China and Vietnam Economic Development and Industrialization

Introduction: Growth Stories of China and Vietnam

Economic development is a key element of the growth and sustainability of a country, as well as of equity, prosperity, and the well-being of its population. Recently, the world has witnessed rapid economic growth in two Southeast Asian countries: China and Vietnam. Both countries faced major challenges to their economic growth, survived those challenges, and proved themselves to be success stories of development. Vietnam continues to follow in the footsteps of China, which is already one of the strongest economies in the world. Vietnam is working to transition from a low-income country to a middle-income one, whereas China is working its way from middle-income to high-income status.

Comparing these two countries — with one clearly ahead of the other in economic prosperity, particularly with regard to industrialization — provides clarity on what it takes to develop from an underdeveloped state, the challenges each has faced or continues to face, and the policies designed to overcome those challenges.

Economic Development and Industrialization

China, a communist country, faced major challenges to its growth and sovereignty. The country experienced civil unrest, outbreaks of major diseases, and wars that killed millions of people and deteriorated the economy. It then focused on market-based economic development and soon became one of the fastest-growing economies in the world, attracting large amounts of foreign investment, becoming one of the biggest exporters globally, and emerging as a rapidly industrializing country. According to the World Bank, China became the world's second-largest economy in 2010. Over the last three decades, the poverty rate in China fell from 65% to 4%.

Vietnam, a developing country, shares a border with China and a similar system of governance. The country faced several issues that hindered its economic prosperity, including conservative policies of its communist leaders and the devastation of war. The Vietnamese government is now focused on market-based economic development and is granting greater freedom to its population as it pursues its long-awaited goal of becoming an industrialized country. According to the World Bank, Vietnam is a success story of development. As the World Bank states:

Political and economic reforms (Doi Moi) launched in 1986 have transformed Vietnam from one of the poorest countries in the world, with per capita income below U.S.$100, to a lower middle-income country within a quarter of a century, with per capita income of U.S.$1,130 by the end of 2010.

Vietnam has a population of approximately 91,519,289 and a GDP per capita of $3,300 (CIA). According to the CIA, in the last decade the share of agriculture in economic output shrank from 25% to 22%, while the industrial share increased from 36% to 40%. The incidence of poverty has sharply declined in the same period, and most welfare indicators reflect growing prosperity. Vietnam, like many other developing countries, is working to achieve the Millennium Development Goals (MDGs) and has already attained five of its MDG targets. However, the country continues to face numerous financial challenges, including slow export growth, a trade deficit, high inflation, low foreign exchange reserves, high borrowing costs, and an undercapitalized banking sector.

Rosenstein-Rodan (202–211) commends industrialization by introducing the concept of the "Big Push": if various sectors of the economy adopt increasing returns to technology, they generate income that leads to demand for goods in other sectors of the economy. Eventually, the size of the market expands and makes industrialization profitable for the economy as a whole. This theory is based on using locally available technology and requires no foreign investment of resources, which is especially beneficial for countries with restricted foreign relations or limited access to external capital. Murphy, Shleifer, and Vishny (1003–1026) further investigated this concept and argued that almost every country that has experienced growth in productivity and living standards has achieved it through industrialization, and that the industrialization of some sectors benefits all others. Industrialization in one sector increases demand for the products of other sectors and helps develop infrastructure, making different sectors both users and investors in that infrastructure.

Industrialization thus plays a pivotal role in the growth of any economy, and the development of both China and Vietnam is grounded in industrialization. Both countries have invested heavily in it. Table 1 shows that industry's share of GDP is the highest among all economic sectors and is consistently increasing relative to agriculture, manufacturing, and services. Vietnam, which was a poor agriculture-based economy, is now transitioning toward an industry- and service-oriented one. Industrialization also strengthens other factors essential to economic development, including health, education, communications, and infrastructure.

Vietnam is a country in transition. With the help of the World Bank, it is fostering industrialization through the ten-year Socio-Economic Development Strategy (SEDS) 2011–2020, aiming to achieve its goals through modernization and infrastructure improvement. The government is also committed to meeting several MDG targets by 2015 (Communist Party of Vietnam Online Newspaper) and seeks to enhance scientific and technological capacity to further strengthen the economy.

China's Industrial Transformation

Like Vietnam, China was an agriculture-based country that experienced significant growth within three decades and has become a role model for other developing countries. China had a centralized government that is now shifting toward a market-based economy, with the private sector growing as well. The country undertook economic reforms in 1978. According to the World Bank, the economy grew at an average annual rate of approximately 9.7% after the reforms, with remarkable growth of 11% between 2003 and 2007. The financial sector proved so resilient that even during the global recession, economic prosperity and growth continued in China — reflecting the strength of the economy's growth drivers.

