text: Central Institute for Economic Management Vietnam Competitiveness 20 Report 10 Foreword by H.E. Hoang Trung Hai Deputy Prime Minister Vietnam Michael E. Porter Professor Harvard Business School Christian Ketels Nguyen Dinh Cung Nguyen Thi Tue Anh Do Hong Hanh VIETNAM COMPETITIVENESS REPORT 1 c. Donor agencies, especially the USAID's Vietnam ACKNOWLEDGEMENTS Competitiveness Initiative (VNCI) for providing tremendous support from onset, the Singapore Embassy, World Bank, UNIDO, UNDP, JICA, IFC's VBF, USAID's STAR project and the Like-Minded Donor Group (LMDG); and d. Research institutes, including the Fulbright Program, Vietnam Development Forum, DEPOCEN, and the This report is a joint product of the Central Institute for many other individual experts who have shared their Economic Management (CIEM) under the Vietnam's analysis with us. Ministry of Planning and Investment and the Asia Competitiveness Institute (ACI) of the Lee Kuan Yew For facilitating the project, we would like to thank Mr Cao School of Public Policy, National University of Singapore. Xuan Thanh, Mr Nguyen Huu Thanh and Ms Hoang Thi Professor Michael E. Porter and his team at the Institute Kim Hong of the Office of the Government and staff of the for Strategy and Competitiveness of the Harvard Business Economic Affairs Department of the Ministry of Foreign School provided the conceptual framework and technical Affairs. Special thanks go to Ms Marjorie Yang and her team guidance to the drafting team. The report was initiated by at Esquel Group for providing us with support throughout H.E. Deputy Prime Minister Hoang Trung Hai who also the whole process. provided invaluable support and guidance throughout the process. For peer reviewing the report, we are grateful to Mr Tran Xuan Gia, Dr Nguyen Dinh Thien, Dr Dang Duc Dam, We would like to thank all our partners and colleagues Prof Kenichi Ohno, Dr Vo Tri Thanh, Doan Hong Quang who have provided their time, materials and support to and Dr Vu Thanh Tu Anh. make this report possible. We have benefited from regular inputs and feedback from the VCR Advisory Panel, whose The report was prepared by a research team from CIEM and members are listed in the following page. We are indebted ACI, with overall coordination provided by Dr Christian to those who have shared their important analyses or co- Ketels, Dr Nguyen Dinh Cung, and Do Hong Hanh. authored specific sections of the report – Dr Ulrich Ernst The CIEM team is led by Dr Nguyen Dinh Cung and Dr of USAID's Vietnam Competitiveness Initiative who Nguyen Thi Tue Anh, with research assistance from Luu contributed to several sub-sections in Chapters 2 and 3; Minh Duc, Nguyen Minh Thao and Le Phan. Their primary Dr Vu Thanh Tu Anh of the Fulbright Economic Teaching contributions are in compiling data and conducting the Program who co-authored the macro-economic policy sub- analysis in Chapters 2 and 3, with analytical inputs from section in Chapter 3; Dr Manuel Albaladejo of UNIDO Dr Ulrich Ernst and Do Hong Hanh. The ACI team is who provided analytical inputs to and comments on the led by Dr Christian Ketels, with research assistance from trade section in Chapter 2; and Prof Kenichi Ohno of the Do Hong Hanh and Alvin Diaz. Dr Ketels is the Special Vietnam Development Forum who contributed to the Advisor to ACI and is a member of the Harvard Business policy making process section in Chapter 3. School faculty at Professor Michael E. Porter's Institute for Strategy and Competitiveness. The ACI team, including A range of interviews and consultation sessions were former director Prof Neo Boon Siong and Dr Vu Minh organized during the process of writing this report and we Khuong, are primarily responsible for conceptualizing are grateful to all the organizations and individuals who the framework of the report and the recommendations in have given us their valuable time to share their insights and Chapter 4. Editing was done by Prof Ashish Lall and Dr Vu opinions. We would in particular, like to thank: Minh Khuong. Cindy Chang and Hong Bee Kuen provided extensive coordination and support to ensure that the report a. The Government of Vietnam, particularly the Office is completed timely. of the Government, the Ministry of Planning and Investment, the Ministry of Industry and Trade, the Finally, we are grateful to the generosity of the Saigon Ministry of Finance, the Ministry of Foreign Affairs as Investment Group (SGI) for sponsoring the printing of the well as the National Assembly's Economic Committee Vietnamese translation of the report. and the Central Party's Committee Office; All views and opinions expressed in this report remain the b. The business community in Vietnam, particularly the sole responsibility of the authors. Vietnam Chamber of Commerce and Industry (VCCI), the US–ASEAN Business Council, European Chamber of Commerce (Eurocham), American Chamber of Commerce (Amcham) and the various other business associations and companies; 2 ASIA COMPETITIVENESS INSTITUTE VCR Advisory Panel1 1. Dr Cao Sy Kiem National Assembly Delegate, Chairman of the Small and Medium Enterprises Association 2. Dr Dinh Van An Vice Chairman, Central Party's Committee Office 3. Dr Le Dang Doanh Expert, Former CIEM President 4. Dr Manuel Albaladejo Expert on behalf of UNIDO Vietnam 5. Dr Nguyen Ngoc Anh Chairman, DEPOCEN Economic Consulting Company 6. Mdm Pham Chi Lan Expert, Former Vice General Secretary of VCCI 7. Dr Tran Du Lich Vice Head, Ho Chi Minh City's National Assembly Delegation 8. Mr Tran Xuan Gia Expert, Former Minister of Planning and Investment 9. Mr Truong Dinh Tuyen Expert, Former Minister of Trade 10. Dr Vu Viet Ngoan Vice Chairman, National Assembly's Economic Committee 1 Members are listed in order of alphabet VCR Partner Focus Group2 1. Mr Alain Cany Chairman, Eurocham 2. Mr Hank Tomlinson Chairman, Amcham 3. Dr Jim Winkler Director, USAID's VNCI Project 4. Dr Vu Tien Loc Chairman, Vietnam Chamber of Commerce and Industry 5. Mr Vu Tu Thanh Country Representative, US – ASEAN Business Council 2 Members are listed in order of alphabet VIETNAM COMPETITIVENESS REPORT 3 4 ASIA COMPETITIVENESS INSTITUTE Table of Contents Foreword .............................................................................................................................................................................................. 8 Abbreviations ..................................................................................................................................................................................... 10 Executive Summary ........................................................................................................................................................................... 13 Chapter 1: Introduction Why this Report? ................................................................................................................................................................................ 22 Methodology ....................................................................................................................................................................................... 23 Chapter 2: Vietnam's Economic Performance Economic Outcomes .......................................................................................................................................................................... 28 Standard of Living ............................................................................................................................................................................. 28 The Elements of Prosperity .............................................................................................................................................................. 32 Assessment ......................................................................................................................................................................................... 39 Intermediate Indicators of Economic Performance ..................................................................................................................... 39 Investment ......................................................................................................................................................................................... 39 Trade ................................................................................................................................................................................................... 46 Entrepreneurship ............................................................................................................................................................................. 54 Technology and Innovation .......................................................................................................................................................... 56 Assessment ......................................................................................................................................................................................... 56 Chapter 3: Vietnam's Competitiveness Foundations Natural Endowments .......................................................................................................................................................................... 60 Geographic Location and Population Size ................................................................................................................................. 60 Natural Resources ........................................................................................................................................................................... 61 Macroeconomic Competitiveness ................................................................................................................................................... 62 Social Infrastructure and Political Institutions .......................................................................................................................... 62 Macroeconomic Policy ................................................................................................................................................................... 68 Microeconomic Competitiveness ................................................................................................................................................... 73 Business Environment Quality ...................................................................................................................................................... 73 Factor Input Conditions ................................................................................................................................................................. 74 Context for Strategy and Rivalry .................................................................................................................................................. 86 Demand Conditions ....................................................................................................................................................................... 89 State of Cluster Development ....................................................................................................................................................... 90 Company Sophistication ................................................................................................................................................................ 92 Assessment ........................................................................................................................................................................................... 96 Summary ............................................................................................................................................................................................... 97 Chapter 4: Vietnam's Competitiveness Agenda Critical Tasks Facing Vietnam ………………………..…………………………………………….............................................................. 104 Improving Vietnamese Competitiveness: What to do? .............................................................................................................. 108 Improving Vietnamese Competitiveness: How to get it done? ................................................................................................. 119 VIETNAM COMPETITIVENESS REPORT 5 6 ASIA COMPETITIVENESS INSTITUTE Vietnam Competitiveness 20 Report 10 FOREWORD The year of 2010 marks an important milestone in the transition between the two decades of Vietnam's socio-economic development. The last ten years have witnessed the country's robust economic growth, improved living standards of the population, and most significantly, the deep integration into the global economy, turning Vietnam into an emerging attractive business location. Yet the economy is facing internally-rooted weaknesses and challenges, reflecting in its low competitiveness in different aspects. Moreover, rapid and complex changes in the external environment are affecting Vietnam's open economy in increasingly significant ways. All of these conditions and factors remind of and emphasize the crucial importance of redefining strategic directions and a growth model for Vietnam in the new stage of development, with competitiveness and sustainability being put at the heart. In this context, the development and release of the Vietnam Competitiveness Report 2009 – 2010 are very meaningful in providing important and useful input for the Vietnamese Government and business leaders in their decision making. This is the first ever national report which provides comprehensive assessments of Vietnam's competitiveness in different aspects and at different levels, from both microeconomic and macroeconomic optics. The Report was developed independently and objectively by researchers and experts of the Asia Competitiveness Institute (Singapore) and the Central Institute for Economic Management (Vietnam), under the technical guidance of Prof Michael Porter of the Harvard Business School. My hope is that this Report will lay an important stepping stone for Vietnam to conduct regular national competitiveness assessments and to implement rigorous action initiatives and programs at both the Government and the firm levels to upgrade the country's competitiveness and successfully achieve its ambitious development goals over the next decade. Hoang Trung Hai Deputy Prime Minister Vietnam VIETNAM COMPETITIVENESS REPORT 7 8 ASIA COMPETITIVENESS INSTITUTE Vietnam Competitiveness 20 Report 10 FOREWORD Over the last two decades, Vietnam has embarked on a remarkable journey. From being a closed and centrally controlled economy, the country has become a vibrant part of the global economy. This process has brought significant benefits to many Vietnamese citizens. Average prosperity has risen and poverty rates have fallen significantly. Vietnam is now ready for the next chapter in its economic development. On this new path, the country will face new and complex choices in order to build the foundations of greater prosperity as well as to consolidate the achievements made so far. The Vietnam Competitiveness Report (VCR) provides comparative data, analysis, and concrete proposals to help Vietnamese decision makers as they chart their country's future path. In my discussions with Vietnamese leaders, I have always been struck by their willingness to learn from outside perspectives. The Vietnam Competitiveness Report provides a comprehensive analysis that provides essential inputs towards an economic strategy that builds on international experience and addresses Vietnam's specific situation. The Report provides an in-depth analysis of the forces that have been driving Vietnam's growth thus far, and the key issues that the country now needs to address to continue and accelerate its development. Vietnam is approaching an important transition point from economic growth based on tapping into the country's existing comparative advantages to growth based on upgrading its competitiveness building increasingly sophisticated competitive advantages. The Report identifies specific policy recommendations and an implementation structure to turn these recommendations into reality. Vietnam will benefit from studying the Report and taking action. While the country can be proud of what has been achieved, its performance is showing signs of fragility. Comparison with other countries reveals that Vietnam has not outperformed leading peers in the region. An action agenda informed by the ideas outlined in this report will be an important step towards exploiting the country's significantly greater potential. Vietnam needs to start a discussion about how it wants to position itself in the global economy. What are the specific activities, clusters, and business environment strengths that it will be known for? And, Vietnam needs a more fundamental review of the institutional framework for economic policy making and implementation. The creation of the Vietnam Competitiveness Council, a recommendation in the Report that I strongly support, needs to be complemented by a new development agency such as a Vietnam Economic Development Board. I am pleased to have been able to contribute to the Vietnam Competitiveness Report through conceptual guidance as well as in my role in ACI's International Advisory Board. The joint team from ACI and CIEM is to be congratulated on this important work. ACI's ambition is to provide government leaders with objective data and frameworks to make more informed policy decisions, whether or not they agree with every conclusion or recommendation. My hope is that this first Vietnam Competitiveness Report achieves this purpose and becomes a model for many other reports to follow. Michael E. Porter Bishop William Lawrence University Professor, Harvard Business School Chair of the International Advisory Panel, Asia Competitiveness Institute VIETNAM COMPETITIVENESS REPORT 9 Global Retail Development ABBREVIATIONS gRDI Index gSO General Statistics Office HbS Harvard Business School HCMC Ho Chi Minh City Human Development HDI Index Advisory Council for HSP Hsinchu Science Park ACAPR Administrative Procedures Independent Commission ICAC Reform Against Corruption Asia Competitiveness Incremental – Output ACI ICOR Institute Ratio AFTA ASEAN Free Trade Area Information and Bank for Agriculture and ICT Communication AgRIbANK Rural Development of Technology Vietnam International Financial IFC American Chamber of Corporation AMCHAM Commerce International Labor ILO Association of South East Organization ASEAN Asian Nations International Monetary IMF Bank for Investment and Fund bIDV Development of Vietnam IPR Intellectual Property Right bOD Board of Directors IT Information Technology Congressional Budget Industrial Technology CbO ITRI Office Research Institute Country Competitiveness IZ Industrial Zone CCI Index Japan External Trade JETRO Central Institute for Organization CIEM Economic Management Japan International JICA CIT Corporate Income Tax Cooperation Agency CMT Cut, Make, Trim JSb Joint Stock Bank Council of National Legal Normative CNC LND Competitiveness Document CPI Consumer Price Index Legal Normative LND Corrupt Practices Document CPIb Investigation Bureau Logistics Performance LPI Economic Development Index EDb Board Multi-National MNC Economist Intelligence Corporation EIU Unit Ministry of National MND EPZ Economic Processing Zone Development EU European Union Ministry of Education and MOET EVN Electricity of Vietnam Training FDI Foreign Direct Investment MOF Ministry of Finance FIE Foreign Invested Enterprise Ministry of Information MOIC and Communication gC General Corporation Ministry of Labor, Invalids gDP Gross Domestic Product MOLISA and Social Affairs Government gEPS NA National Assembly e-Procurement System National Assembly's NASC Standing Committee 10 ASIA COMPETITIVENESS INSTITUTE Newly Industrialized US United States NICS Countries U.S Agency for USAID National Institute for International Development NISTPASS Science and Technology USD United States Dollar Policy and Strategy Studies VAT Value Added Tax National Office of NOIP Vietnam Competition Intellectual Property VCAD Administration Official Development Department ODA Assistance Vietnam Chamber of Official Development VCCI ODA Commerce and Industry Assistance Vietnam Competitiveness Organization for VCR Report OECD Economic Cooperation Vietnam Household Living and Development VHLSS Standards Survey OOg Office of the Government Vietnam Competitiveness Provincial Competitiveness VNCI PCI Initiative Index VND Vietnam Dong Presidential Council of PCNC Vietnam Post and National Competitiveness VNPT Telecommunications PPP Purchasing Power Parity Group Public – Private Vietnam Student PPP VSA Partnership Association R&D Research and Development Wb World Bank Regional Competitiveness WbI World Bank Institute RCI Index Workforce Development Regulatory Impact WDA RIA Agency Assessment World Development ROE Return on Equity WDI Indicator SbO Senior Budget Officers WEF World Economic Forum SbV State Bank of Vietnam WTO World Trade Organization SC State Conglomerate State Capital Investment SCIC Corporation Social Infrastructure and SIPI Political Institutions Small and Medium SME Enterprise State-Owned Commercial SOCb Bank SOE State-Owned Enterprise Support for Trade STAR Acceleration Project TFP Total Factor Productivity TI Transparency International TPI Trade Performance Index UN United Nations United Nations UNCTAD Conference on Trade and Development United Nations UNDP Development Program VIETNAM COMPETITIVENESS REPORT 11 12 ASIA COMPETITIVENESS INSTITUTE 20 Vietnam Competitiveness Report 10 Executive Summary VIETNAM COMPETITIVENESS REPORT 13 that has been achieved was the result of capital deepening EXECUTIVE associated with the structural change from agriculture to manufacturing. While this process has been effective and SUMMARY still has some room to continue, its potential is ultimately limited. The analysis of economic activity indicators reveals that foreign direct investment inflows have been a central driver of structural change. Driven by foreign investors, exports Background have grown significantly. So have imports, driven by the The idea for an in-depth study of Vietnam's competitiveness supply needs of exporters and the growing local demand in emerged from a meeting between Prime Minister Nguyen Vietnam. However, value-added within the exporting sector Tan Dung and Professor Michael E. Porter in Hanoi in remains low and productivity in other parts of the economy late 2008. Professor Porter had been impressed by the high is far lagging. growth and significant reduction in poverty in Vietnam, but Competitiveness fundamentals was concerned that Vietnam's position in many international rankings of competitiveness had remained stagnant. Vietnam's growth has been driven by market opening that has enabled it to realize its existing comparative In 2009, Deputy Prime Minister Hoang Trung Hai asked advantages, primarily the abundance of low cost labor. The Vietnam's Central Institute for Economic Management competitiveness fundamentals are broadly in line with the (CIEM) and the Singapore-based Asia Competitiveness growing but still relatively low level of prosperity reached so Institute (ACI) to develop the first ever National far. Competitiveness Report for Vietnam. The Report contains a broad assessment of Vietnam's current competitiveness, an Vietnam's social infrastructure and political institutions analysis of the key challenges and opportunities ahead, and are generally solid. Basic education and health care are a proposal for an economic strategy to enable Vietnam to available across the country, providing an important basic reach a higher level of sustainable growth. prerequisite for economic growth. In terms of the rule of law, there are improvements in the letters of law, but Main Findings of the Report effectiveness in implementation and the independence of The Report is organized in four main chapters: Chapter the judicial system remain an issue. The political system 1 provides a background on the methodology; Chapter is perceived as stable, but lacks the ability to take effective 2 looks at economic outcomes as indicators of revealed action. Corruption levels show few signs of falling. competitiveness; Chapter 3 provides the assessment of the Macroeconomic policy is a considerable weakness. Fiscal competitiveness fundamentals that underpin the observed policy is hampered by the high structural deficits in the economic outcomes; Chapter 4 identifies the three most government sector. While the support of foreign donors critical tasks Vietnam is currently facing based on this is welcomed, this is no substitute for solid government assessment, and makes concrete action recommendations finances. The persistent pressure on the exchange rate, high on how to address them. inflation, and the financial market overheating before the onslaught of the global financial crisis are indications of the Economic outcomes problematic state of monetary policy. Vietnam has achieved impressive prosperity growth over Factor input conditions are improving but remain the last two decades. Poverty rates have fallen significantly insufficient to support significantly higher levels of across the country. Inequality has overall remained low, productivity. Significant investments have been made to despite some increase. Improvements in the quality of life upgrade the physical and utility infrastructure, but the have not only been driven by the improvements in income, impact of these investments is held back by low efficiency and but also the wide access to basic education and health care. the lack of prioritization. Public infrastructure investments Vietnam is on the verge of becoming a low-middle income are currently used to compensate regions with lower growth country but still falls behind more than 100 other countries rather than to achieve the highest possible overall returns for globally. The prosperity differences within the country's the country. regions are growing; the most prosperous regions around Skill levels remain modest. While there has been a significant Ho Chi Minh City and Hanoi register the strongest growth, increase in the availability of training programs, the quality while other parts of the country are struggling to keep up. of education remains low and varied. The education The key driver of Vietnam's prosperity growth has been system is not keeping pace with the rising demands of the an improvement in labor productivity. However, despite Vietnamese economy. Government's efforts to manage the recent gains, Vietnam still remains behind many other the education sector through entry barriers for foreign countries on productivity. The labor productivity growth providers and administrative oversight are a hindrance for 14 ASIA COMPETITIVENESS INSTITUTE extending supply and do not succeed in ensuring higher • Inflation and exchange rate; Vietnam's inflation rate has quality standards. in the last few years become increasingly volatile, with the rate of inflation ratcheting up. Large unsterilized Despite improvements in recent years, the overall capital inflows and rapid growth in domestic credit have administrative environment is still cumbersome. This is created inflationary pressure. Under an exchange rate undermining Vietnam's attractiveness as a business location. policy oriented towards stable nominal rates, this has led Several major reform initiatives, such as Project 30, are to increasing real exchange rates that had forced Vietnam being carried out to improve the administrative practices. into repeated devaluations. If they are fully implemented as planned, they will mark a significant improvement. At the minimum, these imbalances lead investors to require a higher risk premium to invest in Vietnam. Vietnam's Financial markets remain relatively shallow and immature. macroeconomic imbalances could culminate in a crisis, Smaller private sector companies continue to have difficulties when sentiments shift to deny Vietnam access to external in getting access to capital. Equity markets suffer from high financing. This would require a painful adjustment process volatility and a lack of transparency, especially when it with exchange rate adjustments, cuts in public expenditure, comes to the financial situation of state-owned enterprises. and possibly years of lost growth. The current policy The context for strategy and competitiveness is characterized response has recently received international praise, but falls not only by significant levels of formal market openness but short of a coherent strategy to address these challenges in also a dominant role of state-owned companies across many a proactive and comprehensive way. Vietnam needs a more sectors of the economy. While foreign companies find an prudent macroeconomic policy approach that addresses the open environment in Vietnam, the domestic private sector root causes of the emerging imbalances. struggles to achieve a more significant role in the economy. Microeconomic bottlenecks Competition remains focused on price and head-on rivalry, rather than on quality and features. • Skill and infrastructure shortages; Foreign investors are increasingly reporting skill shortages and infrastructure Clusters have emerged naturally as co-locations of companies bottlenecks. These problems are locally concentrated in conducting similar types of activities. However, the focus is high-growth regions, especially the Ho Chi Minh City on a narrow set of activities without the breadth of related region. and supporting industries, and active collaboration among companies remains limited. • Profile and implementation rate of FDI; FDI is increasingly shifted to real estate and labor-intensive Critical tasks facing Vietnam activities, with little evidence of positive spillovers. There Vietnam has achieved impressive growth based on its current is an increasing gap between announced and actual model of FDI-driven sectoral change. With a significant investments, partly because of the interest to "over- share of the work force still active in agriculture, this model report" FDI attractions and problems in implementing still has the potential to deliver years of growth. This positive FDI projects. outlook and the complacency it can easily foster is the most • Decreasing relation between investment and growth; difficult challenge facing Vietnam. The three most critical the incremental capital to output ratio (ICOR) is tasks that Vietnam faces are, at their core, symptomatic of often criticized in terms of its conceptual validity. But the growing fragilities of the current growth model. These it is interesting to note that relative to its investment, fragilities are an important impetus to enter a new stage of Vietnam achieves lower GDP growth than China and development. India. State-owned enterprises account for the lion's Macroeconomic imbalances share of capital investment, accentuating the low overall investment efficiency. • Trade and current account balances; Vietnam is facing an increasing deficit in its trade balance. While widely These emerging bottlenecks are signs of a gradually perceived as a typical export-led economy, Vietnam is decreasing level of dynamism that the current growth model systematically importing more than it is exporting. is able to generate. The policy response so far has been based on a largely accurate identification of the bottlenecks – • Savings-investment imbalance; The external deficit has all three main elements of the ten-year strategy are highly to be covered through capital inflows, from foreign relevant. However, the impact of the steps taken in response investment, remittances, development aid, or through has so far been clearly insufficient. other sources. The increasing concerns about Vietnam's ability to finance its external deficit, fuelled by rising external debt and a significant drop in foreign reserves, create uncertainty about the country's future economic outlook. VIETNAM COMPETITIVENESS REPORT 15 Competitiveness fundamentals sustainable productivity growth and many macroeconomic policies to fuel short-term growth have no or negative • Low value added exports; export-oriented manufacturing impact on longer-term productivity. activities in Vietnam rely almost exclusively on imported supplies, while the only local content provided is the Second, Vietnam's government needs to define a new role, in work of low- or semi-skilled Vietnamese employees. line with the demands of an emerging and dynamic market The only exceptions are exports of natural resources and economy. This role is defined by the role that government agricultural products. needs to play to allow the market to function. Government needs to provide a transparent and effective regulatory • Eroding cost competitiveness of Vietnam; while environment in which companies can compete on equal productivity has improved only marginally as terms and to have an effective approach towards providing infrastructure has been upgraded, costs have also gone public goods. In short, it needs an approach towards creating up. Vietnam's cost position is gradually eroding relative a business location with clear competitive advantages. The to other countries that also provide a large pool of low current policy debate in Vietnam is often focused on the cost labor. size and the direct power of government, rather than on its • Low productivity of Vietnamese products versus ability to provide the functions needed. imports; In a number of industries, foreign companies, Third, Vietnam needs to provide an environment where there for example from China, are able to out-compete local is a more balanced mix of state-owned, private, and foreign producers. While foreign companies generally face companies competing in its economy. Competition between higher cost levels, they more than compensate for this these groups needs to be on equal terms, enabling those that with higher productivity levels. Higher foreign cost levels make the strongest contribution to Vietnamese prosperity are more than compensated for by higher productivity to gain ground. The current policy debate in Vietnam too levels abroad. often gets hung up on political views about ownership. These observations are typical for an economy that is Market structure, i.e. the exposure to competition, is more growing quickly based on the combination of domestic low critical than ownership per se in determining productivity cost labor and foreign capital. The current policy response is levels. SOE governance needs to be transparent, the role of based on a widely shared view that Vietnam needs to move the government as an owner clearly separated from its role beyond the current economic growth model, which is based as a regulator, and SOEs need to be exposed to the same on low labor cost and intensive capital investment rather market rules and incentives as their foreign and local rivals. than on productivity and competitiveness. At the moment, Activities Vietnam is trying to upgrade too many things at the same time, without a clear strategy that could align and sequence Vietnam needs a more coherent and effective macroeconomic these activities towards a coherent new goal. policy approach to address the risks posed by the imbalances that have built up in the economy. The following policy Main Recommendations of the Report actions are examples of the necessary steps: Vietnam's economic policy approach since 1986 has in • Transparency of fiscal position of the government many ways been an enormous success. Standards of living and SOEs; Vietnam should establish an effective and have gone up and many people in Vietnam have seen their independent reporting body in charge of providing livelihoods transformed. This is a source of well deserved transparent and robust data, in line with international pride. Changing the policy approach now is by no indication norms, on the state of the economy. SOEs need that the policies of the past were mistaken. It is a sign that to be subject to stringent information disclosure Vietnam has changed: what worked well in the past is not requirements, especially on their economic efficiency, necessarily what will work best in the future. Moving from financial performance, and financial relations with the one policy approach to another is not just a matter of refining government. current policies. It is driven by the need to adopt a new set of principles that can then guide the multitude of individual • Strengthen budget discipline; Transparency and changes that are required. Three principles are particularly discipline in state budget management need to be important and summarize the main transitions needed. enforced to minimize off-budget spending items and maintain a sustainable fiscal balance. The quality and First, Vietnam's future growth has to move beyond effectiveness of public debt management need to be providing access to and leveraging existing economic enhanced, and the transparency and independent fundamentals. It needs to be based on a consistent upgrading monitoring of public investment needs to be enforced. of these fundamentals. This will require changes on both the macroeconomic and microeconomic conditions driving • Consistent and predictable monetary policy; Monetary productivity. The current policy debate in Vietnam has not policy collaboration among the National Assembly, the quite made the transition to this new vision. Much of the government, and the SBV needs to be clarified. Within focus remains on short-term growth rates rather than on this structure, SBV needs to send clear signals on its main 16 ASIA COMPETITIVENESS INSTITUTE monetary target, namely inflation, and the corresponding for emergence of a higher value-added economy money supply and credit growth targets. Over time, the in Vietnam. The current approach has delivered a central bank's independence, competence, and capability significant upgrading of physical infrastructure. While need to be strengthened. the costs of these investments have been high, their impact on competitiveness is limited and the demands • Financial market regulation; Vietnam needs to develop of the economy have grown faster than capacity. A a more robust regulatory framework in which the room new approach for infrastructure investment needs to for speculation is reduced while the financial system is systematically evaluate public infrastructure projects by gradually deepened. SBV needs to prudentially oversee their contribution to competitiveness. the financial system to ensure the soundness of financial markets and institutions. • SOE Governance; State-owned enterprises remain an important part of the Vietnamese economy and are • Coordination of overall macroeconomic policy over likely to continue to do so. The current approach of time; The Central Committee for Financial and SOE governance is not delivering the strong companies Monetary Policies can play an important coordinating that are the objective of policy makers. A new approach role to enhance alignment of efforts across different needs to separate the roles of government as an owner ministries. Its operation and mandate should be from that as a regulator. Government needs to define a upgraded and formalized to manage a medium- to long- clear owner policy in terms of what it expects as returns term agenda rather than to seek ad-hoc solutions to from its SOEs. SOE need to be subject to the same immediate crises and problems. competitive pressure as their foreign and local private Vietnam needs microeconomic policies that can effectively sector rivals. and quickly react to bottlenecks in the regions and clusters • FDI attraction; The attraction for foreign direct where they are most pressing. While a fundamental solution investment has been a critical driver of recent to these challenges requires broader-based changes in Vietnamese growth and will continue to be important. policies and institutions, there is a need to find effective The current approach towards FDI attraction is reactive answers more quickly in public private partnerships: and oriented towards high announcements of FDI • Cluster-based action initiatives; the lack of dialogue inflows. The value that this generates for Vietnam is between government agencies and companies is one insufficient. A new approach needs to focus on actual of the most critical barriers towards removing the FDI, not announcement and more effective monitoring bottlenecks for growth. Pilot initiatives can be launched and follow up. Vietnam needs to separate FDI attraction in clusters where there is sufficient critical mass for from regulation and see FDI as a tool to strengthen actions to affect a meaningful number of companies and Vietnam's competitiveness. the willingness of companies and public sector agencies • Cluster development/Industrial policy; Higher to collaborate. competitiveness requires specialization in areas where the Vietnam needs an overall economic strategy that provides presence of related and supporting activities can support a coherent approach for upgrading competitiveness and a level of productivity that any individual company moving the country to the next level of development and finds hard to achieve. The current approach is based competitive advantages. This strategy is also dependent on creating national champions from SOEs, providing on how Vietnam intends to position itself in the global cheap credit to individual companies, and creating economy. To achieve this, Vietnam will need to change dedicated infrastructure. There are no effective strategies many of its policies as well as the way policies are designed for specific sectors or industries. A new approach needs and implemented. While, the task of repositioning Vietnam to focus on clusters and value chains, not individual in the global economy is beyond the scope of this report, companies or narrow industries. The objective needs the following are key policy areas and policy processes where to be improving productivity, not private profitability. change is most critical. Government efforts should enable companies in clusters to compete on a higher level, not shelter them from Policies competition. • Education and workforce skills; skills are critical to enable the emergence of a higher value-added economy in Vietnam. The current approach has not delivered the required skills. A new approach towards education, in particular workforce skill development needs, will be required to strengthen the role of education as a central enabling condition for higher productivity. • Physical infrastructure; Transportation, communication, and energy infrastructure are another critical condition VIETNAM COMPETITIVENESS REPORT 17 Institutional architecture not positive results to point towards. Getting the sequence of reforms right is thus a critical dimension of a sustainable • Policy process; effective policies are more likely to emerge competitiveness agenda. if a robust process of policy design and implementation is in place. Competitiveness requires an inherent ability For Vietnam, we suggest an evolutionary reform process. to systematically upgrade and improve policies over time. Changes in competitiveness will initially be driven by The current policy design and implementation process narrow activities in well-defined pilot cases. Over time these in Vietnam have significant weaknesses. A new approach new solutions will then be rolled-out nationally and across a needs to provide data for fact-driven policy making and broader set of policy areas. In the last stage, the institutional clear procedures to monitor the relevance and quality architecture of policy making will be upgraded. The only of policy. Planning efforts have to be consolidated and exception to this bottom-up approach is the set of activities connected. There has to be an institutionalized impact needed to defuse the increasing risk of macroeconomic assessment process and the coordination among different imbalances. Here an effective response will require changes government agencies needs to be strengthened. at all levels – individual measures, changes in policy, reform of institutional structures – within a relatively small time • Capacity; more effective policies require a more capable frame. public sector. Well trained public officials and an effective organization and management structure are crucial Progress on implementing the competitiveness agenda to enable government to operate more effectively. The requires the assignment of clear responsibilities. Such current approach in Vietnam reflects a very traditional responsibilities can be defined at two levels. First, for each public sector organization. The lack of a merit- specific initiative there needs to be an institution or group based and transparent performance system and good in charge of driving the process. Second, there needs to be governance principles have limited the performance of an overarching structure that can manage the portfolio of the public sector. A new approach needs to be based activities, ensuring that the most critical efforts are being on an integrated efforts providing modern solution undertaken and mobilizing new efforts at the appropriate got leadership, training, incentives, and organizational time. For Vietnam, we suggest creating a Vietnamese structures. Competitiveness Council to assume this role, leveraging the experience many other countries have made with similar • National – regional structure; Given Vietnam's size and structures. The Council would coordinate the government geographic profile, the effective allocation of roles and agencies and public-private project groups that are engaged responsibilities between national, regional, and local in the specific activities launched in the context of the authorities is of particular importance. As companies competitiveness agenda. It would manage the overall project always locate in specific regions within the country, the portfolio and monitor progress on individual activities. The cumulative effect of government decisions at all levels at Council would report to the Party, the government, and these specific places will directly impact the performance the public on the progress of the competitiveness agenda. of these companies. The current structures in Vietnam To perform these tasks, the Council would have direct link have potential but currently suffer from significant to the political leaders, be comprised of leading government weaknesses. A new approach needs to review the current and business leaders, including executives of foreign-owned mechanism of responsibility delegation, and strengthen companies, and have a dedicated secretariat with appropriate oversight and quality control by the central government. resources. Regions need to be motivated to collaborate and leverage on each other to develop their competitiveness Conclusion and clusters rather than by competing with each other. Vietnam's growth since the mid-1980s has been driven by Implementation transition and structural change. Transition has transformed the governance of the economy from plan to market, opening The sequencing of activities in a competitiveness agenda is up Vietnam for integration with the global economy. a crucial task and not just a technicality. First, governments Structural change has transformed the composition of the cannot upgrade all dimensions of competitiveness in parallel. economy, moving millions from subsistence agriculture This overstretches their ability to achieve change and into capital-intensive manufacturing and services. Both of results in most cases in failure. This challenge is even more these changes have enabled underlying competitiveness, acute when, as is the case in Vietnam, an economy needs essentially the presence of low cost labor, to be revealed. to transition from one set of competitive advantages and Growth has been fueled by these macroeconomic, "systemic" policies to the next level. Second, the impact of individual changes. More recently, the policy response mainly focuses reforms often depends on other policy steps taken in parallel on intensifying investment, especially in SOEs and or even before. Without the right sequencing, results will infrastructure, to generate growth rather than on upgrading take much longer to materialize. In the meantime, the productivity and efficiency. political willingness to pursue reforms can wane if there are 18 ASIA COMPETITIVENESS INSTITUTE However, the economic logic behind this growth model ultimately has limited potential. The highest level of prosperity that Vietnam can reach given this approach is defined by the level of productivity unskilled workers can reach in manufacturing. If Vietnam is not able to move beyond this model, it will be stuck at lower middle income level, with poorer economies threatening its position. Furthermore, the over-reliance on externally-financed investment as a driver of growth is generating dangerous macro-imbalances which may ignite crises. It is widely acknowledged that Vietnam needs to move beyond the current economic growth model which is based on low labor cost and intensive capital investment towards productivity and competitiveness as the core of growth. Vietnam's future growth has to move beyond providing access to and leveraging existing economic fundamentals. It needs to be based on a consistent upgrading of these fundamentals and creating new advantages. This will require changes on both macroeconomic and microeconomic conditions driving productivity. This new vision is a critical perquisite for Vietnam to move up sustainably to the next stage of development. VIETNAM COMPETITIVENESS REPORT 19 20 ASIA COMPETITIVENESS INSTITUTE 20 Vietnam Competitiveness Report 10 Chapter 1 Introduction VIETNAM COMPETITIVENESS REPORT 21 Institute for Economic Management (CIEM) and the INTRODUCTION Singapore-based Asia Competitiveness Institute (ACI) to develop the first ever National Competitiveness Report for Vietnam. Professor Michael E. Porter has remained engaged in this process through his role as the co-chair of ACI's International Advisory Panel. His team at the Institute for Strategy and Competitiveness has provided technical Why this report? guidance throughout. Background Ambitions/ Objectives of the Report Vietnam has been one of the most impressive growth stories The Vietnam Competitiveness Report aims to contribute in the global economy over the last few decades. Following in three key dimensions to the debate about the choices the economic reforms during the second half of the 1980s, Vietnamese leaders are facing: GDP per capita has grown at an annual rate of almost 6%. Millions of Vietnamese have been lifted out of poverty. • a broad set of data on different aspects of Vietnam's The Asian financial crisis and the current global economic economic performance, activity, and competitiveness; downturn did not affect Vietnam as much as many other • a conceptual framework for interpreting this data countries. International donors view Vietnam as one of and the underlying relationships between its different their clear success cases, where foreign aid is generally well dimensions; and utilized and has a visible impact. Private investors also see Vietnam as an increasingly attractive destination. • concrete proposals on policy priorities and specific action initiatives. While much has been achieved, there is an acute awareness