Wednesday, 18/7/2018
Promoting sustainable growth and improving Vietnam economy’s competitiveness
11/3/2011 14:15' Send Print

It is widely known that with average annual GDP growth rate of 7.45%, 1991-2009 was really a period of magnificent economic growth inVietnam. 2009 GDP (in 1994 price) was approximately 3.7 and 1.76 times higher than that of 1991 and 2001, respectively. GDP per capita in real terms in 2010 was about USD1,200, which put Vietnam in the group of low middle income countries; the poverty rate reduced rapidly from 58% in 1993 to 26% in 2000 and below 10% in 2010. The development gap between Vietnam and other regional economies has narrowed significantly. For example, Thailand’s GDP per capita in PPP terms in 1995 was 4.4 times higher than that of Vietnam, which has reduced to 2.5 times in 2008. Similarly, the gap with Singapore has reduced from 27 to 18 times, with Indonesia – from 2.3 to 1.4, and with South Korea from 13 to 10.4 times.

Despite these remarkable economic growth achievements, our growth has still been below potentials, unstable and unsustainable. It could be seen that annual average growth has slowed down, with reduced growth quality. Economic growth continues to be largely based on incremental increase of capital(1) and expansion of exploitation of natural resources and manual labor; exports are mainly composed of assembling and primary processing with low added value, which relies heavily on imported inputs. Technology and manufacturing level of domestic industries remains low, and we have yet any major trademarks known regionally or internationally. FDI remains a crucial, indispensable driver of growth and exports. Given this gap of development level between domestic and external economies, together with the openness of the economic following the WTO accession, the economy has become increasingly vulnerable to external shocks, macro balances have gone beyond control and posing risk of instability, undermining the economy's attractiveness and the competitiveness of the domestic sector.

In this context, promotion of sustainable growth, or in other words maintaining high growth rate in the medium and long term, which requires both extensive and quality economic growth, has become an essential requirement for Vietnam's socio-economic development strategy in the coming time. The paper will provide an analysis of features of growth and the current quality of growth and the competitiveness of Vietnam's economy in order to identify weaknesses and gaps that were revealed recently, and the causes of those problems. On this basis, the paper will recommend viewpoints, policy objectives and concrete solutions to be included in Vietnam's socio-economic development programs and plans in the coming period.

1. Quality of Growth

(1) Continuous, but unstable growth

Despite high growth in the last 19 years, GDP growth in Vietnam has not really been stable, as most clearly seen in 1991-1992, 1997-1998 and 2007-2008. In the first instance, GDP growth in 1992 was very impressive as compared to 1991, reflecting positive impact of measures taken for macroeconomic stabilization and inflation control.

On the contrary, in the latter two cases, GDP growth fell sharply compared to the previous years, both happened in the wake of financial crisis in combination with macroeconomic instability, which means that the economy is highly vulnerable to both internal and external shocks. Both cases of growth reduction also mean that our national growth in the last 10 years has been increasingly dependant on the global aggregate demand. Therefore, contraction of demand for goods in the world market may pose a major risk to Vietnam's economic growth.

(2) Growth has been largely capital-driven, generating limited employment and effectiveness

Up to now, capital remains the main driver of growth. Moreover, since 1991 growth has become even more reliant on capital. Between 1991-1995, capital contributed 29.8% to GDP growth, which increased to 51.2% in the 5-year SEDP, and 60% in SEDP 2001-2005, which means that two thirds of growth is attributed to capital. This trend continued in 2006 and 2007.

Vietnam has abundant labor force, but its contribution to GDP growth remains low. Despite 2.46% annual growth in employment between 1991-2009, both labor quality and effectiveness of labor use remains low, especially in the state sector. Agriculture with the lowest labor productivity still accounts for 51.9% of employed labor force in 2009. It is another reason for low contribution of labor to growth.

An important indicator used to measure effectiveness and quality of growth - Total Factor Productivity (TFP) has been on the downward trend since 1991. Low contribution of TFP to growth would not be so worrying given the low starting point of the economy(2), but the fact that its contributions has reduced rather than increased deserves a closer look. It reflects a situation in which quality of labor, technology and other factors, including public governance is both low and showing slow progress, while they are the ones that decide labor productivity improvement. Therefore, the limited contribution of TFP, if continues to fall, will have negative impact on growth quality and economic efficiency.(3)

(3) Rapid growth has accompanied poverty reduction, which has however slowed down with increased inequality in income distribution

Employment, income, poverty reduction and equality are closely related aspects, which have direct impacts on growth policy, especially for conditions like Vietnam's (big population, high poverty incidence). A remarkable achievement of growth in recent time has been the combination of growth and rapid poverty reduction, from 58.1% in 1993 to 14.5% in 2008, and below 10% in 2010. On average, each percentage point of GDP growth accounts for 0.37% reduction of poverty rate. Vietnam has early fulfilled its MDG on poverty reduction, and Human Development Index has also improved together with improvements of growth and people's living standards.

