aci vietnam competitiveness report 2010

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VietnamCompetitivenessReport 2010

Foreword by

H.E. Hoang Trung HaiDeputy Prime MinisterVietnam Michael E. PorterProfessorHarvard Business School

Christian KetelsNguyen Dinh Cung

Nguyen Thi Tue AnhDo Hong Hanh

Central Institute forEconomic Management


http://slidepdf.com/reader/full/aci-vietnam-competitiveness-report-2010 2/126VIETNAM COMPETITIVENESS REPORT 1

Foreword byH.E. Hoang Trung HaiDeputy Prime MinisterVietnam Michael E. PorterProfessorHarvard Business School

Christian KetelsNguyen Dinh CungNguyen Thi Tue AnhDo Hong Hanh



http://slidepdf.com/reader/full/aci-vietnam-competitiveness-report-2010 3/1262 ASIA COMPETITIVENESS INSTITUTE

Tis report is a joint product of the Central Institute forEconomic Management (CIEM) under the Vietnam’sMinistry 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 dra ing team. Te report was initiated byH.E. Deputy Prime Minister Hoang rung Hai who also provided invaluable support and guidance throughout the process.

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 USAID’s 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 theVietnam Development Forum who contributed to the policy 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 Office

of the Government, the Ministry of Planning andInvestment, the Ministry of Industry and rade, theMinistry of Finance, the Ministry of Foreign Affairs as well as the National Assembly’s Economic Committeeand the Central Party’s Committee Office;

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

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

c. Donor agencies, especially the USAID’s VietnamCompetitiveness Initiative (VNCI) for providingtremendous support from onset, the Singapore Embassy, World Bank, UNIDO, UNDP, JICA, IFC’s VBF,USAID’s S AR 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 Office of the Government and staff of theEconomic Affairs Department of the Ministry of ForeignAffairs. 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 uangand 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 theanalysis 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. Porter’s 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 theVietnamese 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 Party’s Committee Office3. Dr Le Dang Doanh Expert, Former CIEM President4. Dr Manuel Albaladejo Expert on behalf of UNIDO Vietnam5. Dr Nguyen Ngoc Anh Chairman, DEPOCEN Economic Consulting Company 6. Mdm Pham Chi Lan Expert, Former Vice General Secretary of VCCI7. Dr ran Du Lich Vice Head, Ho Chi Minh City’s National Assembly Delegation8. Mr ran Xuan Gia Expert, Former Minister of Planning and Investment9. Mr ruong Dinh uyen Expert, Former Minister of rade10. Dr Vu Viet Ngoan Vice Chairman, National Assembly’s Economic Committee

1 Members are listed in order of alphabet

VCR Partner Focus Group2

1. Mr Alain Cany Chairman, Eurocham2. Mr Hank omlinson Chairman, Amcham3. Dr Jim Winkler Director, USAID’s VNCI Project4. 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 ContentsForeword.........................................................................................................................................................................8 Abbreviations .................................................................................................................................................................10Executive Summary...........................................................................................................................................................13

Chapter 1: Introduction Why this Report? ...........................................................................................................................................................Methodology .................................................................................................................................................................

Chapter 2: Vietnam’s Economic PerformanceEconomic Outcomes ..................................................................................................................................................... Standard of Living ....................................................................................................................................................... Te Elements of Prosperity ............................................................................................................................................ Assessment ..................................................................................................................................................................Intermediate Indicators of Economic Performance ........................................................................................................ Investment ................................................................................................................................................................... rade ........................................................................................................................................................................... Entrepreneurship ......................................................................................................................................................... echnology and Innovation ......................................................................................................................................... Assessment ..................................................................................................................................................................

Chapter 3: Vietnam’s Competitiveness Foundations

Natural Endowments ...................................................................................................................................................... Geographic Location and Population Size .................................................................................................................. Natural Resources ......................................................................................................................................................Macroeconomic Competitiveness .................................................................................................................................. Social Infrastructure and Political Institutions ............................................................................................................ Macroeconomic Policy ...............................................................................................................................................Microeconomic Competitiveness .................................................................................................................................. Business Environment uality .................................................................................................................................... Factor Input Conditions ...............................................................................................................................................

Context for Strategy and Rivalry ................................................................................................................................ Demand Conditions .................................................................................................................................................... State of Cluster Development ..................................................................................................................................... Company Sophistication .............................................................................................................................................Assessment ....................................................................................................................................................................Summary .......................................................................................................................................................................

Chapter 4: Vietnam’s Competitiveness AgendaCritical asks Facing Vietnam ………………………..…………………………………………….............................Improving Vietnamese Competitiveness: What to do? ..................................................................................................Improving Vietnamese Competitiveness: How to get it done? ......................................................................................



Te year of 2010 marks an important milestone in the transition between the two decades of Vietnam’s socio-econodevelopment. Te last ten years have witnessed the country’s robust economic growth, improved living standards o

population, and most signicantly, the deep integration into the global economy, turning Vietnam into an emerging attrbusiness location. Yet the economy is facing internally-rooted weaknesses and challenges, reecting in its low competin different aspects. Moreover, rapid and complex changes in the external environment are affecting Vietnam’s open ecin increasingly signicant ways. All of these conditions and factors remind of and emphasize the crucial importaredening strategic directions and a growth model for Vietnam in the new stage of development, with competitivenesustainability being put at the heart.

In this context, the development and release of the Vietnam Competitiveness Report 2009 – 2010 are very meaning providing important and useful input for the Vietnamese Government and business leaders in their decision makingis the rst ever national report which provides comprehensive assessments of Vietnam’s competitiveness in differentand at different levels, from both microeconomic and macroeconomic optics. Te Report was developed independand objectively by researchers and experts of the Asia Competitiveness Institute (Singapore) and the Central InstituEconomic Management (Vietnam), under the technical guidance of Prof Michael Porter of the Harvard Business SchMy hope is that this Report will lay an important stepping stone for Vietnam to conduct regular national competitivassessments and to implement rigorous action initiatives and programs at both the Government and the rm levels to upthe country’s competitiveness and successfully achieve its ambitious development goals over the next decade.

Hoang Trung HaiDeputy Prime MinisterVietnam

FOREWORD



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

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 newcomplex choices in order to build the foundations of greater prosperity as well as to consolidate the achievements mad

Te Vietnam Competitiveness Report (VCR) provides comparative data, analysis, and concrete proposals to help Vietnadecision makers as they chart their country’s future path. In my discussions with Vietnamese leaders, I have always beeby their willingness to learn from outside perspectives. Te Vietnam Competitiveness Report provides a comprehenanalysis that provides essential inputs towards an economic strategy that builds on international experience and addVietnam’s specic situation. Te Report provides an in-depth analysis of the forces that have been driving Vietnam’s gthus far, and the key issues that the country now needs to address to continue and accelerate its development.

Vietnam is approaching an important transition point from economic growth based on tapping into the country’s exicomparative advantages to growth based on upgrading its competitiveness building increasingly sophisticated compadvantages. Te Report identies specic policy recommendations and an implementation structure to turn therecommendations into reality. Vietnam will benet from studying the Report and taking action. While the country ca proud of what has been achieved, its performance is showing signs of fragility. Comparison with other countries reveVietnam has not outperformed leading peers in the region. An action agenda informed by the ideas outlined in this r will be an important step towards exploiting the country’s signicantly greater potential.

Vietnam needs to start a discussion about how it wants to position itself in the global economy. What are the specic actclusters, and business environment strengths that it will be known for? And, Vietnam needs a more fundamental revithe institutional framework for economic policy making and implementation. Te creation of the Vietnam CompetitiveCouncil, a recommendation in the Report that I strongly support, needs to be complemented by a new development a

such as a Vietnam Economic Development Board.I am pleased to have been able to contribute to the Vietnam Competitiveness Report through conceptual guidanc well as in my role in ACI’s International Advisory Board. Te joint team from ACI and CIEM is to be congratulatethis important work. ACI’s ambition is to provide government leaders with objective data and frameworks to makeinformed policy decisions, whether or not they agree with every conclusion or recommendation. My hope is that thiVietnam Competitiveness Report achieves this purpose and becomes a model for many other reports to follow.

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

FOREWORD



ACAPRAdvisory Council forAdministrative ProceduresReform

ACI Asia CompetitivenessInstitute

AFTA ASEAN Free rade Area

AGRIBANK Bank for Agriculture andRural Development ofVietnam

AMCHAMAmerican Chamber ofCommerce

ASEAN Association of South EastAsian Nations

BIDV Bank for Investment andDevelopment of Vietnam

BOD Board of Directors

CBO Congressional BudgetOffice

CCI Country CompetitivenessIndex

CIEM Central Institute forEconomic Management

CIT Corporate Income axCMT Cut, Make, rim

CNC Council of NationalCompetitiveness

CPI Consumer Price Index

CPIB Corrupt PracticesInvestigation Bureau

EDBEconomic DevelopmentBoard

EIU Economist IntelligenceUnit

EPZ Economic Processing ZoneEU European Union

EVN Electricity of VietnamFDI Foreign Direct InvestmentFIE Foreign Invested EnterpriseGC General Corporation

GDP Gross Domestic ProductGEPS Government

e-Procurement System

GRDI Global Retail DevelopmentIndex

GSO General Statistics OfficeHBS Harvard Business School

HCMC Ho Chi Minh City

HDI Human Development

IndexHSP Hsinchu Science Park

ICAC Independent CommissionAgainst Corruption

ICOR Incremental – OutputRatio

ICTInformation andCommunication

echnology

IFC International FinancialCorporation

ILO International LaborOrganization

IMF International MonetaryFund

IPR Intellectual Property RightIT Information echnology

ITRI Industrial echnologyResearch Institute

IZ Industrial Zone

JETRO Japan External radeOrganization

JICA Japan InternationalCooperation Agency

JSB Joint Stock Bank

LNDLegal NormativeDocument

LND Legal NormativeDocument

LPI Logistics PerformanceIndex

MNC Multi-NationalCorporation

MND Ministry of NationalDevelopment

MOET Ministry of Education andraining

MOF Ministry of Finance

MOIC Ministry of Informationand Communication

MOLISA Ministry of Labor, Invalidsand Social Affairs

NA National Assembly

NASC National Assembly’sStanding Committee

ABBREVIATIONS



NICS Newly IndustrializedCountries

NISTPASSNational Institute forScience and echnologyPolicy and Strategy Studies

NOIP National Office ofIntellectual Property

ODA Official DevelopmentAssistance

ODA Official DevelopmentAssistance

OECDOrganization forEconomic Cooperationand Development

OOG Office of the Government

PCI Provincial CompetitivenessIndex

PCNC Presidential Council ofNational Competitiveness

PPP Purchasing Power Parity

PPP Public – PrivatePartnership

R&D Research and Development

RCI Regional CompetitivenessIndex

RIA Regulatory ImpactAssessment

ROE Return on Equity SBO Senior Budget OfficersSBV State Bank of VietnamSC State Conglomerate

SCIC State Capital InvestmentCorporation

SIPISocial Infrastructure andPolitical Institutions

SME Small and MediumEnterprise

SOCB State-Owned CommercialBank

SOE State-Owned Enterprise

STAR Support for radeAcceleration Project

TFP otal Factor Productivity TI ransparency International

TPI rade Performance IndexUN United Nations

UNCTADUnited NationsConference on rade andDevelopment

UNDP United NationsDevelopment Program

US United States

USAID U.S Agency forInternational Development

USD United States Dollar VAT Value Added ax

VCAD

Vietnam Competition

AdministrationDepartment

VCCI Vietnam Chamber ofCommerce and Industry

VCR Vietnam CompetitivenessReport

VHLSS Vietnam Household LivingStandards Survey

VNCI Vietnam CompetitivenessInitiative

VND Vietnam Dong

VNPTVietnam Post and

elecommunicationsGroup

VSA Vietnam StudentAssociation

WB World Bank WBI World Bank Institute

WDA Workforce DevelopmentAgency

WDI World DevelopmentIndicator

WEF World Economic ForumWTO World rade Organization



ExecutiveSummary



Background

Te idea for an in-depth study of Vietnam’s competitivenessemerged from a meeting between Prime Minister Nguyen

an 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 Vietnam’s position in many internationalrankings of competitiveness had remained stagnant.

In 2009, Deputy Prime Minister Hoang rung Hai asked

Vietnam’s 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 Vietnam’s 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 differences within the country’sregions 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 Vietnam’s 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 effective 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 driverof structural change. Driven by foreign investors, exportshave grown signicantly. So have imports, driven by thesupply needs of exporters and the growing local demand inVietnam. However, value-added within the exporting sectorremains low and productivity in other parts of the economyis far lagging.

Competitiveness fundamentals

Vietnam’s growth has been driven by market openingthat has enabled it to realize its existing comparativeadvantages, primarily the abundance of low cost labor. Tecompetitiveness fundamentals are broadly in line with thegrowing but still relatively low level of prosperity reached sofar.

Vietnam’s 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, buteffectiveness in implementation and the independence ofthe judicial system remain an issue. Te political systemis perceived as stable, but lacks the ability to take effectiveaction. 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 remaininsufficient 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 efficiency 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 theVietnamese economy. Government’s efforts 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 Vietnam’s 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 difficultiesin getting access to capital. Equity markets suffer 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 manysectors 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 VietnamVietnam 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 mostdifficult 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 Vietnam’s

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

• Ination and exchange rate; Vietnam’s 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. Vietnam’smacroeconomic 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 shi ed 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) iso en 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 lion’sshare of capital investment, accentuating the low overallinvestment efficiency.

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 insufficient.



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. Vietnam’s 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 facehigher cost levels, they more than compensate for this with 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

Vietnam’s 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 thatVietnam 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, Vietnam’s 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, Vietnam’s 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. Governmentneeds to provide a transparent and effective regulatoryenvironment in which companies can compete on equalterms and to have an effective 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 o en 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 tooo en 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 effective macroeconomic policy 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 effective 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 efficiency,nancial performance, and nancial relations with thegovernment.

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

• Consistent and predictable monetary policy; Monetary policy 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 bank’s 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 isgradually 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 efforts across differentministries. 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 effectivelyand 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 effectiveanswers 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 launchedin clusters where there is sufficient critical mass foractions to affect 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 recentVietnamese 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 isinsufficient. A new approach needs to focus on actualFDI, not announcement and more effective monitoringand follow up. Vietnam needs to separate FDI attraction

from regulation and see FDI as a tool to strengthenVietnam’s 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 effective strategiesfor specic sectors or industries. A new approach needsto focus on clusters and value chains, not individualcompanies or narrow industries. Te objective needsto be improving productivity, not private protability.Government efforts should enable companies in clustersto compete on a higher level, not shelter them fromcompetition.



Institutional architecture

• Policy process; effective policies are more likely to emergeif a robust process of policy design and implementationis in place. Competitiveness requires an inherent abilityto systematically upgrade and improve policies over time.Te current policy design and implementation processin Vietnam have signicant weaknesses. A new approachneeds to provide data for fact-driven policy making andclear procedures to monitor the relevance and qualityof policy. Planning efforts have to be consolidated andconnected. Tere has to be an institutionalized impactassessment process and the coordination among differentgovernment agencies needs to be strengthened.

• Capacity; more effective policies require a more capable public sector. Well trained public officials and an effectiveorganization and management structure are crucialto enable government to operate more effectively. Tecurrent approach in Vietnam reects a very traditional public sector organization. Te lack of a merit-based and transparent performance system and goodgovernance principles have limited the performance ofthe public sector. A new approach needs to be basedon an integrated efforts providing modern solutiongot leadership, training, incentives, and organizationalstructures.

• National – regional structure; Given Vietnam’s size andgeographic prole, the effective allocation of roles andresponsibilities between national, regional, and local

authorities is of particular importance. As companiesalways locate in specic regions within the country, thecumulative effect of government decisions at all levels atthese specic places will directly impact the performanceof these companies. Te current structures in Vietnamhave potential but currently suffer from signicant weaknesses. A new approach needs to review the currentmechanism of responsibility delegation, and strengthenoversight and quality control by the central government.Regions need to be motivated to collaborate andleverage on each other to develop their competitivenessand clusters rather than by competing with each other.

Implementation

Te sequencing of activities in a competitiveness agenda isa crucial task and not just a technicality. First, governmentscannot upgrade all dimensions of competitiveness in parallel.Tis overstretches their ability to achieve change andresults in most cases in failure. Tis challenge is even moreacute when, as is the case in Vietnam, an economy needsto transition from one set of competitive advantages and policies to the next level. Second, the impact of individualreforms o en depends on other policy steps taken in parallelor even before. Without the right sequencing, results willtake much longer to materialize. In the meantime, the political willingness to pursue reforms can wane if there are

not positive results to point towards. Getting the sequenceof reforms right is thus a critical dimension of a sustainablecompetitiveness agenda.

For Vietnam, we suggest an evolutionary reform process.Changes in competitiveness will initially be driven bynarrow activities in well-dened pilot cases. Over time thesenew solutions will then be rolled-out nationally and across abroader set of policy areas. In the last stage, the institutionalarchitecture of policy making will be upgraded. Te onlyexception to this bottom-up approach is the set of activitiesneeded to defuse the increasing risk of macroeconomicimbalances. Here an effective response will require changesat all levels – individual measures, changes in policy, reformof institutional structures – within a relatively small timeframe.

Progress on implementing the competitiveness agendarequires the assignment of clear responsibilities. Suchresponsibilities can be dened at two levels. First, for eachspecic initiative there needs to be an institution or groupin charge of driving the process. Second, there needs to bean overarching structure that can manage the portfolio ofactivities, ensuring that the most critical efforts are beingundertaken and mobilizing new efforts at the appropriatetime. For Vietnam, we suggest creating a VietnameseCompetitiveness Council to assume this role, leveragingthe experience many other countries have made with similarstructures. Te Council would coordinate the governmentagencies and public-private project groups that are engagedin the specic activities launched in the context of the

competitiveness agenda. It would manage the overall project portfolio and monitor progress on individual activities. TeCouncil would report to the Party, the government, andthe public on the progress of the competitiveness agenda.

o perform these tasks, the Council would have direct linkto the political leaders, be comprised of leading governmentand business leaders, including executives of foreign-ownedcompanies, and have a dedicated secretariat with appropriateresources.

Conclusion

Vietnam’s growth since the mid-1980s has been driven bytransition and structural change. ransition has transformedthe governance of the economy from plan to market, openingup Vietnam for integration with the global economy.Structural change has transformed the composition of theeconomy, moving millions from subsistence agricultureinto capital-intensive manufacturing and services. Both ofthese changes have enabled underlying competitiveness,essentially the presence of low cost labor, to be revealed.Growth has been fueled by these macroeconomic, “systemic”changes. More recently, the policy response mainly focuseson intensifying investment, especially in SOEs andinfrastructure, to generate growth rather than on upgrading productivity and efficiency.



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.Vietnam’s 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 critical perquisite 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 li ed out of poverty.Te Asian nancial crisis and the current global economicdownturn did not affect Vietnam as much as many othercountries. International donors view Vietnam as one oftheir clear success cases, where foreign aid is generally wellutilized 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 thecountry’s medium-term outlook. One of them is the officiallaunch of Vietnam’s 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 ofVietnam’s 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 Vietnam’s 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 Vietnam’s Central

Institute for Economic Management (CIEM) and theSingapore-based Asia Competitiveness Institute (ACI) todevelop the rst ever National Competitiveness Report forVietnam. Professor Michael E. Porter has remained engagedin this process through his role as the co-chair of ACI’sInternational 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 choicesVietnamese leaders are facing:

• a broad set ofdata on different aspects of Vietnam’seconomic performance, activity, and competitiveness;

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

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, thatthe picture from the data alone is o en 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 deal with 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 effectiveness 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 identifying which 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 Vietnam’s performance with othercountries on many indictors. But it does not focus on rankingVietnam 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 Vietnam’s 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 Report’s 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 different 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 country’s 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 efficiency 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 thatare 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 affect productivity directly but create the opportunity space in which 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 affect productivity, but can providedirect benets to prosperity. Tey also set in an important way the overall context in which a country’s economy and its

global positioning develop.

SocialInfrastructureand PoliticalInstitutions

NaturalResources

GeographicLocation

Size

Quality ofMacroeconomic

Policy

Sophisticationof Company

Operations andStrategy

State of Cluster Development

Microeconomic Competitiveness


Endowments

Quality of theNationalBusiness

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 different perspectives on Vietnam’scompetitiveness position:

• Te rst group of indicators provides an assessmentof the economic performance of the country. Tisincludes an analysis of the standard of living ofVietnamese 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 Vietnam’s 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 areo en 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 broadrange 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 officials, Vietnamesebusiness leaders, foreign investors, researchers, experts andrepresentatives of foreign aid organizations. An advisorygroup of experienced Vietnamese officials 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 describesdifferent dimensions of Vietnam’s prosperity. While GDP per capita is a central benchmark, this section widens the view beyond GDP per capita to better capture the qualityof life across different parts of Vietnam’s society. It thendecomposes Vietnam’s 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, o en 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 Vietnam’sendowments 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 effectiveness 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 insufficient 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 aVietnamese Competitiveness Council at its center.



Vietnam’sEconomicPerformance

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 forVietnam, 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 efficiently or productively these resources have been employed in order toachieve a higher standard of living.

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

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

Vietnam’s 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.

VIETNAM’SECONOMICPERFORMANCE

FIGURE 2.1:GROWTH PATTERNS OF

VIETNAM’S GDP PERCAPITA 1984-2009

Source: WorldDevelopmentIndicators.



While Vietnam’s 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, Vietnam’s prosperity level lags signicantly behind traditional tigereconomies such as South Korea and even China’s per-capitaGDP is more than twice that of Vietnam’s ( able 2.1 andFigure 2.3).

Non-income Measures of Economic well-being Po erty Reduction- Signicant successes in po erty reduction, however risk of

re-impo erishment 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 Government’s poverty standards2 . However,it is worthwhile noting that while the country’s 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

IndiaMalaysia

Philippines

Thailand

VietnamCambodia

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0 2 4 6 8 10 12 14 16 G D P p e r c a p i t a G r o w t h

( C A G R

) , 1 9 9 0 - 2

0 0 9

GDP per capita in 2009 (thousand current PPP$)

Note: GDP per capitagrowth (CAGR) forCambodia is for the period 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 20South Korea 17,078 27,168 3 26

Malaysia 6,975 13,982 4 49Tailand 3,894 8,004 5 80China 3,744 6,838 6 83

Indonesia 2,349 4,205 7 106Philippines 1,745 3,546 8 110Vietnam 1,052 2,957 9 113

Lao 940 2,259 10 125Cambodia 677 1,913 11 131Source: World

DevelopmentIndicators.



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 difficultaccess 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 Vietnam’s high economic growth. However, thecountry’s 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

1 9 9 8

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

P o v e r t R a t e s

( % )

Overall

Urban

Rural

Source:VHLSS,GSO

FIGURE 2.3:CATCHING-UPON ECONOMICDEVELOPMENT–VIETNAM VS. EASTASIAN COUNTRIES

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1 9 8 0

1 9 8 1

1 9 8 2

1 9 8 3

1 9 8 4

1 9 8 5

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

P e r c e n t a g e o

f U S I n c o m e

( % )

South Korea

Indonesia

Thailand

Malaysia

Philippines

Vietnam

Source: World BankDevelopment Indicators;calculations by ACI.



uality of Life

Te broader concept of “quality of life” is an importantmeasurement of a country’s 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 those

of 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)

Mean years ofschooling

(years)

Expected years ofschooling

(years)

Grossnationalincome

(GNI) percapita (PPP

2008 $)

GNI percapitarank

minusHDI rank

Non-incomeHDI value

South Korea 12 0.877 79.8 11.6 16.8 29,518 16 0.918Singapore 27 0.846 80.7 8.8 14.4 48,893 –19 0.831Malaysia 57 0.744 74.7 9.5 12.5 13,927 –3 0.775China 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 0.738Tailand 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 0.726Indonesia 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 0.549Lao PDR 122 0.497 65.9 4.6 9.2 2,321 3 0.548Cambodia 124 0.494 62.2 5.8 9.8 1,868 12 0.566Bangladesh 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

G I N I I n

d e x

, 1 9 9 2 -

2 0 0 7

GDP per capita in 2007 (thousands PPP$)

L e s s I n e q u a

l i t y

G r e a t e r I n e q u a

l i t y

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.



En ironmental uality

- Industrial pollution has resulted in a serious degradation ofen ironmental 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 density 3.

e Elements of Prosperity Prosperity decomposition is an arithmetic exercise whichdecomposes the sources of economic growth which includemobilization of factors of production and productivity. Sincethe different components of GDP per capita are driven by policy choices in different areas, the decomposition providesuseful insights into which dimensions of competitivenessmay need further analysis.

e Sources of Growthotal factor productivity ( FP)4 - an important measure

of efficient 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 Vietnam’s 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 2000-2008GDP Sources of Growth GDP Sources of Growth

Growth Capital Labor FP Growth Capital Labor FPContribution 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 5India 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 1.3Indonesia 4.1 2.5 1.1 0.5 5.1 1.4 1.1 2.5Malaysia 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 1.8Tailand 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 industrial waste. 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 an4 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 industriaand 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 from WDI; 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 intensity—labor force participation—depends on the effectiveness of labor markets in providing job opportunities.

Demographic Trends

- A young population with a high share of people in working age is an advantage, but initial signs of population aging and 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, 29.6 percent 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:VIETNAM’SWORKING-AGEPOPULATION

45

50

55

60-

65

70

75

1 9 5 0

1 9 5 5

1 9 6 0

1 9 6 5

1 9 7 0

1 9 7 5

1 9 8 0

1 9 8 5

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0

2 0 1 5

2 0 2 0

2 0 2 5

2 0 3 0

P e r c e n t a g e a g e

d 1 5 - 6

4 ( % )

Forecast

Source: UNPopulation DatabaseRevision 2008.

