vietnam competitiveness report 2010_full report

8/6/2019 Vietnam Competitiveness Report 2010_Full Report

1/124VIETNAM COMPETITIVENESS REPORT 1

Foreword by

H.E. Hoan Trun HaiDeputy Prime MinisterVietnamMichael E. PorterProfessorHarvard Business School

Christian Ketels

Nuyen Dinh Cun

Nuyen Thi Tue Anh

Do Hon Hanh

Central Institute forEconomic Management


2/1242 ASIA COMPETITIVENESS INSTITUTE

Tis report is a joint product of the Central Institute forEconomic Management (CIEM) under the VietnamsMinistry of Planning and Investment and the AsiaCompetitiveness Institute (ACI) of the Lee Kuan YewSchool of Public Policy, National University of Singapore.Professor Michael E. Porter and his team at the Institutefor Strategy and Competitiveness of the Harvard BusinessSchool provided the conceptual framework and technicalguidance to the draing team. Te report was initiated byH.E. Deputy Prime Minister Hoang rung Hai who also

provided invaluable support and guidance throughout theprocess.

We would like to thank all our partners and colleagues who have provided their time, materials and support tomake this report possible. We have beneted from regularinputs and feedback from the VCR Advisory Panel, whosemembers are listed in the following page. We are indebtedto those who have shared their important analyses or co-authored specic sections of the report Dr Ulrich Ernstof USAIDs Vietnam Competitiveness Initiative whocontributed to several sub-sections in Chapters 2 and 3;

Dr Vu Tanh u Anh of the Fulbright Economic eachingProgram who co-authored the macro-economic policy sub-section in Chapter 3; Dr Manuel Albaladejo of UNIDO

who provided analytical inputs to and comments on thetrade section in Chapter 2; and Prof Kenichi Ohno of the

Vietnam Development Forum who contributed to thepolicy making process section in Chapter 3.

A range of interviews and consultation sessions wereorganized during the process of writing this report and weare grateful to all the organizations and individuals whohave given us their valuable time to share their insights and

opinions. We would in particular, like to thank:a. Te Government of Vietnam, particularly the Oce

of the Government, the Ministry of Planning andInvestment, the Ministry of Industry and rade, theMinistry of Finance, the Ministry of Foreign Aairs as

well as the National Assemblys Economic Committeeand the Central Partys Committee Oce;

b. Te business community in Vietnam, particularly theVietnam Chamber of Commerce and Industry (VCCI),the USASEAN Business Council, European Chamber

of Commerce (Eurocham), American Chamber ofCommerce (Amcham) and the various other businessassociations and companies;

c. Donor agencies, especially the USAIDs VietnamCompetitiveness Initiative (VNCI) for providingtremendous support from onset, the Singapore Embassy,

World Bank, UNIDO, UNDP, JICA, IFCs VBF,USAIDs SAR project and the Like-Minded DonorGroup (LMDG); and

d. Research institutes, including the Fulbright Program,

Vietnam Development Forum, DEPOCEN, and themany other individual experts who have shared theiranalysis with us.

For facilitating the project, we would like to thank Mr Cao Xuan Tanh, Mr Nguyen Huu Tanh and Ms Hoang TiKim Hong of the Oce of the Government and sta of theEconomic Aairs Department of the Ministry of ForeignAairs. Special thanks go to Ms Marjorie Yang and her teamat Esquel Group for providing us with support throughoutthe whole process.

For peer reviewing the report, we are grateful to Mr ran Xuan Gia, Dr Nguyen Dinh Tien, Dr Dang Duc Dam,Prof Kenichi Ohno, Dr Vo ri Tanh, Doan Hong Quangand Dr Vu Tanh u Anh.

Te report was prepared by a research team from CIEM andACI, with overall coordination provided by Dr ChristianKetels, Dr Nguyen Dinh Cung, and Do Hong Hanh.Te CIEM team is led by Dr Nguyen Dinh Cung and DrNguyen Ti ue Anh, with research assistance from LuuMinh Duc, Nguyen Minh Tao and Le Phan. Teir primarycontributions are in compiling data and conducting the

analysis in Chapters 2 and 3, with analytical inputs fromDr Ulrich Ernst and Do Hong Hanh. Te ACI team isled by Dr Christian Ketels, with research assistance fromDo Hong Hanh and Alvin Diaz. Dr Ketels is the SpecialAdvisor to ACI and is a member of the Harvard BusinessSchool faculty at Professor Michael E. Porters Institute forStrategy and Competitiveness. Te ACI team, includingformer director Prof Neo Boon Siong and Dr Vu MinhKhuong, are primarily responsible for conceptualizingthe framework of the report and the recommendations inChapter 4. Editing was done by Prof Ashish Lall and Dr Vu

Minh Khuong. Cindy Chang and Hong Bee Kuen providedextensive coordination and support to ensure that the reportis completed timely.

Finally, we are grateful to the generosity of the SaigonInvestment Group (SGI) for sponsoring the printing of the

Vietnamese translation of the report.

All views and opinions expressed in this report remain thesole responsibility of the authors.

ACKNOWLEDGEMENTS



VCR Advisory Panel1

1. Dr Cao Sy Kiem National Assembly Delegate, Chairman of the Small and Medium EnterprisesAssociation

2. Dr Dinh Van An Vice Chairman, Central Partys Committee Oce

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 Company6. Mdm Pham Chi Lan Expert, Former Vice General Secretary of VCCI

7. Dr ran Du Lich Vice Head, Ho Chi Minh Citys National Assembly Delegation

8. Mr ran Xuan Gia Expert, Former Minister of Planning and Investment

9. Mr ruong Dinh uyen Expert, Former Minister of rade

10. Dr Vu Viet Ngoan Vice Chairman, National Assemblys Economic Committee

1 Members are listed in order of alphabet

VCR Partner Focus Group2

1. Mr Alain Cany Chairman, Eurocham

2. Mr Hank omlinson Chairman, Amcham

3. Dr Jim Winkler Director, USAIDs VNCI Project

4. Dr Vu ien Loc Chairman, Vietnam Chamber of Commerce and Industry

5. Mr Vu u Tanh Country Representative, US ASEAN Business Council

2 Members are listed in order of alphabet



Table of Contents

Foreword .............................................................................................................................................................................................. 8

Abbreviations ..................................................................................................................................................................................... 10

Executive Summary........................................................................................................................................................................... 13

Chapter 1: Introduction

Why this Report? ............................................................... ........................................................................ ......................................... 22

Methodology ............................................................. ....................................................................... ................................................... 23

Chapter 2: Vietnams Economic Performance

Economic Outcomes ................................................................... ........................................................................ ............................... 28

Standard of Living ...................................................................... ........................................................................ ............................... 28

Te Elements of Prosperity ................................................................. ....................................................................... ...................... 32

Assessment ............................................................ ........................................................................ ..................................................... 39Intermediate Indicators of Economic Performance .............................................................. ....................................................... 39

Investment ................................................................ ....................................................................... .................................................. 39

rade ................................................................. ........................................................................ .......................................................... 46

Entrepreneurship ............................................................. ........................................................................ ........................................ 54

echnology and Innovation ........................................................................ ...................................................................... ............ 56

Assessment ............................................................ ........................................................................ ..................................................... 56

Chapter 3: Vietnams Competitiveness Foundations

Natural Endowments .................................................................... ........................................................................ .............................. 60Geographic 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 ...................................................................... ....................................................................... ..... 86Demand Conditions ................................................................. ....................................................................... ............................... 89

State of Cluster Development ............................................................. ....................................................................... ................... 90

Company Sophistication ...................................................................... ....................................................................... ................... 92

Assessment ............................................................. ........................................................................ ...................................................... 96

Summary ................................................................ ........................................................................ ....................................................... 97

Chapter 4: Vietnams Competitiveness Agenda

Critical asks Facing Vietnam ................................................................ 104

Improving Vietnamese Competitiveness: What to do? ..................................................................... ......................................... 108

Improving Vietnamese Competitiveness: How to get it done? ................................................................................................. 119



Te year of 2010 marks an important milestone in the transition between the two decades of Vietnams socio-economicdevelopment. Te last ten years have witnessed the countrys robust economic growth, improved living standards of the

population, and most signicantly, the deep integration into the global economy, turning Vietnam into an emerging attractivebusiness location. Yet the economy is facing internally-rooted weaknesses and challenges, reecting in its low competitivenessin dierent aspects. Moreover, rapid and complex changes in the external environment are aecting Vietnams open economyin increasingly signicant ways. All of these conditions and factors remind of and emphasize the crucial importance ofredening strategic directions and a growth model for Vietnam in the new stage of development, with competitiveness andsustainability being put at the heart.

