Prof. Tran Van Tho, a lecturer at Waseda University in Japan, has sent to VietNamNet his analysis of the achievements and the problems of the Vietnamese economy after 30 years of reform, the challenges that Vietnam faces, and the ideas for a new stage of development of the country. VietNamNet presents this article as a comment on the draft documents of the 12th National Party Congress.

Reform has taken Vietnam out of the poverty trap to become a low-level middle-income country. But considering the potential, including the missed opportunity and compared to the experience of East Asian countries, the growth rate of Vietnam is low and the performance is poor.

East Asian countries like Japan, South Korea, and China rapidly developed and their economy reached the high tide in a short time thanks to the desire of the leaders who wanted to keep up with developed nations. The development and national spirit were highly appreciated, the talents respected, and the corporate spirit promoted. Private enterprises are the driving force to boost economic growth.

Vietnam currently faces three major challenges. The first is the risk of getting old before getting rich. The golden population structure is almost passing, the population’s aging phase is very close but the per capita income is still very low.

The second is the risk of economic fragmentation into two areas, FDI and domestic capital.

The third is the risk of the low middle-income trap (the middle income trap comes soon when the per capita income is still low).

The analysis suggests much attention when discussing guidelines, strategies and policies required in the medium and long-term future of Vietnam. The most important and decisive factor is the aspiration and courage of leaders in the coming period.

Japan: Capable and honest officials

Workers check the quality of cars at Toyota Miyata plant in Fukuoka Prefecture, Japan. Photo: Bloomberg

The two important stages that changed Japan are the Meiji period (1868-1911) and the period of high development known as the phenomenal growth era (1955-1973).

The two periods have the same characteristics, with qualities of patriotism and high sense of responsibility of political leaders and competence and ethics of officials.

In the late 1950s, politician Ikeda Hayato conceived an idea of bringing Japan into a new era of development, meeting the aspirations of the majority of the population.

While searching for ideas, he read an article by Professor Nakayama Ichiro on the possibility to double the actual wages or the living standards of the people in 10 years. He formed a research team gathering dedicated and capable intellectuals and economists to discuss and implement the idea. Ikeda directly attended many through-the-night meetings of this group.

The group reached the final conclusion that the savings of people was increasing, and the country was opening up to integrate into the world, so foreign technology would be imported easily. These are two prerequisites for capital investment and accumulation. These two efficiencies of investment both increased aggregate demand and production of the economy. Thus Japan's economy entered a strong upsurge era.

Ikeda decided to take the strategy of national income increase multifold as his political commitment in his presidential election campaign of his party. Ikeda won the election and became the Prime Minister in July 1960.

The core of the plan to increase national income multifold (1960-1970) was full employment, making people see the clear improvement in life and turning Japan into a developed country.

The basic motto was to create conditions for investment of private enterprises. The government’s mission was just trying to save public funds to be able to reduce taxes in order to stimulate investment, infrastructure investment, and ensure social security. Development is  industrialization, the development of services, so labor has to shift from agriculture to non-agricultural areas. Therefore Ikeda stressed developing college-level and vocational education so the labor shift would not be interrupted.

Ikeda blew into society a cheerful and confident feeling about the future. Businesses actively invested, people were eager to work. The result is that the economy developed rapidly, far exceeding the plan. The average economic growth rate reached over 10% instead of 7% as planned. The strategy of national income multifold achieved the goals in just seven years, instead of 10 years as originally planned.

Based on the real prices in 2000, total national income per capita of Japan in 1960 was $7,700 and up to $16,600 in 1970. Expenditures of a working class family in 1960 averaged JPY32,000/month and it rose to JPY83,000 in 1970. Monthly wages of workers in the industry increased from JPY23,000 to JPY72,000 between 1960 and 1970.

Subtracting annual inflation of a few percent, the income of workers doubled or more. In addition, the number of employed workers increased much more than the plan and the number of working hours dropped from 203 to 187 hours/month. The 1960s was also the period when all Japanese families had refrigerators, electric fans, washing machines, TVs.

Strategic vision of nation

Why was the plan to increase national income multifold more successful than expectations? The first is bravery, and strategic vision for the nation of the leaders, which could help gather talents. The second is a contingent of capable, honest officials who were filled with a sense of responsibility to the country. Thanks to these two basic factors, we can see they created many highly practical policies and implemented them very effectively. Here are a few examples:

Firstly, creating a level playing field for all businesses, supporting SMEs with credit policies, having simple procedures, and having almost no corruption, so investment increased very rapidly.

The ratio of investment to GDP rose from 20% in 1955 to 30% in 1960 and 35% in 1970. Of the total investment, up to 75% belonged to private enterprises. The private companies became famous later as Honda, Sony, Toyota, etc. grew in this period. It was very easy for SMEs to borrow capital; even enterprises with number of employees fewer than 20 people could rely primarily on loans from banks and credit agencies.

Secondly, foreign currencies were closely managed and saved as much as possible, restricting foreign travel and strictly controlling use of foreign currencies to go abroad by officials.

Instead, the foreign currency was used to import equipment, materials and technology necessary for investment. Enterprises were ardent on technological innovation, making products with lower costs and better quality or manufacturing new products with strong competitiveness in the world market.

Thanks to effective technological innovations, administrative management and corporate governance, the economy developed very efficiently. Notably, the contribution in growth of capital was only 25%, while the dedication of technology and management or total factor productivity (TFP) was 65%.

Besides, there were many other policies on education, science and technology, and boosting exports and organizing the market... Overall, leaders and officials urgently implemented policies to achieve the objectives of the plan to increase national income multifold; and firms warmly responded, creating a strong investment impetus.

Speaking about the qualities of Japanese officials, I would recommend the wisdom, action and behavior of officials from the Ministry of Trade and Industry (MITI) in the mid-1950s whom I called heroes in the development era.

At that time, a car imported from the US was very expensive, equivalent to five years of salary of a middle-ranking official. Officials at the Ministry of Industry and Trade at that time dreamed one day that ordinary people would also have a car and they thought that developing the auto industry would make Japan prosperous.

There were many different opinions on this point. Some leaders of the ruling party were afraid that the car-making plan would not succeed and could harm relations between Japan and America. But officials of the MITI actively lobbied the government and business leaders to realize this plan because they believed in the importance of the auto industry for Japan in the future.

But will is only one thing. It is more important to implement the plant effectively. Japan’s comparative advantages at the time were industrial goods using unskilled labor, much like textiles and footwear.

While still wondering about the possibility of the production ability of Japan, officials read an article by Professor Shinohara Miyohei (1919-2013) on dynamic comparative advantage (comparative advantages in the future) and the conditions to turn comparative advantages into reality. They were excited, and immediately contacted Professor Shinohara for details.

In the memoirs written in June 2009, Shinohara wrote that four to five officials from the MITI came to his house in the evening and talked until nearly 5am.

There are many similar stories about the enthusiasm of Japanese officials.

Then, MITI was confident that Japan could manufacture cars and issued policies to support the auto-making plan. The first cars were still not nice in shape, so some Americans working in the auto industry jeered at the cars. But officials of MITI insisted on the plan, with the motto "America can do it, so can Japan." As we know, the Japanese car industry has flourished from the 1960s.

We can say the national spirit was the driving force toward action taken by state officials, and as a result Japanese industry developed powerfully.

Prof. Tran Van Tho