Economic Growth of The National Economy and Foreign Trade of Vietnam

NGUYEN PHUONG HOA – IFF20-4k
ECONOMIC GROWTH OF THE NATIONAL ECONOMY

AND FOREIGN TRADE OF VIETNAM.
INTRODUCTION
Vietnam in the mid–1980s was considered as one of the poorest countries with a
backward economy. “Doi Moi” reform in 1986 originated a wide-based economic
transformation, which demolished the centrally planned economy, unlocked a
closed economy to international markets and trade. After the renovation, Vietnam
is often considered as one of the best developing countries in terms of high
economic growth and low poverty rate. Foreign trade is considered as one of the
most influence factors on the economic transformation. This paper aims to
highlight the effects of foreign trade to growth of Vietnam economy.
1. THE ACTUAL STATE OF NATIONAL ECONOMY AND FOREIGN

TRADE OF VIETNAM
After the economic reform in 1986, Vietnam witnessed miraculous economic
changes with the reduction of inflation from three to one digit. In 1986, inflation
was noticed at a record level with three digits - 700%, but only 6 years later
(1992), this figure has dropped sharply to 17.2%. From 2000 up to now, Vietnam's
average inflation remains at around 3-4%. High economic growth rate remarkably
upgrade capita income from 140 USD in 1990 to more than 300 USD in 2005. The
scale of GDP continues to expand annually (GDP per capita in 2020 is estimated at
about 2,750 USD/person, about 1.3 times higher than that of 2015). Together with
economic growth, Vietnam economy has witnessed a fundamental change in its
structure. In 1990, agriculture contributed 38.74% to GDP, industry: 22.67%, and
service: 38.59%. Thirty years later, the role of agricultural sector in the economy is
reduced sharply while that of industry and service sectors increases
correspondingly. In 2019, the share of added value of agriculture in GDP is
13.96%, industry: 34.49% and service: 41.64%, and contribution to GDP growth is
4.6%, 50.4% and 45% respectively.
Talking about the integration towards the global economy, the open-door policy
helped Vietnam to establish relations with more than 170 countries in the world,
expanding trade and exports to over 230 markets of countries and territories,
signed on 90 bilateral trade agreements, nearly 60 agreements on investment
promotion and protection, 54 agreements on double taxation, 12 trade agreements
By (FTA) with 56 countries and economies in the world, of which 6 FTAs are
actively participating outside of ASEAN framework or with ASEAN partner
countries. In 2015 exports and imports account for 200% of total GDP, which
significantly higher than Germany with around 70%, China around 42% and USA
23%.
Talking about foreign direct investment net inflows, Vietnam had reached its peak
in 1996 and in 2008, thanks to joining WTO. FDI inflows remained comparatively
low after 2008 as a result of the adverse effects of the global financial crisis and
Vietnam's unsteady macroeconomic development.
The main imports of Vietnam are machinery, raw materials for making consumer
goods, and items like cars, motorcycles, and refrigerators that aren't yet produced
domestically. Vietnam mostly exports raw products (mineral resources and
agriculture, forestry and fishery products) or pre-processed outsourced
manufacturing (footwear, textiles or gaiters). In general, Vietnam’s exports
originate from absolute advantages. This is the case for natural resource and
agricultural exports, whose competitiveness is significantly influenced by the
Vietnamese climate. Moreover, in the manufacturing sector, Vietnam exports low-
tech, labor-intensive goods.
2. THE REAL IMPACT OF FOREIGN DIRECT INVESTMENT AND
INTERNATIONAL TRADE ON ECONOMIC GROWTH
There are two methodology that used to measure the relationship between foreign
direct investment (FDI), foreign trade and economic development.
The first investigation uses using data collected from 63 provinces in the period of
2005-2015. In this study, researchers combine economic institutions, FDI and trade
openness in a multiple variable analysis (FDI*TRADE*INS). To be more precise,
FDI and trade openness together strengthen the effect of high-quality economic
institutions (INS high) on economic growth. The combined impact of FDI and
trade openness, however, is negatively impacted by poor economic institutions
(INS low). The GMM two-step system was used to conduct the study.
The following dynamic regression equation is used to assess the effects of foreign
direct investment and trade openness on the economic growth of Vietnam's
provinces based on the general framework:
In the second step, the residuals from the system GMM estimator are used in a
two-stage estimation procedure to determine the coefficients of time-invariant
variables:
in which 𝑋𝑖𝑡 ′ is a vector of explanatory variables as in Eq. 𝑓𝑖 ′ corresponds to