that Vietnam still has ways to go. The level of prosperity Each of these dimensions is important in its own right. is still low, even compared to many Asian peers. Domestic Many if not all of the choices that Vietnam is facing today macroeconomic instability has been a reminder of the cannot be addressed by ideology or generic theory alone. fragility of growth. Poverty remains entrenched among They require an in-depth analysis of where Vietnam stands specific social groups and low-growth regions of the today. This is why providing policy makers with data to country, and becomes much harder to address by general pursue fact-driven policy choices is increasingly critical. economic growth. The achievements thus far have raised both ambitions and expectations, forcing the country to Competitiveness has so many aspects and dimensions, that look for ways in which growth can be sustained at the level the picture from the data alone is often hard to translate into of development that Vietnam has now reached. In many clear policy implications. This is why using the conceptual respects, Vietnam is now facing a more complex set of framework developed by Prof. Porter - embedded in choices then it did when it decided to open up to the global academic research but not driven by strong ideological economy two decades ago. priors - is an important tool helping decision makers to deal with this complexity. Over the next few months, Vietnam faces a number of key milestones that will have a significant impact on the Policy decisions are what ultimately matters. These decisions country's medium-term outlook. One of them is the official have to be developed by the relevant authorities in Vietnam, launch of Vietnam's 10-year strategy, currently under taking into account its legacy and context. This report discussion in the Party, the Government, and the National contributes to the effectiveness of the decision making Assembly. It sets important markers on the policy issues that process by presenting action proposals that decision makers the government aims to address and outlines a broad vision can build upon. for where its leaders see Vietnam at the end of this decade. Not everyone will agree with all the recommendations in Another one is the Party Congress in early 2011 which will this report. But many, we hope, will find the analysis a useful also set important directions for the course ahead. stimulus for their own thinking. And the data, we hope, can Against this background, the idea for an in-depth study of become a widely accepted foundation for the policy debate Vietnam's competitiveness emerged in a meeting between in Vietnam. Prime Minister Nguyen Tan Dung and Professor Michael Positioning of the Report versus other reports and studies E. Porter, Harvard Business School, in Hanoi in late 2008. Professor Porter was impressed by the high growth and the The Vietnam Competitiveness Report intends to significant reduction in poverty over the last two decades. complement and build on existing work, not to replace it. But he also pointed out that Vietnam's stagnant position in It has a number of characteristics that distinguish it from many international rankings of competitiveness was a cause existing reports and plans. The ambition of the report is for concern. The ensuing discussions triggered the decision both more comprehensive and more focused: It is more to develop the Vietnam Competitiveness Report. In 2009, comprehensive in providing a view across many policy areas Deputy Prime Minister Hai asked Vietnam's Central and combining analysis with action recommendations. Yet, 22 ASIA COMPETITIVENESS INSTITUTE DETERMINANTS OF Microeconomic Competitiveness COMPETITIVENESS Sophistication Quality of the of Company State of Cluster National Operations and Development Business Strategy Enviroment Microeconomic Competitiveness Social Quality of Infrastructure Macroeconomic and Political Policy Institutions Endowments Source: Professor Natural Geographic Size Resources Location Michael E. Porter and Dr. Christian H.M. Ketels it is also more focused in its primary aim of identifying makes no prior assumptions about the critical role of any which areas are most critical for Vietnam, and in suggesting individual factor. a specific sequencing of actions across the various areas in which upgrading ultimately needs to take place. The central tenet of the competitiveness framework is the notion that productivity – the ability to create valuable goods The report compares Vietnam's performance with other and services through the use of a country's human, capital, countries on many indictors. But it does not focus on ranking and natural resources – is the ultimate driver of sustained Vietnam overall against other countries, as other global prosperity. Productivity depends both on the value of the rankings and indices have done. Instead, it provides an in- goods and services produced and on the efficiency with depth analysis of the root causes of economic performance, which they are being provided. High competitiveness, then, based on Vietnam's competitiveness fundamentals. The is ultimately reflected in high productivity. report provides an overall look at the national economy. The analysis of individual regions or sectors is beyond the Productivity is the result of a large number of factors that scope of this report and could be conducted in the future. are shaped by the collective action of all participants in an economy. One set of factors, organized under the heading The Vietnam Competitiveness Report serves as a of macroeconomic competitiveness, set the overall context complimentary source of policy input to elaborate and in which companies operate. These factors include the support the broad vision and orientation set forth in key quality of social infrastructure and political institutions policy documents such as the ten year strategy, the five year as well as of macroeconomic policy. They do not affect development plan and the Party Congress Resolution. productivity directly but create the opportunity space in which productivity-enhancing actions can be taken. Finally, the institutional authorship of the Report gives it a unique blend: It is not influenced by strong institutional The other set of factors, called microeconomic interests; the combination of CIEM and ACI was explicitly competitiveness, capture the way companies operate and the chosen to minimize such bias. And the combination of a external dimensions that have a direct impact on the results domestic and a foreign partner marries local insights with of their activities. These factors include the sophistication international experience. of companies, the strength of clusters, and the quality of the business environment. All of them have a direct impact on Methodology productivity. The Report's analysis is grounded in the competitiveness Endowments are another important set of factors to framework developed by Professor Michael E. Porter over consider. They do not affect productivity, but can provide the last two decades. This framework is flexible in capturing direct benefits to prosperity. They also set in an important the role of many different types of factors that influence way the overall context in which a country's economy and its competitiveness. It recognizes their interdependence and global positioning develop. VIETNAM COMPETITIVENESS REPORT 23 Economic Outcomes Intermediate Indicators The competitiveness diagnostics applied in this report use a The combination of these three groups of indicators broad set of data. The data are organized in a number of key provides important insights for policy makers that are categories that provided different perspectives on Vietnam's often lost in more narrow assessments. The economic competitiveness position: performance indicators capture the ultimate objectives of policy; failure on this dimension signals failure overall. • The first group of indicators provides an assessment Their decomposition provides initial insights into critical of the economic performance of the country. This policy issues. The economic activity indicators then deepen includes an analysis of the standard of living of the understanding of how competitiveness fundamental Vietnamese citizens, given the fundamentals of their are translated into ultimate economic benefits. Again, the economy. Relevant variables include average prosperity particular patterns of these indicators provide important levels, income inequality, regional development, and direction to where policy must focus. The competitiveness other measures of progress. It also examines the main fundamentals, then, capture the root causes of outcomes elements of prosperity growth: labor productivity and at higher levels. This is where policy needs to intervene, labor mobilization. Indicators of structural change and targeting those areas that the analysis of economic outcomes demographics are also included. have revealed as critical, not just those in which a country • The second group of indicators includes intermediate happens to be weak. indicators of economic activity. The factors in this The Vietnam Competitiveness Report draws on a broad category are signs of and contributors to competitiveness range of data sources including many international but not ultimate goals of economic policy. They assessments and databases. Many Vietnamese and foreign include measures of foreign and domestic investment, institutions have provided access to their analysis and international trade, innovation, and entrepreneurship. reports; we appreciate their willingness to share this material • The third group of indicators tracks Vietnam's position with us. Through CIEM, we have also had access to a large on the broad range of macro- and microeconomic number of Vietnamese government statistics. competitiveness fundamentals that ultimately explain Over the last year, CIEM and ACI organized a range of the economic outcomes discussed in the previous interviews and workshops to obtain inputs and to discuss sections. The indicators covered range from assessments preliminary findings of the analysis. These meetings have of governance quality, the provision of primary public included Vietnamese government officials, Vietnamese services, the state of public finances, the sophistication business leaders, foreign investors, researchers, experts and of companies, the dynamism of clusters, the quality representatives of foreign aid organizations. An advisory of physical infrastructure and, the intensity of local group of experienced Vietnamese officials and experts competition, and many more. has provided regular input and feed-back. In June 2010, a preliminary version of the report was discussed with more 24 ASIA COMPETITIVENESS INSTITUTE than 300 attendees at a workshop organized alongside the policy in this transition. It then provides specific action WEF East Asia Summit in Ho Chi Minh-City. We are recommendations in each of the priority policy areas. The grateful to all our partners for their openness in sharing third and final part of the chapter turns to implementation, insights and opinions with us. an area which has received insufficient attention in the past. It suggests an approach of sequencing actions over time, to The remainder of the report is organized in three chapters. enhance the momentum for change based on initial success Chapter 2 looks at economic outcomes as indicators of and learning. And it outlines and organizational architecture revealed competitiveness. The chapter first describes for managing the competitiveness action agenda, with a different dimensions of Vietnam's prosperity. While GDP Vietnamese Competitiveness Council at its center. per capita is a central benchmark, this section widens the view beyond GDP per capita to better capture the quality of life across different parts of Vietnam's society. It then decomposes Vietnam's overall prosperity performance into labor productivity and labor mobilization. The impact of structural changes in the economy is a particular focus of this analysis. The second part of the chapter then looks at indicators of economic activity that as signals and contributors of competitiveness tend to foreshadow future prosperity. They are important analytical tools but not appropriate policy objectives. Targeting them directly, as many countries have done, often leads to better performance on the indicator but no improvement in either prosperity or competitiveness. The economic outcome indicators addressed include measures of investment (domestic, inward FDI), global integration (FDI, exports, imports), innovation, and entrepreneurship. Key observations from the analysis of outcome indicators are summarized at the end of each major section. Chapter 3 provides the assessment of the competitiveness fundamentals that underpin the observed economic outcomes. The first part of the chapter reviews Vietnam's endowments in terms of geographical location, natural resources, and other given factors. The second part is devoted to the main elements of macroeconomic competitiveness, i.e. the strength of social infrastructure and political institutions (SIPI) and the quality of macroeconomic policy. SIPI includes basic human capacity, the rule of law, and the effectiveness of the political system. Macroeconomic policy indicators include fiscal and monetary policy as well as external and internal balances. The third part covers the three dimensions of microeconomic competitiveness, i.e. company sophistication, cluster strength, and business environment quality. The diamond, a concept first introduced by Professor Michael Porter in 1990 is used to organize the analyses of the business environment by four broad dimensions - factor input conditions, the context for strategy and rivalry, demand conditions, and supporting and related industries. Key observations from the analysis of competitiveness indicators are summarized at the end of each major section. Chapter 4 turns from the analysis to the recommendations. The first part of this chapter synthesizes the main findings from the previous two chapters to identify three critical tasks Vietnam is facing. The second part outlines an action agenda to address these tasks in turn. It sets out a number of general principles that should guide Vietnamese economic VIETNAM COMPETITIVENESS REPORT 25 26 ASIA COMPETITIVENESS INSTITUTE 20 Vietnam Competitiveness Report 10 Chapter 2 Vietnam's Economic Performance VIETNAM COMPETITIVENESS REPORT 27 making. It only describes the combined impact of all the VIETNAM'S determinants of competitiveness on the quality of life of the average Vietnamese. Policy-relevant insights can be ECONOMIC obtained from assessing both economic and non-economic PERFORMANCE measures of well-being and from decomposing the standard of living into various components such as the mobilization of resources, in particular labour, and how efficiently or productively these resources have been employed in order to achieve a higher standard of living. Standard of Living Chapters 2 and 3 examine the competitiveness of Income: GDP per capita the Vietnamese economy in three levels, providing - GDP per capita has grown quickly and steadily over the a comprehensive assessment of outcomes, drivers last two decades, yet it is at a low absolute level or intermediate indicators and underlying causes. Understanding these is critical to the formulation of a Vietnam's average income — real GDP per capita — has national economic strategy and a comprehensive supporting grown rapidly since the country launched the Doi Moi policy package. Chapter 2 focuses on the first two layers. It Reform, growing at an average annual rate of 5.06 percent begins with an examination of indicators of economic well- between 1986 and 1997 (pre-Asian Financial crisis) and being and the quality of life of the Vietnamese people. This if at the higher rate of 5.64 percent between 1997 and 2009 followed by an exploration of the intermediate indicators or (Figure 2.1). Vietnam stood out as one of the fastest drivers of prosperity such as trade and investment. The third growing economies in the world during this period allowing layer of competitiveness, or underlying causes, is discussed it to reach the lower middle-income group in 2008 when its in Chapter 3. per capita income exceeded USD 1,000. And it continues to make significant progress since, despite the recent financial Economic Outcomes crisis. Ultimately, the goal of economic development is a sustained increase in prosperity or the standard of living. Indeed, many economic plans, including the ten-year strategy for Vietnam, which is currently under discussion, also refers to specific goals in terms of the standard of living. Comparing these metrics across countries as is done below, provides a realistic competitiveness benchmark or a relative assessment of how competitive an economy is. While the standard of living is a central element of the assessment, it is not a very informative tool to guide policy FIgURE 2.1: GROWTH PATTERNS OF VIETNAM'S GDP PER CAPITA 1984-2009 Source: World Development Indicators. 28 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.2: 10% GDP per capita Growth (CAGR), 1990-2009 China COMPARISON OF 9% GDP PER CAPITA 8% GROWTH, 1990- 7% 2009 6% Cambodia Vietnam 5% India 4% Thailand Malaysia 3% Indonesia Note: GDP per capita growth (CAGR) for 2% Cambodia is for the Philippines period 1993 - 2009. 1% 0% Source: World 0 2 4 6 8 10 12 14 16 Development Indicators. GDP per capita in 2009 (thousand current PPP$) While Vietnam's economic growth over the past two decades Vietnam is recognized as one of the early achievers of the has been impressive in relative terms, the per capita GDP Millennium Development Goals on poverty reduction. . Its (measured using purchasing power parity) of the country poverty rate fell dramatically from 58.1 percent in 1993 to remains low compared to other countries. In 2009, Vietnam 14.5 percent in 2008 (GSO 2006)1. The country managed ranked 113th in the world and it is still among the poorest to significantly reduce poverty rate in both urban and rural countries in East Asia (Table 2.1). In addition, Vietnam's areas as shown in Figure 2.4. In 2009, despite the slowdown prosperity level lags significantly behind traditional tiger in economic growth, the proportion of poor households economies such as South Korea and even China's per-capita continued to decline. This is estimated to remain at 11 GDP is more than twice that of Vietnam's (Table 2.1 and percent by the Government's poverty standards2 . However, Figure 2.3). it is worthwhile noting that while the country's successes in poverty reduction are significant, "these results are not Non-income Measures of Economic well-being really stable, the rate of re-impoverishment remains high" as Poverty Reduction candidly pointed out by Prime Minister Nguyen Tan Dung - Significant successes in poverty reduction, however risk of in his article written on the occasion of the New Year 2010 re-impoverishment remains high (Press Center 2010). TAbLE 2.1: Group Rank World Rank by COMPARISON Economy USD PPP$ ($PPP) ($PPP) OF PER CAPITA Singapore 36,537 50,705 1 4 INCOME IN 2009 Japan 39,727 32,443 2 20 South Korea 17,078 27,168 3 26 Malaysia 6,975 13,982 4 49 Thailand 3,894 8,004 5 80 China 3,744 6,838 6 83 Indonesia 2,349 4,205 7 106 Philippines 1,745 3,546 8 110 Vietnam 1,052 2,957 9 113 Lao 940 2,259 10 125 Source: World Cambodia 677 1,913 11 131 Development Indicators. VIETNAM COMPETITIVENESS REPORT 29 FIgURE 2.3: 10% CATCHING-UP 9% ON ECONOMIC 8% DEVELOPMENT– 7% Percentage of US Income (%) South Korea VIETNAM VS. EAST 6% Indonesia ASIAN COUNTRIES 5% Thailand 4% Malaysia 3% Philippines 2% Vietnam Source: World Bank 1% Development Indicators; 0% calculations by ACI. 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 The risk of re-impoverishment is high for three groups. poorer regions in order to improve their standard of living The first group includes poor households who rely solely in a sustainable way. on agricultural production and live in the coastal region of the Red River Delta or Mekong Delta. These areas Income Inequality are also more susceptible to natural disasters, floods and - Overall, inequality is widening in the wake of economic epidemics. The second group includes poor, mostly minority growth, but remains lower than that of peer countries households living in the Northern mountainous region, Income inequality has been widening and this is an expected the Central Highlands, islands, or places with difficult result of Vietnam's high economic growth. However, the access to production sources or social services. The third country's level of income inequality is still low relative to group includes the urban poor with low education levels countries such as China, Thailand, Philippines, Malaysia, or professional skills. Income disparity among economic and Cambodia (Figure 2.5). regions demonstrates that growth policies which aim at creating low value-added jobs will help reduce poverty, but will not bridge the income gap between rich and poor areas. Thus, policies need to target productivity improvement in FIgURE 2.4: 50 POVERTY 45 REDUCTION, 40 1998-2006 35 Povert Rates (%) 30 Overall 25 Urban 20 Rural 15 10 5 Source: VHLSS, GSO 0 1998 2002 2004 2006 2008 Source: VHLSS, GSO 30 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.5: 55 GINI COEFFICIENT AND Greater Inequality GDP PER CAPITA Malaysia 50 GINI Index, 1992 - 2007 China 45 Philippines Cambodia Thailand 40 Less Inequality Note: The Gini index ranges from 0 (absolute equality) Vietnam 35 Laos and 100 (absolute inequality). Gini index in the latest period Indonesia from 1992-2007. 30 Source: Human 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 Development Report 2009, GDP per capita in 2007 (thousands PPP$) UNDP. Quality of Life The HDI is compiled based on a set of indicators organized into three components: income, health, and education. The broader concept of "quality of life" is an important Vietnam scored well in the health component, which is measurement of a country's competitiveness. The Human proxied by life expectancy, compared to its Asian peers Development Index (HDI) represents an attempt to (Table 2.2). However, Vietnam needs to do more to measure such a quality. In addition, other indicators include improve the education component where it continues to environmental quality, population characteristics, quality lag behind many of its Asian peers. For instance, the mean and access to health care services, education, and gender years of schooling is 5.5 and the expected years of schooling equality. is 10.4 (an improvement of 4.9) for Vietnam, while these Human Development Index (HDI) figures, respectively, are 5.7 and 12.7 (an improvement of 7) - Moderate position on HDI ranking, lower scores than those for Indonesia. In order to improve the HDI, it is essential for of most Asian peer countries Vietnam not only to catch-up in GDP per capita, but also in terms of other indicators, especially education. TAbLE 2.2: Gross GNI per HUMAN Human Life Mean Expected national capita Non- HDI Development expectancy years of years of income income DEVELOPMENT rank Index (HDI) at birth schooling schooling (GNI) per rank HDI minus INDICATOR value (years) (years) (years) capita (PPP HDI rank value AND ITS 2008 $) COMPONENTS South Korea 12 0.877 79.8 11.6 16.8 29,518 16 0.918 IN 2010 Singapore 27 0.846 80.7 8.8 14.4 48,893 –19 0.831 Malaysia 57 0.744 74.7 9.5 12.5 13,927 –3 0.775 China 89 0.663 73.5 7.5 11.4 7,258 –4 0.707 Sri Lanka 91 0.658 74.4 8.2 12 4,886 10 0.738 Thailand 92 0.654 69.3 6.6 13.5 8,001 –11 0.683 Philippines 97 0.638 72.3 8.7 11.5 4,002 12 0.726 Indonesia 108 0.6 71.5 5.7 12.7 3,957 2 0.663 Viet Nam 113 0.572 74.9 5.5 10.4 2,995 7 0.646 India 119 0.519 64.4 4.4 10.3 3,337 –6 0.549 Lao PDR 122 0.497 65.9 4.6 9.2 2,321 3 0.548 Source: United Cambodia 124 0.494 62.2 5.8 9.8 1,868 12 0.566 Nations, 2010. Bangladesh 129 0.469 66.9 4.8 8.1 1,587 12 0.543 VIETNAM COMPETITIVENESS REPORT 31 bOX 2.1: The mining and mineral exploitation industry alone accounts for 55 percent of industrial POLLUTION IN THE waste. Twenty-five percent stems from metal production, 7 percent from paper production DELTAS OF DONG and food industry accounts for 4 percent. In the Nhue river valley (including the Hanoi NAI RIVER, CAU region), 56 percent of total sewage is from households, 24 percent is industrial wastewater and RIVER AND NHUE 4 percent is sewage from trade villages. In the Dong Nai river valley (including HCMC, Dong RIVER Nai, Binh Duong), about 480,000 metric tons of waste water are released daily, with industrial and processing zones accounting for 24.6 percent of that total. Source: World Bank, 2006. Environmental Quality The Sources of Growth Total factor productivity (TFP)4 - an important measure - Industrial pollution has resulted in a serious degradation of of efficient use of capital and labor inputs- has tended to environmental quality decline significantly since 2000 and capital deepening has Over the period 1998-2007, the emission of CO2 from become the main driver of growth. energy consumption increased by 9.6 percent annually (UN GDP growth rate of a country can be decomposed into three Environment Programme). Air pollution is mainly caused sources: growth in capital input, growth in labor, and growth by industries, transportation and other civil industries. in TFP. Over the period 1990-2000, 34% of GDP growth in Water pollution is getting worse, especially in large industrial Vietnam was accounted for by growth in capital input, 22% centers, industrial zones in the deltas of Dong Nai river, by growth in labour input and 44% by growth in total factor Cau river and Nhue river. Pollution causing agents include productivity (TFP). However, during the period 2000- growing industrial production, rapid urbanization and high 2008, the contribution of capital increased significantly to construction density3. 53%, while that of TFP declined sharply to 26% (Table 2.3). In comparison, in most of Vietnam's ASEAN peers such The Elements of Prosperity as Indonesia, Malaysia, Thailand and the Philippines, the Prosperity decomposition is an arithmetic exercise which contribution of TFP to economic growth increased quite decomposes the sources of economic growth which include substantially during the more recent period 2000-2008. mobilization of factors of production and productivity. Since Furthermore, in China, more than 50% of economic growth the different components of GDP per capita are driven by over the entire period 1990-2008, more than 50% of growth policy choices in different areas, the decomposition provides was accounted for by TFP growth. Clearly, Vietnam stands useful insights into which dimensions of competitiveness out in its reliance on capital accumulation and this suggests may need further analysis. that the real return on capital is likely to be low in Vietnam and also calls into question the sustainability of the present growth trajectory. TAbLE 2.3: Period 1990-2000 Period 2000-2008 SOURCES OF Country GDP Sources of Growth GDP Sources of Growth GDP GROWTH, Growth Capital Labor TFP Growth Capital Labor TFP 1990-2008 Contribution in percentage points per annum (ppa) Vietnam 7.3 2.5 1.6 3.2 7.3 3.9 1.4 1.9 China 9.9 3.6 0.7 5.5 9.7 4.1 0.6 5 India 5.3 2.1 1.2 2 7.3 3.1 1.6 2.7 Cambodia 7.3 2.8 2.5 2 9 4.2 3.5 1.3 Indonesia 4.1 2.5 1.1 0.5 5.1 1.4 1.1 2.5 Malaysia 6.9 3.7 2.1 1.1 5.4 1.6 1.1 2.7 Philippines 3 1.3 1.4 0.3 4.7 1 1.9 1.8 Thailand 4.4 2.7 0.3 1.4 4.7 0.8 1.4 2.5 Contribution share Vietnam 100% 34% 22% 44% 100% 53% 19% 26% China 100% 36% 7% 56% 100% 42% 6% 52% India 100% 40% 23% 38% 100% 42% 22% 37% Cambodia 100% 38% 34% 27% 100% 47% 39% 14% Indonesia 100% 61% 27% 12% 100% 27% 22% 49% Source: Data from Malaysia 100% 54% 30% 16% 100% 30% 20% 50% WDI; calculations by ACI. Philippines 100% 43% 47% 10% 100% 21% 40% 38% 32 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.6: 75 VIETNAM'S WORKING-AGE 70 POPULATION Percentage aged 15-64 (%) 65 60- 55 50 Forecast Source: UN 45 1955 1965 1975 1985 1995 2005 2015 2025 1950 1960 1970 1980 1990 2000 2010 2020 2030 Population Database Revision 2008. Labor Mobilization 13th most populous country in the world. Labor mobilization measures the share of population The share of the population below the working age (0 – 14 engaged in generating value in the economy. As an aggregate, years old) has declined from 34.3 percent (1999) to 26.5 it captures the impact of two factors. First, the demographic percent in 2009 (UN Population Database). Meanwhile, profile determines the working age population. Changes the share of the working age population (15 – 64 years old) in the ratio of the working to non-working population can has increased from 60.18 to 67.18 percent over the last have a significant impact on growth rates over time. Second, decade. The senior citizens group (above 64) has increased the employment intensity—labor force participation— slightly from 5.51 percent to 6.30 percent. Vietnam has depends on the effectiveness of labor markets in providing entered the period of a "golden population structure" with job opportunities. a total workforce about double the size of the non-working population. This "golden" structure can be maintained Demographic Trends for about 15 to 30 years, or up to 40 years at a maximum, - A young population with a high share of people in working depending on future birth rates. Vietnam needs to take age is an advantage, but initial signs of population aging advantage of this low dependency ratio and demographic and rising population density are posing challenges bonus to develop a high quality labor force for boosting Vietnam has a large and young population, with 90 percent economic growth. below or within working age. At the end of 2009, its population was estimated at 86.06 million; of which, 29.6 percent live in cities and 70.4 percent in rural parts5. It is the third most populous country in South East Asia and the 100 FIgURE 2.7: 95 LABOR FORCE Labor Par cipa on Rates (%) 90 PARTICIPATION 85 RATES BY AGE 80 15-24 GROUPS, 1980- 75 25-34 2008 70 35-54 65 55-64 60 55 50 1995 1997 2005 2008 1980 1986 1990 2000 Source: International Labour Organization VIETNAM COMPETITIVENESS REPORT 33 FIgURE 2.8: 100 AGE-SPECIFIC 90 LABOR FORCE 80 Par cipan on rates (%) PARTICIPATION 70 RATES IN 2008, 60 VIETNAM AND 50 OTHER ASIAN 40 COUNTRIES 30 20 10 0 15-24 25-34 35-54 55-64 65+ Source: International Vietnam Japan Malaysia Labour Organization China South Korea Hong Hong There are however some initial signals of an ageing As illustrated in Figure 2.7, the labor participation rate population. The ageing rate of Vietnam has increased by 11 has decreased over time, primarily as a result of declining percent (from 24.5 to 35.9 percent) over the past 10 years. participation by the 15-24 age-group. However, although in The current ageing rate is higher than the average rate for 2008 this rate decreased by 2.5 percentage points compared the ASEAN region (30 percent). An aging population will to that in 1998, it still remained high at 77.4 percent, equal pose serious challenges for the social security system given to the rate for many high-income countries such as Japan, the country's current low level of development. Denmark, etc. Vietnam is among the most densely populated countries The lower participation rate of working-age population in the world—with the average population density of 254 could be explained by the fact that younger people stay longer people/km2 in 2007. This density is 1.86 times higher than in school. Thanks to improvements in living standards. The that of China (136 people/km2), 10 times higher than that participation rate for 15-24 year old age group has declined of developed countries and 6 to 7 times higher than the continuously since 1980. world's average density. High population density affects the quality of the living environment, especially in urban areas. In 2008, the structure of labor force participation by age- This implies that land-intensive industries are no longer an group for Vietnam resembled that of China, where 92.8 advantage for Vietnam and Vietnam needs to use its land percent of the 25-34 year old age-group participated in the resources most efficiently. labour force. For the 15-24 age-group, the participation rate of high-income countries such as South Korea was lower Labor Force Participation than that of Vietnam; however, the rates for 55-64 and 65 - The labor participation rate is high but declining, as and above age group were higher. The evidence from these younger people can afford to stay longer in school and other countries implies that Vietnam needs to take full advantage of its golden population structure before the Vietnam's labor force comprises 43.8 million people (April greying of the population emerges over the next two decades. 2009), equivalent to 51.1 percent of the total population. 34 ASIA COMPETITIVENESS INSTITUTE TAbLE 2.4: Country Employment growth (%) COMPARISON OF Vietnam 1991 – 2007 2.4 EMPLOYMENT Korea 1969-1988 3.2 GROWTH RATES Malaysia 1977-1996 3.5 Thailand 1976-1995 3.0 Source: Fulbright Taiwan 1963-1982 3.4 Economics Teaching Indonesia 1977-1996 2.9 Program, The Structural Roots of Macroeconomic Philippines 1961- 1980 3.3 Instability, September 2008. Employment Growth jobs. In contrast, the private domestic ("non-state") sector - Employment growth lags behind GDP growth; a high employs 87 percent of all workers, but its share in total share of self-employed and informal employment suggests investment is only 28 percent. Redressing that imbalance that unemployment and underemployment figures may be needs to be part of any strategy for accelerating job creation. underestimated The serious challenge for facing Vietnam's economy is to The growth in labor demand is relatively low compared to create sufficient jobs in rapidly growing sectors that can the Vietnam's high income and export growth. Compared absorb its large young labor force, without being trapped in to other countries in the period of their own rapid growth, low-productivity, labor-intensive industries. Vietnam's performance on job creation is not as impressive. Vietnam's high labor participation rate (43.9% in 1991) as Salaried employees in the formal sector account for only 23 compared to peer countries (e.g. 29.4% for Korea in 1960 percent of the total number of workers (ILO's Employment and 34.2% for Malaysia in 1977) may provide a partial Trends Report 2009). The remaining 77 percent are self- explanation. However, Thailand started the take-off period employed or unpaid family workers. Small, and mostly in 1976 also with relatively high labor participation rate informal, family farms and enterprises comprise an unusually (42.6%) but still recorded the average job growth at 3.0% large proportion of employment in Vietnam. Therefore, the over two decades. official unemployment statistics may underestimate the level of underemployment or unemployment of the self-employed The sectoral distribution of investment explains much of workers (including people working in agriculture) and those the lackluster performance of the economy in creating jobs. who work outside of formal economy. Some 37 percent of total investment flows into the capital- intensive state sector, which accounts for only 10 percent of 100% FIgURE 2.9: 90% EMPLOYMENT STRUCTURE BY 80% Employment Share (%) OWNERSHIP, 70% 2000-2009 60% 90.1 89.4 Foreign invested sector 87.8 87.8 87.4 87.2 87.0 50% 40% Non-state sector 30% State sector 20% 10% 9.3 9.5 9.5 9.1 9.0 9.1 9.6 0% Source: General Statistics 2000 2002 2005 2006 2007 2008 2009 Office of Vietnam VIETNAM COMPETITIVENESS REPORT 35 FIgURE 2.10: $45,000 PRODUCTIVITY $40,000 GDP per employment in 1990 US$ GROWTH – $35,000 VIETNAM VS. Korea $30,000 OTHER ASIAN Malaysia COUNTRIES, $25,000 Thailand 1975-2009 $20,000 Indonesia $15,000 China $10,000 Vietnam $5,000 Source: The Conference $0 Board,Total Economy 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Database 2010. Labor Productivity generated by a shift towards capital-intensive production or Labor productivity growth is ultimately the key for sustained by improvements in skills and technological progress. prosperity gains as it is intimately linked to wages and the standard of living. Labor productivity—defined here as In absolute terms, Vietnam remains a low productivity GDP per worker has three dimensions: country compared to the rest of Southeast Asia. In 2009, Vietnam's productivity was equivalent to only 14.9 percent • First, higher labor productivity can be the result of better of that of Singapore, 9 percent of that of the U.S., 40 percent skilled employees, an increase in complementary factors of that of Thailand and 52.6 percent of that of China. of production such as capital, or better use of technology. The comparisons look even worse for the manufacturing • Second, higher average labor productivity can be the sector, which is expected to be the key driver of Vietnam's result of either sectoral change — a growing share of productivity growth. Taking the level of manufacturing labor in sectors with higher productivity levels, or sector productivity of the US in 20006 as 100, the relative within-sector growth — higher labor productivity productivity of the manufacturing sector in the same year within sectors as a result of innovation. was only 2.4 for Vietnam; whereas it was 4.3 for India, 5.2 for Indonesia, 6.9 for China, 7 for Thailand, 15.1 for Malaysia, • Third, higher average labor productivity can be the 55.3 for Singapore, and 63.6 for South Korea (Figure 2.11). result of changes in the composition of companies in the economy (foreign vs. local, private vs. government- The low growth rate of productivity within sectors raises a owned) that have different levels of productivity or of serious concern. The experience of NICs in Asia has shown productivity growth. that sectoral productivity growth should be the key driver of overall productivity growth. In South Korea for example, Overall Labor Productivity sectoral productivity growth accounted for 83 percent of - Despite relatively high growth rate in overall labor overall productivity growth during the high growth period productivity, the absolute level remains much lower 1963-1973 while sectoral structural shift accounted for compared to most countries in the region only 17 percent. The figures were 69 percent and 31 percent Labor productivity has continuously improved since 1986, during 1973-1985 and 89 percent and 11 percent during with a relatively high rate of improvement compared to 1985-1996, respectively (Van Art and Timmer, 2003). peers. Vietnam's average labor productivity growth during Similarly, 85 percent of Singapore's productivity growth the period 1986 to 2009 was 4.67 percent; higher than that during 1970-2005 was from sectoral productivity growth of other ASEAN countries (3.73 percent) but significantly (ACI, 2009). lower than that of China (7.26 percent). However, the subsequent sections examine whether this growth was 36 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.11: 70 63.6 MANUFACTURING 60 Produc vity Index (US in 2000 = 100) 55.3 SECTOR 50 PRODUCTIVITY IN 2000 – VIETNAM 40 VS. SELECTED 30 ASIAN COUNTRIES 20 15.1 10 5.2 6.9 7.0 2.4 4.3 0 Sources: UNIDO; China Vietnam India Indonesia China Thailand Malaysia Singapore South Korea Statistical Yearbook. The Impact of Sectoral Shifts on Labor Productivity of the overall growth. This was largely the result of labor - The growth in labor productivity is largely due to the shift moving from low productivity sectors to higher ones (static from agriculture to manufacturing and services; however, structural shift). Sectors which managed to increase both within-sector productivity growth remains feeble their productivity and their share in the total workforce (dynamic structural shift) were too few in number and had During 1996-2008, labor productivity increased at an little impact to overall productivity growth. In other words, average annual rate of 4.8 percent, from a low base. Much the structural shift over the last two decades has been mostly of this is accounted for by shifts in the sectoral structure, horizontal, with agriculture shrinking while industries and even while sectoral productivity growth has been lower. services expanding in terms of both sectoral contribution to Compared with the period 1991-1999, the contribution of GDP and sectoral share in the total workforce. structural shift to overall productivity growth in 2000-2008 was even higher. Figure 2.12 below shows that structural shift contributed more than two thirds of the overall productivity growth over the 2000 - 2008 period, while sectoral productivity growth only accounted for one third FIgURE 2.12: 12 DECOMPOSITION (0.64) 10 2.87 OF LABOR PRODUCTIVITY, Million VND per worker 8 1.40 1991-1999 AND 2000-2008 6 1.48 (0.13) 1.14 10.91 4 7.12 7.28 Note: Productivity is measured by GDP per 4.63 2 worker at 1994 prices. Source: General Statistics 0 Office of Vietnam; 1991 Within Between Interac on 1999 2000 Within Between Interac on 2008 calculations by ACI and Produc vity Effect Effect Produc vity Produc vity Effect Effect Produc vity CIEM. VIETNAM COMPETITIVENESS REPORT 37 FIgURE 2.13: GROWTH RATE 8 OF OVERALL 4.8 2001-2005 2006-2009 4.5 AND SECTORAL 4.2 Growth rate (%) 4 2.8 LABOR 2.5 PRODUCTIVITY 0.1 1.0 0 -2.4 -4 -4.5 -6.0 -8 Source: General Statistics Total Agriculture and Fishery Mining Manufacturing Office of Vietnam. forestry Figure 2.13 shows that the agricultural and forestry sector 20 times higher than that of the non-state sector and 10 registers the highest rate of growth of labour productivity, times higher than that of the overall economy. But the gap yet the focus of both government and foreign investors is on has been narrowing, primarily because FDI has basically the manufacturing sector where labour productivity growth shifted toward more labor-intensive activities in the post- has been much lower in comparison. In recent years, the integration stage. Many FDI enterprises in processing processing industry has created many new jobs, and has industry use outdated technology, and also fail to comply contributed significantly to the shift in labor structure and with the current legislation on environmental standards, sectoral structure. These achievements are due primarily to causing much pollution. This sector's productivity has the expansion of production volume and the absorption of witnessed a sharp decline during 2000 – 2007. By 2008, low-skilled workers, not from a shift to higher value-added the sector's productivity was only 7 times higher than that products. of the non-state sector and was equivalent to 90 percent of the state sector, yet still 4 times higher than that of the Labor Productivity by Ownership overall economy. Labor productivity in the non-state sector - Labor productivity varies among economic segments: it is lags, because it comprises a large proportion of informal much higher in the FDI sector, but declining sharply as and smallholder businesses with low capital-labor ratios and FDI shifts toward more labor-intensive activities; labor limited access to technology. productivity in the state sector is high because of capital- intensive production processes; it lags in the private sector In 2000, the average labor productivity in the FDI sector was more than double the productivity of the state sector, FIgURE 2.14: 90 LABOR 80 PRODUCTIVITY 70 BY OWNERSHIP Million VND per worker Overall (constant 1994 prices) 60 Economy 50 FDI 40 Non-state 30 State 20 Note: Data for 2009 are 10 preliminary. 0 Source: General Statistics 2009 2001 2005 2007 2008 2000 2002 2003 2004 2006 Office of Vietnam. 38 ASIA COMPETITIVENESS INSTITUTE Assessment Investment is a typical example: if it occurs naturally as Continuous growth has raised Vietnam's income per capita part of the market process, it is a sign of and contributor to over USD 1,000 since 2008 and improved other measures to competitiveness. But if it is the result of government of living standards. However, despite these achievements, the intervention, for example because of subsidies paid growth process has encountered three serious problems that to investors, investment can undermine prosperity. A threaten national competitiveness. First, labor productivity competitiveness assessment therefore needs to view these has progressed continuously for the past 20 years. However, intermediate indicators as part of an overall diagnostic, not opting for capital-intensive production processes has raised as an ultimate objective. This perspective also increases the labor productivity, but at the expense of capital productivity, value of looking at other indicators, for example the nature with limited impact on growth and Vietnam remains an of investors or the productivity of their investments, to economy with low labor productivity. Second, the income get a clearer sense on whether the intermediate indicator gap between the richest and the poorest group has widened. is a good indicator of (and contributor to) underlying Third, environmental quality is degrading, especially in key competitiveness. economic regions that are also the leading engine of national growth. Vietnam is also undergoing rapid urbanization, Investment imposing serious pressures on urban infrastructure and on Investments, whether from domestic or foreign sources, the creation of non-agriculture jobs. are a sign that there is confidence in the future economic attractiveness of a location. Investments have a direct Vietnam' sources of growth resemble those of other impact in terms of the capital deepening they represent. Southeast Asian countries; physical capital still plays a major Quite often, new machinery and equipment lead to role, while the contribution of technological advances is low parallel improvements in organization and activities. and unstable. Vietnam has high labor mobilization rate And investment tends to increase the returns to skills, and will continue to benefit from its golden population creating incentives for upgrading in other dimensions structure in the following decades. However, the fact that of competitiveness. Foreign investments have additional labor quality is low and has not seen much improvement, benefits in contributing additional capital, technology, and especially in the case of young workers, has been a bottleneck linkages to foreign markets. for labor productivity growth. Overall Investment Performance: Moreover, the low contribution of sectoral productivity growth to overall productivity growth is a serious concern. Investment Rate Growth was mainly driven by structural shifts from - The investment rate is high and growing agriculture to manufacturing and services. The process Economic growth is accompanied by acceleration in is still ongoing, but will ultimately be limited by the low investment. For Vietnam, the ratio of Investment to GDP productivity of the manufacturing sector. Experiences increased from 18.1 percent in 1990 up to 46.5 percent from developed countries show that in the long run, it is in 2007. Inflation-restraint measures by the government productivity growth within sectors rather than structural brought the ratio back down to 41.3 percent in 2008. shifts that drives overall productivity growth. Thus, future policies need to target sectoral productivity growth in order This ratio was much higher than that for some NICs over the to increase national competitiveness. period 1960-1980, or for China and some fast-developing countries during the last few decades. For instance, from Intermediate Indicators of Economic Performance 1961-1980, the ratio of investment to GDP of South Korea Indicators like investment, trade, and innovation represent reached an average of 23.3 percent, and Taiwan 26.2 percent, 'leading indicators' of future prosperity. Investment while their GDP grew by 7.9 percent and 9.7 percent, increases the capital stock and is often a sign of other respectively. During 1981-1995 (before the Asian financial improvements in the productive capacity of an economy. crisis), Thailand's GDP had an annual average increase of 8.1 Competition through trade improves efficiency, exposes percent, with 33.3 percent of investment to GDP. In 2001- local companies to external rivalry and new ideas, and thus 2006, Vietnam registered an annual investment ratio of 37.2 enhances productivity. Innovation leads to new products, percent, close to the 38.8 percent of China; however, annual new services, or new ways of production and marketing. GDP growth rate of China was 9.7 percent compared to 7.6 percent for Vietnam (Reidel, 2009). From the perspective of a competitiveness analysis, these indicators play a dual role. They reflect underlying competitiveness, but they also contribute to competitiveness. If there is more investment, more trade, or more innovation, the underlying competitiveness of a location tends to grow over time. Intermediate indicators are too often misunderstood as policy objectives rather than as diagnostic instruments. VIETNAM COMPETITIVENESS REPORT 39 FIgURE 2.15: 50 Gross Fixed Capital forma on (% of GDP) INVESTMENT 45 PATTERNS, 40 1990-2008 35 30 China 25 Vietnam 20 South Korea 15 Indonesia 10 Malaysia 5 0 Source: World 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Development Indicators Investment Efficiency Investment of the State Sector - Investment efficiency is low and declining - The state sector accounts for a high share of investment, but efficiency is low The incremental-capital output ratio (ICOR) which relates (net) investment in one year to subsequent gains in GDP Despite the fact that the private and FDI sector's investments may not be a solid analytical tool but nevertheless gives an have expanded at a very high rate, 18 percent and 44 percent interesting perspective: Vietnam's investment rate is high respectively, in the last two decades, the state sector still relative to growth. And the rate appears to be on the increase. accounted for the lion's share of total investment. The Vietnam's ICOR averaged 4.8 during 2000-2008 and 5.4 for efficiency of these investments therefore plays a key role in the period 2006-2008. At that level, it is much higher than determining the growth rate and macroeconomic stability that of NICs during the transition period from 1961-1980 in Vietnam. such as Taiwan (2.7), South Korea (3) or some countries in the region like Thailand (4.1 from 1981-1995) and China (4 from 2001-2006). Incremental Capital-Output Ratio, Vietnam and selected Asian countries. FIgURE 2.16: 0.0 INCREMENTAL High Investment Efficiency CAPITAL- 1.0 OUTPUT RATIO – VIETNAM AND 2.0 SELECTED ASIAN Cambodia Ra o 3.0 ECONOMIES China India 4.0 Vietnam 5.0 Source: World Low Investment Efficiency Development Indicators and Economist 6.0 Intelligence Unit 2010; 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 calculations by ACI. 40 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.17: 100% 16 14 15 16 COMPOSITION 90% 26 21 17 18 18 17 24 26 Composi on of Total Investment (%) 30 28 31 OF TOTAL 80% INVESTMENT 70% 24 23 23 25 24 31 38 38 BY OWNERSHIP, 60% 25 23 38 1995-2009 28 39 34 FDI 50% 35 Non-state 40% State 30% 56 59 59 60 57 49 49 53 48 42 48 46 20% 37 41 34 10% 0% Source: General Statistics 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Office of Vietnam. State investment comes from four sources—state budget, Foreign Direct Investment SOEs, state credit, and "the other."7 The first two sources Overall FDI Performance account for about three quarters of total public investment. - Robust FDI inflows result in a high share of FDI to GDP State investment is declining8 since 1996 as a result of the continuing equitization process. Even so, it still accounts for In Vietnam, FDI represents an important source of capital. high percentage in total social investment, at an average of According to data published by UNCTAD, the share of FDI 49.3 percent from 1995-2008. in total gross fixed capital formation in Vietnam increased from 12 percent in 2006 to 25.5 percent in 2007 and 24.1 Investments in the state sector have been less efficient percent in 2008. The FDI stock relative to GDP increased than in both the non-state and FDI sectors. For instance, from 25.5 percent in 1990 to 66.1 percent in 2000. By 2008, according to some estimates, the ICOR of the state sector is the total registered FDI amounted to USD 164 billion with 1.5 times higher than that of the whole economy, regardless almost 11,000 projects, but the FDI stock had dropped to of the ICOR calculation methods, whether by using gross 53.8 percent of GDP. capital formation or accumulative assets (Bùi Trinh 2010). Given its importance in terms of total investment, the low efficiency of state investment, especially of SOEs, drags down overall performance and undermines competitiveness gains in Vietnam. 