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Vietnam: Leading Growth in Southeast Asia

Vietnam plans to become a modern and industrialized country by 2020 (Socio-Economic Development Plan, 2011). One hallmark of industrialized states is the extent of the manufacturing sector, and in particular, the share of medium and high technology value added within this sector (Amsden 2004, UNIDO 2010, CIEM 2010). Manufacturing generates externalities in technology development, skill creation and learning that are crucial for competitiveness. A cursory analysis of the share of medium and high technology activities in total manufacturing exports shows a positive correlation between the latter and economic development (UNIDO, 2011). Analyzing manufacturing exports allows for a better comparison across countries as the ability to participate in global markets illustrates the competitiveness of a country. Vietnam has benefited from a program of internal modernization, a transition from its agricultural base toward manufacturing and services, and a demographic dividend powered by its young population (MGI, 2012).

Vietnam’s manufacturing exports basket consists of resource-based and low tech manufactures such as oil, fisheries, textiles, footwear, etc. Competitiveness in these sectors relies on worker productivity and a large pool of cheap labor. In addition to low value added Vietnam’s export-oriented manufacturing activities rely almost exclusively on imported supplies, while the only local content provided is the work of low- or semi-skilled employees (CIEM, 2010). The share of medium to high tech activities in manufacturing value added is about 20% and in total manufacturing exports, 28% (UNIDO, 2011). By way of contrast, medium to high tech manufactures account for 80% of Japan’s total manufacturing exports, 60% of China’s and 62% of Thailand’s. This is where the new growth model needs to focus on[1]. Policy attention is needed in the supporting industries of emerging clusters of electronics and automotive sectors.

A new growth model requires a far reaching strategy that will propel Vietnam into the global value chain of medium to high technology sectors. Productivity deepening ought to define the new growth model envisioned in this paper. Productivity in the old model has been based on factor accumulation partly through heavy public investment and partly through labor migration. Given the extraordinarily rapid pace of economic development already achieved, it seems unlikely that Vietnam can continue to increase the contribution of productivity growth that has resulted from public investment and from migration from farm to factory. Moreover, the high levels of public investment are now unsustainable and are destabilizing the economy.

Instead, a surge in productivity within manufacturing and services will need to compensate. At present, however, Vietnam‘s industrial productivity growth is the slowest in the region, less than one percent per annum over the past decade. According to the McKinsey Global Institute, industrial productivity growth is slow for two reasons:
i)                    labor productivity growth is slow in labor intensive export industries like garments and shoes because sewing shirts and shoes is difficult to mechanize;
ii)                  state-dominated, inward-oriented industries are highly protected and inefficient. (MGI, 2012).

Defining Vietnam’s relative strengths in the global value chain of any product will involve a discovery process—in which private firms and the government learn about underlying costs and opportunities and engage in strategic coordination. This will help alleviate the first constraint to industrial productivity growth. A complementary rather than adversarial relationship between the state and the private sector will also be key if a productivity-led model is to take root in industry. Because addressing (ii) involves shutting down deadwood, we must be prepared to deal with the task ahead of time. In other words, reformers should be prepared to answer these questions: What is to be the strategy for engaging those threatened by reform? Can they be persuaded to support it? To what extent can/should their objections be overridden? Should they be compensated for their anticipated losses – and, if so, how and to what extent?

[1] Policy discussions on deepening medium to high technology manufacturing in the auto and electronics sector forthcoming.

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