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Vietnam’s economy in the 2020s: Key strategies

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As the Covid-19 pandemic may persist or recur, Vietnam’s economy will grow less rapidly. However, it still has much room for productivity growth and development at a pace far greater than that of many other countries. This article will discuss the possibilities and offer some specific strategies.

Profile change

Two important profile changes need to take place, pertaining to labor and enterprises.

There is much excess labor in agriculture. About 35% of workers are in agriculture, forestry and fishery (Table 1), where productivity is low. Meanwhile, industrialization remains limited (the value of processing and manufacturing industries as a share of GDP was about 16.5% in 2019) and the industrial profile remains fragile (assembly is dominant, supporting industries are feeble and Vietnam still has a low status in the global value chain). Consequently, although Vietnam’s industrial export has increased drastically, it has been extremely reliant on imported intermediary products, mainly from China and Korea.

These imported products should be replaced via strategies that boost industrialization in both depth and breadth (providing a conducive environment for foreign and local firms to invest in new industries), so that excess labor in rural areas and agriculture will swiftly shift to industries for greater productivity.

Vietnam faces a new wave of foreign direct investment (FDI) triggered by the U.S. – China trade war and Covid-19. There should be policies to make optimal use of FDI to accelerate industrialization(1) and boost changes in the labor profile.

However, as analyzed in the first article, the roles of agriculture and fishery will be increasingly important. Vietnam should blend agriculture, fishery and industry. Industries will play a part in modernizing agriculture and fishery and giving rise to supply chains for processed goods in agriculture and fishery. Given the attributes of the new era in the first article, rural areas should be given more attention. While labor will move beyond agriculture, the shift from rural to urban areas will be less rapid than under the previous development philosophy.

Vietnam’s population was 96.5 million in 2019(2), including 62.7 million in rural areas (65%). The percentage of urban dwellers was 35% in 2019, up from 30% in 2010. In the future, more will live in urban areas, but the increase will be slower and medium cities should sprout up to prevent congestion in Hanoi and HCMC.

As for the profile of enterprises, the informal sector (mainly household businesses) account for 30% of GDP (Table 2). Its productivity is dismal. Private firms (about 10% of GDP) are small and disadvantaged when it comes to access to factors of production such as capital and land. The informal sector and private firms make up the lion’s share of the non-State sector and include extremely small, inefficient enterprises unable to embrace technological renovation (they are too small to have sufficient capacity for technology import, equipment renewal and large investment). Consequently, they are unable to form links with the global value chains established by multinationals. According to Ohno et al. (2020), non-State productivity in 2015 was about VND30 million per worker (according to fixed prices in 2010) whereas that of the State and FDI sectors was VND200 million per worker.

Most Vietnamese firms are extremely small since the business environment is unfavorable and access to land and capital is limited. Administrative reforms aimed at increased efficiency and improved markets for capital and land are essential. This has been discussed extensively, but implementation has dragged on. This problem must be addressed if Vietnam yearns for development.

Besides, specific support is important. Agencies tasked with helping small and medium enterprises on local and central levels must play their roles effectively, so that these firms can easily borrow money, find partners and gain access to markets and technology. These agencies should also establish connections between these firms and larger companies, including foreign-invested enterprises.

Only when labor shifts from agriculture to industries and from household businesses to modern sectors that enjoy economies of scale will productivity rise. Labor redistribution has immense potential for productivity growth.

There is much excess labor in agriculture. About 35% of workers are in agriculture, forestry and fishery

Training human resources under a new approach

Chart 1 is based on the United Nations’ latest population forecast. Coincidentally, in 2045, when Vietnam celebrates her centennial of independence, the population will be about 110 million, there will be more old people (above 65) than children (under 15) and the number of working-age people will peak (at about 70 million).

In many countries, a golden population (marked by a demographic bonus and dividend) often precedes an aging population. A golden population brims with working-age people and is defined by several quantitative criteria. According to Chart 1, Vietnam has a golden population and this will be the case until about 2045(3).

Consequently, Vietnam will enjoy a large labor force for a long time. Its development strategy should hinge on two components.

First, the labor force should be fully utilized so that everyone can have a job and nobody has to go overseas to find work.

In the future, the pandemic may persist or recur and labor-strapped countries may rely on automation and use more robots instead of importing workers.

Ending labor export is a strategy that Vietnam must aim for since such export reflects a low stage of development(4).

Second, labor should shift from agriculture to industries and services and from the informal sector and household businesses to the more advanced sector with many large-scale firms.