However, poverty reduction has slowed down. After WTO accession, poverty reduction rate has reduced to half of that during 2000-2004, implying that it will be more difficult to reduce poverty, mainly because of changing nature of poverty.

In the meantime, income inequality has gone up together with economic growth, despite growth slow down. In 2006, income disparity moderated compared to 2004 (Gini index 0.36) even though GDP growth in 2006 (8.2%) was higher than in 2004 (7.78%). Clearly, rapid growth does not necessarily lead to increased income gap; instead, the distributional aspect is mainly subject to socio-economic policy. If growth only generates employment for the poor but not improve income, then poverty can be reduced but not sufficiently to reduce inequality. Employment generation in poor areas alone will not be adequate to reduce income gap if not associated with improved labor productivity.

(4) Rapid growth associated with increased environmental pollution

In reality, Vietnam has seen increased environmental pollution in association with economic growth. Between 1996-2004, CO2 emissions to the environment on average went up by almost 15% annually. Compared to the average level of low income countries, CO2 emissions in Vietnam grow faster. Air pollution is mainly caused by industrial activities, construction, transport and civil industries. Most serious is water pollution, especially in major industrial centers and industrial zones in Dong Nai, Cau and Nhue river basins. The major source of pollution comes from industrial production (including craft industrial villages), rapid urbanization and high construction density.

The common feature in both air and water pollution is that the polluting source comes from the industries that contribute most to job creation, economic restructuring, labor restructuring and growth in industrial centers, which drive the national growth. Power and gas generation, processing industries using wood materials are major sources of soil degradation and reduction of forest coverage, the key reason for soil erosion and natural disasters including floods and droughts. In addition, increased agricultural output and productivity mainly relies on unsustainable fundamentals of chemical fertilizers, pesticides, growth stimulators. Negative consequences of these factors may defeat the outcomes brought about by growth. What is going on reflects the trade-off between rapid growth and job creation on the one hand and low productivity, low income and environmental degradation on the other.

2. Competitiveness

(1) Growth in per capita income remains low and leveling off since 2005

Two indicators measuring efficiency and competitiveness of the economy are per capita income and labor productivity. An obvious consequence of growth below potentials during 1999-2005 was the downward trend of per capital income growth. In the wake of 1997 Asian financial crisis, many regional economies saw reduction in growth and income, but they quickly gained back what they had before the crisis in just several years (e.g. Thailand or Malaysia) and surpassed Vietnam since 2001. This makes the task of catching up with other regional economies in terms of per capital income for Vietnam even more difficult.

(2) Labor productivity grows over the years, but with slow pace and is mainly attributed to economic restructuring from agriculture to industry and service with low labor productivity

Similarly, growth in labor productivity remains low and unstable, especially in productivity-driving industries like processing, due to its high contribution to GDP(4). In 2009, processing industry accounted for 20.09% of GDP, but labor productivity of this industry grew by only 4.97%, lower than the national average of 8.44%. Growth of the industry is unstable, unsustainable, due to excessive dependence on external demand. In the meantime, the industry with highest labor productivity is the capital-intensive, effortless exploitation of natural resources. The experience of the two financial crises shows that agriculture has low but stable growth, even in the hardest economic conditions. In 2008, agricultural GDP grew by 4.68%, higher than the sector average level of 3.9% during 2000-2007.

A closer look at the overall labor productivity growth in Vietnam shows that between 1991-2005, the contribution of sector productivity growth leveled off, while the contribution of sector restructuring was on the upward trend. In 2006, contribution of sector productivity growth to the economy’s productivity growth increased, but only accounted for 53.2%. Economic restructuring accounted for 61.4% of labor productivity growth between 2000-2008. This is the evidence of positive impact of economic restructuring by shifting labor from low-productivity sectors to ones with higher productivity (from agriculture to industry and services). This also reveals that growth of the sector productivity remains very slow, implying low efficiency and quality of sector growth.

The processing industry has contributed significantly to job creation and labor and economic restructuring in recent years, but mainly because of its expansion and absorption of low-skilled labor, rather than a scale-up and high-tech content products, which would determine fast growth of productivity and competitiveness.

In the service sector, trade has made the highest contribution to labor productivity growth as a whole, but this is mainly attributed to restructuring caused by sector expansion and increase of labor. Contribution of trade to GDP has reduced from 16.45% in 1995 to 14.77% in 2009. High value-added industries needed for improved growth quality and competitiveness such as finance, credit, education and training, science and technology not only make low contributions to GDP, but also have shown no increase in size, such as science and technology, and education and training.

