A recent CIEM seminar in Hanoi has ignited a heated debate among economists and financial analysts over whether Vietnam has fallen into a middle income trap, World Bank (WB) Vietnam Country Director Victoria Kwakwa said.

The middle income trap is generally accepted as an economic situation where a nation is able to achieve a modest level of per capita income increase but finds it impossible to move beyond that amount.  Economic growth in the nation stagnates as a result, the WB Director said.

“I strongly disagree with the assertion that that Vietnam has fallen into the trap.” the WB Director said, adding that "With the nation experiencing an economic slowdown, many people have prematurely jumped to the wrong conclusion based on faulty analysis.”

“In my opinion, Vietnam is simply experiencing slower economic growth than in the past, and clearly there is no rational analysis that would lead to the conclusion that the country is falling into the middle income trap." the WB Director concluded.

Dr. Nguyen Dinh Cung

Professor Kenichi Ohno from the Japan Institute for National Policy Research in turn cited many indicators proving that Vietnam has not fallen into the trap along with offering a number of suggested solutions addressing steps the government needs to address the economic slowdown.

Dr. Nguyen Dinh Cung did not touch upon the issue of the middle income trap, but focused his comments on the need to steer the economy back on the right track.

 "I do not want to address the middle-income trap but would rather concentrate on examining ways to overcome the current difficulties, and create a more solid foundation for future economic growth." Cung said.

He supposed that Vietnam’s growth is constantly declining with no clear signs of recovery. Per capita income is becoming much far from the average income of the neighbouring countries.

“Vietnam has productivity growth, however, the absolute growth compared to other countries after many years still much lower. The country’s labour productivity is just equivalent to 12-13% of Japan 35% of Thailand, approximately 54% of China and 50% of Indonesia " Cung noted.

Cung warned that there are wrong conceptions about the falling industrial growth. It is said that the country has entered the post-industrial stage when services see a bit higher growth.

"Do not consider the high growth of services in recent years as an achievement.  If doing so, we will fail to implement national industrialization that will result in the decline in labour productivity.” Cung said.

According to him, Vietnam has signs of early industrialization that experiences a downtrend in added value of labour productivity, and manufacturing industry. If this happens, Vietnam will not only fall into the middle income trap, but also face the risk of poverty and return to the low income nation.

Vietnam have an institution that distorts the allocation of resources, the mobilization of resources is very unusual: Labour force flow into low productivity areas such as informal labour areas and economic private sector while investment capital flows into the sectors with low efficiency like State-owned enterprises.

Breakthrough solution for institutional improvements

Dr. Cung said that the bottom line of bringing the economy back on track is that the State should give up their power to create a well-functioning market.

It is imperative to set up a legal system to support this transition in a reasonable manner thus facilitating transition to a solid market economy.

When there was a breakthrough in institutions, the question is how to operate and see where the bottlenecks are to remove.

Vietnam is facing a very big chance when the Constitution has been revised.  In addition, there are thousands of laws the country is enforcing, including important ones the revised Budget Law, the Investment Law, the Law on Organization of the Government, the Central Government Act. These are fundamental laws that help create market economy institutions.

It is important to build these laws in line with market operations aiming to provide a firm foundation for the market economy, Cung concluded.