In this context, the development and release of the Vietnam Competitiveness Report 2009 2010 are very meaningful inproviding important and useful input for the Vietnamese Government and business leaders in their decision making. Tisis the rst ever national report which provides comprehensive assessments of Vietnams competitiveness in dierent aspectsand at dierent levels, from both microeconomic and macroeconomic optics. Te Report was developed independentlyand 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 competitivenessassessments and to implement rigorous action initiatives and programs at both the Government and the rm levels to upgradethe countrys competitiveness and successfully achieve its ambitious development goals over the next decade.

Hoang Trung HaiDeputy Prime Minister

Vietnam

FOREWORD



Over the last two decades, Vietnam has embarked on a remarkable journey. From being a closed and centrally controlledeconomy, the country has become a vibrant part of the global economy. Tis process has brought signicant benets to many

Vietnamese citizens. Average prosperity has risen and poverty rates have fallen signicantly.

Vietnam is now ready for the next chapter in its economic development. On this new path, the country will face new andcomplex choices in order to build the foundations of greater prosperity as well as to consolidate the achievements made so far.

Te Vietnam Competitiveness Report (VCR) provides comparative data, analysis, and concrete proposals to help Vietnamesedecision makers as they chart their countrys future path. In my discussions with Vietnamese leaders, I have always been struckby their willingness to learn from outside perspectives. Te Vietnam Competitiveness Report provides a comprehensiveanalysis that provides essential inputs towards an economic strategy that builds on international experience and addresses

Vietnams specic situation. Te Report provides an in-depth analysis of the forces that have been driving Vietnams growththus 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 countrys existingcomparative advantages to growth based on upgrading its competitiveness building increasingly sophisticated competitiveadvantages. Te Report identies specic policy recommendations and an implementation structure to turn theserecommendations into reality. Vietnam will benet 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 thatVietnam has not outperformed leading peers in the region. An action agenda informed by the ideas outlined in this reportwill be an important step towards exploiting the countrys signicantly greater potential.

Vietnam needs to start a discussion about how it wants to position itself in the global economy. What are the specic activities,clusters, and business environment strengths that it will be known for? And, Vietnam needs a more fundamental review ofthe institutional framework for economic policy making and implementation. Te creation of the Vietnam CompetitivenessCouncil, 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 ACIs International Advisory Board. Te joint team from ACI and CIEM is to be congratulated onthis important work. ACIs ambition is to provide government leaders with objective data and frameworks to make moreinformed policy decisions, whether or not they agree with every conclusion or recommendation. My hope is that this rst

Vietnam Competitiveness Report achieves this purpose and becomes a model for many other reports to follow.

Michael E. PorterBishop William Lawrence University Professor, Harvard Business SchoolChair of the International Advisory Panel, Asia Competitiveness Institute

FOREWORD



ACAPR

Advisory Council forAdministrative ProceduresReform

ACIAsia CompetitivenessInstitute

AFTA ASEAN Free rade Area

AgRIbANK

Bank for Agriculture andRural Development of

Vietnam

AMCHAM

American Chamber ofCommerce

ASEANAssociation of South EastAsian Nations

bIDVBank for Investment andDevelopment of Vietnam

bOD Board of Directors

CbOCongressional BudgetOce

CCICountry CompetitivenessIndex

CIEMCentral Institute forEconomic Management

CIT Corporate Income ax

CMT Cut, Make, rim

CNCCouncil of NationalCompetitiveness

CPI Consumer Price Index

CPIbCorrupt PracticesInvestigation Bureau

EDb

Economic DevelopmentBoard

EIUEconomist IntelligenceUnit

EPZ Economic Processing Zone

EU European Union

EVN Electricity of Vietnam

FDI Foreign Direct Investment

FIE Foreign Invested Enterprise

gC General Corporation

gDP Gross Domestic ProductgEPS

Governmente-Procurement System

gRDIGlobal Retail DevelopmentIndex

gSO General Statistics Oce

HbS Harvard Business School

HCMC Ho Chi Minh City

HDIHuman Development

IndexHSP Hsinchu Science Park

ICACIndependent CommissionAgainst Corruption

ICORIncremental OutputRatio

ICT

Information andCommunicationechnology

IFCInternational FinancialCorporation

ILOInternational LaborOrganization

IMFInternational MonetaryFund

IPR Intellectual Property Right

IT Information echnology

ITRIIndustrial echnologyResearch Institute

IZ Industrial Zone

JETRO Japan External radeOrganization

JICAJapan InternationalCooperation Agency

JSb Joint Stock Bank

LNDLegal NormativeDocument

LNDLegal NormativeDocument

LPILogistics PerformanceIndex

MNCMulti-NationalCorporation

MNDMinistry of NationalDevelopment

MOETMinistry of Education andraining

MOF Ministry of Finance

MOICMinistry of Informationand Communication

MOLISA

Ministry of Labor, Invalids

and Social AairsNA National Assembly

NASCNational AssemblysStanding Committee

ABBREVIATIONS



NICSNewly IndustrializedCountries

NISTPASS

National Institute forScience and echnologyPolicy and Strategy Studies

NOIPNational Oce ofIntellectual Property

ODAOcial DevelopmentAssistance

ODAOcial DevelopmentAssistance

OECD

Organization forEconomic Cooperationand Development

OOg Oce of the Government

PCIProvincial CompetitivenessIndex

PCNC Presidential Council ofNational Competitiveness

PPP Purchasing Power Parity

PPPPublic PrivatePartnership

R&D Research and Development

RCIRegional CompetitivenessIndex

RIARegulatory ImpactAssessment

ROE Return on EquitySbO Senior Budget Ocers

SbV State Bank of Vietnam

SC State Conglomerate

SCICState Capital InvestmentCorporation

SIPISocial Infrastructure andPolitical Institutions

SMESmall and MediumEnterprise

SOCbState-Owned CommercialBank

SOE State-Owned Enterprise

STARSupport for radeAcceleration Project

TFP otal Factor Productivity

TI ransparency International

TPI rade Performance Index

UN United Nations

UNCTAD

United NationsConference on rade andDevelopment

UNDPUnited NationsDevelopment Program

US United States

USAIDU.S Agency forInternational Development

USD United States Dollar

VAT Value Added ax

VCAD

Vietnam Competition

AdministrationDepartment

VCCIVietnam Chamber ofCommerce and Industry

VCRVietnam CompetitivenessReport

VHLSSVietnam Household LivingStandards Survey

VNCIVietnam CompetitivenessInitiative

VND Vietnam Dong

VNPT

Vietnam Post andelecommunicationsGroup

VSAVietnam StudentAssociation

Wb World Bank

WbI World Bank Institute

WDAWorkforce DevelopmentAgency

WDI

World DevelopmentIndicator

WEF World Economic Forum

WTO World rade Organization



ExecutiveSummary



Background

Te idea for an in-depth study of Vietnams competitivenessemerged from a meeting between Prime Minister Nguyenan Dung and Professor Michael E. Porter in Hanoi inlate 2008. Professor Porter had been impressed by the highgrowth and signicant reduction in poverty in Vietnam, but

was concerned that Vietnams position in many internationalrankings of competitiveness had remained stagnant.

In 2009, Deputy Prime Minister Hoang rung Hai asked

Vietnams Central Institute for Economic Management(CIEM) and the Singapore-based Asia CompetitivenessInstitute (ACI) to develop the rst ever NationalCompetitiveness Report for Vietnam. Te Report containsa broad assessment of Vietnams current competitiveness, ananalysis of the key challenges and opportunities ahead, anda proposal for an economic strategy to enable Vietnam toreach a higher level of sustainable growth.