(3) Some industries have gained bigger market share, but mainly in primary and semi-processed goods

Exports grew 20% annually on average between 2000-2008, evidencing greater integration of Vietnam’s goods in the world market, especially in the high-end markets such as the US and EU(5). Nevertheless, there was almost no change in the structure of exports during this period. Vietnam still competed mostly in raw materials or semi-processed inputs (such as foods and fuels), and goods with low technology content (such as footwear, furniture, garments etc.). In 2008, processed or refined goods accounted for 55.2% of total exports from Vietnam, much lower than other countries in the region including Thailand (84.8%); Malaysia (70.8%); Singapore (89.8%); or China (95.8%). Only three main export products with low technology content (footwear, furniture and garments) accounted to 65% of export value. The dependence on these three products may make Vietnam more ‘vulnerable’ to change in demand as well as competition pressures from other exporters.

In terms of world market share, Vietnam’s exports in 1999 accounted for 0.1% of the world market, which rose to 0.36% in 2006. However, Vietnam’s manufactured goods still accounts for a modest share in the world market, about 0.27% in 2007, almost the same as 2006. In the meantime, raw materials and semi-processed goods accounted for about 0.72% of the world market in the same year. This further confirms that our growth is owed to natural resources (minerals, land and forests).

(4) Competitiveness of the business sector remains low, in the absence of strong domestic trademarks which can compete in the world market

With average growth rate of 19.3% between 2004-2007, the number of enterprises in Vietnam by December 2007 increased by 3.7 times against 2000 and 1.37 times against 2005. However, over 92% of this number is non-public enterprises, the majority of which are characterized by small and medium scale, weak capital and technology. In 2010 there are over 60,000 newly registered enterprises, making up the total number of 350,000 non-public enterprises and 5,500 public ones. With this total figure, the target of 500,000 enterprises set forth 5 years ago by the Prime Minister upon promulgation of the Law on Enterprise 2005 had not been achieved by 2010. This is partly the result of high inflation in 2008, followed by adverse impacts of the global financial crisis in 2008-2009.

The share of enterprises surviving after 10 years (since 2000 with the total number of 45,000 enterprises) is 76.5%. This is relatively high against international norms of around 50%. However, other data reveal that Vietnamese enterprises can survive but remain small and weak. In terms of total assets, as many as 92.5% of non-public enterprises have total assets below VND20 billion. Therefore, the majority (89.9%) of non-public enterprises in Vietnam are currently classified as small- and medium-sized according to new criteria (Decree 56/2009/NĐ-CP). In terms of labor force, as high as 96.9% of enterprises are classified as SMEs in accordance with labor criteria.

Large-sized enterprises are mainly SOEs. However, in international comparison, Vietnam’s perceived large-sized enterprises are just equal to SMEs in other countries.(6) Therefore, it would be fair to say size and development level of Vietnamese enterprises is still limited, which make them difficult to compete internationally. This also explains the fact that Vietnam’s exporting businesses are mainly responsible for low-end processing and simple manufacturing in the value chain, and unlikely to be capable of competing in the world market with their own brand names.

(5) Vietnam’s economy constantly faced with major macro imbalances:

a. Widening trade deficit: Despite being an export-oriented economy, Vietnam imports more than what it exports. If it imports capital goods to facilitate increased exports, then trade deficit would be temporary and acceptable for a certain period; the current data, though inconclusive, suggest that the main imports are materials, fuels, machinery and equipment for export production, while import of consumption goods has also increased.

b. Increased saving-investment imbalance: Even though this type of imbalance is usually observed in fast-growing economies with low capital accumulation, but it is low investment efficiency in Vietnam that is causing concerns. These imbalances should be financed by external resources, including FDI, ODA, remittances and others. Concerns about Vietnam’s capacity to finance its external deficits are increasing with higher public debts and significantly reduced reserves, thus affecting the economic outlook.

c. Inflation and exchange rate: Inflation in Vietnam in recent years has been volatile on the upside trend. Huge inflows together with high credit growth put lots of pressure on inflation. While Vietnam tries to maintain nominal exchange rates at stable levels, inflation caused the real effective exchange rate to rise, forcing Vietnam to repeatedly depreciate the currency. Highly dollarized economy also poses more challenges to control of inflation and exchange rates.

