is to maintain its current economic advancement. In this article we will highlight some of the most urgent threats to Vietnam’s economic growth, and what the country is doing to tackle them.

The Demographic Dilemma of Progress

One of the main reasons as to why Vietnam’s economy has flourished over the past years is due to its astounding demographics. The Vietnamese population is growing, and it is growing fast. As of 2018 it was estimated to be around 97 million people, making Vietnam the fifteenth most populous country in the world (Statista, 2019). A majority of its population is of working or below working age, with 63% between the ages of 15-54. With a median age of 31 years, Vietnam finds itself, for now, in a demographic golden age (Department of International Trade, 2019).

That is, however, poised to change. While the population is still growing, birth rates are falling, and life expectancy is rising. Although an increased life expectancy is a sign of Vietnam’s explosive economic growth and progress, it will in time become a major public policy concern for the nation.

The demographic dilemma of an aging population is a well-known phenomenon in the developed world, and developing countries are just beginning to feel the consequences of this shift. The difference between the two is that in developing nations, such as Vietnam, the process of ageing is happening at a much faster rate than it did in the developed world (Shrestha, 2000). Increased standards of living and economic growth are rapidly transforming the societies of developing nations in a matter of decades, a process which occurred in European nations over centuries. In Belgium, it took more than 100 years for the share of the population over the age of 60 to double from 9% to 18% (UN, 2015). In Vietnam this same transition will take a mere 20 years. As such, Vietnam, and other developing nations, will face this demographic shift at much lower levels of per capita income than the developed world did (IMF, 2017).

The rapid ageing of Vietnam’s population will dramatically increase the burden of dependency and increase the demand for social support services such as healthcare, housing, income security and the overall welfare system. This will put a strain on the state’s budget. What’s more, a rapid decrease of its workforce will most likely affect its per capita growth between 2020 and 2050, and decrease overall productivity (IMF, 2017). As such, Vietnam is at risk of growing old before it grows rich. So, what can, and what is being done?

Vietnam has been rather proactive in facing this public policy concern. Some reforms have been suggested, such as raising the retirement age in order to prolong the endurability of its workforce (Hutt, 2017). However, more is needed to be done if Vietnam is to ensure its continued economic productivity and limit budget burden. As of now, Vietnam’s workforce is predominantly occupied in physically taxing occupations. In order to prevent an overall decline in its labor productivity, Vietnam should encourage the movement of people into less physically taxing occupations (IMF, 2017). Vietnam could take heed of Japan, who currently has the oldest population in the world, and its ambitious Abenomics reform package. Some of the policy reforms, dubbed after Prime Minister Shinzo Abe, aim at increasing the size and efficiency of its workforce by relaxing Japan’s immigration policies, and incentivising female labour participation. Although the success of Abenomics remains a debated notion, the policies aimed at increasing its labour force have been successful. The World Economic Forum points out that more women, elderly men and foreign workers have entered the market since the introduction of the reform package (Merler, 2018).

Vietnamese people can live healthy, prosperous, and long lives, but it depends on the right policies.

Protectionism and its effect on Vietnam

Continued international and economic integration, such as trade, is essential for Vietnam’s ability to face future socio-economic challenges such as a demographic transition, and its overall economic growth. This is evident in the government’s proactive approach to free-trade agreements. However, this also makes the country especially vulnerable to an increase in protectionism and inward-looking policies.

As for now, Vietnam has been able to take advantage of the protectionist driven economic disputes between the U.S. and China. Vietnam has proven itself to be an attractive option for investors and businesses looking to establish themselves in Asia but fear the uncertainty of the Chinese market. In the first quarter of 2019, Vietnam gained orders from trade diversions on tariffed goods equal to 7,9% of its current gross domestic product (Boudreau, 2019). Last year, Goertek, a Chinese company assembling Apple’s Air Pods, decided to reroute all of its production to Vietnam, citing macro-economic factors as the main driver behind the decision (Murray, 2018).  Although accelerated by the Trade War, this trend is not new. The combination of Chinese protectionism, with Beijing stepping up its use of discriminatory regulations against foreign companies, and rising Chinese wages, has spurred low-end manufacturers to leave China well before the Trade War (Su, 2019).

While Vietnam may have come out as the trade wars main beneficiary, it has also brought them unwanted attention from President Donald Trump and his protectionist cronies.

Vietnam’s trade surplus with the U.S currently stands at US$39.5 billion, and has prompted President. Trump to call it ‘’The single worst abuser of almost everybody’’ in regard to trade. In the beginning of July, the Trump administration imposed tariffs of more than 400% on steel goods coming from Vietnam (Shao, 2019). This is an escalation which could have uncomfortable consequences for the trade dependent nation. Thus, the Vietnamese government has taken steps to avoid further tariffs. One major concern of the U.S. is the attempt of some Chinese firms to side-step tariffs by faking product origin certificates, a practice which Vietnam has now vowed to punish with increased penalties (Chau, et al, 2019).

Vietnam currently finds itself in the act of balancing relations with two of the world’s greatest powers, who also happen to be the country’s top trading partners (OEC, 2019). Although a healthy relationship with the U.S. and China is vital to Vietnam’s economy, the country is taking steps of its own to ensure economic prosperity beyond its Sino-American relations.

In June 2019, Vietnam and the EU signed a Free Trade Agreement (FTA) that will eventually eliminate 99% of custom duties between the two blocks. 65% of all duties on EU exports to Vietnam will disappear as soon as the deal is signed, while the remainder is phased out over a 10-year period. As for Vietnam, 71% of all duties on its exports to the EU will be gone immediately, with the remainder being gradually phased out over a 7-year period. In 2018, Vietnam exported US$42.5 billion worth of goods and services to the EU, while the value of imports from the region reached US$13.8 billion. The Vietnamese government predicts that the agreement will boost overall GDP by 2.18%-3.25% annually by 2023 and by 4.57%-5.30% annually between 2024-2028, with the EU describing it as the most ambitious FTA ever concluded with a developing country. This FTA is yet another sign of Vietnam’s commitment to economic integration and trade (Vu, 2019). By diversifying its market presence, Vietnam is decreasing its dependence on the US and China, while strengthening its macroeconomic resilience. This is essential for Vietnam if it is to withstand future crisis and challenges. Industries, such as the agricultural sector, heavily depend on trade with the U.S, and Vietnam is hoping that the FTA will increase its agricultural exports to the E.U (European Council, 2019).

Although diversifying its market presence is good, Vietnam’s macroeconomic resilience depends on more than just its trading partners. As Vietnam further integrates itself into global value chains, its economy becomes increasingly dependent on the smooth workings of international trade. The country might benefit now, but further escalation of protectionist tendencies will, not only, hurt Vietnam directly through tariffs, but also indirectly. HSBC reports that Global Growth is already slowing because of the Trade War and other uncertainties, such as Brexit. Trade dependent nations such as Vietnam will eventually bear the brunt of the costs. While riding the wave of its current economic growth, Vietnam should look to improve its fiscal and monetary space, as this will give policymakers leeway for stimulating the economy when rough times eventually do come (Haksar, 2018). And come, they will.

The Burden of Coastal Regions and Deltas

Vietnam’s geographical location, with its numerous deltas and long coastlines, has blessed it with an abundance of fertile land. Over the past decade, agriculture has played an important role in national food security, poverty reduction and social stability. It’s per capita food availability now ranks in the top tier among middle income countries, with many countries trying to learn from Vietnam’s agricultural success. The nation has also become one of the top 5 exporters in products such as cashews, coffee, pepper and rice, and in 2017, agricultural exports earned Vietnam $37 billion, nearly 17% of its total GDP (Tatarski, 2018). In short, agricultural has been, and still is, a major contributor to Vietnam’s explosive economic growth.

However, Vietnam’s geographical location is also a blessing in disguise. The economic importance of the agricultural sector, combined with its densely populated areas and deltas, makes Vietnam one of the most vulnerable countries in the world to the effects of climate change (IPCC, 2019). The agriculturally prosperous region of the Mekong Delta particularly so. In June 2018, heavy rains, flash floods and landslides destroyed over 736 hectares of crops, causing economic losses of over 160 bil. VND (US$6.9 million). It is projected that if sea levels increase by 1 meter, up to 40% of the Mekong Delta would be inundated, resulting in the loss of 40% or more of Vietnam’s agricultural production (Smith, et al. 2018).

The challenge posed by climate change is complicated because it is so multifaceted. Rising sea levels will not only have direct economic consequences, but social and political ones as well. Climate change is already triggering a migrant wave in Vietnam. 1 in 10 Vietnamese are at risk of having their homes submerged in deep water if sea levels continue to rise, and every year, 24,000 people are forced to flee their homes because of natural disasters such as floods, storms and earthquakes. A figure which is likely to increase (Kim, et al. 2017).

Needless to say; climate change is a global challenge, and requires intergovernmental solutions, but there are several precautions that can be taken in order to mitigate its consequences. The Vietnamese government is already investing in multi-purpose structures such as dykes and embankments to prevent some of the damage caused by floods. They have also begun resettling people, living in the most vulnerable areas, into residential clusters built on foundations higher than the flood level, as to prevent future major displacements (Kim, et al. 2017). Alas, any long-term solution to climate change will only come from international collaboration. Besides investing in climate-smart infrastructure and adapting its regions to the metrological challenges brought forth by global warming, Vietnam can only hope that the international community finds a solution to human induced climate change.

Vietnam’s resilience

Vietnam’s future is very bright. Its strong economic growth and high levels of foreign direct investment are clear indicators of this. But regardless its current success, Vietnam’s future heavily depends on its ability to avoid pitfalls and overcome potential hurdles. The key lies in proactive policy making.

Socioeconomic challenges brought forth by an ageing population must not be taken lightly. Although it might be a sign Vietnam’s current progress, it would be foolish to underestimate the potential consequences of a decreased workforce. Vietnam should take heed of developed peers in its region. Vietnam’s ability to overcome challenges lies in its ability to be pragmatic, innovative and cooperative. International economic integration are great ways of strengthening ties with peers and the international community, while welcoming investment. But they should be cautious of becoming too dependent on others. As challenges such as climate change are mounting, the last thing Vietnam needs is an economic crisis caused by their inability to be macroeconomically resilient.

Vietnam’s economy is one of the world’s fastest growing ones, and there is little reason to believe that it will slow down any time soon. But after almost three decades of stable growth, the challenges are increasing. Although they are many and by no means easy, it is reassuring to remember the resilience of the Vietnamese nation, and past calamities that they have survived.


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