How will Vietnam’s growth affect our economy?

Although Thailand’s annual economic growth rate in the past has been higher than 8 percent until more modest growth over the past few years, we must keep an eye on Vietnam, which has achieved some of the most rapid economic growth among Thailand’s neighbors.

Some of us may even look at Vietnam’s flourishing economy with worried eyes. Some think that Vietnam will become our competitor and overtake us in no time. Others are concerned that if Vietnam’s economy catches up to Thailand’s advancement, Thailand will fall behind. Is this worry valid? How does Vietnam’s economic growth really affect Thailand’s economy?

I answer this question by relying on statistical data. Words may be manipulated, but numbers cannot lie.

Since economic growth is calculated from Gross Domestic Product (GDP), I sort the effects of Vietnam growth into two categories: direct and indirect effects.

Direct effects of Vietnamese growth on Thailand are effects from our trade partnership. The growth of one country directly affects another through the channels of international trade. Generally, economic growth in a country means its population will enjoy a higher income, eventually leading to increased imports of consumer goods. In other words, since economic growth is caused by increased industrial capacity, imported raw materials and machineries are needed to increase capital goods in that nation’s production processes.

For this reason, when an economy grows rapidly, its trade partners can export more and, consequently, enjoy a higher growth rate, too.

Table 1: Thai-Vietnamese Trade Balance (million Baht)

In this article, therefore, I measure the direct effect of Vietnam’s growth on Thailand using this Thai-Vietnamese Trade Balance, which is one of the components of GDP. If the Thai-Vietnamese Trade Balance becomes a surplus, Vietnam’s international trade positively affects our economy. In other words, this phenomenon is the opposite of what happens when there is a trade deficit.

According to Table 1, Thailand has gained a surplus in its trade balance with Vietnam and, moreover, the surplus has continually grown at a very high rate. This demonstrates that Thailand has gained increasingly more surplus from Vietnam. The cause of rapid growth in Vietnamese exports is the dramatic growth in its economy.

Let’s consider the details for a moment. The major export goods from Thailand to Vietnam are refined oil and liquid natural gas, ethylene polymers (propylene and plastic products), steel and steel products, cement, motors, and machinery and parts. All of these are either capital goods or raw materials required for Vietnam’s industrial sector.

We already know that the rapid growth of Vietnam’s economy has lead to their dependency on a considerable amount of imported capital goods and raw materials. Because Thailand is an important trading partner with Vietnam, Thailand has gained the spillover effect from Vietnam in terms of export growth.

Besides these direct effects, Vietnam’s growth has also had indirect benefits that do not directly influence Thailand’s GDP but may affect it through other channels. Let’s take a moment to examine the channels of international trade. If Vietnam’s growth is the consequence of its export growth and Thailand is its trading rival, an increase in Vietnam exports would mean a decrease in Thai exports, other things being equal.

Table 2: Top five major exports of Thailand and Vietnam, 2006

According to Table 2, the major exports of these two nations are completely different and, thus, they will not compete against each other. Though Vietnam’s export growth is higher than 20 percent annually, Thailand’s export has not become “crowded out” by Vietnam’s economic growth.

Now, let’s examine whether Vietnam will compete with Thailand’s major industries, such as its electronics sector, in the future. As I look at the nature of the product cycle, I think this would not occur. In a nation’s early period of development, a newly emerging economy will export agricultural products, and then turn to exporting industrial products that are labor-intensive, and then capital-intensive products and, finally, a highly developed economy will export hi-end, high technology products.

I notice that at present Vietnam has the same pattern of growth as Thailand did twenty years ago: exporting labor-intensive goods, especially textiles and apparel, attracting a huge pile of Foreign Direct Investment (FDI), exulting in an annual economic growth rate higher than 8 percent, and even tolerating the negative repercussions of such growth, which are high inflation and a trade balance deficit. In the future, I believe that one day Vietnam’s development expand so much that it will be able to export more sophisticated goods, like electronics.

Beyond everything, I want to emphasize that Vietnam is not only one country which develops itself in accordance with the product cycle. I assure you, Thailand will and must develop, too. At present, formerly thriving sectors such as the textiles industry is temporarily set back by Vietnam’s thriving textiles industry, while the more sophisticated Thai sectors, including the computer and electronics industry have become rising stars.

In the future, Thailand must develop itself so it will be able to export more sophisticated, value-added goods. The best way to deal with Vietnam’s frantic catch-up efforts is not to cling to the old industries forever, but to develop other more sophisticated industries. Uncertainty is reality in this world.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com