FIGURE 2.7:LABOR FORCEPARTICIPATIONRATES BY AGEGROUPS, 1980-2008

50

55

60

65

70

75

80

85

90

95

1 9 8 0

1 9 8 6

1 9 9 0

1 9 9 5

1 9 9 7

2 0 0 0

2 0 0 5

2 0 0 8

L a b o r P a r c i p a o n R a t e s

( % )

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 11 percent (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 country’s current low level of development.

Vietnam is among the most densely populated countriesin the world—with 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 world’s average density. High population density affects 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 efficiently.

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

younger people can afford to stay longer in school

Vietnam’s 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 ratehas decreased over time, primarily as a result of declining participation 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 ANDOTHER ASIANCOUNTRIES

0

10

20

30

40

50

60

70

80

90

100

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

P a r c i p a n o n r a t e s

( % )

Vietnam Japan Malaysia

China South Korea Hong HongSource: 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 3.2Malaysia 1977-1996 3.5Tailand 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 Vietnam’s high income and export growth. Comparedto other countries in the period of their own rapid growth,Vietnam’s performance on job creation is not as impressive.Vietnam’s 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-off 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 Vietnam’s economy is tocreate sufficient 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 23 percent of the total number of workers (ILO’s Employment

rends 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, theofficial unemployment statistics may underestimate the levelof underemployment or unemployment of the self-employed workers (including people working in agriculture) and those who work outside of formal economy.

FIGURE 2.9:EMPLOYMENTSTRUCTURE BYOWNERSHIP,

2000-2009

Source: General StatisticsOffice 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%

2 0 0 0

2 0 0 2

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

E m p

l o y m e n t S h a r e

( % )

Foreign invested sector

Non-state sector

State sector



e Impact of Sectoral Shi s on Labor Productivity- e growth in labor productivity is largely due to the shi

om agriculture to manufacturing and services; however,within-sector productivity growth remains feeble

During 1996-2008, labor productivity increased at anaverage annual rate of 4.8 percent, from a low base. Muchof this is accounted for by shi s in the sectoral structure,even while sectoral productivity growth has been lower.Compared with the period 1991-1999, the contribution ofstructural shi to overall productivity growth in 2000-2008 was even higher. Figure 2.12 below shows that structural

shi contributed more than two thirds of the overall productivity growth over the 2000 - 2008 period, whilesectoral productivity growth only accounted for one third

of the overall growth. Tis was largely the result of labormoving from low productivity sectors to higher ones (staticstructural shi ). Sectors which managed to increase boththeir productivity and their share in the total workforce(dynamic structural shi ) were too few in number and hadlittle impact to overall productivity growth. In other words,the structural shi over the last two decades has been mostlyhorizontal, with agriculture shrinking while industries andservices expanding in terms of both sectoral contribution toGDP and sectoral share in the total workforce.

FIGURE 2.12:DECOMPOSITIONOF LABORPRODUCTIVITY,1991-1999 AND2000-2008

FIGURE 2.11:MANUFACTURINGSECTORPRODUCTIVITY IN2000 – VIETNAMVS. SELECTEDASIAN COUNTRIES

Note: Productivity ismeasured by GDP per worker at 1994 prices.

Source: General StatisticsOffice of Vietnam;calculations by ACI andCIEM.

Sources: UNIDO; ChinaStatistical Yearbook.

4.63

7.12 7.28

10.911.14

1.48 (0.13)

1.40

2.87 (0.64)

0

2

4

6

8

10

12

1991Produc vity

WithinEffect

BetweenEffect

Interac on 1999Produc vity

2000Produc vity

WithinEffect

BetweenEffect

Interac on 2008Produc vity

M i l l i o n V N D

p e r w o r k e r

2.4 4.3 5.2 6.9 7.0

15.1

55.3

63.6

0

10

20

30

40

50

60

70

Vietnam India China Thailand Malaysia Singapore South KoreaIndonesia

P r o

d u c v i t y I n d

e x

( U S i n 2 0 0 0 =

1 0 0

)



FIGURE 2.13:GROWTH RATEOF OVERALLAND SECTORALLABORPRODUCTIVITY

FIGURE 2.14:LABORPRODUCTIVITYBY OWNERSHIP

Figure 2.13 shows that the agricultural and forestry sectorregisters the highest rate of growth of labour productivity, yet the focus of both government and foreign investors is onthe manufacturing sector where labour productivity growthhas been much lower in comparison. In recent years, the processing industry has created many new jobs, and hascontributed signicantly to the shi in labor structure andsectoral structure. Tese achievements are due primarily tothe expansion of production volume and the absorption oflow-skilled workers, not from a shi to higher value-added products.

Labor Productivity by Ownership- Labor productivity varies among economic segments: it is

much higher in the FDI sector, but declining sharply as FDI shi s toward more labor-intensive activities; labor productivity in the state sector is high because of capital-intensive production processes; it lags in the private sector

In 2000, the average labor productivity in the FDI sector was more than double the productivity of the state sector,

20 times higher than that of the non-state sector and 10times higher than that of the overall economy. But the gaphas been narrowing, primarily because FDI has basicallyshi ed toward more labor-intensive activities in the post-integration stage. Many FDI enterprises in processingindustry use outdated technology, and also fail to comply with the current legislation on environmental standards,causing much pollution. Tis sector’s productivity has witnessed a sharp decline during 2000 – 2007. By 2008,the sector’s productivity was only 7 times higher than thatof the non-state sector and was equivalent to 90 percentof the state sector, yet still 4 times higher than that of the

overall economy. Labor productivity in the non-state sectorlags, because it comprises a large proportion of informaland smallholder businesses with low capital-labor ratios andlimited access to technology.

Source: General StatisticsOffice of Vietnam.

Note: Data for 2009 are preliminary.


0

10

20

30

40

50

60

70

80

90

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

M i l l i o n V N D p e r w o r k e r

( c o n s t a n t 1 9 9 4 p r i c e s ) Overall

Economy

FDI

Non-state

State

4.8 4.5

-2.4

-6.0

2.5

4.2

2.8

0.1

-4.5

1.0

-8

-4

0

4

8

Total Agriculture andforestry

Fishery Mining Manufacturing

2001-2005 2006-2009

G r o w t h r a t e

( % )



AssessmentContinuous growth has raised Vietnam’s income per capitato over USD 1,000 since 2008 and improved other measuresof living standards. However, despite these achievements, thegrowth process has encountered three serious problems thatthreaten national competitiveness. First, labor productivityhas progressed continuously for the past 20 years. However,

opting for capital-intensive production processes has raisedlabor productivity, but at the expense of capital productivity, with limited impact on growth and Vietnam remains aneconomy with low labor productivity. Second, the incomegap between the richest and the poorest group has widened.Tird, environmental quality is degrading, especially in keyeconomic regions that are also the leading engine of nationalgrowth. Vietnam is also undergoing rapid urbanization,imposing serious pressures on urban infrastructure and onthe creation of non-agriculture jobs.

Vietnam’ sources of growth resemble those of other

Southeast Asian countries; physical capital still plays a majorrole, while the contribution of technological advances is lowand unstable. Vietnam has high labor mobilization rateand will continue to benet from its golden populationstructure in the following decades. However, the fact thatlabor quality is low and has not seen much improvement,especially in the case of young workers, has been a bottleneckfor labor productivity growth.

Moreover, the low contribution of sectoral productivitygrowth to overall productivity growth is a serious concern.Growth was mainly driven by structural shi s fromagriculture to manufacturing and services. Te processis still ongoing, but will ultimately be limited by the low productivity of the manufacturing sector. Experiencesfrom developed countries show that in the long run, it is productivity growth within sectors rather than structuralshi s that drives overall productivity growth. Tus, future policies need to target sectoral productivity growth in orderto increase national competitiveness.

Intermediate Indicators of Economic Performance

Indicators like investment, trade, and innovation represent

‘leading indicators’ of future prosperity. Investmentincreases the capital stock and is o en a sign of otherimprovements in the productive capacity of an economy.Competition through trade improves efficiency, exposeslocal companies to external rivalry and new ideas, and thusenhances productivity. Innovation leads to new products,new services, or new ways of production and marketing.

From the perspective of a competitiveness analysis,these indicators play a dual role. Tey reect underlyingcompetitiveness, but they also contribute to competitiveness.If there is more investment, more trade, or more innovation,the underlying competitiveness of a location tends to growover time.

Intermediate indicators are too o en misunderstood as policy objectives rather than as diagnostic instruments.

Investment is a typical example: if it occurs naturally as part of the market process, it is a sign of and contributorto competitiveness. But if it is the result of governmentintervention, for example because of subsidies paidto investors, investment can undermine prosperity. Acompetitiveness assessment therefore needs to view theseintermediate indicators as part of an overall diagnostic, notas an ultimate objective. Tis perspective also increases the value of looking at other indicators, for example the natureof investors or the productivity of their investments, toget a clearer sense on whether the intermediate indicatoris a good indicator of (and contributor to) underlyingcompetitiveness.

InvestmentInvestments, whether from domestic or foreign sources,are a sign that there is condence in the future economicattractiveness of a location. Investments have a directimpact in terms of the capital deepening they represent.

uite o en, new machinery and equipment lead to parallel improvements in organization and activities.And investment tends to increase the returns to skills,creating incentives for upgrading in other dimensionsof competitiveness. Foreign investments have additionalbenets in contributing additional capital, technology, andlinkages to foreign markets.

Overall In estment Performance:

In estment Rate- e in estment rate is high and growing

Economic growth is accompanied by acceleration ininvestment. For Vietnam, the ratio of Investment to GDPincreased from 18.1 percent in 1990 up to 46.5 percentin 2007. Ination-restraint measures by the governmentbrought the ratio back down to 41.3 percent in 2008.

Tis ratio was much higher than that for some NICs over the period 1960-1980, or for China and some fast-developingcountries during the last few decades. For instance, from1961-1980, the ratio of investment to GDP of South Koreareached an average of 23.3 percent, and aiwan 26.2 percent,

while their GDP grew by 7.9 percent and 9.7 percent,respectively. During 1981-1995 (before the Asian nancialcrisis), Tailand’s GDP had an annual average increase of 8.1 percent, with 33.3 percent of investment to GDP. In 2001-2006, Vietnam registered an annual investment ratio of 37.2 percent, close to the 38.8 percent of China; however, annualGDP growth rate of China was 9.7 percent compared to 7.6 percent for Vietnam (Reidel, 2009).



In estment Efficiency

- In estment efficiency is low and declining Te incremental-capital output ratio (ICOR) which relates(net) investment in one year to subsequent gains in GDPmay not be a solid analytical tool but nevertheless gives aninteresting perspective: Vietnam’s investment rate is highrelative to growth. And the rate appears to be on the increase.Vietnam’s ICOR averaged 4.8 during 2000-2008 and 5.4 forthe period 2006-2008. At that level, it is much higher thanthat of NICs during the transition period from 1961-1980such as aiwan (2.7), South Korea (3) or some countries inthe region like Tailand (4.1 from 1981-1995) and China(4 from 2001-2006). Incremental Capital-Output Ratio,Vietnam and selected Asian countries.

In estment of the State Sector

- e state sector accounts for a high share of in estment, butefficiency is low

Despite the fact that the private and FDI sector’s investmentshave expanded at a very high rate, 18 percent and 44 percentrespectively, in the last two decades, the state sector stillaccounted for the lion’s share of total investment. Teefficiency of these investments therefore plays a key role indetermining the growth rate and macroeconomic stabilityin Vietnam.

FIGURE 2.16:INCREMENTALCAPITAL-OUTPUT RATIO– VIETNAM ANDSELECTED ASIANECONOMIES

Source: WorldDevelopment Indicatorsand EconomistIntelligence Unit 2010;calculations by ACI.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

R a

o

Cambodia

China

India

Vietnam

High Investment Efficiency

Low Investment Efficiency

FIGURE 2.15:INVESTMENTPATTERNS,1990-2008

0

5

10

15

20

25

30

35

40

45

50

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

G r o s s F i x e

d C a p i t a

l f o r m a o n

( % o

f G D P

)

China

Vietnam

South Korea

Indonesia

Malaysia

Source: WorldDevelopment Indicators



FIGURE 2.17:COMPOSITIONOF TOTALINVESTMENTBY OWNERSHIP,1995-2009

4249 49

56 59 59 60 57 5348 48 46

37 3441

28

25 23

2424 23 23 25 31 38 38 38

3935

34

30 26 28

21 17 18 18 17 16 14 15 1624

31 26

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

C o m p o s i o n o

f T o t a

l I n v e s t m e n t

( % )

FDI

Non-state

State


State investment comes from four sources—state budget,SOEs, state credit, and “the other.”7 Te rst two sourcesaccount for about three quarters of total public investment.State investment is declining 8 since 1996 as a result of thecontinuing equitization process. Even so, it still accounts forhigh percentage in total social investment, at an average of49.3 percent from 1995-2008.

Investments in the state sector have been less efficientthan in both the non-state and FDI sectors. For instance,according to some estimates, the ICOR of the state sector is1.5 times higher than that of the whole economy, regardless

of the ICOR calculation methods, whether by using grosscapital formation or accumulative assets (Bùi rinh 2010).Given its importance in terms of total investment, the lowefficiency of state investment, especially of SOEs, dragsdown overall performance and undermines competitivenessgains in Vietnam.

Foreign Direct InvestmentOverall FDI Performance- Robust FDI inows result in a high share of FDI to GDP

In Vietnam, FDI represents an important source of capital.According to data published by UNC AD, the share of FDIin total gross xed capital formation in Vietnam increasedfrom 12 percent in 2006 to 25.5 percent in 2007 and 24.1 percent in 2008. Te FDI stock relative to GDP increasedfrom 25.5 percent in 1990 to 66.1 percent in 2000. By 2008,the total registered FDI amounted to USD 164 billion withalmost 11,000 projects, but the FDI stock had dropped to

53.8 percent of GDP.

FIGURE 2.18:GROSS FIXEDCAPITAL FORMATION

BY OWNERSHIP,1986-2009


0

50,000

100,000

150,000

200,000

250,000

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

FDI Non-state State

V N D

B i l l i o n a t c o n s t a n t 1

9 9 4 p r i c e



FIGURE 2.19:OPENNESSTO FOREIGNINVESTMENT

Domestic savings have not been sufficient to nanceinvestment. Te economy therefore depends increasinglyon foreign resources and FDI has increasingly become animportant source to compensate the saving and investmentgap that has widened in the past three years.

FDI Implementation Rate- A widening gap between announced and realized FDI

While the announced foreign direct investment projectscontinue to be strong, there is an increasing gap betweenannouncements of foreign investment projects and actualinvestments made. Te disbursement rate, actual vs.

announced, was highest during 1997 – 2004 (73.5 percent)but has dropped dramatically to 40.1 percent during 2006 –2008. Part of the growing gap might be explained by the FDIattraction race at the regional level that provides an incentiveto “over-report” FDI commitments. But part of it is likelyto be driven by increasing problems in implementing FDI projects in line with initial plans, or speculative behaviors ofsome investors who register projects to “reserve a seat” andresell their licenses for prot.

FIGURE 2.20:THE SAVINGS-INVESTMENTGAP, 2002-2009

Source: EconomistIntelligence Unit 2010;calculations by ACI.


China

India

Indonesia

Malaysia

PhilippinesSingaporeThailand

Vietnam

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

C h a n g e i n n e t o w s o

f i n w a r d F D I

a s %

o f G D P

( 1 9 8 9 - 2

0 0 9

)

Net ows of inward FDI as % of GDP, 2009

-20

-10

0

10

20

30

40

50

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

P e r c e n t o

f G D P

( % )

Total savings

Total investments

Savings-Investment

balance



Targets of FDI- FDI is increasingly shi ing to real estate and labor-

intensive industries

In the early years, FDI inows were concentrated in importsubstitution and non-tradable industries (such as oil,construction, transportation, or communications) to servethe temporarily protected domestic market (S AR 2003).However, over the last ve years, FDI inows have shi edto more export-oriented and labor-intensive industries andto the real estate sector. Figure 2.22 shows that the numberof workers in the FDI sector grew faster than the number

of rms and xed capital, reecting a rapid shi towardslabor-intensive industries. Tis trend is a response to theremoval of industrial protection measures and also to the prevailing low-wage labor advantages. In 2009, the numberof FDI projects investing in real estate and leasing business

accounted for 21 percent of the total projects and theamount of invested capital was equivalent to 33 percent oftotal registered capital (GSO 2009).

Although the manufacturing sector still accounts for thelargest share in total registered capital, actual disbursementlevel in this sector have been especially low, representingonly 30 percent of the total implemented capital during1988-2007. Tis may reect more difficulties and lowerreturns in investing in the manufacturing sector comparedto the services and real estate sectors. It therefore requiresreconsideration in policy and provision of incentives

to encourage more FDI into the sectors that can boostup productivity and create more spillover values for theeconomy.

FIGURE 2.21:ANNOUNCED VS.REALIZED FDI,2000-2008

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

M i l l i i o n U S D

Registered Capital Imple menta on Capi tal


FIGURE 2.22:PERFORMANCE OFTHE FOREIGNINVESTED SECTOR

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

100

150

200

250

300

350

400

450

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

P r o t s

( R e t u r n s o n x e d c a p i t a l )

G r o w t h

( 2 0 0 0 = 1

0 0

)

Number of Firms Workers

Fixed Capital Prots




Policy decisions by the government of Vietnam in relationto the sectoral composition of FDI may also have an impact.Tere has been a call for a re-thinking of priorities for FDI.Investments in real estate projects have been criticized for various reasons, ranging from loss of land for agriculture toland price bubbles and increasing asset inequality betweenurban and rural areas. Tere is widespread discussion aboutfocusing on projects with high domestic value-added or ahigh technological component. For instance, Ho Chi MinhCity is now reluctant to grant FDI licenses to low-skilledlabor-intensive projects. At the same time, the relocation ofFDI manufacturing projects from China to Vietnam would

continue. For instance, at present many South Koreanbusinesses are seeking more competitive locations to replacesome of their Chinese operations, and ASEAN countriesare favoured because of their location and culture. Tus,Vietnam could be among the countries to benet the mostfrom this trend.

Regional FDI concentration- FDI is highly concentrated in a few geographic centers, but

is mo ing slowly to the next layer of pro inces

In 2009, the top provinces attracting FDI in Vietnam areBaria-Vung au (USD 6.73 billion out of the total USD21.48 billion), uang Nam (USD 4.174 billion) and BinhDuong (USD 2.502 billion). Ho Chi Minh City and Hanoi were ranked 7th and 8th, respectively. Tere were 537 projects licensed in the three major economic centers of thecountry, accounting for 64 percent of the total new licensesgranted countrywide. Cumulatively by the end of 2008, Ho

Chi Minh City, Ba Ria Vung au and Hanoi were the topthree destinations for FDI.

FIGURE 2.23:CUMULATIVE FDIDISBURSEMENTRATIOS BY SECTOR,1988-2007

Source: FIA’s Report onVietnam’s 20-year FDIDevelopment.

0

10

20

30

40

50

60

70

80

90

0

5

10

15

20

25

30

35

L i g h t i n

d u s t r y

H e a v y i n

d u s t r y

F o o

d p r o c e s s i n g

C o n s t r u c o n

T r a n s p o r t a o n

H o t e

l - T o u r i s m

R e a l e s t a t e

F i n a n c e

O t h e r s e r v i c e s

A g r i c u

l t u r e & F i s h e r y

% I m p l e m e n t e d

B i l l i o n U S D

Registered Capital Implemented Capital % Implemented

FIGURE 2.24:TOP DESTINATIONSFOR FDI(CUMULATIVE) ASOF DECEMBER 31,2008

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

H o c h i m i n

h c i t y

B a R i a -

V u n g T a u

H a n o i

D o n g N a i

B i n

h D u o n g

N i n

h T h u a n

H a T i n

h

T h a n

h H o a

P h u Y e n

H a i P

h o n g

Q u a n g N g a i

L o n g A n

K i e n G i a n g

D a N a n g

T h u a T h i e n -

H u e

H a i D u o n g

O i l a n

d G a s

V i n

h P

h u c

B a c N i n

h

M i l l i o n U S D

Note: FDI data arecumulative and coverthe periods whenVietnam started toattract FDI untilDecember 31, 2008.

Source: FIA.



Impact of FDI - FDI has limited spillo er effects and few linkages with the

local economy

Te increasing volume of FDI has been characterized by arelatively low technological content. Policies to attract high-tech investments from FDI have been strengthened since2005 with the adoption of the Investment Law and theLaw on echnology ransfer in 2006. Te government also paid more attention to attract FDI with high technologicalcontent via the establishment of high-tech industrial parks

such as Hoa Lac High- ech Zone9

. However, there are only28 licensed investment projects in these parks at present,some of which are foreign invested, with registered capitaltotaling less than USD 1 billion and still in the “warm-up” phase. Low labor skills, low technological capabilityof domestic enterprises and weak forward and backwardlinkages between foreign-invested enterprises (FIEs) anddomestic enterprises have hindered effective technologytransfer ( ue Anh N. . 2009).

According to the 2009 Provincial Competitiveness Index(PCI) Survey, among nearly 10,000 local private enterprises

surveyed, only 6.9 percent reported FIEs as their mainclients. Of the remainder, 15 percent cited SOEs and 58 percent mentioned other local private companies as theirmain clients.

A recent CIEM survey of 100 percent foreign-investedcompanies in the garment and electronics industriesin Hung Yen, Hai Duong, Vung au, Binh Duong andDong Nai provinces revealed that the companies carry

out only the simplest activities in their production line inVietnam, while design and other more sophisticated detailsare decided by the parent company overseas. Te parentcompany also supplies inputs and handles distribution andsales of nal products. Tis is a typical model of a simple processing industry competing primarily on price, whichrequires cheap labor, high consumption of electric power,and good transportation and logistical infrastructure. Withthis model, it is very difficult to generate positive technologyspillovers from the FDI sector. Recent policy measures andefforts to create a more enabling and less costly environment

for enterprises, particularly for FDI, are important butnot necessarily sufficient to generate FDI spillovers andcontribute to productivity upgrading.

What Attracts FDI? According to a recent JE RO’s annual survey of Japanese-affiliated rms operating in Asia, political stability (61.1 percent of respondents), low wage labor (38.9 percent)and market size (38 percent) are Vietnam’s strengths as aninvestment location.

In summary, FDI has increased in terms of olume, but the lack

of incentives to increase quality, efficiency and competitivenessof industries in particular and the economy in general, haslimited its contribution to upgrading competitiveness. Betterincentives are needed to encourage high technology-intensive activities, accelerated technology transfer, introductionof technologies with less en ironmental pollution and acontinuous skills transfer

As of December 31, 2008, HCM city has three export processing zones and twelve industriazones with a total of 1,143 active projects, whose registered capital stood at USD 4.36 billioand with approximately 250,000 employees. However, there are only three qualied hightech enterprises: Nidec osok, Mtex, and Renesas. In 2005, exports of high-tech productsfrom these three enterprises alone made up almost 22 percent of total export turnover of alloperating industrial zones (IZs), amounting to USD 300 million. Overall, the technologicalcontent of industrial products remains low.

According to the recent 2008 survey conducted by HCM city’s Department of Science andechnology, out of a total of 429 enterprises operating in industrial and export processing

zones (EPZs), only one percent of all enterprises attained a high-technology level, 4 percennearly high-technology, 8 percent slightly above average, 36 percent average and up to 5 percent, a below-average technology level. Te technology level is measured in terms osophistication in the following factors: machinery and equipment; information technology;human resources; and business operation methodologies. an Tuan EPZ is fully utilized,mostly by FIEs. However, a sizable number of its enterprises still have low technology leve

Source: CIEM

BOX 2.2:TECHNOLOGY LEVELOF FIES IN HCM CITY



Trade10

rade contributes to prosperity in many ways and it enables

specialization where an economy has comparative orcompetitive advantages. As a two-way street, trade exposeslocal producers to competition and it also offers access toknowledge in global markets.

Exports

Export Patterns- e level of exports to GDP is high, but Vietnam accounts

for a relatively small share of the global market

Available trade data vividly demonstrate the rapid integrationof Vietnam into the world economy, especially a er theconclusion of the Bilateral rade Agreement with the US in

2001. Exports of goods and services soared more than fourtimes between 2000 – 2008, from USD 17.2 billion to USD69.8 billion in 2008, before contracting to USD 62.8 billionin 2009 in the a ermath of the global nancial crisis. Withthis level, Vietnam’s ratio of exports to GDP in 2009 wasalmost 68 percent, only behind Singapore and Malaysia, andat par with Tailand and higher than most of other countriesin the region.

able 2.5 below shows additional performance indicatorsof trade. Vietnam’s export growth lags only behind that ofChina, but its global market share is relatively small. Tis isin part a reection of the size of the economy.

FIGURE 2.25:LEVEL ANDGROWTH OFEXPORTS

ChinaIndia

Indonesia

Malaysia

Myanmar

Philippines

Singapore

Thailand

Vietnam

-0.1

0

0.1

0.2

0.3

0.4

0.5

0% 50% 100% 150% 200% 250%

C h a n g e i n E x p o r t s a s %

o f G D P

( 1 9 8 9 - 2

0 0 9

)

Total Exports as % of GDP, 2009Source: EconomistIntelligence Unit 2010.

