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Vietnam’s domestic moment
Sunday,  8/2/2020, 12:10 

Vietnam’s domestic moment

By Richard McClellan(*)

A biology class at a school in HCMC. Vietnam's 100 million strong are young and rapidly maturing in every conceivable way: in educational attainment, in entrepreneurial spirit, in financial acumen and access to capital, and so on - PHOTOS: THANH HOA

Editor’s note: The author of this article, an American business and policy strategist providing services primarily for the private sector, argues that although foreign direct investment in Vietnam has hit a snag because of Covid-19, it may not be disastrous for the country. It is time, he says, to bring the private sector into full play and “serve Vietnamese customers with Vietnamese products, services, and ideas.”

I recently took a taxi to the Tan Son Nhat International Airport in HCMC. Halfway there, the driver confirmed whether I would go to the domestic terminal, and I laughed to myself, thinking “well, nobody’s going to the international one!” But as we made the final approach even I was shocked at the contrast. To the left was the typical line of traffic for the domestic terminal, stretching perhaps a half mile. To the right, the ramp leading to the international terminal was barren—the gigantic building dark, lights off, no people, no cars, no nothing.

Richard McClellan

Vietnam is the beneficiary of decades of inflows from foreign direct investment (FDI) and official development assistance (ODA). Whilst both stand as pillars of Vietnam’s economy, it is neither possible nor desirable that these buttresses should continue indefinitely; rather, both must wane in significance as the country develops its own self-sustaining economic engines. Considering the forces at work, both regionally and globally, the time is now for a hard pivot to domestic growth in Vietnam.

FDI has been shouldering the bulk of Vietnam’s rapid economic growth for some time despite representing roughly a fifth of the economy. The private domestic sector has seen similar acceleration, but starting from scratch still represents only one-tenth of economic activity. The largest two sectors—state-owned enterprises (SOEs) and “household” (i.e., the informal domestic sector)—comprise two-thirds of the economy, but both underperform on growth. It is the formal private sector (both foreign and domestic) which propels us forward.

Long-term, economic self-sufficiency will require the Vietnamese to also develop robust domestic supply chains that extend from the ground all the way to final consumption

And certainly, the developed nations behind Vietnam’s historic FDI growth cannot sustain it. We are likely to see global recessionary impacts from Covid-19 for at least a couple of years as declining consumption in developed countries creates knock-on effects in producing countries. Still, in the long-run the risk of production retrenchment is a far more serious threat, with countries (and companies) increasingly incentivized to bring production home. Western countries were already trending nationalistic the last few years—a reckoning long due after decades of globalization—and Covid-19 will only strengthen this trend. China is likely to absorb the majority of the global fallout, but for Vietnam, a meaningful slowdown in exports would be problematic.

Fortunately, Vietnam is well poised to begin standing on its own economic feet. Having emerged from the first wave of the pandemic relatively unscathed, but with the resumption of “normal” international travel unlikely any time soon, the country is moving forward—strangely enough—without the steady parade of investors, experts, and advisors that had become routine.

This is a very good sign. Long-term, economic self-sufficiency will require the Vietnamese to not only depend less on foreign money and expertise, but also develop robust domestic supply chains that extend from the ground all the way to final consumption; shift the “household” sector into the formal economy (i.e., registered businesses, paying taxes, and expanding); and find ways to innovate and scale uniquely Vietnamese solutions to unique Vietnamese challenges.

The demographics and timing could not be better. The post-American War baby boom generation is coming into prime career years, propelled into opportunity and leadership roles by the economic liberation unleashed in the late 1980s. Vietnam’s 100 million strong are young and rapidly maturing in every conceivable way: in educational attainment, in entrepreneurial spirit, in financial acumen and access to capital, and perhaps most importantly (economically speaking) in consumption patterns.

And thus we’ve arrived at the opportunity and necessity of catalyzing Vietnam’s private sector. The time has clearly come to point export profits back into domestic growth opportunities. The time has come to innovate new products for a growing middle class. The time is now to fully establish our national infrastructure. The time is now to accelerate the privatization and modernization of SOEs, so they can at least start tracking the broader economic growth. The time is now to build supply chains capable of moving higher volumes of goods to more parts of the country. And the time is now for our nascent (and adolescent) businesses to begin capturing more value-add, no longer content to take the lowest-margin slices of global systems, but ready to serve Vietnamese customers with Vietnamese products, services, and ideas.

Perhaps it’s not a bad thing if we keep the lights off at the international terminal a little bit longer.

(*) Richard McClellan is an American business and policy strategist serving private companies, NGOs, and provincial governments in Vietnam. His career as an advisor includes a decade working with McKinsey & Co., but he first came to Vietnam six years ago to lead a team developing socio-economic policies under the direction of Mr. Tony Blair. His current work covers growth, transformation, and sustainability topics.

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