250,000 FIgURE 2.18: GROSS FIXED FDI Non-state State VND Billion at constant 1994 price CAPITAL FORMATION 200,000 BY OWNERSHIP, 1986-2009 150,000 100,000 50,000 0 1987 1988 1989 1991 1995 1997 1998 1999 2001 2005 2007 2008 2009 1986 1990 1992 1993 1994 1996 2000 2002 2003 2004 2006 Source: General Statistics Office of Vietnam. VIETNAM COMPETITIVENESS REPORT 41 FIgURE 2.19: 10% OPENNESS 8% Change in net flows of inward FDI TO FOREIGN Vietnam as % of GDP (1989-2009) 6% INVESTMENT 4% India 2% Indonesia China 0% Thailand Singapore Philippines -2% -4% Malaysia -6% Source: Economist 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Intelligence Unit 2010; calculations by ACI. Net flows of inward FDI as % of GDP, 2009 Domestic savings have not been sufficient to finance announced, was highest during 1997 – 2004 (73.5 percent) investment. The economy therefore depends increasingly but has dropped dramatically to 40.1 percent during 2006 – on foreign resources and FDI has increasingly become an 2008. Part of the growing gap might be explained by the FDI important source to compensate the saving and investment attraction race at the regional level that provides an incentive gap that has widened in the past three years. to "over-report" FDI commitments. But part of it is likely to be driven by increasing problems in implementing FDI FDI Implementation Rate projects in line with initial plans, or speculative behaviors of - A widening gap between announced and realized FDI some investors who register projects to "reserve a seat" and While the announced foreign direct investment projects resell their licenses for profit. continue to be strong, there is an increasing gap between announcements of foreign investment projects and actual investments made. The disbursement rate, actual vs. FIgURE 2.20: 50 THE SAVINGS- 40 INVESTMENT GAP, 2002-2009 30 Percent of GDP (%) Total savings 20 Total investments 10 0 Savings-Investment balance -10 Source: General Statistics -20 2005 2007 2008 2009 Office of Vietnam. 2002 2003 2004 2006 42 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.21: $70,000 Registered Capital Implementa on Capital ANNOUNCED VS. $60,000 REALIzED FDI, 2000-2008 $50,000 Milliion USD $40,000 $30,000 $20,000 $10,000 Source: General Statistics $0 Office of Vietnam. 2001 2005 2007 2008 2000 2002 2003 2004 2006 Targets of FDI accounted for 21 percent of the total projects and the - FDI is increasingly shifting to real estate and labor- amount of invested capital was equivalent to 33 percent of intensive industries total registered capital (GSO 2009). In the early years, FDI inflows were concentrated in import Although the manufacturing sector still accounts for the substitution and non-tradable industries (such as oil, largest share in total registered capital, actual disbursement construction, transportation, or communications) to serve level in this sector have been especially low, representing the temporarily protected domestic market (STAR 2003). only 30 percent of the total implemented capital during However, over the last five years, FDI inflows have shifted 1988-2007. This may reflect more difficulties and lower to more export-oriented and labor-intensive industries and returns in investing in the manufacturing sector compared to the real estate sector. Figure 2.22 shows that the number to the services and real estate sectors. It therefore requires of workers in the FDI sector grew faster than the number reconsideration in policy and provision of incentives of firms and fixed capital, reflecting a rapid shift towards to encourage more FDI into the sectors that can boost labor-intensive industries. This trend is a response to the up productivity and create more spillover values for the removal of industrial protection measures and also to the economy. prevailing low-wage labor advantages. In 2009, the number of FDI projects investing in real estate and leasing business FIgURE 2.22: 450 50% PERFORMANCE OF 400 Number of Firms Workers 45% THE FOREIGN Fixed Capital Profits 40% Profits (Returns on fixed capital) INVESTED SECTOR 350 35% Growth (2000 = 100) 30% 300 25% 250 20% 200 15% 10% 150 5% 100 0% Source: General Statistics 2001 2005 2007 2000 2002 2003 2004 2006 Office of Vietnam. VIETNAM COMPETITIVENESS REPORT 43 FIgURE 2.23: 35 Registered Capital Implemented Capital % Implemented 90 CUMULATIVE FDI 30 80 DISBURSEMENT 70 25 RATIOS BY SECTOR, 60 % Implemented 1988-2007 20 50 Billion USD 15 40 30 10 20 5 10 0 0 Hotel - Tourism Transporta on Construc on Finance Other services Light industry Agriculture & Fishery Real estate Heavy industry Food processing Source: FIA's Report on Vietnam's 20-year FDI Development. Policy decisions by the government of Vietnam in relation Regional FDI concentration to the sectoral composition of FDI may also have an impact. - FDI is highly concentrated in a few geographic centers, but There has been a call for a re-thinking of priorities for FDI. is moving slowly to the next layer of provinces Investments in real estate projects have been criticized for various reasons, ranging from loss of land for agriculture to In 2009, the top provinces attracting FDI in Vietnam are land price bubbles and increasing asset inequality between Baria-Vung Tau (USD 6.73 billion out of the total USD urban and rural areas. There is widespread discussion about 21.48 billion), Quang Nam (USD 4.174 billion) and Binh focusing on projects with high domestic value-added or a Duong (USD 2.502 billion). Ho Chi Minh City and Hanoi high technological component. For instance, Ho Chi Minh were ranked 7th and 8th, respectively. There were 537 City is now reluctant to grant FDI licenses to low-skilled projects licensed in the three major economic centers of the labor-intensive projects. At the same time, the relocation of country, accounting for 64 percent of the total new licenses FDI manufacturing projects from China to Vietnam would granted countrywide. Cumulatively by the end of 2008, Ho continue. For instance, at present many South Korean Chi Minh City, Ba Ria Vung Tau and Hanoi were the top businesses are seeking more competitive locations to replace three destinations for FDI. some of their Chinese operations, and ASEAN countries are favoured because of their location and culture. Thus, Vietnam could be among the countries to benefit the most from this trend. FIgURE 2.24: $30,000 TOP DESTINATIONS $25,000 FOR FDI (CUMULATIVE) AS $20,000 OF DECEMBER 31, Million USD 2008 $15,000 $10,000 Note: FDI data are $5,000 cumulative and cover the periods when $0 Vietnam started to Ba Ria - Vung Tau Phu Yen Quang Ngai Hanoi Dong Nai Ninh Thuan Ha Tinh Thanh Hoa Long An Da Nang Hai Duong Vinh Phuc Bac Ninh Thua Thien - Hue Oil and Gas Kien Giang Binh Duong Hochiminh city Hai Phong attract FDI until December 31, 2008. Source: FIA. 44 ASIA COMPETITIVENESS INSTITUTE bOX 2.2: As of December 31, 2008, HCM city has three export processing zones and twelve industrial TECHNOLOGY LEVEL zones with a total of 1,143 active projects, whose registered capital stood at USD 4.36 billion OF FIES IN HCM CITY and with approximately 250,000 employees. However, there are only three qualified high- tech enterprises: Nidec Tosok, Mtex, and Renesas. In 2005, exports of high-tech products from these three enterprises alone made up almost 22 percent of total export turnover of all operating industrial zones (IZs), amounting to USD 300 million. Overall, the technological content of industrial products remains low. According to the recent 2008 survey conducted by HCM city's Department of Science and Technology, out of a total of 429 enterprises operating in industrial and export processing zones (EPZs), only one percent of all enterprises attained a high-technology level, 4 percent nearly high-technology, 8 percent slightly above average, 36 percent average and up to 51 percent, a below-average technology level. The technology level is measured in terms of sophistication in the following factors: machinery and equipment; information technology; human resources; and business operation methodologies. Tan Thuan EPZ is fully utilized, mostly by FIEs. However, a sizable number of its enterprises still have low technology levels. Source: CIEM Impact of FDI out only the simplest activities in their production line in - FDI has limited spillover effects and few linkages with the Vietnam, while design and other more sophisticated details local economy are decided by the parent company overseas. The parent company also supplies inputs and handles distribution and The increasing volume of FDI has been characterized by a sales of final products. This is a typical model of a simple relatively low technological content. Policies to attract high- processing industry competing primarily on price, which tech investments from FDI have been strengthened since requires cheap labor, high consumption of electric power, 2005 with the adoption of the Investment Law and the and good transportation and logistical infrastructure. With Law on Technology Transfer in 2006. The government also this model, it is very difficult to generate positive technology paid more attention to attract FDI with high technological spillovers from the FDI sector. Recent policy measures and content via the establishment of high-tech industrial parks efforts to create a more enabling and less costly environment such as Hoa Lac High-Tech Zone9. However, there are only for enterprises, particularly for FDI, are important but 28 licensed investment projects in these parks at present, not necessarily sufficient to generate FDI spillovers and some of which are foreign invested, with registered capital contribute to productivity upgrading. totaling less than USD 1 billion and still in the "warm- up" phase. Low labor skills, low technological capability What Attracts FDI? of domestic enterprises and weak forward and backward According to a recent JETRO's annual survey of Japanese- linkages between foreign-invested enterprises (FIEs) and affiliated firms operating in Asia, political stability (61.1 domestic enterprises have hindered effective technology percent of respondents), low wage labor (38.9 percent) transfer (Tue Anh N.T. 2009). and market size (38 percent) are Vietnam's strengths as an investment location. According to the 2009 Provincial Competitiveness Index (PCI) Survey, among nearly 10,000 local private enterprises In summary, FDI has increased in terms of volume, but the lack surveyed, only 6.9 percent reported FIEs as their main of incentives to increase quality, efficiency and competitiveness clients. Of the remainder, 15 percent cited SOEs and 58 of industries in particular and the economy in general, has percent mentioned other local private companies as their limited its contribution to upgrading competitiveness. Better main clients. incentives are needed to encourage high technology-intensive activities, accelerated technology transfer, introduction A recent CIEM survey of 100 percent foreign-invested of technologies with less environmental pollution and a companies in the garment and electronics industries continuous skills transfer in Hung Yen, Hai Duong, Vung Tau, Binh Duong and Dong Nai provinces revealed that the companies carry VIETNAM COMPETITIVENESS REPORT 45 FIgURE 2.25: 0.5 Change in Exports as % of GDP (1989-2009) LEVEL AND 0.4 Vietnam GROWTH OF Thailand EXPORTS 0.3 Malaysia 0.2 Singapore India China 0.1 Philippines 0 Myanmar Indonesia -0.1 0% 50% 100% 150% 200% 250% Source: Economist Intelligence Unit 2010. Total Exports as % of GDP, 2009 Trade10 2001. Exports of goods and services soared more than four Trade contributes to prosperity in many ways and it enables times between 2000 – 2008, from USD 17.2 billion to USD specialization where an economy has comparative or 69.8 billion in 2008, before contracting to USD 62.8 billion competitive advantages. As a two-way street, trade exposes in 2009 in the aftermath of the global financial crisis. With local producers to competition and it also offers access to this level, Vietnam's ratio of exports to GDP in 2009 was knowledge in global markets. almost 68 percent, only behind Singapore and Malaysia, and at par with Thailand and higher than most of other countries Exports in the region. Export Patterns Table 2.5 below shows additional performance indicators - The level of exports to GDP is high, but Vietnam accounts of trade. Vietnam's export growth lags only behind that of for a relatively small share of the global market China, but its global market share is relatively small. This is in part a reflection of the size of the economy. Available trade data vividly demonstrate the rapid integration of Vietnam into the world economy, especially after the conclusion of the Bilateral Trade Agreement with the US in TAbLE 2.5: Number of big Growth of TRADE PERFORMANCE Country Global market Growth of export volume exports with INDEX (TPI) IN 2006 share (%) export value (%) turnover of USD (%) 100,000 China 8.1 31 21 4,644 Source: Trade Performance Malaysia 1.3 14 2 3,397 HS: Exports and Imports of all industries (2006), Thailand 1.1 18 8 3,281 Trade Competitiveness Map, Indonesia 0.8 15 2 2,941 International Trade Centre (ITC). Vietnam 0.4 26 9 2,107 46 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.26: Other products Mineral Fuel, Oil COMPOSITION OF Footwear VIETNAM'S EXPORTS Woven Apparel BY MAjOR PRODUCT Electrical Machinery, Etc. Knit Apparel CATEGORY Furniture and Bedding 2003 AND 2008 Machinery; Fish and Seafood Reactors, Boilers Spices, Coffee, Tea Cereals Edible Fruits and Nuts Rubber Note: Export products are Leather Art; Saddlery, Etc. 2008 2003 classified according to the Prepared Meat, Fish Harmonized System (HS). Wood Source: Global Trade Atlas. 0 2 4 6 8 10 12 14 Billion USD Composition of Exports apparel (16.7 percent), fish and seafood (16.4 percent), - Strong specialization in labor-intensive low-tech and rubber (18 percent), leather art & saddlery (13.2 percent), agribusiness products and prepared meat & fish (14.1 percent). The fast-growing product groups include electrical machinery (29 percent), Besides crude oil which accounts for a share of roughly one- furniture and bedding (30.7 percent), machinery, reactors fifth of all exports, key export products remain largely labor- and boilers (47.6 percent) and cereals (46.5 percent). As intensive or agricultural activities, such as footwear, apparel a group, the top 15 product categories increased by 22.9 (both woven and knit), and electrical machinery. percent per year, another indicator of Vietnam's growing For the 15 top product categories shown in Figure 2.26, the export diversification. Exports in all other product categories relative increase between 2003 and 2009 varies considerably. (not shown in Figure 2.26) increased by 31.7 percent per The slower-growing product groups include footwear year during the period 2003 to 2008. (average annual rate of increase of 13.8 percent), woven TAbLE 2.6: Value of manufactured World market share Annual growth rate MANUFACTURED exports (billion USD) Country EXPORTS, 2000- 2005- 2000- 2000-2008 2000 2005 2008 2000 2005 2008 2005 2008 2008 Cambodia 1.1 3 4.6 0.02% 0.03% 0.03% 22.2% 15.4% 19.6% China 228.4 722.6 1,370.1 3.79% 7.44% 9.51% 25.9% 23.8% 25.1% Hong Kong 22.1 16.5 10.7 0.37% 0.17% 0.07% -5.7% -13.6% -8.7% Indonesia 42.9 55 82.4 0.71% 0.57% 0.57% 5.1% 14.4% 8.5% South Korea 166.5 277.7 409.4 2.76% 2.86% 2.84% 10.8% 13.8% 11.9% Malaysia 87.5 120.4 140.1 1.45% 1.24% 0.97% 6.6% 5.2% 6.1% Note: Mirror data is Philippines 36.6 39.4 45.2 0.61% 0.41% 0.31% 1.5% 4.6% 2.7% used for Vietnam and Cambodia in 2008. Singapore 129.6 215.4 303.7 2.15% 2.22% 2.11% 10.7% 12.1% 11.2% Taiwan 144.5 183.1 223.9 2.39% 1.89% 1.55% 4.9% 6.9% 5.6% Source: UN Comtrade. Thailand 58.7 95.9 149.1 0.97% 0.99% 1.04% 10.3% 15.9% 12.4% Vietnam 6.8 17.5 41.2 0.11% 0.18% 0.29% 21% 33% 25.4% VIETNAM COMPETITIVENESS REPORT 47 FIgURE 2.27: MARKET SHARES IN WORLD'S 20 MOST DYNAMIC MANUFACTURED EXPORTS, 2000 AND 2008 Note: Most dynamic manufactured exports are products of which total global trade values are above USD 20 billion between 2000 and 2008. Source: UN Comtrade. Vietnam may have specialized in industrial sectors facing - Low level of value added in manufactured exports sluggish demand growth and saturated markets. For instance, between 2000 and 2008 global trade of woven Compared to other countries in the region, Vietnam's clothing for men and women grew at 4.3 percent and 7.1 industrial structure is technologically unsophisticated— percent respectively. These figures were well below the world the share of medium- and high-tech sectors in total trade average of 11.5 percent for the period. manufacturing value added remains just above 20 percent, and it has been unchanged over the last few years. Figure 2.28 sums up the evolution of Vietnam's export Labor-intensive low-tech industries, mainly the fashion structure towards more sophisticated products. In general, cluster, account for more than 70 percent of Vietnam's Vietnam is moving in the right direction. However, the manufacturing value added. real challenge for Vietnam entails improvement in the technological sophistication of its industry. FIgURE 2.28: 90% EVOLUTION OF EXPORT 80% Towards a sophis cated Malaysia 00 Share of medium- and high-tech manufactured trade export structure STRUCTURE TOWARD 70% Malaysia 05 MANUFACTURED AND in manufactured total trade, % Thailand 05 China 08 60% Thailand 08 Malaysia 08 China 05 TECHNOLOGY-INTENSIVE 50% Thailand 00 EXPORTS, 2000-2008 China 00 40% Indonesia 05 Indonesia 00 30% Indonesia 08 Vietnam 00 Vietnam 05 Vietnam 08 20% 10% Cambodia 08 Cambodia 05 Cambodia 00 0% 40% 50% 60% 70% 80% 90% 100% Source: UN Comtrade . Share of manufactured trade in total trade, % 48 ASIA COMPETITIVENESS INSTITUTE TAbLE 2.7: 2000 2008 EXPORT Country High Medium Low Resource High Medium Low Resource TECHNOLOGY tech tech tech based tech tech tech based INTENSITY, Cambodia 0.1% 1.2% 93% 5.7% 0.1% 1.8% 96.7% 1.4% 2000 AND 2008 China 21.2% 24.3% 45.4% 9.1% 29.9% 28.3% 33.3% 8.5% Hong Kong 25.8% 11.3% 58.5% 4.4% 20.5% 17.9% 47.1% 14.5% Indonesia 14.9% 19.6% 31.9% 33.6% 6.4% 23.3% 22.7% 47.6% South Korea 35.1% 35.3% 17.9% 11.7% 28.4% 44.3% 11.6% 15.7% Malaysia 55.2% 21.4% 9.8% 13.7% 34.3% 24% 13% 28.6% Philippines 69% 12.4% 11.9% 6.6% 62.1% 15.5% 8.1% 14.4% Singapore 59.4% 20.9% 6.9% 12.7% 44.8% 22% 6.7% 26.6% Taiwan 43.2% 28.2% 24.3% 4.3% 35.8% 32.5% 18.5% 13.2% Thailand 32.4% 27.2% 21.9% 18.5% 22.7% 37.7% 16.1% 23.5% Source: UN Comtrade . Vietnam 11.1% 10.3% 64.7% 13.8% 10.1% 14.5% 67.1% 8.2% Export Diversification Export Trading Partners - Market diversification is high, while the relatively low - Focus on advanced markets in North America, Europe and product diversification is improving Asia Vietnam's manufactured trade is far from concentrated. The US remains Vietnam's most important export market, Vietnam ranks second in the region in market diversification as shown in Figure 2.29. It is followed by Japan, Australia, just shy of China, and ahead of South Korea, Indonesia and China and Germany. The top five export markets account Thailand (see Table 2.9). Vietnam's market diversification for the majority of all exports from Vietnam, albeit their protects it from the stronger presence of key competitors in combined share has declined from 57.2 percent in 2003 to large markets. In terms of manufactured exports, the top five 55.4 percent in 2008. For the 17 major trading partners, the export categories accounted for over 50 percent in 2000, but average annual growth rate of total exports was 23.5 percent. dropped to slightly over 40 percent in 2008 (Figure 2.30) — The slower-growing countries in that group included the EU evidence of increasing diversification. countries and Singapore. The overall pattern shows a growing concentration of exports in the region and in Australia with 26.3 percent average annual growth of exports in the latter. FIgURE 2.29: United States Japan VIETNAM'S EXPORTS Australia BY MAjOR TRADING China Germany PARTNER, 2003 AND Singapore 2008 Malaysia South Korea United Kingdom Philippines Thailand Belgium Netherlands Taiwan Italy 2008 2003 France Spain Source: Global Trade Atlas 0 2 4 6 8 10 12 14 billion USD VIETNAM COMPETITIVENESS REPORT 49 TAbLE 2.8: Share of Vietnam's total 2008 2009 EXPORTS OF exports (%) MAIN PRODUCT Markets Value (billion Value (billion CATEGORIES BY Key Products Key products 2008 2009 USD) USD) MARKETS, 2008- Footwear 2.51 Footwear 1.71 2009 Garment 1.7 Garment 1.44 EU 17.3% 15.1% Seafood 1.15 Seafood 0.96 Crude oil 2.82 Crude oil 2.21 Rice 1.52 Rice 1.23 ASEAN Computers 0.73 Computers 0.59 16.3% 13.6% Garment 5.1 Garment 4.99 Footwear 1.07 Furniture 1.1 US Furniture 1.06 Footwear 1.04 18.9% 19.9% Crude oil 2.18 Garment 0.95 Seafood 0.83 Seafood 0.76 Japan Garment 0.82 Electric cable 0.64 13.6% 11% Rubber 1.06 Coal 0.94 Source: DEPOCEN's Coal 0.74 Rubber 0.86 Export Promotion Report China 7.2% 10.7% 2009 – 2010. Crude oil 0.6 Cassava 0.5 Imports in imports in 2009 was caused by the sluggish domestic production as a consequence of the global recession. In Import Patterns addition, import prices also dropped due to the contraction - Imports are high and growing, leading to widening and in global demand. persistent trade deficit Figure 2.31 illustrates the trend in Vietnam's trade balance Since 2006, imports have risen quickly, surpassing the and its comparator countries over the period 1990 - 2008. growth of exports. During 2006–2008, the average annual The three comparison countries follow a similar pattern— growth of imports was 30.2 percent. This has led to a rapidly roughly balanced until 1998, followed by a significant trade widening trade deficit, from 4.5 percent of GDP in 2006 surplus in that year, primarily as a result of cutbacks in to 16.8 percent in 2008. In 2009, imports contracted to imports. Vietnam, however, has had a negative trade balance USD 68.8 billion (equivalent to 62.5 percent of GDP) – a throughout the entire period, slightly less in the years fall of 14.7 percent as compared to 2008. The contraction TAbLE 2.9: Ranking Index value MARKET DIVERSIFICATION Country 2000 2008 2000 2008 INDEX, 2000 AND 2008 China 3 1 1.0 1.0 Vietnam 1 2 1.0 0.9 Korea 4 3 1.0 0.8 Indonesia 2 4 1.0 0.7 Thailand 5 5 0.9 0.7 Philippines 7 6 0.8 0.7 Malaysia 8 7 0.8 0.7 Taiwan 6 8 0.8 0.6 Hong Kong 10 9 0.4 0.4 Singapore 9 10 0.6 0.4 Source: UN Comtrade . Cambodia 11 11 0 0 50 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.30: 100% SHARES OF TOP FIVE 90% 88% 88% 2000 2008 MANUFACTURED 80% EXPORTS IN TOTAL 70% MANUFACTURED 60% 54% Share (%) 53% EXPORTS, 2000 AND 50% 43% 2008 40% 42% 32% 26% 28% 30% 24% 20% 10% Source: UN Comtrade. 0% Vietnam Cambodia China Malaysia Thailand following the financial crisis, but widening substantially in total imports has been increasing rapidly at an average again afterwards. In 2009, imports exceeded exports by 20 rate of 28.8 percent during 2006–2008, and these accounted percent, equivalent to 11.9 percent of GDP. The negative for 69.7 percent of the total imports in 2008. Among the trade balance has affected the overall balance of payments; imported primary products, fuel accounted for the biggest however, remittances from Vietnamese overseas, FDI and share of 56.6 percent. Among the imported manufactured portfolio capital inflows, the balance of payments remains products, equipment, machinery and input materials positive. accounted for the biggest share of 75.7 percent. This reflects Vietnam's heavy dependence on imported materials and Import Composition equipment to serve the manufacturing sector. - Imports of capital goods dominate, but the share of consumption goods is increasing When classified by the Standard International Trade Classification (SITC), the share of manufactured products FIgURE 2.31: 30 (exports minus imports as percent of GDP) TRADE 25 BALANCE, 20 1990-2008 15 10 Trade balance (%) Malaysia 5 Thailand 0 Indonesia -5 Vietnam -10 -15 -20 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: World Development Indicators VIETNAM COMPETITIVENESS REPORT 51 FIgURE 2.32: $90,000 COMPOSITION $80,000 2005 OF VIETNAM'S 2006 IMPORTS, $70,000 2007 2005-2008 $60,000 Million USD 2008 $50,000 $40,000 $30,000 $20,000 $10,000 Source: General Statistics $0 Office of Vietnam. TOTAL Primary products Manufactured products Others In terms of commodity groups, 90 percent of total imports standards are still relatively low. In 2009, imports of cars and in 2009 comprised capital goods—fuel and raw materials luxury goods accounted for almost 50 percent of the total accounted for 60 percent, while machinery and equipment imports of consumption goods. These trends are adding comprised 30 percent of the total imports. Consumption pressures on the trade balance and foreign reserves as such goods accounted for a relatively small, but increasing, consumption goods are not used to serve export-oriented share in total imports—from 6 percent in 2000 to almost production and to create foreign exchange revenues. 10 percent in 2009. This reflects the "typical" structure of the Vietnamese economy which is dominated by low value- added processing industries and higher living standards which encourage consumption. It is more worrisome that imports of cars, motorbikes and other luxury goods for consumption are increasing rapidly while the overall living FIgURE 2.33: 100% 8 7 7 9 8 8 8 COMPOSITION OF 90% VIETNAM'S IMPORTS 80% Non-monetary BY COMMODITY Import Composi on (%) 70% gold GROUP, 2005-2009 60% 61 65 62 61 Consumer 64 63 61 goods 50% Fuel, raw 40% materials 30% Machinery, Note: In 2003 and 2004 20% instrument, non-monetary gold is 32 29 29 accessory included in fuels & raw 25 25 29 28 10% materials. 0% Source: General Statistics 2003 2004 2005 2006 2007 2008 2009 Office of Vietnam. 52 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.34: 30% VIETNAM'S 25% IMPORTS BY COUNTRY OF 20% ORIGIN, 2005- Import of goods (%) ASEAN 2009 15% China Japan 10% USA 5% Source: General Statistics 0% Office of Vietnam. 2005 2006 2007 2008 2009 Import Trading Partners Trade in Services - Neighboring countries (ASEAN, China, East Asia) - A relatively small share of trade in services in total trade, represent the main sources of imports; the trade deficit with and an increasing deficit in trade in services China in particular is widening dramatically The value of services exports in 2009 reached USD 5.77 Vietnam's trading partners focus on some key countries and million. Tourism exports still dominate services exports regions, including ASEAN (20 percent of total imports in and are estimated at USD 3.05 million; falling 22.4 percent 2009), China (23 percent), Japan (10 percent), Korea (10 compared to 2008. Next in importance are transportation percent), EU (8.3 percent) and USA (4 percent). These services with an export value of USD 2.06 million, dropping markets alone account for over three quarters of Vietnam's 12.5 percent compared to that in 2008. Despite decreasing total imports. export values, tourism and transportation still accounted for 91.3 percent of Vietnam's total services export volume. Vietnam's imports from ASEAN are decreasing in relative Since these two sectors were primarily affected by the 2008 terms while imports from China are increasing rapidly, financial crisis, Vietnam's services export volume in 2009 fell from 15 percent in 2005 to 23 percent in 2009. This is 18.1 percent compared to that in 2008. partly explained by China's import products that tend to be cheaper than those imported from more advanced markets, In a similar fashion, services imports also suffered from the and partly because Vietnam has not been able to take global financial crisis. In 2009, import of services attained advantage of geographical proximity and the sizable, less- USD 6.9 billion, dropping 1.4 percent compared to that demanding Chinese market to boost up its exports to China. in 2008. Although their import values decreased, tourism, These trends are raising questions about strengthening the insurance and transportation services saw an increasing dynamism of intra-regional trade among ASEAN members. share in total services import, reaching 83 percent. All services, apart from government- and telecommunications- related ones, had lower import value in 2009 than in 2008. VIETNAM COMPETITIVENESS REPORT 53 FIgURE 2.35: Vietnam SERVICES Thailand EXPORTS AND Taiwan IMPORTS IN 2008 Singapore Laos South Korea China Cambodia Source: World 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Development Indicators. Commercial services imports (% of GDP) Commerical services exports (% of GDP) Figure 2.35 shows a regional comparison of patterns in trade surpassed those from the year before. According to the data in services. The pattern for Vietnam closely resembles that supplied by the Enterprise Development Agency, there were of South Korea, showing an increasing deficit in trade in about 355,000 private firms registered in the whole country services. The deficit in 2008 amounted to USD 819 million, in 2009, with about 272,680 in operation that are paying while the deficit stood at USD 716 million in 2007. taxes. Entrepreneurship As shown in Figure 2.36, the average investment capital Enterprise Creation also increased sharply, especially after the Enterprise Law - The Enterprise Law (2000) triggered a rapid growth in the was adjusted in 2005 to simplify the business registration number and size of private enterprises procedures and to allow companies of all sectors to operate in the same forms of governance. The average capital of one The Enterprise Law adopted in 2000 eased restrictions and start-up in 2001 was VND 1.29 billion and this increased conditions in formal market entry. Since then, the number to VND 3.17 billion in 2006, and to VND 11.6 billion in of enterprises has increased rapidly. The total number of 2008.11 business registration in the three years 2000-2002 surpassed the total number of the previous decade. Even when growth slowed in 2008 due to inflation and the global financial crisis, new enterprise registrations (over 51,000) still FIgURE 2.36: 60,000 600,000 NEWLY 51,015 Number of incorporated Enterprises 48,959 49,791 Registered capital (billion VND) 50,000 500,000 INCORPORATED 46,691 PRIVATE 40,000 37,099 39.659 400,000 ENTERPRISES IN VIETNAM, 30,000 27.653 300,000 1991-2008 19,773 21,464 20,000 200,000 14,441 10,000 100,000 0 0 1991-1999 2001 2005 2007 2008 2000 2002 2003 2004 2006 (average) Source: Enterprise Development Agency, MPI Number of Enterprises Registered capital of private businesses 54 ASIA COMPETITIVENESS INSTITUTE FIgURE 2.37: >=5000 30.5 42.4 27.1 SIzE DISTRIBUTION OF FIRMS BY 1000-<5000 31.6 41.8 26.7 OWNERSHIP, 2008 Asset Size (Billion VND) 500-<1000 36.8 33.0 30.3 100-<500 56.8 33.0 30.3 Private firms SOEs 20-<100 78.3 8.0 13.7 FDI 5-<20 94.7 Under 5 bil. 99.1 Source: General Statistics Office of Vietnam; Calculations by CIEM 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Business Capacity driven to knowledge-driven, or from labour-intensive to - Private sector development needs to be fostered capital- driven economic models. Lack of adequate capital has also prevented private companies from investing in and While the Enterprise Law triggered a boom in new and upgrading their technology. increasingly well capitalized enterprise registrations, there have been few further reforms to encourage intensive growth The development of the business sector also faces a major of the private business sector. challenge related to the distortion of the market. Land and real estate speculation is usually far more profitable The private business sector in Vietnam lacks both the than investment in upgrading technology, developing intellectual foundations and adequate capital to keep up new products, or improving worker skills. As a result, this with the demands of today's global economy. Small and problem has severely diverted efforts of many enterprises medium enterprises (SMEs) make up 98.4 percent of the from activities that increase productivity and enhance private firms. The lack of education and training for business competitiveness, which are critical for avoiding the middle management and capital accumulation has clearly hindered income trap. their capability to contribute to the move from factor- TAbLE 2.10: Invention Utility solution Industrial design Trademark NUMBER OF PROTECTED Year protection protection protection protection TITLES GRANTED 2001 783 26 376 3,639 2002 743 47 377 5,200 2003 774 55 468 7,150 2004 698 69 647 7,600 2005 668 74 726 9,760 2006 669 70 1,175 8,840 Source: National Office of Intellectual Property 2007 725 85 1,370 15,860 (NOIP). 2009 706 64 1,238 22,730 VIETNAM COMPETITIVENESS REPORT 55 Technology and Innovation goods is a sign that few if any additional capabilities are Development of Intellectual Property emerging. Linkages between the export sector and the - Low level of protected intellectual property titles local economy are undeveloped. Although inventions and utility solutions are central to 3. High diversification of markets but low diversification technology transfer transactions, there have been only few of products suggests that Vietnam has some generic technology sales and purchases associated with patents. advantages, such as low labor costs, but lacks strong Among all protected titles, trademark protection in Vietnam market positions to capture value. The Vietnamese has accounted for the highest proportion and also the fastest economy does not yet participate effectively in the increase in number for the past 10 years. world's most dynamic export markets. The low number of protected titles indicates that technology 4. Dependence on foreign investment is higher than that goods have yet to develop in Vietnam. This is due to the of other countries at the same stage of development, but lack of cooperation between inventors and firms, onerous the foreign sector has shallow roots in the local economy. protection registration procedures and low effectiveness of Lack of entry by growth-oriented private companies and patent protection regulations. low level of innovation in SOEs suggest that few, if any, domestic growth drivers are emerging. Quality Infrastructure - Weak application and enforcement of quality standards 5. Market distortions and resources misallocation are among enterprises among the major causes of Vietnam's slow pace of moving up the technological ladder and low efficiency in Much remains to be done with respect to upgrading capital investment. the quality standards of the manufacturing and service operations in the country. Vietnam is lagging behind the region in terms of the percentage of firms with internationally recognized quality certifications. According to the World Bank's Enterprise Surveys, only 11.4 percent of the firms met this criterion, versus 22.4 percent for the region (2005). Assessment Vietnam's economic development pattern reflects the standard profile of a transitional economy on the catch-up path. It has been successful in achieving vigorous growth over the last two decades but the dynamism for further sustainable growth is declining as cost pressures rise, while new competitive advantages have yet to be created. Vietnam's performance on intermediate indicators reflects current strengths which are unsustainable and will contribute little to creating future competitive advantages: 1. Capital deepening appears natural for a labor-intensive economy. The marginal productivity of capital should be much higher in a developing country like Vietnam where capital is scarce. However, in reality, capital has created growth but has failed to improve overall productivity. Decreasing efficiency of investment indicates that few new capabilities are emerging. 2. Low value added in exports dominated by labor-intensive 56 ASIA COMPETITIVENESS INSTITUTE Endnotes 1 Poverty rate based on poverty line of GSO and WB with monthly average expenditure per capita of 216 thousand VND. 2 The Government set the poverty line for 2006-2010 to be VND 200,000 of monthly expenditure per capita for rural areas and VND 220,000 for urban areas. 3 Industrial centres in Cau River Valley including Thai Nguyen, Bac Giang, Bac Ninh, Hai Duong, and Vinh Phuc Province. 4 In economics, total-factor productivity (TFP) is a variable which accounts for effects in total output not caused by the growth in traditional inputs, labor and capital. TFP comprises a range of factors, but the predominant driver is technological progress. 5 Preliminary population survey results in 2009. 6 The comparable data for later years are not available. 7 "The other" investment comes mostly from government bonds and accounted as off-budget expenditure. In 2008, total social investment increased at 10.2 percent while state investment reduced by 15.7 percent compared to that in 2007, 8 mainly due to the measures adopted to control the inflation. 9 The zone has been facing a delay in land clearance, construction of infrastructure and policy incentives. This section used some analytical input and data provided by Dr. Manuel Albaladejo (UNIDO). See Albaladejo, M. 2010. 'Benchmarking 10 Vietnam's Industrial Competitive Performance', background paper prepared by UNIDO for the Vietnam Competitiveness Report 2010, Vienna, Austria. 11 These figures should be interpreted with caution because they are used only for registration. Chapter References: Albaladejo, M. (2010). "Benchmarking Vietnam's Industrial Competitive Performance", background paper prepared by UNIDO for the Vietnam Competitiveness Report 2010, Vienna, Austria. Ark, B. Van and M.P.Timmer (2003). "Asia's Productivity and Potential: The contribution of sectors and structural change," http://www eco.rug.nl medewerk/Ark/pdf/Asiapaper4.pdf Asia Competitiveness Institute (2009). Singapore Competitiveness Report 2009. Bùi Trinh (2010). "Assessment of Investment Efficiency," unpublished monograph. DEPOCEN. Export Promotion Report 2009 – 2010. FIA. Report on Vietnam's 20-year FDI Development. Fulbright Economics Teaching Program (2008). "The Structural Roots of Macroeconomic Instability." General Statistics Office of Vietnam (2006). Household Living Standards Survey. General Statistics Office of Vietnam (2009). http://www.gso.gov.vn. International Labour Organization (2009). Employment Trends Report 2009. Maddison, Angus (2001). The World Economy: A Millennium Perspective, OECD Development Centre. Press Center (2010). "PM Underlines Top Priorities for 2010", http://www.presscenter.org.vn/en//images/PMmessage.pdf. Accessed October 6, 2010. Riedel, James (2009). "Growth Models in Hanoi." STAR – Vietnam (2003). An Assessment of the Economic Impact of the US – Vietnam Bilateral Trade Agreement, Annual Report for 2002, Hanoi, National Political Publisher. Trade Competitiveness Map (2006). International Trade Centre (ITC), http://www.intracen.org/marketanalysis/ tradecompetitivenessmap aspx. United Nations Development Programme (2009). Human Development Report 2009. United Nations Environment Programme. Global Environment Outlook Data Portal. http://geodata.grid.unep.ch/results.php. World Bank (2005), Enterprise Surveys, http://www.enterprisesurveys.org. World Bank (2006). Vietnam Environment Monitor 2006 - Water Quality in Vietnam with a focus on the Chau, Nhue-Day and Dong Nai River Basins, http://go.worldbank.org/VHNN3QC0A0. VIETNAM COMPETITIVENESS REPORT 57 58 ASIA COMPETITIVENESS INSTITUTE 20 Vietnam Competitiveness Report 10 Chapter 3 Vietnam's Competitiveness Foundations VIETNAM COMPETITIVENESS REPORT 59 are major advantages; but location and climate also expose VIETNAM'S the population to natural disasters and disease COMPETITIVENESS Vietnam's central location in Asia and the country's long coastline offer major advantages for economic development. FOUNDATIONS With a total area of 327,500 square kilometers, Vietnam borders China on the North, and Laos and Cambodia on the West. The coastline stretches 3,260 kilometer from East to South, bordered by the East Sea and the gulf of Thailand. These locational endowments provide potential advantages Following the diagnosis of the economic outcomes and in tourism, agriculture and sea trade. Unfortunately, the intermediate indicators in Chapter 2, this chapter looks into country so far has not utilized these potential advantages the underlying factors of competitiveness, offering greater efficiently, such as developing aggressively its seaport insight into the drivers of those outcomes. services. Prosperity drivers are the ultimate source of sustained Vietnam has been the center of the Indochina region and improvements in the standard of living. Prosperity the bridge between China and other ASEAN countries– can be inherited, or based on endowments; or created. a clear advantage for regional economic cooperation. Competitiveness is about created prosperity which is the However, Vietnam has yet to reap the full benefits of its result of choices that determine the level of productivity. economic geography. Neither the Mekong Delta economic The factors which raise productivity and competitiveness cooperation nor the ASEAN-China regional and sub- can be classified into two broad categories. Macroeconomic regional cooperation have achieved their potential. There competitiveness covers conditions that determine the is therefore a need for a long-term strategy that will utilize context in which productivity improvements must take place. Vietnam's location to contribute to national competitiveness. These are determined by government alone. Microeconomic At the same time, coastal location and tropical climate competitiveness covers factors that have a direct impact on expose the country and its population to natural disasters productivity; they depend on the interrelated choices of and epidemics. At the Climate Conference in Copenhagen many public and private sector entities and institutions (2009), experts included Vietnam in the top five countries for collaboration. Figure 3.1, provides the analytic most affected by global climate change. They stressed that framework for competitiveness which includes all the above the Red River Delta and the Mekong Delta are likely to be determinants. the two most heavily hit areas. The impact of global climate Natural Endowments change may be exacerbated by Vietnam's socio-economic conditions as well as poor capability to fight climate change. Geographic Location and Population Size - The country's central location in Asia and its long coastline FIgURE 3.1: COMPETITIVENESS FUNDAMENTALS Quality of the Sophis ca on Na onal State of Cluster of Company Business Development Opera ons and Environment Strategy Social Quality of Infrstructure Macroeconomic and Poli cal Policy Ins u ons Natural Geographic Size Resources Loca on 60 ASIA COMPETITIVENESS INSTITUTE bOX 3.1: Vietnam has been one worst victims of climate change. For the past 50 years, the average IMPACT OF CLIMATE temperature has risen 0.7 degree Celsius, while the average sea level has risen by 20 centimeters. CHANGE ON VIETNAM El Niño and La Niña are hitting the country harder than before. Floods and droughts are occurring more frequently and at a more severe scale, directly affecting the health of the people and the economy. With its long coastline, Vietnam is considered highly vulnerable to climate change. In 2007, the World Bank projected that Vietnam, along with Egypt, Suriname, Bahamas and Bangladesh, will be heavily affected by the rise of average sea level. According to the study by the World Bank on the impact of sea level rise on 84 coastal developing countries, if sea level rises by 1 meter, it can flood as much as 5 percent of the area of Vietnam and affect 11 percent of the country's population, reducing GDP by 10 percent. Source: Dasgupta et al. (2009) In spite of the dangers of climate change, Vietnam can Large mineral reserves in Vietnam include: coal; oil and still leverage its favorable location and large population gas; bauxite; and uranium. Vietnam has over six billion tons for development. To date, these advantages have not been of coal reserves, mainly in Quang Ninh, Thai Nguyen. Oil fully exploited to increase the country's competitiveness, and gas reserves are estimated to be at three to four billion especially with respect to agriculture, tourism and seaport barrels and 50 – 70 billion cubic meters respectively, mainly services advantages. in the sediments of deltas and continental shelf. Bauxite reserves are projected to be about 6 billion tons and could Natural Resources be over 8 billion tons while uranium reserves are estimated - Vietnam possesses rich deposits of natural assets, but at about 200 – 300 thousand tons.1 In addition, reserves of wasteful and irresponsible exploitation poses serious risks ferrous metals (iron, manganese, titan); non-ferrous metals Vietnam possesses plentiful natural resources, including (aluminum, copper, gold, zinc, lead); non-metals (apatite, land, water, forest, mineral and tourism resources. Over 75 pyrite) are being exploited. percent of Vietnam's 33 million hectares of geographic area is However, accelerated exploitation of natural resources agricultural land. The country also possesses plentiful water is posing serious risks to preservation and sustainable resources and a dense river network, offering opportunities development of natural resources2 and is also to some extent to develop waterway traffic, hydropower and agricultural discouraging innovation and investment to build up new production. capabilities (instead of relying on natural endowments). TAbLE 3.1: Vietnam Brunei Cambodia Indonesia Malaysia Philippines Singapore Thailand China Hong India Kong MACROECONOMIC New Global COMPETITIVENESS Competitiveness 82 34 115 57 37 104 3 55 42 13 77 OF VIETNAM AND Index (GCI) COMPARISON Macroeconomic Competitiveness 92 11 119 67 47 104 10 61 39 16 93 COUNTRIES, 2009 (MACRO) Social Source: WEF Global infrastructure Executive Opinion and political 72 34 102 60 45 115 7 68 53 16 67 Survey, Institute institutions for Strategy and (SIPI) Competitiveness, Macroeconomic 110 5 120 77 59 87 58 52 23 9 113 Harvard Business Policy (MP) School. VIETNAM COMPETITIVENESS REPORT 61 TAbLE 3.2: Indicators 2006 2007 2008 2009 HEALTH CARE Communes with health clinics (%) 97.5 98 98.2 100 INDICATORS, Communal health clinics with 2006-2009 medical doctors (%) 65.1 67.4 68 73 Number of hospital beds per 10,000 23.6 24.8 25.7 27 people Maternal mortality rate against 80 78 75 70 100,000 live cases (%) Source: MPI (2009). Macroeconomic competitiveness other ASEAN countries as well as with China and India. Vietnam's indicator for Social Infrastructure and Political Macroeconomic competitiveness captures the dimensions Institutions (SIPI) is at average level (ranked 72nd) which is that set the overall context in which government agencies, not far below that of higher income countries like Thailand companies, and other institutions make the choices that and India. Thus, the main reason for low macroeconomic ultimately determine productivity. Macroeconomic competitiveness lies in macroeconomic policy (ranked competitiveness can be classified into two main categories. 110th) primarily because of inflation and fiscal policy. Social infrastructure and political institutions describe the basic setting in terms of education, health services, Social Infrastructure and Political Institutions the rule of law, and policy making. These factors tend to Basic Social Services change only moderately over time and have a significant Healthcare services and primary education are two crucial long-term impact. Macroeconomic policy describes the indicators of human development and always score macroeconomic context of fiscal and monetary policy relatively higher than other competitiveness indicators as well as of macroeconomic volatility. These factors can for Vietnam. Nonetheless, Vietnam ranked only 85th on change more rapidly and tend to have a more short-term human development in the new CCI 2009. This is lower impact. All categories of macroeconomic competitiveness than the median rank. tend to be controlled centrally by government. In 2009, Vietnam ranked 92nd on macroeconomic competitiveness - Primary education: Relatively high levels of enrollment in the Country Competitiveness Index (CCI) 20093, or and literacy for the country's stage of development in the 70th percentile of the countries covered. Vietnam's macroeconomic competitiveness is higher than that of the Philippines and Cambodia, but lower in comparison with TAbLE 3.3: Net enrolment ratio NET ENROLMENT IN SECONDARY EDUCATION Area BY SUBGROUPS (2006) Urban 88.8 Rural 76.1 Income group Top 20% poorest 59.9 Top 20% richest 91.5 Ethnicity Other 64.9 Kinh/Hoa 81.3 Source: MICS. Overall 78.8 62 ASIA COMPETITIVENESS INSTITUTE Vietnam's performance on universal primary education participation by the private sector. Therefore, expenditures and literacy is relatively strong given its current stage of on education and health care are rising in total household development. Vietnam is among the countries that have spending. achieved the Millennium Development Goals and targets related to primary education ahead of time. In 1990, the net During the last three years, the share of education and enrollment rate of primary education was 87 percent, but by training has increased to 20 percent of the total state budget. 