TABLE 2.5:TRADE PERFORMANCEINDEX (TPI) IN 2006

Country Global marketshare (%)

Growth ofexport value (%)

Growth ofexport volume

(%)

Number of bigexports with

turnover of USD100,000

China 8.1 31 21 4,644Malaysia 1.3 14 2 3,397Tailand 1.1 18 8 3,281

Indonesia 0.8 15 2 2,941 Vietnam 0.4 26 9 2,107

Source: rade PerformanceHS: Exports and Importsof all industries (2006),

rade Competitiveness Map,International rade Centre(I C).



Vietnam may have specialized in industrial sectors facingsluggish demand growth and saturated markets. Forinstance, between 2000 and 2008 global trade of wovenclothing for men and women grew at 4.3 percent and 7.1 percent respectively. Tese gures were well below the worldtrade average of 11.5 percent for the period.

Figure 2.28 sums up the evolution of Vietnam’s exportstructure towards more sophisticated products. In general,Vietnam is moving in the right direction. However, thereal challenge for Vietnam entails improvement in thetechnological sophistication of its industry.

- Low level of value added in manufactured exports

Compared to other countries in the region, Vietnam’sindustrial structure is technologically unsophisticated—the share of medium- and high-tech sectors in totalmanufacturing value added remains just above 20 percent,and it has been unchanged over the last few years.Labor-intensive low-tech industries, mainly the fashioncluster, account for more than 70 percent of Vietnam’smanufacturing value added.

FIGURE 2.28:EVOLUTION OF EXPORTSTRUCTURE TOWARDMANUFACTURED ANDTECHNOLOGY-INTENSIVEEXPORTS, 2000-2008

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

40% 50% 60% 70% 80% 90% 100%

S h a r e o

f m e

d i u m -

a n

d h i g h - t e

c h m a n u

f a c t u r e

d t r a

d e

i n m a n u

f a c t u r e

d t o t a

l t r a d e

, %

Share of manufactured trade in total trade, %

Towards a sophis catedexport structure

Vietnam 00Vietnam 05 Vietnam 08

Cambodia 00Cambodia 05Cambodia 08

China 00

China 05

China 08

Malaysia 00

Malaysia 05

Malaysia 08

Thailand 00

Thailand 05Thailand 08

Indonesia 08

Indonesia 00Indonesia 05

Source: UN Comtrade .

FIGURE 2.27:MARKET SHARESIN WORLD’S 20MOST DYNAMICMANUFACTUREDEXPORTS, 2000 AND2008

Note: Most dynamicmanufactured exports are products of which total globaltrade values are above USD20 billion between 2000 and2008.

Source: UN Comtrade.



Export Diversication- Market diversication is high, while the relatively low

product diversication is impro ing

Vietnam’s manufactured trade is far from concentrated.Vietnam ranks second in the region in market diversication just shy of China, and ahead of South Korea, Indonesia andTailand (see able 2.9). Vietnam’s market diversication protects it from the stronger presence of key competitors in

large markets. In terms of manufactured exports, the top veexport categories accounted for over 50 percent in 2000, butdropped to slightly over 40 percent in 2008 (Figure 2.30) —evidence of increasing diversication.

Export Trading Partners- Focus on advanced markets in North America, Europe and

Asia

Te US remains Vietnam’s most important export market,as shown in Figure 2.29. It is followed by Japan, Australia,China and Germany. Te top ve export markets accountfor the majority of all exports from Vietnam, albeit theircombined share has declined from 57.2 percent in 2003 to

55.4 percent in 2008. For the 17 major trading partners, theaverage annual growth rate of total exports was 23.5 percent.Te slower-growing countries in that group included the EUcountries and Singapore. Te overall pattern shows a growingconcentration of exports in the region and in Australia with26.3 percent average annual growth of exports in the latter.

Source: Global rade Atlas

TABLE 2.7:EXPORTTECHNOLOGYINTENSITY,2000 AND 2008

Country 2000 2008

Hightech

Mediumtech

Lowtech

Resourcebased

Hightech

Mediumtech

Lowtech

Resourcebased

Cambodia 0.1% 1.2% 93% 5.7% 0.1% 1.8% 96.7% 1.4%China 21.2% 24.3% 45.4% 9.1% 29.9% 28.3% 33.3% 8.5%

Hong Kong 25.8% 11.3% 58.5% 4.4% 20.5% 17.9% 47.1% 14.5%Indonesia 14.9% 19.6% 31.9% 33.6% 6.4% 23.3% 22.7% 47.6%

South Korea 35.1% 35.3% 17.9% 11.7% 28.4% 44.3% 11.6% 15.7%Malaysia 55.2% 21.4% 9.8% 13.7% 34.3% 24% 13% 28.6%

Philippines 69% 12.4% 11.9% 6.6% 62.1% 15.5% 8.1% 14.4%Singapore 59.4% 20.9% 6.9% 12.7% 44.8% 22% 6.7% 26.6%

aiwan 43.2% 28.2% 24.3% 4.3% 35.8% 32.5% 18.5% 13.2%Tailand 32.4% 27.2% 21.9% 18.5% 22.7% 37.7% 16.1% 23.5% Vietnam 11.1% 10.3% 64.7% 13.8% 10.1% 14.5% 67.1% 8.2%Source: UN Comtrade .

FIGURE 2.29:VIETNAM’S EXPORTSBY MAJOR TRADINGPARTNER, 2003 AND2008

0 2 4 6 8 10 12 14

Spain

ItalyFrance

South KoreaUnited Kingdom

PhilippinesThailandBelgium

NetherlandsTaiwan

MalaysiaSingaporeGermany

AustraliaChina

Japan

United States

2008

billion USD

2003



Imports

Import Patterns- Imports are high and growing, leading to widening and

persistent trade decit

Since 2006, imports have risen quickly, surpassing thegrowth of exports. During 2006–2008, the average annualgrowth of imports was 30.2 percent. Tis has led to a rapidly widening trade decit, from 4.5 percent of GDP in 2006to 16.8 percent in 2008. In 2009, imports contracted toUSD 68.8 billion (equivalent to 62.5 percent of GDP) – afall of 14.7 percent as compared to 2008. Te contraction

in imports in 2009 was caused by the sluggish domestic production as a consequence of the global recession. Inaddition, import prices also dropped due to the contractionin global demand.

Figure 2.31 illustrates the trend in Vietnam’s trade balanceand its comparator countries over the period 1990 - 2008.Te three comparison countries follow a similar pattern—roughly balanced until 1998, followed by a signicant tradesurplus in that year, primarily as a result of cutbacks inimports. Vietnam, however, has had a negative trade balancethroughout the entire period, slightly less in the years

TABLE 2.9:MARKET DIVERSIFICATIONINDEX, 2000 AND 2008

Country Ranking Index value

2000 2008 2000 2008China 3 1 1.0 1.0

Vietnam 1 2 1.0 0.9Korea 4 3 1.0 0.8

Indonesia 2 4 1.0 0.7Tailand 5 5 0.9 0.7

Philippines 7 6 0.8 0.7Malaysia 8 7 0.8 0.7

aiwan 6 8 0.8 0.6Hong Kong 10 9 0.4 0.4Singapore 9 10 0.6 0.4Cambodia 11 11 0 0Source: UN Comtrade .

TABLE 2.8:EXPORTS OFMAIN PRODUCTCATEGORIES BYMARKETS, 2008-2009

Markets2008 2009

Share of Vietnam’s totalexports (%)

Key ProductsValue (billion

USD)Key products

Value (billionUSD)

2008 2009

EU

Footwear 2.51 Footwear 1.71

17.3% 15.1%Garment 1.7 Garment 1.44Seafood 1.15 Seafood 0.96

Crude oil 2.82 Crude oil 2.21

ASEANRice 1.52 Rice 1.23

16.3% 13.6%Computers 0.73 Computers 0.59Garment 5.1 Garment 4.99

USFootwear 1.07 Furniture 1.1

18.9% 19.9%Furniture 1.06 Footwear 1.04Crude oil 2.18 Garment 0.95

JapanSeafood 0.83 Seafood 0.76

13.6% 11%Garment 0.82 Electric cable 0.64Rubber 1.06 Coal 0.94

ChinaCoal 0.74 Rubber 0.86

7.2% 10.7%Crude oil 0.6 Cassava 0.5

Source: DEPOCEN’sExport Promotion Report2009 – 2010.



FIGURE 2.30:SHARES OF TOP FIVEMANUFACTUREDEXPORTS IN TOTALMANUFACTUREDEXPORTS, 2000 AND2008

53%

88%

24%

54%

32%

43%

88%

26%

42%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Vietnam Cambodia China Malaysia Thailand

S h a r e

( % )

2000 2008

FIGURE 2.31:TRADEBALANCE,1990-2008

-20

-15

-10

-5

0

5

10

15

20

25

30

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

T r a d e

b a l a n c e

( % )

( e x p o r t s m i n u s i m p o r t s a s p e r c e n t o

f G D P

)

Malaysia

Thailand

Indonesia

Vietnam

Source: WorldDevelopment Indicators

Source: UN Comtrade.

following the nancial crisis, but widening substantiallyagain a erwards. In 2009, imports exceeded exports by 20 percent, equivalent to 11.9 percent of GDP. Te negativetrade balance has affected the overall balance of payments;however, remittances from Vietnamese overseas, FDI and portfolio capital inows, the balance of payments remains positive.

Import Composition- Imports of capital goods dominate, but the share of

consumption goods is increasing

When classied by the Standard International radeClassication (SI C), the share of manufactured products

in total imports has been increasing rapidly at an averagerate of 28.8 percent during 2006–2008, and these accountedfor 69.7 percent of the total imports in 2008. Among theimported primary products, fuel accounted for the biggestshare of 56.6 percent. Among the imported manufactured products, equipment, machinery and input materialsaccounted for the biggest share of 75.7 percent. Tis reectsVietnam’s heavy dependence on imported materials andequipment to serve the manufacturing sector.



FIGURE 2.33:COMPOSITION OFVIETNAM’S IMPORTSBY COMMODITYGROUP, 2005-2009

32 29 25 25 29 28 29

61 6564 63

62 61 61

8 78 8 7 8 9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

I m p

o r t C o m p o s i o n

( % ) Non-monetary

gold

Consumergoods

Fuel, rawmaterials

Machinery,instrument,accessory

Note: In 2003 and 2004non-monetary gold isincluded in fuels & rawmaterials.


FIGURE 2.32:COMPOSITIONOF VIETNAM’SIMPORTS,2005-2008


$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

TOTAL Primary products Manufactured products Others

M i l l i o n U S D

2005

2006

2007

2008

In terms of commodity groups, 90 percent of total importsin 2009 comprised capital goods—fuel and raw materialsaccounted for 60 percent, while machinery and equipmentcomprised 30 percent of the total imports. Consumptiongoods accounted for a relatively small, but increasing,share in total imports—from 6 percent in 2000 to almost10 percent in 2009. Tis reects the “typical” structure ofthe Vietnamese economy which is dominated by low value-added processing industries and higher living standards which encourage consumption. It is more worrisome thatimports of cars, motorbikes and other luxury goods forconsumption are increasing rapidly while the overall living

standards are still relatively low. In 2009, imports of cars andluxury goods accounted for almost 50 percent of the totalimports of consumption goods. Tese trends are adding pressures on the trade balance and foreign reserves as suchconsumption goods are not used to serve export-oriented production and to create foreign exchange revenues.



FIGURE 2.34:VIETNAM’SIMPORTS BYCOUNTRY OFORIGIN, 2005-2009

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009

I m p o r t o f g o o

d s

( % )

ASEAN

ChinaJapan

USA


Import Trading Partners- Neighboring countries (ASEAN, China, East Asia)

represent the main sources of imports; the trade decit withChina in particular is widening dramatically

Vietnam’s trading partners focus on some key countries andregions, including ASEAN (20 percent of total imports in2009), China (23 percent), Japan (10 percent), Korea (10 percent), EU (8.3 percent) and USA (4 percent). Tesemarkets alone account for over three quarters of Vietnam’stotal imports.

Vietnam’s imports from ASEAN are decreasing in relativeterms while imports from China are increasing rapidly,

from 15 percent in 2005 to 23 percent in 2009. Tis is partly explained by China’s import products that tend to becheaper than those imported from more advanced markets,and partly because Vietnam has not been able to takeadvantage of geographical proximity and the sizable, less-demanding Chinese market to boost up its exports to China.Tese trends are raising questions about strengthening thedynamism of intra-regional trade among ASEAN members.

Trade in Services- A relatively small share of trade in services in total trade,

and an increasing decit in trade in servicesTe value of services exports in 2009 reached USD 5.77million. ourism exports still dominate services exportsand are estimated at USD 3.05 million; falling 22.4 percentcompared to 2008. Next in importance are transportationservices with an export value of USD 2.06 million, dropping12.5 percent compared to that in 2008. Despite decreasingexport values, tourism and transportation still accountedfor 91.3 percent of Vietnam’s total services export volume.Since these two sectors were primarily affected by the 2008nancial crisis, Vietnam’s services export volume in 2009 fell18.1 percent compared to that in 2008.In a similar fashion, services imports also suffered from theglobal nancial crisis. In 2009, import of services attainedUSD 6.9 billion, dropping 1.4 percent compared to thatin 2008. Although their import values decreased, tourism,insurance and transportation services saw an increasingshare in total services import, reaching 83 percent. Allservices, apart from government- and telecommunications-related ones, had lower import value in 2009 than in 2008.



FIGURE 2.36:NEWLYINCORPORATEDPRIVATEENTERPRISES INVIETNAM,1991-2008

Figure 2.35 shows a regional comparison of patterns in tradein services. Te pattern for Vietnam closely resembles thatof South Korea, showing an increasing decit in trade inservices. Te decit in 2008 amounted to USD 819 million, while the decit stood at USD 716 million in 2007.

Entrepreneurship Enterprise Creation- e Enterprise Law (2000) triggered a rapid growth in the

number and size of private enterprises

Te Enterprise Law adopted in 2000 eased restrictions andconditions in formal market entry. Since then, the numberof enterprises has increased rapidly. Te total number ofbusiness registration in the three years 2000-2002 surpassedthe total number of the previous decade. Even when growthslowed in 2008 due to ination and the global nancialcrisis, new enterprise registrations (over 51,000) still

surpassed those from the year before. According to the datasupplied by the Enterprise Development Agency, there wereabout 355,000 private rms registered in the whole countryin 2009, with about 272,680 in operation that are payingtaxes.

As shown in Figure 2.36, the average investment capitalalso increased sharply, especially a er the Enterprise Law was adjusted in 2005 to simplify the business registration procedures and to allow companies of all sectors to operatein the same forms of governance. Te average capital of onestart-up in 2001 was VND 1.29 billion and this increasedto VND 3.17 billion in 2006, and to VND 11.6 billion in2008.11

Source: EnterpriseDevelopment Agency, MPI

48,959

14,441

19,773 21,464

27.653

37,09939.659

46,691

49,791 51,015

0

100,000

200,000

300,000

400,000

500,000

600,000

0

10,000

20,000

30,000

40,000

50,000

60,000

1 9 9 1

- 1 9 9 9

( a v e r a g e

)

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

R e g i s t e r e d c a p i t a l ( b i l l i o n V ND

)

N u m

b e r o

f i n c o r p o r a t e

d E n t e r p r i s e s

Number of Enterprises Registered capital of private businesses

FIGURE 2.35:SERVICESEXPORTS ANDIMPORTS IN 2008

Source: WorldDevelopment Indicators.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Cambodia

China

South Korea

Laos

Singapore

Taiwan

Thailand

Vietnam

Commercial services imports (% of GDP) Commerical services exports (% of GDP)



Business Capacity- Private sector development needs to be fostered

While the Enterprise Law triggered a boom in new andincreasingly well capitalized enterprise registrations, therehave been few further reforms to encourage intensive growthof the private business sector.

Te private business sector in Vietnam lacks both theintellectual foundations and adequate capital to keep up with the demands of today’s global economy. Small andmedium enterprises (SMEs) make up 98.4 percent of the private rms. Te lack of education and training for businessmanagement and capital accumulation has clearly hinderedtheir capability to contribute to the move from factor-

driven to knowledge-driven, or from labour-intensive tocapital- driven economic models. Lack of adequate capitalhas also prevented private companies from investing in andupgrading their technology.

Te development of the business sector also faces a majorchallenge related to the distortion of the market. Landand real estate speculation is usually far more protablethan investment in upgrading technology, developingnew products, or improving worker skills. As a result, this problem has severely diverted efforts of many enterprisesfrom activities that increase productivity and enhancecompetitiveness, which are critical for avoiding the middleincome trap.

FIGURE 2.37:SIZE DISTRIBUTIONOF FIRMS BYOWNERSHIP, 2008

Source: General StatisticsOffice of Vietnam;Calculations by CIEM

30.5

31.6

36.8

56.8

78.3

94.7

99.1

42.4

41.8

33.0

33.0

8.0

27.1

26.7

30.3

30.3

13.7

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

>=5000

1000-<5000

500-<1000

100-<500

20-<100

5-<20

Under 5 bil.

A s s e t S i z e

( B i l l i o n V N D

)

Private rms

SOEs

FDI

TABLE 2.10:NUMBER OF PROTECTEDTITLES GRANTED

Source: National Officeof Intellectual Property(NOIP).

Year Invention protection

Utility solution protection

Industrial design protection

Trademark protection

2001 783 26 376 3,6392002 743 47 377 5,200

2003 774 55 468 7,1502004 698 69 647 7,6002005 668 74 726 9,7602006 669 70 1,175 8,8402007 725 85 1,370 15,8602009 706 64 1,238 22,730



Technology and Innovation Development of Intellectual Property- Low level of protected intellectual property titles

Although inventions and utility solutions are central totechnology transfer transactions, there have been only fewtechnology sales and purchases associated with patents.Among all protected titles, trademark protection in Vietnamhas accounted for the highest proportion and also the fastestincrease in number for the past 10 years.

Te low number of protected titles indicates that technologygoods have yet to develop in Vietnam. Tis is due to thelack of cooperation between inventors and rms, onerous protection registration procedures and low effectiveness of patent protection regulations.

uality In astructure- Weak application and enforcement of quality standards

among enterprises

Much remains to be done with respect to upgradingthe quality standards of the manufacturing and serviceoperations in the country. Vietnam is lagging behind theregion in terms of the percentage of rms with internationallyrecognized quality certications. According to the WorldBank’s Enterprise Surveys, only 11.4 percent of the rmsmet this criterion, versus 22.4 percent for the region (2005).

AssessmentVietnam’s economic development pattern reects thestandard prole of a transitional economy on the catch-up path. It has been successful in achieving vigorous growthover the last two decades but the dynamism for furthersustainable growth is declining as cost pressures rise, whilenew competitive advantages have yet to be created.

Vietnam’s performance on intermediate indicatorsreects current strengths which are unsustainable and willcontribute little to creating future competitive advantages:

1. Capital deepening appears natural for a labor-intensiveeconomy. Te marginal productivity of capital should bemuch higher in a developing country like Vietnam wherecapital is scarce. However, in reality, capital has createdgrowth but has failed to improve overall productivity.Decreasing efficiency of investment indicates that fewnew capabilities are emerging.

2. Low value added in exports dominated by labor-intensive

goods is a sign that few if any additional capabilities areemerging. Linkages between the export sector and thelocal economy are undeveloped.

3. High diversication of markets but low diversicationof products suggests that Vietnam has some genericadvantages, such as low labor costs, but lacks strongmarket positions to capture value. Te Vietnameseeconomy does not yet participate effectively in the world’s most dynamic export markets.

4. Dependence on foreign investment is higher than thatof other countries at the same stage of development, butthe foreign sector has shallow roots in the local economy.Lack of entry by growth-oriented private companies andlow level of innovation in SOEs suggest that few, if any,domestic growth drivers are emerging.

5. Market distortions and resources misallocation areamong the major causes of Vietnam’s slow pace ofmoving up the technological ladder and low efficiency incapital investment.



Chapter References:Albaladejo, M. (2010). “Benchmarking Vietnam’s Industrial Competitive Performance”, background paper prepared by UNIDO

Vietnam Competitiveness Report 2010, Vienna, Austria.Ark, B. Van and M.P. immer (2003). “Asia’s Productivity and Potential: Te contribution of sectors and structural change,” http://w

eco.rug.nl medewerk/Ark/pdf/Asiapaper4.pdf Asia Competitiveness Institute (2009). Singapore Competitiveness Report 2009.

Bùi rinh (2010). “Assessment of Investment Efficiency,” unpublished monograph.DEPOCEN. Export Promotion Report 2009 – 2010.FIA. Report on Vietnam’s 20-year FDI Development.Fulbright Economics eaching Program (2008). “Te Structural Roots of Macroeconomic Instability.”General Statistics Office of Vietnam (2006). Household Living Standards Survey.General Statistics Office of Vietnam (2009). http://www.gso.gov.vn.International Labour Organization (2009). Employment rends Report 2009.Maddison, Angus (2001). Te World Economy: A Millennium Perspective, OECD Development Centre.Press Center (2010). “PM Underlines op Priorities for 2010”, http://www.presscenter.org.vn/en//images/PMmessage.pdf. Acces

October 6, 2010.Riedel, James (2009). “Growth Models in Hanoi.”S AR – Vietnam (2003). An Assessment of the Economic Impact of the US – Vietnam Bilateral rade Agreement, Annual Repo

2002, Hanoi, National Political Publisher.rade Competitiveness Map (2006). International rade Centre (I C), http://www.intracen.org/marketanalysis/tradecompetitivenessmap aspx.

United Nations Development Programme (2009). Human Development Report 2009.United Nations Environment Programme. Global Environment Outlook Data Portal. http://geodata.grid.unep.ch/results.php. World Bank (2005), Enterprise Surveys, http://www.enterprisesurveys.org. World Bank (2006). Vietnam Environment Monitor 2006 - Water uality in Vietnam with a focus on the Chau, Nhue-Day and D

Nai River Basins, http://go.worldbank.org/VHNN3QC0A0.

Endnotes1Poverty rate based on poverty line of GSO and WB with monthly average expenditure per capita of 216 thousand VND.2Te Government set the poverty line for 2006-2010 to be VND 200,000 of monthly expenditure per capita for rural areas and V220,000 for urban areas.3Industrial centres in Cau River Valley including Tai Nguyen, Bac Giang, Bac Ninh, Hai Duong, and Vinh Phuc Province.4In economics, total-factor productivity ( FP) is a variable which accounts for effects in total output not caused by the growtraditional inputs, labor and capital. FP comprises a range of factors, but the predominant driver is technological progress.5Preliminary population survey results in 2009.6Te comparable data for later years are not available.7“Te other” investment comes mostly from government bonds and accounted as off-budget expenditure.8In 2008, total social investment increased at 10.2 percent while state investment reduced by 15.7 percent compared to that inmainly due to the measures adopted to control the ination.9Te zone has been facing a delay in land clearance, construction of infrastructure and policy incentives.10Tis section used some analytical input and data provided by Dr. Manuel Albaladejo (UNIDO). See Albaladejo, M. 2010. ‘BenchmVietnam’s Industrial Competitive Performance’, background paper prepared by UNIDO for the Vietnam Competitiveness Report 2Vienna, Austria.11Tese gures should be interpreted with caution because they are used only for registration.



Vietnam’sCompetitivenessFoundations

Chapter 3



Following the diagnosis of the economic outcomes andintermediate indicators in Chapter 2, this chapter looks intothe underlying factors of competitiveness, offering greaterinsight into the drivers of those outcomes.

Prosperity drivers are the ultimate source of sustainedimprovements in the standard of living. Prosperitycan be inherited, or based on endowments; or created.Competitiveness is about created prosperity which is the

result of choices that determine the level of productivity.Te factors which raise productivity and competitivenesscan be classied into two broad categories. Macroeconomiccompetitiveness covers conditions that determine thecontext in which productivity improvements must take place.Tese are determined by government alone. Microeconomiccompetitiveness covers factors that have a direct impact on productivity; they depend on the interrelated choices ofmany public and private sector entities and institutionsfor collaboration. Figure 3.1, provides the analyticframework for competitiveness which includes all the abovedeterminants.

Natural Endowments

Geographic Location and Population Size- e country’s central location in Asia and its long coastline

are major advantages; but location and climate also exposethe population to natural disasters and disease

Vietnam’s central location in Asia and the country’s longcoastline offer major advantages for economic development. With a total area of 327,500 square kilometers, Vietnamborders China on the North, and Laos and Cambodia onthe West. Te coastline stretches 3,260 kilometer from Eastto South, bordered by the East Sea and the gulf of Tailand.Tese locational endowments provide potential advantagesin tourism, agriculture and sea trade. Unfortunately, thecountry so far has not utilized these potential advantagesefficiently, such as developing aggressively its seaportservices.

Vietnam has been the center of the Indochina region andthe bridge between China and other ASEAN countries–a clear advantage for regional economic cooperation.However, Vietnam has yet to reap the full benets of itseconomic geography. Neither the Mekong Delta economiccooperation nor the ASEAN-China regional and sub-regional cooperation have achieved their potential. Tereis therefore a need for a long-term strategy that will utilizeVietnam’s location to contribute to national competitiveness.

At the same time, coastal location and tropical climateexpose the country and its population to natural disastersand epidemics. At the Climate Conference in Copenhagen(2009), experts included Vietnam in the top ve countriesmost affected by global climate change. Tey stressed thatthe Red River Delta and the Mekong Delta are likely to be

the two most heavily hit areas. Te impact of global climatechange may be exacerbated by Vietnam’s socio-economicconditions as well as poor capability to ght climate change.

