In 2009, when Jonathan Moreno’s company, Diversatek, was looking for a location for a new factory to make its medical devices, it ruled out much of the world. Europe and the Americas were too expensive, India was too complex and intellectual-property rights in China were too patchy.
In the end Vietnam was the one candidate left standing. It still seemed risky, because the country was only then emerging as a destination for foreign investors.
Seven years later Moreno surveyed the scene at the factory, as employees assembled delicate diagnostic probes in a room that resembled a laboratory, and had no doubt about where Diversatek will expand next.
“To the back, there and there,” he said, pointing to either side.
It is far from alone. Foreign direct investment in Vietnam hit a record in 2015 and has surged again this year. Deals reached $11.3 billion in the first half of 2016, up by 105 percent from the same period last year, despite a sluggish global economy. Big free-trade agreements explain some of the appeal, but something deeper is happening. Like South Korea, Taiwan and China before it, Vietnam is piecing together the right mix of ingredients for rapid, sustained growth.
Vietnam already has a strong, often underappreciated record. Since 1990 its growth has averaged nearly 6 percent a year per person, second only to China’s. That has lifted it from among the world’s poorest countries to middle-income status. If Vietnam can deliver 7-percent growth for another decade, its trajectory would be similar to those of China and the Asian tigers.
That is no sure thing, however. Should growth fall back to 4 percent, it would end up in the same underwhelming orbit as Brazil and Thailand.
Perhaps the biggest factor in Vietnam’s favor is geography. Its border with China, a military flashpoint in the past, now is a competitive advantage. No other country is closer to the manufacturing heartland of southern China, with connections by land and sea. As Chinese wages rise, that makes Vietnam the obvious substitute for companies moving to lower-cost production hubs, especially if they want to maintain links back to China’s well-stocked supply chains.
A relatively young population adds to Vietnam’s appeal. Whereas China’s median age is 36, Vietnam’s is 30.7. Soon enough it will start aging more rapidly, but its urban work force has much scope to grow. Seven in 10 Vietnamese live in the countryside, about the same as in India—and compared with only 44 percent in China. The reservoir of rural workers should help dampen wage pressures, giving Vietnam time to build labor-intensive industries, a necessity for a nation of nearly 100 million people.
Many other countries also boast young work forces, but few have had as effective policies as Vietnam. Since the early 1990s the government has been open to international trade and investment. This has given foreign companies the confidence to build factories. Foreign investors are responsible for a quarter of annual capital spending. Trade accounts for roughly 150 percent of national output, more than any other country at its level of per-person GDP.
Investors also have taken heart from the stability of Vietnam’s long-term planning. Like China, it has used five-year plans as rough blueprints for development. However, also like China, its governance allows scope for innovation: Its 63 provinces compete with each other to attract investors. A model of developing industrial parks with foreign money and managers began in Ho Chi Minh City in 1991 and since then has been replicated elsewhere.
Vietnam’s work force is not only young but also skilled. Public spending on education is about 6.3 percent of GDP, two percentage points more than the average for low-or-middle-income countries. Although some governments spend even more, Vietnam’s expenditures have been well focused, aiming to boost enrolment levels and ensure minimal standards. In global rankings, 15-year-olds in Vietnam beat those in America and Britain in math and science.
That pays dividends in its factories. At Saitex, a high-end denim manufacturer, workers must handle complex machinery from lasers to nanobubble washers, all to produce the worn jeans so popular in the West.
On top of this solid foundation, Vietnam is reaping benefits from trade deals. It is set to be the biggest beneficiary of the Trans-Pacific Partnership (TPP), a 12-country deal that includes America and Japan. With American politics turning hostile to trade, there is a risk that the TPP will fail. Even if that happens, though, Vietnam will do well. The TPP already has helped to advertise its capabilities. Besides, there are other major agreements: A free-trade pact with the European Union is in the works, and one with South Korea went into force in December.
Vietnam also faces a series of challenges, however, any of which could impede its rise. Speculative excesses in the past helped fuel a real-estate bubble which burst in 2011, saddling banks with bad debts. Vietnam created a “bad bank” to house the failed loans and has started cleaning up its banks. However, it has been slow to inject new capital into its banks and hesitant about modernizing their operations.
In one crucial area it compares poorly with China: getting the most out of the private sector. Private Chinese companies generate about 1.7 yuan of revenue per yuan of assets, more than double the 0.7 ratio for state-owned enterprises. In Vietnam private-sector productivity has slumped during the past decade to the 0.7 level, the same as state-owned enterprises, according to the World Bank. One reason is that large groups in Vietnam sprawl across 6.4 separate industries on average. Those in China operate in only 2.3, according to the Organization for Economic Cooperation and Development.
After years of solid growth, Vietnam has nearly reached a milestone. Now that it is classified as a middle-income country, it is about to lose access to preferential financing from development banks. In 2017 the World Bank will start to phase out concessional lending.
For Vietnam it is a moment to reflect on how far it has come and also to ponder the trickier path ahead. It has a chance to be Asia’s next great success story. It will take courage to get there.
© 2016 Economist Newspaper Ltd., London (August 6). All rights reserved. Reprinted with permission.
Image credits: Doug Mills/Th e New York Times, Hoang Dinh Nam/Agence France-Presse/Getty Images