VINACHEM

The question of which sector of the economy holds the largest potential for the national economic growth attracted much attention from economic experts at the Autumn Economic Forum held last month.

Vietnam's economy has gone through three quarters of 2014 with many positive signs, particularly a record trade surplus of US$3 billion in late August.

Aggregate demand is on the road to recovery, the total export revenue has seen a year-on-year increase of 14%, and the gross domestic product (GDP) over nine months surged 5.62% against the same period in 2013, exceeding the estimate figures of 5.3-5.4%.

Most notably, the macroeconomy has maintained long-term stability, inflation has been kept in check, the consumer price index (CPI) is stable, and the country can boast high foreign currency reserves.

However, it can still be said that the Vietnam's economy has bottomed out and worries of a slow recovery remain.

Economic experts shared the same assessment on the slow and not-yet sustainable recovery of the national economy: weak domestic demand has led to an economy vulnerable to external shocks and lack of a motivation for a breakthrough in such a quiet period.

The question is, what is the driving force for Vietnam’s future economic growth? And furthermore, should we stimulate aggregate demand or supply to make the economy quickly back to its growth trajectory ─ 7% or higher ─ as expected

Boosting aggregate demand is a way to recover the economy in the short term and prevent economic decline.

The Government has made considerable efforts to enact operating policies to reduce interest rates, spur credit growth and promote public investment projects. These solutions have brought about positive results, helping the economy emerge from the most difficult periods.

But demand stimulus is only a supporting solution and it cannot solve systemic problems in the economy. The fiscal space for expanding public investment is very limited due to constraints on overspending and maintaining safe public debt, leaving narrow room for implementing a demand stimulus policy.

As such, a stimulus policy should not be in place so long as to cause a threat to the safety of national finances and trigger inflation.

Improvement to supply will be a fundamental solution to the growth of the economy in the coming period as it helps deal with current economic issues including improving social productivity, enhancing investment efficiency and bettering the competitiveness of the economy.

Supply side policies are carried out through restructuring programmes aligned with the renovation of growth models. And as long as the restructuring programmes have not yielded practical results and new growth models with higher productivity have not been formed, economists have reasons to believe that the economy does not have the momentum to make a breakthrough.

So, which sector will be the driving force and motivation for the national economy?

Much research shows that the State-owned enterprise sector no longer operates effectively, with its investment efficiency declining. Indicators of capital productivity, investment performance and employment elasticity in this sector are all second to non-state sectors.

The FDI sector is forecast to continue attracting more investment and expanding further in the future, making more significant contributions to Vietnam's economy, particularly when Vietnam completes the signing of free trade agreements (FTAs) including the Vietnam - EU FTAs, Vietnam - Republic of Korea FTAs, Trans-Pacific Strategic Economic Partnership Agreement and others.

However, the facts indicate that the private sector is indeed the sector recording the highest investment efficiency with capital efficiency two times higher than that in the State-owned enterprise sector. Its contributions to the nation in tax payment and GDP growth are even higher than FDI sector.

These analyses show that it is time to give more priorities to the private sector. It is necessary to put the focus of the strategy on enhancing the productivity of the national economy on this sector as it is absolutely the motivation for stronger economic growth in the future.

To achieve the target, Vietnam needs more changes and reforms to build up trust for enterprises and create favourable conditions for the private sector, especially through reforms in its institutions, legal frameworks, administrative reform, and State-owned enterprise equitisation among others.