VIETNAM’SCOMPETITIVENESSFOUNDATIONS

FIGURE 3.1:COMPETITIVENESSFUNDAMENTALS Quality of the

Na onal

BusinessEnvironment

SocialInfrstructureand Poli calIns u ons

Quality of Macroeconomic

Policy

NaturalResources

GeographicLoca on

Size

Sophis ca onof Company

Opera ons andStrategy

State of Cluster

Development



TABLE 3.1:MACROECONOMICCOMPETITIVENESSOF VIETNAM ANDCOMPARISONCOUNTRIES, 2009

Vietnam has been one worst victims of climate change. For the past 50 years, the averagtemperature has risen 0.7 degree Celsius, while the average sea level has risen by 20 centimetEl Niño and La Niña are hitting the country harder than before. Floods and droughts areoccurring more frequently and at a more severe scale, directly affecting the health of the peopand the economy.

With its long coastline, Vietnam is considered highly vulnerable to climate change. In

2007, the World Bank projected that Vietnam, along with Egypt, Suriname, Bahamas andBangladesh, will be heavily affected by the rise of average sea level. According to the studythe World Bank on the impact of sea level rise on 84 coastal developing countries, if sea levrises by 1 meter, it can ood as much as 5 percent of the area of Vietnam and affect 11 perceof the country’s population, reducing GDP by 10 percent.

Source: Dasgupta et al. (2009)

BOX 3.1:IMPACT OF CLIMATECHANGE ON VIETNAM

In spite of the dangers of climate change, Vietnam canstill leverage its favorable location and large populationfor development. o date, these advantages have not been

fully exploited to increase the country’s competitiveness,especially with respect to agriculture, tourism and seaportservices advantages.

Natural Resources- Vietnam possesses rich deposits of natural assets, but

wasteful and irresponsible exploitation poses serious risks

Vietnam possesses plentiful natural resources, includingland, water, forest, mineral and tourism resources. Over 75 percent of Vietnam’s 33 million hectares of geographic area isagricultural land. Te country also possesses plentiful water

resources and a dense river network, offering opportunitiesto develop waterway traffic, hydropower and agricultural production.

Large mineral reserves in Vietnam include: coal; oil andgas; bauxite; and uranium. Vietnam has over six billion tonsof coal reserves, mainly in uang Ninh, Tai Nguyen. Oil

and gas reserves are estimated to be at three to four billionbarrels and 50 – 70 billion cubic meters respectively, mainlyin the sediments of deltas and continental shelf. Bauxitereserves are projected to be about 6 billion tons and couldbe over 8 billion tons while uranium reserves are estimatedat about 200 – 300 thousand tons.1 In addition, reserves offerrous metals (iron, manganese, titan); non-ferrous metals(aluminum, copper, gold, zinc, lead); non-metals (apatite, pyrite) are being exploited.

However, accelerated exploitation of natural resourcesis posing serious risks to preservation and sustainable

development of natural resources2

and is also to some extentdiscouraging innovation and investment to build up newcapabilities (instead of relying on natural endowments).

Vietnam Brunei Cambodia Indonesia Malaysia Philippines Singapore ailand China HongKong India

New GlobalCompetitivenessIndex (GCI)

82 34 115 57 37 104 3 55 42 13 77

MacroeconomicCompetitiveness(MACRO)

92 11 119 67 47 104 10 61 39 16 93

Socialinfrastructureand politicalinstitutions(SIPI)

72 34 102 60 45 115 7 68 53 16 67

MacroeconomicPolicy (MP) 110 5 120 77 59 87 58 52 23 9 113

Source: WEF GlobalExecutive OpinionSurvey, Institutefor Strategy andCompetitiveness,Harvard BusinessSchool.



TABLE 3.2:HEALTH CAREINDICATORS,2006-2009

TABLE 3.3:NET ENROLMENT INSECONDARY EDUCATIONBY SUBGROUPS (2006)

Macroeconomic competitiveness

Macroeconomic competitiveness captures the dimensionsthat set the overall context in which government agencies,companies, and other institutions make the choices thatultimately determine productivity. Macroeconomiccompetitiveness can be classied into two main categories.Social infrastructure and political institutions describethe basic setting in terms of education, health services,the rule of law, and policy making. Tese factors tend tochange only moderately over time and have a signicantlong-term impact. Macroeconomic policy describes themacroeconomic context of scal and monetary policy

as well as of macroeconomic volatility. Tese factors canchange more rapidly and tend to have a more short-termimpact. All categories of macroeconomic competitivenesstend to be controlled centrally by government. In 2009,Vietnam ranked 92nd on macroeconomic competitivenessin the Country Competitiveness Index (CCI) 20093, orin the 70th percentile of the countries covered. Vietnam’smacroeconomic competitiveness is higher than that of thePhilippines and Cambodia, but lower in comparison with

other ASEAN countries as well as with China and India.Vietnam’s indicator for Social Infrastructure and PoliticalInstitutions (SIPI) is at average level (ranked 72nd) which isnot far below that of higher income countries like Tailandand India. Tus, the main reason for low macroeconomiccompetitiveness lies in macroeconomic policy (ranked110th) primarily because of ination and scal policy.

Social Infrastructure and Political Institutions Basic Social ServicesHealthcare services and primary education are two crucialindicators of human development and always scorerelatively higher than other competitiveness indicators

for Vietnam. Nonetheless, Vietnam ranked only 85th onhuman development in the new CCI 2009. Tis is lowerthan the median rank.

- Primary education: Relatively high levels of enrollment and literacy for the country’s stage of development

Indicators 2006 2007 2008 2009Communes with health clinics (%) 97.5 98 98.2 100Communal health clinics withmedical doctors (%)

65.1 67.4 68 73

Number of hospital beds per 10,000 people

23.6 24.8 25.7 27

Maternal mortality rate against100,000 live cases (%)

80 78 75 70

Net enrolment ratio Area

Urban 88.8 Rural 76.1Income group

op 20% poorest 59.9 op 20% richest 91.5Ethnicity

Other 64.9

Kinh/Hoa 81.3 Overall 78.8

Source: MPI (2009).

Source: MICS.



TABLE 3.4:AVERAGE HEALTH

EXPENDITURE PER PATIENTBY SUBGROUPS (2006)

Vietnam’s performance on universal primary educationand literacy is relatively strong given its current stage ofdevelopment. Vietnam is among the countries that haveachieved the Millennium Development Goals and targetsrelated to primary education ahead of time. In 1990, the netenrollment rate of primary education was 87 percent, but by2006 the rate had increased to 95.96 percent and the targetof 99 percent is being put for the period of 2006 – 2010(www.mdgmonitor.org).

- Basic healthcare: Access to basic health care services broadlyin line with the stage of development

- However, access to services varies considerably amongdifferent groups of population and different regions

In education, inequality remains large in secondaryeducation, most notably by income, then by geography andnally by ethnic minorities.

Similarly, in health care, the level of inequality is also highfrom basic to higher quality of health care services. Althoughhealth care at the grassroots level, like medical stations at thelevel of the commune or ward, has been available nationwide,the service quality and infrastructure are frequently poor,especially in rural areas and lower-income provinces. Tisfact results in even a higher inequality in accessing to goodhealth care services due to ability to pay and geographicalbarrier.

- e share of in estment for education and health care inthe state budget is relatively high, but remains small in

absolute terms, while private sector nancing is not fullymobilized

Te policy of socializing education and health care whichhas been carried out since the 1990s to mobilize privateinvestment into these two areas has had little effect becauseof their public service nature and the entry barriers for

participation by the private sector. Terefore, expenditureson education and health care are rising in total householdspending.

During the last three years, the share of education andtraining has increased to 20 percent of the total state budget.Over the period 2005-2009, budget spending for educationincreased most rapidly, at an average annual rate of 22.6 percent, amounting to VND 359,687 billion (USD 18billion) for the whole period—2.23 times higher than thespending level during 1998–2004. Te budget for highereducation accounts for only 10–12 percent of the entirebudget for education. Besides the state budget, investmentfor education is supported by official developmentassistance (ODA) and tuition fees. o date, only four foreignuniversities have been licensed, but only one university sofar started operations. Te total registered capital of thefour universities is USD 68.9 million – ve times higherthan the total state investment for xed capital formation of

public universities in 2008 (National Assembly’s StandingCommittee 2010).

At present, Vietnam’s human development indicators in thenew CCI 2009 are similar to Indonesia’s. Tey are higherthan those of Cambodia, India, and the Philippines but farbelow that of China (ranked 66th), Malaysia (ranked 52nd),and Tailand (ranked 70th) which are developing economiesto escape from the middle-income trap. In fact, Vietnamfaces a serious shortage of high quality human resources amajor obstacle to productivity growth. If Vietnam were tobe satised with its achievements on basic human capacity

indicators, it would hardly move beyond the current leveland climb the competitiveness ladder.

1,000 VND Area

Urban 811.5 Rural 520.3Income group

op 20% poorest 171.8 op 20% richest 1,244.6Ethnicity

Kinh 643.1 H’mong 120.0 Others 160.7

Source: V HLSS 2006.GSO.



FIGURE 3.2:RULE OF LAWRANKINGS–VIETNAMAND COMPARISONCOUNTRIES, NEW CCI2009

FIGURE 3.3:PERFORMANCE

ON REGULATORYQUALITY–VIETNAMAND COMPARISONCOUNTRIES

Rule of Law- e quality of laws on the books is relatively good given

Vietnam’s stage of development, but effectiveness inimplementation is low

Over the past decade, Vietnam’s legal system has improvedremarkably through the government’s effort to rene themarket economic institutions resulting in higher position inrule of law indicators. In 2009, Vietnam ranked 73rd on ruleof law, or in the 55th percentile of the countries covered inthe new CCI 2009.

Priorities are to complete the legal framework for protectionof property rights, to improve the business environment,to reform administrative systems, to strengthen factor andcommodity markets, to protect natural resources, and toensure social security. Since 2002, many legal documentshave been issued and implemented4. Te quality of legalregulations has improved and this is reected by the factthat the efficiency of Vietnam’s legal framework was ranked

53rd in the new CCI 2009. Te issuance of numerouslegal documents, which is a typical feature of the transitionfrom central planning to market economy, has placed great pressure on the implementation stage, especially when thecodes and documents are still inconsistent. Meanwhile, policy implementation at the ministerial, sectoral andlocal levels is lagging, making it difficult for citizens andenterprises to fully benet from the provisions of the laws.

Another piece to the puzzle is the performance of Vietnamand its peer countries on the World Bank Institute’s (WBI)governance indicator of “regulatory quality” which iscomprised of six components. Te results suggest that

Vietnam lags behind selected Asian peers (Figure 3.3). Teindicator for Vietnam tracks that for China which is alsobelow the median, but closer. Te other three comparatorcountries, Malaysia, Tailand and South Korea, are abovethe median performance for all the countries included inthe ranking.

121416181

101121141

Reliabli ty of police services(Low) Business costs of crime

and violence

(Low impact of) Origanized Crime

Judicial independence

Efficiency of legal framework

Property rights

(Low occurrence of) Diversionof public funds

(Low occurrence of) Irregularpayments by rms

(Low) Business costs ofcorrup on

Ethical behavior of rms

Control of Corrup on (WB)

Rule of Law (WB)

Singapore

China

Thailand

Vietnam

Cambodia

Source: WEF GlobalExecutive Opinion Survey,Institute for Strategy andCompetitiveness, HarvardBusiness School.

Note: Values for 1997,1999 and 2001 have beeninterpolated.

Source: World Bank Institute,Global Governance Indicators;calculations by CIEM.

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

Malaysia

Thailand

China

Vietnam

C o m p o s t e m e a s u r e o

f r e g u

l a t o r y q u a

l i t y



FIGURE 3.6:VOICE ANDACCOUNTABILITY–VIETNAM ANDCOMPARISONCOUNTRIES, 2008

Political Institutions- A high level of political stability

Both the Country Competitiveness Index (CCI) usingdata from the WEF Global Executive Opinion Surveyand the World Bank’s Worldwide Governance Indicatorsrank Vietnam highly on political stability (according tothe latter, Vietnam is only behind Singapore and far aboveother countries in the region, including China). In thisregard, Vietnam is much more stable than peer countries inthe region which is an important advantage for Vietnam toattract investment and boost its competitiveness.

- Moderate efficiency of the political system

Indicators on the efficiency of Vietnam’s political systemreceive moderate rankings in the CCI; for example:transparency of policy making—45th in 2009 (from 32ndin 2008); wastefulness in government spending—37th;favoritism in government decisions – 34th.

- A high level of decentralization is one of the factors leadingto dispersed power across different parts of go ernments and regions; there are major differences in the applicationof policies and regulations

Vietnam’s decentralization of policymaking is ratedrelatively highly (ranked 25th in the CCI 2009). In Vietnam,the supply of education, health care and environmentservices has been decentralized to localities since the startof economic transition period. For issues like investmentapprovals, this policy was carried out step by step, startingin the 1990s and accelerating in 2001. However, in the process of decentralization, little thought was given tonancial capability and resources at the local level. Centralmonitoring and evaluation were inadequate, resulting inlow efficiency in distributing and using resources, especiallyin terms capital and land resources. Te decentralization

efforts have also given rise to the uneven implementation ofrules and regulations among provinces, especially regardinglicensing and land management. An example of variableapplication of rules and regulations is in the provision ofincentives beyond the national laws on foreign investment

attraction. In addition to the investment incentives permitted by the central government, local governments

o en provide extra incentives, ranging from investment premiums and accelerated depreciation to tax holidays andreductions of land use fees. Out of 48 provinces surveyedby the Ministry of Finance (MOF) in 2006, 32 provincesissued extralegal documents granting extra incentives toinvestment projects. Most of the incentives are related to landor taxation. Te Ministry of Finance reported that amongthose 32 rule breakers, 18 violated budget regulations, 21offered land incentives that go beyond the frameworkestablished by national land policy, and 11 broke corporateincome tax regulations. Many provinces were found to have violations in more than two areas. Most provinces offered very generous incentives with respect to land use fees andextended the exemption period for up to 10 to 20 years (VuTanh et al. 2007).

A high decentralization indicator for Vietnam does notnecessarily mean good political institutions. Tis issuerepresents another weak point of Vietnam that couldhave negative effects on the improvement of Vietnam’smacroeconomic competitiveness indicators.

- Weaknesses in “ oice and accountability”

Te ranking on “voice and accountability” in the WorldBank’s Worldwide Governance Indicators constitutes oneof Vietnam’s weak points. Its citizens are used to “obeying”administrative orders of the government at various levels.Similarly, administrative accountability is still weak and hasnot satised the public demand. Although the regulation5 of democracy at grassroots level came into force since 1998, public participation was not effective and active, while thegovernment has not encouraged and promoted popular policy participation. Until now there is still a lack ofeffective sanctions to deal with cases in which accountability

was not carried out or was carried out ineffectively at eachlevel in the administrative system. Te World Bank’s Voiceand Accountability index ranks Vietnam only slightly aboveChina and far behind nearly all peer countries.

Source: World Bank Worldwide GovernanceIndicators, 2008.

60.6

44.2

41.3

35.1

32.2

31.7

22.6

6.7

5.8

0 10 20 30 40 50 60 70

Hong Kong

Indonesia

Philippines

Singapore

Thailand

Malaysia

Cambodia

Vietnam

China

Percen le Rank



Policy Making in Vietnam

Policy InstrumentsTe instruments of economic policy in Vietnam comprisethe following:

• Overarching national ten-year socio-economicdevelopment strategies and national ve-year socio-

economic development plans;• Legal normative documents (LNDs), such as

National Assembly’s laws, ordinances and resolutions,Government’s decrees and resolutions, Prime Minister’sdecisions, Ministries’ circulars; and

• Non-normative policy instruments such as strategiesor master plans of specic sectors, industries or regions which are ratied by Prime Minister’s or regions’administrative decisions or Ministries’ official letters.

Policy Making Procedures and Organization While there is clear guidance on procedures for issuinglegal normative documents (LNDs) under the Law onPromulgation of LNDs (Law on Laws), procedures forissuing other non-normative documents are not yet denedclearly and remain discretionary.

- Under the Law on Laws, the process of developingand issuing LNDs is summarized as follows: A focalMinistry in charge of the specic policy area proposesthe development and issuance of a LND. Tat Ministryestablishes a dra ing committee to review existing

relevant policies and regulations, conduct a RegulatoryImpact Assessment (RIA); dra the policy or regulationand share it with other government agencies and related parties for review and consultation. Upon completionof the consultation process, the Ministry in chargesubmits the dra to the Ministry of Justice for appraisalin terms of necessity, relevance, appropriateness, legalityand compatibility of the dra . Once the Ministry of Justice approves, the dra is then be submitted to theGovernment for review and ratication. Depending onthe legal nature of the policy instrument, it will then besubmitted for debate, approval and promulgation by thePrime Minister or the National Assembly.

- Other non-normative policy instruments do not have tocomply with any specic legal procedures, and thereforetheir promulgation remains discretionary. In theory, theissuance of non-normative documents should followsimilar procedures as for the LNDs, except that the dra s will not have to be submitted to the Ministry of Justicefor appraisal or to the National Assembly for debate andapproval. Depending on the legal nature of the policyinstrument, it will be promulgated by the dra ing agency(such as a Ministry or a provincial government) or by thePrime Minister.

Shortcomings of the Current System

Te current process raises a number of issues:

• A protracted and inexible process: It takes in averageabout two years to issue a new law, ordinance, or add oramend a current one;

• Irrelevance and vagueness of the policy: Policies in manycases are too general, vague and unclear, and o en do notrespond to social and market requirements;

• Procedural deciencies: A systematic mechanism(criteria, process and organization) for evaluatingand verifying the content of the policy is lacking. Teassessment process usually takes a deeper look into thelegal aspect of the document; rather than into the socio-economic and technical dimension of the policy orregulation;

• Lack of vision, focus and prioritization in making policies, especially at provincial levels;

• Inconsistency, overlap and even conict among different policies and regulations; lack of connection betweenshort term plans and long term strategies;

• Discretion and lack of transparency in interpretationand application of policies; and

• Low effectiveness in implementation and enforcementof policies.

Root Causes of Shortcomings6

Vietnam’s system of policy formulation is saddled withthe legacies of planning days, and cannot cope effectively with problems in the age of global competition. Te main procedural and organizational problems are interrelated andconstitute the main sources of formalism and the generallack of creativity and responsiveness in policy making.

(i) Te involvement of the private sector and other affectedgroups in designing and executing policies remainsinadequate

Te policy making process in Vietnam is closed within thegovernment with little involvement of other stakeholders.Te dra ing team is usually lightly staffed and has limitedbudgetary resources mainly for securing external data andanalyses as well as organizing interviews and hearings.Although the dra policy is circulated for comments andreview, comments are rarely substantive, and debates onfundamental directions or crucial issues rarely take place.Signicant delay may occur at internal review or nalapproval. Te dra ing team is routinely overworked with alarge number of policy documents to nish each year, whichdoes not allow sufficient time (or money) to think creatively,

interact with non-government stakeholders, or publicize thenal result. If a domestic or foreign rm wants to raise its voice, it must devise its own way since the current proceduredoes not allow meaningful involvement of the businesscommunity.



Although public consultations are becoming more popularin recent years, an effective mechanism to follow-up onhow comments are taken into the dra is missing. Inother East Asian countries, private sector participationis institutionalized; private sector representatives serveas members of the steering committee and task forces indra ing the policy, or the private sector is involved heavilyin deciding targets and action plans.

(ii) Inter-ministerial coordination on policy substance as well as implementation details is poor primarily becausemechanisms are lacking to encourage different Ministriesto work together.

Compartmentalization of the government along Ministeriallines is a common problem around the world, but mostgovernments manage to somehow ameliorate it. Onesolution is to have a strong top leader with a good economicmindset who directs various ministries and becomes thehub of policy making him or herself. Another way is toestablish a powerful team of technocrats directly servingthe president or the prime minister who makes key policydecisions while Ministries become executing agents of the plans emanating from this team; South Korea’s EconomicPlanning Board, 1961-1994, exemplies this option. Stillanother way is to let a super Ministry, with sufficient policyauthority and instruments at its disposal, lead policy makingand be responsible for it—Japan’s Ministry of International

rade and Industry in the 1960s. Finally, it is also possibleto install a mechanism to guarantee the representation of allrelevant ministries and nongovernment stakeholders in the

official dra ing process as well as in informal exchange—Malaysia’s dra ing of the Industrial Master Plan at present.In Vietnam, though all policy documents specify a leadingMinistry and a list of related Ministries, the mechanism tomake them participate substantively and work as one is stillmissing.

(iii)Lack of accountability:

Vietnam’s decision making tends to be based on consensus.Tis system can produce stability and continuity but it is notsuitable for staging bold reforms or responding quickly to a

changing world. Policies remain mostly reactive rather than pro-active. When a serious problem is identied, an inter-ministerial committee is called and its chair is appointed.Each Ministry proposes solutions from its perspective, which are summarized into general policy recommendations without execution details. Bureaucracy can supply broadideas touching every aspect of the problem, but it does notset priorities or provide selectivity for real action. Tereshould be an interaction between the high level and theimplementing level of the government to produce policiesthat are both realistic and sharply focused.

(iv)An inadequate civil service system tends is prompting anexodus of talented people to other sectors.

Vietnam’s public service must overcome the problems ofoverstaffing, low salary, nepotism, corruption, relation-

based promotion, and ODA-related benets (foreign travel,training, benets associated with supervising aid projects,etc.). Tese were the legacies of the subsidy system existingup to the 1980s, where the public sector was the provider of jobs, minimum income and social security for all and whereno alternative employment opportunities were available inthe private or foreign sectors with far more attractive salariesand rewarding duties. Under the present circumstanceof market orientation and global integration, the publicsector only attracts people who want stability, people whogenuinely believe in the importance of public service, or people who want to take advantage of official privilegesto study abroad or receive training as a stepping stone to abetter-paying job in the future. As a result, highly qualiedand motivated people are becoming difficult to recruit orretain for public service.

Minor repairs or ad hoc adjustments cannot solve these problems. o reverse the hollowing-out of the Vietnamese

government, far reaching reforms to remake the publicadministration completely are needed as soon as possible which will be discussed in more details in Chapter 4.

Macroeconomic Policy Overall Macroeconomic PerformanceFollowing a period of macroeconomic stability,7 themacroeconomic conditions have turned volatile since2007. Te success of the economy, and especially investors’optimism about the country’s W O accession, hasencouraged inows of foreign investment pouring intoVietnam. Te unprecedented increase of capital inows, while both the economy and macroeconomic management were not ready, triggered the most serious macroeconomicinstability since the “price-wage-money crisis” in the secondhalf of the 1980s. Vietnam experienced macroeconomicinstability during 2007-2008 before the eruption of theglobal nancial crisis; the principal culprits were internal,not external factors. able 3.5 provides a summary ofVietnam’s macroeconomic conditions during 2004-2009.

Fiscal Policy- Increasing and persistent budget decits result in a

narrower scal space

Vietnam’s scal decit, including both on-budget and off-budget, had been moderate at 3 to 4 percent of GDP until2006, however since 2007 it has risen to the 7 to 7.4 percentrange. Te limited scal space has narrowed further becauseof the ambitious stimulus package amounting to about 9 percent of GDP passed in 2009 in the wake of the globalnancial crisis.



TABLE 3.5:MACROECONOMICINDICATORS FORVIETNAM ANDCOMPARISONCOUNTRIES (2004-2009)

FIGURE 3.7:VIETNAM VS.

ASIAN PEERS ONMACROECONOMICINDICATORS–BUDGETBALANCE, 2005-2010

Vietnam China Indonesia Malaysia Philippines ailand

Fiscal Policy (% GDP)

Overall scal balance -5.8 -0.9 -0.9 -4.3 -2.1 -1.1

Fiscal revenue 26.8 18.4 17.9 21.6 15.5 18.3

Gross capital formation 36.2 40 22.6 22.2 17.7 22.3

Public debt 46.9 20.1 39.1 43.8 64.7 43.8

Monetary Policy (% per year)

Growth of money supply M2 32.2 19.4 14.5 15.1 12.3 7

Growth of domestic credit 37 15.7 12.4 8.1 7.1 4.4

Balance of Payment

Current account balance (% GDP) -5.7 7.7 1.4 15.5 3.5 2.2

Net FDI (% GDP) 6.8 3 1.6 3.4 1.6 3.8

FX Reserves (months of imports) 3.5 18.9 7.9 7.9 6.9 7.5

GDP Growth and Ination (%)

GDP growth 7.4 11.1 5.5 4.5 4.7 3.5

Consumer price index (CPI) 10.2 2.9 8.4 2.7 5.8 3.1

Note: Data for 2010 areestimates.

Source: EconomistIntelligence Unit.

Note: Figures are averagesfor the period 2004-2009.


- Public debt has increased rapidly over the last decade

By the denition of the Ministry of Finance (MOF),8 Vietnam’s total public debt by the end of 2009 was about44.7 percent of GDP, of which the central government debt was 35.4 percent of GDP, debt guaranteed by the centralgovernment was 7.9 percent of GDP, and local governmentdebt was 1.4 percent of GDP.9 Although this level of publicdebt is not a cause of concern, it is higher than the commonlevel of 30 – 40 percent in other developing and emergingeconomies. On a per capita basis, Vietnam’s public debt rosenearly four times, from USD 144 to USD 548, during the2001 – 2009 period, or 18 percent annually (EIU), whileGDP per capita growth was only 6 percent during the same period.

