Viet Nam Must Escape Low Productivity, Low Value-Add Trap to Industrialize

Traffic in Ho Chi Minh City.
Traffic in Ho Chi Minh City.

By Hyun H. Son

In its quest to become an industrialized nation, Viet Nam must redouble efforts to improve the skills of the labor force and cultivate high-technology, high value-add industries.

Viet Nam seeks to become an industrialized country by 2020 by leveraging its improved competitiveness, productivity and efficiency after two decades of rapid economic expansion. This growth, however, is starting to slow down, as the country is drawn against limited skills level and low technological innovation. Viet Nam, touted as one of Asia’s most remarkable development stories in the 1990s and 2000s, is showing symptoms of slipping into a low-productivity, low-value trap.

The country’s manufacturing activity expanded at its slowest pace in four months in July given a decline in the growth of output, new orders and employment, according to the seasonally adjusted purchasing managers' index released on 1 August.

With few skills, the vast majority of Vietnamese can only find menial jobs that offer low wages. About two-thirds of the country’s workers are employed in informal jobs. This figure is no surprise, since in 2014 less than one-fifth of Viet Nam’s labor force had technical training and qualifications, according to a recent country partnership strategy validation report by ADB's Independent Evaluation Department. The situation is worst in the Mekong River Delta, where just about 10% of workers are skilled compared with 39% in Hanoi.

Furthermore, the industries that drive Viet Nam’s manufacturing sector—and thus economic growth until now—are mainly low value-add and labor-intensive, and use low-level technologies. Private investors continue to see Viet Nam as a hub for cheap export-oriented manufacturing, not high value-add manufacturing. The country is the world’s third largest exporter of footwear, accounting for a global market share of 7% in 2012.

In contrast, Viet Nam remains a marginal player globally in manufacturing high-technology goods, with a worldwide market share of just 0.7%. Moreover, medium and high technology represent only 20% of its manufacturing value-add compared to almost 80% in Singapore. The good news is that exports of high-technology products increased nearly 50% per year in 2002–2012, well above the world average annual growth rate of 11%; if this momentum is maintained, Viet Nam can move toward more sophisticated export products like office machines, of which the country became the world’s fifth largest exporter in 2012.

As Viet Nam increasingly opens its economy to foreign markets, the manufacturing sector will continue to be a key engine of growth. But if the country really wants to achieve middle-income status through industrialization, it should move toward more sophisticated export products.

To escape the low-productivity and low value-add trap, Viet Nam must stimulate technological innovation and product diversification to transition to a hub for high value-add manufacturing, and boost skills development. One way to do this is for the government and development partners to provide matching grants or capital financing to small and medium-enterprises and the private sector in general. Other suggested interventions are restructuring state-owned enterprises and supporting businesses practices that address export competitiveness impediments such as poor-quality products, substandard design and outdated technologies, as well as the additional obstacles of mismatched skills, poor working environments, and regional and/or provincial disparities.

Skills development is crucial to the continued rise of the manufacturing sector. But the low skills level of Viet Nam’s labor force are compounded by the poor quality of technical and vocational education and training (TVET) programs, which largely fail to meet the requirements of industries. Strengthening the collaboration between Viet Nam’s TVET institutes and the private sector is imperative to help ensure that the supply of skills meets the demands of enterprises. To achieve this goal, a skills development fund could be set up through mandatory funding contributions collected from companies. This scheme, currently underway in Singapore, offers competitive-based financing that provide internships for students and/or staff training.

In its quest to become an industrialized nation, Viet Nam is at an important crossroads. Improving the skills of the labor force and cultivating high-technology, high value-add industries can help the country seize this pivotal moment for transforming itself into an industrialized nation.