(6) There are signals of bottlenecks in the micro growth model (driven by increased capital and low cost labor):

a. Shortage of skilled labor and infrastructure: Businesses are increasingly complaining about difficulties in finding adequate skilled labor to meet the requirements, especially mid-level managers and technicians. There have been increasing concerns about shortage of technical infrastructure, logistics and energy. These issues are worse in the regions, areas with concentrated production and export activities, such as Ho Chi Minh City and the neighboring provinces.

b. Poor disbursement and limited trickle-down effect of FDI: Foreign Direct Investment (FDI) has increasingly been attracted to real estates and labor-intensive industries. FDI businesses have mainly been taking advantage of cheap labor in Vietnam in combination with imported equipment and materials to produce to serve their global value chain, with weak linkage with the local economy. While the registered FDI figures remain positive, the gap between realized and registered capital has been widening. This is partly caused by the "competition" among provinces for FDI. On the other hand, it could be due to implementation problems that impedes projects to perform to the expected level, or due to rent-seeking practices of a number of investors who register projects in order to acquire land and gain a foothold, and then would sell their projects to other for a nice profit.

c. Low investment efficiency: ICOR is used to measure the interaction between investment and GDP growth. While there is still debate over the methodology of measuring ICOR itself, but it is generally agreeable that for the same level of investment, Vietnam's GDP growth is lower than that of China and India. SOEs account for a large share in the total social investment, an element that contributes to low investment efficiency in the economy as a whole.

3. Main causes

Causes for this situation can be divided into two groups - objective causes from outside and subject causes from inside the economy itself. Strong globalization trend since the 1990s, the Asian financial crisis and the recent global financial crisis are deemed as major elements affecting the quality of growth, efficiency and competitiveness of the economy, both positively and negatively. However, as Vietnam has been in the process of international economic integration for the last over 20 years, with the major milestone of WTO accession in late 2006, objective elements affecting our economy should be seen as secondary to the subjective causes from inside the economy as the primary ones. Clearly, a healthy economy will be in a better position to avoid or overcome negative impacts caused by external factors.

(1) Perceptions of overall strategy

Perceptions of raising quality of growth, efficiency and competitiveness of the economy remain symbolic; in reality emphasis is still given to rate of growth rather than quality of growth, efficiency and competitiveness in the development, implementation and assessment of policies. Generally, Vietnam's development viewpoint in the last 15 years has been fast, sustainable growth, with the emphasis that high growth should be accompanied by increased efficiency and quality. However, the actual results show that quantitative targets still receive more attention. The general trend has been pursuit of high growth rate as the primary objective, with limited attention paid to quality, efficiency and competitiveness of the economy (including employment, income, inequality and environmental pollution, business competitiveness, labor productivity and so on).

While acceleration of economic growth rate has been well aware of, this is not the case for the "efficiency and sustainability" side of growth and development. Moreover, while quantitative targets are defined clearly, concepts, scopes and connotations of quality of growth and efficiency of development are much more ambiguous. For example, official documents do not address labor productivity or TFP as indicators of quality and efficiency. The excessive focus on growth rate has resulted in the 'run' after growth achievements and unselected policies, which are not driven by improved growth quality, efficiency and competitiveness of businesses and products.

(2) Shortfalls of growth model

On the whole, Vietnam's growth model is one based on exploitation and use of natural resources. The industry that grows solely thanks to exploitation of natural resources is mining industry, which has maintained a stable share of GDP of around 10.14% between 2005-2009. Processing industries, whose growth is driven by using natural resources as inputs including construction materials, wood processing, food processing and non-ferrous metals etc. also account for a stable share of about 6% of GDP between 1991-2008. These are also the industries generating most employment for the economy. But the problem is that natural resources are not used in ways which bring about high economic efficiency, evidenced by lower share of manufactured goods using natural resources and higher share of resource-based exports (primary and semi-processed).

(3) Drivers of growth and economic restructuring are processing industries with high intermediate costs, dependency on imported inputs, low added value, polluting environment and consuming excessive foreign currency

Manufacturing contributes significantly to growth of the industry sector, but drivers of productivity growth are processing industries, which use excessive imported materials and inputs which push up intermediate costs and generate low added value. Up to now, the processing industries have been positive contributors to sector and labor restructuring and tapping of comparative advantages. Nevertheless, the growth that has been driven by processing and assembling as mentioned above has also revealed its weaknesses, namely:

a. Continuous dependence on imported inputs and materials, vulnerability to world's price volatility and pressure on domestic demand for foreign currency;

b. Clearer risks of environmental pollution due to import of outdated, unselected processing technologies, which are no longer in use in the region and worldwide;

c. The development and scaling-up of processing industries rely heavily on infrastructures (roads, ports, energy, water…) which have already been under serious pressure;

d. Development of processing industry in the absence of supporting industries also means that we continue to rely on external demands and outputs being high-cost industries, which causes difficulties for expansion of production and improving competitiveness.

(4) Vietnam's growth and economic restructuring increasingly depend on FDI resources characterized by uneven distribution and low quality, which, in turn, do not make expected contributions to improved growth quality and competitiveness.

