How a small country in Southeast Asia can outgrow its neighbors
Six months into the pandemic, Vietnam’s fight against COVID-19 has been widely praised as a success story. Out of 66 developing economies, the Economist ranked Vietnam as the 12th strongest economy to cope with the global crisis, its success owing to swift containment strategies and a whole-of-society effort in battling the virus.
Still, Vietnam’s success is not a reason for celebration just yet. In the end of July, the country found itself grappling with a second wave that led to over 500 new local transmissions and 25 deaths. Strict lockdown measures also came at a cost to 30.8 million Vietnamese — almost half of the workforce. They either saw their jobs disappear or their workhours and wages reduced.
The economic impact fell most heavily on MSMEs, or micro-, small-, and medium-sized enterprises that are often found in the services and tourism sectors. Once the bustling streets of Vietnam become unusually quiet, these businesses faced extraordinary stress. At the height of the lockdown in April, revenues contracted by 78%, according to a UNDP report. When the lockdown lifted in May, it was still down 68% compared to before the pandemic. And while other sectors have had promising recovery signs, MSMEs — as a result of their more informal business nature — experienced the slowest improvements.
In every crisis, however, is an opportunity. In a post-pandemic world, as countries continue to contend with the economic and social challenges of COVID, Vietnam’s success can only be realized if MSMEs become a government priority. Accounting for over 50% of the workforce and 40% of the country’s total GDP, MSMEs can deliver three distinct benefits to Vietnam, strengthening its ability to:
1. Rebalance Vietnam’s Economy
Vietnam has long relied on international trade as the backbone for rapid growth; its exports made up 106% of GDP in 2019. For comparison, world exports was only 30.6% of total GDP. With COVID, however, Vietnam’s trade is expected to contract significantly if foreign demand for Vietnamese goods remains down.
MSMEs in turn provide the perfect pivot for Vietnam’s economy. According to the World Bank, focusing on its domestic sector for growth is the only way for the Southeast Asian nation to escape the “COVID-19 economic trap”. Boosting small businesses, providing further fiscal stimulus, tax breaks, and workforce training programs are just a few examples of how Vietnam can decrease its heavy dependence on export partners. Otherwise, the country’s economic fate will inevitably remain out of its hands.
2. Embrace A Digital Revolution
Vietnam has always been a front-runner in the Southeast Asia’s race for digital adoption, but this pandemic may have provided the perfect push for a breakout. The need to provide more online education, shopping, and entertainment led many small businesses and technology start-ups to devote all resources to digital innovation in mobile payments, big data analytics, and automation and blockchain. The public health crisis further rallied the country to develop a contact-tracing app, which has now been downloaded by over 20 million people. With government support, MSMEs can further invest in these transformative technologies, laying the foundation for small businesses to become the new engine of growth.
3. Respond to Rising Inequality
Although Vietnam has made impressive strides in poverty reduction in the past decades, COVID has and will continue to hurt some more than others. Across Southeast Asia, 218 million workers are estimated to have their livelihoods at risk due to the pandemic. 35 million will fall into poverty. Moreover, the prevalence of the informal economy means that many of the most vulnerable workers are unlikely to get the help they need.
In response, the Vietnamese government must make strong efforts to reach out to potentially vulnerable groups. Engaging with local government and financial institutions to deliver much-needed aid is crucial to reverse some of the distributional impacts of the pandemic. Here, boosting MSMEs will also be an important part of that strategy. By focusing on those in informal sector, Vietnam can provide support to businesses and workers that were impacted the most by the crisis.
In a post-pandemic world, reviving small businesses will be Vietnam’s key to unlocking sustainable, long-term recovery. As unfavorable external conditions continue to expose weaknesses in the economy, Vietnam can realize its potential by focusing on domestic drivers of growth rather than waiting for external partners to recover. Although this transformation will be a long, strenuous undertaking, it has immense potential to jump-start Vietnam’s economic trajectory.