Advertising

Vietnam’s journey and lessons for Pakistan

One of the gravest economic setbacks for the country’s economy has been a high current account deficit, which is a result of higher imports of goods and services as compared to the export of products. Furthermore, Pakistan has an uncertain business environment, inefficient policymaking and faces major security concerns, thus placing it low on the ease of doing business index. One such example is the economy of Vietnam and it has some great lessons that Pakistan can learn from.

Print Friendly, PDF & Email
 

The economy of Pakistan has been facing severe macroeconomic challenges for quite some time now. Gradually declining foreign exchange reserves, negative export growth, deteriorating economic growth, high inflation, increasing debt, rising poverty, and a twin deficit problem are not new for Pakistan. The economy of Pakistan, from its very existence, can be characterized by the volatile annual growth and declining long-run economic growth patterns. All of this has led to low investment in the country, both domestic and foreign.

This may be attributed to deep-rooted structural issues such as low savings and investment, under-reformed energy and power sector, barriers to trade and poor performance of state-owned enterprises. One of the gravest economic setbacks for the country’s economy has been a high current account deficit, which is a result of higher imports of goods and services as compared to the export of products. Furthermore, Pakistan has an uncertain business environment, inefficient policymaking and faces major security concerns, thus placing it low on the ease of doing business index.

blank

The figure above is a graphical illustration of the annual GDP growth rate of Pakistan from the period 1971-2021 (Source: Pakistan Bureau of Statistics)

A comparison of the GDP growth rate of regional economies in Asia from the time 2009 to 2019 revealed that Pakistan was the worst-performing economy with its average GDP growth rate far behind that of its regional competitors. China and India are two of the major economies of the world, experiencing fast-paced economic growth, with China focusing mainly on manufacturing and FDI-led growth, while India relies largely on its IT sector, commodities and its status as an attractive outsourcing destination of the world. Other well-performing economies in the region also started off from a low point and only through proper reforms, were they able to take off towards a path of sustainable economic growth.

Read more: Indisputable link between competitive energy and export growth

One such example is the economy of Vietnam. During the early 1980s, Vietnam was suffering on various socio-economic fronts. There was a heavy reliance on foreign and domestic loans since the country lacked foreign direct investment and the state-owned enterprises were very inefficient. The country suffered from an unstable political environment, high debt accumulation, poor international relations and a balance of payment deficit. Moreover, the economy of Vietnam was a command economy whereby the market economy was controlled by the state and there was little to no market autonomy. Reforms made by the Vietnamese government under the country’s first, second and third Five-Year Plans were not successful and the economy continued to suffer.

The first Five-Year Plan (1961-1965) was a failure and issues like unemployment, low productivity of the labor force, low production of consumer goods, and small-scale production were still dominantly prevalent in the economy by the end of the second Five-Year Plan (1976-1980). The Third Five-Year Plan (1981-1985) aimed towards the establishment of a newly nationalized sector and at the same time to encourage private sector enterprises. This resulted in a cartelization of rent-seeking with monumentally disastrous results, according to Mr. Saeed Afridi, an IR professor at the University of Westminster.

Several factors may be attributed to the failure of the second and third Five-Year Plans, however, according to the Vietnamese, these reforms were unsuccessful because they failed to realize the existing political dynamics and elite capture within the country. Party and military elite existed in the North while military and economic elite was prevalent in the South. Although the World Bank and United Nations agreed that these were contributing factors to the failure of the reforms, major contributing factors were the wars with Cambodia and China which led to the international isolation of Vietnam.

The second and third Five-Year Plans had undesirable effects on the economy

They led to State-led price controls, high import tariffs, currency controls and protectionist localization policies, all of which resulted in an increase in the consumer price index, hyperinflation of commodity prices, recurrent devaluation of currency and increased foreign debt seeking.

Today, Pakistan faces similar issues to those that Vietnam was facing during its economic downturn. The political environment in Pakistan is very unstable, which has led to an uncertain business environment, reduced investments and a slow pace of economic development. Pakistan is a poor country with high-income disparity and limited resources. The country relies largely on foreign debt for its functioning and development. The country has a major trade deficit with imports far greater than exports.

Read more: Women Emancipation: A Successful and Happy Nation

This, along with recurrent rupee devaluation and increased consumer price inflation has further worsened the situation. The high political instability and lack of effective policymaking in Pakistan have further worsened the situation. The existing conditions have not only discouraged the domestic industry but have also discouraged foreign investors, leading to an overall lack of investment in the country. There has been a recurrent devaluation of the Pakistani rupee, making it one of the worst-performing currencies in Asia. There is high inflation in the country, leading to increased prices of consumer goods which have, in turn, led to a decline in the standard of living of the general public.

