Use the following article to answer.Question:Vietnam provides subsidies (e.g., corporation tax reductions) to promote import-competing industries. Please analyze the effects of this type of subsidy on domestic producers, consumers, and national welfare.

Finance & economics The Economist September 4th 2021 57 Vietnam's growth model city states dominated by maritime trade, The special sauce are or have ever been so trade-intensive. It is not just the level of exports but the nature of the exporters that makes Viet- nam different from China. Indeed, its deep connection to global supply chains and high levels of foreign investment make it Trade and foreign investment helped Vietnam emerge from extreme poverty. seem more like Singapore. Since 1990 Viet- Can they make the country rich? nam has received average foreign-direct- investment inflows worth 6% of GDP each HAVING IMPRESSED the world by taming bours hands down (see chart 1 on next year, more than twice the global level-and I the virus last year, Vietnam is now in page). Its record has been characterised not far more than China or South Korea have the middle of its worst outbreak of covid-19 by the fits and starts of many other frontier ever recorded over a sustained period. by far. Parts of the country are in strict lock- markets, but by steady growth. The govern- As the rest of East Asia developed and down and a swathe of factories, from those ment is even more ambitious, wanting wages there rose, global manufacturers making shoes for Nike to those producing Vietnam to become a high-income country were lured by Vietnam's low labour costs smartphones for Samsung, have either by 2045, a task that requires growing at 7% and stable exchange rate. That fuelled an slowed or shut down, disrupting global a year. What is the secret to Vietnam's suc- export boom. In the past decade, exports by supply chains. Yet integration with global cess-and can it be sustained? domestic firms have risen by 137%, while manufacturing has kept Vietnam's econ- Vietnam is often compared to China in those by foreign-owned companies have omy humming during the pandemic. In the 1990s or early zooos, and not without surged by 422% (see chart 2 on next page) 2020 GDP rose by 2.9% even as most coun- reason. Both are communist countries But the widening gap between foreign tries recorded deep recessions, Despite the that, led by a one-party political system, and domestic firms now poses a threat to latest outbreak, this year could see even turned capitalist and focused on export- Vietnam's expansion. It has become over- faster growth. The World Bank's latest fore- led growth. But there are big differences, whelmingly dependent on investment and casts, published on August 24th, point to too. For a start, even describing Vietnam as exports by foreign companies, whereas do- an expansion of 4.8% in 2021. export-intensive does not do justice to just mestic firms have underperformed. This performance hints at the real rea- how much it sells abroad. Its goods trade Foreign firms can continue to grow, son to be impressed by Vietnam. Its open- exceeds 200% of GDP. Few economies, ex- providing more employment and output. ness to trade and investment has made the cept the most resource-rich countries or Yet there are limits to how far they can country, with GDP per capita of a mere drive Vietnam's development. The country $2,800, an important link in supply We're hiring We are looking for an economics will need a productive services sector. As chains. And that in turn has powered a re- writer. Joumalistic experience is not necessary. The living standards rise it may become less at- markable expansion. It has been one of the ability to write clearly and entertainingly is, as is a tractive to foreign manufacturers, and five fastest-growing countries in the world thorough understanding of economics. At first the writer will cover Europe. For more details, visit workers will need other opportunities. over the past 30 years, beating its neigh- economist.com/economics-job, Part of the drag on domestic enterprise58 Finance & economics The Economist September 4th 2021 health. VinHomes, its property arm, is It's successful diaspora makes Vietnam one Showing up the neighbours 1 Vietnam's largest listed private firm by of the largest recipients of remittances in GDP per person, 1990=100, $ terms market capitalisation. the world; $17bn flowed in last year, equiv- The group's efforts to break into fin- alent to 6% of GDP. ished automotive production through Vin- The setback from covid-19 aside, it Vietnam Fast, its carmaker, may become important might seem hard not to be rosy about a for the economic development of a coun- country that appears to be in the carly stag- es of emulating an East Asian economic Malaysia 30 try that is usually known for intermediate manufacturing. In July the company's Fa- miracle. But no country has become rich 20 lil car, which is based on the design for through remittances alone. As Vietnam de- Opel's Karl make, became Vietnam's best- velops, sustaining rapid growth from ex- Philippines 100 selling model, beating Toyota's Vios. Vin- ports of foreign companies will become Thailand Fast has grand ambitions abroad, too. In increasingly difficult, and the tension be- july it announced that it had opened offic- tween staying open to foreign investment 95 05 10 15 20 es in America and Europe and intended to and promoting national champions will Source World Bank sell electric vehicles there by March 2022. become more acute. All of that makes re- Fostering national champions while forming the domestic private sector and staying open to investment is not easy, the financial system paramount. Without comes from state-owned firms. Their im- however. VinFast benefits from a bevy of it, the government's lofty goal of getting portance in overall activity and employ- tax reductions, including a large cut in cor- rich quick may prove beyond its reach. I ment has shrunk. But they still have an poration tax for its first 15 years of opera- outsize effect on the economy through tion. In August, state media also reported their preferential position in the banking that the government was considering rein- system, which lets them borrow cheaply. stating a 50% reduction in registration fees Banks make up for that unproductive lend- for locally built cars that expired last year. ing by charging other domestic firms high- But the country's membership of the er rates. Whereas foreign companies can Comprehensive and Progressive Agree- easily access funding overseas, the average ment for Trans-Pacific Partnership, and a interest rate on a medium- or long-term range of other trade and investment deals, bank loan in Vietnamese dong ran to means that it cannot offer preferential 10.25% last year. Research by academics for treatment to domestic producers. It must the Centre for Economic Performance at extend support to foreign firms that make the London School of Economics also sug- cars in Vietnam, too. (By contrast, China's gests that productivity gains in the five trade policy, which prefers broad but shal- years after Vietnam joined the World Trade low deals, does not constrain domestic Organisation in zoo7 would have been policy in quite the same way.) 10% higher without state-owned firms. Vietnam may also hope to rely on an- To fire up the private sector, the govern- other source of growth. The economic ment wants to nurture the equivalent of boom has encouraged its enormous dias- South Korea's chaebol or Japan's keiretsu, pora to invest, or even to return home. sprawling corporate groups that operate in "There aren't a lot of economies that are ex- a variety of sectors. The government is periencing the sort of thing that Vietnam 'trying to create national champions", says is," says Andy Ho of VinaCapital, an invest- Le Hong Hiep, a senior fellow at the ISEAS- ment firm with $3.7bn in assets. His family Yusof Ishak Institute in Singapore, and a moved to America in 1977, where he was former Vietnamese civil servant. educated and worked in consulting and fi- Vingroup, a dominant conglomerate, is nance. He returned to Vietnam with his the most obvious candidate. In VinPearl, own family in 2004. "If I were Korean, I VinSchool and VinMec, it has operations might have gone back in the 1980s, if I were that spread across tourism, education and Chinese I might have gone back in 2000." Overseas hit 2 Merchandise trade, % of GDP Vietnam, merchandise exports, $bn 200 100 200 1300 Hong Kong Foreign companies 150 Singapore 100 Vietnam Netherlands 50 1991 China Domestic 2020 companies United States 1995 2030 05 10 15 206 Sources World Trade Organisation, Word Bark; national statistics *Estimate