Quality of Growth

This is the most outstanding feature of the Government’s report to the National Assembly in early 2006. The report mainly focuses on institutional reform and growth quality improvement. An important change in the access to economic targets depicts a diversion, suitable with the State’s functions in the market economy.

However, it is not easy at all to have a strong change in awareness and turn it into a suitable action mechanism. This could be seen via debates of the National Assembly’s forum about Vietnam’s economic growth target for 2006. Debates focused on a target of a growth rate of eight per cent with two different opinions. One stated that a growth rate of eight per cent was too low and the other concentrated mainly on quality of growth instead of a high growth rate.

 

 

The first opinion was based on three reasons. Firstly, in 2005, despite many difficulties due to complicated developments of prices of oil and petrol, markets of textiles and garments, natural disasters, and the outbreak of bird flu, the Vietnamese economy gained a high growth rate of 8.4 per cent, close to a target of 8.5 per cent. Secondly, the economy, as stated in many research works and documents of the Party and State, has a growth rate lower than its potential. Therefore, there are adequate conditions for the Vietnamese economy to increase its growth rate significantly against the present rate. Thirdly, in an environment of fierce competition and international integration, a high growth rate is a vital requirement for the Vietnamese economy as it would not be able to avoid a risk of being left further behind other economies in the region without the improving its growth rate.

 

Based on such arguments, some propose to increase the growth rate target for 2006 and the coming years to between 8.5 and nine per cent.

The second opinion focuses many on quality of growth. This implies a more reasonable target with a growth rate of between 7.5 and eight per cent. Firstly, as the Vietnamese economy’s growth model is mainly based on the increase of investment capital, and with an evident inflation risk, Vietnam cannot strive for short-term growth targets, destroying long-term growth foundations, the most important factor of which is a macroeconomic stability. Secondly, some basic conditions for the economy’s growth, which are not under the control of the local government and enterprises, are drawbacks for the economy’s growth. These include developments of the world market, for both inputs, such as oil and petrol, chemicals, steel, fertiliser, foreign exchange, and outputs, including textiles and garments, footwear and seafood, let alone natural disasters and outbreak of epidemics, which will produce negative impacts on the Vietnamese economy. With such arguments, the second opinion is more convincing.

 

However, the two opinions fail to point out persuasively how the Vietnamese economy to achieve its growth targets in 2006.

 

At first, without unexpected developments, which produce negative impacts on the local economy, Vietnam is in a good situation to gain a higher economic growth rate. However, it is just a possibility despite its high probability. To turn the possibility, which is growth potential, into a real GDP growth rate of between nine and ten per cent, even between 15 and 17 per cent, certain conditions are needed. To achieve its potential growth rate, it is necessary to improve the effectiveness of investment but not to increase investment capital.

 

From the point of view of economics, to improve the effectiveness of investment, it is necessary to create and strengthen long-term foundations for growth but not to mobilise maximally capital and allocate it mainly to State-owned enterprises. Concretely, policies and efforts of the macroeconomic apparatus should prioritise the creation of mechanisms for an effective allocation of resources of the economy. A healthy and dynamic business environment with a synchronous development of all markets, a suitable division between the State and markets, the division of works and roles of components of markets, and more importantly among economic sectors, a simple taxation system, and a banking system which operate without a bias in favour of any economic sector, are components of such an effective mechanism for resource allocation.

 

For the Vietnamese economy to improve its growth, reaching the potential level, efforts should be made to create and strengthen growth foundations. This is a long term vision for growth, which is also the most important content of a requirement for a change in awareness and a conversion in getting access to economic growth targets.

More specifically, it is time for Vietnam to put an end to a growth model which is mainly based on the increase of investment, the exploitation of natural resources and State investment. Even with sustainable growth, the Vietnamese economy cannot wait for a long time to convert into a model which is based on a market-determined resources allocation in accordance with the rule of free competition, and the encouragement of the involvement of the private and foreign-invested sectors, as well as hi-tech, skilled human resources and international integration.

 

With limited financial budget and capability of the apparatus and cadres, in 2006, and possibly in coming years, the government cannot address these two issues adequately, creating and strengthening foundations for growth and achieving a high growth rate. The best method for the short term is to prioritise the creation and strengthening of foundations for growth instead of efforts to increase the State’s investment to achieving a high growth rate.

 

At present, the increase of investment capital has become a chronic disease of the Vietnamese economy, which cannot be treated in one or two days. In the State-owned sector, ministries, agencies and localities, investment for development has become a fierce competition. In many cases, behind the competition, there are partial benefits from the State investment ‘cake’ and personal interests from corruption and embezzlement, as well as power abuse. From the moral point of view, everybody is willing to condemn such a disease. However, a few people refuse to give up the benefits offered by the mechanism.

 

At the same time, another important factor is a change in the concept of target. Usually, economic targets have been set for a certain period of time, which may be one, five or ten years. This means that the economy is ‘designed’ to gain a growth rate of five or seven per cent per year, for example, so at a certain moment, late 2006, late 2010 or late 2015, GDP or export turnover will reach certain figures. This system of quantitative targets is important as they measure the progress and identify potential, which is also capability for growth and development of the economy. However, this method does not express quality of the progress and has its weaknesses. Firstly, it may easily create satisfaction. Secondly, it has nothing to deal with effectiveness and quality of growth. Thirdly, and more importantly, in an open economic system, the method fails to help identify the strength and position of the economy in comparison with its rivals.

 

This may result in the economy gaining a high growth rate in the short and medium term, but will lose in the long term development race due to a failure in competition. For a poor and under-developing economy, it is easy to gain a high growth rate. However, these countries’ capability of improving quality of growth, creating and strengthening long term foundation for growth is often poor. That is why most poor countries are still poor in a long term race for growth. This can be seen in the case of Nigeria, Brazil and Argentina in the 1970s. At first, these countries gained a miracle growth for decades with a model of import substitution, mainly relying on the exploitation of natural resources and being led by inward oriented policies and dominant direct interference of the State, but then fell into economic recession and crisis.

 

This means that in an open world economy with deeper competition and integration, the vital target, which is more important than a GDP growth rate of between five and seven per cent, is involved in competition capability and position within a competition system. Failing to achieve these targets, the economy cannot exist as a competition entity. It will have no opportunities to escape its under-developing situation, despite its high growth rate.

 

From that point of view, a drop in Vietnam’s position in the global competitiveness standings implies a further possibility of being further left behind, which is worse than a drop of between one or two per cent in its economic growth rate. This is the main message of the awareness of the open market about growth targets for the coming years.

 

Following the message, in the short term, which may last several years, the economy may fail to achieve its expected growth rate as it has to concentrate on creating and strengthening long term foundations for growth, instead of striving for short term growth targets. However, the economy will gain sustainable high growth targets. This will be a foundation for Vietnam to think about and believe in a period of time, which will last tens of years, with a GDP growth rate of between 12 and 15 per cent.