2006 the rate had increased to 95.96 percent and the target Over the period 2005-2009, budget spending for education of 99 percent is being put for the period of 2006 – 2010 increased most rapidly, at an average annual rate of 22.6 (www.mdgmonitor.org). percent, amounting to VND 359,687 billion (USD 18 billion) for the whole period—2.23 times higher than the - Basic healthcare: Access to basic health care services broadly spending level during 1998–2004. The budget for higher in line with the stage of development education accounts for only 10–12 percent of the entire budget for education. Besides the state budget, investment - However, access to services varies considerably among for education is supported by official development different groups of population and different regions assistance (ODA) and tuition fees. To date, only four foreign In education, inequality remains large in secondary universities have been licensed, but only one university so education, most notably by income, then by geography and far started operations. The total registered capital of the finally by ethnic minorities. four universities is USD 68.9 million – five times higher than the total state investment for fixed capital formation of Similarly, in health care, the level of inequality is also high public universities in 2008 (National Assembly's Standing from basic to higher quality of health care services. Although Committee 2010). health care at the grassroots level, like medical stations at the level of the commune or ward, has been available nationwide, At present, Vietnam's human development indicators in the the service quality and infrastructure are frequently poor, new CCI 2009 are similar to Indonesia's. They are higher especially in rural areas and lower-income provinces. This than those of Cambodia, India, and the Philippines but far fact results in even a higher inequality in accessing to good below that of China (ranked 66th), Malaysia (ranked 52nd), health care services due to ability to pay and geographical and Thailand (ranked 70th) which are developing economies barrier. to escape from the middle-income trap. In fact, Vietnam faces a serious shortage of high quality human resources a - The share of investment for education and health care in major obstacle to productivity growth. If Vietnam were to the state budget is relatively high, but remains small in be satisfied with its achievements on basic human capacity absolute terms, while private sector financing is not fully indicators, it would hardly move beyond the current level mobilized and climb the competitiveness ladder. The policy of socializing education and health care which has been carried out since the 1990s to mobilize private investment into these two areas has had little effect because of their public service nature and the entry barriers for TAbLE 3.4: 1,000 VND AVERAGE HEALTH Area EXPENDITURE PER PATIENT BY SUBGROUPS (2006) Urban 811.5 Rural 520.3 Income group Top 20% poorest 171.8 Top 20% richest 1,244.6 Ethnicity Kinh 643.1 Source: VHLSS 2006. H'mong 120.0 GSO. Others 160.7 VIETNAM COMPETITIVENESS REPORT 63 FIgURE 3.2: Reliabli ty of police services 1 (Low) Business costs of crime RULE OF LAW Rule of Law (WB) 21 and violence RANKINGS–VIETNAM 41 61 AND COMPARISON Control of Corrup on (WB) 81 (Low impact of) Origanized Singapore Crime COUNTRIES, NEW CCI 101 China 2009 121 Thailand Ethical behavior of firms 141 Judicial independence Vietnam Cambodia (Low) Business costs of Efficiency of legal framework corrup on Source: WEF Global (Low occurrence of) Irregular Property rights Executive Opinion Survey, payments by firms Institute for Strategy and (Low occurrence of) Diversion Competitiveness, Harvard of public funds Business School. Rule of Law 53rd in the new CCI 2009. The issuance of numerous - The quality of laws on the books is relatively good given legal documents, which is a typical feature of the transition Vietnam's stage of development, but effectiveness in from central planning to market economy, has placed great implementation is low pressure on the implementation stage, especially when the codes and documents are still inconsistent. Meanwhile, Over the past decade, Vietnam's legal system has improved policy implementation at the ministerial, sectoral and remarkably through the government's effort to refine the local levels is lagging, making it difficult for citizens and market economic institutions resulting in higher position in enterprises to fully benefit from the provisions of the laws. rule of law indicators. In 2009, Vietnam ranked 73rd on rule of law, or in the 55th percentile of the countries covered in Another piece to the puzzle is the performance of Vietnam the new CCI 2009. and its peer countries on the World Bank Institute's (WBI) governance indicator of "regulatory quality" which is Priorities are to complete the legal framework for protection comprised of six components. The results suggest that of property rights, to improve the business environment, Vietnam lags behind selected Asian peers (Figure 3.3). The to reform administrative systems, to strengthen factor and indicator for Vietnam tracks that for China which is also commodity markets, to protect natural resources, and to below the median, but closer. The other three comparator ensure social security. Since 2002, many legal documents countries, Malaysia, Thailand and South Korea, are above have been issued and implemented4. The quality of legal the median performance for all the countries included in regulations has improved and this is reflected by the fact the ranking. that the efficiency of Vietnam's legal framework was ranked FIgURE 3.3: 0.8 Compos te measure of regulatory quality PERFORMANCE 0.6 ON REGULATORY 0.4 QUALITY–VIETNAM 0.2 AND COMPARISON Malaysia COUNTRIES 0 Thailand -0.2 China Note: Values for 1997, -0.4 Vietnam 1999 and 2001 have been interpolated. -0.6 Source: World Bank Institute, -0.8 Global Governance Indicators; 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 calculations by CIEM. 64 ASIA COMPETITIVENESS INSTITUTE FIgURE 3.4: Philippines CONTROL OF 2008 2009 CORRUPTION– Vietnam VIETNAM AND COMPARISON Indonesia COUNTRIES, 2008 AND 2009 China Korea Singapore Source: Transparency International's Corruption 0 1 2 3 4 5 6 7 8 9 10 Perception Index 2008 - 2009. Lesser control of Corrup on Percenp on Index Greater control of corrup on corrup on - Transparency of regulations is low and irregular payments - Corruption remains significant and shows little signs of by firms persist abatement According to the Provincial Competitiveness Index (PCI) According to Transparency International (TI)'s Corruption study for 2009, there has also been deterioration in other Perception Index, in 2009, Vietnam was ranked 120th out areas of governance; most notably in transparency and of 180 countries—behind most of its regional peers (except informal charges. Despite LNDs becoming easier to access, for the Philippines). Vietnam's absolute score on this index businesses report that access to planning documents has is low (2.7 out of 10 points) and remains unchanged as become more difficult. Businesses also indicate that personal compared to that in 2008, while Indonesia has seen a slight relationships with provincial officials are more important in improvement in its score (from 2.6 up to 2.8 points). accessing provincial documents in 2009 (61.26 percent say it is important or very important in the average province) According to the PCI 2009, paying commission on compared to 2007 (56.6 percent) and 2008 (49.82 percent). government contracts remains a serious problem with about 50% of firms involved in this practice. However, this PCI 2009 also reveals that although the percentage of firms rate varies larger among provinces with 72% for the worst paying over 10 percent of their revenue on extra payments province and 24% for the best one in 2009 (Figure 3.5). This declined in 2009 and fewer enterprises felt their fellow variation suggests that it is feasible to reduce this problem businesses were subject to local bribes, there were some if every province is forced to model after the best province. worrying increases in informal charges. At the local level, the number of firms that felt local regulations were being used for informal charges increased significantly. FIgURE 3.5: 80 75 72 PERCENTAGE OF FIRMS 70 PAYING COMMISSIONS ON GOVERNMENT 60 54 53 Percentage of firms (%) CONTRACTS 50 Best Province 40 Average 33 Province 30 23 Worst Province 20 10 Source: Provincial Competitiveness Index 2009 0 2008 2009 VIETNAM COMPETITIVENESS REPORT 65 FIgURE 3.6: China 5.8 VOICE AND Vietnam 6.7 ACCOUNTABILITY– Cambodia 22.6 VIETNAM AND COMPARISON Malaysia 31.7 COUNTRIES, 2008 Thailand 32.2 Singapore 35.1 Philippines 41.3 Indonesia 44.2 Hong Kong 60.6 Source: World Bank Worldwide Governance 0 10 20 30 40 50 60 70 Indicators, 2008. Percen le Rank Political Institutions attraction. In addition to the investment incentives - A high level of political stability permitted by the central government, local governments often provide extra incentives, ranging from investment Both the Country Competitiveness Index (CCI) using premiums and accelerated depreciation to tax holidays and data from the WEF Global Executive Opinion Survey reductions of land use fees. Out of 48 provinces surveyed and the World Bank's Worldwide Governance Indicators by the Ministry of Finance (MOF) in 2006, 32 provinces rank Vietnam highly on political stability (according to issued extralegal documents granting extra incentives to the latter, Vietnam is only behind Singapore and far above investment projects. Most of the incentives are related to land other countries in the region, including China). In this or taxation. The Ministry of Finance reported that among regard, Vietnam is much more stable than peer countries in those 32 rule breakers, 18 violated budget regulations, 21 the region which is an important advantage for Vietnam to offered land incentives that go beyond the framework attract investment and boost its competitiveness. established by national land policy, and 11 broke corporate - Moderate efficiency of the political system income tax regulations. Many provinces were found to have violations in more than two areas. Most provinces offered Indicators on the efficiency of Vietnam's political system very generous incentives with respect to land use fees and receive moderate rankings in the CCI; for example: extended the exemption period for up to 10 to 20 years (Vu transparency of policy making—45th in 2009 (from 32nd Thanh et al. 2007). in 2008); wastefulness in government spending—37th; favoritism in government decisions – 34th. A high decentralization indicator for Vietnam does not necessarily mean good political institutions. This issue - A high level of decentralization is one of the factors leading represents another weak point of Vietnam that could to dispersed power across different parts of governments have negative effects on the improvement of Vietnam's and regions; there are major differences in the application macroeconomic competitiveness indicators. of policies and regulations - Weaknesses in "voice and accountability" Vietnam's decentralization of policymaking is rated relatively highly (ranked 25th in the CCI 2009). In Vietnam, The ranking on "voice and accountability" in the World the supply of education, health care and environment Bank's Worldwide Governance Indicators constitutes one services has been decentralized to localities since the start of Vietnam's weak points. Its citizens are used to "obeying" of economic transition period. For issues like investment administrative orders of the government at various levels. approvals, this policy was carried out step by step, starting Similarly, administrative accountability is still weak and has in the 1990s and accelerating in 2001. However, in the not satisfied the public demand. Although the regulation5 process of decentralization, little thought was given to of democracy at grassroots level came into force since 1998, financial capability and resources at the local level. Central public participation was not effective and active, while the monitoring and evaluation were inadequate, resulting in government has not encouraged and promoted popular low efficiency in distributing and using resources, especially policy participation. Until now there is still a lack of in terms capital and land resources. The decentralization effective sanctions to deal with cases in which accountability efforts have also given rise to the uneven implementation of was not carried out or was carried out ineffectively at each rules and regulations among provinces, especially regarding level in the administrative system. The World Bank's Voice licensing and land management. An example of variable and Accountability index ranks Vietnam only slightly above application of rules and regulations is in the provision of China and far behind nearly all peer countries. incentives beyond the national laws on foreign investment 66 ASIA COMPETITIVENESS INSTITUTE Policy Making in Vietnam Shortcomings of the Current System Policy Instruments The current process raises a number of issues: The instruments of economic policy in Vietnam comprise the following: • A protracted and inflexible process: It takes in average about two years to issue a new law, ordinance, or add or • Overarching national ten-year socio-economic amend a current one; development strategies and national five-year socio- economic development plans; • Irrelevance and vagueness of the policy: Policies in many cases are too general, vague and unclear, and often do not • Legal normative documents (LNDs), such as respond to social and market requirements; National Assembly's laws, ordinances and resolutions, Government's decrees and resolutions, Prime Minister's • Procedural deficiencies: A systematic mechanism decisions, Ministries' circulars; and (criteria, process and organization) for evaluating and verifying the content of the policy is lacking. The • Non-normative policy instruments such as strategies assessment process usually takes a deeper look into the or master plans of specific sectors, industries or regions legal aspect of the document; rather than into the socio- which are ratified by Prime Minister's or regions' economic and technical dimension of the policy or administrative decisions or Ministries' official letters. regulation; Policy Making Procedures and Organization • Lack of vision, focus and prioritization in making While there is clear guidance on procedures for issuing policies, especially at provincial levels; legal normative documents (LNDs) under the Law on Promulgation of LNDs (Law on Laws), procedures for • Inconsistency, overlap and even conflict among different issuing other non-normative documents are not yet defined policies and regulations; lack of connection between clearly and remain discretionary. short term plans and long term strategies; - Under the Law on Laws, the process of developing • Discretion and lack of transparency in interpretation and issuing LNDs is summarized as follows: A focal and application of policies; and Ministry in charge of the specific policy area proposes • Low effectiveness in implementation and enforcement the development and issuance of a LND. That Ministry of policies. establishes a drafting committee to review existing relevant policies and regulations, conduct a Regulatory Root Causes of Shortcomings6 Impact Assessment (RIA); draft the policy or regulation Vietnam's system of policy formulation is saddled with and share it with other government agencies and related the legacies of planning days, and cannot cope effectively parties for review and consultation. Upon completion with problems in the age of global competition. The main of the consultation process, the Ministry in charge procedural and organizational problems are interrelated and submits the draft to the Ministry of Justice for appraisal constitute the main sources of formalism and the general in terms of necessity, relevance, appropriateness, legality lack of creativity and responsiveness in policy making. and compatibility of the draft. Once the Ministry of (i) The involvement of the private sector and other affected Justice approves, the draft is then be submitted to the groups in designing and executing policies remains Government for review and ratification. Depending on inadequate the legal nature of the policy instrument, it will then be submitted for debate, approval and promulgation by the The policy making process in Vietnam is closed within the Prime Minister or the National Assembly. government with little involvement of other stakeholders. The drafting team is usually lightly staffed and has limited - Other non-normative policy instruments do not have to budgetary resources mainly for securing external data and comply with any specific legal procedures, and therefore analyses as well as organizing interviews and hearings. their promulgation remains discretionary. In theory, the Although the draft policy is circulated for comments and issuance of non-normative documents should follow review, comments are rarely substantive, and debates on similar procedures as for the LNDs, except that the drafts fundamental directions or crucial issues rarely take place. will not have to be submitted to the Ministry of Justice Significant delay may occur at internal review or final for appraisal or to the National Assembly for debate and approval. The drafting team is routinely overworked with a approval. Depending on the legal nature of the policy large number of policy documents to finish each year, which instrument, it will be promulgated by the drafting agency does not allow sufficient time (or money) to think creatively, (such as a Ministry or a provincial government) or by the interact with non-government stakeholders, or publicize the Prime Minister. final result. If a domestic or foreign firm wants to raise its voice, it must devise its own way since the current procedure does not allow meaningful involvement of the business community. VIETNAM COMPETITIVENESS REPORT 67 Although public consultations are becoming more popular based promotion, and ODA-related benefits (foreign travel, in recent years, an effective mechanism to follow-up on training, benefits associated with supervising aid projects, how comments are taken into the draft is missing. In etc.). These were the legacies of the subsidy system existing other East Asian countries, private sector participation up to the 1980s, where the public sector was the provider of is institutionalized; private sector representatives serve jobs, minimum income and social security for all and where as members of the steering committee and task forces in no alternative employment opportunities were available in drafting the policy, or the private sector is involved heavily the private or foreign sectors with far more attractive salaries in deciding targets and action plans. and rewarding duties. Under the present circumstance of market orientation and global integration, the public (ii) Inter-ministerial coordination on policy substance as sector only attracts people who want stability, people who well as implementation details is poor primarily because genuinely believe in the importance of public service, or mechanisms are lacking to encourage different Ministries people who want to take advantage of official privileges to work together. to study abroad or receive training as a stepping stone to a Compartmentalization of the government along Ministerial better-paying job in the future. As a result, highly qualified lines is a common problem around the world, but most and motivated people are becoming difficult to recruit or governments manage to somehow ameliorate it. One retain for public service. solution is to have a strong top leader with a good economic Minor repairs or ad hoc adjustments cannot solve these mindset who directs various ministries and becomes the problems. To reverse the hollowing-out of the Vietnamese hub of policy making him or herself. Another way is to government, far reaching reforms to remake the public establish a powerful team of technocrats directly serving administration completely are needed as soon as possible the president or the prime minister who makes key policy which will be discussed in more details in Chapter 4. decisions while Ministries become executing agents of the plans emanating from this team; South Korea's Economic Macroeconomic Policy Planning Board, 1961-1994, exemplifies this option. Still Overall Macroeconomic Performance another way is to let a super Ministry, with sufficient policy Following a period of macroeconomic stability,7 the authority and instruments at its disposal, lead policy making macroeconomic conditions have turned volatile since and be responsible for it—Japan's Ministry of International 2007. The success of the economy, and especially investors' Trade and Industry in the 1960s. Finally, it is also possible optimism about the country's WTO accession, has to install a mechanism to guarantee the representation of all encouraged inflows of foreign investment pouring into relevant ministries and nongovernment stakeholders in the Vietnam. The unprecedented increase of capital inflows, official drafting process as well as in informal exchange— while both the economy and macroeconomic management Malaysia's drafting of the Industrial Master Plan at present. were not ready, triggered the most serious macroeconomic In Vietnam, though all policy documents specify a leading instability since the "price-wage-money crisis" in the second Ministry and a list of related Ministries, the mechanism to half of the 1980s. Vietnam experienced macroeconomic make them participate substantively and work as one is still instability during 2007-2008 before the eruption of the missing. global financial crisis; the principal culprits were internal, not external factors. Table 3.5 provides a summary of (iii)Lack of accountability: Vietnam's macroeconomic conditions during 2004-2009. Vietnam's decision making tends to be based on consensus. This system can produce stability and continuity but it is not Fiscal Policy suitable for staging bold reforms or responding quickly to a - Increasing and persistent budget deficits result in a changing world. Policies remain mostly reactive rather than narrower fiscal space pro-active. When a serious problem is identified, an inter- Vietnam's fiscal deficit, including both on-budget and off- ministerial committee is called and its chair is appointed. budget, had been moderate at 3 to 4 percent of GDP until Each Ministry proposes solutions from its perspective, 2006, however since 2007 it has risen to the 7 to 7.4 percent which are summarized into general policy recommendations range. The limited fiscal space has narrowed further because without execution details. Bureaucracy can supply broad of the ambitious stimulus package amounting to about 9 ideas touching every aspect of the problem, but it does not percent of GDP passed in 2009 in the wake of the global set priorities or provide selectivity for real action. There financial crisis. should be an interaction between the high level and the implementing level of the government to produce policies that are both realistic and sharply focused. (iv)An inadequate civil service system tends is prompting an exodus of talented people to other sectors. Vietnam's public service must overcome the problems of overstaffing, low salary, nepotism, corruption, relation- 68 ASIA COMPETITIVENESS INSTITUTE TAbLE 3.5: Vietnam China Indonesia Malaysia Philippines Thailand MACROECONOMIC Fiscal Policy (% GDP) INDICATORS FOR Overall fiscal balance -5.8 -0.9 -0.9 -4.3 -2.1 -1.1 VIETNAM AND Fiscal revenue 26.8 18.4 17.9 21.6 15.5 18.3 COMPARISON Gross capital formation 36.2 40 22.6 22.2 17.7 22.3 COUNTRIES (2004- Public debt 46.9 20.1 39.1 43.8 64.7 43.8 2009) Monetary Policy (% per year) Growth of money supply M2 32.2 19.4 14.5 15.1 12.3 7 Growth of domestic credit 37 15.7 12.4 8.1 7.1 4.4 Balance of Payment Current account balance (% GDP) -5.7 7.7 1.4 15.5 3.5 2.2 Net FDI (% GDP) 6.8 3 1.6 3.4 1.6 3.8 FX Reserves (months of imports) 3.5 18.9 7.9 7.9 6.9 7.5 Note: Figures are averages for the period 2004-2009. GDP Growth and Inflation (%) GDP growth 7.4 11.1 5.5 4.5 4.7 3.5 Source: Economist Intelligence Unit. Consumer price index (CPI) 10.2 2.9 8.4 2.7 5.8 3.1 - Public debt has increased rapidly over the last decade This coupled with the increasing fiscal deficit may jeopardize sustainable debt management; particularly since Vietnam's By the definition of the Ministry of Finance (MOF),8 sovereign debt rating has been downgraded by all rating Vietnam's total public debt by the end of 2009 was about agencies (Table 3.6). As a fast growing economy, Vietnam 44.7 percent of GDP, of which the central government debt still needs to invest heavily to build up infrastructure and was 35.4 percent of GDP, debt guaranteed by the central provide public services, while the domestic investment – government was 7.9 percent of GDP, and local government saving gap tends to widen very quickly, from 6 percent of debt was 1.4 percent of GDP.9 Although this level of public GDP in the mid-2000 to 15 percent of GDP by 2009. This debt is not a cause of concern, it is higher than the common implies that the country's public debt will keep rising.10 level of 30 – 40 percent in other developing and emerging economies. On a per capita basis, Vietnam's public debt rose nearly four times, from USD 144 to USD 548, during the 2001 – 2009 period, or 18 percent annually (EIU), while GDP per capita growth was only 6 percent during the same period. FIgURE 3.7: 5% 2005-2009 2010 VIETNAM VS. 3% ASIAN PEERS ON 1% 0.7% Budget Balance MACROECONOMIC (% of GDP) -1% -0.7% INDICATORS–BUDGET -0.8% -0.8% -1.7% -1.3% -1.5% -3% -2.2% -2.2% BALANCE, 2005- -5% -3.9% 2010 -4.5% -4.4% -5.5% -5.8% -5.6% -7% -7.0% Note: Data for 2010 are -9% Singapore Singapore Malaysia Malaysia Vietnam Vietnam Thailand Thailand China India Indonesia Philippines China India Indonesia Philippines estimates. Source: Economist Intelligence Unit. VIETNAM COMPETITIVENESS REPORT 69 TAbLE 3.6: Country S&P Moody's Fitch SOVEREIGN CREDIT 2008* 2010** Change 2008* 2010** Change 2008* 2010** Change RATINGS, VIETNAM Vietnam BB/Stable BB/Negative Worse Ba3/Positive Ba3/ Worse BB-/Stable B+/Stable Worse Negative VS. ASIAN PEERS China A/Positive A+/Stable Better A1/Stable A1/Stable Unchanged A+/Stable A+/Stable Unchanged Ba2/ BB-/ BB+/ Indonesia BB-/Stable BB/Positive Better Ba3/Stable Better Better Positive Positive Stable Notes: * as of January 10, 2008; ** as of November Malaysia A-/Positive A-/Stable Worse A3/Stable A3/Stable Unchanged A-/Stable A-/Stable Unchanged 6, 2010. Philippines BB-/Stable BB-/Stable Unchanged B1/Stable Ba3/Stable Better BB/Stable BB/Stable Unchanged Sources: Data from AAA/ AAA/ AAA/ Singapore AAA/Stable Unchanged Aaa/Stable Aaa/Stable Unchanged Unchanged Stable Stable Stable ADB Asia Bond Online (http:// Thailand BBB+/ BBB+/ Worse Baa1/Stable Baa1/Stable Unchanged BBB+/ BBB/ Worse asianbondsonline.adb. Stable Negative Stable Stable org/) Higher interest rates increase the cost of financing the public economy, not only in the provision of public services such debt. The demand for money in Vietnam has always been as administration, education, or healthcare, but also in high in order to finance growth, leading to high inflation economic activities, especially by investing heavily into (Figure 3.8) and interest rates. As a consequence, the yield general corporations (GCs) and state conglomerates (SCs). of government bonds in 2010 has been as high as 11-12 percent, while the equivalent yield in Malaysia, Thailand, By 2008, which is the most recent year for which state or China is less than 3 percent. Similarly, compared to budget data are publicly available, about three quarters Indonesia or the Philippines, Vietnam had to pay a higher of fiscal revenue come from four sources: value-added tax premium for its sovereign bonds issued in early 2010. In (VAT), corporate income tax (CIT), crude oil and foreign- addition, now that Vietnam has moved out of the low- trade related taxes (mostly tariffs and excise tax on imports). income status, preferential loans will gradually be replaced Revenues from VAT and form CIT have increased over by commercial loans with much higher interest rates.11 the years and accounted for 25 percent and 15 percent of fiscal revenues in 2008 respectively. The contribution of - High but structurally unsustainable fiscal revenue levels the other two sources, oil revenue and trade related taxes which accounted for 20 percent and 15 percent in 2008 The government's fiscal revenue has increased from 13 respectively, is expected to decline due to declining oil percent of GDP in 1991 to nearly 30 percent of GDP reserves and the process of trade liberalization following in 2009. Table 3.5 shows that Vietnam had the highest WTO accession. fiscal revenue as a percentage of GDP during the 2004 – 2009 period vis-à-vis countries in the region.12 The public sector has consistently expanded its size relative to the FIgURE 3.8: 16% 2005-2009 2010 VIETNAM VS. 14% 11.7% ASIAN PEERS ON 12% 10.8% MACROECONOMIC Infla on (%) 10% 8.9% 8.6% INDICATORS– 8% 7.2% INFLATION, 2005- 6% 5.8% 5.2% 2010 4% 2.9% 3.2% 3.0% 4.2% 3.3% 2.7% 2.6% 2.1% 1.8% 2% 0% Singapore Singapore Malaysia Malaysia Thailand China India Indonesia Philippines Thailand China India Indonesia Philippines Vietnam Vietnam Note: Data for 2010 are estimates. Source: Economist Intelligence Unit. 70 ASIA COMPETITIVENESS INSTITUTE TAbLE 3.7: 2005 2008 STRUCTURE OF BUDGET Total 100 100 EXPENDITURE (IN Development Investment 30.2 27.5 PERCENT) Of which: capital spending 27.7 25.2 Social and economic services 50.4 52.3 Of which: Education and training 10.9 12.9 Healthcare 2.9 4 Science, technology and environment 1 1.6 Pension and social relief 6.8 10.2 Notes: 2008 data is for the Other 28.8 23.7 first three quarters. Additional to finance reserve fund 0 0 Source: Vietnam's Ministry of Finance. Others 19.5 20.2 - Large but inefficient capital spending markets (real estate and equity). When too much money is chasing too few goods, inflation is inevitable. Specifically, Table 3.7 suggests that the share of development investment during 2007 – 2008 the money supply increased by 80 expenditure has declined slightly from 2005 to 2008, but percent while GDP grew by only 15 percent, and inflation remains high. Capital spending accounted for over 91 at some point was as high as 28 percent.14 percent of development investment in 2008. By the second quarter of 2008, the government became In an economy like Vietnam, the ability to use scarce capital very determined to give priority to taming inflation, efficiently to create new jobs and build up industrial capacity achieving macroeconomic stability, mitigating negative is essential for improving competitiveness. However, as social impacts, and ensuring sustainable development by discussed earlier, large but inefficient investment exerts tightening monetary policy. The growth rate of credit and pressures on the price level and imposes constraints on money supply was cut from 55 and 35 percent in the first monetary policy, as the 2007–2008 slump showed. half of 2008 to 33 and 20 percent respectively in the second Monetary Policy half of 2008.15 As a result, CPI then fell to a single-digit level - An expansionary monetary policy and growing credit in early 2009. supply - The current account deficit has created significant Vietnam has generally adopted an expansionary monetary depreciation pressures policy throughout the last decade. During the period 2004 Any gap between official and unofficial exchange rates is – 2009, the average growth rate of credit and money supply a reliable indicator for the government's macroeconomic (M2) were 37 percent and 32 percent respectively (Table management. In Vietnam, the unofficial rate is always higher 3.5). These growth rates were almost twice as high as those than the official rate by a significant margin (Figure 3.9). In of China, which was the most overheating economy in the 2009, the unofficial rate rose substantially above the upper 2000s. The rationale behind this expansionary policy was to bound dictated by the State Bank of Vietnam. accommodate an expansionary fiscal policy, and to satisfy the investment needs of a growing economy. The upside of this policy is that it produced a relatively high growth rate of 7.3 percent during the period of 2000 – 2009. The down side of it, however, is that growth was achieved at the cost of increasingly serious macroeconomic imbalances. As noted earlier, macroeconomic instability predated the global financial crisis. The major trigger of the two-digit inflation in 2007-2008 was the sharp increase in capital inflows while the economy was functioning inefficiently.13 Since these massive capital inflows were not properly sterilized, they resulted in the record growth rate of money supply, credit and investment, in which a lion's share was allocated to inefficient state enterprises and speculative VIETNAM COMPETITIVENESS REPORT 71 FIgURE 3.9: 15,250 USD/VND 15,750 EXCHANGE 16,250 RATES, 16,750 2007–2010 VND/USD 17,250 17,750 18,250 Note: Unlabeled lines are the upper and lower 18,750 bounds. 19,250 Source: Global Financial 19,750 Data and State Bank of August-07 August-08 August-09 August-10 Vietnam. Official Rate Unofficial Rate Several factors contribute to this strain in the foreign In summary, the fixed exchange rate maintained throughout exchange market. First, high inflation during 2007–2008 most of 2009 together with the depreciation pressure on the led to further appreciation of the already overvalued dong dong had resulted in a widening gap between the official by about 20 percent compared to the beginning of 2007.16 and the unofficial exchange rates. On the one hand, these Second, the balance of payments shifted from a big surplus factors caused a surge in the trade deficit to USD 12 billion. in 2007 (USD 10.2 billion) to a large deficit (USD -5.7 One the other hand, the portfolio shift towards USD and billion) in the first three quarters of 2009 (Table 3.8 and gold also significantly contributed to a very high balance of Figure 3.10), putting further pressure on the dong. payment deficit, estimated to be USD 13 billion. Foreign exchange reserves fell sharply from 4.6 months of imports There were two main reasons for this balance of payment by the end of 2007 to less than 3.0 months of imports by deficit. First, the trade deficit increased sharply, because the end of 2009. This level of reserves was much lower than of currency appreciation and the ambitious stimulus that of other countries in the region (Figure 3.11). This put measures led to higher imports. Second, throughout 2009 the SBV in a very difficult situation to manage monetary the government's stimulus program provided a 4-percent policy and maintain the market confidence, especially when interest rate subsidy for short-term borrowings in VND to the "twin deficits," fiscal and current account deficit, still eligible firms to support their working capital. This policy exist, and the uncertainty in global financial markets and led to a surge in money and credit supply. At the same time, downside risks regarding the world economy remain.17 high interest rates for USD and gold deposits, together with the expectation of VND depreciation, encouraged firms and Facing the increasing pressure on the foreign exchange people to shift their portfolio by hoarding USD and gold market throughout 2009, the government devalued the instead of VND. This caused the "errors and omissions" item dong twice, the first time by 5.0 percent in November 2009, in the balance of payment to go up to USD 9 billion in the and the second time by 3.3 percent in February 2010.18 As first three quarters of 2009 and USD 13 billion in the whole a result, the foreign exchange market was cooling down year. and the unofficial rate was converging towards the official rate. However, since mid-July 2010, the two exchange rates FIgURE 3.10: 40% 2005-2009 2010 VIETNAM VS. 30% 22.9% 22.4% ASIAN PEERS ON 20% 18.4% 19.4% Trade Balance MACROECONOMIC 11.2% (% of GDP) 7.2% 6.6% 7.6% INDICATORS– 10% 3.6% 5.1% TRADE BALANCE, 0% 2005-2010 -10% -6/5% -5.8% -7.3% -8.0% -9.4% -11.2% -20% -30% Malaysia Singapore Malaysia Singapore China India Thailand Indonesia Philippines China India Thailand Indonesia Philippines Vietnam Vietnam Source: Economist Intelligence Unit 72 ASIA COMPETITIVENESS INSTITUTE TAbLE 3.8: 2006 2007 2008 2009(E) BALANCE OF Current account balance -164 -6,992 -10,787 -7,440 PAYMENTS IN Trade balance -2,776 -10,360 -12,782 -8,306 MILLION USD, Investment income (net) -1,429 -2,168 -4,401 -4,532 2006-2009 Remittances 3,800 6,180 6,804 6,018 Others 241 -644 -408 -620 Financial account balance 3,088 17,540 12,341 11,452 Official 1,025 2,045 992 4,473 Private (FDI, portfolio investment, trade 3,598 12,872 10,672 7,284 credit)1 Net financial assets of commercial banks -1,535 2,623 677 -305 Errors and omissions 1,398 -349 -1,081 -12,178 Notes: 1/ Includes the Overall balance 4,322 10,199 473 -8,166 sovereign bond issuance of USD750 million in Memorandum items 2005 and USD 1 billion Gross official reserves (excluding government in 2010; 2/ Data for 2009 11,491 20,964 23,022 14,148 include the SDR allocation deposits)2 of SDR 267.1 million; 3/ Current account balance (in percent of Data for 2009 include gold 0 -10 -12 -8 GDP)3 re-exports. Trade balance (in percent of GDP)3 -5 -15 -14 -9 Source: IMF Article IV Consultation (2010) GDP (in millions of U.S. dollars) 60,933 71,111 90,274 93,164 started to diverge, once again because of the return of trade credit rating of financial institutions, are limited. deficit (approximately USD 1 billion per month) together with the recovery of the economy. The reality is that the In summary, Vietnam has followed an investment-led massive inflows of foreign capital had saved Vietnam from growth strategy but much of the investment—especially the risk of a currency crisis. Capital flow reversals would be of the SOEs—has been inefficient. The economy faces a detrimental to the economy. Attracting and maintaining constant pressure to maintain a fairly high growth rate to FDI will still play a key role in Vietnam's development create employment for a young and growing population. policy in the future. The government has pursued an expansionary fiscal and monetary policy in most of the 2000s to support growth, Assessment of Macroeconomic Management leading to fiscal deficit, inflation and other macroeconomic Vietnam lacks a coherent and holistic framework for imbalances. macroeconomic management. Policies are designed and In addition, the shallow value-added of the economy has undertaken with little linkages and coordination. Monetary created persistent trade deficits. High inflation and major policy is either reactive and non-market driven—for "twin deficits" put the dong under constant devaluation example, imposing administrative price controls to curb pressure. Vietnam has fallen into a dilemma, which is inflation—or inconsistent and unpredictable—such as pushing for high economic growth risks macroeconomic exchange or interest rates. Fiscal policy requires more instability. Unless the economy's efficiency is improved, transparency and discipline to balance government revenues starting with public investment, it will be very difficult for and expenditures in a way that is consistent with a long-term the country to maintain a sufficiently high growth rate for a budget constraint of the public sector. Monetary and fiscal sufficiently long period of time to escape the middle income policies are not consistently and effectively coordinated. trap. Policy measures often address the symptoms, not the root causes of the problems. Macroeconomic management is not Microeconomic Competitiveness effective in preventing the build-up of unsustainable bubbles in the economy, for example in the real estate, credit, or Business Environment Quality equity markets, and strengthening the soundness of the Given the macroeconomic framework, the productivity financial market and institutions. of firms depends upon a set of interlinked microeconomic factors which underpin the business environment. The The State Bank of Vietnam is not fully equipped and business environment sets the stage (and incentives) for empowered to play the role of an independent central bank. company strategy and operations and shapes interaction Its capacity in institutional surveillance and risk management between firms. As firms respond, they in turn trigger remains weak. In addition, availability and transparency of changes in the business environment. Microeconomic information, such as fiscal position of the country or SOEs, VIETNAM COMPETITIVENESS REPORT 73 FIgURE 3.11: 20 18 FOREIGN 2007 2009 June/2010 EXCHANGE 16 RESERVES IN Months of import 12 MONTHS OF 12 IMPORTS, 2007 VS. 2009 8 8 7 6 6 5 5 5 5 4 5 4 4 4 4 4 3 3 2 0 Malaysia Singapore China Thailand Cambodia Philippines Indonesia Lao Vietnam Source: IMF, International Financial Statistics. competitiveness is therefore the result of a complex inner city roads, especially for large cities such as Hanoi and interplay of the decisions of public and private actors. Ho Chi Minh City. Vietnam's investment in infrastructure Effective strategies for upgrading competitiveness require has been high, amounting to over 10 percent of GDP. This an understanding of these interactions and their impact on is a higher percentage than that for Thailand and China innovation and productivity. which currently spend between 7 – 8 percent of GDP – more in line with World Bank recommendations (Fulbright Professor Michael Porter's 'Diamond' framework seeks to Economic Teaching Program 2008, 3).Public investment capture the interactions that determine competitiveness at has been the major source of financing, contributing the microeconomic level (Porter 1990). The four corners of almost three quarters of the total infrastructure investment. the diamond describe the four dimensions of the business While any developing economy like Vietnam requires environment for a country, region or cluster. The four high infrastructure investment, efficiency and impact of dimensions are: factor input conditions, the context for the investment are not necessarily achieved by higher investment strategy and rivalry among companies, demand conditions intensity. and the presence of related and supporting industries. - However, the efficiency of investment is low and Factor Input Conditions deteriorating, and the resulting quality and impact of infrastructure are questionable Physical Infrastructure - Significant investments over the last few years have created Despite the huge amount of investment, Vietnam's basic physical connectivity infrastructure capacity remains inadequate and quality still remains low according to respondents to the WEF's In recent years, the Government has increased investment in Executive Opinion Survey (EOS). the North-South highway system and in the improvement of TAbLE 3.9: 2000 2006 INFRASTRUCTURE GDP (billion USD) 31.2 61.0 INVESTMENTS IN VIETNAM, 2000 Infrastructure investment (billion USD) 2.6 6.5 AND 2006 Public infrastructure investment (billion USD) 2.4 4.8 Infrastructure investment/GDP (%) 8% 11% Source: Infrastructure Challenges in Vietnam, Public infrastructure investment/ Total infrastructure investment (%) 94% 74% Fulbright Economic Teaching Program, 2008. 74 ASIA COMPETITIVENESS INSTITUTE TAbLE 3.10: Ha Noi-Vinh Beijing-Shanghai Qinghai-Tibet INFRASTRUCTURE INVESTMENT Length 334 km 1,318 km 1,142 km EFFICIENCY – COMPARISON OF Speed 200 kph 300-350 kph 120 kph SEVERAL RAILROAD PROjECTS IN Travel Time 1.5 hours 5 hours - VIETNAM AND CHINA Cost $12.9 billion $22.6 billion $3.68 billion Source: Vietnam's Infrastructure Mil USD/km 38.6 17.1 3.2 Development Challenges, Fulbright Economics Teaching Program, 2008. Also according to the PCI survey, 71 percent of production and business activities in Vietnam (ranked 1st manufacturing firms report that their products are being in 2009 and 2nd in 2010 in terms of negative impact). damaged due to poor road quality, causing an annual average loss of VND 43 million per firm. Although Vietnam has 2,600 kilometers of railways, the railroad infrastructure is outdated. The market is entirely - Logistical performance is relatively poor compared to other controlled by the State which is unable to meet the growing countries in the region demand. Railway density is 0.8 km per 100 km2, and notable railway lines include the North-South (1726 kilometer); Vietnam's score on the World Bank's Logistics Performance Hanoi-Laocai (230 kilometer); Hanoi-Haiphong (100 Index (LPI) is shown in Figure 3.12. The LPI is a composite kilometer); and two transnational ones (Hanoi-Laocai- index, combining seven sub-indices, on a scale of 0 to 5. Of Kunming and Hanoi-Dong Dang-Beijing). Even though the comparator countries, only Cambodia shows a lower the North-South railway is being upgraded, the fact that score than Vietnam. there is no alternative line means even a slight congestion - Infrastructure and utilities (electricity and water) are at one location can cause the whole line to halt. Moreover, struggling to keep pace with growth and urbanization the country lacks railway lines to economic zones, industrial zones, seaports, and to neighboring countries such as Laos Obsolete and inadequate infrastructure is hindering and Cambodia. The existing railways have poor quality; Vietnam's socio-economic development: traffic congestion narrow gauge which limits train speed; and too many railway is occurring more frequently; people are wasting more time crossings at roads in residential areas, causing frequent on the road; and many roads are degrading, yet receiving accidents. little maintenance. The Executive Opinion Survey shows that weak infrastructure has been a major barrier to TAbLE 3.11: Rankings RANKINGS ON Port Air transport INFRASTRUCTURE Country Roads Railway infrastructure infrastructure (CCI), 2009 Vietnam 96 51 85 79 China 55 28 70 80 Singapore 1 8 1 2 Malaysia 25 21 33 32 Indonesia 87 61 92 67 India 92 20 91 71 Thailand 34 54 41 25 Philippines 110 99 128 119 Source: WEF Global Cambodia 69 100 97 91 Executive Opinion Survey, Institute for Strategy and South Korea 16 10 27 18 Competitiveness, Harvard Japan 21 3 36 50 Business School. VIETNAM COMPETITIVENESS REPORT 75 FIgURE 3.12: Singapore LOGISTICS Taiwan PERFORMANCE INDEX, VIETNAM Malaysia AND COMPARISON China COUNTRIES Thailand Indonesia Vietnam Cambodia Source: Logistics 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Performance Index 2007, World Bank/Turku School Logis cs Performace Index: of Economics. Country rankings from 0-5, based on seven subindices Though there are international seaports (in Saigon, Danang, Airports are also hitting capacity barriers, especially Haiphong etc.) receiving large ships, their services do not international airports. Passenger capacity is low, service meet the requirements of shippers. For instances, service quality is poor, domestic flights are frequently delayed. Up costs are too high; customs clearance takes too much time, to now, the size of Vietnam's domestic aviation market is usually between 3 and 7 days but in some cases up to one only nine to ten million passengers per year. month (for Singapore the figure is 10 minutes); international container transshipment port is lacking; railways and roads Though there are international seaports (in Saigon, Danang, are not connected to the seaport system. Infrastructure Haiphong etc.) receiving large ships, their services do not development has not kept pace with export growth. meet the requirements of shippers. For instances, service costs are too high; customs clearance takes too much time, The principal port for Vietnam is Ho Chi Minh City, which usually between 3 and 7 days but in some cases up to one ranks 36th among the busiest container ports in the world. month (for Singapore the figure is 10 minutes); international Since 2004, traffic has been increasing at an average of 4.2 container transshipment port is lacking; railways and roads percent per year, but it has not kept up with the expansion of are not connected to the seaport system. Infrastructure total container shipping worldwide, as illustrated in Figure development has not kept pace with export growth. 3.13. Its share in total container traffic (as measured by the total volume for the 40 top seaports) has declined from 1.3 The principal port for Vietnam is Ho Chi Minh City, which percent to 1.0 percent between 2004 and 2008. ranks 36th among the busiest container ports in the world. Since 2004, traffic has been increasing at an average of 4.2 FIgURE 3.13: Ho Chi Minh City traffic as percent of top 40 3,500 1.4% Annual container traffic (in thousands TEU) CONTAINER TRAFFIC 3,000 1.2% FOR HO CHI MINH busiest ports in the world CITY SEAPORT, 2,500 1.0% 2004-2008 2,000 0.8% 1,500 0.6% 1,000 0.4% 500 0.2% 0 0.0% 2004 2005 2006 2007 2008 Source: List of world's busiest container port. Ho Chi Minh City As percent of top 40 76 ASIA COMPETITIVENESS INSTITUTE TAbLE 3.12: Growth rate, 2005-2006 AIR TRAFFIC VOLUME Airport Total Passengers (million) (%) COMPARISONS Hongkong 43.3 8.7% Singapore 33.4 8.6% Bangkok 29.6 10.3% Incheon – Korea 27.7 8.1% Narita – Tokyo 27.5 1.7% Source: Fulbright Shanghai 16.1 10.4% Economics Teaching Program, Vietnam Kuala Lumpur 15.1 6.8% Infrastructure Challenges, 2008. Tan Son Nhat 4.26 2.1% percent per year, but it has not kept up with the expansion of - Demand for further investment is huge, but lacks focus total container shipping worldwide, as illustrated in Figure and prioritization; donor interests may affect selection of 3.13. Its share in total container traffic (as measured by the projects total volume for the 40 top seaports) has declined from 1.3 percent to 1.0 percent between 2004 and 2008. According to the plan, investment demand for electricity, roads, railways, and seaports over the next 10 years will Airports are also hitting capacity barriers, especially amount to about USD 120 – 150 billion (40 billion for international airports. Passenger capacity is low, service electricity; 53 billion for roads; 3 billion for railroads quality is poor, domestic flights are frequently delayed. Up excluding elevated railways and subways; 25 billion for to now, the size of Vietnam's domestic aviation market is seaports). Thus, an investment of about USD 12 – 15 billion only nine to ten million passengers per year. is required every year. However, traditional capital sources including the state budget, SOEs, ODA and government Electricity demand increased at an annual rate of 16-17 bonds can only satisfy at most 50 percent of that demand. percent; twice as fast as the growth rate of the economy. Private investment in infrastructure accounts for less than Domestic electricity capacity is inadequate to meet growing 5 percent of demand. The Government has called for demand, thus the country has to import electricity from private investment in infrastructure through public private Laos and China. According to the PCI survey in 2009, on partnerships (PPP). PPPs are expected to be an important average, firms had to deal with 50 hours of power outages in factor for infrastructure development in the coming years. a month as compared to 44 hours in 2008. In about half of Vietnam has applied the PPP model to a number of highway these instances, users did not receive any prior notice about development projects. So far there have been around 80 the power cut. implemented PPP projects in the form of BOT, with total Water supply coverage rate for urban areas remains low; invested capital of nearly VND 90 trillion (The Motherland about 70-80 percent in first- and second-tier cities; 50- 2009). Recently, the Government has drafted regulations 55 percent in third-tier cities; and only 15-20 percent in allowing the pilot implementation of several infrastructure fourth- and fifth-tier ones. Designed capacity of water projects under the PPP model. Specifically, the Government supply facilities is unrelated to demand, resulting in excess may subsidize up to 30 percent of required capital, or even capacity in some regions and capacity shortages in others. 