Main Findings of the Report

Te Report is organized in four main chapters: Chapter

1 provides a background on the methodology; Chapter2 looks at economic outcomes as indicators of revealedcompetitiveness; Chapter 3 provides the assessment of thecompetitiveness fundamentals that underpin the observedeconomic outcomes; Chapter 4 identies the three mostcritical tasks Vietnam is currently facing based on thisassessment, and makes concrete action recommendationson how to address them.

Economic outcomes

Vietnam has achieved impressive prosperity growth over

the last two decades. Poverty rates have fallen signicantlyacross the country. Inequality has overall remained low,despite some increase. Improvements in the quality of lifehave not only been driven by the improvements in income,but also the wide access to basic education and health care.

Vietnam is on the verge of becoming a low-middle incomecountry but still falls behind more than 100 other countriesglobally. Te prosperity dierences within the countrysregions are growing; the most prosperous regions aroundHo Chi Minh City and Hanoi register the strongest growth,

while other parts of the country are struggling to keep up.

Te key driver of Vietnams prosperity growth has beenan improvement in labor productivity. However, despitethe recent gains, Vietnam still remains behind many othercountries on productivity. Te labor productivity growth

that has been achieved was the result of capital deepeningassociated with the structural change from agriculture tomanufacturing. While this process has been eective andstill has some room to continue, its potential is ultimatelylimited.

Te analysis of economic activity indicators reveals thatforeign direct investment inows have been a central driver

of structural change. Driven by foreign investors, exportshave grown signicantly. So have imports, driven by thesupply needs of exporters and the growing local demand in

Vietnam. However, value-added within the exporting sectorremains low and productivity in other parts of the economyis far lagging.

Competitiveness fundamentals

Vietnams growth has been driven by market openingthat has enabled it to realize its existing comparativeadvantages, primarily the abundance of low cost labor. Te

competitiveness fundamentals are broadly in line with thegrowing but still relatively low level of prosperity reached sofar.

Vietnams social infrastructure and political institutionsare generally solid. Basic education and health care areavailable across the country, providing an important basic

prerequisite for economic growth. In terms of the ruleof law, there are improvements in the letters of law, buteectiveness in implementation and the independence ofthe judicial system remain an issue. Te political systemis perceived as stable, but lacks the ability to take eectiveaction. Corruption levels show few signs of falling.

Macroeconomic policy is a considerable weakness. Fiscal policy is hampered by the high structural decits in thegovernment sector. While the support of foreign donorsis welcomed, this is no substitute for solid governmentnances. Te persistent pressure on the exchange rate, highination, and the nancial market overheating before theonslaught of the global nancial crisis are indications of the

problematic state of monetary policy.

Factor input conditions are improving but remain

insucient to support signicantly higher levels of productivity. Signicant investments have been made toupgrade the physical and utility infrastructure, but theimpact of these investments is held back by low eciency andthe lack of prioritization. Public infrastructure investmentsare currently used to compensate regions with lower growthrather than to achieve the highest possible overall returns forthe country.

Skill levels remain modest. While there has been a signicantincrease in the availability of training programs, the qualityof education remains low and varied. Te educationsystem is not keeping pace with the rising demands of the

Vietnamese economy. Governments eorts to managethe education sector through entry barriers for foreign

providers and administrative oversight are a hindrance for

EXECUTIVESUMMARY



extending supply and do not succeed in ensuring higherquality standards.

Despite improvements in recent years, the overalladministrative environment is still cumbersome. Tis isundermining Vietnams attractiveness as a business location.Several major reform initiatives, such as Project 30, arebeing carried out to improve the administrative practices.

If they are fully implemented as planned, they will mark asignicant improvement.

Financial markets remain relatively shallow and immature.Smaller private sector companies continue to have dicultiesin getting access to capital. Equity markets suer from high

volatility and a lack of transparency, especially when itcomes to the nancial situation of state-owned enterprises.

Te context for strategy and competitiveness is characterizednot only by signicant levels of formal market openness butalso a dominant role of state-owned companies across many

sectors of the economy. While foreign companies nd anopen environment in Vietnam, the domestic private sectorstruggles to achieve a more signicant role in the economy.Competition remains focused on price and head-on rivalry,rather than on quality and features.

Clusters have emerged naturally as co-locations of companiesconducting similar types of activities. However, the focus ison a narrow set of activities without the breadth of relatedand supporting industries, and active collaboration amongcompanies remains limited.

Critical tasks facing Vietnam

Vietnam has achieved impressive growth based on its currentmodel of FDI-driven sectoral change. With a signicantshare of the work force still active in agriculture, this modelstill has the potential to deliver years of growth. Tis positiveoutlook and the complacency it can easily foster is the mostdicult challenge facing Vietnam. Te three most criticaltasks that Vietnam faces are, at their core, symptomatic ofthe growing fragilities of the current growth model. Tesefragilities are an important impetus to enter a new stage ofdevelopment.

Macroeconomic imbalances

rade and current account balances; Vietnam is facingan increasing decit in its trade balance. While widely

perceived as a typical export-led economy, Vietnam issystematically importing more than it is exporting.

Savings-investment imbalance; Te external decit hasto be covered through capital inows, from foreigninvestment, remittances, development aid, or throughother sources. Te increasing concerns about Vietnams

ability to nance its external decit, fuelled by risingexternal debt and a signicant drop in foreign reserves,create uncertainty about the countrys future economicoutlook.

Ination and exchange rate; Vietnams ination rate hasin the last few years become increasingly volatile, withthe rate of ination ratcheting up. Large unsterilizedcapital inows and rapid growth in domestic credit havecreated inationary pressure. Under an exchange rate

policy oriented towards stable nominal rates, this has ledto increasing real exchange rates that had forced Vietnaminto repeated devaluations.

At the minimum, these imbalances lead investors to requirea higher risk premium to invest in Vietnam. Vietnamsmacroeconomic imbalances could culminate in a crisis,

when sentiments shi to deny Vietnam access to externalnancing. Tis would require a painful adjustment process

with exchange rate adjustments, cuts in public expenditure,and possibly years of lost growth. Te current policyresponse has recently received international praise, but fallsshort of a coherent strategy to address these challenges ina proactive and comprehensive way. Vietnam needs a more

prudent macroeconomic policy approach that addresses theroot causes of the emerging imbalances.

Microeconomic bottlenecks

Skill and infrastructure shortages; Foreign investors areincreasingly reporting skill shortages and infrastructurebottlenecks. Tese problems are locally concentrated inhigh-growth regions, especially the Ho Chi Minh Cityregion.

Prole and implementation rate of FDI; FDI isincreasingly shied to real estate and labor-intensiveactivities, with little evidence of positive spillovers. Tereis an increasing gap between announced and actualinvestments, partly because of the interest to over-report FDI attractions and problems in implementingFDI projects.

Decreasing relation between investment and growth;the incremental capital to output ratio (ICOR) isoen criticized in terms of its conceptual validity. Butit is interesting to note that relative to its investment,

Vietnam achieves lower GDP growth than China and

India. State-owned enterprises account for the lionsshare of capital investment, accentuating the low overallinvestment eciency.

Tese emerging bottlenecks are signs of a graduallydecreasing level of dynamism that the current growth modelis able to generate. Te policy response so far has been basedon a largely accurate identication of the bottlenecks all three main elements of the ten-year strategy are highlyrelevant. However, the impact of the steps taken in responsehas so far been clearly insucient.



Competitiveness fundamentals

Low value added exports; export-oriented manufacturingactivities in Vietnam rely almost exclusively on importedsupplies, while the only local content provided is the

work of low- or semi-skilled Vietnamese employees.Te only exceptions are exports of natural resources andagricultural products.

Eroding cost competitiveness of Vietnam; while productivity has improved only marginally asinfrastructure has been upgraded, costs have also goneup. Vietnams cost position is gradually eroding relativeto other countries that also provide a large pool of lowcost labor.

Low productivity of Vietnamese products versusimports; In a number of industries, foreign companies,for example from China, are able to out-compete local

producers. While foreign companies generally face

higher cost levels, they more than compensate for thiswith higher productivity levels. Higher foreign cost levelsare more than compensated for by higher productivitylevels abroad.