Vietnam's growth is dependant on capital; while domestic savings are not sufficient to meet the demand; foreign direct investment is becoming an increasingly important source of capital, making incremental contributions to growth in recent time. After more than 20 years of attracting FDI, the linkage in production and consumption between local and foreign businesses remain undeveloped, and the direct job creation effect of FDI sector remains limited. In recent years, FDI flows have tended to move to real estates. In 2009, FDI flows in real estates reached USD7.6 billion, accounting for 35.38% of the total newly registered and additional capital. Real estate is an area with low capacity of job creation and limited contribution to sustainable improvement of labor productivity of the country.

(5) While growth is driven by export, the latter, on the other hand, experiences slow structural changes, mainly involve raw materials and semi-processed goods; manufactured goods are produced with high costs, limiting the sector competitiveness

In recent time, our growth has owed to the world aggregate demand; and in 2008 the exports over GDP ratio was over 70%. The paradox is, however, that contribution of exports to GDP growth has declined since 2006 (i.e. WTO accession) despite the increase in commodity market share in the world market(7). This suggests that Vietnam's exports have contributed to job creation but at high costs, relying on primary goods with low added value (despite benefiting from higher world prices in 2007-2008).

Despite positive structural changes in exports, the increasing share of manufactured goods and reduction of raw and semi-processed products over years, but seven out of eleven main export products with value of more than USD 1 billion in 2008 are raw and semi-processed goods(8). The remaining four products are either assembled (electronics) or processed (textile, clothing, footwear). Exports by the FDI sector on average accounts for 55% of the total exports between 2004-2008, one third of which being crude oil, and the remaining was assembled and processed goods. This situation has been persistent for years, but corrections and changes have yet to take place.

(6) Growth driven by and reliant on state sector increasingly reveals shortcomings in efficient use and allocation of resources and improvement of labor productivity

Despite declining contribution to GDP in recent years, the state sector has maintained control of key industries, including airlines, ports, shipbuilding, energy, coal mining… and possesses a lion share of capital. This sector also enjoys most policy incentives (protectionism, delayed liberalization), and has many advantages over the non-state sector in terms of access to land, capital, market, and technology, among others.

Business performance of SOEs, however, remains poor. In 2008, SOEs accounted for 1.6% of the total number of enterprises, but 40.8% of the total capital, 42.9% of total fixed assets, while employing only 20% of labor and generating 25.4% of revenues. The capital per worker ratio in 2008 was VND1.43 billion, compared with just VND1.11 billion in 2007, and which is 2.8 times higher than that in the non-public sector (VND0.51 billion) and 2.6 times than FDI sector (VND0.54 billion). However, to generate VND1 of net revenue, in 2008 SOEs needed on average VDN1.73 of capital, while the non-state sector needed VND0.81 and FDI - VND1.

(7) Structure of investment is imbalanced, biased towards investment in physical infrastructure and much less in human resources and science and technology

In 2008, the industry sector alone attracted 36.5% of total social investment, transport and communication 14.7%, meaning that two sectors together made up 51.3% of total investment. However, both sectors accounted for only 18.2% of total employed workforce. Despite 33.5% contribution of industry to GDP, this does not deny the fact that Vietnam is developing a costly industry sector. In the meantime, compared to 2000, investment in agriculture in 2008 increased in absolute terms but its share reduced by half to merely 7.4% (agro-forestry accounting 4.8%). Similarly, the share of investment in science & technology and education & training also reduced by half, representing 0.6% and 2.7% respectively, while investment in health care and social assistance remained unchanged.

Investment in science & technology over GDP (in real terms) in 2008 was merely 0.26%. In the meantime, successful developing countries in Asia including India and China shared the general trend of increasing expenditure on this area since 2000. In 2006, China’s investment in R&D accounted for 3.24% of GDP (USD86.8 billion).

The main reason for attraction of capital to industry and transport is the aim to achieve fast growth and sector restructuring towards industrialization. However, imbalanced investment has resulted in serious shortage of skilled labor competent to apply and master advanced technology. The direct consequence of this is failure to meet the demand for skilled labor, and the indirect one is failure to create an enabling environment for development of industries using skilled labor to attract trans- and multinational companies with high technology potentials to Vietnam.

(8) Investment in the state sector has always secured a high share in total social investment, while producing low efficiency and quality

While the growth of investment in the state sector has slowed down since 2006, the investment figure remains significant in the total social investment, averaging 49.3% between 1995-2008. As Vietnam’s growth is driven by investment, the state’s share of which remains high with low efficiency, this could be regarded as one of the major causes of slow improvement in growth quality, efficiency & competitiveness of the economy.