Technological advancement drags down demand for labor per unit product, so extensive and intensive industrialization, including that linked with agriculture and fishery, and the rise of new services capable of generating many jobs will be crucial. The percentage of industrial value as a share of GDP in Vietnam remains low, global food demand is on the rise and many countries must import agricultural products. These factors mean Vietnam must boost industrialization and food production. As these sectors thrive and the population swells, the domestic market for services will also expand. Agriculture, the public sector and services will enable Vietnam to make better use of its labor force and stand a chance of ending labor export. This is a development scenario for the 2020s.

In the longer term, when industrialization becomes saturated (industrial value as a share of GDP is high), economic growth slows and technology that replaces labor is adopted on a wider scale, Vietnam must count on work sharing.

A smooth transition from one sector to another entails effective human resource training. Vietnam tends to wax lyrical about 4.0 technology and a knowledge-based economy, but not much has been done, especially regarding human resources. There should be practical and efficacious solutions to this problem.

This era of technology requires workers holding at least a diploma to be proficient in English and information technology (IT) and familiar with the Internet (basic digital skills). Besides these fundamental skills, they should acquire reasoning skills to analyze and solve problems and possess cultural discernment to collaborate and treat others with responsibility.

To that end, two-year colleges may prove effective since they can swiftly supply human resources for industries and services.

In Vietnam, vocational training schools are equivalent to two-year colleges but do not appeal to learners or receive sufficient funding. Current college courses take three years to complete so most want to opt for university courses, which take just one more year. Reforms are needed – two-year colleges that boast a good curriculum and ensure graduates can find a job easily after graduation will prove alluring and solve the issue of people who struggle to be gainfully employed even after four years in university.

At present, private universities proliferate. The obsession with a degree means even low-quality universities can still attract students, who may have difficulty finding a good job.

Second, vocational training schools and colleges are vital for Vietnam’s development within the next 10 years, but are not appealing to young people since they associate these schools with lack of prestige.

Revamping these schools, as well as high schools, will be important.

Vocational training schools and colleges should be turned into two-year colleges, which will be more alluring to learners. The curriculum should be modernized to meet enterprises’ needs in this era of 4.0 technology, with an emphasis on English and IT. One year should be spent on general skills and one year on professional skills. There should be high schools where students can both learn general subjects and receive vocational training. Their curriculum may span four years instead of three years. Internships should be introduced. These new types of schools should be promoted, so that young people will have confidence in the career and social mobility prospects they offer (as they impart skills that will help with career advancement).

As analyzed in the first article, automation and digitalization will influence labor demand. Human resource development should aim to nurture self-directed learners who can adapt to technology changes and shifts in labor demand.

Conclusion

Vietnam has been a middle-income country since 2008 and is aiming for the upper end of this spectrum. With efforts to shift its profile and train labor to enjoy the fruits of a golden population, it may develop swiftly. However, given the pandemic, Vietnam must embrace a new development philosophy.

According to the World Bank (WB), in 2018, Vietnam’s nominal GDP ranks 47th and GDP in terms of purchasing power parity ranks 30th out of 193 countries. Most long-term forecasts indicate that Vietnam will grow faster than many countries. The country will have an important status and say in the global arena. However, its reputation should extend beyond these aspects. As the pandemic may recur, a new model of development based on humanitarian values will make Vietnamese happier and offer a case study for the world.

By Prof. Tran Van Tho

(*) Professor Tran Van Tho, together with Professor Nguyen Xuan Xanh, is the main author of a book that compiles articles from intellectuals, both local and overseas, on how to foster Vietnam’s development in various domains such as institutions, culture, education, health care and business. This article, by Professor Tran Van Tho, is part of the book.

(**) https://www.thesaigontimes.vn/315807/tuong-lai-kinh-te-viet-nam-nhin-tu-dai-dich-the-gioi-hau-covid-19-hay-voi-covid-19.html

(1) Discussed in detail in Tran Van Tho (2020b).

(2) Population is a stock concept and dependent on each point of time (such as the start or end of the year). For example, for the phrase “the population in 2019,” the point of time in 2019 when the figure is recorded should be specified. Unfortunately, Vietnam’s statistics do not specify this.

(3) Chapter 7 (Tran Van Tho, 2016) defines a golden population as the phase where working-age people (15-64) as a share of the population starts to rise. This phase ends when this indicator falls. Under this approach, Vietnam enjoyed a golden population from 1975 to 2020. Chart 1 shows that this phase will last for another 20 years. Calculations are relative – it is difficult to accurately pinpoint when the phase really starts or ends. Apart from population policies, changes in definitions of working age also have an impact. From various perspectives, it can be claimed that Vietnam will have ample labor for the next 20 years or so. 

(4) Analyzed in Tran Van Tho (2016), Chapter 5.

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