Tese observations are typical for an economy that isgrowing quickly based on the combination of domestic lowcost labor and foreign capital. Te current policy response isbased on a widely shared view that Vietnam needs to movebeyond the current economic growth model, which is basedon low labor cost and intensive capital investment ratherthan on productivity and competitiveness. At the moment,

Vietnam is trying to upgrade too many things at the sametime, without a clear strategy that could align and sequencethese activities towards a coherent new goal.

Main Recommendations of the Report

Vietnams economic policy approach since 1986 has inmany ways been an enormous success. Standards of livinghave gone up and many people in Vietnam have seen theirlivelihoods transformed. Tis is a source of well deserved

pride. Changing the policy approach now is by no indicationthat the policies of the past were mistaken. It is a sign that

Vietnam has changed: what worked well in the past is notnecessarily what will work best in the future. Moving fromone policy approach to another is not just a matter of reningcurrent policies. It is driven by the need to adopt a new setof principles that can then guide the multitude of individualchanges that are required. Tree principles are particularlyimportant and summarize the main transitions needed.

First, Vietnams future growth has to move beyond providing access to and leveraging existing economicfundamentals. It needs to be based on a consistent upgradingof these fundamentals. Tis will require changes on both themacroeconomic and microeconomic conditions driving

productivity. Te current policy debate in Vietnam has notquite made the transition to this new vision. Much of thefocus remains on short-term growth rates rather than on

sustainable productivity growth and many macroeconomic policies to fuel short-term growth have no or negativeimpact on longer-term productivity.

Second, Vietnams government needs to dene a new role, inline with the demands of an emerging and dynamic marketeconomy. Tis role is dened by the role that governmentneeds to play to allow the market to function. Government

needs to provide a transparent and eective regulatoryenvironment in which companies can compete on equalterms and to have an eective approach towards providing

public goods. In short, it needs an approach towards creatinga business location with clear competitive advantages. Tecurrent policy debate in Vietnam is oen focused on thesize and the direct power of government, rather than on itsability to provide the functions needed.

Tird, Vietnam needs to provide an environment where thereis a more balanced mix of state-owned, private, and foreigncompanies competing in its economy. Competition betweenthese groups needs to be on equal terms, enabling those thatmake the strongest contribution to Vietnamese prosperityto gain ground. Te current policy debate in Vietnam toooen gets hung up on political views about ownership.Market structure, i.e. the exposure to competition, is morecritical than ownership per se in determining productivitylevels. SOE governance needs to be transparent, the role ofthe government as an owner clearly separated from its roleas a regulator, and SOEs need to be exposed to the samemarket rules and incentives as their foreign and local rivals.

ActivitiesVietnam needs a more coherent and eective macroeconomicpolicy approach to address the risks posed by the imbalancesthat have built up in the economy. Te following policyactions are examples of the necessary steps:

ransparency of scal position of the governmentand SOEs; Vietnam should establish an eective andindependent reporting body in charge of providingtransparent and robust data, in line with internationalnorms, on the state of the economy. SOEs need

to be subject to stringent information disclosurerequirements, especially on their economic eciency,nancial performance, and nancial relations with thegovernment.

Strengthen budget discipline; ransparency anddiscipline in state budget management need to beenforced to minimize o-budget spending items andmaintain a sustainable scal balance. Te quality andeectiveness of public debt management need to beenhanced, and the transparency and independentmonitoring of public investment needs to be enforced.

Consistent and predictable monetary policy ; Monetarypolicy collaboration among the National Assembly, thegovernment, and the SBV needs to be claried. Withinthis structure, SBV needs to send clear signals on its main



monetary target, namely ination, and the correspondingmoney supply and credit growth targets. Over time, thecentral banks independence, competence, and capabilityneed to be strengthened.

Financial market regulation; Vietnam needs to developa more robust regulatory framework in which the roomfor speculation is reduced while the nancial system is

gradually deepened. SBV needs to prudentially overseethe nancial system to ensure the soundness of nancialmarkets and institutions.

Coordination of overall macroeconomic policy overtime; Te Central Committee for Financial andMonetary Policies can play an important coordinatingrole to enhance alignment of eorts across dierentministries. Its operation and mandate should beupgraded and formalized to manage a medium- to long-term agenda rather than to seek ad-hoc solutions toimmediate crises and problems.

Vietnam needs microeconomic policies that can eectivelyand quickly react to bottlenecks in the regions and clusters

where they are most pressing. While a fundamental solutionto these challenges requires broader-based changes in

policies and institutions, there is a need to nd eectiveanswers more quickly in public private partnerships:

Cluster-based action initiatives; the lack of dialoguebetween government agencies and companies is oneof the most critical barriers towards removing thebottlenecks for growth. Pilot initiatives can be launched

in clusters where there is sucient critical mass foractions to aect a meaningful number of companies andthe willingness of companies and public sector agenciesto collaborate.

Vietnam needs an overall economic strategy that providesa coherent approach for upgrading competitiveness andmoving the country to the next level of development andcompetitive advantages. Tis strategy is also dependenton how Vietnam intends to position itself in the globaleconomy. o achieve this, Vietnam will need to changemany of its policies as well as the way policies are designedand implemented. While, the task of repositioning Vietnamin the global economy is beyond the scope of this report,the following are key policy areas and policy processes wherechange is most critical.

Policies

Education and workforce skills; skills are critical toenable the emergence of a higher value-added economyin Vietnam. Te current approach has not delivered therequired skills. A new approach towards education, in

particular workforce skill development needs, will berequired to strengthen the role of education as a centralenabling condition for higher productivity.

Physical infrastructure; ransportation, communication,and energy infrastructure are another critical condition

for emergence of a higher value-added economyin Vietnam. Te current approach has delivered asignicant upgrading of physical infrastructure. Whilethe costs of these investments have been high, theirimpact on competitiveness is limited and the demandsof the economy have grown faster than capacity. Anew approach for infrastructure investment needs tosystematically evaluate public infrastructure projects bytheir contribution to competitiveness.

SOE Governance; State-owned enterprises remain animportant part of the Vietnamese economy and arelikely to continue to do so. Te current approach ofSOE governance is not delivering the strong companiesthat are the objective of policy makers. A new approachneeds to separate the roles of government as an ownerfrom that as a regulator. Government needs to dene aclear owner policy in terms of what it expects as returnsfrom its SOEs. SOE need to be subject to the same

competitive pressure as their foreign and local privatesector rivals.

FDI attraction; Te attraction for foreign directinvestment has been a critical driver of recent

Vietnamese growth and will continue to be important.Te current approach towards FDI attraction is reactiveand oriented towards high announcements of FDIinows. Te value that this generates for Vietnam isinsucient. A new approach needs to focus on actualFDI, not announcement and more eective monitoringand follow up. Vietnam needs to separate FDI attraction

from regulation and see FDI as a tool to strengthenVietnams competitiveness.

Cluster development/Industrial policy ; Highercompetitiveness requires specialization in areas where the

presence of related and supporting activities can supporta level of productivity that any individual companynds hard to achieve. Te current approach is basedon creating national champions from SOEs, providingcheap credit to individual companies, and creatingdedicated infrastructure. Tere are no eective strategiesfor specic sectors or industries. A new approach needs

to focus on clusters and value chains, not individualcompanies or narrow industries. Te objective needsto be improving productivity, not private protability.Government eorts should enable companies in clustersto compete on a higher level, not shelter them fromcompetition.


18/124



However, the economic logic behind this growth modelultimately has limited potential. Te highest level of

prosperity that Vietnam can reach given this approach isdened by the level of productivity unskilled workers canreach in manufacturing. If Vietnam is not able to movebeyond this model, it will be stuck at lower middle incomelevel, with poorer economies threatening its position.Furthermore, the over-reliance on externally-nancedinvestment as a driver of growth is generating dangerousmacro-imbalances which may ignite crises.

