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Vietnam ready for AEC

Released at: 12:44, 16/12/2014

Vietnam ready for AEC

A recent report states that Vietnam is well prepared for the ASEAN Economic Community.

by Hung Khanh

Vietnam has made essential preparations for the approaching ASEAN Economic Community (AEC) in terms of governance and institutional and administrative procedure reforms, according to a report from the Central Institute for Economics Management (CIEM) and the European Trade Policy and Investment Support Project (MUTRAP).

The report touches on four characteristics for the bloc: Resilient, Inclusive, Competitive and Harmonious. The authors note the level of Vietnam's readiness for the AEC by analyses of economic growth, GDP per capita, FDI attractiveness, competitiveness advantage, commercial development, financial markets, and other social factors.

Four pillars of AEC

Four pillars have been identified to reach the AEC's targets: a single market and production base (Pillar 1) that includes free flow of goods, services, investment, skilled labor and capital. A competitive economic region (Pillar 2) with the following targets: competition policy, consumer protection, and intellectual property rights and infrastructure development by means of enforcing regulations, taxation policy, and the e-ASEAN framework agreement.

Equitable economic development (Pillar 3) aims to narrow the gap among ASEAN countries. Lastly, integration with the global economy (Pillar 4) focuses on developing external economic relations such as signing free trade agreements (FTAs) with non-ASEAN members.

The MUTRAP report shows that Vietnam has put a lot of effort into addressing these pillars, meeting 74.6 per cent of the criteria set by ASEAN for Pillar 1, 77.3 per cent for Pillar 2, 61.1 per cent for Pillar 3, and 75 per cent for Pillar 4.

Vietnam has a stable socio-political environment that ensures a favorable setting for investment and business activities for long-term growth. It pays among the lowest average wage in the region, only higher than Cambodia, which makes it a competitive cost location. Additionally, a middle class is emerging, which will spur significant changes in consumption behavior, said Mr. Nguyen Anh Duong, an expert from MUTRAP.

Remaining challenges

The microeconomic foundation of Vietnam's economy and prosperity remains fragile, with the country's Global Competitiveness Index (GCI) performance remaining weak once sustainability measures are considered. The 2013-2014 GCI ranked Vietnam lower than 57th for every pillar except market size (36th). Its growth rate has been under 7 per cent for six consecutive years, the World Bank has reported.

Problems in cross ownership/investment have emerged recently and are seen as a "new generation" of risk in Vietnam's financial system that should not be neglected. A legacy of the bank-based financial market, this cross ownership creates additional systematic risk, masks the real risk to banks, and may lead to imprudent lending practices, according to the report.

The AEC will bring opportunities to Vietnam to expand its markets and at the same time spark fiercer competition on its own turf, particularly in the industrial and agricultural sectors, said Mr. Vo Tri Thanh, Deputy Director of CIEM. He added that Vietnam still faces problems in human resource quality and poor infrastructure, at a time when the AEC will transform ASEAN into a region with free movement of goods, services, investment, skilled labor, and capital.

Mr. Thanh has a point because foreign manufacturers are attracted to Vietnam by its low labor costs but this is partly traded off by relatively low productivity and/or high costs of training. This will negatively impact quality standards in manufacturing and services in the country. Therefore, the CIEM and MUTRAP report said that the main challenge for Vietnam is to reach the same level of workforce qualifications as other ASEAN members.

Mr Thanh also suggests the government continue improving its investment and business environment and perfecting the legal framework to support firms investing in researching, developing and updating technologies.

Vietnam's infrastructure system remains underdeveloped despite huge investment. Infrastructure services and utilities are too expensive and even restrictive for economic activities. The issue is even worse in urban areas, where high population density and migration are common, according to Mr. Duong from MUTRAP.

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