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Home / Economy / Trade - Service
Reducing poverty through model of export led growth
Ngoc Thuy 14:24, 2017/12/17
Vietnam’s economy gathered further momentum in 2017 reflecting strong domestic demand, robust export-oriented manufacturing, and a gradual rebound of agriculture.
After a moderation during the first quarter, growth started to rebound to 6.2 percent (y/y) in the second quarter and accelerate to 7.5 percent in the third quarter, bringing y/y growth to 6.4 percent for the first nine months of the year. Low inflation and strengthening consumer confidence supported an uptick in private consumption while investment was bolstered by robust foreign direct investment and an expansion of credit growth. At the same time, the recovery in external demand helped Vietnam’s export oriented manufacturing and agricultural sectors with exports up 21 percent in value term during the first three quarters of the year.
 
Vietnam’s economy gathered further momentum in 2017.
Vietnam’s economy gathered further momentum in 2017.
On the production side, growth was led by a pick-up in manufacturing. Vietnam’s industrial production expanded by 8.6 percent (y/y) during the first ten months of 2017– much higher than the same period last year (7.3 percent). Strong performance in manufacturing sector, which grew 13.6 percent, compensated the decline in mining sector which is down 7.4 percent y/y. Manufacturing output recovered from one-off factors such as the Samsung recall and a decline in steel production by Formosa. The headline Vietnam Manufacturing Purchasing Managers’ Index (PMI) rose to 53.3 in September from 51.8 in August (the strongest performance since March 2017), marking the 22 consecutive months of strengthening and signaling sustained improvement in business conditions.

The agricultural sector also rebounded gradually from the severe drought last year. Agricultural output expanded by 2.8 percent (y/y) in the first nine months 2017 compared to 0.6 percent during the same time of 2016. The fishery sub-sector increased 5.4 percent while agriculture rebounded more gradually to 1.96 percent. 

Activity in the service sector also strengthened on account of strong retail growth and tourism sector. Low inflation and strengthening consumer confidence supported an uptick in private consumption where retail sales increased 10.7 percent (y/y) in nominal terms (9.4 percent in real term) during the period from January to October 2017. Tourist entries also increased to 10.5 million, with the sector expanding at 28 percent during the first three quarters of the year.
 
Buoyant Wage Growth Nominal Wage Growth.
Buoyant Wage Growth Nominal Wage Growth.
The economic recovery over the past three years was associated with a pick-up in job creation, especially in manufacturing. Over the past three years Vietnam added 1.6 million new manufacturing jobs (net) – a significant pick up in manufacturing job creation. Within manufacturing, jobs were primarily created in export oriented sectors i.e. textiles and electronics. Labor demand in construction, retail and hospitality sectors was also buoyant with these sectors together adding another 700,000 jobs. These four sectors together accounted for 80 percent of all jobs created, with the manufacturing sector contributing to more than half of all new jobs between 2014 and 2016. They absorbed labor from agriculture, contributing to a net out flow of labor from the sector, reinvigorating structural transformation and contributing re-allocation of labor to higher productivity activities. 

Strong labor demand also lifted real wages. Average nominal wages increased by 8 percent on average between Q1 2014 and Q1 2017. Average monthly nominal wages in the domestic and FDI private sector grew rapidly expanding at an average rate of 8.4 percent. Meanwhile wages in the public sector grew only by an average 3 percent, reflecting the government’s efforts in reining in the public-sector wage bill. Wages grew in all sectors but expanded fastest in industry where demand for labor was strongest. High wage growth in both the domestic and FDI sector and across all industries, underpinned household income growth for all groups, agricultural or non-agricultural.

Vietnam’s model of export led growth in labor intensive sectors paid off in reducing poverty. An expanding wage sector and growth in labor incomes is the main driver of poverty reduction in Vietnam. Previous estimates showed that growth in wage income explained more than 80 percent of poverty reduction in Vietnam during 2010-14. Poverty is thus expected to have declined much more since 2014, given the subsequent high growth in wages across all sectors and a net shift of labor into the more productive non-agriculture sectors. The reduction in poverty is also expected to be broad based because wage growth was high across all sectors. Resultantly, poverty continued to decline with extreme poverty now estimated to have fallen to less than 2 percent, using the international poverty line (US$1.9 per day). 
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