Tis coupled with the increasing scal decit may jeopardizesustainable debt management; particularly since Vietnam’ssovereign debt rating has been downgraded by all ratingagencies ( able 3.6). As a fast growing economy, Vietnamstill needs to invest heavily to build up infrastructure and provide public services, while the domestic investment –saving gap tends to widen very quickly, from 6 percent ofGDP in the mid-2000 to 15 percent of GDP by 2009. Tisimplies that the country’s public debt will keep rising.10

-0.8%

-4.5%

-0.8%

-4.4%

-1.7%

0.7%

-1.3%

-5.8%

-2.2%

-5.5%

-1.5%

-5.6%

-3.9%

-0.7%

-2.2%

-7.0%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

C h i n a

I n d i a

I n d o n e s i a

M a l a y s i a

P h i l i p p i n e s

S i n g a p o r e

T h a i l a n

d

V i e t n a m

C h i n a

I n d i a

I n d o n e s i a

M a l a y s i a


S i n g a p o r e

T h a i l a n

d

V i e t n a m

B u

d g e t B a l a n c e

( % o

f G D P

)

2005-2009 2010



Higher interest rates increase the cost of nancing the publicdebt. Te demand for money in Vietnam has always beenhigh in order to nance growth, leading to high ination(Figure 3.8) and interest rates. As a consequence, the yieldof government bonds in 2010 has been as high as 11-12 percent, while the equivalent yield in Malaysia, Tailand,or China is less than 3 percent. Similarly, compared toIndonesia or the Philippines, Vietnam had to pay a higher premium for its sovereign bonds issued in early 2010. Inaddition, now that Vietnam has moved out of the low-income status, preferential loans will gradually be replacedby commercial loans with much higher interest rates.11

- High but structurally unsustainable scal revenue levels

Te government’s scal revenue has increased from 13 percent of GDP in 1991 to nearly 30 percent of GDPin 2009. able 3.5 shows that Vietnam had the highestscal revenue as a percentage of GDP during the 2004 –2009 period vis-à-vis countries in the region.12 Te publicsector has consistently expanded its size relative to the

economy, not only in the provision of public services suchas administration, education, or healthcare, but also ineconomic activities, especially by investing heavily intogeneral corporations (GCs) and state conglomerates (SCs).

By 2008, which is the most recent year for which statebudget data are publicly available, about three quartersof scal revenue come from four sources: value-added tax(VA ), corporate income tax (CI ), crude oil and foreign-trade related taxes (mostly tariffs and excise tax on imports).Revenues from VA and form CI have increased overthe years and accounted for 25 percent and 15 percent ofscal revenues in 2008 respectively. Te contribution of

the other two sources, oil revenue and trade related taxes which accounted for 20 percent and 15 percent in 2008respectively, is expected to decline due to declining oilreserves and the process of trade liberalization following W O accession.

FIGURE 3.8:

VIETNAM VS.ASIAN PEERS ONMACROECONOMICINDICATORS–INFLATION, 2005-2010

TABLE 3.6:SOVEREIGN CREDITRATINGS, VIETNAMVS. ASIAN PEERS

Note: Data for 2010 areestimates.


Country S&P Moody’s Fitch

2008* 2010** Change 2008* 2010** Change 2008* 2010** Change

Vietnam BB/Stable BB/Negative Worse Ba3/Positive Ba3/Negative Worse BB-/Stable B+/Stable Worse

China A/Positive A+/Stable Better A1/Stable A1/Stable Unchanged A+/Stable A+/Stable Unchanged

Indonesia BB-/Stable BB/Positive Better Ba3/Stable Ba2/Positive Better BB-/

PositiveBB+/Stable Better

Malaysia A-/Positive A-/Stable Worse A3/Stable A3/Stable Unchanged A-/Stable A-/Stable UnchangedPhilippines BB-/Stable BB-/Stable Unchanged B1/Stable Ba3/Stable Better BB/Stable BB/Stable Unchanged

Singapore AAA/Stable AAA/Stable Unchanged Aaa/Stable Aaa/Stable UnchangedAAA/

StableAAA/Stable Unchanged

Tailand BBB+/Stable

BBB+/Negative Worse Baa1/Stable Baa1/Stable UnchangedBBB+/

StableBBB/Stable Worse

Notes: * as of January 10,2008; ** as of November6, 2010.

Sources: Data fromADB Asia BondOnline (http://asianbondsonline.adb.org/)

2.7%

7.2%

8.9%

2.9%

5.8%

2.1%

3.2%

10.8%

3.0%

11.7%

5.2%

1.8%

4.2%

2.6%3.3%

8.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

C h i n a

I n d i a

I n d o n e s i a

M a l a y s i a


S i n g a p o r e

T h a i l a n

d

V i e t n a m

C h i n a

I n d i a

I n d o n e s i a

M a l a y s i a


S i n g a p o r e

T h a i l a n

d

V i e t n a m

I n a o n

( % )

2005-2009 2010



- Large but inefficient capital spending

able 3.7 suggests that the share of development investmentexpenditure has declined slightly from 2005 to 2008, butremains high. Capital spending accounted for over 91 percent of development investment in 2008.

In an economy like Vietnam, the ability to use scarce capitalefficiently to create new jobs and build up industrial capacityis essential for improving competitiveness. However, asdiscussed earlier, large but inefficient investment exerts pressures on the price level and imposes constraints onmonetary policy, as the 2007–2008 slump showed.

Monetary Policy - An expansionary monetary policy and growing credit

supply

Vietnam has generally adopted an expansionary monetary policy throughout the last decade. During the period 2004– 2009, the average growth rate of credit and money supply(M2) were 37 percent and 32 percent respectively ( able3.5). Tese growth rates were almost twice as high as thoseof China, which was the most overheating economy in the2000s. Te rationale behind this expansionary policy was toaccommodate an expansionary scal policy, and to satisfythe investment needs of a growing economy. Te upside ofthis policy is that it produced a relatively high growth rateof 7.3 percent during the period of 2000 – 2009. Te downside of it, however, is that growth was achieved at the cost ofincreasingly serious macroeconomic imbalances.

As noted earlier, macroeconomic instability predated theglobal nancial crisis. Te major trigger of the two-digitination in 2007-2008 was the sharp increase in capital

inows while the economy was functioning inefficiently.13

Since these massive capital inows were not properlysterilized, they resulted in the record growth rate of moneysupply, credit and investment, in which a lion’s share wasallocated to inefficient state enterprises and speculative

markets (real estate and equity). When too much money ischasing too few goods, ination is inevitable. Specically,during 2007 – 2008 the money supply increased by 80 percent while GDP grew by only 15 percent, and inationat some point was as high as 28 percent.14

By the second quarter of 2008, the government became very determined to give priority to taming ination,achieving macroeconomic stability, mitigating negativesocial impacts, and ensuring sustainable development bytightening monetary policy. Te growth rate of credit and

money supply was cut from 55 and 35 percent in the rsthalf of 2008 to 33 and 20 percent respectively in the secondhalf of 2008.15 As a result, CPI then fell to a single-digit levelin early 2009.

- e current account decit has created signicantdepreciation pressures

Any gap between official and unofficial exchange rates isa reliable indicator for the government’s macroeconomicmanagement. In Vietnam, the unofficial rate is always higherthan the official rate by a signicant margin (Figure 3.9). In

2009, the unofficial rate rose substantially above the upperbound dictated by the State Bank of Vietnam.

TABLE 3.7:STRUCTURE OF BUDGETEXPENDITURE (INPERCENT)

Notes: 2008 data is for therst three quarters.

Source: Vietnam’sMinistry of Finance.

2005 2008Total 100 100Development Investment 30.2 27.5 Of which: capital spending 27.7 25.2Social and economic services 50.4 52.3 Of which:

Education and training 10.9 12.9 Healthcare 2.9 4 Science, technology and environment 1 1.6 Pension and social relief 6.8 10.2 Other 28.8 23.7 Additional to nance reserve fund 0 0Others 19.5 20.2



FIGURE 3.10:VIETNAM VS.ASIAN PEERS ONMACROECONOMICINDICATORS–TRADE BALANCE,2005-2010

FIGURE 3.9:USD/VNDEXCHANGERATES,2007–2010

Source: EconomistIntelligence Unit

Note: Unlabeled linesare the upper and lowerbounds.

Source: Global FinancialData and State Bank ofVietnam.

Several factors contribute to this strain in the foreignexchange market. First, high ination during 2007–2008led to further appreciation of the already overvalued dongby about 20 percent compared to the beginning of 2007.16 Second, the balance of payments shi ed from a big surplusin 2007 (USD 10.2 billion) to a large decit (USD -5.7billion) in the rst three quarters of 2009 ( able 3.8 andFigure 3.10), putting further pressure on the dong.

Tere were two main reasons for this balance of paymentdecit. First, the trade decit increased sharply, becauseof currency appreciation and the ambitious stimulusmeasures led to higher imports. Second, throughout 2009the government’s stimulus program provided a 4-percentinterest rate subsidy for short-term borrowings in VND toeligible rms to support their working capital. Tis policyled to a surge in money and credit supply. At the same time,high interest rates for USD and gold deposits, together withthe expectation of VND depreciation, encouraged rms and people to shi their portfolio by hoarding USD and goldinstead of VND. Tis caused the “errors and omissions” itemin the balance of payment to go up to USD 9 billion in therst three quarters of 2009 and USD 13 billion in the whole year.

In summary, the xed exchange rate maintained throughoutmost of 2009 together with the depreciation pressure on thedong had resulted in a widening gap between the officialand the unofficial exchange rates. On the one hand, thesefactors caused a surge in the trade decit to USD 12 billion.One the other hand, the portfolio shi towards USD andgold also signicantly contributed to a very high balance of payment decit, estimated to be USD 13 billion. Foreignexchange reserves fell sharply from 4.6 months of importsby the end of 2007 to less than 3.0 months of imports bythe end of 2009. Tis level of reserves was much lower thanthat of other countries in the region (Figure 3.11). Tis putthe SBV in a very difficult situation to manage monetary policy and maintain the market condence, especially when

the “twin decits,” scal and current account decit, stillexist, and the uncertainty in global nancial markets anddownside risks regarding the world economy remain.17

Facing the increasing pressure on the foreign exchangemarket throughout 2009, the government devalued thedong twice, the rst time by 5.0 percent in November 2009,and the second time by 3.3 percent in February 2010.18 Asa result, the foreign exchange market was cooling downand the unofficial rate was converging towards the officialrate. However, since mid-July 2010, the two exchange rates

15,250

15,750

16,250

16,750

17,250

17,750

18,25018,750

19,250

19,750

August-07 August-08 August-09 August-10

V N D / U S D

Official Rate Unofficial Rate

7.2%

-7.3%

6.6%

22.4%

-6/5%

22.9%

7.6%

-9.4%

3.6%

-8.0%

5.1%

18.4%

-5.8%

19.4%

11.2%

-11.2%

-30%

-20%

-10%

0%

10%

20%

30%

40%

C h i n a

I n d i a

I n d o n e s i a

M a l a y s i a


S i n g a p o r e

T h a i l a n

d

V i e t n a m

C h i n a

I n d i a

I n d o n e s i a

M a l a y s i a


S i n g a p o r e

T h a i l a n

d

V i e t n a m

T r a d e B a l a n c e

( % o

f G D P

)

2005-2009 2010



started to diverge, once again because of the return of tradedecit (approximately USD 1 billion per month) together with the recovery of the economy. Te reality is that themassive inows of foreign capital had saved Vietnam fromthe risk of a currency crisis. Capital ow reversals would bedetrimental to the economy. Attracting and maintainingFDI will still play a key role in Vietnam’s development policy in the future.

Assessment of Macroeconomic Management Vietnam lacks a coherent and holistic framework formacroeconomic management. Policies are designed andundertaken with little linkages and coordination. Monetary policy is either reactive and non-market driven—forexample, imposing administrative price controls to curbination—or inconsistent and unpredictable—such as

exchange or interest rates. Fiscal policy requires moretransparency and discipline to balance government revenuesand expenditures in a way that is consistent with a long-termbudget constraint of the public sector. Monetary and scal policies are not consistently and effectively coordinated.Policy measures o en address the symptoms, not the rootcauses of the problems. Macroeconomic management is noteffective in preventing the build-up of unsustainable bubblesin the economy, for example in the real estate, credit, orequity markets, and strengthening the soundness of thenancial market and institutions.

Te State Bank of Vietnam is not fully equipped andempowered to play the role of an independent central bank.Its capacity in institutional surveillance and risk managementremains weak. In addition, availability and transparency ofinformation, such as scal position of the country or SOEs,

credit rating of nancial institutions, are limited.

In summary, Vietnam has followed an investment-ledgrowth strategy but much of the investment—especiallyof the SOEs—has been inefficient. Te economy faces aconstant pressure to maintain a fairly high growth rate tocreate employment for a young and growing population.Te government has pursued an expansionary scal andmonetary policy in most of the 2000s to support growth,leading to scal decit, ination and other macroeconomicimbalances.

In addition, the shallow value-added of the economy hascreated persistent trade decits. High ination and major“twin decits” put the dong under constant devaluation pressure. Vietnam has fallen into a dilemma, which is pushing for high economic growth risks macroeconomicinstability. Unless the economy’s efficiency is improved,starting with public investment, it will be very difficult forthe country to maintain a sufficiently high growth rate for asufficiently long period of time to escape the middle incometrap.


Business Environment uality Given the macroeconomic framework, the productivityof rms depends upon a set of interlinked microeconomicfactors which underpin the business environment. Tebusiness environment sets the stage (and incentives) forcompany strategy and operations and shapes interactionbetween rms. As rms respond, they in turn triggerchanges in the business environment. Microeconomic

TABLE 3.8:BALANCE OFPAYMENTS INMILLION USD,2006-2009

2006 2007 2008 2009(E)Current account balance -164 -6,992 -10,787 -7,440 rade balance -2,776 -10,360 -12,782 -8,306

Investment income (net) -1,429 -2,168 -4,401 -4,532 Remittances 3,800 6,180 6,804 6,018

Others 241 -644 -408 -620 Financial account balance 3,088 17,540 12,341 11,452 Official 1,025 2,045 992 4,473 Private (FDI, portfolio investment, trade

credit)13,598 12,872 10,672 7,284

Net nancial assets of commercial banks -1,535 2,623 677 -305Errors and omissions 1,398 -349 -1,081 -12,178Overall balance 4,322 10,199 473 -8,166Memorandum items Gross official reserves (excluding governmentdeposits)2

11,491 20,964 23,022 14,148

Current account balance ( in percent ofGDP)3

0 -10 -12 -8

rade balance (in percent of GDP)3 -5 -15 -14 -9GDP (in millions of U.S. dollars) 60,933 71,111 90,274 93,164

Notes: 1/ Includes thesovereign bond issuanceof USD750 million in2005 and USD 1 billionin 2010; 2/ Data for 2009

include the SDR allocationof SDR 267.1 million; 3/Data for 2009 include goldre-exports.

Source: IMF Article IVConsultation (2010)



TABLE 3.9:INFRASTRUCTUREINVESTMENTS INVIETNAM, 2000AND 2006

2000 2006GDP (billion USD) 31.2 61.0Infrastructure investment (billion USD) 2.6 6.5Public infrastructure investment (billion USD) 2.4 4.8Infrastructure investment/GDP (%) 8% 11%Public infrastructure investment/ otal infrastructure investment (%) 94% 74%

Source: InfrastructureChallenges in Vietnam,Fulbright Economic eachingProgram, 2008.

FIGURE 3.11:FOREIGNEXCHANGERESERVES INMONTHS OFIMPORTS, 2007

VS. 2009

12

54

55 4

34

5

18

87

6 65

4 43

2

0

4

8

12

16

20

C h i n a

T h a i l a n

d


M a l a y s i a

S i n g a p o r e

I n d o n e s i a

C a m

b o

d i a

L a o

V i e t n a m

2007 2009 June/2010

M o n t h s o

f i m p o r t

competitiveness is therefore the result of a complexinterplay of the decisions of public and private actors.Effective strategies for upgrading competitiveness requirean understanding of these interactions and their impact oninnovation and productivity.

Professor Michael Porter’s ‘Diamond’ framework seeks tocapture the interactions that determine competitiveness atthe microeconomic level (Porter 1990). Te four corners ofthe diamond describe the four dimensions of the businessenvironment for a country, region or cluster. Te fourdimensions are: factor input conditions, the context for thestrategy and rivalry among companies, demand conditionsand the presence of related and supporting industries.

Factor Input Conditions

Physical In astructure- Signicant in estments over the last few years have created

basic physical connectivity

In recent years, the Government has increased investment inthe North-South highway system and in the improvement of

inner city roads, especially for large cities such as Hanoi andHo Chi Minh City. Vietnam’s investment in infrastructurehas been high, amounting to over 10 percent of GDP. Tisis a higher percentage than that for Tailand and China which currently spend between 7 – 8 percent of GDP –more in line with World Bank recommendations (FulbrightEconomic eaching Program 2008, 3).Public investmenthas been the major source of nancing, contributingalmost three quarters of the total infrastructure investment. While any developing economy like Vietnam requireshigh infrastructure investment, efficiency and impact ofinvestment are not necessarily achieved by higher investment

intensity.- However, the efficiency of in estment is low and

deteriorating, and the resulting quality and impact ofin astructure are questionable

Despite the huge amount of investment, Vietnam’sinfrastructure capacity remains inadequate and qualitystill remains low according to respondents to the WEF’sExecutive Opinion Survey (EOS).

Source: IMF, InternationalFinancial Statistics.



TABLE 3.10:INFRASTRUCTURE INVESTMENTEFFICIENCY – COMPARISON OFSEVERAL RAILROAD PROJECTS INVIETNAM AND CHINA

Ha Noi-Vinh Beijing-Shanghai Qinghai-TibetLength 334 km 1,318 km 1,142 km

Speed 200 kph 300-350 kph 120 kph

ravel ime 1.5 hours 5 hours -Cost $12.9 billion $22.6 billion $3.68 billion

Mil USD/km 38.6 17.1 3.2Source: Vietnam’sInfrastructureDevelopment Challenges,Fulbright Economics

eaching Program, 2008.

Also according to the PCI survey, 71 percent ofmanufacturing rms report that their products are beingdamaged due to poor road quality, causing an annual averageloss of VND 43 million per rm.

- Logistical performance is relatively poor compared to other

countries in the regionVietnam’s score on the World Bank’s Logistics PerformanceIndex (LPI) is shown in Figure 3.12. Te LPI is a compositeindex, combining seven sub-indices, on a scale of 0 to 5. Ofthe comparator countries, only Cambodia shows a lowerscore than Vietnam.

- Infrastructure and utilities (electricity and water) arestruggling to keep pace with growth and urbanization

Obsolete and inadequate infrastructure is hinderingVietnam’s socio-economic development: traffic congestionis occurring more frequently; people are wasting more timeon the road; and many roads are degrading, yet receivinglittle maintenance. Te Executive Opinion Survey showsthat weak infrastructure has been a major barrier to

production and business activities in Vietnam (ranked 1stin 2009 and 2nd in 2010 in terms of negative impact).

Although Vietnam has 2,600 kilometers of railways, therailroad infrastructure is outdated. Te market is entirelycontrolled by the State which is unable to meet the growing

demand. Railway density is 0.8 km per 100 km2, and notablerailway lines include the North-South (1726 kilometer);Hanoi-Laocai (230 kilometer); Hanoi-Haiphong (100kilometer); and two transnational ones (Hanoi-Laocai-Kunming and Hanoi-Dong Dang-Beijing). Even thoughthe North-South railway is being upgraded, the fact thatthere is no alternative line means even a slight congestionat one location can cause the whole line to halt. Moreover,the country lacks railway lines to economic zones, industrialzones, seaports, and to neighboring countries such as Laosand Cambodia. Te existing railways have poor quality;narrow gauge which limits train speed; and too many railwaycrossings at roads in residential areas, causing frequentaccidents.

TABLE 3.11:RANKINGS ONINFRASTRUCTURE(CCI), 2009

Rankings

Country Roads Railway Port

infrastructure Air transportinfrastructure

Vietnam 96 51 85 79China 55 28 70 80

Singapore 1 8 1 2Malaysia 25 21 33 32Indonesia 87 61 92 67

India 92 20 91 71Tailand 34 54 41 25

Philippines 110 99 128 119Cambodia 69 100 97 91

South Korea 16 10 27 18 Japan 21 3 36 50

Source: WEF GlobalExecutive Opinion Survey,Institute for Strategy andCompetitiveness, Harvard

Business School.



FIGURE 3.13:CONTAINER TRAFFICFOR HO CHI MINH

CITY SEAPORT,2004-2008

Tough there are international seaports (in Saigon, Danang,Haiphong etc.) receiving large ships, their services do notmeet the requirements of shippers. For instances, servicecosts are too high; customs clearance takes too much time,usually between 3 and 7 days but in some cases up to onemonth (for Singapore the gure is 10 minutes); internationalcontainer transshipment port is lacking; railways and roadsare not connected to the seaport system. Infrastructuredevelopment has not kept pace with export growth.

Te principal port for Vietnam is Ho Chi Minh City, whichranks 36th among the busiest container ports in the world.Since 2004, traffic has been increasing at an average of 4.2

percent per year, but it has not kept up with the expansion oftotal container shipping worldwide, as illustrated in Figure3.13. Its share in total container traffic (as measured by thetotal volume for the 40 top seaports) has declined from 1.3 percent to 1.0 percent between 2004 and 2008.

Airports are also hitting capacity barriers, especiallyinternational airports. Passenger capacity is low, servicequality is poor, domestic ights are frequently delayed. Upto now, the size of Vietnam’s domestic aviation market isonly nine to ten million passengers per year.

Tough there are international seaports (in Saigon, Danang,Haiphong etc.) receiving large ships, their services do notmeet the requirements of shippers. For instances, servicecosts are too high; customs clearance takes too much time,usually between 3 and 7 days but in some cases up to onemonth (for Singapore the gure is 10 minutes); internationalcontainer transshipment port is lacking; railways and roads

are not connected to the seaport system. Infrastructuredevelopment has not kept pace with export growth.

Te principal port for Vietnam is Ho Chi Minh City, whichranks 36th among the busiest container ports in the world.Since 2004, traffic has been increasing at an average of 4.2

Source: List of world’sbusiest container port.

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2004 2005 2006 2007 2008

H o C h i M i n h C i t y t r a ffi c a s p e r c e n t o f t o p 4 0

b u s i e s t p o r t s i n t h e w o r l d

A n n u a l c o n t a i n e r t r a ffi c

( i n t h o u s a n

d s T E U

)

Ho Chi Minh City As percent of top 40

FIGURE 3.12:LOGISTICSPERFORMANCEINDEX, VIETNAMAND COMPARISONCOUNTRIES

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Cambodia

Vietnam

Indonesia

Thailand

China

Malaysia

Taiwan

Singapore

Logis cs Performace Index:Country rankings from 0-5, based on seven subindices

Source: LogisticsPerformance Index 2007, World Bank/ urku Schoolof Economics.



TABLE 3.12:AIR TRAFFIC VOLUMECOMPARISONS

Airport Total Passengers (million) Growth rate, 2005-2006(%)

Hongkong 43.3 8.7%Singapore 33.4 8.6%Bangkok 29.6 10.3%Incheon – Korea 27.7 8.1%Narita – okyo 27.5 1.7%Shanghai 16.1 10.4%Kuala Lumpur 15.1 6.8%Tan Son Nhat 4.26 2.1%

Source: FulbrightEconomics eachingProgram, VietnamInfrastructureChallenges, 2008.

percent per year, but it has not kept up with the expansion oftotal container shipping worldwide, as illustrated in Figure

3.13. Its share in total container traffic (as measured by thetotal volume for the 40 top seaports) has declined from 1.3 percent to 1.0 percent between 2004 and 2008.

Airports are also hitting capacity barriers, especiallyinternational airports. Passenger capacity is low, servicequality is poor, domestic ights are frequently delayed. Upto now, the size of Vietnam’s domestic aviation market isonly nine to ten million passengers per year.

Electricity demand increased at an annual rate of 16-17 percent; twice as fast as the growth rate of the economy.

Domestic electricity capacity is inadequate to meet growingdemand, thus the country has to import electricity fromLaos and China. According to the PCI survey in 2009, onaverage, rms had to deal with 50 hours of power outages ina month as compared to 44 hours in 2008. In about half ofthese instances, users did not receive any prior notice aboutthe power cut.

Water supply coverage rate for urban areas remains low;about 70-80 percent in rst- and second-tier cities; 50-55 percent in third-tier cities; and only 15-20 percent infourth- and h-tier ones. Designed capacity of water

supply facilities is unrelated to demand, resulting in excesscapacity in some regions and capacity shortages in others. Water loss rate usually ranges from 30-40 percent, but insome places, it can be as high as 50 percent. Water qualitydoes not meet standards.

Generally, Vietnam’s urban areas do not have a separate waste water drainage system; instead, a common system forboth rain and waste water is still being used. In addition, thedrainage system has not been built in a synchronous mannerand many downgraded culverts are limiting drainagecapacity. Waste water from industrial zones has causedsevere pollution in large rivers such as Dongnai, Saigon, TiVai, Day, Nhue, o Lich and Cau. Large cities are susceptibleto being ooded whenever there is heavy rain or high tide.In short, drainage capacity and waste water management arestill two major problems in this eld.

- Demand for further in estment is huge, but lacks focus and prioritization; donor interests may affect selection of

projectsAccording to the plan, investment demand for electricity,roads, railways, and seaports over the next 10 years willamount to about USD 120 – 150 billion (40 billion forelectricity; 53 billion for roads; 3 billion for railroadsexcluding elevated railways and subways; 25 billion forseaports). Tus, an investment of about USD 12 – 15 billionis required every year. However, traditional capital sourcesincluding the state budget, SOEs, ODA and governmentbonds can only satisfy at most 50 percent of that demand.Private investment in infrastructure accounts for less than

5 percent of demand. Te Government has called for private investment in infrastructure through public private partnerships (PPP). PPPs are expected to be an importantfactor for infrastructure development in the coming years.Vietnam has applied the PPP model to a number of highwaydevelopment projects. So far there have been around 80implemented PPP projects in the form of BO , with totalinvested capital of nearly VND 90 trillion (Te Motherland2009). Recently, the Government has dra ed regulationsallowing the pilot implementation of several infrastructure projects under the PPP model. Specically, the Government

may subsidize up to 30 percent of required capital, or even50 percent for projects with long operating periods and highlevels of capital recovery (Saigon Online 2010).