It is widely acknowledged that Vietnam needs to movebeyond the current economic growth model which is basedon low labor cost and intensive capital investment towards

productivity and competitiveness as the core of growth. Vietnams future growth has to move beyond providingaccess to and leveraging existing economic fundamentals.It needs to be based on a consistent upgrading of thesefundamentals and creating new advantages. Tis will require

changes on both macroeconomic and microeconomicconditions driving productivity. Tis new vision is a criticalperquisite for Vietnam to move up sustainably to the nextstage of development.



Introduction

Chapter 1



Why this report?

Background

Vietnam has been one of the most impressive growth storiesin the global economy over the last few decades. Followingthe economic reforms during the second half of the 1980s,GDP per capita has grown at an annual rate of almost 6%.Millions of Vietnamese have been lied out of poverty.Te Asian nancial crisis and the current global economicdownturn did not aect Vietnam as much as many othercountries. International donors view Vietnam as one oftheir clear success cases, where foreign aid is generally well

utilized and has a visible impact. Private investors also seeVietnam as an increasingly attractive destination.

While much has been achieved, there is an acute awarenessthat Vietnam still has ways to go. Te level of prosperityis still low, even compared to many Asian peers. Domesticmacroeconomic instability has been a reminder of thefragility of growth. Poverty remains entrenched amongspecic social groups and low-growth regions of thecountry, and becomes much harder to address by generaleconomic growth. Te achievements thus far have raisedboth ambitions and expectations, forcing the country tolook for ways in which growth can be sustained at the levelof development that Vietnam has now reached. In manyrespects, Vietnam is now facing a more complex set ofchoices then it did when it decided to open up to the globaleconomy two decades ago.

Over the next few months, Vietnam faces a number ofkey milestones that will have a signicant impact on thecountrys medium-term outlook. One of them is the ociallaunch of Vietnams 10-year strategy, currently underdiscussion in the Party, the Government, and the National

Assembly. It sets important markers on the policy issues thatthe government aims to address and outlines a broad visionfor where its leaders see Vietnam at the end of this decade.Another one is the Party Congress in early 2011 which willalso set important directions for the course ahead.

Against this background, the idea for an in-depth study of Vietnams competitiveness emerged in a meeting betweenPrime Minister Nguyen an Dung and Professor MichaelE. Porter, Harvard Business School, in Hanoi in late 2008.Professor Porter was impressed by the high growth and thesignicant reduction in poverty over the last two decades.

But he also pointed out that Vietnams stagnant position inmany international rankings of competitiveness was a causefor concern. Te ensuing discussions triggered the decisionto develop the Vietnam Competitiveness Report. In 2009,Deputy Prime Minister Hai asked Vietnams Central

Institute for Economic Management (CIEM) and theSingapore-based Asia Competitiveness Institute (ACI) todevelop the rst ever National Competitiveness Report for

Vietnam. Professor Michael E. Porter has remained engagedin this process through his role as the co-chair of ACIsInternational Advisory Panel. His team at the Institutefor Strategy and Competitiveness has provided technicalguidance throughout.

Ambitions/ Objectives of the Report

Te Vietnam Competitiveness Report aims to contributein three key dimensions to the debate about the choices

Vietnamese leaders are facing:

a broad set of data on dierent aspects of Vietnamseconomic performance, activity, and competitiveness;

a conceptual framework for interpreting this dataand the underlying relationships between its dierent

dimensions; and concrete proposals on policy priorities and specic

action initiatives.

Each of these dimensions is important in its own right.Many if not all of the choices that Vietnam is facing todaycannot be addressed by ideology or generic theory alone.Tey require an in-depth analysis of where Vietnam standstoday. Tis is why providing policy makers with data to

pursue fact-driven policy choices is increasingly critical.

Competitiveness has so many aspects and dimensions, that

the picture from the data alone is oen hard to translate intoclear policy implications. Tis is why using the conceptualframework developed by Prof. Porter - embedded inacademic research but not driven by strong ideological

priors - is an important tool helping decision makers to dealwith this complexity.

Policy decisions are what ultimately matters. Tese decisionshave to be developed by the relevant authorities in Vietnam,taking into account its legacy and context. Tis reportcontributes to the eectiveness of the decision making

process by presenting action proposals that decision makerscan build upon.

Not everyone will agree with all the recommendations inthis report. But many, we hope, will nd the analysis a usefulstimulus for their own thinking. And the data, we hope, canbecome a widely accepted foundation for the policy debatein Vietnam.

Positioning of the Report versus other reports and studies

Te Vietnam Competitiveness Report intends tocomplement and build on existing work, not to replace it.

It has a number of characteristics that distinguish it fromexisting reports and plans. Te ambition of the report isboth more comprehensive and more focused: It is morecomprehensive in providing a view across many policy areasand combining analysis with action recommendations. Yet,

INTRODUCTION



it is also more focused in its primary aim of identifyingwhich areas are most critical for Vietnam, and in suggestinga specic sequencing of actions across the various areas in

which upgrading ultimately needs to take place.

Te report compares Vietnams performance with othercountries on many indictors. But it does not focus on ranking

Vietnam overall against other countries, as other globalrankings and indices have done. Instead, it provides an in-depth analysis of the root causes of economic performance,

based on Vietnams competitiveness fundamentals. Tereport provides an overall look at the national economy.Te analysis of individual regions or sectors is beyond thescope of this report and could be conducted in the future.

Te Vietnam Competitiveness Report serves as acomplimentary source of policy input to elaborate andsupport the broad vision and orientation set forth in key

policy documents such as the ten year strategy, the ve yeardevelopment plan and the Party Congress Resolution.

Finally, the institutional authorship of the Report gives it

a unique blend: It is not inuenced by strong institutionalinterests; the combination of CIEM and ACI was explicitlychosen to minimize such bias. And the combination of adomestic and a foreign partner marries local insights withinternational experience.

Methodology

Te Reports analysis is grounded in the competitivenessframework developed by Professor Michael E. Porter overthe last two decades. Tis framework is exible in capturingthe role of many dierent types of factors that inuencecompetitiveness. It recognizes their interdependence and

makes no prior assumptions about the critical role of anyindividual factor.

Te central tenet of the competitiveness framework is thenotion that productivity the ability to create valuable goodsand services through the use of a countrys human, capital,and natural resources is the ultimate driver of sustained

prosperity. Productivity depends both on the value of thegoods and services produced and on the eciency with

which they are being provided. High competitiveness, then,

is ultimately reected in high productivity.Productivity is the result of a large number of factors that

are shaped by the collective action of all participants in aneconomy. One set of factors, organized under the headingof macroeconomic competitiveness, set the overall contextin which companies operate. Tese factors include thequality of social infrastructure and political institutionsas well as of macroeconomic policy. Tey do not aect

productivity directly but create the opportunity space inwhich productivity-enhancing actions can be taken.

Te other set of factors, called microeconomiccompetitiveness, capture the way companies operate and theexternal dimensions that have a direct impact on the resultsof their activities. Tese factors include the sophisticationof companies, the strength of clusters, and the quality of thebusiness environment. All of them have a direct impact on

productivity.

Endowments are another important set of factors toconsider. Tey do not aect productivity, but can providedirect benets to prosperity. Tey also set in an important

way the overall context in which a countrys economy and its

global positioning develop.

SocialInfrastructure

and Political

Institutions

Natural

Resources

Geographic

LocationSize

Quality ofMacroeconomic

Policy

Sophistication

of Company

Operations and

Strategy

State of Cluster

Development

Microeconomic Competitiveness

Microeconomic Competitiveness

Endowments

Quality of the

National

Business

Enviroment

DETERMINANTS OFCOMPETITIVENESS

Source:ProfessorMichael E. Porter and Dr.Christian H.M. Ketels



Te competitiveness diagnostics applied in this report use abroad set of data. Te data are organized in a number of keycategories that provided dierent perspectives on Vietnamscompetitiveness position:

Te rst group of indicators provides an assessmentof the economic performance of the country. Tisincludes an analysis of the standard of living of

Vietnamese citizens, given the fundamentals of theireconomy. Relevant variables include average prosperitylevels, income inequality, regional development, andother measures of progress. It also examines the mainelements of prosperity growth: labor productivity andlabor mobilization. Indicators of structural change anddemographics are also included.

