Has VN entered the middle-income trap? Economists cannot agree

Monday, Apr 21, 2014 08:36

"We are falling into the trap but are afraid of mentioning the problem." said Tran Dinh Thien, director of the Viet Nam Economics Institute.— Photo petrotimes

Compiled by Le Hung Vong

Becoming a middle-income country has brought enormous challenges for Viet Nam, including the danger of getting caught in the so-called middle-income trap.

The issue of whether the country has already fallen into the trap has sparked much debate in the past few weeks.

Japanese expert Kenichi Ohno has said it has but local economist Nguyen Minh Phong said since Viet Nam has been a middle-income country for just three years, it cannot be considered to have fallen into the trap.

At a seminar organised by the Party Central Committee's Economic Commission in Ha Noi early last week, Ohno, who has spent over 20 years studying Viet Nam's economic issues, said: "I know experts do not share my viewpoint, but to me the middle-income trap is a tendency rather than an exact point of time."

He said policymaking in Viet Nam is different and does not follow international criteria, and urged the Government to change this and be more proactive.

Tran Dinh Thien, director of the Viet Nam Economics Institute, said Viet Nam has missed many opportunities to renovate technology and fuel growth since it was admitted to the World Trade Organisation seven years ago.

Manpower is an important factor for breakthroughs, but in Viet Nam training has been poor, he said, with a VND35 trillion (US$1.65 billion) education reform programme planned by the education ministry failing to get public consent.

The private sector, the most important force in the market economy, is always at a disadvantage compared to State-owned enterprises, he said.

"We are falling into the trap but are afraid of mentioning the problem."

Ohno told Tuoi Tre (Youth) newspaper that there are five pieces of evidence to prove that Viet Nam is in the middle-income trap: it has seen an economic (GDP) slowdown since 2006; poor labour productivity; Viet Nam's adherence to economic "formalism"; little improvement in competitiveness rankings; and rising problems such as environmental pollution, widening rich-poor gap, and chaos in the property market.

Phong said there are two points to show that Viet Nam has not yet fallen into the trap. "First, Viet Nam has been a middle-income country for only three years. A country would be considered as being in the trap only if it is stuck there for several decades.

"And second, Viet Nam has slowed down its growth only to enable economic restructure and achieve more rapid economic growth in the medium term."

He quoted the World Bank as saying that a country is considered to be in the trap if its average annual per capita income remains $4,000-6,000 for 42 years.

According to a forecast by the Organisation for Economic Cooperation and Development last December, it may take Indonesia until 2042 to graduate into a high-income country. Malaysia might do it by 2020; mainland China, by 2026; Thailand, by 2031; and Viet Nam, by 2058.

Many economies like Japan, Taiwan, Singapore, and South Korea have successfully escaped the trap.

All of them consider the private sector as central to economic development and attach importance to international co-operation, Phong said.

Viet Nam should study their methods though it need not follow them, he said. For instance, it can focus on developing the services sector instead of industry since it lacks advantages in the latter field, and it could take 15-20 years to develop a modern industrial sector, too long a period, he said.

Besides, its development depends on technology transfer from foreign partners, he said.

"We should focus on boosting the service sector to overcome the middle-income trap since the sector could bring benefits quicker than industry," Vietweek quoted him as saying.

"We should focus on international services. For example, Viet Nam could become an international gastronomy or resort center of the world."

Casino regulations eased

At a meeting of the National Assembly's Standing Committee last Thursday, many members backed a proposal to allow Vietnamese into casinos which currently admit foreigners and Viet Kieu (Overseas Vietnamese).

In a report he tabled at the meeting, Minister of Finance Dinh Tien Dung said locals could be admitted on "certain stipulations" such as their financial capacity.

The Government has submitted the draft decree to the NA Standing Committee for approval.

"After a decree on casino operations is promulgated, relevant authorities and agencies will consider the proposal to admit Vietnamese visitors into casinos," Dung said.

According to the chairman of the NA's Justice Committee, Nguyen Van Hien, many Vietnamese patronise casinos in places like Hong Kong, Cambodia and Thailand.

NA Deputy Chairman Uong Chu Luu said: "I back the plan to admit Vietnamese visitors with financial conditions into casinos."

But member Ksor Phuoc said relevant agencies should be careful, adding: "There is no need to hurry. There is no profit to it. The losses could sometimes be bigger than the profits."

According to the finance ministry, since 1992, when casino were allowed limited operations in the country, seven casinos have been licensed, including six that are operational in Lao Cai, Quang Ninh, Hai Phong, Da Nang and Ba Ria – Vung Tau.

In 2012 these casinos reported total revenues of VND930 billion (US$44 million) and paid taxes of VND254 billion ($12 million). Each employ 200 to 500 workers.

This is the first time that a decree to regulate the industry is being submitted to the Standing Committee for approval.

But the proposal is being opposed by some economists.

Prof Nguyen Mai, a former deputy chairman of the State Committee for Cooperation and Investment, said using casinos as an impetus for economic development is "a mistake."

"Viet Nam could become the ‘casino champion' if the demand to open casinos by 10 localities are all approved," he said.

End to development

Real estate companies oppose a proposal by the Ministry of Construction to stop licensing development of new commercial housing projects and urban areas.

The proposal is in a report it sent to the Prime Minister in March.

In the report, Minister of Construction Trinh Dinh Dung has urged the Prime Minister to order provincial authorities not to issue any more licences this year.

Dung said the proposal is aimed at reducing housing inventories and urging developers to accelerate work on stalled projects.

According to the ministry, infrastructure has yet to be created at many projects, especially urban areas in Ha Noi and HCM City, though work on them began over 10 years ago. It makes the houses there unusable and causes wastage of land, it said.

HCM City has licensed nearly 1,300 housing projects and hundreds of them are behind schedule. Many have suspended work due to financial problems.

Dung said many licensed projects have stalled, causing a big waste of land and money.

"We should stop licensing … to avoid further waste," he was quoted as saying by Sai Gon Giai Phong (Liberated Sai Gon) newspaper.

Figures from the ministry reveal that over 4,000 new urban area projects valued at VND4,500 trillion (US$213 billion) were licensed by the end of last year on 102,000ha.

The unsold inventories at these projects are estimated at VND94.5 trillion (nearly $4.5 billion).

The suspension of licensing would help bring the unfinished projects to completion, creating an impetus for new projects, the minister said.

But the proposal is opposed by developers.

Le Chi Hieu, general director of HCM City-based property firm Thu Duc House, said the proposal is not only "unreasonable" but also "contrary to the principles of the market economy," because licensing is the last step in a (long and costly) process to prepare for a project.

Property firms are responsible for their investments and for making their products attractive to buyers, he pointed out.

"Then why not license?" Hieu asked.

The deputy head of a property firm in HCM City, who asked not to be named, said no ban on licensing commercial housing and urban area projects has been issued yet. He said the ministry's proposal flies in the face of its own report saying that property inventories decline in the first quarter of 2014 and the real estate market is "warming up."

The Government's VND30 trillion loan package to "revive" the stagnant property market has faced difficulties because many people desiring to buy houses cannot get loans from it.

"In such a situation, why are there no new projects with conditions enabling home buyers to borrow from the VND30 trillion stimulus package?" Sai Gon Giai Phong quoted the unnamed property industry executive as saying. — VNS

Comments (0)