Econ
Tepid productivity to weigh on Vietnam’s medium-term growth potential: Brookings
In order to become a high-income country by 2045, Vietnam will need to sustain average growth rates of at least 7% over the next 25 years—this would bring GDP per capita to about US$25,000.
Tepid productivity, along with a rapidly aging population and sluggish investment growth, is expected to weigh on Vietnam’s medium-term growth potential, according to US-based thinktank Brookings Institution.
Brookings in its latest report said many of the drivers that propelled the country’s growth in the past will diminish over the next decade.
Gains from structural transformation—workers moving from lower-productivity agriculture to higher productivity manufacturing and services—is running its course.
Meanwhile, wages are rising and will start to erode Vietnam’s current comparative advantage in relatively low-value, labor-intensive segments of global value chains.
In order to become a high-income country by 2045, Vietnam will need to sustain average growth rates of at least 7% over the next 25 years—this would bring GDP per capita to about US$25,000.
“While Vietnam has the potential to meet this aspiration, without reforms, the country is likely to experience a slowdown in growth and fall short of its own aspiration,” stated the report.
Vietnam will also need to navigate shifting global trade patterns and disruptive technologies, which are both reshaping opportunities and creating new risks.
World trade volume has grown by just over 3% per year since 2012, less than half the average rate during the previous three decades. Meanwhile, the increasing adoption of advanced manufacturing technologies—robotics, 3D printing, smart manufacturing—in labor-scarce economies and in China exacerbates concerns over wage competitiveness. For example, the sports apparel company Adidas has plans to re-shore production from Vietnam and other low-cost manufacturing hubs to a new 3D printing factory in its home country, Germany.
These trends could challenge Vietnam’s ability to continue to emulate the success of Asian Tiger economies but they may also create new opportunities for faster technological catch-up and even leapfrogging.
Four priorities
The report suggested four priorities for Vietnam to take advantage of these new opportunities but also to manage downside risks.
First, accelerate productive investment. Vietnam’s economy is still relatively capital-scarce. This means much is to be gained by boosting the productivity of the country’s abundant labor force with investment in productive infrastructure, machinery, and technology.
This will require a more efficient financial system that reduces the cost of financing and allocates Vietnam’s significant domestic savings into productive private sector and infrastructure investment.
It will also require removing bottlenecks to private sector investment to de-risk and raise the returns on these investments.
Second, promote a productive workforce with 21st-century skills. Vietnam’s rapidly developing economy requires a new and more complex set of skills and production processes than in the past.
According to the recently released World Bank Human Capital Index (HCI), which ranks Vietnam 48 out of 157 countries, the lifetime productivity of a child born in Vietnam today will be only 67% of their potential with full education and health.
Despite remarkable achievements in expanding educational attainment and quality, only two in three children complete high school and less than one in 10 current workers have a university degree or vocational training.
Already today more than half the firms in Vietnam report difficulties in finding workers with relevant skills.
Vietnam will need a big reform push to build inclusive and competitive vocational training systems and world-class universities not only to ensure competitiveness but also to enable its people to participate productively in the opportunities offered a rapidly growing economy.
Third, foster innovation. Innovation will need to become a more important driver of increased productivity, both through the upgrading of processes, technologies, and products by existing firms, as well as the entry of high-productivity and exit of low-productivity firms.
Opportunities abound for firms in Vietnam to adopt existing knowledge and technologies. Secure intellectual property rights, competition—easy entry and exit of firms—as well as openness to trade and investment are key ingredients to stimulate innovation among firms. For example, Vietnam’s increasing integration into global value chains can serve as a vehicle for diffusion of technology and ideas.
The final and perhaps most important priority: institutions. Institutional legacies, including the still large state-owned sector, incomplete market institutions, and a cumbersome investment climate continue to impede the development of Vietnam’s private sector.
With the state still involved in productive activities and resource allocation, questions about a level playing field, independent regulation of markets, and an effective competition framework remain pertinent. This is compounded by fragmentation within and across levels of government, implementation gaps, and weak accountability. If left unaddressed these governance weaknesses may become a drag on future growth and social outcomes.
Brookings in its latest report said many of the drivers that propelled the country’s growth in the past will diminish over the next decade.
Gains from structural transformation—workers moving from lower-productivity agriculture to higher productivity manufacturing and services—is running its course.
Meanwhile, wages are rising and will start to erode Vietnam’s current comparative advantage in relatively low-value, labor-intensive segments of global value chains.
Vietnam’s transition to a modern economy is not yet done (T = year when reforms began).
Source: Brookings. |
“While Vietnam has the potential to meet this aspiration, without reforms, the country is likely to experience a slowdown in growth and fall short of its own aspiration,” stated the report.
Vietnam will also need to navigate shifting global trade patterns and disruptive technologies, which are both reshaping opportunities and creating new risks.
World trade volume has grown by just over 3% per year since 2012, less than half the average rate during the previous three decades. Meanwhile, the increasing adoption of advanced manufacturing technologies—robotics, 3D printing, smart manufacturing—in labor-scarce economies and in China exacerbates concerns over wage competitiveness. For example, the sports apparel company Adidas has plans to re-shore production from Vietnam and other low-cost manufacturing hubs to a new 3D printing factory in its home country, Germany.
These trends could challenge Vietnam’s ability to continue to emulate the success of Asian Tiger economies but they may also create new opportunities for faster technological catch-up and even leapfrogging.
Four priorities
The report suggested four priorities for Vietnam to take advantage of these new opportunities but also to manage downside risks.
Vietnam’s growth potential is lower than other Asian Tigers. Source: Brookings.
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This will require a more efficient financial system that reduces the cost of financing and allocates Vietnam’s significant domestic savings into productive private sector and infrastructure investment.
It will also require removing bottlenecks to private sector investment to de-risk and raise the returns on these investments.
Second, promote a productive workforce with 21st-century skills. Vietnam’s rapidly developing economy requires a new and more complex set of skills and production processes than in the past.
According to the recently released World Bank Human Capital Index (HCI), which ranks Vietnam 48 out of 157 countries, the lifetime productivity of a child born in Vietnam today will be only 67% of their potential with full education and health.
Despite remarkable achievements in expanding educational attainment and quality, only two in three children complete high school and less than one in 10 current workers have a university degree or vocational training.
Already today more than half the firms in Vietnam report difficulties in finding workers with relevant skills.
Vietnam will need a big reform push to build inclusive and competitive vocational training systems and world-class universities not only to ensure competitiveness but also to enable its people to participate productively in the opportunities offered a rapidly growing economy.
Third, foster innovation. Innovation will need to become a more important driver of increased productivity, both through the upgrading of processes, technologies, and products by existing firms, as well as the entry of high-productivity and exit of low-productivity firms.
Opportunities abound for firms in Vietnam to adopt existing knowledge and technologies. Secure intellectual property rights, competition—easy entry and exit of firms—as well as openness to trade and investment are key ingredients to stimulate innovation among firms. For example, Vietnam’s increasing integration into global value chains can serve as a vehicle for diffusion of technology and ideas.
The final and perhaps most important priority: institutions. Institutional legacies, including the still large state-owned sector, incomplete market institutions, and a cumbersome investment climate continue to impede the development of Vietnam’s private sector.
With the state still involved in productive activities and resource allocation, questions about a level playing field, independent regulation of markets, and an effective competition framework remain pertinent. This is compounded by fragmentation within and across levels of government, implementation gaps, and weak accountability. If left unaddressed these governance weaknesses may become a drag on future growth and social outcomes.
