Vietnam's over-reliance on FDIs makes it vulnerable to global crises

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SEPTEMBER 04, 2020 - 12:24 AM

WHILE Vietnam's heavy reliance on exports and foreign direct investments (FDI) has helped to grow its economy, it needs to strengthen its domestic production and export capabilities to guard against global crises, a researcher has suggested.

In a report published by the ISEAS-Yusof Ishak Institute, Le Hong Hiep, a fellow at the institute, noted that more than 30 years since adopting market-based economic reforms in 1986, Vietnam has turned itself from an isolated pariah state and one of the least developed countries into one of the fastest-growing and most dynamic economies in the world.

Its foreign trade turnover increased from US$5.16 billion in 1990 to US$480.94 billion in 2018, Dr Le said. Meanwhile, Vietnam's foreign trade and FDI performance over the past 30 years has turned the country into one of the most open economies in the world, he said. In 2017, Vietnam’s trade-to-GDP ratio was 200.4 per cent, which was the sixth highest in the world.

Vietnam’s openness to trade and FDI originated from a combination of economic and strategic considerations, Dr Le said.

"Vietnamese strategists believe that by integrating Vietnam deeply into the global economy and strengthening economic ties with the major powers, Vietnam can align its economic interests with its partners’, thereby encouraging them to protect Vietnam’s interests," he said.

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At the same time, foreign trade and FDI help to create jobs and upgrade skills for the workforce, contribute to tax revenue and boost workers' income, he said.

However, policy makers and experts are now concerned that Vietnam's excessive reliance on exports and FDI could pose potential problems for the country, making it "highly vulnerable to global crises", he said.

This is a legitimate concern, he said, given the disruptions in international trade and global supply chain caused by the Covid-19 pandemic and intensifying US-China rivalry.

Dr Le noted that while foreign invested companies accounted for only 20.3 per cent of Vietnam’s GDP, they contributed a whopping 67.8 per cent to Vietnam’s total export turnover in 2019.

A key solution, he said, is to strengthen the production and export capabilities of domestic corporations so that they can play a bigger role in the economy.

Another measure is to encourage private enterprises to expand their businesses, especially into the manufacturing and high-tech sectors, to strengthen Vietnam's domestic industrial base. This can not only boost Vietnam's gross domestic product growth but also generate more exports for the country, he said.

At the same time, Vietnam businesses are also encouraged and assisted to work with foreign firms to participate in the global value chain as this would enable them to play a bigger role in the economy in the long run, he said.