HSBC warns Vietnam of low-middle income trap
HSBC warns Vietnam of low-middle income trap
HSBC Global Research team has warned that the inefficient allocation of resources could sap productivity of Vietnam and leave the country caught in the low-middle income trap despite opportunities ahead including those from the trade pact TPP.
The bank said in a recent report that U.S. President Barack Obama’s signing of the Trade Promotion Authority (TPA) suggested that the Trans-Pacific Partnership (TPP) negotiations may conclude in the months ahead. This is particularly positive for Vietnam, which still does not have a free trade agreement with America as its largest export market.
HSBC believed the TPP would be beneficial for Vietnam, which has an advantage in low labor cost and this advantage will continue in the next two decades.
“Labor productivity is among the lowest in the region but growing the fastest, thanks to more efficient foreign direct investment (FDI) sectors. We expect gross domestic product (GDP) to accelerate in the coming years,” the report said.
Vietnam’s biggest growth driver in the coming years will be trade, facilitated by key trade agreements such as the TPP and labor cost endowment. The biggest risks would come from within Vietnam, where the inefficient allocation of resources would affect productivity and leave the country caught in the low-middle income trap.
Vietnamese firms have still managed to expand their slice of the global market pie after the country joined the World Trade Organization (WTO). However, the inefficient allocation of resources, especially by State-owned enterprises and the supply glut globally have hurt domestic firms.
As a result, the trajectory has diverged, in which foreign firms with more efficient allocation of resources, better technological support and tax incentives, have performed much better while domestic firms have languished and contributed negatively to export growth.
Experiences from other countries revealed that escaping this is an anomaly and requires proactive efforts to boost efficiency of investment, whether on soft or hard infrastructure, it added.
The Government issued Decree 60 removing the 49% ownership cap in many sectors from September this year, with the exception of key industries including banking.
HSBC said the decree itself is a step in the right direction but its lack of details and retention of the cap on the banking sector suggests that progress could be slow.
Vietnam is slowly liberalizing its economy and will unlikely do it overnight.
Whether its state-owned enterprise equitization efforts or liberalization of public equity to foreign investment, it is important to pay attention to the details of the laws as well as their implementation.
Besides, the TPP has investment and service clauses, which may force Vietnam to liberalize its protected sectors.
