Is globalization of the Vietnamese economy good or bad

Vietnam has made a great progress in global integration since it began the “Doi Moi” process, especially when our country became the 150th member of WTO in 2007. The global integration has helped to change a poor country facing with starvation in the 1980s into a highly developing country now. However, Vietnam also has to face up with challenges affecting economic stability such as global financial crisis, severe competition from foreign enterprises. In order to understand more about globalization and its effects on the Vietnamese economy, I would like to write this paper to discuss the opportunities and challenges of this process upon the Vietnamese economy and what can be done to overcome these challenges.

I. Literature Review

1. What is globalization?

Globalization has now become a popular term appearing regularly on television, radio and newspaper. It is a very broad term which is related to economy, politics, culture, and environment. Carbaugh (2008) defines globalization as “the process of greater interdependence among countries and their citizens. It consists of increased integration of product and resource markets across nations via trade, immigration, and foreign investment – that is, via international flows of goods and services, of people, and of investment such as equipment, factories, stocks, and bonds. It also includes noneconomic elements such as culture and environment. Simply put, globalization is political, technological, and cultural as well as economic” (p.2). Within this paper, we only focus on the economic side of globalization.

2. History of globalization in the world’s economy

Carbaugh (2008) mentions three waves of globalization which constitute the so-called globalization nowadays. The first process was initialized by the global economic integration occurred from 1870 to 1914. It began with the decreases in tariff barriers and the development of new technologies – railway, steam engines, and steam ships which lowered transportation cost. This wave was mainly driven by European countries, American businesses and individuals. As a result, the ratio of exports over the world’s total income nearly doubled to 8 percent and the United States became the richest country in the world. The first wave of globalization was ended by World War I, followed by the Great Depression of the 1930s, which pushed back the process.

The second wave of globalization happened within the period 1945-1980 with the continual falling cost of transportation and the removal of trade barriers among developed countries. This period were featured by a new kind of trade: agglomeration economies-firms clustered together and were connected in a vertical linkage; parts manufacturers located near the main assembly line to lower the cost of transport. However, most developing countries still could not participate in this process for many different reasons. As the result, per capita income in developed countries increased dramatically while other developing countries were left behind.

The last wave of globalization began in 1980 and continues up to now. The pace of this global integration has become much faster and dramatic because of unprecedented advancements in technology, communications, science, transport and industry. The wave is featured by the dramatic increase in global trade not only from developed countries but also from developing countries, which has made the global GDP increase quickly. Developing countries such as China, India, Brazil have succeed in joining the world market, exporting the goods they have competitive advantage – mostly labor-intensive products. The communication technology developed very quickly. Another aspect of this wave is the increasing foreign outsourcing, which aims mainly at lowering the production cost by producing parts in developing courtiers. The period is also featured by bilateral and multilateral trade agreements and the establishment of the world’s biggest trade institution: WTO (the world trade organization) to supervise and liberalize international trade.

3. The globalization of the world economy-for better

There is maybe no other issues which are more controversial than globalization. There are maybe no other international institutions which are more protested than WTO. However, theories and reality have proved globalization’s indispensability.

According to the law of competitive advantage by David Ricardo, because of trade, films, regions, countries will gain benefits if they specialize in producing things they do well at a lower cost and use the earnings from these activities to by goods for which they are high-cost producers. Carbaugh (2008, p.14)

Globalization encourages innovation and efficient production in each country’s economy. Because of competitiveness from foreign enterprises, domestic producers have a strong incentive to improve the quality of their products. Carbaugh (2008, p.14)

Globalization also helps reduce the price of goods. For example, in the case of the US, because of global competition, the prices of such items as TV sets, clothing, toys have reduced dramatically. Meanwhile, the prices of products untouched by globalization, such as hospital services, sports tickets, and car repair have a tendency to increase. Carbaugh (2008, p.14)

Globalization through the form of international trade provides stability for production. For example, a company can buy parts and components worldwide to supply its production. Moreover, it can export its products to other countries if the demand in the domestic economy is low. Carbaugh (2008, p.16)

Globalization plays an important part in the economic growth of one country. For example, countries that open their economy to international trade tend to benefit from new technology and other sources of economic growth. (Carbaugh, 2008, p.16)

Protestants of globalization often mention job displacement, loss of country’s sovereignty, environmental damage, etc. as reasons for anti-globalization. Indeed, these problems can be properly addressed if each government has determination and right strategies.