Low efficiency and quality of state sector’s investment is also reflected in the following:

a. Leakage and wastage in capital investment and projects using state funds has not been put under control.
 
b. Delayed implementation is widespread in major investment projects.

c. Fragmented, unfocused investment and arrears is prevalent.

d. Poor quality of a number of completed projects and works, which failed to contribute to socio-economic development objective designed

A number of main reasons for limited efficiency and quality of state sector’s investment could be named:

- Limited implementation capacity of project owners and project management units;

- Poor management of investment and construction;

- Lack of consistency in legal framework on investment and construction; complicated and overlapping documents cause different interpretation and application by ministries, sectors and provinces, and difficulties in finalizing procedures for project implementation;

- Gaps and weaknesses in the decentralization policy between the national and local levels, and between the state and the people;

- Poor enforcement of legal regulations on investment and construction;

- Poor quality of planning;

- National targeted programs are biased towards investment in physical infrastructure, lacking post-program support policies.

(9) Slow improvement in fundamentals of growth and competitiveness

The four fundamentals of a nation’s growth and competitiveness are composed of: (i) basic education and health care, (ii) physical infrastructure, (iii) macroeconomic stability, and (iv) socio-economic institutions. Improvement of these factors has been slow and not met the requirement of development. Vietnam is still in the process of resource-based growth, with significant export of raw materials and primary goods. Following is the status of these four fundamental factors:

- Vietnam has been agreeably successful in achieving basic education and health care targets, but quality of education and health care has improved slowly and unsustainably;

- Physical infrastructures, while increased in number, have not met the demand and with low quality;

- Macroeconomic stability has basically been maintained since 1994, but without needed sustainability;

- Market economy institutions have been further improved, contributing to increased economic efficiency, but enforcement remains modest.

(10) Lack and shortage of factors that contribute to improved growth quality and competitiveness of the economy

Improvement of factors that contribute to increased growth quality and national competitiveness remains modest, insufficient to meet the requirement of growth both in quantity and quality, and hindering improvement of national competitiveness. These factors include:

a. Quality of workforce: While the number of trained workers have increased over years, the share and quality of trained workers remains low, not meeting the requirement and demand of development;

b. Efficiency of production factors market (labor market, capital, land and technology): Production factor market has gradually improved, but not yet bringing into play advantages in resource allocation and utilization, resulting in poor performance of this market and wastage of resources;

c. Creativeness and technological innovation: Creativity and quality of scientific research institutions remains limited, there has yet to be a bridge between research organizations and businesses.

4. Policy viewpoints and objectives

In the face of changes in both internal and external contexts, Vietnam’s long-term position is sustainable development, with the following viewpoints for growth in the next 10-year period (up to 2020):

(1) Fast growth accompanied with improved quality of growth and competitiveness of the economy. This viewpoint already implies that fast growth should be accompanied with poverty reduction, improved social sector, environmental protection, through improved labor productivity and competitiveness. Therefore, this viewpoint accords with the view of sustainable development in the long run.

Poverty reduction in the coming period continues to be an important and regular task, but the nature of poverty has changed. Therefore, poverty reduction should respect the view of fast growth accompanied with improved growth quality to ensure sustainable development. In that sense, growth should be accompanied with job creation as well as improved labor productivity to reduce poverty sustainably.

(2) Fast growth alongside improved growth quality in this period should take improved efficiency of resource use and determinants of improved national competitiveness as main drivers, and rate of labor productivity growth as main measure. The efficiency of resource use is ultimately measured by labor productivity and productivity-based income distribution.

Income distribution based on productivity means to take advantage of the market mechanism. The state conducts income redistribution through policy and mainly through indirect interventions, minimizing direct interventions that can cause distortions and thus adversely affecting optimal resource allocation function of the market.

(3) Fast growth accompanied with improved growth quality and national competitiveness should become the backbone of policy making, implementation and assessment from the national to local levels. Therefore, it requires policy makers to consider both aspects of growth in each particular policy.

(4) It is important to take advantage of the market mechanism to improve the efficiency of resource allocation and utilization for fast growth alongside improved growth quality and national competitiveness. Thrift and fighting against wastage in use of resources should be exercised through market mechanisms instead of administrative ones.

Building on this viewpoint, the overall goal with regard to improved growth quality, efficiency and competitiveness of the national economy in the next 10-year period is to rapidly increase labor productivity, bridge the per capita income gap with more developed ASEAN countries (Singapore, Thailand, Malaysia); improve national competitiveness to approach more developed ASEAN countries (Thailand, Malaysia) and China. Proposed specific objectives regarding improved growth quality, efficiency and national competitiveness include:

2011-2015 period:

- To gradually increase the share of contribution of sector productivity to the overall labor productivity growth.

- To gradually increase the quantity and share of high value-added products in the export structure, and gradually expand market share for these products in the world market.

- To gradually increase the number of enterprises producing branded products, capable of competing internationally.

