INTRODUCTION

The first generation of East Asian newly industrializing countries and territories (NICs-1), including Hong Kong SAR (China), the Republic of Korea, Singapore and Taiwan (Province of China), like Japan in the post-war period, and China and India since 1980, have raised the bar for other developing economies. Second-tier Southeast Asian NICs (NICs-2), including Indonesia, Malaysia, Thailand and Viet Nam, have not yet been able to replicate the NICs-1 long-term growth of gross domestic product (GDP) or labour productivity, partly because – barring Viet Nam – they never properly recovered from the 1997 Asian financial crisis. If Malaysia and Thailand, for example, had been able to sustain their pre-crisis growth rates into the 21st century, output per person could have reached US$18,900 and $17,000, respectively, ranking them among the most successful developing economies of the post-war period. However, because of slower growth from 2000 to 2019, Malaysia's GDP per capita was 70 per cent lower and Thailand's 50 per cent lower than prospective numbers, leaving both NICs-2 well below the $20,000 per capita threshold (Figure 5.1). Is it possible that Indonesia, Malaysia and Thailand are showing signs of an economic and productivity growth slowdown similar to the slowdowns in Argentina, Brazil, and Mexico?

The term ‘middle-income trap’ was coined by Gill et al. (2007), who predicted that growth in Asia would inevitably taper off as capital–labour ratios rose as economies approached the global technological frontier, which they define as the most advanced technology currently in use (Kharas and Gill, 2015). In countries with few or no natural resources, the trap manifests when middle-income countries are priced out of labour-intensive activities by cheap-labour competitors, but cannot yet challenge more technologically advanced countries because of lagging productivity levels. In countries rich in natural resources, the trap tends to manifest when they exhaust their merely extractive development model and do not move to processing their commodities.

Operating within mainstream new growth theory, Gill et al. view increasing returns to scale as a positive externality that stems from research and development activities outside of the firm. Although these growth models posit that research-intensive activities generate increasing returns, as single sector models they do not associate increasing returns with the level of output or investment in manufacturing.

Vietnam suffered two major domestic financial crises on either side of the global economic crisis of 2008. This extended period of turbulence destabilized the economic model that had been in place for most of the doi moi or “renovation” period since the late 1980s. The model had consisted of export-oriented and labour intensive “vent for surplus” sectors welded to a state-dominated economy producing goods and services for the domestic market. The former generated employment and export earnings, while the latter distributed economic rents throughout Vietnam's highly commercialized and fragmented state apparatus.

By the early 2000s, rapid credit growth was fuelling speculative investments in equities, property and other risky ventures by domestic businesses and households, both in the state and non-state sectors. This process gradually undermined bank, corporate and household balance sheets. By 2011 the decay could no longer be concealed, and major scandals broke in the state economic groups, notably in the shipbuilder Vinashin and the state shipping company Vinalines. The export sector continued to grow, led by surging exports of mobile phones and other electronic goods as global producers sought to diversify production bases away from China, where wages and other costs were rising quickly. However, domestic investment and consumption stagnated as businesses and households struggled under the weight of a heavy debt burden, frozen asset markets and tight credit conditions. Moderate rates of growth have been sustained but they remain heavily dependent on foreign direct investment and external demand. The challenge facing the government is to devise a new growth model that builds on the country's export success and stimulates investment in domestic supplier and downstream industries, while at the same time opening domestic markets to greater competition.

This chapter sets out to do three things. First, it briefly describes the growth model that evolved during the doi moi period and remained intact until the crises of 2008–11 played themselves out. One of the most interesting features of the model is the concentration of domestic commercial activity within the state, and the resulting absence of large-scale private firms in the dynamic export sectors or the importsubstituting sectors. Second, we revisit the crises of 2008 and 2010 to emphasize the central importance of these events to the breakdown of the old model.

Vietnam suffered two major domestic financial crises on either side of the global economic crisis of 2008. This extended period of turbulence destabilized the economic model that had been in place for most of the doi moi or “renovation” period since the late 1980s. The model had consisted of export-oriented and labour intensive “vent for surplus” sectors welded to a state-dominated economy producing goods and services for the domestic market. The former generated employment and export earnings, while the latter distributed economic rents throughout Vietnam's highly commercialized and fragmented state apparatus.

By the early 2000s, rapid credit growth was fuelling speculative investments in equities, property and other risky ventures by domestic businesses and households, both in the state and non-state sectors. This process gradually undermined bank, corporate and household balance sheets. By 2011 the decay could no longer be concealed, and major scandals broke in the state economic groups, notably in the shipbuilder Vinashin and the state shipping company Vinalines. The export sector continued to grow, led by surging exports of mobile phones and other electronic goods as global producers sought to diversify production bases away from China, where wages and other costs were rising quickly. However, domestic investment and consumption stagnated as businesses and households struggled under the weight of a heavy debt burden, frozen asset markets and tight credit conditions. Moderate rates of growth have been sustained but they remain heavily dependent on foreign direct investment and external demand. The challenge facing the government is to devise a new growth model that builds on the country's export success and stimulates investment in domestic supplier and downstream industries, while at the same time opening domestic markets to greater competition.

This chapter sets out to do three things. First, it briefly describes the growth model that evolved during the doi moi period and remained intact until the crises of 2008–11 played themselves out. One of the most interesting features of the model is the concentration of domestic commercial activity within the state, and the resulting absence of large-scale private firms in the dynamic export sectors or the import-substituting sectors. Second, we revisit the crises of 2008 and 2010 to emphasize the central importance of these events to the breakdown of the old model.