ASEAN Enlargement: Impacts & Implications

13. The ASEAN Economic Model and Vietnam's Economic Transformation: Adjustment, Adaptation, and Convergence

322 Carolyn L. Gates© 2001 Institute of Southeast Asian Studies, Singapore 322 13 The ASEAN Economic Model and Vietnam’s Economic Transformation: Adjustment, Adaptation, and Convergence CAROLYN L. GATES For more than a decade, Vietnam has been carrying out market reforms that have brought profound changes to its economy and society. One remarkable aspect of doi moi (renovation) has been the swift reversal of its international economic relations, moving Vietnam from a quasi-closed economy with planned trade and financial links with the Council for Mutual Economic Assistance (CMEA) to a more open economy that courts its capitalist neighbours in East Asia, particularly, the Association of Southeast Asian Nations (ASEAN). For years during the Cold War, the Vietnamese Government became increasingly concerned that the ASEAN economies were rapidly advancing, even as its own economy stagnated. Nevertheless, it was only the historical changes of the early 1990s and the initiation of Vietnam’s own transformation process that made it possible for Vietnam to bridge the decades-long regional divide by joining ASEAN in July 1995. Since that time, it has aimed to catch up with ASEAN incomes and levels of economic development. How will Vietnam close the wide gap between it and its ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand) partners that has developed over the past thirty years? This chapter will focus on Vietnam’s adjustment and adaptation processes that are bringing it closer to the more advanced ASEAN members. It will argue that Vietnam has made a fundamental economic shift by abolishing its old command economy, marketizing the new economy, and bringing more balance to its ISEAS DOCUMENT DELIVERY SERVICE. No reproduction without permission of the publisher: Institute of Southeast Asian Studies, 30 Heng Mui Keng Terrace, SINGAPORE 119614. FAX: (65)7756259; TEL: (65) 8702447; E-MAIL: publish@iseas.edu.sg The ASEAN Economic Model and Vietnam’s Economic Transformation 323© 2001 Institute of Southeast Asian Studies, Singapore fundamentals. Through market transformation, it is moving towards ASEAN-type macroeconomic management, economic institutions, and structures. Among the greatest challenges to Vietnam’s economic transformation are its weak financial system, lax governance and institutional development, and low technological and organizational development of its firms and microeconomy. Since the onset of the regional economic crisis in 1997, however, it has become more apparent that many ASEAN economies face similar constraints in varying degrees. Nevertheless, if Vietnam is to succeed in closing the breach between it and the more advanced ASEAN economies within a generation — as some Vietnamese leaders have discussed — it must accelerate its programme of institutional reform and technological progress to sustain rapid growth and structural change, thereby supporting its goal of convergence. The chapter is organized as follows: the first section presents an introduction to the theoretical issue of convergence and empirical evidence on the topic. The second section briefly compares the resources, fundamentals, and economic systems of Vietnam and the original ASEAN members. The key factors that contributed to the ASEAN economic model — Vietnam’s target — and its virtuous cycle of development during the past three decades will then be reviewed. The fourth section discusses Vietnam’s market transformation process, which is now allowing Vietnam to compete and co-operate with ASEAN. The following section examines Vietnam’s market-based development strategy, which incorporates some ASEAN-like features, and compares the strategy and outcomes to those of ASEAN. Concluding remarks will then be presented. Catching Up: What Makes Convergence Possible? One hypothesis of convergence is developed from neoclassical exogenous growth models, which assume decreasing returns to scale to the accumulating factor of capital (see, for example, Ramsey 1928; Solow 1956; and Cass 1965).1 It predicts convergence to steady-state levels of per capita income for economies with similar resource endowments, production technologies, savings rates, population growth, and time preferences for consumption. Capital-poor economies with lower capital–labour ratios will grow at a faster rate than capital-rich economies because of the former’s higher marginal product of capital; equal amounts of investment should produce proportionately higher output in capital-poor economies. In developed economies, returns to new investment decline over time where the capital stock is rising faster than labour. By contrast, capital-scarce countries will experience accelerated rates of return, which will lead to faster capital accumulation, greater capital inflows, and higher rates of growth. Empirical evidence has not overwhelmingly supported these models. The findings of 324 Carolyn L. Gates© 2001 Institute of...