4. The globalization of the Vietnamese economy-some important events

To Vietnam, since the country began the “Doi Moi” process in 1986, the economy has gradually integrated into global market. With the guideline “Vietnam is prepared to be a friend and reliable partner of all countries in the world community, striving for peace, independence and development.” Vietnam has gradually joined international organizations and economic institutions as well as cooperated with other countries for mutual development. “Vietnam re-joined the World Bank (WB), International Monetary Fund (IMF) and Asian Development Bank (ADB) in 1992 and 1993. The year 1995 saw many significant external economic events. Vietnam joined the ASEAN and committed to implement the ASEAN Free Trade Area (AFTA), signed a Cooperative Agreement with the European Union (EU) and normalized relations with the US and applied for WTO membership. In 1998 Vietnam officially became a member of the Asia Pacific Economic Cooperation (APEC)”. (Ho)

In order to enhance trade among Vietnam and other countries, many bilateral and multilateral trade agreements have been signed. On July 13th 2000, the Viet Nam-United States Bilateral Trade Agreement was officially signed. Our country has signed over 80 bilateral trade agreements – 40 bilateral investment agreements and 40 agreements on avoidance of double taxation.

Most significantly, after eleven years of negotiation, in 2007 Vietnam became the official member of the world trade organization (WTO)-the world’s biggest trade organization. Since then, Vietnam has entered the largest trade “play ground” where every country is equal in both opportunities and challenges. So it can be summarized that Vietnam has taken part in the international integration for over the past twenty years and fully joined in the globalization process for three years dating from 2007.

II. Benefits and opportunities of globalization to the Vietnamese economy

Integration deeply into the world market has brought many tangible benefits and opportunities to the Vietnamese economy.

1. Increasing export revenues

As a result of integrating into the regional and global market, export revenues have increased continually since 1990, speeded up sine 1995 when Vietnam joined ASEAN and grew sharply since Vietnam joined WTO in 2007. The growth in export revenues is illustrated in the following table

Total

Of which:

Balance(*)

Exports

Imports

Mill.USD

1990

5156.4

2404.0

2752.4

-348.4

1991

4425.2

2087.1

2338.1

-251.0

1992

5121.5

2580.7

2540.8

39.9

1993

6909.1

2985.2

3923.9

-938.7

1994

9880.1

4054.3

5825.8

-1771.5

1995

13604.3

5448.9

8155.4

-2706.5

1996

18399.4

7255.8

11143.6

-3887.8

1997

20777.3

9185.0

11592.3

-2407.3

1998

20859.9

9360.3

11499.6

-2139.3

1999

23283.5

11541.4

11742.1

-200.7

2000

30119.2

14482.7

15636.5

-1153.8

2001

31247.1

15029.2

16217.9

-1188.7

2002

36451.7

16706.1

19745.6

-3039.5

2003

45405.1

20149.3

25255.8

-5106.5

2004

58453.8

26485.0

31968.8

-5483.8

2005

69208.2

32447.1

36761.1

-4314.0

2006

84717.3

39826.2

44891.1

-5064.9

2007

111326.1

48561.4

62764.7

-14203.3

Prel. 2008

143398.9

62685.1

80713.8

-18028.7

Table 1 Export and import of goods

Source: General statistics office of Vietnam (GSO)

The country’s export turnover in 2007 reached US$48 billion, 21.3 percent higher than 2006’s figure, surpassing the 3.1 percent target set by the government. Vietnam’s key export items having high export turnovers were seafoods, rice, coffee, vegetables, rubber, cashew nuts, and pepper. (GSO)

The second year of WTO membership saw a sharp increase in the country’s export turnover. Export turnover in 2008 reached US$62 billion, 29.5 percent higher than that in 2007. (GSO)

In 2009 the export turnovers were estimated to be US$56.6 billion, reflecting a drop of 9.7 percent from 2008.However, it was due to price drops during the economic crisis.