50 percent for projects with long operating periods and high Water loss rate usually ranges from 30-40 percent, but in levels of capital recovery (Saigon Online 2010). some places, it can be as high as 50 percent. Water quality Meanwhile, the infrastructure development plan is scattered does not meet standards. and lacks strategic focus. For example, over the next ten Generally, Vietnam's urban areas do not have a separate years, Vietnam plans to develop 39 seaports with 108 waste water drainage system; instead, a common system for terminals to be built or upgraded (of which 32 seaports are both rain and waste water is still being used. In addition, the to be newly built). Meanwhile, there are only three main drainage system has not been built in a synchronous manner ports on the West Coast of the U.S. (over 1900km long). In and many downgraded culverts are limiting drainage Malaysia, there were only two major ports in 1970 but then capacity. Waste water from industrial zones has caused the Government decided to develop four more national and severe pollution in large rivers such as Dongnai, Saigon, Thi three sub-national ports which led to redundant capacity Vai, Day, Nhue, To Lich and Cau. Large cities are susceptible and fierce competition among ports. to being flooded whenever there is heavy rain or high tide. In short, drainage capacity and waste water management are still two major problems in this field. VIETNAM COMPETITIVENESS REPORT 77 bOX 3.2: The feasibility and efficiency of the North – South high-speed train project is being debated. NORTH – SOUTH With a total length of 1,570km, the project is estimated to cost USD 56 billion (current price) HIGH-SPEED TRAIN – equivalent to over 50 percent of Vietnam's GDP. To date, there are only 11 countries in the PROjECT world having high-speed train system -- all of them are developed countries (except China) and the popular length of the system is between 100 - 400 km, which is the optimal length for the ef-ficiency and safety of a high-speed train system (according to experts of the Vietnam's Construc-tion Association, with the length of more than 800km, airway transportation will be more effi-cient than railway transportation). It is estimated that the annual investment cost is USD 2.63 billion, two thirds of which is external borrowing from donors (with the condition that the project cost will remain unchanged and the annual GDP growth rate is kept stable at 6.4 percent over the next 25 years). This is raising con-siderable concerns about the financing feasibility and sustainability of the project, even among the donor community, given the current high levels of fiscal deficit and external borrowings. The impact of project is still questionable as high-speed train can only serve transportation of a small group of passengers who can afford the relatively high price rather than mass transportation of lower-income passengers and commodities. The experts of Vietnam's Environment Protection Association also estimated that the construction of the system will cause deforestation of 1,383 ha of natural forests and affect the lives of 16,592 households who will have to relocate for building the system. Source: Collected from VietnamNet, Dan tri, VnExpress Communication Infrastructure between 65 and 77 percent. Vietnam belongs to the second - Solid and high penetration rates with potential for further group with penetration rates between 24 and 27 percent, growth driven by the young population which also includes China, the Philippines and Thailand. Indonesia lags behind the others with a penetration rate of Vietnam came late to the Internet, with service first being 12.5 percent. offered in 1997. Since then, however, internet use has expanded rapidly. As Figure 3.14 illustrates, the latest data The same historical pattern applies to telecommunications (second quarter of 2009) show an Internet penetration rate —a slow start, followed by a more aggressive catch-up phase. of about 25 percent. In 2006, the government announced its Vietnam originally fell short of meeting the ambitious plans to increase the internet penetration rate to 35 percent goals set by the government for the expansion of the by 2010. Reaching this target would obviously require a telecommunications sector. In response, the government huge jump within a single year, which appears unlikely. adopted a new approach introducing greater competition into the market. The mobile telephony market is the most Figure 3.14 shows three distinct levels of internet dynamic. penetration. The top six countries show penetration rates FIgURE 3.14: South Korea INTERNET Japan PENETRATION Singapore RATES FOR VIETNAM Taiwan AND COMPARISON Hong Kong COUNTRIES, QII 2009 Malaysia China Philippines Vietnam Thailand Indonesia Source: Internet World Stats, http://www.internetworldstats. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% com/stats3.htm Internet penetra on rate (percent of popula on) 78 ASIA COMPETITIVENESS INSTITUTE FIgURE 3.15: 90 Telephone lines / Mobile Phones Subscrip ons VIETNAMESE 80 TELEPHONE 70 (per 100 inhabitants) SERVICES 60 PENETRATION, 50 1990-2008 40 30 20 10 0 1991 1993 1995 1996 1997 1998 1999 2001 2003 2005 2006 2007 2008 1990 1992 1994 2000 2002 2004 Source: World Development Indicators. Telephone lines (per 100 inhabitants) Mobile cellular subscrip ons (per 100 inhabitants) As Figure 3.15 shows, Vietnam had only 100,000 telephone service providers have been allowed greater flexibility in subscribers in 1990, that is, 0.14 fixed lines for every 100 setting prices; authorities have sought to make regulations persons, one of the lowest rates in the world. By 2000, it was more transparent and streamlined, and a number of state- approaching three million fixed lines; the equivalent of 4 for owned telecommunications companies have sought to every 100 persons. By 2008, penetration reached 34.32 per increase the role of the private sector in providing capital 100 persons for fixed line services and 81.2 per 100 persons for further investment in the industry. In areas where there for mobile services. is strong competition, operators are authorized to set tariffs and service charges, while the state-owned provider retains - The telecommunications market in Vietnam reflects the control over tariffs and service charges in monopoly areas. benefits of liberalization and competition. Prices have fallen and coverage has increased.19 The changes outlined above have brought about rapid growth in fixed lines and mobile phones, as well as a Telecommunications is one of several sectors in Vietnam marked widening in the geographical and socioeconomic reserved largely for state ownership on "strategic" and coverage of the expanding and multiplying networks. The "security" grounds, thus the approach to liberalization Vietnamese telecommunications sector has been growing at has been gradual and cautious. In recognition that a rate of around 25 percent per year; double the average for telecommunications is a key component of the the Asian region and triple the world average. infrastructure required for national economic development, the government has made substantial investment in the Financial Infrastructure20 sector, expanding and upgrading capacity and gradually - The financial sector has expanded quickly, yet it is still easing control. In 1990 the sector operated under strict shallow and unsophisticated state control, with effectively only one state-owned service provider. As illustrated in Figure 3.16, domestic credit provided by the banking sector corresponded to about 20 percent of GDP in Since then, however, foreign companies have been allowed the mid-1990s, but it has since been roughly at par with the to establish operations to produce telecommunications corresponding figures for key comparison countries. equipment and material or to assist domestic local operators in the provision of services. Since 1995, new domestic companies have been allowed to provide telecommunication services in competition with the state-owned monopoly and new services have been introduced. Since the late 1990s, VIETNAM COMPETITIVENESS REPORT 79 200 FIgURE 3.16: DOMESTIC CREDIT 180 OF VIETNAM AND 160 COMPARISON 140 Percent of GDP (%) COUNTRIES 120 China 100 Thailand 80 Vietnam 60 Singapore 40 Indonesia 20 0 Source: Key indicators 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010, Asian Development Bank. The market has also become more diversified but is still for three of the four major SOCBs were below the average largely bank-based, while equity market capitalization grew for Asian banks, and their capital adequacy ratios, although rapidly. Bond and insurance markets have been established meeting the international requirements of 8 percent, are but they remain relatively small. Despite the prominence of below the regional averages of 13.1 percent for Asia and the banks in the formal markets, their penetration rate within Pacific, and 12.3 percent for East Asia (Leung 2009, 48). the Vietnamese population is estimated to be only about 10 percent (Leung 2009, 47), and informal finance still plays a As stipulated in Decree No. 141/2006/ND-CP dated significant role in the economy. November 22, 2006, a commercial bank is required to have a minimum chartered capital of VND 3 trillion. However, - Actual access to capital remains limited and the access is of the 37 commercial banks there are seven whose chartered inequitable among different segments of the economy; state- capital is VND 5 trillion or above; seven are capitalized at owned banks dominate the market VND 3-4 trillion; the remaining 23 have less than VND 3 trillion. The majority of commercial banks have low The rapid growth of Vietnam's financial sector, however, has chartered capital which has limited liquidity, especially not equally benefited all segments of the economy. Lending in 2008-09 when monetary policy was tightened to fight practices of state-owned commercial banks (SOCBs), for inflation. Low capital also hindered the competitiveness example, still tend to favor state-owned enterprises. There of these banks. To strengthen the banking system and has been a downward trend in SOE lending, however, reduce liquidity risk, banks will have to increase their according to some estimates, SOEs accounted for less than chartered capital to at least VND 3 trillion by December 30 percent of the credit growth in recent years. Certain 21, 2010 according to the roadmap. Conditions for new regulations (supposedly for prudential purposes) still imply establishment will also be more rigorous, consistent with that SOCBs would continue to discriminate against private WTO commitment on opening financial market. sector borrowers and in favor of SOEs; these regulations include the requirement that unsecured lending will be A further weakness of the banking system is that the bad provided only to private enterprises with at least two debt ratio is still high and persistent. It was estimated at 2.52 consecutive years of profits (Leung 2009, 47). SMEs, which percent of total outstanding loans by the end of June 2009 generate most employment for the economy, still face the (The Motherland 2009). According to SBV, as of September greatest difficulties in obtaining access to credit. 27, 2010, the total outstanding loans have increased by 19.27 percent over the same period last year (Sai Gon Giai Although the number of non-state commercial banks has Phong Newspaper 2010). The real estate bubble in 2008 increased rapidly since 2005 and there are currently 37 joint- was partly due to excess bank lending, while credit market stock commercial banks, state-owned commercial banks monitoring was lacking. This situation also means that SMEs still dominate the credit market. As of September 2009, the have greater difficulty in gaining access to official sources four large state-owned commercial banks (Agribank, BIDV, of credit for export and production activities. Thus, the Vietcombank and Vietinbank) accounted for 51 percent assessment of credit satisfaction for Vietnam in the Country of total loans and two thirds of all loans in the interest rate Competitiveness Index may be somewhat overstated and subsidy program (Fitch Ratings 2009). optimistic. Besides, the maturity mismatch has barely - Soundness and performance of banks are still an issue; changed, posing risks for both banks and businesses. As a credit is increasingly going to real estate and speculative consequence, businesses must borrow short-term loans for activities long-term investment, thus requiring them to pay high cost of borrowing and also making production and business For both 2006 and 2007, the average rate of return on assets activities more prone to market risks. 80 ASIA COMPETITIVENESS INSTITUTE TAbLE 3.13: Indicators Vietnam Indonesia Philippines Malaysia Thailand China India Year, Source SELECTED EDUCATION School enrollment, 76 63 85 76 71 74 56 2005, ADB DEVELOPMENT secondary (%) INDICATORS, VIETNAM School enrollment, 16 17 28 32 43 20 11 2005, ADB tertiary (%) AND COMPARISON COUNTRIES Internet penetration 24 8 6 56 24 22 5 2008, WDI (per 100 population) Students studying in Note: a Data from Institute of the US (per 100,000 15 3 <10 22 13 7 9 2008/2009 a International Education (IIE), population) available at www.opendoors. iienetwork.org. - The regulatory framework is lax and supervision and risk Human Infrastructure management capacity remain weak - Strong performance on secondary and post-secondary education given the country's stage of development Lax banking regulations have increased systemic risks of the sector. In 2007, the SBV freely licensed rural credit Vietnam ranks favourably relative to other Asian countries institutions as urban commercial banks, leading to a leap on secondary school enrollment. Vietnamese students have in credit expansion and fuelling inflation. In 2005, the SBV also rapidly embraced education opportunities abroad. For required banks to complete the set up of credit classification example, Vietnam has become one of the 10 nations with system within three years, but by end-2008, only two out of the largest student populations studying in the US. over eighty commercial banks have completed this process (Leung 2009, 48). - New educational capacity has been added recently, but concerns remain about quality and relevance of education21 Also, there is a tendency among SOEs to expand into the financial sector by setting up their affiliated joint stock As of September 2009, the country had 412 colleges and banks ( JSBs) or investing in existing JSBs, contributing universities, 78 of which were private. There were a total of to the rapid growth of the sector. There have been 15 1,719,499 college and university students in the academic applications for banking license from large SOEs and three year 2008-2009, which represents a thirteen-fold increase of those have been issued during 2008. This makes it even since 1987. The ratio of students to population has risen harder for regulators to supervise the credit channeled from 80 per 10,000 in 1997 to 195 per 10,000 in 2009, and among companies within the same economic group and is expected to reach 200 per 10,000 in 2010. From 2005 to increases systemic risk. 2009, 195 colleges and universities were established and upgraded (139 public schools and 56 private ones). Only - High volatility on equity markets is a sign of limited four foreign-invested universities/colleges have obtained maturity establishment permits and only one has started operating. While establishing foreign-invested universities/colleges The equity market has grown rapidly in recent years from appears to be difficult, establishing domestic schools and/or about 5.5 percent in 2005 to the peak of 43 percent during upgrading colleges/vocational schools to universities can be the bubble in 2007 before falling back to 15 percent accomplished quite easily. Since criteria are somewhat lax, towards end-2008. The legal framework is in place, but the many domestic schools, especially private and local ones, soundness of market institutions and capacity of regulators provide poor educational quality because of inadequate remain weak. facilities and incompetent teaching staff. Volatility and speculation are common in the Vietnamese A number of private schools have been established on a small equity market. In 2007, the average P/E ratio of the 20 firms scale, purely for profit and are only focused on getting more with largest market cap was 73, compared with average students rather than improving the quality of education. P/E ratios in other Southeast Asian markets of between For instance, nearly 20 percent of private schools operate in 10 and 20 (Leung 2009, 50). Transparency and disclosure rented facilities at locations different from their registered of the listed companies is very poor and insider trading is location and most of them do not have space or facilities for still common. Corporate governance standards and investor sports and other extra-curricular activities. protection measures have not been enforced effectively. The market has recently lost over 60 percent of its value According to the Ministry of Education and Training compared to the peak in 2007. Speculation has prevented (MOET), while the total number of students increased the capital market from becoming an effective channel for by 13 times between 1987 and 2009, the number teachers raising capital for the economy. increased by only three times. The ratio of students to teachers was higher than stipulated (in 2008-2009 the ratio was 28 students per teacher). Many teachers teach up to VIETNAM COMPETITIVENESS REPORT 81 FIgURE 3.17: 63.0 Vietnam 70.4 DIFFICULTY IN 22.2 RECRUITMENT IN 37.7 Philippines 30.2 SELECTED ASIAN 11.3 COUNTRIES, 2007 29.6 Indonesia 51.9 7.4 36.7 Thailand 42.9 Note: Data drawn from 27.6 Japanese-Affiliated 25.5 Manufacturers in Asia, Malaysia 25.5 23.4 JETRO. Sources: Junichi Mori , 0 10 20 30 40 50 60 70 80 Nguyen Thi Xuan Thuy, Firms that reported difficulty in rerui ng workers (%) and Pham Truong Hoang Engineers or technicians Middle Managers General Workers (2009). 1,000 lessons per year, far more than the eligible maximum the Ministry, such as the promotion of faculty. This system number of 260 lessons per year. All schools have to follow denies universities and institutes the incentive to compete MOET's educational framework which was formulated and or innovate. Remuneration is based on seniority and issued in the early 2000s. A large proportion of this content official salaries are so low that university instructors must is now obsolete. moonlight to support themselves. International connections are lacking, and the system is very inward looking and does There has not been an effective quality evaluation system not benchmark itself with international standards (Thomas for higher education, and quality evaluation activities are Vallely and Ben Wilkinson 2009, 3-4). more or less just experiments. Higher education quality is currently assessed only through students' examination - The business community is increasingly concerned about grades. Although quality evaluation for higher education shortages of skilled labor started in 2006, so far only 169 schools (92 universities and 77 colleges) have submitted their self-assessment. Cooperation among educational/training institutions, In addition, the National Committee for Evaluation of enterprises and other units employing people is rare. As a Education Quality has assessed only 20 universities and result, graduates often lack the skills being demanded in the results are yet to be announced (National Assembly's the market. A survey conducted by the Vietnam Student Standing Committee Report 2010). Association (VSA) showed that 50 percent of graduates in Vietnam cannot find jobs in their field and those who have Government policy towards education is highly centralized to be retrained account for a significant share. According and very much control-oriented. The Ministry of Education to AmCham's discussion paper presented at the Vietnam and Training determines how many students can enroll Business Forum in June 2010, about 65 percent of the at a particular university and (in the case of public Vietnamese labor force is unskilled and about 78 percent universities) how much university instructors are paid. Even of the population aged 20-24 is untrained or lacks the administrative and operational decisions are controlled by necessary skills (AmCham 2010). FIgURE 3.18: 37.2 2003 53.8 DIFFICULTY IN RECRUITMENT– 2004 44.7 54.1 VIETNAM, 2003- 2007 2005 50.6 59.0 14.5 Note: Data drawn from 55.2 Japanese-Affiliated 2006 65.7 10.4 Manufacturers in Asia, JETRO. Surveys in 2003- 63.0 2007 70.4 2004 did not include questions 22.2 about recruitment of general workers. 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 Sources: Junichi Mori , Firms that reported difficulty in recrui ng workers (%) Nguyen Thi Xuan Thuy, and Engineers or Technicians Middle Managers General Workers Pham Truong Hoang (2009). 82 ASIA COMPETITIVENESS INSTITUTE FIgURE 3.19: Employing workers SELECTED DOING BUSINESS INDICATORS Redundancy costs (weeks of salary) ON "EMPLOYING Rigidity of employment index WORKERS" FOR VIETNAM AND Difficulty of redundancy index COMPARISON Rigidity of hours index COUNTRIES, 2009 Difficulty of hiring index 0 20 40 60 80 100 120 Source: World Bank/IFC, Different scales (index, weeks and rank) Doing Business (2010). Malaysia Thailand Indonesia South Korea China Vietnam The results of the Japanese JICA surveys of Japanese- There are several reasons for the low flexibility in the affiliated manufacturers in Asia show that the shortage of Vietnamese labor market. First, the imbalance between skilled labor is more severe for Vietnam than for its ASEAN labor supply and labor demand still persists. In reality, peers (Figure 3.17), and this difficulty has tended to increase unemployment in urban areas and job shortages in rural over time in Vietnam (Figure 3.18). ones are likely to be higher than reported because of a large informal sector, the seasonality of jobs and attempts by firms Intel's struggle to hire engineers to staff its manufacturing to minimize non-wage labor costs such as social, health or facility in Ho Chi Minh City is illustrative. When the unemployment insurance. Second, supply of skilled workers company administered a standardized assessment tests is low while demand has been increasing over time in almost to 2,000 Vietnamese IT students, only 90 candidates all firms, activities, economic regions, urban areas as well passed (5 percent), and of this group, only 40 individuals as rural ones. The problem of skilled labor shortage has were sufficiently proficient in English which is a hiring grown in both scope and scale, which is likely to increase prerequisite. Vietnamese and international investors cite the competition for skilled workers and push up labor costs—a lack of skilled workers and managers as a major barrier to disadvantage from competitiveness viewpoint. Third, expansion (Thomas Vallely and Ben Wilkinson 2009, 2). labor costs themselves tend to increase, driven in part Apart from the fact that formal education and training do by the upward adjustment of the minimum wage by the not match market requirements, another reason for the lack Government, making it harder for labor supply and demand of skilled workers is inadequate focus on vocational training. to meet. The current vocational training management system is The Navigos Vietnam's salary survey report in 2008 based fragmented and scattered across different government on data for 64,905 employees of 206 companies shows that bodies, such as MOLISA, MOET, or specialized the average salary increased by 19.5 within a year, the highest management agencies. Vocational training facilities and annual rate of increase in the past five years. Salary increases the teaching staff have not received adequate funding; and at that level may lead to the gradual loss of competitiveness society still undervalues this type of training and graduates of labor-intensive industries, unless they are able to increase of vocational schools. productivity. - Rigid and inefficient labor markets With respect to labor markets, the major issue remains the development of effective solutions to rapidly upgrade the skills of the workforce. Figure 3.19 shows some of the regulatory constraints on labor markets as defined by the Doing Business approach ("Employing workers"). Vietnam scores higher than China, South Korea and Indonesia on this indicator, but lags behind Malaysia and Thailand. The construction of the "Employing workers" indicator depends largely on the cost of laying off workers ("redundancy costs") and any restrictions on hiring and firing expressed in the "rigidity of employment" sub- indicator: a higher score means worse performance. VIETNAM COMPETITIVENESS REPORT 83 FIgURE 3.20: Enforcing contracts SELECTED DOING BUSINESS INDICATORS Trading across borders FOR VIETNAM Paying taxes AND COMPARISON COUNTRIES, 2009 Registering property Dealing with construc on permits Star ng a business 0 20 40 60 80 100 Inverted normalized rankings (100 = best) Source: World Bank/IFC, Doing Business (2010). Malaysia Thailand China Vietnam Administrative Infrastructure the figure in Singapore is only 84 hours. Closing a business - Modest performance on overall administrative takes 5 years in Vietnam as compared to one year in Hong environment Kong (Doing Business). The Government estimates that if 30 percent of the current administrative burden is cut The Doing Business rankings provide one perspective on the down (as per commitments of the Project 30), a significant performance of a country's administrative infrastructure. amount of VND 6,000 billion (USD 300 million) could be Of the ten indicators, arguably six refer to administrative saved in the economy. efficiency, including the enforcement of contracts. Figure 3.20 presents a comparison of Vietnam's performance to The total number of regulations in Vietnam that affect that of three comparison countries. Overall, China is doing businesses has increased dramatically since 2005. Over the worse, especially on construction permits, while Vietnam period 2005-2008, Vietnam issued more legal normative lags behind Malaysia and especially Thailand. documents (LNDs) that affected businesses (17,164 LNDs) than the previous 18 years put together (1987-2004). In - The administrative burden is imposing costs on business addition, during 2005–2008, the number of official letters and citizens containing legal norms has more than tripled compared to On average, a company has to spend 1,050 hours per year to the previous 18 years (Quang and Bentley 2009). (Figure deal with administrative procedures for paying taxes, while 3.21) FIgURE 3.21: 8,000 NUMBER OF LEGAL 7,000 DOCUMENTS22 6,000 Number of documents ISSUED BY CENTRAL 5,000 REGULATORY 4,000 AUTHORITIES 3,000 2,000 1,000 Source: www.luatvietnam.vn 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Official Le ers 2 6 8 26 63 38 41 47 72 168 189 97 242 196 551 606 283 217 2683 2621 2310 1767 Legal Norma ve Documents 236 249 253 311 479 484 447 506 670 853 982 1008 1207 1043 1478 1476 1423 1241 4130 4137 4434 4463 84 ASIA COMPETITIVENESS INSTITUTE This large unknown number of regulations is problematic ranked 73rd, behind most of its regional peers – China in many ways. The uncertainty of the existing stock of (42nd), Thailand (49th), Malaysia (29th) and India regulations (in terms of legal consistency, applicability or (33rd); even necessity) is likely to entail unnecessary costs for citizens and businesses when trying to find the right regulation to • World Bank—Knowledge Economy Index: a highly comply with. It also creates an opportunity for rent seeking flexible index based on several components. Vietnam is by corrupt officials. Such an uncertain environment is ranked 100th out of 146 countries; and friendly to neither businesses nor citizens. • INSEAD – Global Innovation Index: evaluates the - Several substantial regulatory and administrative reform aspects of the environment required to stimulate efforts are underway innovation within an economy and measures the results of innovation within the economy. Vietnam was ranked (i) Prime Minister's Master Plan to Simplify Administration 71st out of 132 countries in the 2009 – 2010 index. Procedures in State Management – Project 30 One of the main concerns for Vietnam given its high degree Project 30 entails a comprehensive approach with a target of openness is the insignificant spill-over effects from the of simplifying at least 30 percent of all Administration FDI sector into the domestic economy. A recent study by Procedures in 2010. Over 5,700 Administrative Procedures Tue Anh (2009), for example, suggests that the expected at all four levels of government across all 63 Provinces knowledge spillovers from foreign direct investments can have been collected in an electronic database. They will be be modest, calling for a proactive policy of promoting such reviewed and then either abolished, simplified or remain. spillovers in the context of a national system of technological The review process is using the principles of regulatory learning. impact analysis (RIA) to assess the legality, necessity and business friendliness of administrative procedures. Based on qualitative evidence, Vietnam appears to lack a Project 30 has been conducted by the Special Task Force coherent structure for active technological learning and in the Office of Government (OOG) with involvement innovation. A key institution in that process is the National of the international agencies (mainly USAID) and private Institute for Science and Technology Policy and Strategy sector through the Advisory Council for Administrative Studies (NISTPASS) in the Ministry of Science and Procedures Reform (ACAPR). A new agency called the Technology. NISTPASS has the appropriate mandate, but it Administrative Procedures Control Agency in OOG has is unclear whether it actually has the resources and influence been set up to continue the role of Project 30 on an ongoing to lead the way from a "passive FDI-dependent" structure to basis and also to manage the flow of new administrative the next level, and ultimately to an autonomous innovation procedures. system. (ii) 2008 Law on the Promulgation of Legal Normative Infrastructure for innovation and creativity has not Documents – Law on Laws) seen much improvement in recent years. In early 2007, Vietnam had 1,200 science and technology organizations The process for drafting new legal normative documents (institutions, research centers, and universities), which is has been enhanced through the requirements for public 2.5 times higher than the 1995 figure (Theo, http://www. comment and impact analysis of the proposed LND during most.gov.vn); 60 percent of these organizations are state- the drafting process. These requirements support greater owned. Although the number of science and technology transparency and introduce evidence-based policy making organizations increased, their quality remains low. Annual for better regulatory decisions. However the requirements investment on science and technology activities accounts for are clearly stipulated for Laws, Ordinances and Decrees, only 2 percent of total state budget spending, and there were while lower level LNDs and non-normative instruments are only few practical research results. not subject to these same formal requirements.23 The number of employees in professional, scientific and The success of programs such as Project 30 is critical for technological activities only accounts for 1.3 percent of Vietnam to improve its administrative and legal environment total employees in all establishments; and only 65.5 percent rapidly and gain competitiveness. of total employees used PCs in 2007. Of all professional, scientific and technological establishments, only 28.5 Innovation Infrastructure percent are connected to the Internet, and only 0.2 percent - Innovative and technological capacity remains weak had e-commercial transactions. The lack of adequate On the key indices that seek to measure the innovative domestic training institutions, sufficient research activities capacity and activity of countries, Vietnam's position is in training institutions and effective university-research uncompetitive: institution-enterprise cooperation undermines innovative capacity, limiting the country's competitiveness. • World Economic Forum—National Innovative Capacity Index: based on the institutional and policy - Inadequate IPR legislation may fail to create incentives for environment for innovation. In 2009, Vietnam was innovation-based competition VIETNAM COMPETITIVENESS REPORT 85 FIgURE 3.22: 18- Trade (exports + imports) as % of GDP, 2009 Malaysia TRADE OPENNESS– ,160 Vietnam VIETNAM AND 140 Thailand COMPARISON 120 COUNTRIES, 2009 100 80 Philippines 60 China 40 Indonesia 20 0 Source: EIU (for the export share); WTO (for the tariff ). 0% 2% 4% 6% 8% 10% 12% MFN Tariffs, Simple Average, Applied, 2009 There are diminished incentives for knowledge search by Context for Strategy and Rivalry Vietnamese entrepreneurs. Adopting existing technology Openness represents "inside-the-frontier innovation" which ultimately - High level of economic openness is readily available but lacking adequate intellectual property protection. Thus, the pioneering firm is likely to see its The economic reforms ushered in by the doi moi initiative successful application of some innovation replicated by in the late 1980s opened the economy to privately-owned other firms. The implied risk provides little incentive for firms. Subsequent policy developments went further to innovation. encourage private enterprise, and to reduce the role of state- owned enterprises (SOEs). Vietnam began to integrate There have been many cases in which IPR violations are substantively into the regional and international trade and either inadequately sanctioned or even not sanctioned at economic system by becoming a member of the ASEAN Free all. This has discouraged enterprises from renovating their Trade Area (AFTA) in 1996. However, the breakthrough technology. According to the National Intellectual Property lever in its integration process was actually the signing of Office, in 2008, there were 2,766 cases of intellectual the Bilateral Trade Agreement with the U.S. (US BTA). property infringement, up by 300 cases in comparison with Vietnam has fully participated in the global economy and 2007. However this is only the tip of the iceberg as many trade since its accession into the World Trade Organization cases are not discovered or reported by the regulator. In the (WTO) in 2007. European Commission's IPR Enforcement Report 2009, Vietnam was classified as one of the priority countries As discussed in chapter 2 Vietnam is one of the most open in which IPR protection and enforcement are seriously economies in the ASEAN region both in terms of trade worrisome. The report cited several reasons for the serious and foreign direct investment. Vietnam has removed most IPR violation in Vietnam, including deficient enforcement of its trade and investment barriers in compliance with of the domestic IPR regulations, lack of trained IPR officials its integration commitments. For example, the amended and lengthy and burdensome proceedings, civil and criminal Enterprise Law (2005) has superseded previous laws and put procedures, provisional measures, and particularly customs all enterprises of different segments (FDI, SMEs and SOEs) procedures as being deficient or not implemented. under a common legal framework. In some cases, especially at the provincial level, FDI firms receive even more privileges - Investment in R&D and innovation remains limited and special treatments than local private firms, such as lower tax rates or access to land. Empirical analysis of the 2008 Enterprise Survey shows that among the 205,529 surveyed enterprises there are 1,340 in the field of science and technology (or 0.65 percent). 26.3 percent of which are in the state sector; 63.3 percent in the private sector; and the remaining 10.4 percent in the foreign- invested sector (FIS). Average technological and scientific R&D investment among these enterprises is equivalent to 1.15 percent of their pre-tax profit; 0.4 percent for R&D activities and 0.69 percent for technology adaptation. The figure for all surveyed enterprises was much lower, equivalent to 0.27 percent of pre-tax profit, of which 0.1 percent for R&D activities and 0.16 percent for technology renovation. 86 ASIA COMPETITIVENESS INSTITUTE Vietnam's openness to both trade and investment is regulators, such as for telecommunications, electricity and expected to increase further in the future since its current banking. Even so, there is a continuing challenge to educate average applied MFN tariffs are still high relative to its the sectoral regulators regarding the competition impacts of Asian peers and will decline in accordance with Vietnam's their decisions, and the respective roles of the competition multilateral and bilateral trade commitments. Vietnam's agencies with an economy-wide mandate vis-à-vis the more robust integration into the world economy has enabled the limited sectoral optic. Moreover, the fact that VCAD country to benefit from the globalization process, yet this operates under the jurisdiction of the Ministry of Industry poses challenges for regulating a more complex and exposed and Trade, which is in turn the regulator of key industrial economy. sectors, affects the independence and objectivity of its operation. Level of Rivalry - Weak competition policy and enforcement More needs to be done to ensure clarity in the roles and responsibilities of the competition agencies and sectoral Vigorous domestic competition is essential for promoting regulators, and to tackle situations where different innovation. As part of Vietnam's transition to an efficient standards are applied by different agencies. More broadly, all market economy, the National Assembly adopted the government agencies need to embrace the likely impact of country's Competition Law in December 2004; it entered policies and activities on competition. into force in July 2005. The Law applies to all enterprises: domestic private, SOEs and foreign invested enterprises - Unequal treatment of companies, with SOEs receiving (FIEs). special treatment and privileges The Law created the Competition Administration As in other instances, the formal legal framework has been Department (VCAD) with a broad scope of responsibilities— established, but effective application lags behind. State restraint of competition, unfair competition, management monopolies and special arrangements for SOEs continue of competition, anti-dumping, consumer protection and to distort the playing field. While equitization of local international cooperation. The combination of protecting SOEs appears to have removed much of the SOE bias at domestic competition and taking on an important role in the provincial level, central authorities still treat SOEs as international trade relations is somewhat unusual, and may special concerns. That special role may also undermine pose particular challenges to the new institution. competitiveness more broadly, since SOE performance is critical for a range of supporting industry functions. Exemptions are possible for instances where agreements among enterprises may enhance efficiency or set standards At the same time, FIEs as a rule have relatively few complaints that may enhance competition. However, exemptions may about uneven treatment, although cases of course do occur. also be possible for the protection of SMEs, or for the One issue is the relative isolation of FIEs from the rest of formation of export cartels. The Law also allows for state the economy—they are primarily part of global value chains monopolies, authorizing VCAD to take action only if with relatively shallow roots in the Vietnamese economy. the state monopoly is acting outside its monopoly grant. Foreign investors, however, often lead the charge with respect Competition policy relies heavily on market shares as one to deficiencies in terms of administrative environment, of the principal indicators of dominant position. Thus, supporting industries, in particular infrastructure and agreements in restraint of competition are prohibited only logistics services. where the participating parties' have a combined market SOEs are receiving special treatments from the government share of 30 percent or more of the relevant market. Below in many different forms, both explicitly and implicitly. the 30-percent threshold agreements among firms are not They are sheltered from competition and market discipline prohibited, even if they do end up restraining competition. which other economic segments are obliged to comply with. Even once anti-competitive behaviors have been identified Examples of special, anti-competitive treatments that the and confirmed by the VCAD, penalties and enforcement state-owned sector is enjoying include: measures do not appear strong enough to effectively stop the violation. • Access to subsidized credit, either directly through financing from government's budget or government's Vietnam's experience with the full application of the guarantee or indirectly through state-owned commercial Competition Law is limited. Initially, few businesses were banks with whom they have traditionally strong ties.24 aware of any potential violations, either by themselves of Government's guarantees for corporate borrowings have by others affecting them. For the domestic private sector, been used more widely recently and are increasing rapidly outreach and education therefore are key priorities. to the equivalence to 7 percent of GDP, of which 90 Another issue concerns the cooperation between the new percent is for SOEs (State Bank of Vietnam's estimates). competition agencies and the sectoral regulators. There • Access to land: SOEs usually possess property of is an overlap of responsibilities as VCAD has assumed high commercial value in lucrative locations, but pay jurisdiction concerning competition-related complaints. land rental fees much lower than the market rates. The agency has reached an understanding with some sectoral VIETNAM COMPETITIVENESS REPORT 87 Undervaluation of property and other state assets is - Equitization (privatization) efforts have targeted only quite common, especially when SOEs go equitized (see smaller SOEs and have focused on diffusing state ownership examples in Box 3.3 below); rather than improving efficiency and governance of enterprises • Exclusively obtaining government contracts through non-competitive bidding or access to insider information The equitization process has been implemented since 1992 through connection, especially in public invested and it has been well emphasized in the government's policy projects; and statements. However, the progress of the equitization process in Vietnam has not been very promising. In 2009, the • Exemption from prudential governance and financial number of equitized enterprises (105) is only equivalent to management regulations which are currently applied 8.4 percent of the plan for 2009 – 2010 (Ministry of Finance to all public companies such as information disclosure, 2010). Only smaller SOEs that once reported to provincial independent audit, etc. governments and line ministries are equitized, while bigger SOEs are holding monopoly or dominant positions and more important SOEs have been consolidated into state in almost all key major economic sectors and they are conglomerates and put under the direct oversight of the possessing huge assets as compared to other segments in the central government. In most cases, SOEs are only partially economy. However, their performance is disappointing on equitized while the state still retains a controlling share of many fronts.25 The debt of 70 conglomerates and general the enterprises. The current approach to equitization focuses corporations had built up to an astonishing USD 28 billion on selling state shares to outside investors rather than on (40 percent of GDP) by the end of 2007. In addition, improving governance and efficiency of the enterprises. The SOEs' investment increased abruptly by nearly 60 percent, state's intention in retaining control of the equitized SOEs resulting in a surge in fiscal deficit in 2007. According to a fails to create institutional mechanisms necessary to drive report of the Ministry of Finance, the debt-to-equity ratios performance improvement, which makes equitization less of conglomerates are very high: 42 times in the case of attractive to strategic investors. Lack of transparency and Cienco 5, 22.5 times for Cienco 1, 22 times for Vinashin, standards in valuation of the equitized assets such as land, and 21.5 times in the case of Lilama (Harvard's Fulbright real estate and machinery further provides avenues that can Economics Teaching Program 2008, 8). lead to misallocations of state assets. Anti-competitive practices undermine the efficiency of - Competition focuses on price, not on features and quality SOEs' in the long run as they are not motivated to strive for The garment industry is a clear example of competition better performance. SOEs believe that they are "too big to based on low cost. It has grown almost 30 percent per year fail" entities and are therefore willing to take extra risks and over the last few years, and the country has now become one enter into highly speculative areas in a quest for short-term of the world's ten biggest garment exporters. However, the profitability. This anti-market treatment imposes great costs industry's average profitability rate is only 5 – 8 percent.26 on other more efficient segments of the economy by having The industry has to import up to 90 percent of cotton them compete for much scarcer resources. These conditions and 70 percent of accessories from abroad and generate therefore limit the capacity of other business entities from only marginal profits from simple CMT (cut, make, trim) pursuing productive opportunities within the domestic process. Competition on design, branding and product economy. differentiation is also very limited within the industry. bOX 3.3: The Hanoi Department of Natural Resources and Environment has just released a report after the THE STATE SECTOR inspection by the municipal People's Committee of the 420 projects which had been allocated MAINTAINS land or eligible for land rent from January 1st 2003 to December 31st 2008.The inspection team INEFFECTIVE has discovered 20 projects (taking up a total area of about 365,000 m2) with serious violations PERFORMANCE which need to be withdrawn. In particular, the Hanoi production services import-export company DESPITE HAVING (Haprosimex) is being suspected for improper use of a "beautiful" area located at the centre of LAND INCENTIVES Hanoi. As decided by the Hanoi People's Committee on February 18th 2009, Haprosimex was allowed to rent the area of 353.4 m2 at 22 Hang Luoc (Hoan Kiem, Hanoi) to locate their head office for 50 years. Annual land rental fee was VND 339,300 per m2, which would remain stable for five years. The land lease contract between the Committee and Haprosimex again stated that this land is to be used for location of the head office by the city's decision. However, on July 15th 2009, Haprosimex subleased this land to the Fashion Joint-stock Company NEM for a period of 34 years with total rental fee of VND 24 billions. At the cost of VND 339,300 per m2, in 50 years Haprosimex only pays for the Committee around VND 6 billion. Source: CIEM 88 ASIA COMPETITIVENESS INSTITUTE - Unclear definition of government's roles in a market still under the direct management of the government. Also, economy SCIC management team is all drawn from the government (notably Ministry of Finance) and its operation is still Since the mid-1980s, the Government of Vietnam has heavily influenced by the government which prevents it experienced a significant transformation in its role in the from separating commercial business from political agenda. economy. While the Government remains an important factor in most spheres of the economy, a new role needs In addition, the government's traditional approach to to evolve to keep pace with a more complex and rapidly regulating the economy is through imposing control and changing economic environment. administrative measures which in many cases are either ineffective or not compliant with market principles. First, the government's role as an owner should be Examples of such anti-market intervention include sufficiently separated from its regulatory functions. This is mandatory requirements for financial institutions to buy not particularly notable in the area of SOE management. treasury bills or imposing price controls for taming inflation. The biggest conglomerates are reporting directly to the The current approach in government intervention fails to Prime Minister, while smaller SOEs are reporting to create a level and competitive environment for all enterprises line Ministries, and more recently SCIC. Their major to compete for excellence and quality. investment and business decisions are made or approved by those owners who, at the same time also, are the regulators Demand Conditions of the economy or specific economic sectors. This creates - A sizeable and growing market serious conflicts of interest as SOEs have special ties and connections with the regulators which provides significant Domestic demand patterns reflect both growing per capita advantages for them vis-à-vis their rivals from other incomes and growing sophistication among domestic economic segments. Moreover, as the state conglomerates consumers. The discussion of rising per capita incomes in expand, the Government will not have sufficient staffing and Section 2.1 suggests a growing middle class while market size other resources to control closely their operations, leading in terms of effective domestic demand is also expanding. The to loopholes in governance and management of the SOEs. A.T.Kearney Global Retail Development Index (GRDI) ranks Vietnam as the 14th most attractive markets for retail The Government has taken the first step in establishing an expansion in 2010. investment management arm, the State Capital Investment Corporation (SCIC), to represent the government's ownership in SOEs. However, the SCIC to date has received transfers of only smaller, less important or loss- making enterprises from the government, ministries and provinces, while the most powerful and lucrative ones are bOX 3.4: The Head of the Telecoms Department, Ministry of Information and Communication (MOIC), PRICE WAR AMONG said that the Ministry will require Vietnam Post and Telecommunications Group (VNPT) to TELECOMMUNICATION abandon its plan to reduce mobile phone tariff by 20.29 percent for two tariff schemes as this CARRIERS violates the Ministry's regulations on the band of tariff reduction no more than 15 percent. Accordingly, VNPT will have to adjust its tariff reduction plan and submit it to the Ministry to ensure that the plan is in line with the government's regulations on the 15 percent cap. Previ- ously, Vinaphone and MobiFone announced to cut down mobile phone tariff for their 60 million customers as of August 10, 2010. All tariff schemes will be reduced by 10-15 percent, except for the Vinaphone's