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AseanAffairs Magazine
March - April 2010

The United States is facing daunting prospects in the Asia-Pacific region, a huge market for US goods, while China’s influence is growing as it makes rapid trade inroads in the region. The implications for the US and its need to redefine its ties with Asean are explored in our exclusive interviews with Ernest Z. Bower, Senior Adviser & Director - Southeast Asia Program, Center for Strategic and International Studies, Founding Partner, Brooks Bower Asia LLC and former President of the US-Asean Business Council, and Demetrios Marantis, Deputy United States Trade Representative for Asia.

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Having set itself a 2010 target of embracing middle-income status, Vietnam is now facing a daunting prospect of being trapped in that virtual bracket. There are concerns that Vietnam may find it hard to keep up the momentum after a decade of rapid economic growth.

With a population of 86 million, Vietnam has managed to achieve rapid economic growth this decade, expanding by 5.2 percent in 2009 even amid the global slump.

“This is a significant milestone for Vietnam, a country which will have moved from the category of highly indebted country to middle income status in less than seven years,” said World Bank Vice President for the East Asia and Pacific Region, Jim Adams. He was refering to the $500 million loan - the first to the fast-growing communist country from the bank’s low-interest lending arm, the International Bank for Reconstruction and Development (IBRD), which provides credit to mainly middle income nations.

The World Bank declared Vietnam IBRD-eligible in late 2007 but the Vietnamese government has requested a gradual transition to borrowing from the bank on IBRD-only terms. It will continue to access IDA funds indefinitely.

The World Bank begins to provide IBRD lending when countries hit a per capita income of 1,025 dollars for two consecutive years, virtually endorsing them as middle income level economies.

International donors, at a meeting in Hanoi earlier in January, pledged a 33 percent increase in aid to Vietnam for the next year of more than $8 billion. The collection may have been the last in its current form before the country officially attains middle-income status, probably in mid-2010.

The World Bank says its loan “is aimed at addressing weaknesses in public investment processes highlighted during recent macroeconomic turbulence.”

It is the first of two single-tranche operations that will support the country’s stimulus program in response to the economic crisis, the Bank says. Over the last two years, Vietnam has experienced a succession of shocks, starting with massive capital inflows in 2007, a surge in commodity prices in 2008 and export declines as a result of the global economic crisis.

Stimulus measures adopted in late 2008 and supplemented in early 2009 contributed to strong growth, projected to be 5.2 percent this year.

According to the World Bank Country Director for Vietnam, Victoria Kwakwa, the quality of Vietnam’s future growth will depend on reforms to beef up public investment processes. The areas to be strengthened under the reform program according to the World Bank include environmental screening of publicly funded infrastructure projects, as well as strengthening public financial management and regulatory framework for private participation in infrastructure.

The problem is Vietnam’s approach to what the World Bank classifies as a lower middle-income status, based on growth that draws from “moving people out of
very low-productivity activities,” according to a senior official of the global lender.

Most people live in rural areas and smallscale agriculture still employs many millions of people, hence growth for middleincome countries needs to be based on
mastering new technologies, producing more sophisticated goods, breaking into new markets and improving workers’ skills.

A leading economist at the World Bank said a middle-income country’s transformation to high-income status usually takes around 50 years, but only a few middle-
income economies have succeeded in transforming. None of the more advanced members of the Association of Southeast Asian Nations (Asean), except Singapore, have managed to escape the trap yet, according to Kenichi Ohno, Research Director at the Hanoi-based Japanese think tank, Vietnam Development Forum.
Vietnam is still at stage one, which means simple manufacturing under foreign guidance. The country’s development has been “passive,” dependent on the “liberalisation effect” after doi moi and large inflows of investment, capital and aid, and unable to create “internal value” to ensure sustainable growth. Economies like Thailand and Malaysia are in stage two, having supporting industries but still under foreign guidance. At stage three, high-income South Korea and Taiwan have reached the level of mastering technology and management and can produce high-quality goods on their own.
The middle-income trap, caused by the failure to improve human skills and technology and create internal value, prevents countries jumping from stage two to stage three, according to Ohno. Two things are needed to address the issue, he says: “the private sector’s dynamism and good policies to compliment that dynamism.” The first factor is a “given, more or less,” he points out and the reason for South Korea’s success in becoming a high-income country is its people’s industriousness.


Consumer Optimism
Vietnam At the Top of THE Curve

While the ghost of the global crisis still haunts consumers in
economies, both rich and poor, those in Vietnam are found to be the most optimistic. MasterCard’s latest survey of 24 countries in Asia Pacific, the Middle East and Africa, released early this year, showed Vietnamese consumers have the most favourable view of the economy going forward.

The US-based group’s Index of Consumer Confidence (ICC), released twice yearly, provides insights into consumer confidence based on five factors, including quality of life,

economy, regular income, employment and the stock market, for thenext six months ahead.

The latest survey, conducted from October 1 to November 9
last year, was based on feedback from 10,623 correspondents from 14 countries in the Asia Pacific region, six from the Middle East and four from Africa. Vietnamese consumers have recovered their confidence to pre-economic crunch levels, according to the survey.
The country’s consumer confidence index in the second half of 2009 recorded the highest recovery level by scoring 90 points compared to 60.9 points six month ago and 88.1 points one year ago.

Consumer confidence in Hanoi scored 94.6 points, higher
than that of Ho Chi Minh City, at 85.2 points. Chinese consumers were ranked the second most optimistic after Vietnam in the Asia Pacific region with 85 points, followed by Singapore, scoring 79.4 points. “The global economy has begun to stabilise in the latter half of 2009 and the situation has been improving in an especially fast pace in the Asia Pacific,” Yuwa Hedrick Wong, economic advisor to MasterCard Worldwide in Asia Pacific said. Launched in 1993, ICC is considered a barometer of the general consumer pulse in the Asia Pacific Region. Released twice a year, the index is calculated with zero as the most pessimistic, 100 as most optimistic and 50 as neutral.


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