Vietnamese commodities have been exported widely to 150 countries and territories, with many sectors benefiting from WTO membership including labor-intensive industries like clothing, footwear and electronics. (SGGP)

An example of quick development in export after joining WTO is textile and garment industry. Vietnam has become one of the ten largest exporters of textiles and garments in the world after earning US$7.7 billion from exporting these commodities in 2007. The US market made up 56 percent of this total turnover, followed by the EU (US$1.45 – 1.65 billion) and Japan (US$700 million.) (GSO)

 

Unit

2005

2006

2007

Prel. 2008

Crude oil

Thous.tons

17966.6

16442.0

15062.0

13752.3

Coal

“

17987.8

29308.0

32072.0

19354.7

Electronic parts (Including TV parts), computer and their parts

Mill.USD

1427.4

1807.8

2165.2

2638.4

Articles of plastic

“

357.7

452.3

709.5

921.2

Electrical wire and cable

“

518.2

705.7

882.3

1001.3

Rucksacks, bag, pockets, wallets(*)

“

470.9

502.1

627.1

833.0

Footwear

“

3038.8

3595.9

3999.5

4767.8

Textile, sewing products

“

4772.4

5854.8

7732.0

9120.4

Rattan, bamboo and rush products

“

157.3

214.1

246.7

255.6

Pottery and glassware

“

255.3

274.4

334.9

344.0

Embroidery products

“

78.4

98.1

111.8

Fresh and processed vegetables & fruit

“

235.5

259.1

305.6

407.0

Pepper

Thous. tons

109.9

114.8

83.0

90.3

Coffee

“

912.7

980.9

1232.1

1059.5

Rubber

“

554.1

703.6

715.6

658.3

Rice

“

5254.8

4642.0

4580.0

4741.9

Shelled cashew nut

“

109.0

127.7

154.7

165.3

Tea

Thous. tons

91.7

105.4

115.7

104.5

Wood and wooden products

“

1561.4

1943.1

2384.6

2829.3

Fishery products

Mill. USD

2732.5

3358.0

3763.4

4510.1

Of which:

Frozen shrimps

“

1265.7

1262.8

1387.6

Frozen fish

“

608.8

1083.4

1379.1

Frozen cuttle fish

“

73.9

92.5

60.8

(*) Data from year 2004 include hats and umbrellas.

Table 2: Some main goods for exportation

Source: General statistics office of Vietnam (GSO)

2. Rapid increase in foreign direct investment (FDI)

As a WTO member, Vietnam has become an attractive destination for foreign investors. Registered FDI surged to US$71 billion in 2008, compared with only $12 billion in 2006. Although FDI commitments dropped last year to $21.4 billion as a result of the global financial crisis, the figure was still at the same level as pre-crisis 2007. (Thanh Nien news)

During the three years of WTO membership, total registered FDI into Vietnam reached more than $114 billion, 4.5 times higher than the target set for the 2006-2010 period. Of this, $29.5 billion was disbursed in the five years. (Thanh Nien news)

The data for FDI into Vietnam over the past 20 years are summarized in the following table:

 

Number of projects

Registered capital (Mill. USD) (*)

Implementation capital

(Mill. USD)