Te second group of indicators includes intermediateindicators of economic activity. Te factors in this

category are signs of and contributors to competitivenessbut not ultimate goals of economic policy. Teyinclude measures of foreign and domestic investment,international trade, innovation, and entrepreneurship.

Te third group of indicators tracks Vietnams positionon the broad range of macro- and microeconomiccompetitiveness fundamentals that ultimately explainthe economic outcomes discussed in the previoussections. Te indicators covered range from assessmentsof governance quality, the provision of primary publicservices, the state of public nances, the sophistication

of companies, the dynamism of clusters, the qualityof physical infrastructure and, the intensity of localcompetition, and many more.

Te combination of these three groups of indicators provides important insights for policy makers that areoen lost in more narrow assessments. Te economic

performance indicators capture the ultimate objectivesof policy; failure on this dimension signals failure overall.Teir decomposition provides initial insights into critical

policy issues. Te economic activity indicators then deepenthe understanding of how competitiveness fundamentalare translated into ultimate economic benets. Again, the

particular patterns of these indicators provide importantdirection to where policy must focus. Te competitivenessfundamentals, then, capture the root causes of outcomesat higher levels. Tis is where policy needs to intervene,targeting those areas that the analysis of economic outcomeshave revealed as critical, not just those in which a countryhappens to be weak.

Te Vietnam Competitiveness Report draws on a broad

range of data sources including many internationalassessments and databases. Many Vietnamese and foreigninstitutions have provided access to their analysis andreports; we appreciate their willingness to share this material

with us. Trough CIEM, we have also had access to a largenumber of Vietnamese government statistics.

Over the last year, CIEM and ACI organized a range ofinterviews and workshops to obtain inputs and to discuss

preliminary ndings of the analysis. Tese meetings haveincluded Vietnamese government ocials, Vietnamesebusiness leaders, foreign investors, researchers, experts and

representatives of foreign aid organizations. An advisorygroup of experienced Vietnamese ocials and expertshas provided regular input and feed-back. In June 2010, a

preliminary version of the report was discussed with more

Economic Outcomes

Intermediate Indicators



than 300 attendees at a workshop organized alongside the WEF East Asia Summit in Ho Chi Minh-City. We aregrateful to all our partners for their openness in sharinginsights and opinions with us.

Te remainder of the report is organized in three chapters.

Chapter 2 looks at economic outcomes as indicators of

revealed competitiveness. Te chapter rst describesdierent dimensions of Vietnams prosperity. While GDP per capita is a central benchmark, this section widens theview beyond GDP per capita to better capture the qualityof life across dierent parts of Vietnams society. It thendecomposes Vietnams overall prosperity performance intolabor productivity and labor mobilization. Te impactof structural changes in the economy is a particular focusof this analysis. Te second part of the chapter then looksat indicators of economic activity that as signals andcontributors of competitiveness tend to foreshadow future

prosperity. Tey are important analytical tools but notappropriate policy objectives. argeting them directly, asmany countries have done, oen leads to better performanceon the indicator but no improvement in either prosperityor competitiveness. Te economic outcome indicatorsaddressed include measures of investment (domestic,inward FDI), global integration (FDI, exports, imports),innovation, and entrepreneurship. Key observations fromthe analysis of outcome indicators are summarized at theend of each major section.

Chapter 3 provides the assessment of the competitiveness

fundamentals that underpin the observed economicoutcomes. Te rst part of the chapter reviews Vietnamsendowments in terms of geographical location, naturalresources, and other given factors. Te second part is devotedto the main elements of macroeconomic competitiveness,i.e. the strength of social infrastructure and politicalinstitutions (SIPI) and the quality of macroeconomic policy.SIPI includes basic human capacity, the rule of law, andthe eectiveness of the political system. Macroeconomic

policy indicators include scal and monetary policy as wellas external and internal balances. Te third part covers thethree dimensions of microeconomic competitiveness, i.e.

company sophistication, cluster strength, and businessenvironment quality. Te diamond, a concept rstintroduced by Professor Michael Porter in 1990 is used toorganize the analyses of the business environment by fourbroad dimensions - factor input conditions, the context forstrategy and rivalry, demand conditions, and supportingand related industries. Key observations from the analysisof competitiveness indicators are summarized at the end ofeach major section.

Chapter 4 turns from the analysis to the recommendations.Te rst part of this chapter synthesizes the main ndingsfrom the previous two chapters to identify three criticaltasks Vietnam is facing. Te second part outlines an actionagenda to address these tasks in turn. It sets out a number ofgeneral principles that should guide Vietnamese economic

policy in this transition. It then provides specic actionrecommendations in each of the priority policy areas. Tethird and nal part of the chapter turns to implementation,an area which has received insucient attention in the past.It suggests an approach of sequencing actions over time, toenhance the momentum for change based on initial successand learning. And it outlines and organizational architecturefor managing the competitiveness action agenda, with a

Vietnamese Competitiveness Council at its center.



VietnamsEconomicPerformance

Chapter 2



Chapters 2 and 3 examine the competitiveness ofthe Vietnamese economy in three levels, providinga comprehensive assessment of outcomes, driversor intermediate indicators and underlying causes.Understanding these is critical to the formulation of anational economic strategy and a comprehensive supporting

policy package. Chapter 2 focuses on the rst two layers. Itbegins with an examination of indicators of economic well-

being and the quality of life of the Vietnamese people. Tis iffollowed by an exploration of the intermediate indicators ordrivers of prosperity such as trade and investment. Te thirdlayer of competitiveness, or underlying causes, is discussedin Chapter 3.

Economic Outcomes

Ultimately, the goal of economic development is a sustainedincrease 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

specic goals in terms of the standard of living. Comparingthese metrics across countries as is done below, provides arealistic competitiveness benchmark or a relative assessmentof how competitive an economy is.

While the standard of living is a central element of theassessment, it is not a very informative tool to guide policy

making. It only describes the combined impact of all thedeterminants of competitiveness on the quality of life ofthe average Vietnamese. Policy-relevant insights can beobtained from assessing both economic and non-economicmeasures of well-being and from decomposing the standardof living into various components such as the mobilizationof resources, in particular labour, and how eciently or

productively these resources have been employed in order toachieve a higher standard of living.

Standard of LivingIncome: GDP per capita- GDP per capita has grown quickly and steadily over the

last two decades, yet it is at a low absolute level

Vietnams average income real GDP per capita hasgrown rapidly since the country launched the Doi MoiReform, growing at an average annual rate of 5.06 percentbetween 1986 and 1997 (pre-Asian Financial crisis) and

at the higher rate of 5.64 percent between 1997 and 2009(Figure 2.1). Vietnam stood out as one of the fastestgrowing economies in the world during this period allowingit to reach the lower middle-income group in 2008 when its

per capita income exceeded USD 1,000. And it continues tomake signicant progress since, despite the recent nancialcrisis.

VIETNAMSECONOMICPERFORMANCE

FIgURE 2.1:

GROWTH PATTERNS OF

VIETNAMS GDP PERCAPITA 1984-2009

Source: WorldDevelopmentIndicators.



While Vietnams economic growth over the past two decadeshas been impressive in relative terms, the per capita GDP

(measured using purchasing power parity) of the countryremains low compared to other countries. In 2009, Vietnamranked 113th in the world and it is still among the poorestcountries in East Asia (able 2.1). In addition, Vietnams

prosperity level lags signicantly behind traditional tigereconomies such as South Korea and even Chinas per-capitaGDP is more than twice that of Vietnams (able 2.1 andFigure 2.3).

Non-income Measures of Economic well-beingPoerty Reduction- Signicant successes in poerty reduction, however risk of

re-impoerishment remains high

Vietnam is recognized as one of the early achievers of theMillennium Development Goals on poverty reduction. . Its

poverty rate fell dramatically from 58.1 percent in 1993 to14.5 percent in 2008 (GSO 2006)1. Te country managedto signicantly reduce poverty rate in both urban and ruralareas as shown in Figure 2.4. In 2009, despite the slowdownin economic growth, the proportion of poor householdscontinued to decline. Tis is estimated to remain at 11

percent by the Governments poverty standards2 . However,it is worthwhile noting that while the countrys successesin poverty reduction are signicant, these results are notreally stable, the rate of re-impoverishment remains high ascandidly pointed out by Prime Minister Nguyen an Dungin his article written on the occasion of the New Year 2010(Press Center 2010).

