Lessons from the East: Decoding Vietnam’s Growth

The report compares two countries, Vietnam and Pakistan, in order to understand how Vietnam has been able to thrive in the global market as compared to Pakistan, despite it being a smaller and war-torn country.

In 2000, Vietnam’s GDP was $31.17 billion, significantly lower than Pakistan’s GDP which was then $99.48 billion. However, post-2000 Vietnam’s economy has taken off and has become one of the fastest growing economies in the world. As of 2023, Vietnam’s GDP was $429.72 billion and Pakistan’s GDP was $338.37 billion. Until 2008, Vietnam’s GDP per capita was also lower than Pakistan’s, however the GDP per capita has grown exponentially whereas Pakistan’s GDP per capita has relatively not increased much.

The figure below shows Vietnam’s and Pakistan’s overall trade over the period (1999-2023). In 1999, Vietnam’s overall trade was only 1.54 times of Pakistan’s overall trade. This difference has skyrocketed and in 2023 Vietnam’s overall trade was 8.61 times higher than Pakistan’s. In 2023, Vietnam’s trade surplus was $43.96 billion and Pakistan’s trade deficit was $19.42 billion.

Vietnam has emerged as a global manufacturing hub, particularly in electronics, textiles, and footwear. This has driven substantial export growth and job creation. Manufacturing sector has become an anchor of the country’s growth by largely contributing to a positive trade balance and attracting foreign direct investment (FDI). One of the notable examples is that of Samsung that contributes almost 25 percent to Vietnam’s annual exports.

The figure below shows that Vietnam’s reliance on exports of primary goods such as mineral and vegetable products has reduced significantly over the last two decades. The country’s exports of machinery, electrical products, and textile products have however, increased exponentially, unlike Pakistan’s export basket, which has been concentrated in textile products over the last two decades.

Vietnam’s trade agreements have aided significantly in gaining market access and resulted in export growth. Agreeing to providing broader access and lowering and removing tariffs on a large number of tariff lines has helped Vietnam to get concessions on a higher number of tariff lines from partner countries. Vietnam’s imports from partner FTA countries makes up 80.92 percent of its total imports and Vietnam’s exports to these countries make up 62.83 percent of Vietnam’s total exports. Whereas, Pakistan’s imports from co-signatories contributed 32.09 percent to total Pakistan’s imports and Pakistan’s exports to these countries contributed 13.66 percent to Pakistan’s total exports.

As far as FDI is concerned, Vietnam’s top sector that attracts FDI is manufacturing, whereas Pakistan’s top sector that attracts FDI is power. The foreign companies, especially in the manufacturing sector, contribute significantly to Vietnam’s total exports and play a crucial role in integrating Vietnam into global value chains. Whereas, the foreign companies in Pakistan primarily serve domestic market needs.

The major underlying issues that hinder Pakistan’s export growth are regulatory issues, political instability, energy and infrastructure issues, and low-quality human participation rate. A few factors which are conducive to business environment in Vietnam are political stability and better regulatory policies, tax incentives based on economic zones and industries, and low labor cost.

The report provides recommendations focusing on trade negotiation, broadening the scope of FTAs, infrastructural developments, providing tax incentives, seeking export oriented FDI, and developing human capital.

Recommendations

Trade Negotiations:

Ministry of Commerce needs to effectively negotiate future FTAs which can provide Pakistani exporters a comparative advantage as compared to other MFN countries. Pakistan should also request renegotiations for trade agreements where Pakistan has not been provided favorable market access. In case of CPFTA, China offers Pakistan immediately duty-free access on 45% of tariff lines. However, after discounting for lines which China does not import from anywhere and Pakistan does not export, only 14.15% of tariff lines have duty-free access that Pakistan could immediately benefit from.

Ministry of Commerce and the FBR need to appreciate that to get maximum market access, Pakistan will need to open its markets to imports from partner countries. Vietnam and other countries which have become manufacturing hubs, have a liberal import regime which allows imported inputs to be part of exports.

Broader scope of future FTAs:

In addition to providing concessions on a broader number of tariff lines and negotiate for concessions on a broader range of tariff lines in return, Pakistan also needs to ensure that investments and services are part of future FTAs.

Export Diversification:

In the past twenty years, Pakistan has barely diversified its exports to the world. Pakistan needs to encourage export diversification beyond traditional sectors like textiles and agriculture, with a share of almost 60 percent and 12 percent in the total exports respectively, and focus on value-added manufactured goods.

All imports are not bad:

Pakistan’s imports are barely 14.29 percent of its GDP as compared to Vietnam’s 72.31 percent. Vietnamese exports are supported by its export-led-imports which enable the manufacturing hub to produce value-added goods. Vietnam’s abundant imports have not led to an increase in the country’s consumption, but has enabled the country to become an integral part of global supply chains. Pakistan should also appreciate that import restrictions are not a sustainable way to reduce its trade deficit, rather it can be utilized to empower the industrial sector.

Infrastructure Development:

Pakistan needs to improve its infrastructure and resolve energy issues which are instrumental to sustain business environment by improving connectivity and reducing the cost of production. Pakistan should also seek renewable and locally available energy sources to combat the power outages that corresponds to higher production cost.

Tax Incentives:

Vietnam’s tax incentives schemes need to be studied carefully. These have encouraged foreign investors to setup their production lines in the country. The government has also helped in building economic zones, boosting urbanization, and promoting industries that align with development strategies. Pakistan needs to attract FDI into sectors which are critical for its economic growth and strengthen its manufacturing capabilities.

Seek export-oriented FDI:

Pakistan’s FDI attraction has been concentrated in the power sector, which primarily serves domestic needs which has negatively impacted balance of payments. To bolster the balance of payments and stimulate economic growth, Pakistan should attract FDI in sectors with strong export potential, such as manufacturing and technology.

Human Capital Development:

Pakistan needs to invest in human capital in order to attract FDI. Investment in basic, technical and vocational education will equip the workforce with the skills needed for modern industrial operations.

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