Total

10981

163607.2

57045.5

1988

37

341.7

1989

67

525.5

1990

107

735.0

1991

152

1291.5

328.8

1992

196

2208.5

574.9

1993

274

3037.4

1017.5

1994

372

4188.4

2040.6

1995

415

6937.2

2556.0

1996

372

10164.1

2714.0

1997

349

5590.7

3115.0

1998

285

5099.9

2367.4

1999

327

2565.4

2334.9

2000

391

2838.9

2413.5

2001

555

3142.8

2450.5

2002

808

2998.8

2591.0

2003

791

3191.2

2650.0

2004

811

4547.6

2852.5

2005

970

6839.8

3308.8

2006

987

12004.0

4100.1

2007

1544

21347.8

8030.0

Prel. 2008

1171

64011.0

11600.0

 

 

 

 

(*)Including supplementary capital to licensed projects in previous years.

Table 3: Foreign direct investment projects licensed in period 1988 – 2008

Source: General statistics office of Vietnam (GSO)

3. Increase in enterprises’ awareness, adaptation and performance

Joining WTO means that Vietnam has entered a large “play ground” where Vietnamese enterprises have to compete with many giant players-big foreign corporations with strong financial power and experience. Moreover, the reduction of tariffs and non-tariffs measures, the open of servicing market have made the domestic market more competitive. All these factors have forced domestic enterprises (both state-owned and private ones) to restructure and self-improve. Being aware of these challenges, Vietnamese enterprises have invested money to standardize their operation and products. Thousands of Vietnamese enterprises in different fields such as textile, transport, service, telecommunication, food production have met international standards: ISO 9000, ISO 14000. Furthermore, besides traditional markets such as the US, Japan, they have reached new markets such as Europe, the Middle East, and Africa. More effort is put on employee training and attraction high quality employees. Some big Vietnamese enterprises which have strong competitiveness are Co.opmart, Hoang Anh Gia Lai group, Sai Gon tourist, VNPT. This is also a chance for state-owned enterprises pending on the Government protection and subsidies restructure their operation. Otherwise they will be defeated even in the domestic market. So under the competition pressure, the Vietnam’s enterprises will become more effective and competitive.

4. More favorable legal system for trading activities

Global economic integration and accession to the WTO have given Vietnam a chance to refine its policy and legal system to be more transparent, sustainable and predictable to be in line with WTO regulations and to attract more foreign investors. For example, according to Law on Foreign Investment, there are flexible regulations of establishment “Enterprises with foreign investment are permitted to change the form of investment, and divide, consolidate or merge with other enterprises. Existing joint ventures are allowed to transform into wholly-owned foreign capital enterprises under certain conditions. In addition, there is no obligation to form a joint venture with a local partner. Foreign investors are entitled to make their own choice from three forms of investment set forth by the Law on Foreign Investment”. There is also the reduction of the administrative burden “The duration for investment licensing was cut from 60 working days to 45 working days for projects under the category of appraisal and issuance of investment licences, and to 30 working days for projects under the category of registration for investment licences”

Furthermore, under the Government’s Project 30 to enhance administrative reform, about 5,700 administrative papers at all levels have been under consideration. Duplicate or unnecessary documents will be abolished. The Prime Minister has proposed a 30 percent reduction of all legal documents. To enhance administrative procedures Vietnamese government are developing e-commerce and e-government to create effective links between administration agencies, businesses and people. (Vov news)

Moreover, as a WTO member, Vietnam is treated as a full WTO membership. Vietnamese enterprises have a healthy environment for development in foreign markets. If there are trade disputes, they can be treated under WTO’s Dispute Settlement Mechanism. “Vietnamese enterprises will be judged by the WTO international court, which means we have more advantages to protect our rights.” (Ho) For example, the lawsuit is no longer imposed by domestic laws as the previous “catfish war” case- Vietnam’s tra and basa dumping disputes, and we can implement some legal retaliating tools within WTO regulations. Vietnam will have equal status with other countries in the global trade policy-making process and an opportunity to participate in building a more equal and logical international trade cooperative framework. Le (2008)

