Will Vietnam’s FDI-led economy get stuck in a middle income trap?

Author: Tran Van Tho, Waseda University

The Vietnamese economy has experienced a downturn in growth since 2008. In the past five years, the growth averaged about 5.5 per cent a year and is not expected to be much higher in the coming years. For a country of per capita income of about US$2000, that rate of growth is low. Increasing the rate of growth to somewhere in the vicinity of 8 per cent a year is imperative if Vietnam is to avoid the so-called middle income trap.

Another feature of the Vietnamese economy is that growth has increasingly been driven by foreign direct investment (FDI). FDI firms in recent years accounted for nearly half of industrial output and more than 65 per cent of exports. The contribution of FDI has been even stronger in various types of machinery, such as telephones, computers, motorbikes and home electric appliances. In addition, due to high income-elastic characteristics, machinery is now the mainstream of industrialisation and trade in the growing East Asian region.

Because of the large flows of FDI, Vietnam has been increasingly intertwined in the machinery supply chains developed by multinational corporations in East Asia. Machinery is becoming increasingly important in Vietnam’s trade structure: it …continue reading