Meanwhile, the infrastructure development plan is scatteredand lacks strategic focus. For example, over the next ten years, Vietnam plans to develop 39 seaports with 108terminals to be built or upgraded (of which 32 seaports areto be newly built). Meanwhile, there are only three main ports on the West Coast of the U.S. (over 1900km long). InMalaysia, there were only two major ports in 1970 but thenthe Government decided to develop four more national and

three sub-national ports which led to redundant capacityand erce competition among ports.



FIGURE 3.14:INTERNETPENETRATIONRATES FOR VIETNAMAND COMPARISONCOUNTRIES, QII 2009

Communication In astructure- Solid and high penetration rates with potential for further

growth driven by the young population

Vietnam came late to the Internet, with service rst beingoffered in 1997. Since then, however, internet use hasexpanded rapidly. As Figure 3.14 illustrates, the latest data(second quarter of 2009) show an Internet penetration rate

of about 25 percent. In 2006, the government announced its plans to increase the internet penetration rate to 35 percentby 2010. Reaching this target would obviously require ahuge jump within a single year, which appears unlikely.

Figure 3.14 shows three distinct levels of internet penetration. Te top six countries show penetration rates

between 65 and 77 percent. Vietnam belongs to the secondgroup with penetration rates between 24 and 27 percent, which also includes China, the Philippines and Tailand.Indonesia lags behind the others with a penetration rate of12.5 percent.

Te same historical pattern applies to telecommunications—a slow start, followed by a more aggressive catch-up phase.

Vietnam originally fell short of meeting the ambitiousgoals set by the government for the expansion of thetelecommunications sector. In response, the governmentadopted a new approach introducing greater competitioninto the market. Te mobile telephony market is the mostdynamic.

Te feasibility and efficiency of the North – South high-speed train project is being debated. With a total length of 1,570km, the project is estimated to cost USD 56 billion (current price)– equivalent to over 50 percent of Vietnam’s GDP. o date, there are only 11 countries in the world having high-speed train system -- all of them are developed countries (except Chinaand the popular length of the system is between 100 - 400 km, which is the optimal length forthe ef-ciency and safety of a high-speed train system (according to experts of the Vietnam’Construc-tion Association, with the length of more than 800km, airway transportation willbe more effi-cient than railway transportation).It is estimated that the annual investment cost is USD 2.63 billion, two thirds of which isexternal borrowing from donors (with the condition that the project cost will remainunchanged and the annual GDP growth rate is kept stable at 6.4 percent over the next 25 years). Tis is raising con-siderable concerns about the nancing feasibility and sustainabilityof the project, even among the donor community, given the current high levels of scal deciand external borrowings. Te impact of project is still questionable as high-speed train canonly serve transportation of a small group of passengers who can afford the relatively high prirather than mass transportation of lower-income passengers and commodities. Te experts ofVietnam’s Environment Protection Association also estimated that the construction of thesystem will cause deforestation of 1,383 ha of natural forests and affect the lives of 16,592households who will have to relocate for building the system.Source: Collected from VietnamNet, Dan tri, VnExpress

BOX 3.2:NORTH – SOUTHHIGH-SPEED TRAINPROJECT

Source: Internet World Stats,http://www.internetworldstats.com/stats3.htm

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Indonesia

Thailand

Vietnam

Philippines

China

Malaysia

Hong Kong

Taiwan

Singapore

Japan

South Korea

Internet penetra on rate (percent of popula on)



FIGURE 3.15:VIETNAMESETELEPHONESERVICESPENETRATION,1990-2008

Source: World DevelopmentIndicators.

0

10

20

30

40

50

60

70

80

90

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

T e l e p h o n e l i n e s / M o b i l e P h o n e s S u b s c r i p o n s

( p e r 1 0 0 i n

h a b i t a n t s )

Mobile cellular subscrip ons (per 100 inhabitants)

Telephone lines (per 100 inhabitants)

As Figure 3.15 shows, Vietnam had only 100,000 telephonesubscribers in 1990, that is, 0.14 xed lines for every 100 persons, one of the lowest rates in the world. By 2000, it wasapproaching three million xed lines; the equivalent of 4 forevery 100 persons. By 2008, penetration reached 34.32 per100 persons for xed line services and 81.2 per 100 personsfor mobile services.

- e telecommunications market in Vietnam reects thebenets of liberalization and competition. Prices have

fallen and co erage has increased.19

elecommunications is one of several sectors in Vietnamreserved largely for state ownership on “strategic” and“security” grounds, thus the approach to liberalizationhas been gradual and cautious. In recognition thattelecommunications is a key component of theinfrastructure required for national economic development,the government has made substantial investment in thesector, expanding and upgrading capacity and graduallyeasing control. In 1990 the sector operated under strictstate control, with effectively only one state-owned service provider.

Since then, however, foreign companies have been allowedto establish operations to produce telecommunicationsequipment and material or to assist domestic local operatorsin the provision of services. Since 1995, new domesticcompanies have been allowed to provide telecommunicationservices in competition with the state-owned monopoly andnew services have been introduced. Since the late 1990s,

service providers have been allowed greater exibility insetting prices; authorities have sought to make regulationsmore transparent and streamlined, and a number of state-owned telecommunications companies have sought toincrease the role of the private sector in providing capitalfor further investment in the industry. In areas where thereis strong competition, operators are authorized to set tariffsand service charges, while the state-owned provider retainscontrol over tariffs and service charges in monopoly areas.

Te changes outlined above have brought about rapidgrowth in xed lines and mobile phones, as well as a

marked widening in the geographical and socioeconomiccoverage of the expanding and multiplying networks. TeVietnamese telecommunications sector has been growing ata rate of around 25 percent per year; double the average forthe Asian region and triple the world average.

Financial In astructure 20

- e nancial sector has expanded quickly, yet it is still shallow and unsophisticated

As illustrated in Figure 3.16, domestic credit provided by thebanking sector corresponded to about 20 percent of GDP in

the mid-1990s, but it has since been roughly at par with thecorresponding gures for key comparison countries.



Te market has also become more diversied but is stilllargely bank-based, while equity market capitalization grew

rapidly. Bond and insurance markets have been establishedbut they remain relatively small. Despite the prominence ofbanks in the formal markets, their penetration rate withinthe Vietnamese population is estimated to be only about 10 percent (Leung 2009, 47), and informal nance still plays asignicant role in the economy.

- Actual access to capital remains limited and the access isinequitable among different segments of the economy; state-owned banks dominate the market

Te rapid growth of Vietnam’s nancial sector, however, has

not equally beneted all segments of the economy. Lending practices of state-owned commercial banks (SOCBs), forexample, still tend to favor state-owned enterprises. Terehas been a downward trend in SOE lending, however,according to some estimates, SOEs accounted for less than30 percent of the credit growth in recent years. Certainregulations (supposedly for prudential purposes) still implythat SOCBs would continue to discriminate against privatesector borrowers and in favor of SOEs; these regulationsinclude the requirement that unsecured lending will be provided only to private enterprises with at least twoconsecutive years of prots (Leung 2009, 47). SMEs, whichgenerate most employment for the economy, still face thegreatest difficulties in obtaining access to credit.

Although the number of non-state commercial banks hasincreased rapidly since 2005 and there are currently 37 joint-stock commercial banks, state-owned commercial banksstill dominate the credit market. As of September 2009, thefour large state-owned commercial banks (Agribank, BIDV,Vietcombank and Vietinbank) accounted for 51 percentof total loans and two thirds of all loans in the interest ratesubsidy program (Fitch Ratings 2009).

- Soundness and performance of banks are still an issue;credit is increasingly going to real estate and speculative activities

For both 2006 and 2007, the average rate of return on assets

for three of the four major SOCBs were below the averagefor Asian banks, and their capital adequacy ratios, although

meeting the international requirements of 8 percent, arebelow the regional averages of 13.1 percent for Asia and thePacic, and 12.3 percent for East Asia (Leung 2009, 48).

As stipulated in Decree No. 141/2006/ND-CP datedNovember 22, 2006, a commercial bank is required to havea minimum chartered capital of VND 3 trillion. However,of the 37 commercial banks there are seven whose charteredcapital is VND 5 trillion or above; seven are capitalized atVND 3-4 trillion; the remaining 23 have less than VND3 trillion. Te majority of commercial banks have lowchartered capital which has limited liquidity, especiallyin 2008-09 when monetary policy was tightened to ghtination. Low capital also hindered the competitivenessof these banks. o strengthen the banking system andreduce liquidity risk, banks will have to increase theirchartered capital to at least VND 3 trillion by December21, 2010 according to the roadmap. Conditions for newestablishment will also be more rigorous, consistent with W O commitment on opening nancial market.

A further weakness of the banking system is that the baddebt ratio is still high and persistent. It was estimated at 2.52 percent of total outstanding loans by the end of June 2009(Te Motherland 2009). According to SBV, as of September27, 2010, the total outstanding loans have increased by19.27 percent over the same period last year (Sai Gon GiaiPhong Newspaper 2010). Te real estate bubble in 2008 was partly due to excess bank lending, while credit marketmonitoring was lacking. Tis situation also means that SMEshave greater difficulty in gaining access to official sourcesof credit for export and production activities. Tus, theassessment of credit satisfaction for Vietnam in the CountryCompetitiveness Index may be somewhat overstated andoptimistic. Besides, the maturity mismatch has barely

changed, posing risks for both banks and businesses. As aconsequence, businesses must borrow short-term loans forlong-term investment, thus requiring them to pay high costof borrowing and also making production and businessactivities more prone to market risks.

FIGURE 3.16:DOMESTIC CREDITOF VIETNAM ANDCOMPARISONCOUNTRIES

Source: Key indicators2010, Asian DevelopmentBank.

0

20

40

60

80

100

120

140

160

180

200

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

P e r c e n t o

f G D P

( % )

China

Thailand

Vietnam

Singapore

Indonesia



FIGURE 3.17:DIFFICULTY INRECRUITMENT INSELECTED ASIANCOUNTRIES, 2007

FIGURE 3.18:DIFFICULTY INRECRUITMENT–VIETNAM, 2003-2007

Note: Data drawn from Japanese-AffiliatedManufacturers in Asia, JE RO.

Sources: Junichi Mori ,Nguyen Ti Xuan Tuy,and Pham ruong Hoang(2009).

Note: Data drawn from Japanese-AffiliatedManufacturers in Asia, JE RO. Surveys in 2003-2004 did not include questionsabout recruitment of general workers.Sources: Junichi Mori ,Nguyen Ti Xuan Tuy, andPham ruong Hoang (2009).

23.4

27.6

7.4

11.3

22.2

25.5

42.9

51.9

30.2

70.4

25.5

36.7

29.6

37.7

63.0

0 10 20 30 40 50 60 70 80

Malaysia

Thailand

Indonesia

Philippines

Vietnam

Firms that reported difficulty in rerui ng workers (%)

Engineers or technicians Middle Managers General Workers

22.2

10.4

14.5

70.4

65.7

59.0

54.1

53.8

63.0

55.2

50.6

44.7

37.2

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0

2007

2006

2005

2004

2003

Firms that reported difficulty in recrui ng workers (%)

Engineers or Technicians Middle Managers General Workers

1,000 lessons per year, far more than the eligible maximumnumber of 260 lessons per year. All schools have to followMOE ’s educational framework which was formulated andissued in the early 2000s. A large proportion of this contentis now obsolete.

Tere has not been an effective quality evaluation systemfor higher education, and quality evaluation activities aremore or less just experiments. Higher education qualityis currently assessed only through students’ examinationgrades. Although quality evaluation for higher educationstarted in 2006, so far only 169 schools (92 universitiesand 77 colleges) have submitted their self-assessment.

In addition, the National Committee for Evaluation ofEducation uality has assessed only 20 universities andthe results are yet to be announced (National Assembly’sStanding Committee Report 2010).

Government policy towards education is highly centralizedand very much control-oriented. Te Ministry of Educationand raining determines how many students can enrollat a particular university and (in the case of publicuniversities) how much university instructors are paid. Evenadministrative and operational decisions are controlled by

the Ministry, such as the promotion of faculty. Tis systemdenies universities and institutes the incentive to competeor innovate. Remuneration is based on seniority andofficial salaries are so low that university instructors mustmoonlight to support themselves. International connectionsare lacking, and the system is very inward looking and doesnot benchmark itself with international standards (TomasVallely and Ben Wilkinson 2009, 3-4).

- e business community is increasingly concerned about shortages of skilled labor

Cooperation among educational/training institutions,enterprises and other units employing people is rare. As aresult, graduates o en lack the skills being demanded inthe market. A survey conducted by the Vietnam StudentAssociation (VSA) showed that 50 percent of graduates inVietnam cannot nd jobs in their eld and those who haveto be retrained account for a signicant share. Accordingto AmCham’s discussion paper presented at the VietnamBusiness Forum in June 2010, about 65 percent of theVietnamese labor force is unskilled and about 78 percentof the population aged 20-24 is untrained or lacks thenecessary skills (AmCham 2010).



Te results of the Japanese JICA surveys of Japanese-affiliated manufacturers in Asia show that the shortage ofskilled labor is more severe for Vietnam than for its ASEAN

peers (Figure 3.17), and this difficulty has tended to increaseover time in Vietnam (Figure 3.18).

Intel’s struggle to hire engineers to staff its manufacturingfacility in Ho Chi Minh City is illustrative. When thecompany administered a standardized assessment teststo 2,000 Vietnamese I students, only 90 candidates passed (5 percent), and of this group, only 40 individuals were sufficiently procient in English which is a hiring prerequisite. Vietnamese and international investors cite thelack of skilled workers and managers as a major barrier toexpansion (Tomas Vallely and Ben Wilkinson 2009, 2).

Apart from the fact that formal education and training donot match market requirements, another reason for the lackof skilled workers is inadequate focus on vocational training.Te current vocational training management system isfragmented and scattered across different governmentbodies, such as MOLISA, MOE , or specializedmanagement agencies. Vocational training facilities andthe teaching staff have not received adequate funding; andsociety still undervalues this type of training and graduatesof vocational schools.

- Rigid and inefficient labor markets With respect to labor markets, the major issue remainsthe development of effective solutions to rapidly upgradethe skills of the workforce. Figure 3.19 shows some of theregulatory constraints on labor markets as dened by theDoing Business approach (“Employing workers”).

Vietnam scores higher than China, South Korea andIndonesia on this indicator, but lags behind Malaysia andTailand. Te construction of the “Employing workers”indicator depends largely on the cost of laying off workers

(“redundancy costs”) and any restrictions on hiring andring expressed in the “rigidity of employment” sub-indicator: a higher score means worse performance.

Tere are several reasons for the low exibility in theVietnamese labor market. First, the imbalance betweenlabor supply and labor demand still persists. In reality,

unemployment in urban areas and job shortages in ruralones are likely to be higher than reported because of a largeinformal sector, the seasonality of jobs and attempts by rmsto minimize non-wage labor costs such as social, health orunemployment insurance. Second, supply of skilled workersis low while demand has been increasing over time in almostall rms, activities, economic regions, urban areas as wellas rural ones. Te problem of skilled labor shortage hasgrown in both scope and scale, which is likely to increasecompetition for skilled workers and push up labor costs—adisadvantage from competitiveness viewpoint. Tird,labor costs themselves tend to increase, driven in partby the upward adjustment of the minimum wage by theGovernment, making it harder for labor supply and demandto meet.

Te Navigos Vietnam’s salary survey report in 2008 basedon data for 64,905 employees of 206 companies shows thatthe average salary increased by 19.5 within a year, the highestannual rate of increase in the past ve years. Salary increasesat that level may lead to the gradual loss of competitivenessof labor-intensive industries, unless they are able to increase productivity.

FIGURE 3.19:SELECTED DOINGBUSINESS INDICATORSON “EMPLOYINGWORKERS” FORVIETNAM ANDCOMPARISONCOUNTRIES, 2009

0 20 40 60 80 100 120

Difficulty of hiring index

Rigidity of hours index

Difficulty of redundancy index

Rigidity of employment index

Redundancy costs (weeks of salary)

Employing workers

Malaysia Thailand Indonesia South Korea China Vietnam

Different scales (index, weeks and rank)Source: World Bank/IFC,Doing Business (2010).



FIGURE 3.20:SELECTED DOINGBUSINESS INDICATORSFOR VIETNAMAND COMPARISONCOUNTRIES, 2009

Source: World Bank/IFC,Doing Business (2010).

0 20 40 60 80 100

Star ng a business

Dealing withconstruc on permits

Registering property

Paying taxes

Trading across borders

Enforcing contracts

Malaysia Thailand China

Inverted normalized rankings (100 = best)

Vietnam

Administrative In astructure- Modest performance on overall administrative

en ironment

Te Doing Business rankings provide one perspective on the performance of a country’s administrative infrastructure.Of the ten indicators, arguably six refer to administrativeefficiency, including the enforcement of contracts. Figure3.20 presents a comparison of Vietnam’s performance tothat of three comparison countries. Overall, China is doing worse, especially on construction permits, while Vietnamlags behind Malaysia and especially Tailand.

- e administrative burden is imposing costs on business and citizens

On average, a company has to spend 1,050 hours per year todeal with administrative procedures for paying taxes, while

the gure in Singapore is only 84 hours. Closing a businesstakes 5 years in Vietnam as compared to one year in HongKong (Doing Business). Te Government estimates thatif 30 percent of the current administrative burden is cutdown (as per commitments of the Project 30), a signicantamount of VND 6,000 billion (USD 300 million) could besaved in the economy.

Te total number of regulations in Vietnam that affectbusinesses has increased dramatically since 2005. Over the period 2005-2008, Vietnam issued more legal normativedocuments (LNDs) that affected businesses (17,164 LNDs)than the previous 18 years put together (1987-2004). Inaddition, during 2005–2008, the number of official letterscontaining legal norms has more than tripled compared tothe previous 18 years ( uang and Bentley 2009). (Figure3.21)

FIGURE 3.21:NUMBER OF LEGALDOCUMENTS22 ISSUED BY CENTRALREGULATORYAUTHORITIES

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Official Le ers 2 6 8 26 63 38 41 47 72 168 189 97 242 196 551 606 283 217 2683 2621 2310 1767

Legal Norma ve Documents 23 6 249 253 3 11 4 79 48 4 447 506 6 70 8 53 98 2 100 8 1 207 1 043 14 78 14 76 142 3 1 241 4 130 41 37 443 4 4 46 3

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

N u m

b e r o

f d o c u m e n t s

Source: www.luatvietnam.vn



Tis large unknown number of regulations is problematicin many ways. Te uncertainty of the existing stock ofregulations (in terms of legal consistency, applicability oreven necessity) is likely to entail unnecessary costs for citizensand businesses when trying to nd the right regulation tocomply with. It also creates an opportunity for rent seekingby corrupt officials. Such an uncertain environment isfriendly to neither businesses nor citizens.

- Several substantial regulatory and administrative reformefforts are underway

(i) Prime Minister’s Master Plan to Simplify Administration Procedures in State Management – Project 30

Project 30 entails a comprehensive approach with a targetof simplifying at least 30 percent of all AdministrationProcedures in 2010. Over 5,700 Administrative Proceduresat all four levels of government across all 63 Provinceshave been collected in an electronic database. Tey will bereviewed and then either abolished, simplied or remain.Te review process is using the principles of regulatoryimpact analysis (RIA) to assess the legality, necessityand business friendliness of administrative procedures.Project 30 has been conducted by the Special ask Forcein the Office of Government (OOG) with involvementof the international agencies (mainly USAID) and privatesector through the Advisory Council for AdministrativeProcedures Reform (ACAPR). A new agency called theAdministrative Procedures Control Agency in OOG hasbeen set up to continue the role of Project 30 on an ongoing

basis and also to manage the ow of new administrative procedures.

(ii) 2008 Law on the Promulgation of Legal Normative Documents – Law on Laws)

Te process for dra ing new legal normative documentshas been enhanced through the requirements for publiccomment and impact analysis of the proposed LND duringthe dra ing process. Tese requirements support greatertransparency and introduce evidence-based policy makingfor better regulatory decisions. However the requirementsare clearly stipulated for Laws, Ordinances and Decrees, while lower level LNDs and non-normative instruments arenot subject to these same formal requirements.23

Te success of programs such as Project 30 is critical forVietnam to improve its administrative and legal environmentrapidly and gain competitiveness.

Inno ation In astructure- Inno ative and technological capacity remains weak

On the key indices that seek to measure the innovativecapacity and activity of countries, Vietnam’s position isuncompetitive:• World Economic Forum—National Innovative

Capacity Index: based on the institutional and policyenvironment for innovation. In 2009, Vietnam was

ranked 73rd, behind most of its regional peers – China(42nd), Tailand (49th), Malaysia (29th) and India(33rd);

• World Bank—Knowledge Economy Index: a highlyexible index based on several components. Vietnam isranked 100th out of 146 countries; and

• INSEAD – Global Innovation Index: evaluates theaspects of the environment required to stimulateinnovation within an economy and measures the resultsof innovation within the economy. Vietnam was ranked71st out of 132 countries in the 2009 – 2010 index.

One of the main concerns for Vietnam given its high degreeof openness is the insignicant spill-over effects from theFDI sector into the domestic economy. A recent study by

ue Anh (2009), for example, suggests that the expectedknowledge spillovers from foreign direct investments canbe modest, calling for a proactive policy of promoting suchspillovers in the context of a national system of technologicallearning.

Based on qualitative evidence, Vietnam appears to lack acoherent structure for active technological learning andinnovation. A key institution in that process is the NationalInstitute for Science and echnology Policy and StrategyStudies (NIS PASS) in the Ministry of Science and

echnology. NIS PASS has the appropriate mandate, but itis unclear whether it actually has the resources and inuenceto lead the way from a “passive FDI-dependent” structure tothe next level, and ultimately to an autonomous innovationsystem.Infrastructure for innovation and creativity has notseen much improvement in recent years. In early 2007,Vietnam had 1,200 science and technology organizations(institutions, research centers, and universities), which is2.5 times higher than the 1995 gure (Teo, http://www.most.gov.vn); 60 percent of these organizations are state-owned. Although the number of science and technologyorganizations increased, their quality remains low. Annualinvestment on science and technology activities accounts foronly 2 percent of total state budget spending, and there wereonly few practical research results.

Te number of employees in professional, scientic andtechnological activities only accounts for 1.3 percent oftotal employees in all establishments; and only 65.5 percentof total employees used PCs in 2007. Of all professional,scientic and technological establishments, only 28.5 percent are connected to the Internet, and only 0.2 percenthad e-commercial transactions. Te lack of adequatedomestic training institutions, sufficient research activitiesin training institutions and effective university-research

institution-enterprise cooperation undermines innovativecapacity, limiting the country’s competitiveness.

- Inadequate IPR legislation may fail to create incentives forinno ation-based competition



Tere are diminished incentives for knowledge search byVietnamese entrepreneurs. Adopting existing technologyrepresents “inside-the-frontier innovation” which ultimately

is readily available but lacking adequate intellectual property protection. Tus, the pioneering rm is likely to see itssuccessful application of some innovation replicated byother rms. Te implied risk provides little incentive forinnovation.

Tere have been many cases in which IPR violations areeither inadequately sanctioned or even not sanctioned atall. Tis has discouraged enterprises from renovating theirtechnology. According to the National Intellectual PropertyOffice, in 2008, there were 2,766 cases of intellectual property infringement, up by 300 cases in comparison with2007. However this is only the tip of the iceberg as manycases are not discovered or reported by the regulator. In theEuropean Commission’s IPR Enforcement Report 2009,Vietnam was classied as one of the priority countriesin which IPR protection and enforcement are seriously worrisome. Te report cited several reasons for the seriousIPR violation in Vietnam, including decient enforcementof the domestic IPR regulations, lack of trained IPR officialsand lengthy and burdensome proceedings, civil and criminal procedures, provisional measures, and particularly customs procedures as being decient or not implemented.

- In estment in R&D and inno ation remains limited

Empirical analysis of the 2008 Enterprise Survey shows thatamong the 205,529 surveyed enterprises there are 1,340 inthe eld of science and technology (or 0.65 percent). 26.3 percent of which are in the state sector; 63.3 percent in the private sector; and the remaining 10.4 percent in the foreign-invested sector (FIS). Average technological and scienticR&D investment among these enterprises is equivalent to1.15 percent of their pre-tax prot; 0.4 percent for R&Dactivities and 0.69 percent for technology adaptation. Te

gure for all surveyed enterprises was much lower, equivalentto 0.27 percent of pre-tax prot, of which 0.1 percent forR&D activities and 0.16 percent for technology renovation.

Context for Strategy and RivalryOpenness- High level of economic openness

Te economic reforms ushered in by the doi moi initiativein the late 1980s opened the economy to privately-ownedrms. Subsequent policy developments went further toencourage private enterprise, and to reduce the role of state-owned enterprises (SOEs). Vietnam began to integratesubstantively into the regional and international trade andeconomic system by becoming a member of the ASEAN Free

rade Area (AF A) in 1996. However, the breakthroughlever in its integration process was actually the signing ofthe Bilateral rade Agreement with the U.S. (US B A).Vietnam has fully participated in the global economy andtrade since its accession into the World rade Organization(W O) in 2007.

As discussed in chapter 2 Vietnam is one of the most openeconomies in the ASEAN region both in terms of tradeand foreign direct investment. Vietnam has removed mostof its trade and investment barriers in compliance withits integration commitments. For example, the amendedEnterprise Law (2005) has superseded previous laws and putall enterprises of different segments (FDI, SMEs and SOEs)under a common legal framework. In some cases, especially

at the provincial level, FDI rms receive even more privilegesand special treatments than local private rms, such as lowertax rates or access to land.