III. Challenges of globalization to the Vietnamese economy

Globalization is an indispensable process. As a result, 153 countries have become official members of WTO and up to now no countries would like to exit this organization. This illustrates clearly the benefits of globalization. Globalization by its nature does not make a country worse. However, the opportunities created by globalization are always accompanied with challenges. If a country cannot overcome these challenges, it will meet a lot of difficulties. Vietnam is not the exception. Our challenges are not only from the outsiders but also from the domestic economy. Three major groups of challenges are described as follows

1. Low competitiveness of nation, enterprises and products

Vietnamese enterprises are mainly medium and small-sized. According to Le (2008), none of Vietnam’s state-owned enterprises was on the list of 1000 world biggest corporations, neither its commercial trademarks in the list of 1000 most prestigious global trademarks. If we want to gain strong competitiveness in international market, we must have many strong enterprises like Sony, Toyota of Japan, or Hyundai, Samsung of South Korea.

According to World Economic Forum’s report for the year 2009-2010, in terms of global competitiveness index, Vietnam ranked 75th out of 133 countries in the year 2009-2010, dropping 5 places compared to 2008-2009’s index. From the report and practical situation, we can come up with some drawbacks in our economy which lead to poor nation’s competitiveness.

Firstly, the most problematic factor of doing business which accounts for 16.1 percent in the World Economic Forum’s report is the inadequate supply of infrastructure. According to Thomas Siebert, chairman of the American Chamber of Commerce (AmCham), the lack of high-quality infrastructure and logistical services is both a pressing concern and an impediment, especially to potential American investors. Indeed, this important issue has been brought up in every meeting between AmCham and the Vietnamese authorities since May 2006. Various problems include the delay in constructing bridges, inter-provincial roads and overland infrastructure. The Japan Bank for International Cooperation (JBIC) said that 80% of Japanese companies considered roads as the first factor that needs improvement, followed by power supply (60%) and ports (40%). Dr Le Dang Doanh once compared a gap in infrastructure among Vietnam and other economies in the region by a typical example, it takes ten minutes to do logistics for a container in a Singapore port but seven days in a Vietnamese port.

Secondly, difficulty in accessing financing ranks second in problematic factors of doing business in Vietnam. According to Dr Le (2008), Vietnam’s financial depth ratio, a measurement of money supply relative to the size of the economy – the ratio of M2 over GDP – was about 84% GDP, with around 6 million bank accounts over the population of 84 million, the stock market just accounted for 6% GDP and still in the pilot stage and incomplete. Not to mention technology, Basel standards for the banking industry, number of commercial banks services offered, ratio of bad debts…, we can see clearly how big the gap is for Vietnam to fill.

Thirdly, poor system of higher education and training, which ranks 92/133, is a big challenge. Inadequately trained faculty, ineffective teaching methods, and lack of access to modern technologies severely limit students’ learning. Government sponsored educational reform has not kept pace with the need to transmit from an agricultural economy to an industrial economy. We are now facing with the dilemma of too much common labor force but inadequately educated workforce which ranks 3 in the problematic factors of doing business in Vietnam. Moreover, the quality of management schools is too low (111/133), which results in incompetent staff at different levels, from central to grassroots, from State agencies to businesses.

Table 4: The competitiveness index for Vietnam 2009-2010

Source: World Economic Forum

Table 5: The competitiveness index in detail for Vietnam 2009-2010

Source: World Economic Forum

2. Issues relating to macro policies and administrative procedure

According to the World Economic Forum’s report, although “the country improves in most of the categories of the Index, Vietnam is down five positions to 75th, the considerable worsening of its macroeconomic situation-dropping from 70th to 112th place-weighs heavily on its economy and competitiveness. A widening trade deficit, an overheating economy, and a global rise in commodity prices caused inflation to shoot up to 23 percent in 2008.This in turn triggered a crisis of confidence, big swings in interest rates, and a sharp fall of the dong, the local currency”. Although this issue was over and the government has performed better when dealing with the global financial crisis, it is an important lesson that because the Vietnamese economy has integrated deeply into the global economy, the exchange rates, inflation, balance of payment and budget deficit will develop unpredictably. I share the same point of view with what Prime Minister Nguyen Tan Dung said when having a meeting with the banking sector: “what is right today may not right tomorrow. If we follow the rightness today too long, we may make mistake in tomorrow’s situation”. Hence, it is essential for the government to pay close attention to the world economy, better the forecast ability and have flexible guidance so that Vietnam can reap the benefits of the efforts and successes achieved in other areas.

