Promoting New Growth Driver to Avoid COVID-19 Economic Trap

9:35:57 AM | 9/9/2020

Although Vietnam has been spectacularly controlling the COVID-19 pandemic, the economy has been hurt in recent months. "The COVID-19 economic trap" is a phrase that many foreign economic experts use to refer to the pandemic’s economic effects.

Although Vietnam's GDP still grew at 0.4% in the second quarter, a result that can be considered an exception in the world at this time, it was still the worst result in 35 years. The magnitude of the economic slowdown - a drop of almost 7% points - was equivalent to the one observed in most affected countries – except that Vietnam’s economy, thanks to a healthier body, was in a better starting position to resist the pandemic.

According to Mr. Jacques Morisset, the World Bank's Chief Economist in Vietnam, in terms of employment and income, the scale of the COVID-19 shock may be even larger. It is estimated that over 30 million Vietnamese workers, or about half of the workforce, were affected at the height of social distancing in April 2020.

According to the statistics of the Ministry of Labor, Invalids and Social Affairs, the urban unemployment rate increased by 33% in the second quarter of 2020, while the average income per worker decreased by 5%. However, thanks to the easing of social distancing since the late of April, most family businesses have resumed their operation, and almost all wage workers have returned to work (according to a recent phone survey conducted by World Bank Group). However, this economic shock can be considered unexpectedly large for a country used to recording full employment during the last two decades.

In the near future, the economy is still vulnerable to new waves of coronavirus outbreak and, even in their absence, it could be stuck in the “COVID-19 economic trap.”

In the near future, according to Mr. Jacques Morisset, Vietnam's economy will no longer be able to depend entirely on two traditional drivers of growth – foreign demand and private consumption. Due to domestic and international uncertainties, risk-averse households will limit their investment and consumption plans. For example, the tourism industry will likely miss the 20 million foreign travelers that were expected to visit Vietnam in 2020. The export manufacturing and processing industry – a major source of urban employment – will face a further decline in orders from abroad. All manufacturing and processing exports – with the notable exception of computer parts – have declined in the past 6 months with this negative trend accelerating during the most recent months.

According to the World Bank’s economic update titled “What will be the new normal for Vietnam? The economic impact of COVID-19”, Vietnam is nevertheless in a good position to escape the economic trap of COVID-19, for at least two reasons.

This is because the Government has created enough fiscal space to implement an ambitious fiscal stimulus package. At the end of 2019, the level of public debt to GDP ratio decreased by 7% compared to 2016 – and the authorities had accumulated massive cash reserves. In the spirit of Keynesian economics, the government can therefore enhance both the aggregate demand in the short term and the aggregate supply in the longer term by spending more and better.

Of course, the World Bank's analysis argued that this tool must be used with caution, to ensure debt and fiscal sustainability in the future. Besides, Vietnam also needs to improve the allocative and financial efficiency of public expenditures. The positive impact associated with the fiscal stimulus can be maximized only if the authorities are capable of selecting the projects with the highest multiplier effect on jobs and the entire economy.

On the other hand, to continue stimulating demand, this fiscal drive should also have to provide smart support to the private sector, including family businesses, through a combination of tax relief and financial assistance.

Due to the inconsistent results of Vietnam's policy implementation in the above aspects, the World Bank's economic update also offers a series of recommendations on how to improve them. Although the fiscal stimulus package can boost the Vietnamese economy in the short term, to return to the pre-crisis trajectory of sustained and inclusive growth, Vietnam will need more efforts.

It is worth mentioning that Vietnam can rely on the second advantage. Due to early escaping from the epidemic trajectory in the fight against COVID-19, Vietnam can also increase its footprint on the world economy by attracting foreign businesses looking to diversify their operations and reduce risk associated with future shocks. Vietnam can also diversify trade by forging alliances with other countries with low COVID-19 infection rates and through exporting rice (and other agricultural products) to an increasing number of countries that face the risk of food insecurity.

In the domestic market, according to Mr. Jacques Morisset, Vietnam can accelerate the development of contact-free services (online learning, e-commerce, e-government and telemedicine), at the same time continue to deploy the digital payment system. Such a move not only helps meet the growing demand for quality services from the emerging middle class, but also improves the country's competitiveness by reducing transaction costs for the public and private sectors.

Getting rid of the COVID-19 economic trap is a priority of Vietnam as well as of many countries in the coming months. Nonetheless, Vietnam's policymakers have the opportunity to stay ahead of others, thereby not only adapting its own economy to the new realities, but also inspiring other governments in the coming time when they have to define what will be the new normal in the post-pandemic world.

Quynh Chi (Vietnam Business Forum)