FIgURE 2.2:

COMPARISON OFGDP PER CAPITAGROWTH, 1990-2009

China

Indonesia

India

Malaysia

Philippines

Thailand

VietnamCambodia

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0 2 4 6 8 10 12 14 16GDPpercapitaGrowth(CAGR),1990-2009

GDP per capita in 2009 (thousand current PPP$)

Note:GDP per capitagrowth (CAGR) forCambodia is for theperiod 1993 - 2009.

Source:WorldDevelopment Indicators.

TAbLE 2.1:

COMPARISONOF PER CAPITAINCOME IN 2009

Economy USD PPP$Group Rank

($PPP)

World Rank by

($PPP)

Singapore 36,537 50,705 1 4

Japan 39,727 32,443 2 20

South Korea 17,078 27,168 3 26

Malaysia 6,975 13,982 4 49

Tailand 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

Cambodia 677 1,913 11 131Source: WorldDevelopmentIndicators.



Te risk of re-impoverishment is high for three groups.Te rst group includes poor households who rely solely

on agricultural production and live in the coastal regionof the Red River Delta or Mekong Delta. Tese areasare also more susceptible to natural disasters, oods andepidemics. Te second group includes poor, mostly minorityhouseholds living in the Northern mountainous region,the Central Highlands, islands, or places with dicultaccess to production sources or social services. Te thirdgroup includes the urban poor with low education levelsor professional skills. Income disparity among economicregions demonstrates that growth policies which aim atcreating low value-added jobs will help reduce poverty, but

will not bridge the income gap between rich and poor areas.Tus, policies need to target productivity improvement in

poorer regions in order to improve their standard of livingin a sustainable way.

Income Inequality- Overall, inequality is widening in the wake of economic

growth, but remains lower than that of peer countries

Income inequality has been widening and this is an expectedresult of Vietnams high economic growth. However, thecountrys level of income inequality is still low relative tocountries such as China, Tailand, Philippines, Malaysia,and Cambodia (Figure 2.5).

FIgURE 2.4:

POVERTYREDUCTION,1998-2006

0

5

10

15

20

25

30

35

40

45

50

1998

2002

2004

2006

2008

Pov

ertRates(%)

Overall

Urban

Rural

Source:VHLSS,GSO

FIgURE 2.3:

CATCHING-UPON ECONOMICDEVELOPMENTVIETNAM VS. EASTASIAN COUNTRIES

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

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

PercentageofUSIncome(%)

South Korea

Indonesia

Thailand

Malaysia

Philippines

Vietnam

Source: World BankDevelopment Indicators;calculations by ACI.



Quality of Life

Te broader concept of quality of life is an importantmeasurement of a countrys competitiveness. Te HumanDevelopment Index (HDI) represents an attempt tomeasure such a quality. In addition, other indicators includeenvironmental quality, population characteristics, qualityand access to health care services, education, and genderequality.

Human Development Index (HDI)

- Moderate position on HDI ranking, lower scores than thoseof most Asian peer countries

Te HDI is compiled based on a set of indicators organizedinto three components: income, health, and education.

Vietnam scored well in the health component, which is proxied by life expectancy, compared to its Asian peers(able 2.2). However, Vietnam needs to do more toimprove the education component where it continues tolag behind many of its Asian peers. For instance, the mean

years of schooling is 5.5 and the expected years of schoolingis 10.4 (an improvement of 4.9) for Vietnam, while thesegures, respectively, are 5.7 and 12.7 (an improvement of 7)

for Indonesia. In order to improve the HDI, it is essential forVietnam not only to catch-up in GDP per capita, but also interms of other indicators, especially education.

TAbLE 2.2:

HUMANDEVELOPMENTINDICATORAND ITSCOMPONENTSIN 2010

HDIrank

HumanDevelopmentIndex (HDI)

value

Lifeexpectancy

at birth(years)

Meanyears of

schooling(years)

Expectedyears of

schooling(years)

Grossnationalincome

(GNI) percapita (PPP

2008 $)

GNI percapitarank

minusHDI rank

Non-income

HDIvalue

South Korea 12 0.877 79.8 11.6 16.8 29,518 16 0.918

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

Tailand 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

Cambodia 124 0.494 62.2 5.8 9.8 1,868 12 0.566

Bangladesh 129 0.469 66.9 4.8 8.1 1,587 12 0.543

FIgURE 2.5:

GINI COEFFICIENT ANDGDP PER CAPITA

Vietnam

Cambodia

China

Indonesia

Laos

Philippines

Thailand

Malaysia

30

35

40

45

50

55

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00

GINIIndex

,1992-2007

GDP per capita in 2007 (thousands PPP$)

LessInequality

GreaterInequality

Note: Te Gini index rangesfrom 0 (absolute equality)and 100 (absolute inequality).Gini index in the latest periodfrom 1992-2007.

Source: HumanDevelopment Report 2009,UNDP.

Source: UnitedNations, 2010.



Environmental Quality

- Industrial pollution has resulted in a serious degradation ofenironmental quality

Over the period 1998-2007, the emission of CO2 fromenergy consumption increased by 9.6 percent annually (UNEnvironment Programme). Air pollution is mainly causedby industries, transportation and other civil industries.

Water pollution is getting worse, especially in large industrialcenters, industrial zones in the deltas of Dong Nai river,Cau river and Nhue river. Pollution causing agents includegrowing industrial production, rapid urbanization and highconstruction density3.

e Elements of ProsperityProsperity decomposition is an arithmetic exercise whichdecomposes the sources of economic growth which includemobilization of factors of production and productivity. Sincethe dierent components of GDP per capita are driven by

policy choices in dierent areas, the decomposition providesuseful insights into which dimensions of competitivenessmay need further analysis.

e Sources of Growthotal factor productivity (FP)4 - an important measureof ecient use of capital and labor inputs- has tended todecline signicantly since 2000 and capital deepening hasbecome the main driver of growth.

GDP growth rate of a country can be decomposed into threesources: growth in capital input, growth in labor, and growth

in FP. Over the period 1990-2000, 34% of GDP growth inVietnam was accounted for by growth in capital input, 22%by growth in labour input and 44% by growth in total factor

productivity (FP). However, during the period 2000-2008, the contribution of capital increased signicantly to53%, while that of FP declined sharply to 26% ( able 2.3).In comparison, in most of Vietnams ASEAN peers suchas Indonesia, Malaysia, Tailand and the Philippines, thecontribution of FP to economic growth increased quitesubstantially during the more recent period 2000-2008.Furthermore, in China, more than 50% of economic growthover the entire period 1990-2008, more than 50% of growth

was accounted for by FP growth. Clearly, Vietnam standsout in its reliance on capital accumulation and this suggeststhat the real return on capital is likely to be low in Vietnamand also calls into question the sustainability of the presentgrowth trajectory.

TAbLE 2.3:

SOURCES OFGDP GROWTH,1990-2008

Country

Period 1990-2000 Period 2000-2008

GDP Sources of Growth GDP Sources of Growth

Growth Capital Labor FP Growth Capital Labor FP

Contribution in percentage points per annum (ppa)

Vietnam 7.3 2.5 1.6 3.2 7.3 3.9 1.4 1.9China 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

Tailand 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%

Malaysia 100% 54% 30% 16% 100% 30% 20% 50%

Philippines 100% 43% 47% 10% 100% 21% 40% 38%

Te mining and mineral exploitation industry alone accounts for 55 percent of industrialwaste. wenty-ve percent stems from metal production, 7 percent from paper productionand food industry accounts for 4 percent. In the Nhue river valley (including the Hanoiregion), 56 percent of total sewage is from households, 24 percent is industrial wastewater and4 percent is sewage from trade villages. In the Dong Nai river valley (including HCMC, DongNai, Binh Duong), about 480,000 metric tons of waste water are released daily, with industrialand processing zones accounting for 24.6 percent of that total.

Source:World Bank, 2006.

bOX 2.1:

POLLUTION IN THEDELTAS OF DONGNAI RIVER, CAURIVER AND NHUERIVER

Source: Data fromWDI; calculations byACI.



