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Outward Orientation, Growth, and the Environment in Vietnam

2005, Kluwer Academic Publishers eBooks

CHAPTER 9 OUTWARD ORIENTATION, GROWTH, AND THE ENVIRONMENT IN VIETNAM AMANI EL OBEID, DOMINIQUE VAN DER MENSBRUGGHE, AND SÉBASTIEN DESSUS 1. INTRODUCTION This chapter analyses linkages between growth, trade, and the environment in Vietnam using the empirical economy-wide model presented in Chapter 3. The investigation considers trade liberalisation and environmental policy reforms and their coordination. The analysis decomposes the change in pollution emission induced by changes in the sectoral composition of production and consumption, effects of technology on emission intensity, and aggregate scale effects. The study shows that outward orientation alone promotes growth and pollution, particularly in the area of airborne effluents. With only trade liberalisation, the results show that Vietnam would specialise in dirty activities that increase the emission of air pollution, such as in the energy sector. Pollution intensity of absorption also increases. Environmental taxes have a variable and sometimes significant negative impact on growth, depending on the effluent targeted. Taxes on all pollutants have a negative effect on trade, although most (excluding particulates, sulphur dioxide, nitrogen dioxide and bioaccumulative toxic metals released in water) have a limited impact. Furthermore, some of the pollutants are substitutes, thus exacerbating the emission of other effluents when these pollutants are taxed. The results show that when free trade is combined with appropriate effluent taxes, the growth-environment trade-offs are minimised. There is a significant positive impact on growth (except in the case of bio-accumulative toxic metals released in water) and trade. Under the combined policy of an environmental tax and trade liberalisation, imports are substituted for pollutionintensive domestic production, and Vietnam would specialise in cleaner goods that can be exported. There is also evidence of a double dividend. Increasing effluent taxes, while decreasing border taxes, increases real income without deterioration of tax revenues. 209 J. Beghin et al. (eds.), Trade and the Environment in General Equilibrium: Evidence from Developing Economies, 209–231 © 2002 Kluwer Academic Publishers. Printed in the Netherlands. 210 EL OBEID, VAN DER MENSBRUGGHE, AND DESSUS 1.1 Vietnam’s Economic and Environmental Conditions The implementation of economic reforms in Vietnam after 1989 led the country to achieve one of the fastest growth rates in the world. The growth of Vietnam’s gross domestic product (GDP) averaged 7.6 per cent a year between 1990 and 2000, with agriculture growing by 4.2 per cent, industry by 11.2 per cent, and services by 7.2 per cent (The World Bank 2000). Per capita income increased by 37.9 per cent during the first six years of the macroeconomic reform, i.e., the period between 1990 and 1995.1 Under economic expansion, the share of industrial output in GDP grew from 23.8 per cent in 1991 to 30.1 per cent in 1995, and the share of services also increased, from 35.7 per cent to 42.4 per cent during the same period. Thus, under economic reforms, Vietnam moved from having primarily an agricultural economy to having an industrial and service economy, although the agricultural sector has also experienced rapid growth (Griffin 1998). Included in the economic reforms were trade liberalisation policies, culminating with the Free Trade Agreement with the United States in 2001. Vietnam found new trading partners in Southeast and East Asia. As part of the reforms, the country maintained a flexible exchange rate and substantially reduced tariff rates, quantitative restrictions on imports, and export controls. With trade reforms Vietnam has experienced a significant growth in exports and in foreign direct investment (concentrated in manufacturing industries and tourist hotels). The ratio of exports to GDP by 1995 was 27 per cent and exports increased by 33 per cent between 1995 and 1996. The average annual growth rate of export earnings increased by 20.5 per cent between 1990 and 2000 while that of manufactured exports increased by 28.2 per cent during the same period (The World Bank 2000) More than 80 per cent of the exports in 1995 were comprised of agricultural products (marine fishery, coffee, and rice), crude petroleum, and garments. However, the net foreign exchange earned per unit of garment exports is very low and net petroleum exports (crude oil minus imported refined petroleum products) account for less than 7 per cent of the foreign exchange earned. Thus, export growth in Vietnam is due mainly to the growth of agricultural exports resulting in economic growth; however, at the same time, this makes the country vulnerable to sharp price fluctuations in the international market. Much of the trade in Vietnam, which previously traded primarily with other developing countries, shifted during the reform period toward Organisation for Economic Cooperation and Development (OECD) countries (Khan 1998). The expansion of the production and export of natural resource based commodities, and high rates of industrial growth resulting from Vietnam’s economic reforms of the 1990s led to notable environmental consequences. These environmental effects include problems associated with resource depletion such as loss of habitat, soil erosion, and degradation of biodiversity. The natural forest cover has shrunk from 43 per cent to 29 per cent of land area over the last 50 years. This deforestation may have been exacerbated by three decades of war (1945 to 1975). There is also an acute shortage of arable land (The World Bank 2000).