TalkEZ-Teen and MobiFone's Q-Teen schemes which enjoy up to 20.29 per-cent tariff reduction. Meanwhile, another telecom carrier, EVN Telecom, said that they don't have any plans to reduce the tariff further, but instead will focus on improving the service quality and improving customer services. According to the representative of the MOIC, more competition will benefit customers and en-courage companies to improve. However, competition merely based on price or dumping is un-healthy and unfair. Such unhealthy competition behaviors aim to establish a monopoly or domi-nating position for the companies and deteriorate the competitive environment of the market. MOIC encourages, supports and urges companies to improve productivity, reduce costs to be-come more competitive, but does not support those companies who aim to dominate the market by dumping the price or establishing monopoly positions. Such types of competition behaviors are not in line with international practices and regulations on market competition. Source: VietnamNet VIETNAM COMPETITIVENESS REPORT 89 FIgURE 3.23: 60 PATTERNS Inverted normalized rankings OF MARKET (100=best performance) 50 DEVELOPMENT FOR VIETNAM, CCI 2001- 40 2009 30 20 Source: WEF Global 10 Executive Opinion Survey, Institute for Strategy and 0 Competitiveness, Harvard 2001 2002 2003 2004 2005 2006 2007 2008 2009 Business School. Buyer sophis ca on Degree of customer orienta on Presence of demanding regulatory Extent of marke ng - Sophistication among domestic consumers is improving, yet of supporting enterprises which build around anchor firms still low (industrial castle town) or clusters in large cities where lots of basic production processes are treated (urban processing Figure 3.23 suggests that domestic consumers are in fact clusters) have emerged recently in Vietnam (IDE JETRO becoming more sophisticated. There has been no change 2005) with respect to "demanding regulatory standards." The same observation would apply to the "extent of marketing," with Tourism clusters are currently located in the Central coast the exception of the major leap between 2008 and 2009. while the oil and gas cluster is concentrated in the Southeast It is difficult to find a reason for that jump. The other two coastal region where there is abundance of these resources. categories, "degree of customer orientation" and "buyer The agricultural cluster is found in the Mekong Delta. Light sophistication" follow a similar U-shaped trend. Vietnam industrial and export-oriented clusters tend to concentrate scored high on that measure in the early 2000s, followed by a in the Southern region, especially in Ho Chi Minh City and decline until about 2006. The country's relative performance surrounding provinces (garment, footwear, food processing, since then has improved on both of these measures. electronics etc.). On the other hand, heavy and more capital- intensive clusters tend to concentrate in the Northern These patterns suggest that Vietnam, as seen by survey region, especially in Hanoi and surrounding provinces respondents, is making progress in terms of goods and (mechanical and engineering, electronics, ship building, product markets given its changing demand conditions and etc.). One of the reasons for this distribution is explained improved customer orientation. The upshot of these trends by the fact that import-substituting heavy industries and is that competition for local markets is likely to become more SOEs were once concentrated in the Northern region, while challenging, as Vietnamese producers are facing foreign the Southern region has emerged as the centre for export- firms in an increasingly open market. Meeting that challenge oriented industries after the economic reform and market therefore calls for constant innovation to maintain or gain opening that started in 1986. As a result, the Southern market share. region is also the centre of export-supporting services such State of Cluster Development as port and logistics. In summary, co-location and clustering of firms is evident in Vietnam, but the formation process Presence and Dynamism of Clusters has occurred naturally rather than being driven by effective - Natural process of specialization and geographic co-location cluster policies. of similar activities have occurred - Sophistication and dynamism of clusters are low, with A cluster is a geographically proximate group of interconnected shallow linkages among cluster participants; mostly all companies and associated institutions in a particular field, doing the same activities linked by commonalities and complementarities. In reality, individual firms often face sector-level constraints that they The 2005's IDE-JETRO study found out that access to land cannot address alone, and cluster approach will help increase and infrastructure (connectivity with markets and ports) broad-based competitiveness which is hardly achieved have been the key factors driving the distribution of clusters through supporting individual firms. rather than labor and business linkages. In Vietnam, the traditional type of village-based industrial A study carried out by students of the microeconomics of clusters has grown historically and they tend to specialize competitiveness class at the Harvard Business School (Dost in crafts and other traditional products. An example of this et al., 2008) found that the success of Vietnam's electronics is Hanoi's guild streets. The more modern types of clusters and footwear clusters rested on some weak foundations that 90 ASIA COMPETITIVENESS INSTITUTE threatened long-term sustainability. One of the factors is the Policy measures proposed or adopted usually focus on fleeting nature of competitive advantage based on low-cost providing intervention, protection and subsidies with an aim productive labor. Similar situations apply to other product to shelter industries from competition or create economies categories where Vietnam's exports have been growing. of scale. The automotive industry is just one example of such protection and intervention. Local content requirements Leveraging on FDI anchor firms to develop and facilitate were promulgated and generous financial incentives have formation of clusters seems to be unsuccessful so far. The two been provided to encourage local outsourcing. However, reasons behind this are that FDI firms operate as part of their these passive and direct interventions and subsidies have own global value chains and have very shallow roots in the created opportunities for fraudulent activities (with local economy, and that supporting and related industries are regards to Certificate of Origin) or the wholesale import almost non-existent. Despite impressive growth and export of components and parts and doing only simple assembly records, local value-added remains modest. It is estimated work in Vietnam in order to benefit from the incentives. The that the local content of automobiles or motorcycles shipbuilding industry is another example where subsidies produced in Vietnam is only at 5 – 10 percent. This is also and protection have been provided to build a national evident in other industries of the economy. For instance, the champion, but ultimately these resources and support were garment industry has low value-added because firms have to misused and abused import up to 80 – 90 percent of materials and accessories. Similarly, Intel buys less than 10 percent of its input from Cluster policy needs to be integrated closely in regional the local market. While Canon is often cited as a success policies, but in reality regional strategies are either developed story for developing a local supply chain, 90 percent of their in isolation or copied from each other without thinking suppliers are actually FDI firms operating in Vietnam. about how to create linkages and synergy among regions through cluster formation. The lack of local suppliers have limited forward and backward linkages within clusters and prevented local firms - Industrial parks are not oriented towards clusters from participating deeper in global value chains. Industrial parks are widely used by provincial governments - Inconsistent understanding of the cluster concept, leading as a tool to offer ready-made infrastructure and simplified to a lack of systematic cluster policy administrative procedures to investors. By 2007, there are 550 industrial parks or economic zones established in The "cluster" concept is new to Vietnam, and so it is Vietnam (see Table 3.14). However, there have been few sometimes misunderstood and misconstrued with industrial efforts to encourage the development of supporting and parks which merely define the co-location of firms in a related industries and services which help form cluster common industrial estate without significant linkages and linkages. Recently, there is evidence about success in building interaction among them. up supporting industries in Que Vo industrial park to There has not been any formal discussion on cluster policy support the anchor firms, i.e. Canon and Foxconn. However, among policy makers in Vietnam. Despite some on-going most of the suppliers of supporting parts/components were individual discussion and efforts touching on certain aspects brought in by the FDI anchor firm from their home country of clusters, such as industrial park development, supporting or China. Linkages are also rarely established beyond the industries, business–research collaboration, etc, a holistic industrial parks' boundaries. To date, industrial parks just view and policy approach towards clusters is still absent. play the role of an industrial estate solution rather than a platform for forming clusters. The CCI's ranks Vietnam relatively positive on cluster development probably as a result of the different perceptions of the "cluster" concept among respondents of the WEF Global Executive Opinion Survey in Vietnam. These misconceptions have likely contributed to an over- optimistic assessment of cluster development in Vietnam. - Interventionist approach towards industrial policies Vietnam is taking an ambitious approach towards industrial policies, yet without clear targets and priorities. About 74 strategies and master plans for sectoral development have been developed and issued for the period until 2020 and beyond. All of these plans appear to focus on developing their respective sectors to become the leading industry in the economy. VIETNAM COMPETITIVENESS REPORT 91 TAbLE 3.14: Structure (%) NUMBER AND Export STRUCTURE OF Number Industrial Processing High- Economic Park (or so- ECONOMIC zONES Zone tech Zone called cluster) Zone AND PARKS BY Operation status 550 36.7 1.1 0.4 1.3 60.55 TYPE AND BY In operation 332 44 1.8 0.3 2.1 51.81 REGION In process of construction 112 33 - 0.9 - 66.07 In warm up phase 105 17.1 - - - 82.86 By region Red River delta 165 27.3 1.2 - 0.6 70.91 North east 31 32.3 - - - 67.74 North west - - - - - - North central coast 55 38.2 - 1.8 5.5 54.55 South Central Coast 119 20.2 - - 2.5 77.31 Central Highlands 16 40.8 - - 6.3 50 South East 103 65.1 3.9 - - 31.07 Source: General Statistics Mekong river delta 61 45.9 - - - 54.1 Office of Vietnam. Company Sophistication - Unbalanced structure, with SOEs taking a lion's share of Economic Composition by Type of Company investment but creating modest revenues and employment - Slight changes in GDP structure by ownership over the last According to the recent report titled "The Execution of decade, with the slight decline in state sector's share taken Policy and Law on State Assets and Capital Management up by the foreign invested sector by the State General Corporations and Conglomerates" The GDP structure by ownership is quite stable, with the of the National Assembly's Standing Committee (NASC state sector's share decreasing slightly from 40.8 percent in November 2009), during the period of 2005 – 2007, 2000 down to 37.8 percent in 2009. The non-state sector's the SOEs accounted for 51.3 percent of total business share stood at 48–49 percent over the same period and the sector capital, but contributed only 35.4 percent and 28.3 foreign invested sector gained grounds from 10.8 percent percent to revenue and employment growth respectively. to 13.4 percent between 2000 and 2009. Although SOEs In contrast, the private firms generated more revenue, and has declined as a result of the equitization process, the state more importantly, the sector created more jobs while having sector has not been shrinking in terms of scale because it much less capital share compared to the SOE sector. has been reconsolidated into conglomerates and refinanced to create economies of scale. On the other hand, while the non-state sector has seen growth in terms of quantity and employment, it still lacks the dynamism to become a growth driver. FIgURE 3.24: 100% 10.80 13.40 GDP STRUCTURE BY 90% OWNERSHIP 2000 80% AND 2009 70% GDP Structure (%) 48.40 28.80 60% FDI 50% Non-state 40% State 30% 20% 40.80 37.80 10% Source: General Statistics 0% Office of Vietnam. 2000 2009 92 ASIA COMPETITIVENESS INSTITUTE FIgURE 3.25: 100% CAPITAL, 90% 19.40 21.70 21.30 REVENUE, AND 80% EMPLOYMENT 70% 29.30 Share (%) STRUCTURE OF 60% FDI 42.90 ENTERPRISES 50% 50.40 Private BY OWNERSHIP, 40% SOEs 2005–2007 30% 51.30 20% 35.40 28.30 10% Source: Report of the National Assembly's 0% Standing Committee (2009). Capital Revenue Labour The non-state sector also outperforms the state sector investment in each sector) as a consequence of the in industrial production, which is considered to be policy toward intensive infrastructure investment to central in Vietnam's overall development strategy toward fuel growth. Other public goods such as administrative industrialization. In 1995, the state and non-state sectors services, education and healthcare, social services had an equal share in the total value of industrial output. altogether account for 20 percent of the total investment. But by 2009, the share of the non-state sector has exceeded While the share of investment for these sectors in the that of the state sector by threefold. Following the same total budget spending is high, their share in the total trend, the state sector's contribution to industrial growth public investment is relatively small as it is overshadowed has decreased sharply from more than 40 percent in 1995 to by the dominant share of infrastructure investment. lower than 10 percent in 2009. - Among the remaining 40 percent for investment in - Investment focus varies by ownership economic activities, manufacturing accounts for 10 percent, mining 7 percent, and agriculture 5.4 percent. The state sector's investment structure in 2009 can be The investment share in real estate and construction is characterized as follows: relatively high—up to 7.4 percent, while investments for - Transportation and utility account for the biggest shares science and technology amount to only 1.6 percent. of the state sector's investment (20 percent of the total FIgURE 3.26: Transport and communica ons STATE INVESTMENT U lity and power STRUCTURE BY Manufacturing INDUSTRY, 2009 Mining Public administra on and defense Community and social service Agriculture and forestry Others Construc on Educa on and training Health and social work Trading and repair Source: General Statistics Office of Vietnam, Real estate and ren ng Enterprise Census, 2006 – Science and technology 2008. Financial internedia on VIETNAM COMPETITIVENESS REPORT 93 FIgURE 3.27: 2.8% 1.7% Hotels and restaurants FDI SECTOR'S INVESTMENT Real estate STRUCTURE BY Manufacturing INDUSTRY, 2009 17.1% Construc on 39.6% Mining Transporta on and communica ons Others 33.8% Trading Source: General Statistics Office of Vietnam, U lity and power Enterprise Census, 2006 – 2008 Agriculture and forestry For the FDI sector, its investment structure exhibits the - FDI investments in the agriculture and utility following characteristics: sectors are still very limited (0.6 percent and 0.8 percent respectively), which is a reflection of the low - The FDI sector's investment in 2009 is heavily attractiveness or high entry barriers in those areas. concentrated in the real estate (34 percent of total FDI registered investment) and hotels and restaurants (40 Finally, the non-state sector's investment structure seems to percent) sectors—accounting for three quarters of the be unchanged overtime. In 2005, key areas attracting non- total investment in 2009. state sector's investment were trading, agriculture and coal mining as illustrated in Figure 3.28 below. - Of the remaining one quarter, investment in manufacturing counted for the largest share of 17 Currently, 65 percent of the sector's total investment is percent. Over the period 1988–2009, investment concentrated in trading, hotels and restaurants, construction, share in manufacturing amounted to 45.6 percent transportation, coal mining, telecommunications and while the combined investment in the real estate, seafood processing. hotels and restaurants sectors came up to 33 percent, a sign of the recent rapid shift of FDI into real estate and speculative areas. FIgURE 3.28: INVESTMENT 5% 2% Agriculture STRUCTURE OF THE 5% Fishery NON-STATE SECTOR, 4% 2005 Coal Civil construc on 13% Trade Hotela 64% 2% Road Transporta on 2% Communica ons services Source: General Statistics Office of Vietnam. 3% Other services 94 ASIA COMPETITIVENESS INSTITUTE TAbLE 3.15: Delegates Number DELEGATES TO 12TH Vietnamese business community (associations) 2 NATIONAL ASSEMBLY State-owned enterprises 7 FROM THE ENTERPRISE Private-owned and joint-stock enterprises 15 SECTOR Cooperatives 2 Source: Vietnamese National Assembly, List of Delegates of Total 26 the 12th National Assembly, www.quochoi.vn. In summary, state enterprises concentrate on capital-intensive The adoption of modern corporate governance standards activities such as transportation and utilities. Private is still relatively poor, even among large companies. enterprises focus more on more short-term and service-oriented The operations of boards or directors, appointment of activities such as retails, hotels and restaurants, real estate, management, information disclosure and protection of etc. FDI enterprises initially focused on import-substitution minor investors are most often cited by investors as leading manufacturing and then gradually shifted more to export- concerns on corporate governance. Nepotism is common; oriented light industries and more recently to real estate. in many companies, senior management is appointed by connection rather than by professional qualifications. Sophistication of Companies Despite impressive growth in quantity, sophistication Another optic of the company sophistication represents and quality of companies in Vietnam remain weak as a segment of the Institute for Industrial Policy Studies' characterized below: National Competitiveness Research 2008–2009. In this study, Vietnam is ranked behind peer countries in corporate - Low level of education and extent of staff training governance and restructuring efforts as shown in Figure 3.29 Level of education and extent of staff training largely varies below. depending on the size of enterprises. Survey findings on - Limited role in policy dialogue and advocacy household businesses suggest that entrepreneurs having graduate degrees account for only 0.2 percent of the Representation of various stakeholders from the business total number of entrepreneurs, while entrepreneurs with sector in policy dialogue seems to be inadequate in undergraduate degrees make up 4.3 percent (GSO Survey of Vietnam. Quite often, big MNCs and large SOEs have business and administrative entities 2007). More than two- better influence on the policy agenda. Meanwhile, the fifths or 41.9 percent of entrepreneurs never attended any majority of smaller companies have yet to play active roles business training courses and 24.6 percent do not speak any in policy advocacy, either because they do not have chances foreign languages (National Scientific Study 2009). to participate or because their level of awareness and interest in the broad policy spectrum is still limited. Among current - Weak corporate governance and transparency 493 National Assembly deputies, only 26 are representatives from the business community. FIgURE 3.29: 7.5 CORPORATE Singapore 7 Firm restructuring (scores) GOVERNANCE AND 6.5 RESTRUCTURING China EFFORTS, 2008- 6 India Philippines 2009 Thailand 5.5 Taiwan Indonesia Vietnam South Korea 5 Malaysia Source: Institute for 4.5 Industrial Policy Studies, 4.5 5 5.5 6 6.5 7 7.5 National Competitiveness Research 2008 - 2009 Corporate Governance (scores) VIETNAM COMPETITIVENESS REPORT 95 Vietnam Competitiveness Foundations FIgURE 3.30: Microeconomic Competitiveness VIETNAM COMPETITIVENESS Company Sophistication Huge heterogeneity in performance and State of Cluster Development Presence of naturally emerging Business Environment Quality Basic skills, physical infrastructure, and FOUNDATIONS sectoral-focus between SOEs, foreign- owned companies, and local private agglomerations Focus on narrow industries administrative structures available, but not keeping pace with needs of the economy sectors Financial system shallow, innovation Low level of active collaboration High level of entrepreneurship, high system very weak flexibility and responsiveness to Economic policy tools, e.g. industrial Significant openness for foreign investors customers' needs, aggressive pursuit of parks, not systematically oriented towards short-term market opportunities, clusters Rivalry on local markets not very effective, with role of SOEs largely intransparent Lack of distinctive strategies, low Sector-oriented policies largely driven by and presence of import barriers operational performance, poor innovation, traditional industrial policy ideas; poor weak corporate governance implementation Growing but unsophisticated local market Macroeconomic Competitiveness Social & Political Infrastructure Macroeconomic Policy Widespread availability to basic healthcare and education but Increasing budget deficit and public debt, largely as a result of moderate quality and rising inequality in access intensive but inefficient capital investment Improved quality of legislation, but ineffective and heterogeneous Expansionary policy triggering inflation, depreciation pressures implementation and considerable presence of corruption as a result of current account deficit High level of political stability, but weak position on voice and Reactive and inconsistent approach, lack of transparency and accountability; inflexible, state-centric and control-based policy policy coordination process; low level of consistency in government action Endowments Rich natural Favorable Large and young resources geographic location population Openness and Responsiveness to Customers' Needs demands of a growing economy. The competitiveness - Strong commitment to international integration, fundamentals are signs of an economic strategy that has information technology, and collaboration with customers made the country's existing advantages available to the global economy but is struggling to find the right role The VCCI- ACI joint survey (2009) with 630 enterprises for government to systematically create new competitive revealed that 78.4 percent of the respondents are confident advantages: that global integration is important to boost economic growth and improve their competitiveness. 65.1 percent of 1. Macroeconomic competitiveness is generally in line the companies stressed the role of exports as the main factor with the country's stage of development but does not boosting their company growth in the following years. 97.3 meet the needs of a more prosperous country. percent of interviewees were connected to the Internet and 64.1 percent have their own websites. 67 percent of 2. Microeconomic competitiveness is shaped by the the surveyed enterprises also noted that cooperation with transition to a market economy integrated in the customers is highly important in their business activities—a global economy and the many individual attempts to much higher percentage than those recognizing the upgrade competitiveness fundamentals without clear importance of cooperation with the government and prioritization or coordination. research institutes. 3. Overall, a strategic approach is lacking towards defining the competitiveness profile Vietnam aims to provide Assessment and the steps it intends to take to get there. Vietnam exhibits the standard profile of a transition Figure 3.30 and Figure 3.31 below provide a summary economy on the catch-up path. But efforts to upgrade of macroeconomic and microeconomic foundations of competitiveness fundamentals tend to be reactive and Vietnam's competitiveness. are becoming increasingly insufficient to keep pace with 96 ASIA COMPETITIVENESS INSTITUTE FIgURE 3.31: Vietnam's Diamond – National Business Environment VIETNAM'S DIAMOND Context for – NATIONAL BUSINESS Firm ENVIRONMENT Strategy and Rivalry High level of openness to foreign investors; still significant important barriers for local market Weak competition policy and enforcement Factor Unequal competition among companies, with Demand (Input) SOEs receiving special treatment Conditions Conditions Competition focused on price, not quality Unclear separation of government role as a Basic physical infrastructure in place; low regulator from that as an owner Attractive sizeable and growing effectiveness of the significant ongoing Equitization of SOEs not oriented towards market further investments improving performance Low, yet improving, sophistication of Solid communication infrastructure as a local customers result of liberalization and competition Weak regulatory quality standards Growing but still shallow financial system; and enforcement highly volatile and speculative, with Related and limited access to credit for new private Supporting companies Industries Education system is growing but provides largely insufficient quality; serious shortage of skilled labor Natural emergence of clusters, but focus on narrow activities with weak presence of local Modest performance on administrative suppliers and service providers infrastructure, but major reforms (e.g. Project 30) under way Shallow roots of FDI in the local economy Poor innovation infrastructure Sector-oriented policies ineffective and not systematically focused on clusters Summary driver is growing, but beyond that, its role in improving productivity and innovation remains murky. The rapidly Vietnam's transition since the mid-1980s has been growing local private sector is asserting its role, but accompanied by major structural changes. It transformed innovative capacity is still limited. the governance of the economy from planned to market, opening up Vietnam for integration with the global economy. - Investment-driven growth: Growth is driven by Structural change has transformed the composition of the investment in capital goods formation, while domestic economy, moving millions from subsistence agriculture savings (especially in the public sector) are decreasing, into capital-intensive manufacturing and services. Both of leading to greater reliance on external financing sources, these changes have contributed to the country's underlying namely FDI, ODA and remittances. This strategy creates competitiveness, essentially the presence of low cost labor. unsustainable macroeconomic imbalances. Growth Growth has been fueled by these macro-level, "systemic" policies focus on breath rather than depth, on quantity changes. More recently, the policy responses have mainly rather than quality, thereby creating high, but ultimately focused on intensifying investment, especially in SOEs unsustainable, growth rates rather than upgrading and infrastructure, with an emphasis on generating growth productivity and improving efficiency. rather than on upgrading productivity and efficiency. - The transformation of the economic structure: Growth However, this growth model ultimately has limited has been fueled by the one-off structural change from potential. The highest level of prosperity that Vietnam can agriculture to capital-intensive manufacturing and reach given this approach is in fact capped by the level of services, rather than by within-sector productivity productivity unskilled workers can reach in manufacturing. upgrading. Productivity of the manufacturing sector is If Vietnam is unable to move beyond this model, it will low which impedes not only the sector's moving up but remain stuck at a lower middle-income level, with poorer also spillovers in upgrading overall productivity across economies threatening its position. Furthermore, the over- the board. reliance on externally-financed investment as a driver of growth is generating dangerous macro-imbalances that may - Low value-added economic structure: Despite impressive ignite crises. growth and export records, the level of local value-added of the economy remains low, even in the dynamic export In summary, the current economic model is characterized by sector. Low cost labor is the main advantage which helps the following main features: generate export growth, while most of the machinery and materials are still imported. FDI companies bring in - Roles of different economic segments: The dominant role capital to combine with local cheap labor to produce for of state-owned enterprises whose efficiency increasingly their own value chains, with little, if any, linkages with poses questions. The role of the FDI sector as the export the local economy. Without such forward and backward VIETNAM COMPETITIVENESS REPORT 97 linkages with the FDI sector, local companies fail to • The global reallocation of manufacturing activities participate effectively in the global value chains. provides opportunities for Vietnam. Global companies are under continued cost pressure, and many of them are - Social and institutional infrastructure does not keep looking for ways to rebalance their strong dependence pace with dynamism and vibrancy of economic growth: on China. Vietnam can be competitive in this race In spite of good records on universal basic education and among alternative locations, if it manages to significantly healthcare services, there are increasingly worrying signs increase its ability to support higher productivity in about the quality and accessibility of higher education export-oriented operations integrated into global and healthcare services. Institutional capacity has not value chains. On the flip side, it may also pose a risk of kept pace with the sophistication and complexity of the relocating low value-added labor-intensive and polluted market economy and external environment. activities from "early mover" countries like China to - Regional development: Economic activities are clustered Vietnam. around the two main poles, Hanoi and Ho Chi Minh • The increasing level of global competition, a trend City, with the rest of the country lagging behind. The Vietnam has itself taken ample opportunity of in the aim of regional policy is to mitigate inequality among past, is more and more also becoming a challenge. regions. However, this policy approach is actually New competitors with even lower wages and/or more demotivating regions to create unique advantages and productive business environments are challenging upgrade competitiveness. Heavy concentration in the Vietnam's attractiveness among foreign investors. two poles has also created serious urbanization problems, Within ASEAN, the agreed path of trade liberalization such as traffic congestion, pollution and microeconomic is exposing Vietnam's domestic market more and more bottlenecks. to competition. ASEAN's free trade agreements with - Industrial policy: Industrial policy focuses on other countries add to the pressure. This is good for intervention, protection and subsidies rather than on Vietnamese consumers but a challenge that companies upgrading productivity and strengthening industrial in Vietnam have to prepare for. Vietnam's commitments linkages. Industrial parks and financial incentives are within ASEAN but also the WTO have in the meantime widely used as a tool of industrial policy, while little closed the door for using protectionist countermeasures. attention is paid to upgrading workforce skills, improving • The risks to the global trading system have so far productivity, facilitating innovation or building cluster been contained, but can easily erupt with significant linkages. consequences for Vietnam. The large global capital flow - Deep integration into the global economy: With the imbalances have led to significant talk about currency WTO's accession and other multilateral and bilateral wars. Protectionism has so far been held at bay, but agreements, Vietnam has integrated deeply in the could become a more important factor. The disruptions global economy and benefited greatly from that process. in trade and investment flows would have increasingly However, signs of volatility and vulnerability to external significant impact on Vietnam as its economy integrates shocks and fluctuations are increasingly emerging, more deeply. Vietnam also is exposed to risks from requiring Vietnam to have a more proactive, long-term economic crisis in individual countries, for example a approach not just to respond to but also to forecast and double-dip in the US or an overheating and subsequent manage external factors effectively. contraction of the Chinese economy. The necessity for change is not only driven by internal • Climate change, energy supply, and food security are factors. As a country increasingly integrated into the global other issues that are inevitably on the rise. They all economy, Vietnam has to acknowledge shifts in the external have global dimensions but also national implications environment it is facing. Some of these are significant for Vietnam. These trends can undermine Vietnam's opportunities, while others provide challenges to be dealt current competitive position in a number of important with: economic sectors, for example agriculture. And they can have a significant direct impact on the prosperity of its • The rise of Asia provides increasing market opportunities citizens. in Vietnamese neighborhood, especially in consumer There is a widely shared acknowledgement that Vietnam needs to markets. Many of these markets have needs much more move beyond the current economic growth model which is based in line with Vietnam's domestic market than the markets on low labor cost and intensive capital investment towards a in the US and Western Europe it traditionally serves. commitment to raising productivity and competitiveness as the core To tap into this potential, however, Vietnam has to of growth. Vietnam's future growth has to move beyond providing dramatically improve its attractiveness as a platform for access to and leveraging existing economic fundamentals. It needs to be based on a consistent upgrading of these fundamentals and creating foreign companies to serve the region. And it has to create new advantages. Success will require changes on both macroeconomic an environment in which Vietnamese companies can and microeconomic conditions driving productivity. This new vision emerge that have the products, brands, and distribution is a critical prerequisite for Vietnam's quest to move up sustainably to channels to serve the growing demand across Asia. the next stage of development. 98 ASIA COMPETITIVENESS INSTITUTE Endnotes 1 Vietnam has over six billion tons of coal reserves, mainly in Quang Ninh, Thai Nguyen. Oil and gas reserves are estimated to be at three to four billion barrels and 50 – 70 billion cubic meters respectively, mainly in the sediments of deltas and continental shelf. Bauxite reserve is projected to be about 6 billion tons and can be over 8 billion tons while uranium reserve is estimated at about 200 – 300 thousand tons. 2 The aggregate annual coal output in Northern Vietnam is around 40 million tones and a majority of the output is for exports, especially to China. In 2009, the total export volume was estimated at 24 million tones, not including cross-border smuggled exports. Meanwhile, Ministry of Industry and Trade plans that Vietnam will need to import coal in large volume as fuel for production by 2012. The import volume may reach 34 million tones by 2015 and 114 million tones by 2020 (Vietnam Energy Portal – http://www.vietnamep.com/ energy). 3 The new CCI was developed by Michael Porter, Mercedes Delgado, Christian Ketels and Scott Stern using data from the World Economic Forum's Global Executive Opinion Survey as well as other data sources. See their chapter in the 2008 Global Competitiveness Report for further background. 4 From 2002-2007, more than 120 law projects and ordinances have been submitted to the National Assembly and the Standing Committee of the National Assembly. It was preliminary estimated that 42 laws, 462 decrees, 12 ordinances, 245 instructions, 957 circulars, 168 resolutions and thousands of other normative acts were promulgated. Many important codes were enforced in this period, for example Intellectual Property Law, Thrift Practice and Waste Combat Law, Corruption Prevention Law and many economic codes were modified, added like Enterprise Law, Budget Law, Land Law, Investment Law, Tendering Law, Environment Protection Law, Social Insurance Law, modified Labor Law. 5 The Standing Committee of the National Assembly (the tenth) promulgated resolutions number 45/1998, number 55/1998 and number 60/1998 asking the Government to issue Decrees on implementing Democracy Regulations at 3 forms of grassroots level. The Government issued 3 Decrees: Decree number 29/1998/NĐ-CP Democracy implementation regulation at communes (11-5- 1998); Decree number 71/1998/NĐ-CP Democracy implementation regulation for offices' activities (8-9-1998); and Decree number 07/1999/NĐ-CP Democracy implementation regulation at state-owned enterprises (13-2-1999). 6 This subsection follows the analysis of Ohno (2009) with minor revisions and editing endorsed by Kenichi Ohno. See Ohno, Kenichi 2009. "Avoiding the Middle-income Trap: Renovating Industrial Policy Formulation in Vietnam," ASEAN Economic Bulletin, 26-1, pp.25-43. 7 The Consumer Price Index (CPI) stayed at single-digit levels, the budget deficit remained below 3 percent, the trade deficit was below 5 percent, and foreign exchange reserves were sufficient for nearly 4 months of imports. 8 MOF defines that public debt includes money owed or borrowing guaranteed by the government at all levels. 9 According to the "External debt bulletin" of the Ministry of Finance, if measured by the definition of the UNCTAD's Debt Management Financial Analysis System (DMFAS), by which public debt also includes liabilities of the central bank and government agencies (including SOEs) at all levels, Vietnam's public debt level would be larger, e.g. EIU estimates Vietnam's public debt by the end of 2009 was 51 percent of GDP, as contrast with 44.7 percent announced by the MOF. Some gigantic planned projects in the next two decades like the North-South express rail (USD 56 billion), namely Hanoi's construction 10 projects (USD 90 billion), nuclear power plants in Ninh Thuan province (USD 10 billion) etc., mainly funded by the budget and public debt, would certainly result in a rapidly increasing public debt in the coming years. 11 Besides GDP growth, inflation and interest rates, the risk level of public debt also depends on a number of other macro variables, such as the current account deficit and foreign exchange reserves. In these respect, Vietnam is also in a significantly disadvantageous position compared with competitors in the region. 12 Malaysia comes second with fiscal revenue equivalent s to 22 percent of GDP. The capital inflows during 2007-2008 period are estimated to be around USD 45 billion, including USD 13 billion of remittances, USD 13 23 billion of private capital (FDI, FPI, commercial credits,) USD 3 billion of ODA, and USD 6 billion of foreign tourists' spending. 14 Other consequences of expansionary credit growth include bubble asset markets and skyrocketing trade deficit. 15 In the mean time, the government also sharply cut public expenditure and tightly controlled SOEs' investment to reduce fiscal deficit. This policy helped reduce public investment in 2008 by 16.4 percent compared with that in 2007. The inflation, after about 6 months of lags, returned to single digit in early 2009. 16 Even after several devaluations (5.0 percent in November 2009, 3.3 percent in February 2010, and another 2.1 percent in August 2010), the dong is still overvalued 13 percent against the dollar compared to the base year of 2000, (see Lê Xuân Nghĩa, 2010). 17 In end of July 2010, Fitch Ratings downgraded Vietnam creditworthiness from "BB– " to "B+" (i.e., four steps lower than the "investment grade"). The main cause is due to the very high budget deficit of Vietnam is funded primarily through the issuance of debt denominated in foreign currency, while foreign exchange reserves are being depleted and current balance continued to deteriorate. It should be noted, however, that these devaluations were conducted in a reactive, unpredictable and abrupt way which may erode 18 confidence of the market. VIETNAM COMPETITIVENESS REPORT 99 This sub-section used some analyses and data from the DFID's Paper "Measuring the Economic Impact of Competition: Findings From 19 Vietnam", 2010, p16. This sub-section follows the analysis of Suiwah Leung (2009) with updates and edits, "Banking and Financial Sector Reforms in 20 Vietnam", ASEAN Economic Bulletin, Volume 26, Number 1, April 2009, pp. 44-57. 21 Analyses and data in this sub-section were drawn from the National Assembly's Standing Committee's Report on University Education Quality, National Assembly 7th Plenary (May – June, 2010) "Legal documents" means both legal normative documents (LNDs) as defined in the 2008 Law on Promulgation of LNDs ("Law on 22 Laws" or the "Law") and official letters and other documents that are not LNDs, but contain legal norms – i.e., rules and procedures of general application. 23 The Law on Laws does not include the requirements for impact analysis and public consultation for non-normative documents. Also the formal requirement for impact analysis is for laws, ordinances and decrees only, while other LNDs have similar but less formal requirements. 24 By end 2005, Ministry of Finance, for the first time on behalf of the Government, issued USD 750 million international sovereign bond which was later on re-lended to Vinashin with the government's guarantee. In the following year, Vinashin itself borrowed another USD 600 million from the international market with arrangements of some foreign banks. This year, the group planned to issue another VND 400 billion (USD 20 million) international bond just before its crisis was revealed. The debt/equity ratio of the group was 11 at that point of time, with the total debt amounting up to VND 86,000 billion (USD 4.3 billion) while its total asset is VND 104,000 billion (USD 5.2 billion. Its debts include USD 750 million government-guaranteed sovereign bond, and debts to contractors and financial institutions. Capital intensity per worker for the state sector in 2007 is VND 1.11 billion, three times of that for non-state sector (VND 0.35 billion) 25 and 2.5 times of that for FIS (VND 0.45 billion). To create one unit of profit, an SOE needs 1.8 units of capital, non-state enterprise 1.13 units and FIE 1.03 units (GSO data). Estimated by the Industrial Development Strategy Institute, Ministry of Industry and Trade 26 Chapter References: Acemoglu, Daron, Simon Johnson, James Robinson, and Yunyong Thaicharoen (2003). "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth", Journal of Monetary Economics, 50: 49 123. AmCham (2010). Speech at Mid-term Vietnam Business Forum Hanoi, May 26th 2010, http://www.vbf.org.vn/downloadsVBF%2 book%20May%2010_ENG.pdf Bùi Trinh (2010). "Assessment of Investment Efficiency," unpublished monograph. Dasgupta, S. Laplante, B. Meisner, C. Wheeler, D. Yan, J. (2007). "The Impact of Sea Level Rise on Developing Countries: A Comparative Analysis," World Bank Policy Research Working Paper. DFID (2010). "Measuring the Economic Impact of Competition: Findings from Vietnam." Dost, Najim, Jaime Frias, Irene Liu, Ziang Tony Ngo and Markus Taussig (2008). "Analysis and Recommendations on the Development of Vietnam's Electronic Cluster." Easterly, William (2005). "National Policies and Economic Growth: A Reappraisal." In The Handbook of Economic Growth, edited by Philippe Aghion and Steve Durlauf, North Holland. European Commission (2009). IPR Enforcement Report. Fitch Ratings (2009). "Outlook on Vietnamese Banks - Another year of high growth adds to concern." Fulbright Economic Teaching Program (2008). "Infrastructure Challenges in Vietnam." Fulbright Economics Teaching Program (2008). "Surviving a Crisis, Returning to Reform." General Statistics Office of Vietnam (2007). Establishment Census 2007. Gordon, Roger and Wei Li (2009). "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Vol. 93, pp. 855–866. Harvard Kennedy School's Vietnam Program and Fulbright Economics Teaching Program (2008). "Choosing Success: The Lessons of East and Southeast Asia and Vietnam's Future - A Policy Framework for Vietnam's Socioeconomic Development, 2011-2020." Policy Discussion Paper Series. 