One of the main reasons for Vietnam’s 75th position is the variable Burden of government regulation (106/133) which constitutes a big disadvantage. In fact, the current administrative system is a serious obstacle to development. Although the government is trying to reduce unnecessary administrative procedure such as “one door”, the current result is not as much as expected. According to the former Prime Minister Phan Van Khai, Vietnamese public administration has been laden with the following problems: red-tape, ineffectiveness, inefficiency, cumbersomeness, corruption, and an unskilled and under-qualified public service. The administration is clearly not keeping itself abreast of economic level.

3. Difficulties in agricultural sector

Agriculture [1] is the main sector in the economy, accounting for 20 percent of GDP and 66 percent of the national population. However, it is confronting with vigorous competition in the global market. Over the past three years, there was no sudden change in the export of agricultural products. Although the export revenue increased compared to the year 2006, the growth rate was lower than the general growth rate of export of the country as a whole, except for coffee. (Center for Information and Documentation).

The table below illustrates the growth rate of agricultural export

 

2003

2004

2005

2006

2007

Prel. 2008

Mill.USD

TOTAL

20149.3

26485.0

32447.1

39826.2

48561.4

62685.1

By economic sector

Domestic economic sector

9988.1

11997.3

13893.4

16764.9

20785.7

28155.9

Foreign invested sector(*)

10161.2

14487.7

18553.7

23061.3

27775.7

34529.2

By commodity group

Heavy industrial products and minerals

6485.1

9641.9

11701.4

14428.6

16000.0

19200.0

Light industrial and handicraft goods

8597.3

10870.8

13293.4

16389.6

21598.0

28575.0

Agricultural products

2672.0

3383.6

4467.4

5352.4

7200.0

10400.0

Forest products

195.3

180.6

252.5

297.6

Aquatic products

2199.6

2408.1

2732.5

3358.0

3763.4

4510.1

Structure (%)

TOTAL

100.0

100.0

100.0

100.0

100.0

100.0

By economic sector

Domestic economic sector

49.6

45.3

42.8

42.1

42.8

44.9

Foreign invested sector(*)

50.4

54.7

57.2

57.9

57.2

55.1

By commodity group

Heavy industrial products and minerals

32.2

36.4

36.1

36.2

32.9

30.6

Light industrial and handicraft goods

42.7

41.0

41.0

41.2

44.5

45.6

Agricultural products

13.3

12.8

13.7

13.4

14.8

16.6

Forest products

1.0

0.7

0.8

0.8

Aquatic products

10.8

9.1

8.4

8.4

7.8

7.2

(*) Included crude oil.

Table 6: Exports of goods by economic sector and by commodity group

Source: General statistics office of Vietnam (GSO)

This is due to a combination of many weaknesses. Farmers lack knowledge and professional skills. Production technology is small and backward, which increases the production costs compared to those of other countries and makes the quality of the products low. Agricultural enterprises are often of small size and disperse. As a result, they have weak financial capacity to improve production technology and labor productivity.

Moreover, there are no shared strategies on developing in foreign markets, no strong and famous trade mark. For example, although Vietnam is currently the world’s second largest rice exporter Vietnamese rice still does not have an established trademark on the international market.

Another problem is the slow and inaccurate market forecast about the world’s demand and price forecast by functional agencies, causing a lot of damages to agricultural enterprises and farmers. For example, in 2008, wrong forecasts about food security and the world’s rice price led to Vietnam’s not exporting rice when the world’s price was