The projection of economic growth for Vietnam in 2022 that was made by the International Monetary Fund (IMF) has just been revised upward, moving from 6 to 7 percent. This was the only significant revision in the other direction among Asia's economies, and it was greater than the estimates for other key regional economies such as India, Japan, and China, which were all decreased by between 0.7 and 1.1 percent. This week, the World Bank raised its prediction for the economic growth of Vietnam, raising it from 5.3 percent to 7.2 percent, which is the highest rate for any nation in East or Southeast Asia.
Those who have been paying close attention to Vietnam over the past few decades could have seen this coming, despite the fact that it caught many people off guard. Vietnam has quietly made the shift from having one of the world's poorest economies to having one of the economies that is developing at the fastest rate, and the escalating great power conflict between China and the United States has only helped Vietnam's recent rise.
The United States military withdrew from Vietnam in 1975, and shortly thereafter, the Vietnamese economy began to experience severe developmental problems. These problems were caused by the inefficiencies of a centrally planned economy, the lingering effects of the war, and low productivity rates that made the country dependent on imports. Meanwhile, Vietnam's invasion of Cambodia in 1979 to remove the Khmer Rouge government complicated these economic woes by redirecting resources to the war effort. This made Vietnam vulnerable to international pressure, including sanctions imposed by the United States and an invasion carried out in retaliation by China. In the meantime, China invaded Vietnam in retaliation. With a gross domestic product (GDP) growth rate of 2.8 percent in 1985 and an inflation rate of 378 percent in 1986, Vietnam's economy was one of the worst in Asia as a result of its economic shortcomings as well as the global tensions that existed at the time.
However, in 1986, the Vietnamese Communist Party (VCP) made the decision to move the country's economy from a centrally planned model to one that utilized market forces to allocate resources. This transition took place over the course of several years. The reforms, which came to be known as doi moi, promoted the private sector, acknowledged the rights of private landowners, and did away with collective farming. These shifts, coupled with Vietnam's withdrawal of its armed forces from Cambodia in 1989, helped set the stage for one of the quickest and most astounding eras of economic expansion in the history of the world. Vietnam is now considered to be one of the most prosperous nations on the planet.
When the Vietnam Communist Party (CCP) first started implementing the reforms, Vietnam had a poverty rate of over 70 percent, making it one of the poorest countries in the region. This rate had dropped to 5 percent by the year 2020, and more than 10 million individuals have been pulled out of poverty in the 2010s alone. Additionally, the nation's GDP per capita climbed by a factor of nearly ten, from less than $300 in the 1980s to $2,800 in the year 2020.
As a result of Vietnam's consistently low labor standards despite the country's rapid economic growth, the country has emerged as a more desirable location for foreign direct investment. It has also developed into an essential component of the worldwide supply chain for the manufacturing of textiles, footwear, and electronic goods. In 2018, textiles and footwear accounted for 18 percent of the country's total exports, while electronics and electrical equipment accounted for 40 percent. Manufacturing operations have been established there by numerous major corporations, including Adidas, Nike, and Samsung, amongst many others. Foreign direct investment (FDI) in Vietnam has increased more than 200 times since 1986, when it was only $40,000, reaching around $15.8 billion in 2018. This growth is not surprising. In the meantime, the company's total exports saw a 19 percent increase between the years 2020 and 2021.
In more recent years, Vietnam has benefited from the great power competition between the United States and China in terms of FDI. This competition has been between the two countries. Businesses have started looking into diversifying their supply chains in order to protect themselves against any potential disruptions as the level of tension between the United States and China continues to rise, the Chinese Communist Party has adopted a position that is less business-friendly, and China's COVID-19 policy has become more stringent and appears to be permanent. When compared to the net growth of 8,000 international firms that registered in China in 2020, the number of foreign firms that canceled their company registration in China increased dramatically to at least 11,000 in 2021. Firms like Apple, Samsung, and Hasbro, to name just a few, have made the decision to scale back their manufacturing activities in China. These companies have been present in the nation for a substantial amount of time and have established deep roots.
Vietnam has reaped the benefits of big firms relocating their manufacturing operations there in order to take advantage of the country's advantageous cost structure, strong infrastructure, business-friendly environment, and successful efforts to mitigate the adverse effects of COVID-19. For example, the well-known electronics company Foxconn, which has business relationships with all of the major technological businesses, including the industry giant Apple, recently stated that it plans to invest $300 million in a new facility located in the northern region of Vietnam. While Microsoft has already utilized Vietnam for some of its Xbox production, Google has just revealed that it aims to relocate as much as half of the production of its Pixel Phones to Vietnam. Microsoft has already utilized Vietnam for some of its Xbox production. A few short years ago, these companies would have relied only on factories in China to manufacture these goods. When compared to the same time period in 2021, foreign direct investment in Vietnam saw an 8.9 percent growth between the months of January and June of this year.
However, Vietnam still confronts significant challenges to its future progress. The country's population size is the biggest limiting issue, as it will never amount to more than a fraction of China's population no matter how many people move there. In a similar vein, Vietnam's labor force possesses a relatively low level of expertise, the country's energy supply is struggling to keep up with demand, and the nation still ranks 47th out of 160 countries in terms of its infrastructure development, despite having made significant strides in this area of development.
In spite of this, Vietnam has made remarkable economic progress over the course of the past 40 years, which has made it an appealing location for foreign direct investment (FDI). In addition, because the growing rift between China and the United States has a negative impact on the ease of purchasing goods, and because Vietnam is an attractive investment destination for China, we should anticipate that the country's economic forecast will trend increasingly positively in the years to come.