FIGURE 3.22:TRADE OPENNESS–VIETNAM ANDCOMPARISONCOUNTRIES, 2009

Source: EIU (for the exportshare); W O (for the tariff ).

China

Indonesia

Philippines

Thailand

VietnamMalaysia

0

20

4060

80

100

120

140

,160

18-

0% 2% 4% 6% 8% 10% 12% T r a d e

( e x p o r t s + i m p o r t s ) a s % o f G D P , 2 0 0 9

MFN Tariffs, Simple Average, Applied, 2009



Vietnam’s openness to both trade and investment isexpected to increase further in the future since its currentaverage applied MFN tariffs are still high relative to itsAsian peers and will decline in accordance with Vietnam’smultilateral and bilateral trade commitments. Vietnam’srobust integration into the world economy has enabled thecountry to benet from the globalization process, yet this poses challenges for regulating a more complex and exposedeconomy.

Level of Rivalry- Weak competition policy and enforcement

Vigorous domestic competition is essential for promotinginnovation. As part of Vietnam’s transition to an efficientmarket economy, the National Assembly adopted thecountry’s Competition Law in December 2004; it enteredinto force in July 2005. Te Law applies to all enterprises:domestic private, SOEs and foreign invested enterprises(FIEs).

Te Law created the Competition AdministrationDepartment (VCAD) with a broad scope of responsibilities—restraint of competition, unfair competition, managementof competition, anti-dumping, consumer protection andinternational cooperation. Te combination of protectingdomestic competition and taking on an important role ininternational trade relations is somewhat unusual, and may pose particular challenges to the new institution.

Exemptions are possible for instances where agreementsamong enterprises may enhance efficiency or set standardsthat may enhance competition. However, exemptions mayalso be possible for the protection of SMEs, or for theformation of export cartels. Te Law also allows for statemonopolies, authorizing VCAD to take action only ifthe state monopoly is acting outside its monopoly grant.Competition policy relies heavily on market shares as oneof the principal indicators of dominant position. Tus,agreements in restraint of competition are prohibited only where the participating parties’ have a combined marketshare of 30 percent or more of the relevant market. Belowthe 30-percent threshold agreements among rms are not

prohibited, even if they do end up restraining competition.Even once anti-competitive behaviors have been identiedand conrmed by the VCAD, penalties and enforcementmeasures do not appear strong enough to effectively stopthe violation.

Vietnam’s experience with the full application of theCompetition Law is limited. Initially, few businesses wereaware of any potential violations, either by themselves ofby others affecting them. For the domestic private sector,outreach and education therefore are key priorities.

Another issue concerns the cooperation between the newcompetition agencies and the sectoral regulators. Tereis an overlap of responsibilities as VCAD has assumed jurisdiction concerning competition-related complaints.Te agency has reached an understanding with some sectoral

regulators, such as for telecommunications, electricity andbanking. Even so, there is a continuing challenge to educatethe sectoral regulators regarding the competition impacts oftheir decisions, and the respective roles of the competitionagencies with an economy-wide mandate vis-à-vis the morelimited sectoral optic. Moreover, the fact that VCADoperates under the jurisdiction of the Ministry of Industryand rade, which is in turn the regulator of key industrialsectors, affects the independence and objectivity of itsoperation.

More needs to be done to ensure clarity in the roles andresponsibilities of the competition agencies and sectoralregulators, and to tackle situations where differentstandards are applied by different agencies. More broadly, allgovernment agencies need to embrace the likely impact of policies and activities on competition.

- Unequal treatment of companies, with SOEs receiving special treatment and privileges

As in other instances, the formal legal framework has beenestablished, but effective application lags behind. Statemonopolies and special arrangements for SOEs continueto distort the playing eld. While equitization of localSOEs appears to have removed much of the SOE bias atthe provincial level, central authorities still treat SOEs asspecial concerns. Tat special role may also underminecompetitiveness more broadly, since SOE performance iscritical for a range of supporting industry functions.

At the same time, FIEs as a rule have relatively few complaintsabout uneven treatment, although cases of course do occur.One issue is the relative isolation of FIEs from the rest ofthe economy—they are primarily part of global value chains with relatively shallow roots in the Vietnamese economy.Foreign investors, however, o en lead the charge with respectto deciencies in terms of administrative environment,supporting industries, in particular infrastructure andlogistics services.

SOEs are receiving special treatments from the governmentin many different forms, both explicitly and implicitly.Tey are sheltered from competition and market discipline which other economic segments are obliged to comply with.Examples of special, anti-competitive treatments that thestate-owned sector is enjoying include:

• Access to subsidized credit, either directly throughnancing from government’s budget or government’sguarantee or indirectly through state-owned commercialbanks with whom they have traditionally strong ties.24

Government’s guarantees for corporate borrowings havebeen used more widely recently and are increasing rapidlyto the equivalence to 7 percent of GDP, of which 90

percent is for SOEs (State Bank of Vietnam’s estimates).• Access to land: SOEs usually possess property of

high commercial value in lucrative locations, but payland rental fees much lower than the market rates.



Te Hanoi Department of Natural Resources and Environment has just released a report a er theinspection by the municipal People’s Committee of the 420 projects which had been allocatedland or eligible for land rent from January 1st 2003 to December 31st 2008.Te inspection teamhas discovered 20 projects (taking up a total area of about 365,000 m2) with serious violations which need to be withdrawn. In particular, the Hanoi production services import-export company(Haprosimex) is being suspected for improper use of a “beautiful” area located at the centre oHanoi.

As decided by the Hanoi People’s Committee on February 18th 2009, Haprosimex was allowed torent the area of 353.4 m2 at 22 Hang Luoc (Hoan Kiem, Hanoi) to locate their head office for 50 years. Annual land rental fee was VND 339,300 per m2, which would remain stable for ve yeaTe land lease contract between the Committee and Haprosimex again stated that this land is to be

used for location of the head office by the city’s decision. However, on July 15th 2009, Haprosimsubleased this land to the Fashion Joint-stock Company NEM for a period of 34 years with totalrental fee of VND 24 billions. At the cost of VND 339,300 per m2, in 50 years Haprosimex only pays for the Committee around VND 6 billion.Source: CIEM

BOX 3.3:THE STATE SECTORMAINTAINSINEFFECTIVEPERFORMANCEDESPITE HAVINGLAND INCENTIVES

Undervaluation of property and other state assets isquite common, especially when SOEs go equitized (seeexamples in Box 3.3 below);

• Exclusively obtaining government contracts throughnon-competitive bidding or access to insider informationthrough connection, especially in public invested projects; and

• Exemption from prudential governance and nancialmanagement regulations which are currently appliedto all public companies such as information disclosure,independent audit, etc.

SOEs are holding monopoly or dominant positionsin almost all key major economic sectors and they are possessing huge assets as compared to other segments in theeconomy. However, their performance is disappointing onmany fronts.25 Te debt of 70 conglomerates and generalcorporations had built up to an astonishing USD 28 billion(40 percent of GDP) by the end of 2007. In addition,SOEs’ investment increased abruptly by nearly 60 percent,resulting in a surge in scal decit in 2007. According to areport of the Ministry of Finance, the debt-to-equity ratiosof conglomerates are very high: 42 times in the case ofCienco 5, 22.5 times for Cienco 1, 22 times for Vinashin,and 21.5 times in the case of Lilama (Harvard’s FulbrightEconomics eaching Program 2008, 8).

Anti-competitive practices undermine the efficiency ofSOEs’ in the long run as they are not motivated to strive forbetter performance. SOEs believe that they are “too big tofail” entities and are therefore willing to take extra risks andenter into highly speculative areas in a quest for short-term protability. Tis anti-market treatment imposes great costson other more efficient segments of the economy by havingthem compete for much scarcer resources. Tese conditionstherefore limit the capacity of other business entities from pursuing productive opportunities within the domesticeconomy.

- Equitization (privatization) efforts have targeted only smaller SOEs and have focused on diffusing state ownershiprather than impro ing efficiency and go ernance ofenterprises

Te equitization process has been implemented since 1992and it has been well emphasized in the government’s policystatements. However, the progress of the equitization process in Vietnam has not been very promising. In 2009, thenumber of equitized enterprises (105) is only equivalent to8.4 percent of the plan for 2009 – 2010 (Ministry of Finance2010). Only smaller SOEs that once reported to provincialgovernments and line ministries are equitized, while biggerand more important SOEs have been consolidated into stateconglomerates and put under the direct oversight of thecentral government. In most cases, SOEs are only partiallyequitized while the state still retains a controlling share ofthe enterprises. Te current approach to equitization focuseson selling state shares to outside investors rather than on

improving governance and efficiency of the enterprises. Testate’s intention in retaining control of the equitized SOEsfails to create institutional mechanisms necessary to drive performance improvement, which makes equitization lessattractive to strategic investors. Lack of transparency andstandards in valuation of the equitized assets such as land,real estate and machinery further provides avenues that canlead to misallocations of state assets.

- Competition focuses on price, not on features and quality

Te garment industry is a clear example of competition

based on low cost. It has grown almost 30 percent per yearover the last few years, and the country has now become oneof the world’s ten biggest garment exporters. However, theindustry’s average protability rate is only 5 – 8 percent.26 Te industry has to import up to 90 percent of cottonand 70 percent of accessories from abroad and generateonly marginal prots from simple CM (cut, make, trim) process. Competition on design, branding and productdifferentiation is also very limited within the industry.



- Unclear denition of go ernment’s roles in a marketeconomy

Since the mid-1980s, the Government of Vietnam hasexperienced a signicant transformation in its role in theeconomy. While the Government remains an importantfactor in most spheres of the economy, a new role needsto evolve to keep pace with a more complex and rapidlychanging economic environment.First, the government’s role as an owner should besufficiently separated from its regulatory functions. Tis isnot particularly notable in the area of SOE management.Te biggest conglomerates are reporting directly to thePrime Minister, while smaller SOEs are reporting toline Ministries, and more recently SCIC. Teir majorinvestment and business decisions are made or approved bythose owners who, at the same time also, are the regulatorsof the economy or specic economic sectors. Tis createsserious conicts of interest as SOEs have special ties andconnections with the regulators which provides signicantadvantages for them vis-à-vis their rivals from othereconomic segments. Moreover, as the state conglomeratesexpand, the Government will not have sufficient staffing andother resources to control closely their operations, leadingto loopholes in governance and management of the SOEs.

Te Government has taken the rst step in establishing aninvestment management arm, the State Capital InvestmentCorporation (SCIC), to represent the government’sownership in SOEs. However, the SCIC to date has

received transfers of only smaller, less important or loss-making enterprises from the government, ministries and provinces, while the most powerful and lucrative ones are

still under the direct management of the government. Also,SCIC management team is all drawn from the government(notably Ministry of Finance) and its operation is stillheavily inuenced by the government which prevents itfrom separating commercial business from political agenda.

In addition, the government’s traditional approach toregulating the economy is through imposing control andadministrative measures which in many cases are eitherineffective or not compliant with market principles.Examples of such anti-market intervention includemandatory requirements for nancial institutions to buytreasury bills or imposing price controls for taming ination.Te current approach in government intervention fails tocreate a level and competitive environment for all enterprisesto compete for excellence and quality.

Demand Conditions- A sizeable and growing market

Domestic demand patterns reect both growing per capitaincomes and growing sophistication among domesticconsumers. Te discussion of rising per capita incomes inSection 2.1 suggests a growing middle class while market sizein terms of effective domestic demand is also expanding. TeA. .Kearney Global Retail Development Index (GRDI)ranks Vietnam as the 14th most attractive markets for retailexpansion in 2010.

e Head of the Telecoms Department, Ministry of Information and Communication (MOIC), said that the Ministry will require Vietnam Post and Telecommunications Group (VNPT) to abandon its plan to reduce mobile phone tariff by 20.29 percent for two tariff schemes as thisviolates the Ministry’s regulations on the band of tariff reduction no more than 15 percent.

Accordingly, VNP will have to adjust its tariff reduction plan and submit it to the Ministryto ensure that the plan is in line with the government’s regulations on the 15 percent cap. Previ

ously, Vinaphone and MobiFone announced to cut down mobile phone tariff for their 60million customers as of August 10, 2010. All tariff schemes will be reduced by 10-15 percenexcept for the Vinaphone’s alkEZ- een and MobiFone’s Q- een schemes which enjoy up to20.29 per-cent tariff reduction. Meanwhile, another telecom carrier, EVN elecom, said thatthey don’t have any plans to reduce the tariff further, but instead will focus on improving theservice quality and improving customer services.

According to the representative of the MOIC, more competition will benet customers anden-courage companies to improve. However, competition merely based on price or dumpingis un-healthy and unfair. Such unhealthy competition behaviors aim to establish a monopolyor domi-nating position for the companies and deteriorate the competitive environment of themarket. MOIC encourages, supports and urges companies to improve productivity, reduce cost

to be-come more competitive, but does not support those companies who aim to dominate themarket by dumping the price or establishing monopoly positions. Such types of competitionbehaviors are not in line with international practices and regulations on market competition.Source: VietnamNet

BOX 3.4:PRICE WAR AMONGTELECOMMUNICATIONCARRIERS



FIGURE 3.23:PATTERNSOF MARKETDEVELOPMENT FORVIETNAM, CCI 2001-2009

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 2008 2009

I n v e r t e d n o r m a

l i z e d r a n

k i n g s

( 1 0 0 = b

e s t p e r f o r m a n c e

)

Buyer sophis ca on Degree of customer orienta on

Presence of demanding regulatory Extent of marke ng

Source: WEF GlobalExecutive Opinion Survey,Institute for Strategy andCompetitiveness, HarvardBusiness School.

- Sophistication among domestic consumers is impro ing, yet

still lowFigure 3.23 suggests that domestic consumers are in factbecoming more sophisticated. Tere has been no change with respect to “demanding regulatory standards.” Te sameobservation would apply to the “extent of marketing,” withthe exception of the major leap between 2008 and 2009.It is difficult to nd a reason for that jump. Te other twocategories, “degree of customer orientation” and “buyersophistication” follow a similar U-shaped trend. Vietnamscored high on that measure in the early 2000s, followed by adecline until about 2006. Te country’s relative performance

since then has improved on both of these measures.Tese patterns suggest that Vietnam, as seen by surveyrespondents, is making progress in terms of goods and product markets given its changing demand conditions andimproved customer orientation. Te upshot of these trendsis that competition for local markets is likely to become morechallenging, as Vietnamese producers are facing foreignrms in an increasingly open market. Meeting that challengetherefore calls for constant innovation to maintain or gainmarket share.

State of Cluster Development Presence and Dynamism of Clusters- Natural process of specialization and geographic co-location

of similar activities have occurred

A cluster is a geographically proximate group of interconnectedcompanies and associated institutions in a particular eld,linked by commonalities and complementarities. In reality,individual rms o en face sector-level constraints that theycannot address alone, and cluster approach will help increasebroad-based competitiveness which is hardly achievedthrough supporting individual rms.

In Vietnam, the traditional type of village-based industrialclusters has grown historically and they tend to specializein cra s and other traditional products. An example of thisis Hanoi’s guild streets. Te more modern types of clusters

of supporting enterprises which build around anchor rms

(industrial castle town) or clusters in large cities where lotsof basic production processes are treated (urban processingclusters) have emerged recently in Vietnam (IDE JE RO2005)

ourism clusters are currently located in the Central coast while the oil and gas cluster is concentrated in the Southeastcoastal region where there is abundance of these resources.Te agricultural cluster is found in the Mekong Delta. Lightindustrial and export-oriented clusters tend to concentratein the Southern region, especially in Ho Chi Minh City andsurrounding provinces (garment, footwear, food processing,

electronics etc.). On the other hand, heavy and more capital-intensive clusters tend to concentrate in the Northernregion, especially in Hanoi and surrounding provinces(mechanical and engineering, electronics, ship building,etc.). One of the reasons for this distribution is explainedby the fact that import-substituting heavy industries andSOEs were once concentrated in the Northern region, whilethe Southern region has emerged as the centre for export-oriented industries a er the economic reform and marketopening that started in 1986. As a result, the Southernregion is also the centre of export-supporting services suchas port and logistics. In summary, co-location and clusteringof rms is evident in Vietnam, but the formation processhas occurred naturally rather than being driven by effectivecluster policies.

- Sophistication and dynamism of clusters are low, with shallow linkages among cluster participants; mostly alldoing the same activities

Te 2005’s IDE-JE RO study found out that access to landand infrastructure (connectivity with markets and ports)have been the key factors driving the distribution of clustersrather than labor and business linkages.

A study carried out by students of the microeconomics ofcompetitiveness class at the Harvard Business School (Dostet al., 2008) found that the success of Vietnam’s electronicsand footwear clusters rested on some weak foundations that



threatened long-term sustainability. One of the factors is theeeting nature of competitive advantage based on low-cost productive labor. Similar situations apply to other productcategories where Vietnam’s exports have been growing.

Leveraging on FDI anchor rms to develop and facilitateformation of clusters seems to be unsuccessful so far. Te tworeasons behind this are that FDI rms operate as part of theirown global value chains and have very shallow roots in thelocal economy, and that supporting and related industries arealmost non-existent. Despite impressive growth and exportrecords, local value-added remains modest. It is estimatedthat the local content of automobiles or motorcycles produced in Vietnam is only at 5 – 10 percent. Tis is alsoevident in other industries of the economy. For instance, thegarment industry has low value-added because rms have toimport up to 80 – 90 percent of materials and accessories.Similarly, Intel buys less than 10 percent of its input fromthe local market. While Canon is o en cited as a success

story for developing a local supply chain, 90 percent of theirsuppliers are actually FDI rms operating in Vietnam.

Te lack of local suppliers have limited forward andbackward linkages within clusters and prevented local rmsfrom participating deeper in global value chains.

- Inconsistent understanding of the cluster concept, leadingto a lack of systematic cluster policy

Te “cluster” concept is new to Vietnam, and so it issometimes misunderstood and misconstrued with industrial parks which merely dene the co-location of rms in acommon industrial estate without signicant linkages andinteraction among them.

Tere has not been any formal discussion on cluster policyamong policy makers in Vietnam. Despite some on-goingindividual discussion and efforts touching on certain aspectsof clusters, such as industrial park development, supportingindustries, business–research collaboration, etc, a holistic view and policy approach towards clusters is still absent.

Te CCI’s ranks Vietnam relatively positive on clusterdevelopment probably as a result of the different perceptions of the “cluster” concept among respondents ofthe WEF Global Executive Opinion Survey in Vietnam.Tese misconceptions have likely contributed to an over-optimistic assessment of cluster development in Vietnam.

- Interventionist approach towards industrial policies

Vietnam is taking an ambitious approach towards industrial policies, yet without clear targets and priorities. About 74strategies and master plans for sectoral development havebeen developed and issued for the period until 2020 andbeyond. All of these plans appear to focus on developingtheir respective sectors to become the leading industry inthe economy.

Policy measures proposed or adopted usually focus on providing intervention, protection and subsidies with an aimto shelter industries from competition or create economiesof scale. Te automotive industry is just one example of such protection and intervention. Local content requirements were promulgated and generous nancial incentives havebeen provided to encourage local outsourcing. However,these passive and direct interventions and subsidies havecreated opportunities for fraudulent activities (withregards to Certicate of Origin) or the wholesale importof components and parts and doing only simple assembly work in Vietnam in order to benet from the incentives. Teshipbuilding industry is another example where subsidiesand protection have been provided to build a nationalchampion, but ultimately these resources and support weremisused and abused

Cluster policy needs to be integrated closely in regional policies, but in reality regional strategies are either developed

in isolation or copied from each other without thinkingabout how to create linkages and synergy among regionsthrough cluster formation.

- Industrial parks are not oriented towards clusters

Industrial parks are widely used by provincial governmentsas a tool to offer ready-made infrastructure and simpliedadministrative procedures to investors. By 2007, thereare 550 industrial parks or economic zones established inVietnam (see able 3.14). However, there have been fewefforts to encourage the development of supporting and

related industries and services which help form clusterlinkages. Recently, there is evidence about success in buildingup supporting industries in ue Vo industrial park tosupport the anchor rms, i.e. Canon and Foxconn. However,most of the suppliers of supporting parts/components werebrought in by the FDI anchor rm from their home countryor China. Linkages are also rarely established beyond theindustrial parks’ boundaries. o date, industrial parks just play the role of an industrial estate solution rather than a platform for forming clusters.



TABLE 3.14:NUMBER ANDSTRUCTURE OFECONOMIC ZONESAND PARKS BYTYPE AND BYREGION

FIGURE 3.24:GDP STRUCTURE BYOWNERSHIP 2000AND 2009

40.8037.80

48.4028.80

10.80 13.40

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2009

G D P S t r u c t u r e

( % )

FDI

Non-state

State

Source:General StatisticsOffice of Vietnam.


Structure (%)

Number IndustrialZone

ExportProcessing

Zone

High-tech

EconomicZone

Park (or so-called cluster)

Operation status 550 36.7 1.1 0.4 1.3 60.55

In operation 332 44 1.8 0.3 2.1 51.81 In process of construction 112 33 - 0.9 - 66.07 In warm up phase 105 17.1 - - - 82.86By region

Red River delta 165 27.3 1.2 - 0.6 70.91 North east 31 32.3 - - - 67.74 North west - - - - - - North central coast 55 38.2 - 1.8 5.5 54.55 South Central Coast 119 20.2 - - 2.5 77.31 Central Highlands 16 40.8 - - 6.3 50 South East 103 65.1 3.9 - - 31.07 Mekong river delta 61 45.9 - - - 54.1

Company Sophistication Economic Composition by Type of Company- Slight changes in GDP structure by ownership over the last

decade, with the slight decline in state sector’s share takenup by the foreign in ested sector

Te GDP structure by ownership is quite stable, with thestate sector’s share decreasing slightly from 40.8 percent in2000 down to 37.8 percent in 2009. Te non-state sector’sshare stood at 48–49 percent over the same period and theforeign invested sector gained grounds from 10.8 percentto 13.4 percent between 2000 and 2009. Although SOEshas declined as a result of the equitization process, the statesector has not been shrinking in terms of scale because ithas been reconsolidated into conglomerates and renancedto create economies of scale. On the other hand, while thenon-state sector has seen growth in terms of quantity andemployment, it still lacks the dynamism to become a growthdriver.

- Unbalanced structure, with SOEs taking a lion’s share ofin estment but creating modest revenues and employment

According to the recent report titled “Te Execution ofPolicy and Law on State Assets and Capital Managementby the State General Corporations and Conglomerates”of the National Assembly’s Standing Committee (NASCNovember 2009), during the period of 2005 – 2007,

the SOEs accounted for 51.3 percent of total businesssector capital, but contributed only 35.4 percent and 28.3 percent to revenue and employment growth respectively.In contrast, the private rms generated more revenue, andmore importantly, the sector created more jobs while havingmuch less capital share compared to the SOE sector.



FIGURE 3.25:CAPITAL,REVENUE, ANDEMPLOYMENTSTRUCTURE OFENTERPRISESBY OWNERSHIP,2005–2007

Source: Report of theNational Assembly’sStanding Committee (2009).

51.3035.40

28.30

29.30

42.9050.40

19.40 21.70 21.30

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Capital Revenue Labour

FDI

Private

SOEs S

h a r e

( % )

Te non-state sector also outperforms the state sectorin industrial production, which is considered to be

central in Vietnam’s overall development strategy towardindustrialization. In 1995, the state and non-state sectorshad an equal share in the total value of industrial output.But by 2009, the share of the non-state sector has exceededthat of the state sector by threefold. Following the sametrend, the state sector’s contribution to industrial growthhas decreased sharply from more than 40 percent in 1995 tolower than 10 percent in 2009.

- In estment focus varies by ownership

Te state sector’s investment structure in 2009 can be

characterized as follows:- ransportation and utility account for the biggest shares

of the state sector’s investment (20 percent of the total

investment in each sector) as a consequence of the policy toward intensive infrastructure investment to

fuel growth. Other public goods such as administrativeservices, education and healthcare, social servicesaltogether account for 20 percent of the total investment. While the share of investment for these sectors in thetotal budget spending is high, their share in the total public investment is relatively small as it is overshadowedby the dominant share of infrastructure investment.

- Among the remaining 40 percent for investment ineconomic activities, manufacturing accounts for 10 percent, mining 7 percent, and agriculture 5.4 percent.Te investment share in real estate and construction is

relatively high—up to 7.4 percent, while investments forscience and technology amount to only 1.6 percent.

FIGURE 3.26:STATE INVESTMENTSTRUCTURE BYINDUSTRY, 2009

Transport and communica ons

U lity and power

Manufacturing

Mining

Public administra on and defense

Community and social service

Agriculture and forestry

Others

Construc on

Educa on and training

Health and social work

Trading and repair

Real estate and ren ng

Science and technology

Financial internedia on

Source: General StatisticsOffice of Vietnam,Enterprise Census, 2006 –2008.



FIGURE 3.28:INVESTMENTSTRUCTURE OF THENON-STATE SECTOR,2005

FIGURE 3.27:FDI SECTOR’SINVESTMENTSTRUCTURE BYINDUSTRY, 2009


Source: General StatisticsOffice of Vietnam,Enterprise Census, 2006– 2008

39.6%

33.8%

17.1%

2.8% 1.7% Hotels and restaurants

Real estate

Manufacturing

Construc on

Mining

Transporta on and communica ons

Others

Trading

U lity and power

Agriculture and forestry

5% 2%5%

4%

13%

2%

2%

3%

64%

Agriculture

Fishery

Coal

Civil construc on

Trade

Hotela

Road Transporta on

Communica ons services

Other services

For the FDI sector, its investment structure exhibits thefollowing characteristics:

- Te FDI sector’s investment in 2009 is heavilyconcentrated in the real estate (34 percent of total FDIregistered investment) and hotels and restaurants (40 percent) sectors—accounting for three quarters of thetotal investment in 2009.