- Develop and gradually increase the number of enterprises with brand names in the world market.

- To gradually increase the share of contribution of technology and human capital to growth.

2016-2020 period:

- To continue objectives of 2011-2015 period, as well as:

- To gradually increase the number of enterprises, industries with high value-added products and environment-friendly production technology.

5. Recommended Solutions

(1) To heighten awareness of leaders at national, sectoral and local levels on the urgency of improved growth quality and competitiveness. This awareness needs to be demonstrated consistently in the thought and methodology of development of directions and policy making, in 5-year and annual plans and implementation at all levels.

(2) To promote economic restructuring to meet the requirement of adjusting growth model in order to improve quality of growth, efficiency and national competitiveness. Economic restructuring should aim at creating industries with higher value added, higher productivity based on improved efficiency of resource use; to gradually reduce the share of processing industries with low value added and exploitation of natural resources.

(3) To improve efficiency of exploitation and use of resources for growth; only develop industries exploiting and using natural resources in the manner that ensures economic efficiency, social efficiency and environmental protection. Projects failing to meet these "triple-efficiency"criteria should be firmly rejected, while industries and businesses with effective solutions for economical use of resources, application of scientific and technological advances in exploitation and production to mitigate environmental impacts.

(4) To adjust investment policies aimed at improved quality of growth and national competitiveness. In accordance with Investment Law 2005, the current investment policies are biased toward financial preferences and incentives (land, taxes, credit). In the meantime, investment incentives are based on sectors, areas and locations, hence making little contribution to formulation of production linkage between industries, sectors and regions. This particular weakness needs to be corrected.

It is suggested that policies be reformed as follows:

- Encourage development of industrial clusters toward specialization and formation of a domestic and export-oriented value chain; gradually establish production networks across businesses regardless of size and ownership.

- Level of specialization and engagement in the value chain should be used as eligibility for incentives. Types of incentives include financial mechanisms such as exemption and relief of corporate income tax, and development of human resources.

- Encourage development of industrial zones, export processing zones and economic zones, so that these will become the core of specialized industrial clusters, forming a domestic and export-oriented value chain.

(5) To adjust policies on FDI attraction and to improve quality of FDI flows, in order to improve quality of growth and the economy's competitiveness. Instead of too much emphasis on the volume of capital, attraction of FDI should now be based on quality and efficiency criteria, including technology content, labor training, technology transfer, skills, and R&D. Given this objective, attraction of FDI is not only aimed at raising more fund for growth, economic restructuring and increasing the share of industry as it was in the past, but it should aim to improve quality of growth and national competitiveness.

Following policy solutions are recommended:

- Provide mandatory requirements for quality of FDI projects subject to geographical location and sector. Requirements on technology level of FDI projects by sector and investment location should be put in place.

- Attraction of FDI should be selective, with preference to those in which the investor is committed to conduct R&D and skill training for the laborer.

- Policies to attract MNCs and give preference to MNCs with plan to collaborate with domestic businesses in consumption an supply of products to form industry-service clusters, laying foundations for formulation of the value chain should be put in place.

- To take advantage of FDI as targeted, FDI attraction policy alone would not be sufficient; this policy should be accompanied with other sector adjustment policies, including policy on investment, policy on formulation of specialized industrial clusters, and policy on regional economic development.

- All these policies should be formulated in a holistic approach to generate signals to guide FDI to the encouraged sectors and regions. This approach helps prevent provinces from attracting same types of industries without necessary coordination and complementariness, which would result in biased, unspecialized and unfocused development.

(6) To continue to increase the number of domestic private businesses while improving their competitiveness. The next 10-year period will be time to nurture and encourage businesses to accumulate assets, expand scale and improve productivity, develop long-term business strategy, improve quality of products and build up brand names.

The policy solutions include:

- Continue to improve business environment, create healthy enabling investment environment by streamlining procedures on business entry, operation and exit.

- Continue to improve the business environment, creating healthy competition environment by streamlining procedures regarding entry, operation and exit of businesses.

- The state encourages businesses to accumulate capital through many policies, such as encouragement of M&A through streamlined procedures; support in information on business…

- Adopt policies to encourage production linkages between large-scale companies and SMEs through instruments of taxation, training and business support services.

- Develop policies to encourage and support businesses to build their brand names.

- Enhance education and support training in legal knowledge and business management for enterprises.

- Support vocational training for workers in small enterprises. Vocational and skill training should be designed to reflect reality, offer greater diversity and closer links with business needs.

- Adjust fiscal policy to meet development demand in the coming period, aiming at improved quality of growth, efficiency and competitiveness of the economy.

(8) Increase quantity and improve quality of human resources toward improved quality of growth and national competitiveness.

