Vietnam surpasses Sri Lanka

Vietnam is now richer than Sri Lanka. In terms of per capita GDP, this Southeast Asian country which was poorer than Sri Lanka has now surpassed it. As of 2022, Vietnam’s per capita GDP is US$ 4,164, compared to $3,354 of Sri Lanka.

Sri Lanka’s current per capita GDP is no different from what it was 10 years ago; in 2012, Sri Lanka’s per capita GDP was $3,352. Particularly, over the past five years (2017-2022), about ‘one-fourth’ of Sri Lanka’s per capita GDP got wiped out. In other words, as a nation Sri Lankans have become poorer, because of the loss of their nominal incomes. If we adjust it for inflation, the loss of ‘real incomes’ is much greater.

The decline in per capita GDP started in 2018 with the negative economic implications of the prominent events and circumstances throughout. The first was the Constitutional crisis in October 2018 resulting from the President’s decision to appoint a new Prime Minister. Secondly, the economic downturn got accelerated with the Easter Sunday terror attack in 2019 and the new government’s policy errors in 2020. Then the economy was hit by the COVID-19 pandemic. Finally, the economy collapsed in 2021 resulting in a debt crisis, and the foreign debt payment was suspended in April 2022.

This year too, the economy has so far been contracting. The first quarter of the year was marked by a contraction of real GDP by 11.5 per cent and the second quarter by 3.1 per cent. As a result, the country’s per capita GDP is likely to decline further.

It is, however, not the decline in Sri Lanka’s per capita GDP that enabled Vietnam’s rise above Sri Lanka. It only made it faster. Vietnam has maintained an impressive 7 per cent average annual rate of GDP growth over the past 30 years. With this, it is inevitable that Vietnam would rise above Sri Lanka sooner or later. It was only a matter of time.

During the same period of past 30 years, Sri Lanka’s average annual rate of GDP growth was 4.5 per cent. We must not look at just the growth rates, but the ‘quality’ of growth rate.

Sri Lanka’s economic growth was increasingly driven by the expansion of the ‘non-tradable’ sector, whereas in Vietnam it was the expansion of the ‘tradable’ sector. While the non-tradable sector includes economic activities such as construction, telecom, finance, public administration and other government services, the tradable sector includes activities that can be traded internationally.

The problem of the non-tradable sector is that it draws much of public finance which comes from borrowings, while it cannot grow in isolation. Non-tradable sector generates inputs to the tradable sector, without which the non-tradable sector cannot survive. Moreover, the economic growth based on nontradable sector expansion does not directly generate foreign exchange earnings, but rather increases strain on foreign exchange availability.

In 1992, both Sri Lanka and Vietnam had similar export values of $2.5 billion. With 30 years of policy-making, Sri Lanka exports about $13 billion worth, while Vietnam’s exports amount to $371 billion. Exports, originating from tradable sector expansion, ensure steady foreign exchange inflows enabling the country to maintain a stable exchange rate and to build foreign exchange reserves. Vietnam’s stock of foreign

Vegetable sellers in Hanoi, Vietnam. exchange reserves remains closer to $90 billion.

In the absence of such steady foreign exchange inflows from exports, the country’s exchange rate stability and foreign exchange reserves remain vulnerable to volatile and tottering foreign exchange flows. That is why Sri Lanka has to depend increasingly on portfolio capital flows to government security market and stock exchange, in addition to its increased direct borrowings from commercial sources.

Sri Lanka hasn’t had its foreign exchange reserves growing above $8 billion, which continued to drain in frequent attempts to meet foreign exchange payments and foreign debt obligations. The stock of foreign reserves declined to below $2 billion last year, which has now been built up to $3.5 billion. The bottom line is the lack of export growth which would originate from tradable sector expansion.

What was the underlying factor that enabled Vietnam to grow fast? By recognising the fact that it all depends on the expansion of exports (tradable sector), Vietnam adopted reforms connecting the two ends of industry growth. The first is the source of growth by attracting private investment to export industries so that investors are confident in starting businesses. At the other end, it is the destination market which is big enough for industries to compete and grow, allowing them to derive the benefits of a free internal market and of economies of scale.

With continued policy and regulatory reforms, Vietnam has been successful in improving the regulatory framework for doing business easier in the country. If we measure it by using the Doing Business Index, Vietnam’s rank of 70 is not that impressive, but the confidence that investors feel was that it has been improving from around 90 during the past 10 years.

Sri Lanka has been experiencing, sometimes stagnancy and at other times irregular ups and downs which doesn’t give any clear direction of reforms to the investors. Sri Lanka’s Doing Business Index is 99 in 2020, but it was better at 83 in 2012; in fact, it worsened rising above 100 after 2014. Lack of consistency and inadequate improvements over the years did not improve investor confidence.

After adopting market-oriented policy reforms since the late 1980s, Vietnam progressed well in integrating with the rest of the world and complying with free and fair trade rules of the WTO. In 1995, it joined the ASEAN, which now comprises 10 countries in Southeast Asia: Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, and Cambodia.

It is a bold decision for poorer countries like Vietnam, Cambodia, and Myanmar to join a regional FTA like ASEAN which also comprises high-income countries such as Singapore, Malaysia and Brunei. Sri Lanka opted to put on hold even the bilateral FTA that it signed with Singapore.

The recent initiative by the ASEAN to form a Regional

The steady policy reform process starting from the so-called “Doi Moi” in 1986, Vietnam attracted the foreign direct investment (FDI) seeking expansion in the growing Asian market. The FDI inflows to Vietnam included global brand names of a wide range of consumables such as Intel, Foxconn, Samsung, Cannon, Nissan, Bridgestone, Nike, Adidas, Compal, Hanes Brand, Hewlett-Packard, IBM, Nokia, and Panasonic.

When one or two big brand names move in, they will be followed by a multitude of related and diverse companies setting up their businesses. It is the power of wining the business confidence which generates multiplier effects on investment flows, leading to a miraculous export growth in Vietnam.

By the way, there are counter arguments justifying that ‘former communist’ countries can grow steady and fast. The underlying point of such arguments is that Sri Lanka, being a ‘non-communist country’ cannot grow like that. If Sri Lanka had tried and failed, then there is some degree of validity of this argument. Even without trying it, it’s absurd to provide such justifications. Besides, it will not be too long to see that ‘non-communist’ democracies too would be rising from Sri Lanka’s backyard.

(The writer is a former Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).