100 ASIA COMPETITIVENESS INSTITUTE IDE-JETRO (2005). "Industrial Clusters in Asia – Analyses of Their Competition and Cooperation." IMF (2010). "Vietnam – Informal Mid-year Consultative Group Meeting," statement by IMF staff representative, Kien Giang, June 9-10, 2010. Lê Xuân Nghĩa (2010). "On the Macroeconomy and Macro-financial Risks," presented at the conference jointly held by the Vietnam Academy of Social Science and the World Bank, Hanoi, August 2010. Leung, Suiwah (2009). "Banking and Financial Sector Reforms in Vietnam." Mori, Junichi, Nguyen Thi Xuan Thuy, and Pham Truong Hoang (2009). "Skill Development for Vietnam's Industrialization: Promotion of Technology Transfer by Partnership between TVET Institutions and FDI Enterprises." National Assembly's Standing Committee (2010). Report on University Education Quality Plenary Session 7. National Scientific Study (2009) No. KX.04.17/06-10 Nguyễn Đình Cung (2009). "Structure of the Economy: Situation, Problems, and Proposed Solutions," presented at the seminar at the Central Institute of Economic Management, July 15, 2009. Ohno, Kenichi (2009). "Avoiding the Middle-income Trap: Renovating Industrial Policy Formulation in Vietnam," ASEAN Economic Bulletin Vol. 26, No. 1, 25-43. Porter, Michael E. (1990). The Competitive Advantage of Nations. Quang, Phan Vinh and John Bentley (2009), "Codification: A New Approach to Reforming Vietnam's Legal System." Saigon Online (2010). "Infrastructure Development for Enhancing Competitiveness," www.sggp.org.vn. Sai Gon Giai Phong Newspaper (2010). Interview of the SBV Governor Nguyen Van Giau on September 30, 2010. The Motherland (2009). "Bad Debt Is Getting More Worrisome," http://www.toquoc.gov.vn The Motherland (2009). "Difficulties in Mobilizing Capital for Transportation Infrastructure Development," http://www toquoc.gov vn. Theo, http://www.most.gov.vn. Tue Anh N.T. (2009). "Foreign Direct Investment and Technology Transfer in Vietnam: A case study in Que Vo Industrial Park," A Paper prepared for the World Bank Institute. Vallely, Thomas and Ben Wilkinson (2008). Vietnamese Higher Education – Crisis and Response," Harvard Kennedy School of Government, Ash Institute. Vietnam Energy Portal, http://www.vietnamep.com/energy. Vietnam's Achievement Against 2015 MDG Goals, http://www.mdgmonitor.org/country_progress. Vietnamese National Assembly's Standing Committee (2009). "The Implementation of Policies and Legislation on Management and Use of State's Capital and Assets in State General Corporations and State Conglomerates," November 2009. VnEconomy (2010). Interview of Mr. Dang Quyet Tien, Deputy Director of the Corporate Finance Department, Ministry of Finance with the VnEconomy newspaper on 20 Jan 2010 http://vneconomy.vn/20100120093926128P0C5/co-phanhoa-cham-do-khach- quan.htm. Vu Thanh Tu Anh et al. (2007). "Provincial Extralegal Investment Incentives in the Context of Decentralisation in Viet Nam: Mutually Beneficial or a Race to the Bottom?" Vũ Thành Tự Anh (2009). "Global Financial Crisis and Its Implications for Vietnam," in From Crisis to Restructuring, Ho Chi Minh City National University Publication, 3-18. Vũ Thành Tự Anh (2010). "Vietnam's Macroeconomy and Fiscal Policy in 2010," presented at a conference held by The Institute of Financial Training, Vietnam Ministry of Finance: "Financial Policy Making in the Period of Post-crisis," January 26, 2010. Hanoi. Vũ Thành Tự Anh (2010). "Structural Reforms as the Means to Vietnam's Development and Poverty Reduction," presented at a conference held by The State Bank of Vietnam and The International Monetary Fund: "Post-Crisis Growth and Poverty Reduction in Developing Asia," March 22, 2010, Hanoi. VIETNAM COMPETITIVENESS REPORT 101 102 ASIA COMPETITIVENESS INSTITUTE 20 Vietnam Competitiveness Report 10 Chapter 4 Vietnam's Competitiveness Agenda: From Analysis to Action VIETNAM COMPETITIVENESS REPORT 103 would go far beyond the mandate of an external academic Vietnam's analysis. Instead, the report in its entirety aims to make a contribution in two ways that are important steps towards Competitiveness a strategy. First, it provides – especially in the previous Agenda: chapters 2 and 3 - many of the facts that are necessary to have an informed debate about a national economic strategy for From Analysis to Action Vietnam that is both feasible and in line with the country's ambitions and nature. Second, it identifies – here in chapter 4 – a set of principles and actions that are fully consistent with the long term strategic ambitions for Vietnam outlined in the ten year strategy. Any value proposition that Vietnam decides to adopt would most likely be consistent with the It is much easier to describe and assess a country's ten-year strategy but there will be a need to specify the competitiveness than to improve it. Yet improving strategy further. The competitiveness agenda outlined here competitiveness is the only way in which the assessment is thus a foundation that can be further specified once a has an impact on the standard of living that the people of national value proposition is in place. Vietnam will be able to enjoy. This chapter therefore aims to provide guidance on the policy recommendations to be The competitiveness agenda developed in this chapter drawn from the assessment in chapters 2 and 3. contains three parts: First, three critical tasks that require the focused attention of policy makers in Vietnam are Competitiveness is, as was discussed in the introduction, the identified based on the analysis in chapters 2 and 3. The result of a large number of factors, actions, and policies. An ability of Vietnam to come to grips with these three exhaustive list of recommendations that address all of these tasks is going to be fundamental to its ability to deal areas is neither feasible, nor effective. What is needed – and with the opportunities and threats ahead. Second, action what is lacking in many countries that fail to make sustained recommendations on what Vietnam should do to approach economic gains - is a clear prioritization that helps policy these tasks are identified. General principles are discussed makers to identify those specific action areas that at this that should guide policy making across the three tasks as point of time are the most powerful levers to improve their well as for economic policy making in general. Specific country's competitiveness. sets of actions are then identified within each of the three Action priorities are not simply the result of an identification tasks. Third, an implementation strategy is outlined that can of strengths and weaknesses as in chapter 2 and 3; they are a provide orientation for how Vietnam can turn these action reflection of the choices that a country makes about where it plans into reality. This strategy covers both an approach wants to go. Once such a strategic direction is set, an action for the sequencing of different types of actions and the agenda becomes the logical set of policies necessary to move organization of a governance structure that can oversee and a nation from where it is to where it aims to get to. manage progress. Where does Vietnam want to go? Ultimately, this is a The competitiveness agenda outlined in this chapter has question that only the Vietnamese can answer. The Ten-year the ambition to be a useful starting point for Vietnamese strategy currently under discussion defines the ambition leaders to discuss the actions to take. In this process, many for Vietnam to become a middle-income country by 2020. of the details proposed here will inevitably be changed. The The strategy identifies human resources, infrastructure, and Vietnamese will have to design an action agenda that reflects institutions as three critical action areas that government their own values, objectives, and preferences. The structure policy has to focus on to reach this target. and specific action recommendations presented here will hopefully make this task easier and enable the Vietnamese The Ten-year strategy is, in its structure of ambitions to engage in a more informed discussion about their and actions, quite typical for similar documents in other competitiveness priorities. At the end of this discussion, countries. While this structure provides some useful Vietnam will have more than a clear action agenda. It will orientation, a complete national strategy would need to also be able to elevate its strategy to the next level and define identify the specific value that Vietnam aims to offer to a clear value proposition in terms of what Vietnam is offering companies that operate in the country, rather than simply as a place to do business. set ambitions and indicators. It would need to define more specifically the type of activities for which this offer would Critical tasks facing Vietnam be most attractive. For example, the specific sectors/clusters Vietnam has – as chapter 2 has documented – achieved or operations targeted at specific markets. In turn, it would one of the most impressive global growth stories of the then be able to deduce from this value proposition the last twenty-five years. The analysis also indicates that the action priorities to guide implementation. fundamental drivers of this growth continue to be in The Vietnam competitiveness agenda outlined in this place: Vietnam has the opportunity to stay on its current chapter does not describe such a complete strategy. This growth path for the next few years. This positive outlook 104 ASIA COMPETITIVENESS INSTITUTE and the complacency it can easily foster is the most difficult components and supplies for exports, and increasingly challenge facing Vietnam. also consumption goods dominate. The tasks that Vietnam is facing fall into two categories: • The flip side is a growing savings-investment imbalance; First, there are two groups of emerging challenges that while such an imbalance is again normal for a country threaten to undermine the current growth dynamics if they with a low capital stock on a fast catch-up path, the low remain unchecked. Second, there is a group of fundamental efficiency of the investment is worrying. The external changes in Vietnamese competitiveness that are necessary deficit has to be covered through capital inflows, from for the country to move beyond the limitations of the foreign investment, remittances, development aid, or current growth model. While different in nature, these through other sources. The increasing concerns about two groups are connected and in part overlapping: The Vietnam's ability to finance the external deficit, fuelled threats to current growth are, at their core, symptomatic of by rising external debt1 and a significant drop in foreign the growing fragilities of the current growth model. These reserves2, create uncertainty about the country's future fragilities are an important impetus for the need to enter a economic outlook. new stage of development. In turn, all progress on creating the foundations for higher productivity growth will also • Inflation and exchange rate; Vietnam's inflation rate has provide relief to the macro- and microeconomic pressure in the last few years become increasingly volatile, with visible today. the trend rate of inflation ratcheting upwards. Large unsterilized capital inflows and rapid growth in domestic Macroeconomic imbalances credit have created inflationary pressure. Under an Vietnam has registered impressive GDP growth over the last exchange rate policy that is oriented towards stable few years and decades, enabling a rise in standards of living nominal rates, this has led to increasing real exchange and lifting millions of Vietnamese out of poverty. However, rates and has forced Vietnam into repeated devaluations. beneath this surface of strong overall GDP growth, Vietnam The high level of dollarization in the economy adds to faces significant macroeconomic imbalances: difficulties in managing inflation and exchange rate fluctuations. • Trade and current account balances; Vietnam is facing an increasing deficit in its trade balance. While widely The analysis in chapter 3 has revealed that the current perceived as a typical export-led economy, Vietnam is policy approach plays a crucial role for these imbalances. systematically importing more than it is exporting. If The public sector accounts for a disproportional share of imports contribute towards the upgrading of the capital investment and is financing it through public sector deficits stock and therefore create opportunities for future that increased quickly from 2.8% of GDP in 2001 to 8.9% of exports, a trade deficit is temporary and justified; the data GDP in 2009 (IMF). Despite a relatively high tax to GDP is not conclusive but suggests that fuels, raw materials, ratio3, public sector revenues are not only insufficient to VIETNAM COMPETITIVENESS REPORT 105 cover expenditures but also overly reliant on revenue sources technicians. There are also growing concerns about the that are either highly volatile (oil and gas taxes) or bound capacity of the logistical and electricity infrastructure. to fall due to policy commitments in the AFTA and WTO These problems are locally concentrated in regions context (import tariffs). Given the still shallow local capital that have received the lion's share of export-oriented markets, the government is forced to finance its budget investment inflows, especially in the Ho Chi Minh City through donor assistance or the global capital market. region. These imbalances are costly and could turn out to become • Profile and implementation rate of FDI; foreign seriously dangerous. At the minimum, they lead investors investment is increasingly focused on real estate projects to require a higher risk premium to invest in Vietnam. This and labor-intensive activities. There is less upgrading from slows down the rate of growth. And it reduces the benefits the induced imports of capital goods; already before, that the Vietnamese can derive from foreign capital that there was little, if any, evidence of positive spillovers is naturally needed in an economy on a rapid catch-up from foreign owned activities to local companies. FDI path. But the consequences could be much more painful. firms use cheap labor in Vietnam to produce for their Vietnam's macroeconomic imbalances could culminate own global value chains and have shallow roots in the in a crisis should sentiments shift so that Vietnam loses local economy. While the announced FDI projects access to external financing. This would require a painful continue to be strong, there is an increasing gap between adjustment process with severe exchange rate changes, these announcements and actual investments. While public expenditure cuts, and possibly years of lost growth. part of the gap might be explained by an interest to "over-report" FDI attraction at the regional level, part The current policy response has recently received of it is likely to be driven by increasing problems in international praise, which noted that the Vietnamese implementing FDI projects in line with initial plans or government had responded to the concerns about by speculative behavior of some investors who register macroeconomic imbalances. While Vietnam has taken such projects to "reserve a seat" and later resell their licenses positive steps, the policy response falls short of a coherent for profit. strategy to address these challenges in a more comprehensive way. There is virtually no publicly announced strategy for • Deteriorating ratio of investment to growth; as an reducing external and government financing deficit. Recent accounting measure, the incremental capital to output price controls in response to inflation have addressed the ratio (ICOR) gives a sense of how investment relates symptoms but not the root causes. Changes in the nominal to GDP growth. Notwithstanding the fact that ICOR exchange rate have been reactive and failed to outline a is often criticized for its conceptual validity, it is still clear future path that financial markets can rely on. The notable that relative to its investment, Vietnam achieves government's pressure exerted on commercial banks to lower GDP growth than China and India. State- reduce interest rates doesn't take into account the market owned enterprises account for the lion's share of capital situation. In particular, interest rates have remained high investment, accentuating the low overall investment because the public does not want to hold Dong balances efficiency. at lower rates. The emerging imbalances described above will continue to grow, or even become chronic, unless the These emerging bottlenecks are signs of the gradually government changes course. decreasing level of dynamism that the current growth model is able to generate. While they are unlikely to result in any Vietnam needs a more prudent macroeconomic policy immediate crisis, they will slow down growth and with it, approach that addresses the root causes of the emerging the rate of improvement in the standard of living of the imbalances. Monetary policy should be more transparent Vietnamese people. And these bottlenecks are likely to and forward looking. Fiscal policy should be more prudent become more cumbersome as the economy expands. in managing budget deficit, public investment, and public debt. In addition, monetary and fiscal policies will need to The policy response so far has been based on a largely accurate be well-coordinated to achieve macroeconomic stability. identification of the bottlenecks – all three main elements of the ten-year strategy are highly relevant. However, the Microeconomic bottlenecks impact of the steps taken in response, has so far, been clearly Vietnam's current growth trajectory is driven by the nature insufficient. of its microeconomic fundamentals, essentially the presence In the area of workforce skills, the educational system is of a large pool of low cost labor that has become more and in a transition. Relative to its GDP, Vietnam is spending more accessible for integration into the global economy. more on education than many of its peers: According to While these factors continue to hold, there are increasing the World Bank, Vietnam's public spending on education signs that the microeconomic growth model is hitting as a percentage of GDP in 2009 was about 5.2% - higher bottlenecks: than most of its ASEAN peers (Malaysia – less than 5%; • Skill and infrastructure shortages; Investors are Thailand – 4%; Indonesia – 3.5%). But the education system increasingly reporting problems in getting sufficiently is inadequate in responding to the needs of companies, skilled employees, especially middle managers and in terms of quality, quantity, and content of education. 106 ASIA COMPETITIVENESS INSTITUTE Private institutions have entered the market to fill some of can reach in manufacturing. If Vietnam is not able to move this gap, but providers vary highly in their quality. Their beyond this model, it will be stuck at lower middle income effectiveness is hampered by the lack of a modern regulatory level, with poorer economies threatening its position. There framework as current government oversight tends to are many signs that Vietnam currently remains trapped in impose administrative and operational control, but has been this dangerous position: ineffective in implementing transparent quality standards. Barriers still exist and restrict competent, especially foreign, • Low value added exports; export-oriented education providers from entering the market. manufacturing activities in Vietnam rely almost exclusively on imported supplies. The only local content In physical infrastructure, the government has – with provided is the work of low- or semi-skilled Vietnamese the strong support of foreign donors - made significant employees, using machinery and materials imported investments over the last few years. However, here too, from abroad. The only exceptions are exports of natural spending has been less effective than in peer countries: resources and agricultural produces, where local The average cost of building one km of railroad between endowments rather than imports provide the critical Hanoi and Vinh (200km/h) is double than that of the road inputs. between Beijing and Shanghai (300 – 350km/h) (Fulbright Economics Teaching Program 2008). Foreign donors provide • Eroding cost competitiveness of Vietnam; the high much needed financing, but their financing is conditional growth in Vietnam has fuelled inflation and raised cost and is tied to their interest. Regional governments request levels. While productivity has improved only marginally projects that in sum lead to an inefficient duplication of as infrastructure has been upgraded, costs have gone up. infrastructure assets. National government allocates funding Vietnam's cost position is gradually eroding relative to for such projects as compensation for regions with lower other countries that either also provide a large pool of growth, not with a view to achieve the highest possible low-cost labor or have increased their productivity more overall development impact. Private sector infrastructure dynamically. investment remains limited due to the lack of regulatory • Low productivity of Vietnamese products versus framework and commercially viable mechanism for profit imports; as Vietnam is opening up to the global sharing. These challenges will only get more complex as economy and as its domestic market is growing, it is Vietnam moves from a stage where the most pressing also becoming a more attractive market for foreign infrastructure needs were obvious to a situation where the exporters. In a number of industries, there are clear prioritization of projects becomes more intricate. signs that these companies, for example from China, In regulatory processes, the government and foreign donors are able to out-compete local producers. While foreign have, through Project 304, engaged in a wide-ranging companies generally face higher cost levels, they more effort to simplify administrative procedures. The many than compensate for this with higher productivity levels simplifications that were successfully identified by Project 30 and better logistical networks. now need to be implemented. A critical challenge that will These observations are typical for an economy that is need to be addressed is the highly heterogeneous application growing quickly based on the combination of domestic of rules and regulations across the country and across low-cost labor and foreign capital. While they do not signal different government agencies. Many foreign companies an imminent crisis, they provide clear evidence that unless report that while the national laws are solid given Vietnam's Vietnam moves to a new economic policy approach, it will overall state of development, their application across the be stuck at the current level of prosperity and might even lose country creates high levels of uncertainty and costs. some ground to new competitors. This task is getting more Vietnam needs microeconomic policies that can effectively urgent given rapid changes in the international economic address these emerging bottlenecks. In the short term, ways environment. need to be found in which the government can ensure such The current policy response is based on the widely shared action without having to wait for a fundamental reform of view that Vietnam needs to move beyond the current government institutions. economic growth model, which is based on low labor cost and intensive capital investment rather than on productivity Foundations for middle-income status and beyond and competitiveness. But there is no clarity or consensus on Vietnam's current growth is based on an economic logic the policy implications to draw and on the new strategy and that ultimately has limited potential. At its core, it raises growth model to implement. The challenge is that moving prosperity by moving Vietnamese workers from agriculture to a new model requires interrelated changes in many policy into more capital-intensive manufacturing activities. areas. Such a fundamental transition is challenging for any This structural change then induces further growth as an administration and is particularly daunting for Vietnam emerging middle class starts to demand a broader range given its widely acknowledged institutional weaknesses. The of consumption goods and services. The highest level of only way to deal with these weaknesses is a competitiveness prosperity that Vietnam can reach given this approach is strategy that sets clear priorities and focuses the government's defined by the level of productivity that unskilled workers limited institutional capacities at a few truly critical tasks VIETNAM COMPETITIVENESS REPORT 107 From a broad-based shift towards market-oriented economic activity to a targeted approach of upgrading productivity at any point in time. At the moment, Vietnam is trying an indication that the policies of the past were mistaken. It to upgrade too many things at the same time, without a is a sign that both Vietnam and the international economic clear strategy that could align and sequence these activities environment in which the country operates have been towards a coherent new goal. The lackluster success in many dramatically transformed over the last two decades: what if not most of the initiatives to fundamentally upgrade worked well in the past is not necessarily what will work best Vietnam's competitiveness is the logical consequence. in the future. Improving Vietnamese competitiveness: What to Moving from one policy approach to another is not just do? a matter of refining current policies. It is driven by the need to adopt a new set of principles that can then guide Vietnam needs an action agenda that accomplishes the three the multitude of individual changes that are required. main tasks identified in the preceding section. Vietnamese These principles describe the direction and underlying leaders have to design the many specific policy programs logic of change. Clarity on these principles enables the and activities required in this context. Companies, local many individual policy makers and implementers to align and foreign, international donors, and others will also have their actions with an overall strategy. While this happens to be involved. The dialogue between these important naturally in a steady-state economy within a given growth stakeholders will provide the basis for future work on paradigm, it becomes a critical condition for effective action defining a comprehensive national economic strategy. when many things need to be changed in parallel. This section contributes to their work in three steps. First, The following three principles outline critical dimensions of it outlines some general principles on how the nature of the Vietnamese economic transition- the economic policy Vietnamese economic policy will have to evolve in this new goals, the role of government and the private sector profile stage of the country's development. Second, it will identify specific actions recommended for early implementation in Growth drivers each of the task areas discussed. Third, it will define important Vietnam's growth since the mid-1980s has been driven by general rules for how to align ongoing government policy transition and structural change. Transition has transformed changes with the overall competitiveness agenda. the governance of the economy from plan to market, opening up Vietnam for integration with the global economy. Guiding principles: How does Vietnamese policy Structural change has transformed the composition of the action need to change economy, moving millions from subsistence agriculture Vietnam's economic policy approach since 1986 has, in into manufacturing and services. These macroeconomic many ways, been an enormous success. Standards of living "systemic" changes have enabled underlying competitiveness, have gone up and many people in Vietnam have seen their essentially the presence of low cost labor, to be revealed. livelihoods transformed. This is a source of well deserved pride. Changing the policy approach now is by no means Vietnam's future growth has to move beyond providing 108 ASIA COMPETITIVENESS INSTITUTE access to and leveraging existing economic fundamentals. dominated by SOEs and foreign companies, with the local It needs to be based on a consistent upgrading of these private sector playing a significant but overall still small role. fundamentals. This will require changes on a wide range The process of "equitization" has been challenging, and of macroeconomic and microeconomic conditions driving the financing of SOEs remains non-transparent. Efforts to productivity. create national champions have not met with much success and in some cases, like Vinashin, seems to have provided The current policy debate in Vietnam has not quite made the an environment where leading executives exploited their transition to this new vision. Much of the focus is on short- position for private gain. Foreign companies have been able term growth rates rather than on sustainable productivity to grow and operate successfully in Vietnam despite these growth. While these objectives do not need to be in conflict, challenges. Yet the local private sector has for the most part they easily can be. Many macroeconomic policies that fuel been relegated to small companies, largely serving local short-term growth have no or even negative impact on demand. the longer-term productivity potential of the economy. This is particularly true for attempts to provide SOEs with Vietnam needs to provide an environment in which a more easy access to capital in order to keep up their investment balanced mix of state-owned, private, and foreign companies activities. characterizes the economy. Competition between these groups needs to be on equal terms, enabling those that make Government role the strongest contribution to Vietnamese prosperity to gain Vietnam has experienced a significant transformation in the ground. role of government in the economy since the mid-1980s. The basic institutions of a market economy, including free The current policy debate in Vietnam too often gets hung price setting, making decisions on buying, producing, up on political views about ownership. Academic research and selling, and so forth, have been created. Government clearly indicates that market structure, i.e. the exposure remains an important factor in the economy, but the nature to competition, is more critical than ownership per se in of its involvement has clearly changed. Government is now determining productivity levels within companies. Vietnam reeling under the strains of finding its new role within the can combine SOEs with a market economy and rising levels more complex market economy that has developed. The of prosperity. However, it can only do so if the governance government's instinctive reaction remains, too often, one of of the SOEs is transparent, the role of the government as control. But the public sector's ability to exercise this control an owner clearly separated from its role as a regulator, and is not keeping pace with the changes in the environment. This SOEs are exposed to the same market rules and incentives as breeds an environment in which inefficiency, corruption, their foreign and local rivals. and weaknesses in the rule of law develop almost naturally. Specific action proposals: Addressing the three Vietnam's government needs to define a new role, in line with critical tasks the demands of an emerging, dynamic market economy. This Guiding principles for economic policy need to be translated role is defined by the roles that government needs to play to into specific actions. Ultimately these actions need to be allow the market to function. Government needs to provide designed and implemented by Vietnamese institutions a transparent and effective regulatory environment in which and individuals to gain real traction. The remainder of this companies can compete on equal terms. Government needs section provides examples of key actions to take, organized by to have an effective approach towards providing public the three key tasks defined earlier, for upgrading Vietnamese goods, including infrastructure, education, and regulation, competitiveness. These actions are meant to provide useful in ways that reflects both its political will and the needs of input for Vietnamese policy makers, not to constitute a fully companies and the broader public. In short, it needs a plan comprehensive list or a readily implementable action plan. for how government actions are contributing towards the emergence of a business location with clear and distinct Macroeconomic imbalances competitive advantages. As a small-open economy with a quasi-fixed exchange regime, Vietnam's ability to stimulate growth through The current policy debate in Vietnam is too often focused macroeconomic policy is limited. Monetary policy on the size and the direct power of government, rather relaxation doesn't guarantee higher economic growth since than on its ability to provide the functions needed. But a large portion of the increased demand (i.e., investment size and effectiveness do not necessarily go hand in hand. and consumption) will be satisfied by imports. It may also Government that aims to directly control many actions is cause inflation, asset bubbles, and dollarization as Vietnam findings itself overburdened, even if it is large. Government experienced during 2009 as the result of the stimulus that focuses on setting and implementing clear rules of the package5. Fiscal policy, too, faces significant limitations in game can have much stronger impact, even if it is smaller. Vietnam: The budget deficit is very high and has become almost chronic. And any fiscal stimulus will attract more Structure of the economy capital inflows that under the quasi-fixed exchange regime Vietnam has in the process of transition moved from will force the central bank to increase money supply and thus an economy in government ownership to an economy push up inflation. Instead of using expansionary fiscal and VIETNAM COMPETITIVENESS REPORT 109 monetary policy to stimulate the economy, the government rate), the government together with the SBV set the should follow a prudent long-term policy approach and intermediate targets (for example, money supply and/or improve its macroeconomic management capability to credit growth), and the SBV is given complete autonomy maintain sound macroeconomic foundations6. in setting the operational targets. SBV then needs to send clear signals on its main monetary target, namely The overall macroeconomic policy mix has to achieve a inflation, and the corresponding money supply and number of objectives: Monetary policy needs to create an credit growth targets. Over time, it is critical that the environment in which inflation, interest rates, and nominal central bank's independence, competence, and capability exchange rates develop in a transparent, market-driven are strengthened. process that sends clear signals to market participants. Fiscal policy needs to ensure transparency and discipline in • Financial market regulation; weak regulatory balancing government revenues and expenditures in a way frameworks and immature financial markets are a recipe that is consistent with the public sector's long-term budget for speculative bubbles and overheating. Vietnam needs constraint. Macroeconomic management needs to align to develop a robust regulatory framework in which short-term monetary and fiscal policies with these long- the room for speculation is reduced while the financial term goals while reducing short-term cyclical fluctuations system is gradually deepened. SBV needs to prudentially of the economy. Macroeconomic management also needs oversee the financial system to ensure the soundness of to monitor and if necessary manage the build-up of financial markets and institutions. Transparency and fair unsustainable bubbles in the economy, for example in the competition should be enforced to ensure that credit real estate, credit or equity markets, and to strengthen the is allocated to the firms and the areas where it can be soundness of financial market institutions. used most efficiently. Regulatory framework should also support effective surveillance of financial institutions The following policy actions are examples of the steps and risk management to ensure soundness of the system Vietnam needs to take to move towards a macroeconomic and reduce systemic risks. policy environment in which imbalances are less likely to occur and can be mitigated: • Coordination of overall macroeconomic policy over time; a short-term focus and a lack of coordination • Transparency of fiscal position of the government and among different macroeconomic policy instruments SOEs; uncertainty about the economy's fiscal conditions, undermine the effectiveness of policy. The Central such as budget deficit, public debt (including debt of Committee for Financial and Monetary Policies can play SOEs), foreign reserve holdings, etc. undermines the an important coordinating role to enhance alignment trust of market participants. Vietnam should establish of efforts across different ministries. Its operation and an effective and independent reporting body in charge mandate should be upgraded and formalized to manage of providing transparent and robust data in line with a medium- to long-term agenda rather than to seek ad- international norms on the state of the economy. SOEs hoc solutions to immediate crises and problems. need to be subject to stringent information disclosure requirements, especially on their economic efficiency, Microeconomic bottlenecks financial performance and financial relations with the Vietnam needs microeconomic policies that can effectively government. and quickly react to bottlenecks in the regions and clusters where they are most pressing. As discussed previously, • Strengthen budget discipline; Transparency and these bottlenecks are related to workforce skills, physical discipline in state budget management need to be enforced infrastructure (including electricity) and administrative to minimize off-budget spending items and maintain a procedures. sustainable fiscal balance. Quality and effectiveness in public debt management need to be enhanced. Public While a fundamental solution to these challenges requires debt management should be considered as an organic broader-based changes in policies and institutions, there is a part of the overall macroeconomic management and need to find effective answers more quickly. This can happen should be coordinated among Ministry of Finance and in public - private partnerships where the companies affected other policy agencies. Transparency and independent by the bottlenecks, the government agencies in charge of the monitoring in public investment need to be enforced. respective issues, and – where relevant – the institutions that provide relevant products and services, launch target • Consistent and predictable monetary policy; Monetary activities together. Such partnerships will provide useful policy needs to be driven by a transparent policy learning and experimental experience to convince people to objective and has to be consistent and predictable embark on broader national-level policy measures. over time. According to Vietnamese laws, monetary policy decisions involve the National Assembly, the government, and the SBV. We recommended a clear assignment of roles among these three entities: The National Assembly could set the ultimate objective for monetary policy (for instance, an inflation target 110 ASIA COMPETITIVENESS INSTITUTE bOX 4.1: - Garment and textile cluster in Ho Chi Minh City's surrounding area (Ho Chi Minh City, EXAMPLES OF Binh Duong, Dong Nai provinces); the garment sector is facing a serious challenge of CLUSTER-BASED low value-added and low productivity. The project will roll out a study and some action INITIATIVES initiatives to enhance the competitiveness of the cluster. For example, skills training programs for technicians, engineers and line managers; capacity building for design and branding; facilitating linkages among garment factories and local textile suppliers and developing material supply zones in collaboration with industry players. - Electronics and engineering cluster in the Red River Delta (Hanoi, Vinh Phuc, Bac Ninh, Hai Duong); building up the local supplier base (supporting industries) is critical to increasing the value-added of this cluster. The initiative will collaborate with flagship FDI companies to map out a database of potential local suppliers; identify areas of potential linkages and promote partnership; build capacity and provide incentives for local suppliers to meet the requirements of FDI clients. Any generalizable lessons could assist government in formulating policy on developing supporting industries in other clusters. - Logistics cluster in the neighborhood of Ho Chi Minh City; an efficient logistics sector is critical for all firms regardless of whether they are serving a domestic or foreign clientele. An industry assessment could be launched to identify factors impeding the sector. This can be followed up with focus group discussions with all stakeholders – public, private and institutions for collaboration so as to seek workable solutions and formulate coherent policies which remove bottlenecks and enhance both the quality and efficiency of the provision of multi-modal logistics services. - Tourism cluster in the Central region (Da Nang, Hue and Quang Nam province); of late there has been an influx of FDI in tourism-related real estate projects in the region however, there is a lack of coordination among provinces to develop a sustainable tourism cluster. The initiative will develop an integrated concept and strategy for the region; prioritize and attract investment in supporting industries such as transportation, recreation and healthcare; facilitate linkages and coordination among cluster participants. - Agro-processing cluster in the Mekong Delta region; most agricultural exports comprise unprocessed or semi-processed goods which have low value-added. The initiative will connect the relevant stakeholders such as farmers, traders, processing factories, supermarkets and exporters, quality standard regulators, agricultural extension service providers and conduct focus groups to promote business linkages and find ways to improve both the quality and value-added of agricultural products. • Cluster-based action initiatives; the lack of dialogue experience could provide technical support. Success will between the government agencies regulating workforce ultimately depend on the willingness of the Vietnamese skills or providing infrastructure and the companies stakeholders to take ownership and translate such using these services is one of the most critical barriers experimental experience into broad-based policy actions. towards removing the bottlenecks for growth. A range of targeted pilot initiatives can be launched in clusters New competitiveness strategy where there is sufficient critical mass for actions to affect Vietnam needs an overall economic strategy that provides a meaningful number of companies and willingness of a coherent approach for upgrading competitiveness and both companies and the relevant public sector agencies moving the country to the next level of development and to collaborate. Central government could provide competitive advantage. This strategy is also dependent special authority to such efforts, where needed. Such on how Vietnam intends to position itself in the global initiatives will showcase how different stakeholders economy. To achieve this, Vietnam will need to change – public and private, central and local, industries and many of its policies as well as the way policies are designed academia – can work together to address issues of and implemented. While, the task of repositioning Vietnam common concern. Issues could be picked and initiatives in the global economy is beyond the scope of this report, could be designed in a way so that the government and the following are key policy areas and policy processes where business people could learn how to formulate a holistic change is most critical. policy mix to address not only individual issues but also a complex set of inter-related problems which is often the case in reality. International agencies with relevant VIETNAM COMPETITIVENESS REPORT 111 Policies solely by the government. It is necessary to have a central government body to champion and oversee the strategy 1. Education and workforce skills and all efforts related to human capital upgrading. This Skills are critical to enable the emergence of a higher value- body will coordinate various issues which are currently added economy in Vietnam. While education alone is not being split among different ministries, namely the sufficient, there is no way forward that does not require a education portfolio of the Ministry of Education and work force that is better trained and educated for the tasks Training, the vocational training and labour issues of required in a more sophisticated modern economy. There the Ministry of Labor, Invalids and Social Affairs and is little if any controversy about this fact in Vietnam; the industry-specific skill issues of line ministries. A Central question is how to get it done. Taskforce on Education Reform under a broader competitiveness watchdog agency can help coordinate The current approach is not delivering. It fails on quantity, and streamline efforts. Another institutional example quality, and relevance of education and workforce skills. is the Workforce Development Agency (WDA) in Public sector institutions have proven unable to provide Singapore. the right skills and to extend their capacity in line with the growing needs of the Vietnamese economy. This is the – Reform the regulatory framework for the education result of ideological and state centric governance system in sector. Instead of focusing on administrative control, the education combined with the lack of collaboration between regulator needs to develop effective quality standards to educational institutions and the business community. Few control the quality, not quantity, of instructors, students foreign institutions have entered the market under the and curriculum. Entry barriers need to be simplified watchful and often constraining oversight of government towards smarter regulation to allow most competent agencies. There is a recent rapid expansion of local private players to enter the market. Educational institutions need sector institutions which has added to capacity but their to have more autonomy to decide their own operational track record in terms of the quality of education has been and organizational issues. A merit-based system needs to highly heterogeneous. The market is not transparent enough be strengthened to encourage most talented instructors to provide guidance to customers seeking high-quality and and students, and also to alleviate corruption and fraud. relevant educational programs. Regulators focus on entry Funding allocation should be tied to performance rather barriers and administrative control of operational issues than size of the institutions. Transparency needs to be (e.g. how many students to enroll, how much instructors enforced to provide clear guidance for the customers are paid, etc.) rather than on strategic control of quality. who are seeking education services. Government needs The policy focus on expanding access to basic education has to mobilize the dynamics of the market process in order come at the cost of lower quality and less relevant education. to enhance the quality of education supply, instead of working against market forces. A new approach towards education and in particular workforce skills development needs to focus on the role – Promote vocational training: The social preference of education as a central enabling condition for higher for university education (especially business and productivity. Entry of private sector training providers, management education) over vocational and technical especially of competent foreign players, needs to be training has led to a serious shortage of capable engineers simplified. Government should focus on its role as a regulator and technicians in the market. The government's for public and private training providers that implements administration in this area need to be streamlined into quality standards and enforces transparency through a a single focal agency (instead of divided among three combination of incentives, controls, and investments. different ministries as currently). Vocational training programs needs to be developed and managed in The collaboration between companies, training providers, close coordination of educational institutions, local and regulators at the level of clusters needs to be actively government, and the business sector, including foreign encouraged to align education content with market needs. investors. An interesting foreign example is the WIRED Government investments should be directed to areas where, program in the US, where groups of regional government based on the dialogue in clusters, the potential for increasing agencies, educational institutions, and companies value-added is the highest. proposed joint workforce skills development plans for Specific actions and mechanisms can build on the efforts specific clusters for funding to the federal government. previously mentioned as a response to local bottlenecks, – Set up a National Productivity Fund to support cluster- and provide a pathway towards rolling them out nationally. based initiatives in improving productivity through Examples to consider include: upgrading workforce skills, technology, production – Develop a national workforce strategy with rigorous management system, etc. The Fund should embrace studies on the type of skills and competencies required a much broader portfolio than the current Vietnam for future growth. This strategy should be developed Productivity Centre (under the Ministry of Science in close consultation and implemented in coordination and Technology) which is merely an ISO accreditation with industry and educational institutions rather than agency. A national productivity fund needs to be put 112 ASIA COMPETITIVENESS INSTITUTE at the centre of the system to coordinate productivity a serious impediment for growth. upgrading efforts in different sectors and to have deep industry-specific knowledge and expertise. Examples of Specific actions and mechanisms can build on the efforts structure and operation of such a fund can be found in previously mentioned as a response to local bottlenecks, Korea, Singapore and Hong Kong. and provide a pathway towards rolling them out nationally. Examples to consider include: 2. Physical infrastructure – Create a centralized planning mechanism to coordinate, Transportation, communication, and energy infrastructure oversee and evaluate infrastructure development. A are another critical condition for emergence of a higher transparent and enforceable system for prioritizing, value-added economy in Vietnam. Again, there is little if selecting, managing and evaluating projects (e.g. set of any controversy about this fact in Vietnam; the question is criteria, procurement system for public infrastructure how to get it done. projects) is critical. Investment decisions need to be The current approach has delivered a significant upgrading based on rigorous assessments of public benefits and of the absolute level of physical infrastructure available in costs. The planning mechanism does not necessarily Vietnam. But the costs of these investments have been centralize all decision making, but should play a central high compared to similar projects in peer countries, and role in developing and overseeing the implementation their impact on competitiveness is not visible. Corruption of the master plan for infrastructure investment, and inefficiencies have been a significant burden. And monitoring the alignment of individual projects with the the demands of the economy have grown even faster than master plan and evaluating the projects' efficiency and infrastructure capacity has been added. In many cases, impact. It would provide a framework and transparent infrastructure projects have been used as a tool of regional rules and processes for other agencies and lower levels of policy, compensating regions not fully benefiting from government to follow. An example for such a mechanism the brisk growth in, especially, Ho Chi Minh-City and its is Singapore's Ministry of National Development, surroundings. The Vietnamese government has now plans which is the country's lead agency that oversees physical to massively upgrade infrastructure nationwide. Foreign infrastructure development (MND 2010). donors have provided capital, but in many cases such projects – Strengthen the system for managing public procurement, are tied to their conditions or interests. Serious concerns including streamlining procurement procedures with have, for example, been voiced about the plans to build a those of international agencies, development of an high-speed rail link between Hanoi and Ho Chi Minh City. e-procurement system and creation of an independent A new approach for infrastructure investment needs to supervisory agency which reports to the National systematically evaluate public infrastructure projects by Assembly and which has power and authority to monitor, their contribution to competitiveness, not by their roles inspect and evaluate major projects. In Singapore all as demand drivers or compensation to regions. The overall infrastructure tenders, other public sector opportunities, budget control should be centralized, with decision making and awards can be readily accessed online through on national projects centralized and other budgets for GeBIZ, the government's one-stop-shop e-procurement regional projects allocated to region. PPP should be used as portal. The Government e-Procurement System (GePS) an instrument to enhance the effectiveness of investments, is a similar initiative in South Korea that centralizes not just to mobilize private capital. Relevant proposals public sector procurement through a dedicated portal. have been discussed in the recent past, for example at the – Provide viable market-based financing options for Vietnam Business Forum. It is now time to move beyond the infrastructure investment (i.e. greater private sector pilot phase and start a larger scale roll out. participation, financially viable, more efficient, etc.). The The major part of infrastructure investment is currently PPP model for infrastructure investment is an option, financed and implemented by the public sector. but scrutiny is required to ensure that it is not abused Enhancement of transparency, efficiency and accountability as a tool to provide privileges for some well-connected in public procurement and construction is critical not only private groups in getting access to land (as a return to reduce costs and enhance quality, but also to strengthen for their co-investment) and cheap ODA credit or in the country's creditworthiness with creditors. overcharging the end-users of infrastructure. Besides a transparent legal framework, an effective and enforceable Policies need to focus not only on building "hardware" competitive bidding system with a monitoring and infrastructure like roads, ports, airports, etc. but also on evaluation mechanism is key to ensuring the impact of developing the complementary "software" solutions and the PPP model. services, e.g. logistical networks and services to ensure seamless and efficient connection of infrastructure – Address electricity shortages through a combination hardware. As an export economy, Vietnam should place of investment, market regulation and technological great importance on improving logistical and custom measures. Gradually liberalize electricity prices to service efficiency where it is currently underperforming attract investment in the sector. Create a competitive other regional peers. Electricity shortage is also emerging as market and put EVN subject to market disciplines. VIETNAM COMPETITIVENESS REPORT 113 Enforce quality control and technology standards and Specific actions and mechanisms to consider include: measures to reduce electricity consumption ratios of key industries, especially steel, cement and chemicals. – Separate the role of the government as an owner from Develop and gradually commercialize new and more that as a regulator. This requires the government to sustainable energy sources. delegate its ownership to an independent, strong body which operates purely as a commercial corporate and 3. SOE Governance independently from any political agenda. All major State-owned enterprises remain are an important part of state-owned conglomerates are still reporting either the Vietnamese economy and are likely to remain so in the directly to the Prime Minister or to the line ministries near future. Enhancing the capabilities of SOEs is critical that ultimately also regulate their markets. Ownership of to increase value-added, to remove the drain on public smaller SOEs is managed through the Vietnamese State sector resources their financing needs impose, and to create Capital Investment Corporation (SCIC). But SCIC opportunities for competitive private companies to emerge. has an unclear mandate, ownership policy, and does not effectively separate regulation and control. Singapore's The current approach of SOE governance is not delivering Temasek is an example of clear separation between the the strong, competitive Vietnam-based companies that are government and its