(9) Develop projects that are aimed at encouraging SMEs to apply technological advances in production.

(10) Continue to improve production factor market (capital, land, labor, technology) toward increased transparency in order to mitigate risks in doing business, reduce business costs and create equality in accessing production factors by difference sectors.

(11) Macroeconomic stability, especially control of inflation and current account needs to be secured. Macroeconomic stabilization should be the highest priority, because this is a fundamental factor that directly affects growth and quality of growth.

(12) Review and conduct research to remove obstacles and barriers to improved efficiency and quality of investment, and improved efficiency of investment regardless of ownership.

(13) Improve efficiency of SOEs, speed up equitization of SOEs and move SOEs to operate under the Enterprise Law.

(14) Improve public governance in order to improve quality of growth and national competitiveness. Improved public governance should be linked with improved productivity of the public sector, and governance should be in line with market mechanisms.

The key solutions to improve quality of growth and national competitiveness are specified as follows:

- Adopt new methodology and process of policy making toward consistent objectives, transparency, specialization and evidence-based approach. Clearly define responsibilities of decision makers regarding: (1) consistency and synchrony of policies in relation with higher-level legal documents and previously issued documents; (2) enforceability of policies.

- Conduct assessment of the current decentralization mechanism and its effectiveness since the decision of decentralization. Appropriate measure of monitoring and evaluation should be recommended to suit the nature of decentralization.

- Decentralization of investment to the local level should be accompanied with implementation mechanism, especially specific, clear responsibilities of the decision maker, so that proper measures can be taken in case investment plan has been approved but funding is not secured, which causes scattered investment and delayed implementation in projects using the state budget funding.

- Decentralization to the local levels should be accompanied with reformed methodology of staff assessment, shifting focus from growth, investment targets to productivity improvement targets, efficiency and quality of investment in close relation with job creation and improved social welfare and environmental protection. In addition, assessment of management efficiency of administrative levels needs to be based on people’s satisfaction, social and other public services.

- Improve capacity of the administrative system toward “lean but competent and professional” objective. When the market mechanism operates at a higher level, the current limited capacity of the administrative system will no longer be satisfactory. Therefore, this is an urgent requirement to improve efficiency of public governance, toward improved labor productivity.

- For this purpose, serious considerations need to be given to: (i) continuous reform of functions and mandates of ministries and ministerial-level agencies with multisectoral approach in order to streamline the government machinery; (ii) continuous scale-down of staffing in the administrative system at all levels together with improved quality of public servants to be in line with the productivity-based distribution principle of the market mechanism; (iii) reform in personnel work aiming at improved productivity and efficiency of state management; with a plan for effective use of cadres in meritocracy principle.

- To implement this solution, first the role of the state and market need to be clearly defined, with necessary adjustments to suit development level of the country in the next 10 years, ensuring that market rules should be respected.

- Enhance policy analysis and forecasting; maintain a mechanism of sharing information and data between sectors and research institutions to serve the purpose of analysis and forecasting./.

_________________

* The Report of Vietnam Ministry of Planning and Investment to 2010 Colsultative Group Meeting on 07-08 December 2010 in Hanoi.

(1) Currently, investment contributes 60% to growth; labor and TFP contributes the remaining 40%, of which TFP contributes around 25%.

(2) In the US, TFP accounts for 66.7% of GDP growth in many consecutive decades (James Riedel, 2009).

(3) Moreover, TFP growth is also lower than the regional average of 1.5%/year, while that of China is 4%, India 3%, Singapore 2,5%, and Thailand 2%.

(4) Based on GSO's official data. Labor productivity is measured by average annual incremental value (in 1994 price) per worker. In 2008, labor productivity of the manufacturing industry grew merely by 3.96%, lower than the 4.9% growth of agriculture-forestry and lower than the national average of 4.4%.

(5) GSO’s data in 2008. In 2008, exports to the US increased twofold, and to EU nearly two-fold against 2005.

(6) For example in EU, enterprises with assets worth below Euro 5 million (VND 120 billion) are classified as small, those with Euro 27 million (VND 648 billion) as medium.

(7) In 2006, exports contributed 9.28 percentage points (equivalent to 112.7%), in 2007 7.77 percentage points (91.9%) and in 2008 only 3.57 percentage points (57.8%) to GDP growth (CIEM, 2008).

(8) In 2008, processed products accounted for 55.37% of total exports, compared with 44.17% in 2000. These include crude oil, coal, coffee, rubber, and rice, wood and wood products, frozen seafood products. These seven products accounted for 59.4% of export value of 11 commodities. Four processing industries include electronics, electric wire and cable, footwear and textile & garment (GSO, 2008).

 
Source: The Vietnam’s Socio-Economic Development Review - No.64, December 2010
Ministry of planning and investment*