Vietnam’s Winning Approach to Sustainable Trade
In order to be sustainable, trade cannot simply be about pursuing breakneck economic growth at the expense of social cohesion and environmental stewardship. Countries which attempt to do so will eventually find their growth trajectories sharply curtailed by mounting civil society disaffection and degraded natural resources.
If they are to be sustainable over the long term, trade policies have to strike a balance between economic growth, strengthened social capital, and environmental responsibility. This is the basic definition of sustainability first articulated by the UN Brundtland Commission in 1987. Sometimes sustainability requires trade-offs between the economic, social, and environmental pillars, but increasingly we are seeing that these pillars can be mutually reinforcing i.e. sound social and environmental policies support, rather than detract from, economic growth.
Vietnam provides an example of a country making substantial progress when it comes to sustainable trade. While continuing to produce impressive trade-driven economic results, including GDP growth rates in excess of six percent and inbound foreign direct investment (FDI) of more than $35 billion, the country has been equally mindful of the need to strengthen social capital and provide responsible environmental stewardship. In fact, the World Bank has lauded Vietnam not only for its impressive growth but also for being a significantly more educated and healthy society than it was just 20 years ago.
The Hinrich Foundation Sustainable Trade Index, developed by the Economist Intelligence Unit, provides a useful tool to benchmark the sustainability of 20 economies across Asia Pacific. Vietnam was a top performer in the 2018 edition of the index, scoring ninth overall, and outperforming its income ranking by an impressive six places.
On the economic pillar, in addition to its strong GDP growth rates, Vietnam has demonstrated an openness to trade, tying for the top score in current account liberalization. Its decision to accede to the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) signals in no uncertain terms the commitment Vietnam has made to trade liberalization.
Vietnam has also worked hard to make itself more attractive as an investment destination. With multinational corporations increasingly factoring sustainability into investment decisions, Vietnam’s sustainable trade policies have helped underpin its high score on FDI as a percentage of GDP. Vietnam has now become an increasingly important cog in the East Asian supply chain, with Japanese, South Korean, and Singaporean investors leading the way. Samsung Electronics alone has invested a remarkable $6.5 billion in Vietnam in recent years.
This impressive economic dynamism has been achieved without succumbing to common pitfalls experienced elsewhere. For example, we’ve seen in some advanced Western economies that rising income inequality, correctly or incorrectly attributed to trade, has helped fuel a backlash against globalization. Vietnam has kept income inequality largely in check. Its GINI coefficient – the most commonly used tool to measure income equality – is among the best in the index, scoring in fifth place overall.
A country’s social fabric can also become frayed when labor standards are inadequate and abuses become rife. Here too Vietnam has made important strides, enacting significant labor reforms, including protections for workers in the informal economy. And Vietnam’s membership in the CPTPP ensures that it will adhere to the workers’ rights contained in the 1998 International Labor Organization Declaration.
Where does Vietnam need to do better? The country actually took a step backwards on some important environmental indicators, in particular its rate of deforestation is amongst the highest in the index. Reducing trade costs should also be an important priority moving forward. The index uses a composite indicator consisting of infrastructure, logistics, corruption, and the legal system, in order to measure the extra burdens to trade created by inefficiencies in the trading system. Vietnam had the eighth highest trade costs in the index.
Trade has undeniably been one of the most powerful engines propelling economic growth throughout the entire post-War era. But countries cannot pursue trade at all costs. Equal consideration needs to be given to broader social issues such as income inequality, and environmental stewardship – for quality of life considerations as well as to avoid depleting valuable natural resources.
Vietnam provides a useful case study, both in terms of the things it is doing well, along with the areas where it needs to improve. Learning from the experiences, positive and negative, of economies in Asia Pacific can provide policy makers and business leaders with useful points of reference as they chart a course towards greater sustainability in the region. This is the hope – and the purpose – of the Hinrich Foundation Sustainable Trade Index.
Author: Stephen Olson – Research Fellow at the Hinrich Foundation.
Follow Stephen Olson on Twitter @StephenOlsonHF