Last week, the Vietnamese Ambassador to China, Nguyen Van Tho, spoke at a reception hosted by the Vietnamese Embassy in Beijing to celebrate the 61st anniversary of diplomatic ties between the two nations. The Ambassador stressed that comprehensive cooperation with China was top priority for Vietnam and a major factor in all Vietnamese policy decisions. This was not surprising since the relationship between the two countries has been strengthened over the years by their major similarities. The Communist Parties in Vietnam and China have maintained a strong grip on their respective nations through a monopoly on political organization, censorship, and control of the army while simultaneously adopting economic reforms to combat poverty. Besides these well known commonalities, however, Vietnam also resembles the China of a decade ago in demographics and the resulting impact that has had on economic growth.
One of these major parallels between China and Vietnam is birth rates. Pundits have argued that economic growth in Asia can be significantly attributed to the demographic dividend associated with changes in the population structure. During 1995-1999, the fertility rate in China was falling because of its one-child policy and the country’s young population (defined as 14 years and younger) decreased from 28% to 26% of the total population. Combined with rapid urbanization, this trend led to a significant increase in Chinese labor force participation as women were ‘freed’ from child care and could take up jobs. With more people working, more money was spent and saved. Banks increased investments and with additional foreign money flowing in, domestic industries realized rapid increases in productivity and GDP. Vietnam is currently undergoing a similar transformation with slowing birth rates. Over the last five years, a Vietnamese woman bore, on average, 2.1 children and the country has seen a decline in its young population from 29% to 26%. Thus, with GDP growth rates in Vietnam from 2005 to 2009 (7.4%) approaching the levels in China from 1995 to 1999 (9%), Vietnam looks primed for an economic ascent in the coming decades that could be similar to China’s rise since the 1990’s.
However, the major difference between the two economies is that Vietnam currently runs a huge trade deficit while China ran a surplus in the 1990s. This is holding Vietnam back. It is therefore essential that Vietnam reduces its reliance on imports and propels domestic production and consumption to create an economy less vulnerable to exogenous shocks. Supplemental social security such as retirement or unemployment benefits would be a good tool to start the process, by removing uncertainty about income in retirement or hardship, thus enticing people to spend today and increasing the confidence of domestic producers. High consumption will help the country significantly in the short run but will of course have to be tempered with policies in the long run that encourage greater savings and therefore investment to ensure sustainable growth in the economy. While Vietnam began the immediate process of addressing its trade deficit by devaluing the Dong on Friday, the steps outlined here should help bring the negative current and trade account balances to sustainable levels in the long run.
In order to increase confidence in Vietnam, policies aimed at economic growth should be reinforced by steps that expand the civil liberties of Vietnamese. The Internet should be uncensored and the Communist Party’s monopoly on power should be gradually broken up; initially by encouraging civil society and then by allowing for a multi-party system to emerge. Although China has proven to be an exception in the short term, history has proven that sustainable growth can only be achieved in a liberal system that upholds the rule of law and guarantees freedom of conscience. The comparison of the United States and Soviet Union post World War II is a prime example of this. Vietnam will continue to accrue the benefits of a growing labor force in its planned economy like the Soviet Union did for some time, but, workers are a finite commodity. Once the labor force threshold is reached, Vietnam will have to rely on technology and entrepreneurs, a la United States, to shift the nation’s production function higher. A democratic government that respects people’s rights and properties will be critical to fostering technical development and attracting entrepreneurs to invest and innovate in Vietnam.
Vietnam today is demographically similar to the China of the 1990s and could experience rapid economic growth by adopting appropriate economic policies. However, while it could easily follow in its mentor’s footsteps, Vietnam would be better advised to embrace democratic reforms. Combined with economic policies that encourage higher domestic consumption in the short run, increased savings in the long run and a focus on technology, this will ensure stability in the nation and prevent extreme inequality amongst its citizens.