Pakistan also experiences barriers to international trade such as high import tariffs which make exports less profitable. Exports are largely dependent on the agriculture sector which has not been able to work on its true potential owing to unfavorable climate conditions, water shortage as well as lack of skilled labor force. Moreover, the trade of Pakistan is such that exports largely comprise raw materials while finished goods make up a large portion of imports. Since finished goods have higher prices as compared to raw materials, this has created a wedge between the amount spent on imports and that received from exports.

Vietnam’s journey towards sustainable economic recovery from a situation similar to that of Pakistan’s current situation is a lesson to learn from. Following the failure of these Five-Year Plans, the Vietnamese introduced the first Vietnam-led reforms known as ‘Doi Moi’, under the fourth Five-Year Plan (1986-1990). Doi Moi is basically a term used for renovation. The goal of these reforms was to transition the Vietnamese economy into a Socialist-Oriented Market Economy. Under Doi Moi, the political state would be Hybrid-Socialist, including the Military and CPV committees. Moreover, Doi Moi put an end to all political reforms within the country in an attempt to transition the economy to a State-controlled market economy.

The Military-led Planning Ministry was responsible for leading the reforms

Provinces were to be transformed such that they shift from state-controlled towards city/district-led market economies. Economic activity between firms and government agencies was to be regulated by market forces. Small enterprises were allowed to be owned privately. Moreover, a stock exchange was created for both state and non-state enterprises. Self-imposed barriers to growth were removed, the domestic market was liberalized, subsidies to state-owned enterprises were reduced while the private sector and Foreign Direct Investment were encouraged.

Read more: Analyzing Energy Ministry’s Failure to Arrange Gas

Moreover, there were efforts to improve international relations and to achieve higher international recognition. For this purpose, Vietnam successfully became a part of institutions both regionally and internationally, including the Association of Southeast Asian Nations (ASEAN), the United Nations (UN), the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation forum. There was an investment in human and social capital which led to sustainable growth by the creation of a skilled labor force which overall improved productivity and increased competitiveness.

Setting its path in the footsteps of Vietnam, Pakistan can also move towards its goal of sustainable economic growth. For this purpose, Pakistan needs to focus on growth-oriented reforms and effective policymaking. All policies and reforms should be focused on the ultimate goal of economic growth. Developing countries, like Pakistan, need to make untiring efforts to improve the balance of payments in an attempt to achieve sustainable economic growth. Like Vietnam, Pakistan needs to increase the ease of doing business in the country. This can be ensured by promoting a stable socio-political environment and by safeguarding the rights of both foreign and domestic investors. Furthermore, free trade agreements should be signed with different countries to remove existing barriers.

Under Doi Moi, Vietnam follows an export-led growth model, incorporating trade liberalization and promotion of foreign direct investment. These reforms in the trade policy have resulted in increased exports of the country and have driven the economy towards an upward trend. Similarly, for Pakistan, there is a need to focus on export-led growth, which would in turn generate the much-needed profits for businesses to thrive and flourish. Trade should be liberalized and free-trade agreements should be signed with potential trade partners. Efforts should be made to stabilize the overall social, economic and political environment of the country and thereby, attract the much-needed foreign direct investment.

Where do we need improvements?

Furthermore, improvements need to be made in the export sector by increasing the production as well as productivity of domestic industries. There is a need to invest in human capital to make the labor force more productive. The quality of exports should be improved to increase their competitiveness in the international market. Efforts should be made to equip the domestic industry to produce goods and commodities that are currently being imported, this would initially reduce imports and eventually lead to the export of such goods. Foreign income, essential for debt servicing, import financing and balancing trade deficit can be attained through an increase in the country’s exports.

Unfortunately, Pakistan has an unsuitable energy environment with inadequate energy resources which hinders the production capacity of the country. There is the import of energy resources which further puts a burden on the balance of payments. Vietnam was able to overcome its energy shortage problem through the implementation of renewable energy sources. Pakistan needs to shift its energy production towards domestic energy resources such as coal and dam-based hydel power plants so that there is reduced dependence on imported resources of energy. Moreover, the country has high energy costs that make the produced goods more expensive as compared to similar goods produced in countries facing low energy costs.

Read more: Tech, human Factor and gender parity: Prerequisites for economic growth

There is a need to identify potential export markets relevant to different goods and commodities. Pakistan needs to focus on its strengths and since approximately 66% of all exports for Pakistan are Textile oriented, the first order of business has to be a comprehensive and stable textile policy for Pakistan, guaranteeing energy supply at regionally competitive prices.

 

By Shahid Sattar and Zainab Malik

Mr. Shahid Sattar, now Executive Director & Secretary General of All Pakistan Textile Mills Association (APTMA), has previously served as Member Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water & Power.

The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy