Will Vietnam fall into the middle-income trap?
10:24 10/10/2014
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If Vietnam's GDP grows by 5.6-5.8 percent in 2014 as economists predict, this will be the fourth year Vietnam has obtained a modest economic growth rate.

Will Vietnam fall into the middle-income trap?

Vietnam remains a very attractive destination for investors. This explains why major investors keep pouring capital into the country despite domestic difficulties.

For example, the Thai BJC Group recently invested $880 million in Vietnam through a deal to take over Metro Cash & Carry Vietnam.

And a series of real estate projects worth hundreds of millions or billions of dollars have been registered.

Analysts noted that foreign investors believe Vietnam has a bright future in the long term.

They believe that Vietnam will enter a new economic development period with greater achievements, something the country did in the past with doi moi (renovation), which turned it from a low-income into a middle-income country.

However, they also said it would be risky to “bet” on Vietnam.

In 1950s, Robert Solow, an economics professor of MIT, released the Solow growth model which can explain the reasons behind the nation's economic growth.

There are two points to the Solow model which could be helpful for Vietnam when they seek a way to follow its economy. First, when income increases, economic growth tends to slow down. Second, technology, which determines labor productivity, will be the decisive factor for a nation to maintain its sustainable development.

The high 7-8 percent GDP growth rate for a number of years was followed by a long slow-growth period commencing in 2009.

This was as expected, if the Solow growth model is taken into account. With the major resources of Vietnam, including investment capital, workforce and natural resources decreasing, and the lowest labor productivity in Asia Pacific, the slowdown was inevitable.

The World Bank has recently released a message that if Vietnam wants to become a rich country like South Korea in the next 20 years, it must obtain an annual GDP growth rate of 9 percent per annum.

The high economic growth rate has proven to be out of reach of Vietnam. The highest GDP growth rate Vietnam obtained in its most prosperous years was 8 percent only.

As such, analysts have every reason to worry that the warning about the middle-income trap could end up being true.

In fact, the warning about the dangerous trap was given many years ago. In 2009, ASH, the leading organization in the world in terms of research on the public sector, commented that Vietnam made considerable progress to become a low-middle income country, but it would face great challenges to avoid the middle-income trap to become rich.

The organization said that in order to avoid the trap, Vietnam needs to urgently carry out institutional reform, especially in education, law and the financial system.

It also warned that this will be a very difficult job and that many countries have failed to do this. Malaysia, Thailand, Indonesia and the Philippines are some of them.

This could happen in Vietnam. Nguyen Xuan Thanh, director of the Fulbright Economics Teaching Program, said recently in Harvard Magazine that if Vietnam did not make radical changes, it would not be able to penetrate the economic sectors which can bring higher added value and improve the national economy.


Source Vietnamnet

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