time-invariant variables reflecting provincial fixed characteristics as social-
economic geographic factors.
According to the key findings, the combined effect of inward FDI and trade
openness has a negative effect on economic growth whereas they have a positive
impact when considered independently. Moreover, economic institutions have a
strong impact on how well trade openness and foreign direct investment work
together to boost economic growth. With the help of these results, the relationship
between economic institutions, FDI, and trade can be addressed, which encourage
policymakers to think about an all-encompassing approach to economic growth. In
order to guarantee long-term profitable economic growth, an appropriate policy
that integrates economic and institutional factors is needed.
The second study evaluates the effects of export and import trade as well as foreign
direct investment (FDI) on Vietnam's economic growth from 2000 to 2018. There
are 4 major inquiries made: (1) Do FDI and international trade have relationship
with Vietnam's economic growth? (2) Does FDI have a positive and statistically
significant impact on Vietnam's economic growth? (3) Does export have a positive
and statistically significant impact on Vietnam's economic growth? (4) Does
import have a positive and statistically significant impact on Vietnam's economic
growth? Author used ordinary least-square method to demonstrate the research.
The model is expressed as follow:
Where GDP is Gross Domestic Product; FDI is Foreign Direct Investment; EXP is
Export; IMP is Import; β1 is regression constant; β2, β3, β4 are coefficients that
measure the effects of FDI, EXP and IMP on GDP, respectively and u is stochastic
error term.
Four hypotheses are set up based on regression results to test the impact of FDI,
export and import on the economy.
Hypothesis 1: Whether the population regression function is significant or not
Hypothesis 2: Whether FDI impacts GDP or not
Hypothesis 3: Whether EXP impacts GDP or not
Hypothesis 4: Whether IMP impacts GDP or not
Results of empirical research indicate a connection between FDI and foreign
commerce and Vietnam's economic expansion. FDI has a favorable and
statistically major effect on Vietnam's economic growth, as for export, while
imports have a negative but not statistically significant impact on economic
growth. The outcome is helpful for Vietnam's policymakers who oversee
international economic relations.
3. VIETNAM’S FOREIGN TRADE AFTER COVID-19 PANDEMIC

The COVID pandemic has led to a dramatic loss of human life worldwide and
presented severe setbacks to the global economy. Vietnam is recognized among
countries as good and timely epidemic prevention and quick recovery. The bright
signs are listed below.
Firstly, in the first six months of 2020, Vietnam’s import and export turnover as
well as trade balance suffered negative effects. However, However, from June
2020 to the present, the rebound was clearly visible.
Secondly, the pandemic negatively impacts on Vietnam's main export markets,

including the United States, China, Europe, Japan,… and the rise in protectionism
in industrialized nations is a significant problem for Vietnamese export businesses.
Thirdly, important export industries like electronics, textiles, leather-based
footwear, and furniture are severely affected by the pandemic. Tourism,
transportation, warehouse, retail, finance, banking, insurance, real estate, health
services, and education and training are among the major service sectors.
Fourth, Vietnam's exchange rates appear to be barely affected by the Covid-19
outbreak thanks to effective fiscal and monetary policy. For open market, the
Vietnamese government employs flexible rate management regulations. One of the
goals of Vietnam's monetary policy is to maintain a stable exchange rate. Along
with sound policies, a substantial supply of foreign currencies and foreign
exchange reserves will maintain the stability of the VND/USD rate.
CONCLUSION
Vietnam has witnessed fundamental changes during the period of comprehensive
reform towards market and the world economy. Especially, foreign trade is a
crucial key of sustainable economic growth in Vietnam. Although the
achievements are not very outstanding, Vietnam is gradually developing on the
world race. The Vietnamese government should continue implementing
preferential policies to attract FDI, choose foreign investors who are focused on
quality, efficiency, high technology, and environmental protection, continue
pursuing an export-oriented policy, increase the added value of exported goods and
regulate the types of imported goods, and further liberalize trade through signing
and implementing trade agreements.
List of References
1. Hansjörg Herr, Erwin Schweisshelm, Truong-Minh Vu (2016). The integration of
Vietnam in the global economy and its effects for Vietnamese economic development.
Global Labour University working paper; No. 44, ISSN: 1866-0541; 2194-7465 (p.20-
27)
https://global-labour-university.org/wp-content/uploads/fileadmin/
GLU_Working_Papers/GLU_WP_No.44.pdf
2. Le Thanh Tung (2019). Does Foreign Direct Investment Really Support Private
Investment in an Emerging Economy? An Empirical Evidence in Vietnam. Montenegrin
Journal of Economics, Vol. 15, No. 1 (2019), 007-020
http://mnje.com/sites/mnje.com/files/007-020_-le_thanh.pdf
3. Nguyen Hieu Huy (2020). Impact of Foreign Direct Investment and International Trade
on Economic Growth: Empirical Study in Vietnam. The Journal of Asian Finance,
Economics and Business, 7(3), 323–331
https://doi.org/10.13106/jafeb.2020.vol7.no3.323
4. Nguyen Thi Thu Hoan (2021). Recovery from The Covid-19 Pandemic: The Case of
Vietnam’s Foreign Trade. The Journal of International Business & Law
https://www.hofstrajibl.org/wp-content/uploads/2021/11/recovery-from-the-covid-19-
pandemic.pdf
5. Su, D. Thanh, Nguyen, P. Canh, & Christophe, S. (2019). Impact of foreign direct
investment, trade openness and economic institutions on growth in emerging countries:
The case of Vietnam. Journal of International Studies, 12(3), 243- 264
https://www.jois.eu/files/20_680_Su%20et%20al.pdf

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NGUYEN PHUONG HOA – IFF20-4k

ECONOMIC GROWTH OF THE NATIONAL ECONOMY

1. THE ACTUAL STATE OF NATIONAL ECONOMY AND FOREIGN

in which 𝑋𝑖𝑡 ′ is a vector of explanatory variables as in Eq. 𝑓𝑖 ′ corresponds to

3. VIETNAM’S FOREIGN TRADE AFTER COVID-19 PANDEMIC

Secondly, the pandemic negatively impacts on Vietnam's main export markets,

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