Last week, an article penned by Vietnam’s relatively newly appointed General Secretary, To Lam, featured in most of Vietnam’s major dailies, imploring Vietnam’s 100 million or so citizens to “practice thrift and fight wastefulness”.
Just days later, Vietnam’s two-child policy, enacted to conserve resources in the late 1980s, at a time when three-quarters of Vietnam’s population was living in poverty, was officially brought to an end.
Considered alone, the latter might have been seen as a measure of progress. However, taken together, these two events suggest that whereas the population policy may have changed, the ideology underpinning may not.
That is to say, it wasn’t clear that it had lost the support of Vietnam’s leadership per se, but rather the economic realities of a shrinking workforce may have forced their hand.
So, what are these economic realities?
Firstly, Vietnam Social Security, or the VSS, needs more workers.
The decades-old system works on a pay-as-you-go model whereby contributions from workers within the system cover benefits paid to older workers as they age out of the scheme.
But a falling birth rate has meant this system is under strain.
From the turn of the century to 2023, Vietnam’s fertility rate averaged just 1.96 births per woman, according to World Bank data, where the replacement rate is 2.1.
At the same time, life expectancy at birth jumped from 73 to 75.
That is to say, there are fewer Vietnamese joining the labour force and paying into the VSS to support retiring workers, who are claiming from the fund for longer.
Moreover, there are few other ways for the fund to make money.
The VSS is heavily restricted as to where it can invest its funds, limited to mostly government and state-owned bank bonds.
With nowhere else to go, this has suppressed bond yields to the detriment of the returns of the fund – the ASEAN+3 Macroeconomic Research Office (AMRO) has its average real yield at 1.8 percent in 2020, down from 5.2 percent in 2016.
In fact, the AMRO has estimated, on its current trajectory, the VSS could see expenditures exceed revenue as soon as 2032.
With this in mind, it makes sense for workers to build their own, separate nest eggs as well.
This then raises a second challenge, Vietnam’s economy is heavily dependent on external rather than local demand.
Domestic consumption in Vietnam accounted for 54 percent of GDP last year, down from 59 percent in 2015.
While this is not unusually low by regional standards, it does highlight the country’s reliance on external markets for growth, which makes it susceptible to fluctuations therein.
For example, the Global Financial Crisis and the War in Ukraine both saw external demand for Vietnam’s manufactured goods fall, significantly denting its economic growth.
Moreover, the poverty that helped steer Vietnam toward a two-child policy in the first place was only a few decades ago, well and truly in living memory for many Vietnamese.
Add to that Vietnam’s largely opaque economic management, with data often incorrect or missing, prices that are often set by the government rather than driven by market demand, and a news media heavily restricted in what it can and cannot report, and this makes for a hazy economic landscape, further encouraging Vietnamese to be cautious with their spending.
In this context, more people spending a little, rather than trying to convince the current population to spend more, may be a better path forward for domestic consumption growth.
Moreover, the labour dynamics in Vietnam’s manufacturing industry, which employs some 17.3 million people or about 33 percent of Vietnam’s workforce, are changing.
Vietnam’s abundant supply of low-cost labour has seen foreign direct investment pour into its manufacturing sector.
The jobs it has created, however, have been mostly in low-value, end-of-the-line assembly, testing, and packaging – work that requires relatively little skill.
With that labour supply now being squeezed and making those wages rise, those jobs are starting to shift to lower-cost jurisdictions like Cambodia and Bangladesh.
The official answer to this has been to increase the value-added in Vietnam; however, whereas this is good in theory, in reality, it just isn’t happening.
In 2015, according to data from the Organisation for Economic Cooperation and Development, Vietnam accounted for about 24.9 percent of the value of the goods it exported. That number in 2020 had fallen to just 22.7 percent.
That is to say, making the transition to a more advanced, higher-value-added economy looks to be some way outta reach, and increasing the labour supply may be one way to steady those wage rises and hold on to those low-value jobs until an alternative can be arranged.
So, where does that leave it?
Lifting population controls likely won’t do all that much.
Historically, once a country’s fertility rate falls below replacement, it’s difficult to get it back up, regardless of policy or financial support.
This change, however, days after the General Secretary’s statement last week, does shed light on the frictions between Soviet-era ideology and new economic realities in Vietnam.
Notably, in this particular instance, it seems that ideological beliefs have given way to economic needs.
This, however, is not always the case, a reality worth keeping in mind when trying to assess future policy initiatives and properly forecasting where Vietnam’s economy might be headed next.