linked companies. the objective of policy makers. The hope was to achieve high performance through creating economies of scale. – Define and enforce modern governance standards for SOEs receive special treatments and privileges in forms of SOEs, especially those related to information disclosure, access to land, subsidized and preferential credit through risk management, independent financial audit, and state-owned banks or government guarantees, etc. They also appointment and operation of the Board of Directors enjoy monopoly positions and strong connections to the (BOD) and the management team. The BOD and the sectoral regulators who are also their direct reporting line management team of the SOEs have to be accountable in most cases. The SOEs are also not required to adhere to for the enterprise's performance. At the minimum, SOEs the governance standards which apply to almost all public need to be subject to the same governance standards and companies such as information disclosure, independent regulations as other public companies. An interesting audit, recruitment of professional management, competitive foreign example is the initiative of the Baltic Institute bidding, etc. It is getting increasingly obvious that low of Corporate Governance. In collaboration with the efficiency persists in large SOEs, growth is achieved by Lithuanian government, it has developed governance entering into other fields, and corruption and personal principles for SOEs that have now been implemented. enrichment remain difficult problems. While it is tempting – Ensure competition and market discipline in the markets to see such failings as the result of individual misbehavior, in which SOEs operate. All the current non-market the experience of many other countries suggests that it is subsidies and special treatments for the SOEs need to systemic. The current policy approach not only fails to be removed. The government can still support the SOEs provide an environment in which SOEs improve their but only under the same rule as it provides support to competitiveness and productivity. It also crowds out more privately-owned companies. The support needs to go productive players and erodes confidence in a transparent to those who can use it most efficiently and contribute and equal playing field. the most to competitiveness and it needs to focus on A new approach needs to separate the roles of government sustainable upgrading of productivity rather than as an owner from that as a regulator. Government needs increasing short-term profitability. SOEs, therefore, to define a clear owner policy in terms of what it expects should be discouraged from expanding into non-core as returns from its SOEs. Government's measures to areas, especially into speculative financial and real estate improve SOEs' performance need to focus on enhancing ones as this is creating systemic risks for the economy. productivity rather than increasing short-term profitability. State resources (land and real estate, equipment, credit, SOEs need to be subject to the same competitive pressure etc.) which have been and will be allocated to SOEs as their foreign and local private sector rivals. It is crucial need to be duly revaluated by independent, competent to ensure that SOEs compete on equal terms to other agencies to protect those from leaking to individual companies on all markets, including those for capital, and pockets. Competition framework and disciplines need are subject to full market discipline. While equitization to be strengthened, e.g. strengthening the capacity needs to remain on the policy agenda, it is more pressing and separating the operation of Vietnam Competition to enforce modern corporate governance standards in SOEs, Administration Department (VCAD) from sectoral especially standards related to information transparency, risk regulators; enforcing competitive bidding in government management, and the transparent operation of the Board of contracts, allowing private sector players to enter the Directors and management team. currently monopolized markets, etc. – Improve the equitization process and define policy for effective management of divestment proceedings. Equitization needs to be used as a tool for adopting 114 ASIA COMPETITIVENESS INSTITUTE technology and know-how transfer, applying good of regional and national agencies in attracting and regulating governance and creating exposure pressures, rather FDI need to be clarified and coordinated. than just for mobilizing private capital. As major state conglomerates and enterprises will be equitized over the Specific actions and mechanisms to consider include: next few years, the amount of divestment proceedings – Develop a new FDI attraction strategy for Vietnam may be huge which requires careful and effective which needs to build on Vietnam's strategic positioning management of the money. and its strategy for the local economy. The strategy should identify and prioritize what sorts of FDI Vietnam wants 4. FDI attraction to attract; how it will add value to the local economy; The attraction for foreign direct investment, especially what can be done next to it to move up the value chain. Greenfield investments, has been a critical driver of recent It should also discuss who Vietnam has to compete Vietnamese growth. Given the weakness of the local with to attract such FDI and so what it can offer to get company base, FDI will continue to be a critical driver of the deal. The current FDI management system needs growth. It will possibly start to include more takeovers of to be reformed, from target prioritization, attraction, Vietnamese companies, including SOEs, alongside further coordination to follow-up, oversight and evaluation. Greenfield investments. This includes strengthening of the current mechanism The current approach towards FDI attraction is reactive and of delegating authority to provincial governments. A oriented towards high announcements of FDI inflows. The centralized coordinating and supervisory mechanism value that this generates for Vietnam is insufficient. FDI needs to be put in place to ensure that provinces do not attraction is essentially focused on the process of dealing "fence-break" to attract any type of FDI at any price and administratively with investors that have already decided the licensed projects are in line with the overall master to come to Vietnam. This process is distributed across plan of each sector or industry. a number of national and regional agencies, with little – Strengthen the capacity of the Foreign Investment coordination or alignment between them. Regions tend to Agency (FIA) under the MPI as the central coordinating race for FDI by offering excessively preferential incentives in agency for attracting and managing FDI. FIA needs to terms of land or tax, rather than by positioning themselves be transformed from a purely policy making agency to to offer unique factors and advantages to investors. There is become an active gateway agency who provides "one- no proactive approach towards contacting those investors stop" innovative package of investment solutions and that might have the most to offer in terms of adding towards services for investors. In this role, FIA will not only Vietnamese competitiveness. There is no systematic work to deal with new coming investors but also follow up integrate the foreign investments with the local economy closely with existing ones to attract their suppliers or once they have materialized. There is also little if any follow- subcontractors to Vietnam and also to get their feedback up in working with investors to attract their suppliers and on strengthening Vietnam's competitive advantages as service providers to Vietnam. There is little linkage and a business destination. FIA should be well-equipped coordination between FDI policy and other policy areas to and empowered to undertake the strategic and central work out what to offer for investors as a package of solutions, coordinating tasks as mentioned above. and then provide feedback from investors about what needs to be developed as new competitive advantages for Vietnam. – Set up outreach initiatives with foreign MNCs to As a result, Vietnam gets mostly investments that create a build local supplier base and clusters and to create very short-term return but are highly mobile in terms incentive system to encourage technological spillovers of moving to other locations. Luckily, Vietnam also gets and linkages between FDI and local economy. In order investments from long-term oriented companies like Intel to successfully leverage the MNCs as anchor firms to or recently Boeing, that are looking at the future outlook build local supplier base around and improve overall of the region and the country. But these investments are the productivity, it is neither sufficient nor effective to result of economic fundamentals, not of a successful FDI merely use financial incentives or impose local-content attraction policy. requirements. Policy measures need to tackle a number of important issues, such as: (i) absorption capacity of A new approach needs to focus on actual FDI, not the local economy, e.g. technology level of local firms, announcement and more effective monitoring and follow workforce skills, quality standard system, linkages with up. FDI attraction needs to be separated from regulation research institutes, etc. (ii) a strong and enforceable IPR and permitting. Investment attraction needs to evaluate FDI protection system to eliminate the risk of appropriation projects as tools to strengthen Vietnam's competitiveness. when MNCs share their technology secrets with local The needs of MNCs to improve business environment suppliers; (iii) level of competition among firms and conditions need to be leveraged to enhance the environment sophistication of customers in the local market – when for all companies. Clusters need to be developed around such factors encourage firms to compete by innovation MNCs, attracting/developing other MNCs, SOEs, and and adopting new technology rather than by reducing local private sector companies and creating incentives for costs; (iv) characteristics of sectors, etc. Especially in a encouraging FDI spill-overs. The roles and responsibilities VIETNAM COMPETITIVENESS REPORT 115 small and newly emerging market, when the risks are too external linkages along the value chains in which firms high for both the FDI and the local firms to invest in are participating. Clusters which are built around MNCs creating forward and backward linkages, there is a role could serve as the platform for local firms to participate in for the Government to match the risk gap by providing the global value chains. Policy priorities should focus on appropriate incentives, e.g. credit risk sharing, labor creating an environment in which meaningful linkages and training or land provision, etc. positive spill-overs can emerge in a market process. Modern cluster policies are fundamentally different from traditional A new FDI policy needs to be put in the context of broader interventionist policies targeting specific companies or competitiveness policy framework and connect to other industries through subsidies or protection: they are open policy areas. Land management policy is important to to all existing clusters that have the ability and willingness redirect FDI from real estate into more fundamental value- to upgrade, and are based on enabling companies in creation manufacturing areas. Provision of workforce clusters to compete on a higher level, not shelter them skills and infrastructure also need to be targeted towards from competition. Several government policies (regional serving the sorts of FDI which contribute the most to development, workforce skills, infrastructure spending, competitiveness. FDI attraction, regulatory reform, etc.) can be organized An interesting foreign example is Singapore's Economic around clusters to provide more coherent policy packages Development Board (EDB). Creating jobs through aligned with the specific needs of an individual cluster. The labor-intensive industries was once the top priority of the orientation towards clusters provides higher effectiveness of government when the city-state gained independence from government spending while minimizing distortions. British rule. The EDB was then formed to take on the Specific actions and mechanisms to consider include: challenge of attracting investors to do business in Singapore. EDB strategically charted the direction of policies that are – Re-organize existing policies around clusters, especially coherent with the nation's overall development goals and it in areas linked to investment attraction, workforce set-up overseas offices to spearhead FDI attraction initiatives skill development, industrial parks, and SME/private (EDB 2010). sector-development. In these areas cluster-based efforts can raise the level of effectiveness and play a crucial 5. Cluster development/Industrial policy role in implementing strategic plans in public-private Higher competitiveness requires specialization in areas collaboration. Pilot efforts to develop clusters/supplier where the presence of related and supporting activities can networks around large foreign investors and/or large support a level of productivity that any individual company SOEs could be among the first of these projects. Taiwan's finds hard to achieve. The actual specialization is the result Hsinchu Science Park (HSP) is a good example of how of the specific assets and capabilities available in a location, cluster thinking can be used to enhance the effectiveness shaped by the way comparative and competitive advantages of an industrial park. The government built the park have dynamically evolved over time. Government does not in close proximity with leading academic institutions create specialization that drives higher productivity but it (Chiaotung and Tsinghua) and Taiwan's Industrial controls many policies that have a significant impact on the Technology Research Institute (ITRI), offered attractive specialization dynamics. financial terms, and focused investment attraction on a The current approach of the Vietnamese government set of related industries with high potential linkages. towards specialization and industrial policy is based on – Conduct a national cluster mapping project to creating national champions from SOEs, providing cheap identify and assess clusters across the country. The credit to individual companies, and creating dedicated resulting database of clusters can then be matched with infrastructure (industrial parks). There is a plethora of instruments like a Vietnam Regional Competitiveness sectoral and industry plans at different levels, but no Index (RCI) to provide a strong factual basis for the integration and no effective follow-up or implementation. design of cluster- and region-specific policies. Such A systematic dialogue with the clusters that have emerged an RCI can be designed to assess comprehensively in the Vietnamese economy is lacking. There are little if any macroeconomic and microeconomic competitiveness linkages between the narrow attempts of industrial policy fundamentals of provinces in the contex of regional based on intervention and subsidies with related policies linkages. This would complement the current like FDI attraction, skill development, or infrastructure Provincial Competitiveness Index (PCI) which focuses investment. on assessing governance quality and proactivity of A new approach needs to focus on clusters and value chains, provincial governments in creating a conducive business not individual companies or narrow industries. The objective environment for private sector businesses. Over time, needs to be improving productivity, not private profitability. the knowledge infrastructure created through the cluster For existing clusters, collaboration and cluster dynamics mapping effort should be matched by a training initiative have to be enhanced to move them beyond the current state focused on education for cluster initiative managers. The of mere co-location. Alongside with strengthening linkages European Cluster Observatory7 and Harvard's course on within clusters, it is necessary to build beyond-cluster Microeconomics of Competitiveness8 are international examples. 116 ASIA COMPETITIVENESS INSTITUTE – Encourage the launch of pilot cluster initiatives through where they can contribute the most to the overall objectives the creation of a Vietnamese Cluster Initiative Fund set by the Vietnamese. that would allocate funds for strategy development to cluster initiatives based on a competitive process with an Specific actions and mechanisms to consider include: international review committee. Cluster efforts should – Creation of a central Regulatory Impact Assessment be evaluated on their current abilities and on their (RIA) unit to constantly review existing laws and willingness to improve. Initial funding would cover only assess new laws and regulations based on effectiveness, the analysis and strategy design, with implementation clarity, consistency, relevance, etc. Project 30 on the of efforts to be covered through existing government Simplification of Administrative Procedures has achieved programs opened up for clusters. significant momentum in reviewing the existing stock Institutional architecture of rules and regulations in term of their administrative efficiency. The Law on Promulgation of Normative Legal 1. Policy process Documents (Law on Laws) was issued to require all the More effective policies, in the specific areas mentioned new laws and regulations to go through a systematic RIA above as well as in others that will rise in importance over process. This is a major movement in the legal reform time, are more likely to emerge, if a robust process of policy process and is compliant with international practices. design and implementation is in place. Competitiveness is However, the Law doesn't provide for a central RIA not achieved through the one-time creation of a good policy. agency to be established and for the RIA process to be It requires an inherent ability to systematically upgrade and applied to lower level laws and regulations, leading to a improve policies over time. loophole for new regulations to skip the requirements. The Law should also legalize the requirements for laws The current policy design and implementation process in and regulations to be developed based on clear facts Vietnam has significant flaws. Policy design is often based and data. The new centralized RIA Agency will need on limited if any data. While the policy quality at higher to streamline and coordinate different portfolios of levels (Central Government, National Assembly) has been laws and regulations currently divided among different improved, especially after WTO accession, the quality and agencies (Ministry of Justice, Office of the Government application of policies at lower levels (rules and regulations and Ministry of Home Affairs, etc.). Placing it under the issued by ministries or provincial governments) are highly National Assembly like the Congressional Budget Office heterogeneous. The inclusion of experts or affected groups (CBO) in the United States might be an option. from outside of government is often insufficient. The Vietnam Business Forum has been rated as one of the most – Establishment of an automatic formal review process effective public-private dialogue structures internationally that invites relevant government agencies and other (World Bank 2009). But even here there are concerns about stakeholders, including private sector associations, to systematic follow-up and the integration of this structure comment on draft laws and regulations within a given into policy planning. In general, there is no lack of policy time frame. There need to be a clear mechanism and plans in Vietnam, but these plans are often set up in isolation, scorecards to follow-up and evaluate how the comments leading to a multitude of conflicting guidelines. The presence were integrated in the new policies. An administrative of many aid organizations with their individual focus areas appeal mechanism also needs to be set up to allow and objectives might contribute to this situation. Long-term businesses and citizens to appeal improper or illegal plans exist in separation from short-term action agendas, policies and regulations. leaving the long-term "strategic" plans without real impact. – Development of a medium-term budget planning There is little systematic follow-up on whether policies were process with rolling updates. The planning process needs implemented and had their desired impact. to integrate annual budgets into medium-term planning. A new approach needs to provide data for fact-driven policy The current budget needs to be design with a view making and clear procedures to monitor the relevance and towards longer-term fiscal policy objectives, especially quality of policy. Planning efforts have to be consolidated over the business cycle. Medium-term budget plans and connected. Policy planning needs to be connected need to reflect changes made in current budgets. One to budgeting and implementation; short-term budgets/ option would be to invite the OECD's Working Party of plans need to be integrated in rolling updates of long- Senior Budget Officials (SBO) to undertake a review of term plans. There has to be an institutionalized impact Vietnam's budgeting system; similar reviews have been assessment for policies. The coordination among different conducted for Thailand and the Philippines. government agencies in design and implementation needs to be strengthened. Dialogue between government and external stakeholders in the policy design process needs to be systematized. In its work with donors, the government needs to be driven by a clear national economic strategy, leveraging the specific capabilities of individual donors VIETNAM COMPETITIVENESS REPORT 117 2. Capacity preventive, and communicative functions while CPIB More effective policies require a more capable public sector. focuses on the investigative functions complemented Well trained public officials and an effective organization with rigorous use of deterrent measures (Heilbrunn and management structure of public agencies are crucial to 2004, 3-6). Both agencies have gained recognition for enable government to operate more effectively. successfully combating corruption both in the public and private spheres. The current approach in Vietnam reflects a very traditional public sector organization. There are numerous training – Review of the current training system for public officials, and capacity building initiatives being offered, but the starting with a number of pilot agencies. Regulatory lack of a merit-based and performance-driven system has Impact Assessment (RIA) is a good example; numerous limited their impact. There is a lack of appropriate incentive technical training courses are available on law making system to encourage good performance (salaries are well techniques, but little training is offered on the approach below market levels, advancement and remuneration are and process of developing and implementing demand- not driven by performance, individual accountability driven and market-oriented rules and regulations. is not enforced, etc.). Leadership is often dispersed and Apart from designing appropriate courses, a key issue coordination mechanisms across government agencies are is the selection of staff for training. This needs to be weak. Good governance principles and code of conduct based on ability and the profile of the position; training system are not in place, giving way to corruption and is not primarily a benefit. Singapore's experience in misbehavior. Government officials are often over-occupied improving the public sector's human resources is another with administrative and operational work, leaving little time interesting case. Every year the government awards for strategic management and professional work. several scholarships to top-notch students transitioning to higher education level. This initiative ensures that A new approach needs to be based on an integrated the government is able to absorb potential leaders of efforts providing modern solution in leadership, training, the public service. Meritocracy and performance-based incentives, and organizational structures. evaluation are considered key principles in human Specific actions and mechanisms to consider include: resources development. The Public Service Division under the Prime Minister's Office has a specialized – Establishment of the Prime Minister's Policy Unit with research and strategic planning unit to plan scenarios high-quality staff and sufficient resource to provide as well as generate, test and realize ideas on improving action oriented analysis and to develop implementable the civil service system. They also conduct researches policy proposals. The Unit should have significant on new skills needed in the civil system and launch powers to draw on data and collaboration from all parts policy venture projects to seek innovative approaches in of government. It could be charged with following up delivering public services. on the implementation of tasks allocated to individual ministries, and provide a central role in coordinating – A comprehensive civil service reform program is crucial activities across different ministries and agencies. Several to ensure success of all other reform efforts. A strategy for countries, like the Strategy Unit in the Prime Minister's public service reform needs to be developed, specifying Office in the UK, provide useful examples. measures to build up elements of a modern civil service system. Performance and transparency need to be key – Launch anti-corruption campaign; corruption is a principles for recruitment, salary, and advancement in systematic problem, not a case of individual misbehavior. the organization. Effective action against corruption requires an integrated set of activities, and a long-term perspective. 3. National – regional structure Reducing the benefits of corruption by both stricter Given Vietnam's size and geographic profile, the effective punishment and higher, more market- and merit-based allocation of roles and responsibilities between national, wages for public employees are important elements of regional, and local authorities is particularly important. the strategy. Strong examples in behavior and rhetoric Companies always locate in specific regions within a from the political leadership are another. Reducing the country, so the cumulative effect of government from all number of situations in which corruption can occur, for levels as it materializes in a specific place is what matters for example through the simplification and transparency of their performance. administrative procedures and the use of e-government The current structures in Vietnam suffer from significant tools, is a further element. There needs to be an effective weaknesses. The lack of coordination between national institutionalized mechanism like an independent agency and regional agencies leads to high variability in the way under the National Assembly to lead anti-corruption that rules and regulations are being implemented. Regional programs. Interesting foreign examples of successfully governments often follow me-too economic strategies implemented anti-corruption mechanisms include that copy the plans of other regions instead of developing Hong Kong's Independent Commission Against a unique strategy based on local circumstances. Regions Corruption (ICAC) and Singapore's Corrupt Practices also compete by "fence-breaking" central rules or offering Investigation Bureau (CPIB). ICAC has investigative, 118 ASIA COMPETITIVENESS INSTITUTE inherited endowments like land to attract investment. • Can the activity be designed in a way that it can take Provincial strategies and plans are not put in the context advantage of activities that are part of the competitiveness of inter-regional linkages. Regional policy from the central agenda? government is often taking the form of large infrastructure investments "compensating" those regions not growing at • Is the activity contributing towards creating the the same level as Ho Chi Minh City and Hanoi. competitive advantages that the competitiveness strategy aims to establish? A new approach needs to review the current mechanism of responsibility delegation and strengthen oversight and For these questions to provide effective guidance for policy quality control by the central government. Regions need makers and administrators across the public sector, it is to be motivated to develop their competitiveness based on crucial that the key elements of the competitiveness strategy a unique positioning. It should encourage collaboration are widely published and discussed. Alignment with the and leveraging through the cluster approach rather than strategy cannot be achieved by fiat; it requires the free competition among regions. decision of many individuals to use their decision power in a way that is consistent where the country aims to go overall. Specific actions and mechanisms to consider include: This is easier than it sounds – individuals will find it in their and their entities interest to take decisions that leverage in – Funding competition for development of regional the best possible way the decisions taken in other parts of economic development strategies. Instead of government and by other private and public entities. compensating regions with infrastructure or financial support for poor performance, central government Improving Vietnamese competitiveness: How to get could incentivize regions to develop their own economic it done? strategies. Such strategies would have to be based on the unique combination of assets each region possesses, not Many of the recommendations covered in the preceding on copying the concept of others. Despite the significant parts of this report have been made in one form or another differences in economic and political context, Denmark's by others before. Still, as the analysis has revealed, the issues Regional Growth Fora could provide an interesting that they aimed to address persist. This lack of effective example for Vietnam to review. follow-through is not unique to Vietnam. What are possible reasons for it, and how can they be overcome? – The national government could support this process by developing a knowledge and skill infrastructure • Lack of urgency; after many years of solid growth with for regional development. This would include region- a corresponding rise in standards of living for millions specific data – a Regional Competitiveness Index (RCI), of Vietnamese, there is little pressure to change the as mentioned in the Cluster Policy section above, is economic policy approach. clearly a key source - as well as training programs for The analysis in this report reveals that such complacency regional decision makers. would be dangerous. The three critical tasks identified – Review the current structure of authority delegation all reflect dangers ahead if left unaddressed. The first – between the central and regional governments and macroeconomic imbalances – could precipitate a major strengthen the oversight and quality control by the crisis. The second and third will progressively lead to central government. Consider centralized mechanisms in decreasing growth rates in the short- to medium-term. certain policy areas (e.g. regulatory review, infrastructure, The political leadership in Vietnam needs to resist the etc.) to help coordinate, prioritize, monitor and evaluate temptation of ignoring the warning signs. These are not an regional policies and implementation. The OECD in indication of failure, but in many ways a natural result of the particular has done significant work on this topic in huge success that Vietnam's economic policy over the last 25 recent years that Vietnam could draw on9. years has delivered. These warning signs should instead be used to give impetus to change. Policy action in other areas The policy areas and institutional changes identified in the • Limited individual incentives for change; for any previous sections are critical for Vietnam to address its short- particular institutional structure, there are always and medium-term competitiveness tasks. But government entrenched interest groups who would be disadvantaged clearly has to be active in many other policy areas as well. by change. This is not unique to Vietnam, but a particular problem when more fundamental economic reforms are Policy action in these other areas needs to be informed by needed. It is therefore important to create incentives and the overall competitiveness agenda as well. Decision makers willingness strong enough to sacrifice individual interests across government need to understand the country's overall of a small number of groups for broader common strategy. For each of their actions, they need to consider a interests of the whole country and its people. sequence of three questions: • Is the planned policy or program undermining efforts on the competitiveness agenda? VIETNAM COMPETITIVENESS REPORT 119 This report provides no magic formula to overcome the a consequence of institutional interests. complexities of political economy that exist. But it tries to provide data and analysis to support the reforms which are Sequencing of activities most needed for Vietnam and the Vietnamese people. And The sequencing of activities in a competitiveness agenda it provides in the following section some thoughts on an is a crucial task and not just a matter of technicality. implementation strategy that is designed to systematically First, governments cannot upgrade all dimensions of align policy initiatives with a gradually increasing impetus competitiveness in parallel. This overstretches their ability for reforms. to achieve change and results in most cases in failure. This challenge is even more acute when, as is the case in Vietnam, • Weak logic behind recommendations; many action an economy needs to transition from one set of competitive proposals are made without a clear analysis of the specific advantages and policies to the next level. Second, the challenges in Vietnam that they are designed to address. impact of individual reforms often depends on other policy They are instead proposed as policies that are viewed as steps taken in parallel or even before. Without the right generically beneficial for any country. This reduces their sequencing, results will take much longer to materialize. In ability to convince policy makers in Vietnam of their the meantime, the political willingness to pursue reforms relevance to the specific situation their country is facing. can wane if there are no positive results to point towards. Getting the sequence of reforms right is thus a critical Unlike many other reports, this report provides full dimension of a sustainable competitiveness agenda. transparency of the data and assessments that drive the recommendations. It develops recommendations that For Vietnam, we suggest an evolutionary reform process. are specific to Vietnam and mutually reinforcing in their Changes in competitiveness will initially be driven by impact. And it provides a holistic view on how targeted narrow activities in well-defined pilot cases. Over time, these efforts in a specific set of policy areas can be leveraged to new solutions will then be rolled-out nationally and across a create a maximum combined effort. It does not purport that broader set of policy areas. In the last stage, the institutional reform in any individual policy area alone is sufficient, nor architecture of policy making will be upgraded. does it argue that everything needs to change at once. The only exception to this bottom-up approach is the • Insufficient focus on implementation; external advisors, set of activities needed to defuse the increasing risk of especially if they come from an academic institution, are macroeconomic imbalances. Here an effective response will naturally focused on the analytical task of identifying require changes at all levels – individual measures, changes in what is wrong or not optimal. They then identify targets policy, reform of institutional structures – within a relatively for what a better situation would look like. But they are short time frame. usually much less focused on (or trained) to understand how to achieve these targets. And they also usually are There are two main reasons for taking a bottom-up approach not experts in understanding why these steps have not to the overall competitiveness strategy. First, in the absence been taken in the past. of a 'clear and present danger' to Vietnamese prosperity, it is hard to mobilize support for a wide-ranging reform agenda. This report provides some initial thoughts on how an Reforms are more likely to happen if the positive results of implementation strategy might look like. The remainder of changes at a lower level can over time create the motivation this chapter discusses first how the action recommendations to attempt changes on the next higher level, where the developed above can be sequenced to increase the odds resistance to change will be higher. Second, given Vietnam's of their success. It then provides some thoughts about an overall profile and political structure, a competitiveness institutional structure to govern the implementation. These strategy will have to convince decision makers across many recommendations are not a full implementation plan, nor different parts and levels of governments. A top-down are they based on a detailed analysis of the political economy strategy process by fiat is unlikely to be effective in such an of reform in Vietnam. This would be far beyond the scope of environment. A gradual process has a better chance of over this report. But it takes the concerns about implementation time winning support and alignment. serious and aims to provide a useful starting point for Vietnamese decision makers to address them. A bottom-up approach also has disadvantages. A national strategy in terms of a set of specific competitive advantages Finally, Vietnamese policy makers have sometimes be to position Vietnam in the global economy cannot emerge skeptical about the motives of external advisors that they bottom-up; it requires a top-down decision that then see more beholden to the institutional interests of their provides guidance to the many individual policy decisions organizations than to Vietnam. This report has been that have to be made. The recommendations in this report prepared in collaboration of a Vietnamese and a Singaporean by-pass the lack of such an overarching national strategy. research institutions as a neutral partnership with no other The actions suggested are consistent with a broad range of interest than to achieve maximum impact for Vietnam by more specific strategies that seem most likely to be options providing decision-relevant data, assessment, conceptual for Vietnam. A national strategy process can follow once the frameworks, and action ideas. Any remaining bias is related actions suggested here have successfully come under way. to the subjective views of the individual researchers, and not 120 ASIA COMPETITIVENESS INSTITUTE Management of the competitiveness agenda national debate on competitiveness issues, their overall Competitiveness upgrading is a multi-faceted, cross- impact on policy tend to be limited. Other countries have sectoral process that requires coordinated efforts across implemented structures that connect their competitiveness different policy areas and levels of government. In many councils more directly with the policy process. This has dimensions, especially in the design and implementation of been achieved through a direct or indirect connection of microeconomic reforms, it also requires engagement with the council with the highest level of government, or through different stakeholders from outside of government. Progress the integration of the Council into the administrative on implementing the competitiveness agenda requires the structure. Korea has through its Presidential Council of assignment of clear responsibilities at two levels. First, for National Competitiveness (PCNC) created a structure each specific initiative there needs to be an institution or that reports directly to the President. This has given the group in charge of driving the process. Second, there needs Council much more political relevance and a direct entry to be an overarching structure that can manage the portfolio point into the policy process. PCNC is also charged with of activities, ensuring that the most critical efforts are being reviewing progress on initiatives launched as a consequence undertaken and mobilizing new efforts at the appropriate of its recommendations. The National Competitiveness time. Council in the Philippines has also a direct link to the Presidency, but is less directly integrated in the policy design Over the last few years, national competitiveness councils and implementation process. Conversely, the Council have been launched in many countries to deal with these of National Competitiveness (CNC) in the Dominican challenges. Competitiveness councils differ in their mandate Republic has been explicitly designed in order to oversee the and in their organizational structure. Most of these councils country's National Competitiveness Program. Denmark's have been charged with developing action proposals that are Globalization Council and Finland's Science and Technology then submitted to government. They have a membership of Policy Council (renamed Research and Innovation Council public and private representatives and tend to be chaired by in January 2009) are both chaired by their country's Prime either a high-ranking official or by a cooperation of public Ministers and include all relevant ministers, alongside and private sector leaders10. These councils are usually representatives from business, academia, and trade unions. supported by a small secretariat that facilitates operations, In both countries, the Cabinet members in the councils use sources analysis from government agencies and outside these fora to discuss and design policies that are then directly researchers, and integrates the findings into reports and turned into draft laws. The Irish National Competitiveness draft action proposals. Council is integrated into the administrative structure of Councils that follow this general model exist in, for example, the government, but also includes members from outside Croatia, Egypt, Peru, and Sweden11. While councils of this the public sector. It is tasked with providing the government type often have been useful in raising the quality of the with objective data, analysis, and advice on competitiveness issues. Singapore's more ad-hoc process of competitiveness VIETNAM COMPETITIVENESS REPORT 121 assessments, most recently through the Economic Strategies the Council to have robust competences to request Committee, follows a similar approach. information from government ministries and agencies. It would also require a solid internal monitoring capacity Based on this international experience, Vietnam needs within the Council or its secretariat, potentially in to choose a structure that is most aligned with its specific collaboration with other government agencies in charge economic policy needs and the realities of its political of auditing, policy analysis, and budget management. process. Our analysis in this report identifies a number of key needs: Vietnam needs to improve the quality of its dialogue • Report to the Party, the Government, and the general about policies in the design phase; Vietnam needs to make public on the progress of the competitiveness agenda. individual policy choices based on a strategic perspective on This would include regular updates, reviews, assessments where the country wants to go, and what is critical to get as well as public events, including an annual Vietnamese there; and Vietnam needs to systematically integrate policy Competitiveness Conference and dissemination of planning with implementation and follow-up. annual (or bi-annual) Vietnam Competitiveness Report. We suggest creating a Vietnamese National Competitiveness Structure and Operational Mechanism: Council to assume this role. To perform these tasks, the Council should be comprised of Mandate: leading government and business leaders, including leaders of the Vietnamese operations of foreign companies. Given The Vietnamese Competitiveness Council should focus on the complexity and comprehensiveness of the Council's three main tasks: mission, it is essential for the Council to be led by the top • Coordinate across the government agencies and public- leader(s) of the government. We propose that the Council private project groups that are engaged in specific to be chaired by the Prime Minister, and be comprised of activities that are launched in the context of the working groups of members interested in specific parts of competitiveness agenda. While the Council would not the overall competitiveness agenda. need to control significant own budgetary resources, The Council would be supported by a full-time secretariat it should help to mobilize the necessary funds and with the resources to draw on competent experts and capabilities when needed. The members of the Council practitioners in different policy areas as needed. The would also provide mentoring and guidance to the secretariat operates independently from governmental individual project groups. agencies but has direct link to the government leaders. It • Monitor progress on individual activities and the overall should have its own budget. The Council should collaborate portfolio of activities. The Council should discuss where closely with the Prime Minister's Policy Unit. projects should be realigned, discontinued, or where As a first step, the government of Vietnam could create new activities should be encouraged. This would require a steering group to manage the pilot projects emerging 122 ASIA COMPETITIVENESS INSTITUTE out of the Vietnam Competitiveness Report. This group structural imbalances facing the economy. Vietnam will could be composed of high-level officials from the relevant need to move beyond the current model if it does not want ministries as well as representatives from companies and to get stuck at lower middle income level and face stiffer other institutions involved in the projects. The group could, competition from newly emerging economies. This will for example, report to a Deputy Prime Minister, who would essentially require Vietnam to put competitiveness and assign the responsibility for providing secretarial support productivity at the core of its growth. Vietnam will need to to the group. This steering group could provide initial constantly upgrade existing competitiveness fundamentals experience with the public-private, cross-agency format. It and create new advantages to move up to the new stage of could become the nucleus for a Competitiveness Council development. with broader mandate and membership. There is currently a widely shared consensus and willingness Conclusion among different stakeholder groups in Vietnam to bring these issues into serious discussion and follow up with Vietnam's dynamic growth since the mid-1980s has been decisive actions. The Vietnam Competitiveness Report was one of the most impressive success stories in the global developed with the hope to provide comprehensive fact- economy and has transformed the livelihoods of millions based analyses and concrete action proposals to inform such of Vietnamese people. Growth has been fueled by the an important discussion. It is unrealistic to expect that the transition to a market economy, integration with the global Report could offer a panacea that could quickly remedy system and a structural shift from subsistence agriculture all the outstanding issues and challenges. The success of to manufacturing and services. More recently, the policy enhancing competitiveness will ultimately depend on the response has been focusing on capital investment to determination and efforts of the Vietnamese government, maintain growth momentums. These drivers have enabled business community and the public. Yet our ambition is to underlying competitiveness, essentially the presence of low- provide a widely accepted foundation for policy debate and cost labor, to be revealed. the follow-up action agenda. This is the first in its series of However, this growth trajectory ultimately has limited periodical National Competitiveness Reports for Vietnam potential hurdled by the low level of productivity and and we intend to pursue our commitment to supporting Vietnam in this important endeavor over the course ahead. Endnotes 1 Vietnam's total public debt by the end of 2009 was about 44.7% of GDP (Ministry of Finance). Public debt per head rose nearly four times, from US$ 144 to US$ 548, during the 2001 – 2009 period, or 18% annually, while GDP per capita growth was only 6% during the same period (EIU). 2 The foreign exchange reserves fell sharply from 4.6 months of imports by the end of 2007 to less than 3.0 months of imports by the end of 2009 (IMF, International Financial Statistics). 3 Vietnam has the highest fiscal revenue as a percentage of the GDP during the 2004 – 2009 period vis-à-vis its comparators in the region (averaging 26.8%) – EIU. 4 More information on Project 30 can be found at http://thutuchanhchinh.vn. 5 For a more detailed discussion on the implications of the "impossible trinity" to Vietnam's fiscal and monetary policy, see Harvard/ FETP (2008a, b). 6 Important aspects of Vietnam's macroeconomic management have been discussed elsewhere. For comments on the transparency and coordination of macroeconomic policy, see Harvard/Fulbright (2008b) and IMF (2009); for the discussion of the SBV's independence, see Vu Thanh Tu Anh (2010c); for an examination of the SBV's supervision and oversight of financial institutions, see Rosengard et al (2010). 7 See European Cluster Observatory, http://www.clusterobservatory.eu/. 8 See Professor Porter's competitiveness course, www.isc.hbs.edu/moc. 9 See http://www.oecd.org/department/0,3355,en_2649_34413_1_1_1_1_1,00.html. 10 Exceptions at the Council of Competitiveness in the US and the Private Council of Competitiveness in Colombia. Both are private sector only and perceive themselves as discussion partners for the government. 11 The Swedish Globalization Council was operational between 2007 and 2009, when it ended its operation with the presentation of its final report. See http://www.sweden.gov.se/sb/d/9299/a/84844 (accessed October 13, 2010). VIETNAM COMPETITIVENESS REPORT 123 Chapter References: Fulbright Economics Teaching Program (2008). "Infrastructure Challenges in Vietnam." Heilbrunn, John R. (2004). "Anti-Corruption Commissions: Panacea or Real Medicine to Fight Corruption?" World Bank Institute, http://siteresources.worldbank.org/WBI/Resources/wbi37234Heilbrunn.pdf. Accessed August 13, 2010. Singapore Ministry of National Development (2010). http://www.mnd.gov.sg/. Accessed August 13, 2010. Singapore Economic Development Board (2010). http://www.edb.gov.sg. Accessed August 13, 2010. World Bank (2009). "Review of World Bank Group Support to Structured Public-Private Dialogue for Private and Financial Sector Development," http://www.publicprivatedialogue.org/papers/. Accessed October 13, 2010. 124 ASIA COMPETITIVENESS INSTITUTE