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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