Labor MobilizationLabor mobilization measures the share of populationengaged in generating value in the economy. As an aggregate,it captures the impact of two factors. First, the demographic

prole determines the working age population. Changesin the ratio of the working to non-working population canhave a signicant impact on growth rates over time. Second,the employment intensitylabor force participationdepends on the eectiveness of labor markets in providing

job opportunities.

Demographic Trends

- A young population with a high share of people in workingage is an advantage, but initial signs of population agingand rising population density are posing challenges

Vietnam has a large and young population, with 90 percentbelow or within working age. At the end of 2009, its

population was estimated at 86.06 million; of which, 29.6percent live in cities and 70.4 percent in rural parts5. It isthe third most populous country in South East Asia and the

13th most populous country in the world.Te share of the population below the working age (0 14 years old) has declined from 34.3 percent (1999) to 26.5 percent in 2009 (UN Population Database). Meanwhile,the share of the working age population (15 64 years old)has increased from 60.18 to 67.18 percent over the lastdecade. Te senior citizens group (above 64) has increasedslightly from 5.51 percent to 6.30 percent. Vietnam hasentered the period of a golden population structure witha total workforce about double the size of the non-working

population. Tis golden structure can be maintainedfor about 15 to 30 years, or up to 40 years at a maximum,

depending on future birth rates. Vietnam needs to takeadvantage of this low dependency ratio and demographicbonus to develop a high quality labor force for boostingeconomic growth.

FIgURE 2.6:

VIETNAMSWORKING-AGEPOPULATION

45

50

55

60-

65

70

75

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

Percentageag

ed15-64(%)

Forecast

Source: UNPopulation DatabaseRevision 2008.

FIgURE 2.7:LABOR FORCEPARTICIPATIONRATES BY AGEGROUPS, 1980-2008

50

55

60

65

70

75

80

85

90

95

1980

1986

1990

1995

1997

2000

2005

2008

LaborParcipaonRates(%)

15-24

25-34

35-54

55-64

Source: InternationalLabour Organization



Tere are however some initial signals of an ageing

population. Te ageing rate of Vietnam has increased by 11percent (from 24.5 to 35.9 percent) over the past 10 years.Te current ageing rate is higher than the average rate forthe ASEAN region (30 percent). An aging population will

pose serious challenges for the social security system giventhe countrys current low level of development.

Vietnam is among the most densely populated countriesin the worldwith the average population density of 254

people/km2 in 2007. Tis density is 1.86 times higher thanthat of China (136 people/km2), 10 times higher than thatof developed countries and 6 to 7 times higher than the

worlds average density. High population density aects thequality of the living environment, especially in urban areas.Tis implies that land-intensive industries are no longer anadvantage for Vietnam and Vietnam needs to use its landresources most eciently.

Labor Force Participation- e labor participation rate is high but declining, as

younger people can aord to stay longer in school

Vietnams labor force comprises 43.8 million people (April2009), equivalent to 51.1 percent of the total population.

As illustrated in Figure 2.7, the labor participation rate

has decreased over time, primarily as a result of decliningparticipation by the 15-24 age-group. However, although in2008 this rate decreased by 2.5 percentage points comparedto that in 1998, it still remained high at 77.4 percent, equalto the rate for many high-income countries such as Japan,Denmark, etc.

Te lower participation rate of working-age populationcould be explained by the fact that younger people stay longerin school. Tanks to improvements in living standards. Te

participation rate for 15-24 year old age group has declinedcontinuously since 1980.

In 2008, the structure of labor force participation by age-group for Vietnam resembled that of China, where 92.8

percent of the 25-34 year old age-group participated in thelabour force. For the 15-24 age-group, the participation rateof high-income countries such as South Korea was lowerthan that of Vietnam; however, the rates for 55-64 and 65and above age group were higher. Te evidence from theseand other countries implies that Vietnam needs to take fulladvantage of its golden population structure before thegreying of the population emerges over the next two decades.

FIgURE 2.8:

AGE-SPECIFICLABOR FORCEPARTICIPATIONRATES IN 2008,VIETNAM AND

OTHER ASIANCOUNTRIES

0

10

20

30

40

50

60

70

80

90

100

15-24 25-34 35-54 55-64 65+

Parcip

anonrates(%)

Vietnam Japan Malaysia

China South Korea Hong Hong

Source: InternationalLabour Organization



TAbLE 2.4:

COMPARISON OFEMPLOYMENTGROWTH RATES

Source:FulbrightEconomics eachingProgram, Te StructuralRoots of MacroeconomicInstability, September 2008.

Country Employment growth (%)

Vietnam 1991 2007 2.4

Korea 1969-1988 3.2

Malaysia 1977-1996 3.5

Tailand 1976-1995 3.0

aiwan 1963-1982 3.4Indonesia 1977-1996 2.9

Philippines 1961- 1980 3.3

Employment Growth- Employment growth lags behind GDP growth; a high

share of self-employed and informal employment suggeststhat unemployment and underemployment gures may beunderestimated

Te growth in labor demand is relatively low compared tothe Vietnams high income and export growth. Comparedto other countries in the period of their own rapid growth,

Vietnams performance on job creation is not as impressive.Vietnams high labor participation rate (43.9% in 1991) ascompared to peer countries (e.g. 29.4% for Korea in 1960and 34.2% for Malaysia in 1977) may provide a partialexplanation. However, Tailand started the take-o periodin 1976 also with relatively high labor participation rate(42.6%) but still recorded the average job growth at 3.0%over two decades.

Te sectoral distribution of investment explains much ofthe lackluster performance of the economy in creating jobs.Some 37 percent of total investment ows into the capital-intensive state sector, which accounts for only 10 percent of

jobs. In contrast, the private domestic (non-state) sectoremploys 87 percent of all workers, but its share in totalinvestment is only 28 percent. Redressing that imbalanceneeds to be part of any strategy for accelerating job creation.

Te serious challenge for facing Vietnams economy is to

create sucient jobs in rapidly growing sectors that canabsorb its large young labor force, without being trapped inlow-productivity, labor-intensive industries.

Salaried employees in the formal sector account for only 23percent of the total number of workers (ILOs Employmentrends Report 2009). Te remaining 77 percent are self-employed or unpaid family workers. Small, and mostlyinformal, family farms and enterprises comprise an unusuallylarge proportion of employment in Vietnam. Terefore, theocial unemployment statistics may underestimate the levelof underemployment or unemployment of the self-employed

workers (including people working in agriculture) and thosewho work outside of formal economy.

FIgURE 2.9:

EMPLOYMENTSTRUCTURE BYOWNERSHIP,

2000-2009

Source: General StatisticsOce of Vietnam

9.3 9.5 9.5 9.1 9.0 9.1 9.6

90.1 89.4 87.8 87.8 87.4 87.2 87.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

2002

2005

2006

2007

2008

2009

EmploymentShare(%)

Foreign invested sector

Non-state sector

State sector



Labor Productiity

Labor productivity growth is ultimately the key for sustainedprosperity gains as it is intimately linked to wages and thestandard of living. Labor productivitydened here asGDP per worker has three dimensions:

First, higher labor productivity can be the result of betterskilled employees, an increase in complementary factorsof production such as capital, or better use of technology.

Second, higher average labor productivity can be theresult of either sectoral change a growing share oflabor in sectors with higher productivity levels, or

within-sector growth higher labor productivitywithin sectors as a result of innovation.

Tird, higher average labor productivity can be theresult of changes in the composition of companies inthe economy (foreign vs. local, private vs. government-owned) that have dierent levels of productivity or of

productivity growth.

Overall Labor Productivity- Despite relatively high growth rate in overall labor

productivity, the absolute level remains much lower

compared to most countries in the region

Labor productivity has continuously improved since 1986, with a relatively high rate of improvement compared topeers. Vietnams average labor productivity growth duringthe period 1986 to 2009 was 4.67 percent; higher than thatof other ASEAN countries (3.73 percent) but signicantlylower than that of China (7.26 percent). However, thesubsequent sections examine whether this g

vietnam competitiveness report 2010_full report

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