China became the world's second-largest economy in 2010 (World Bank) and is playing a leading role on the global financial stage. As shown in Table 1, the share of agriculture in GDP has decreased over time, while industry's share of GDP is the highest among all sectors supporting the economy. Industrial progress was occurring even before the economic reforms, as the country was already producing complex technological products such as nuclear weapons and owned the world's largest hydropower unit ("Technological and Industrial History of the People's Republic of China"). The main constraint on growth was the centralized decision-making of the government.

In the 1970s, major economic reforms were introduced that shifted government decision-making toward market-based economic choices. Policies were redesigned to foster light industry rather than continuing heavy investment in heavy industry. A system of worker incentives to increase productivity was also introduced.

Chenery, in a comparative framework for assessing China's performance relative to other developing countries, notes that China has achieved the industrial and investment structure typical of a middle-income country. He observes that "in the case of China, industrialization has proceeded much further than is typical for countries of its income level." He also attributes slow population growth as a contributing factor to economic growth and credits the autarkic policies pursued over three decades in China for its industrial advancement.

China now has a per capita gross national income of approximately U.S.$4,260 (World Bank), placing it among upper-middle-income countries. The country now faces the challenge of maintaining its growth and transitioning from middle-income to high-income status — a challenge the World Bank has noted is even more difficult than moving from low-income to middle-income status.

Conclusion

China and Vietnam, with their respective strengths and weaknesses, are two role models for developing countries — especially those seeking to increase their industrial strength to improve their economies. China is clearly ahead of Vietnam in economic progress and industrialization. Both countries share certain similarities with each other and with other developing countries, and they can learn from each other by examining which policies were implemented and what innovations can be introduced to achieve similar or better outcomes. The World Bank has invested in research to understand China's development story in order to share this example with others striving to improve their economies.

It can be concluded that while the two countries have different economic objectives today, Vietnam can learn a great deal from its neighbor and use that knowledge to set future goals and design its policies accordingly.

Bibliography

Chenery, Hollis B. "Industrialization and Growth: The Experience of Large Countries." World Bank Staff Working Papers 539 (1982). Web. 10 Apr. 2012.

CIA. "The World Factbook." 2012. Web. 6 Apr. 2012.

Communist Party of Vietnam Online Newspaper. "Vietnam's Development Goals, 2011–2020." 2010. Web. 6 Apr. 2012.

Murphy, Kevin M., Andrei Shleifer, and Robert Vishny. "Industrialization and the Big Push." The Journal of Political Economy 97 (1989): 1003–1026. The University of Chicago Press. Web. 6 Apr. 2012.

Rosenstein-Rodan, P. "Problems of Industrialization of Eastern and South-eastern Europe." The Economic Journal 53 (1943): 202–211. Web. 6 Apr. 2012.

The World Bank Group. "Vietnam–World Bank: Long-Term Companions in Development." Working Paper Report 66928 (2012). Web. 6 Apr. 2012.

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Zhang, Xiaobo, Tim D. Mount, and Richard N. Boisvert. "Industrialization, Urbanization, and Land Use in China." International Food Policy Research Institute (2000). Web. 6 Apr. 2012.

Appendix

Table 1: Key Economic Indicators — China and Vietnam, 1995–2010

GDP growth (annual %): China: 11 (1995), 8 (2000), 11 (2005), 10 (2010); Vietnam: 10 (1995), 7 (2000), 8 (2005), 7 (2010).

Exports of goods and services (annual % growth): China: 9 (1995), 32 (2000), 24 (2005), 28 (2010); Vietnam: 20 (1995), 21 (2000), 18 (2005), 15 (2010).

Exports of goods and services (% of GDP): China: 20 (1995), 23 (2000), 37 (2005), 30 (2010); Vietnam: 33 (1995), 55 (2000), 69 (2005), 78 (2010).

Imports of goods and services (% of GDP): China: 19 (1995), 21 (2000), 32 (2005), 26 (2010); Vietnam: 42 (1995), 57 (2000), 74 (2005), 88 (2010).

Agriculture, value added (% of GDP): China: 20 (1995), 15 (2000), 12 (2005), 10 (2010); Vietnam: 27 (1995), 25 (2000), 21 (2005), 21 (2010).

Industry, value added (% of GDP): China: 47 (1995), 46 (2000), 47 (2005), 47 (2010); Vietnam: 29 (1995), 37 (2000), 41 (2005), 41 (2010).

Services, value added (% of GDP): China: 33 (1995), 39 (2000), 41 (2005), 43 (2010); Vietnam: 44 (1995), 39 (2000), 38 (2005), 38 (2010).