- Of the remaining one quarter, investment inmanufacturing counted for the largest share of 17 percent. Over the period 1988–2009, investmentshare in manufacturing amounted to 45.6 percent while the combined investment in the real estate,hotels and restaurants sectors came up to 33 percent,a sign of the recent rapid shi of FDI into real estateand speculative areas.

- FDI investments in the agriculture and utilitysectors are still very limited (0.6 percent and 0.8 percent respectively), which is a reection of the lowattractiveness or high entry barriers in those areas.

Finally, the non-state sector’s investment structure seems tobe unchanged overtime. In 2005, key areas attracting non-state sector’s investment were trading, agriculture and coalmining as illustrated in Figure 3.28 below.

Currently, 65 percent of the sector’s total investment isconcentrated in trading, hotels and restaurants, construction,transportation, coal mining, telecommunications andseafood processing.



FIGURE 3.29:CORPORATEGOVERNANCE ANDRESTRUCTURINGEFFORTS, 2008-2009

Source: Institute forIndustrial Policy Studies,National CompetitivenessResearch 2008 - 2009

China

India

Indonesia

Malaysia

Philippines

Singapore

South Korea

TaiwanThailand

Vietnam

4.5

5

5.5

6

6.5

7

7.5

4.5 5 5.5 6 6.5 7 7.5

F i r m r e

s t r u c t u r i n g

( s c o r e s )

Corporate Governance (scores)

In summary, state enterprises concentrate on capital-intensive activities such as transportation and utilities. Privateenterprises focus more on more short-term and service-oriented activities such as retails, hotels and restaurants, real estate,etc. FDI enterprises initially focused on import-substitutionmanufacturing and then gradually shi ed more to export-oriented light industries and more recently to real estate.

Sophistication of CompaniesDespite impressive growth in quantity, sophisticationand quality of companies in Vietnam remain weak ascharacterized below:

- Low level of education and extent of staff training

Level of education and extent of staff training largely variesdepending on the size of enterprises. Survey ndings onhousehold businesses suggest that entrepreneurs havinggraduate degrees account for only 0.2 percent of thetotal number of entrepreneurs, while entrepreneurs withundergraduate degrees make up 4.3 percent (GSO Survey ofbusiness and administrative entities 2007). More than two- hs or 41.9 percent of entrepreneurs never attended anybusiness training courses and 24.6 percent do not speak anyforeign languages (National Scientic Study 2009).

- Weak corporate go ernance and transparency

Te adoption of modern corporate governance standardsis still relatively poor, even among large companies.Te operations of boards or directors, appointment ofmanagement, information disclosure and protection ofminor investors are most o en cited by investors as leadingconcerns on corporate governance. Nepotism is common;in many companies, senior management is appointed by

connection rather than by professional qualications.Another optic of the company sophistication representsa segment of the Institute for Industrial Policy Studies’National Competitiveness Research 2008–2009. In thisstudy, Vietnam is ranked behind peer countries in corporategovernance and restructuring efforts as shown in Figure 3.29below.

- Limited role in policy dialogue and advocacy

Representation of various stakeholders from the businesssector in policy dialogue seems to be inadequate inVietnam. uite o en, big MNCs and large SOEs havebetter inuence on the policy agenda. Meanwhile, themajority of smaller companies have yet to play active rolesin policy advocacy, either because they do not have chancesto participate or because their level of awareness and interestin the broad policy spectrum is still limited. Among current493 National Assembly deputies, only 26 are representativesfrom the business community.

TABLE 3.15:DELEGATES TO 12THNATIONAL ASSEMBLYFROM THE ENTERPRISESECTOR

Delegates Number

Vietnamese business community (associations) 2

State-owned enterprises 7Private-owned and joint-stock enterprises 15Cooperatives 2

otal 26Source: Vietnamese NationalAssembly, List of Delegates ofthe 12th National Assembly, www.quochoi.vn.



Macroeconomic Competitiveness


Company SophisticationHuge heterogeneity in performance andsectoral-focus between SOEs, foreign-owned companies, and local privatesectors

High level of entrepreneurship, highflexibility and responsiveness tocustomers’ needs, aggressive pursuit ofshort-term market opportunities,

Lack of distinctive strategies, lowoperational performance, poor innovation,weak corporate governance

Macroeconomic PolicyIncreasing budget deficit and public debt, largely as a result ofintensive but inefficient capital investmentExpansionary policy triggering inflation, depreciation pressuresas a result of current account deficit

Reactive and inconsistent approach, lack of transparency andpolicy coordination

Social & Political InfrastructureWidespread availability to basic healthcare and education butmoderate quality and rising inequality in accessImproved quality of legislation, but ineffective and heterogeneousimplementation and considerable presence of corruption

High level of political stability, but weak position on voice andaccountability; inflexible, state-centric and control-based policyprocess; low level of consistency in government action

Vietnam Competitiveness Foundations

Endowments

Large and youngpopulation

Rich naturalresources

Favorablegeographic location

State of Cluster DevelopmentPresence of naturally emergingagglomerations

Focus on narrow industries

Low level of active collaboration

Economic policy tools, e.g. industrialparks, not systematically oriented towardsclusters

Sector-oriented policies largely driven bytraditional industrial policy ideas; poorimplementation

Business Environment QualityBasic skills, physical infrastructure, andadministrative structures available, but notkeeping pace with needs of the economy

Financial system shallow, innovationsystem very weak

Significant openness for foreign investors

Rivalry on local markets not very effective,with role of SOE s largely intransparentand presence of import barriers

Growing but unsophisticated local market

Openness and Responsiveness to Customers’ Needs- Strong commitment to international integration,

information technology, and collaboration with customers

Te VCCI- ACI joint survey (2009) with 630 enterprisesrevealed that 78.4 percent of the respondents are condentthat global integration is important to boost economicgrowth and improve their competitiveness. 65.1 percent ofthe companies stressed the role of exports as the main factor

boosting their company growth in the following years. 97.3 percent of interviewees were connected to the Internetand 64.1 percent have their own websites. 67 percent ofthe surveyed enterprises also noted that cooperation withcustomers is highly important in their business activities—amuch higher percentage than those recognizing theimportance of cooperation with the government andresearch institutes.

Assessment

Vietnam exhibits the standard prole of a transition

economy on the catch-up path. But efforts to upgradecompetitiveness fundamentals tend to be reactive andare becoming increasingly insufficient to keep pace with

demands of a growing economy. Te competitivenessfundamentals are signs of an economic strategy that hasmade the country’s existing advantages available to theglobal economy but is struggling to nd the right rolefor government to systematically create new competitiveadvantages:

1. Macroeconomic competitiveness is generally in line with the country’s stage of development but does not

meet the needs of a more prosperous country.2. Microeconomic competitiveness is shaped by the

transition to a market economy integrated in theglobal economy and the many individual attempts toupgrade competitiveness fundamentals without clear prioritization or coordination.

3. Overall, a strategic approach is lacking towards deningthe competitiveness prole Vietnam aims to provideand the steps it intends to take to get there.

Figure 3.30 and Figure 3.31 below provide a summaryof macroeconomic and microeconomic foundations ofVietnam’s competitiveness.

FIGURE 3.30:VIETNAMCOMPETITIVENESSFOUNDATIONS



Summary

Vietnam’s transition since the mid-1980s has beenaccompanied by major structural changes. It transformedthe governance of the economy from planned to market,opening up Vietnam for integration with the global economy.Structural change has transformed the composition of theeconomy, moving millions from subsistence agricultureinto capital-intensive manufacturing and services. Both ofthese changes have contributed to the country’s underlyingcompetitiveness, essentially the presence of low cost labor.Growth has been fueled by these macro-level, “systemic”changes. More recently, the policy responses have mainlyfocused on intensifying investment, especially in SOEsand infrastructure, with an emphasis on generating growthrather than on upgrading productivity and efficiency.

However, this growth model ultimately has limited potential. Te highest level of prosperity that Vietnam canreach given this approach is in fact capped by the level of productivity unskilled workers can reach in manufacturing.If Vietnam is unable to move beyond this model, it willremain stuck at a lower middle-income level, with poorereconomies threatening its position. Furthermore, the over-reliance on externally-nanced investment as a driver ofgrowth is generating dangerous macro-imbalances that mayignite crises.

In summary, the current economic model is characterized by

the following main features:- Roles of different economic segments: Te dominant role

of state-owned enterprises whose efficiency increasingly poses questions. Te role of the FDI sector as the export

driver is growing, but beyond that, its role in improving productivity and innovation remains murky. Te rapidlygrowing local private sector is asserting its role, butinnovative capacity is still limited.

- Investment-driven growth: Growth is driven byinvestment in capital goods formation, while domesticsavings (especially in the public sector) are decreasing,leading to greater reliance on external nancing sources,namely FDI, ODA and remittances. Tis strategy createsunsustainable macroeconomic imbalances. Growth policies focus on breath rather than depth, on quantityrather than quality, thereby creating high, but ultimatelyunsustainable, growth rates rather than upgrading productivity and improving efficiency.

- Te transformation of the economic structure: Growth

has been fueled by the one-off structural change fromagriculture to capital-intensive manufacturing andservices, rather than by within-sector productivityupgrading. Productivity of the manufacturing sector islow which impedes not only the sector’s moving up butalso spillovers in upgrading overall productivity acrossthe board.

- Low value-added economic structure: Despite impressivegrowth and export records, the level of local value-addedof the economy remains low, even in the dynamic exportsector. Low cost labor is the main advantage which helps

generate export growth, while most of the machineryand materials are still imported. FDI companies bring incapital to combine with local cheap labor to produce fortheir own value chains, with little, if any, linkages withthe local economy. Without such forward and backward

Context forFirm

Strategyand Rivalry

Related andSupportingIndustries

Factor (Input)

Conditions

DemandConditions

Vietnam’s Diamond – National Business Environment

Attractive sizeable and growingmarket

Low, yet improving, sophistication oflocal customers

Weak regulatory quality standardsand enforcement

Basic physical infrastructure in place; loweffectiveness of the significant ongoingfurther investments

Solid communication infrastructure as aresult of liberalization and competition

Growing but still shallow financial system;highly volatile and speculative, withlimited access to credit for new privatecompanies

Education system is growing but provideslargely insufficient quality; serious

shortage of skilled laborModest performance on administrative

infrastructure, but major reforms (e.g.Project 30) under way

Poor innovation infrastructure

Natural emergence of clusters, but focus onnarrow activities with weak presence of localsuppliers and service providers

Shallow roots of FDI in the local economy

Sector-oriented policies ineffective and notsystematically focused on clusters

High level of openness to foreign investors;still significant important barriers for local

marketWeak competition policy and enforcement

Unequal competition among companies, withSOEs receiving special treatment

Competition focused on price, not quality

Unclear separation of government role as aregulator from that as an owner

Equitization of SOEs not oriented towardsimproving performance

FIGURE 3.31:VIETNAM’S DIAMOND– NATIONAL BUSINESSENVIRONMENT



linkages with the FDI sector, local companies fail to participate effectively in the global value chains.

- Social and institutional infrastructure does not keep pace with dynamism and vibrancy of economic growth:In spite of good records on universal basic education andhealthcare services, there are increasingly worrying signsabout the quality and accessibility of higher educationand healthcare services. Institutional capacity has notkept pace with the sophistication and complexity of themarket economy and external environment.

- Regional development: Economic activities are clusteredaround the two main poles, Hanoi and Ho Chi MinhCity, with the rest of the country lagging behind. Teaim of regional policy is to mitigate inequality amongregions. However, this policy approach is actuallydemotivating regions to create unique advantages andupgrade competitiveness. Heavy concentration in thetwo poles has also created serious urbanization problems,such as traffic congestion, pollution and microeconomicbottlenecks.

- Industrial policy: Industrial policy focuses onintervention, protection and subsidies rather than onupgrading productivity and strengthening industriallinkages. Industrial parks and nancial incentives are widely used as a tool of industrial policy, while littleattention is paid to upgrading workforce skills, improving productivity, facilitating innovation or building clusterlinkages.

- Deep integration into the global economy: With the W O’s accession and other multilateral and bilateralagreements, Vietnam has integrated deeply in theglobal economy and beneted greatly from that process.However, signs of volatility and vulnerability to externalshocks and uctuations are increasingly emerging,requiring Vietnam to have a more proactive, long-termapproach not just to respond to but also to forecast andmanage external factors effectively.

Te necessity for change is not only driven by internalfactors. As a country increasingly integrated into the globaleconomy, Vietnam has to acknowledge shi s in the externalenvironment it is facing. Some of these are signicantopportunities, while others provide challenges to be dealt with:

• Te rise of Asia provides increasing market opportunitiesin Vietnamese neighborhood, especially in consumermarkets. Many of these markets have needs much morein line with Vietnam’s domestic market than the marketsin the US and Western Europe it traditionally serves.

o tap into this potential, however, Vietnam has to

dramatically improve its attractiveness as a platform forforeign companies to serve the region. And it has to createan environment in which Vietnamese companies canemerge that have the products, brands, and distributionchannels to serve the growing demand across Asia.

• Te global reallocation of manufacturing activities provides opportunities for Vietnam. Global companiesare under continued cost pressure, and many of them arelooking for ways to rebalance their strong dependenceon China. Vietnam can be competitive in this raceamong alternative locations, if it manages to signicantlyincrease its ability to support higher productivity inexport-oriented operations integrated into global value chains. On the ip side, it may also pose a risk ofrelocating low value-added labor-intensive and pollutedactivities from “early mover” countries like China toVietnam.

• Te increasing level of global competition, a trendVietnam has itself taken ample opportunity of in the past, is more and more also becoming a challenge.New competitors with even lower wages and/or more productive business environments are challengingVietnam’s attractiveness among foreign investors.

Within ASEAN, the agreed path of trade liberalizationis exposing Vietnam’s domestic market more and moreto competition. ASEAN’s free trade agreements withother countries add to the pressure. Tis is good forVietnamese consumers but a challenge that companiesin Vietnam have to prepare for. Vietnam’s commitments within ASEAN but also the W O have in the meantimeclosed the door for using protectionist countermeasures.

• Te risks to the global trading system have so farbeen contained, but can easily erupt with signicantconsequences for Vietnam. Te large global capital ow

imbalances have led to signicant talk about currency wars. Protectionism has so far been held at bay, butcould become a more important factor. Te disruptionsin trade and investment ows would have increasinglysignicant impact on Vietnam as its economy integratesmore deeply. Vietnam also is exposed to risks fromeconomic crisis in individual countries, for example adouble-dip in the US or an overheating and subsequentcontraction of the Chinese economy.

• Climate change, energy supply, and food security areother issues that are inevitably on the rise. Tey allhave global dimensions but also national implicationsfor Vietnam. Tese trends can undermine Vietnam’scurrent competitive position in a number of importanteconomic sectors, for example agriculture. And they canhave a signicant direct impact on the prosperity of itscitizens.

here is a widely shared acknowledgement that Vietnam needs tomo e beyond the current economic growth model which is basedon low labor cost and intensive capital in estment towards acommitment to raising productivity and competitiveness as the coreof growth. Vietnam’s future growth has to mo e beyond pro iding access to and leveraging existing economic fundamentals. It needs tobe based on a consistent upgrading of these fundamentals and creatingnew advantages. Success will require changes on both macroeconomic and microeconomic conditions driving productivity. is new visionis a critical prerequisite for Vietnam’s quest to mo e up sustainably tothe next stage of development.



Endnotes1Vietnam has over six billion tons of coal reserves, mainly in uang Ninh, Tai Nguyen. Oil and gas reserves are estimated to be atfour billion barrels and 50 – 70 billion cubic meters respectively, mainly in the sediments of deltas and continental shelf. Bauxite projected to be about 6 billion tons and can be over 8 billion tons while uranium reserve is estimated at about 200 – 300 thousan2Te aggregate annual coal output in Northern Vietnam is around 40 million tones and a majority of the output is for exports, espeto China. In 2009, the total export volume was estimated at 24 million tones, not including cross-border smuggled exports. MeaMinistry of Industry and rade plans that Vietnam will need to import coal in large volume as fuel for production by 2012. Te im volume may reach 34 million tones by 2015 and 114 million tones by 2020 (Vietnam Energy Portal – http://www.vietnamepenergy).3Te new CCI was developed by Michael Porter, Mercedes Delgado, Christian Ketels and Scott Stern using data from the WEconomic Forum’s Global Executive Opinion Survey as well as other data sources. See their chapter in the 2008 Global CompetReport for further background.4From 2002-2007, more than 120 law projects and ordinances have been submitted to the National Assembly and the StanCommittee of the National Assembly. It was preliminary estimated that 42 laws, 462 decrees, 12 ordinances, 245 instructioncirculars, 168 resolutions and thousands of other normative acts were promulgated. Many important codes were enforced in this for example Intellectual Property Law, Tri Practice and Waste Combat Law, Corruption Prevention Law and many economic c were modied, added like Enterprise Law, Budget Law, Land Law, Investment Law, endering Law, Environment Protection LawInsurance Law, modied Labor Law.

5Te Standing Committee of the National Assembly (the tenth) promulgated resolutions number 45/1998, number 55/1998 anumber 60/1998 asking the Government to issue Decrees on implementing Democracy Regulations at 3 forms of grassrootsTe Government issued 3 Decrees: Decree number 29/1998/NĐ-CP Democracy implementation regulation at communes (111998); Decree number 71/1998/NĐ-CP Democracy implementation regulation for offices’ activities (8-9-1998); and Decree nu07/1999/NĐ-CP Democracy implementation regulation at state-owned enterprises (13-2-1999).6Tis subsection follows the analysis of Ohno (2009) with minor revisions and editing endorsed by Kenichi Ohno. See Ohno, Ke2009. “Avoiding the Middle-income rap: Renovating Industrial Policy Formulation in Vietnam,” ASEAN Economic Bulletin pp.25-43.7Te Consumer Price Index (CPI) stayed at single-digit levels, the budget decit remained below 3 percent, the trade decit was b percent, and foreign exchange reserves were sufficient for nearly 4 months of imports.8MOF denes that public debt includes money owed or borrowing guaranteed by the government at all levels.9According to the “External debt bulletin” of the Ministry of Finance, if measured by the denition of the UNC AD’s Debt ManagFinancial Analysis System (DMFAS), by which public debt also includes liabilities of the central bank and government agencies (SOEs) at all levels, Vietnam’s public debt level would be larger, e.g. EIU estimates Vietnam’s public debt by the end of 2009 was of GDP, as contrast with 44.7 percent announced by the MOF.10Some gigantic planned projects in the next two decades like the North-South express rail (USD 56 billion), namely Hanoi’s const projects (USD 90 billion), nuclear power plants in Ninh Tuan province (USD 10 billion) etc., mainly funded by the budget and pdebt, would certainly result in a rapidly increasing public debt in the coming years.11Besides GDP growth, ination and interest rates, the risk level of public debt also depends on a number of other macro variablas the current account decit and foreign exchange reserves. In these respect, Vietnam is also in a signicantly disadvantageouscompared with competitors in the region.12

Malaysia comes second with scal revenue equivalent s to 22 percent of GDP.13Te capital inows during 2007-2008 period are estimated to be around USD 45 billion, including USD 13 billion of remittances,23 billion of private capital (FDI, FPI, commercial credits,) USD 3 billion of ODA, and USD 6 billion of foreign tourists’ spend14Other consequences of expansionary credit growth include bubble asset markets and skyrocketing trade decit.15In the mean time, the government also sharply cut public expenditure and tightly controlled SOEs’ investment to reduce scal Tis policy helped reduce public investment in 2008 by 16.4 percent compared with that in 2007. Te ination, a er about 6 monthlags, returned to single digit in early 2009.16Even a er several devaluations (5.0 percent in November 2009, 3.3 percent in February 2010, and another 2.1 percent in Augustthe dong is still overvalued 13 percent against the dollar compared to the base year of 2000, (see Lê Xuân Nghĩa, 2010).17In end of July 2010, Fitch Ratings downgraded Vietnam creditworthiness from “BB– ” to “B+” (i.e., four steps lower than the “inv

grade”). Te main cause is due to the very high budget decit of Vietnam is funded primarily through the issuance of debt denomin foreign currency, while foreign exchange reserves are being depleted and current balance continued to deteriorate.18It should be noted, however, that these devaluations were conducted in a reactive, unpredictable and abrupt way which maycondence of the market.



19Tis sub-section used some analyses and data from the DFID’s Paper “Measuring the Economic Impact of Competition: Findings Vietnam”, 2010, p16.20Tis sub-section follows the analysis of Suiwah Leung (2009) with updates and edits, “Banking and Financial Sector ReforVietnam”, ASEAN Economic Bulletin, Volume 26, Number 1, April 2009, pp. 44-57.21Analyses and data in this sub-section were drawn from the National Assembly’s Standing Committee’s Report on University Edu

uality, National Assembly 7th Plenary (May – June, 2010)22“Legal documents” means both legal normative documents (LNDs) as dened in the 2008 Law on Promulgation of LNDs (“LLaws” or the “Law”) and official letters and other documents that are not LNDs, but contain legal norms – i.e., rules and procedgeneral application.23Te Law on Laws does not include the requirements for impact analysis and public consultation for non-normative documents. the formal requirement for impact analysis is for laws, ordinances and decrees only, while other LNDs have similar but less requirements.24By end 2005, Ministry of Finance, for the rst time on behalf of the Government, issued USD 750 million international sovereign which was later on re-lended to Vinashin with the government’s guarantee. In the following year, Vinashin itself borrowed anothe600 million from the international market with arrangements of some foreign banks. Tis year, the group planned to issue another V400 billion (USD 20 million) international bond just before its crisis was revealed. Te debt/equity ratio of the group was 11 at point of time, with the total debt amounting up to VND 86,000 billion (USD 4.3 billion) while its total asset is VND 104,000 b(USD 5.2 billion. Its debts include USD 750 million government-guaranteed sovereign bond, and debts to contractors and na

institutions.25Capital intensity per worker for the state sector in 2007 is VND 1.11 billion, three times of that for non-state sector (VND 0.35 biand 2.5 times of that for FIS (VND 0.45 billion). o create one unit of prot, an SOE needs 1.8 units of capital, non-state enterprisunits and FIE 1.03 units (GSO data).26Estimated by the Industrial Development Strategy Institute, Ministry of Industry and rade

Chapter References:Acemoglu, Daron, Simon Johnson, James Robinson, and Yunyong Taicharoen (2003).

“Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth”, Journal of Monetary Economics, 50: 49 123.AmCham (2010). Speech at Mid-term Vietnam Business Forum Hanoi, May 26th 2010, http://www.vbf.org.vn/downloadsVBF%2

book%20May%2010_ENG.pdf

Bùi rinh (2010). “Assessment of Investment Efficiency,” unpublished monograph.

Dasgupta, S. Laplante, B. Meisner, C. Wheeler, D. Yan, J. (2007). “Te Impact of Sea Level

Rise on Developing Countries: A Comparative Analysis,” World Bank Policy Research Working Paper.

DFID (2010). “Measuring the Economic Impact of Competition: Findings from Vietnam.”

Dost, Najim, Jaime Frias, Irene Liu, Ziang ony Ngo and Markus aussig (2008). “Analysis and Recommendations on the Develoof Vietnam’s Electronic Cluster.”

Easterly, William (2005). “National Policies and Economic Growth: A Reappraisal.” In Te Handbook of Economic Growth, editePhilippe Aghion and Steve Durlauf, North Holland.

European Commission (2009). IPR Enforcement Report.

Fitch Ratings (2009). “Outlook on Vietnamese Banks - Another year of high growth adds to concern.”

Fulbright Economic eaching Program (2008). “Infrastructure Challenges in Vietnam.”

Fulbright Economics eaching Program (2008). “Surviving a Crisis, Returning to Reform.”

General Statistics Office of Vietnam (2007). Establishment Census 2007.

Gordon, Roger and Wei Li (2009). “ ax structures in developing countries: Many puzzles and a possible explanation,” Journal of

Economics, Vol. 93, pp. 855–866.Harvard Kennedy School’s Vietnam Program and Fulbright Economics eaching Program (2008). “Choosing Success: Te Lesson

East and Southeast Asia and Vietnam’s Future - A Policy Framework for Vietnam’s Socioeconomic Development, 2011-2020.”Discussion Paper Series.



IDE-JE RO (2005). “Industrial Clusters in Asia – Analyses of Teir Competition and Cooperation.”

IMF (2010). “Vietnam – Informal Mid-year Consultative Group Meeting,” statement by IMF staff representative, Kien Giang, Ju9-10, 2010.

Lê Xuân Nghĩa (2010). “On the Macroeconomy and Macro-nancial Risks,” presented at the conference jointly held by the VietAcademy of Social Science and the World Bank, Hanoi, August 2010.

Leung, Suiwah (2009). “Banking and Financial Sector Reforms in Vietnam.”

Mori, Junichi, Nguyen Ti Xuan Tuy, and Pham ruong Hoang (2009). “Skill Development for Vietnam’s Industrialization:Promotion of echnology ransfer by Partnership between VE Institutions and FDI Enterprises.”

National Assembly’s Standing Committee (2010). Report on University Education uality Plenary Session 7.

National Scientic Study (2009) No. KX.04.17/06-10

Nguyễn Đình Cung (2009). “Structure of the Economy: Situation, Problems, and Proposed Solutions,” presented at the seminar aCentral Institute of Economic Management, July 15, 2009.

Ohno, Kenichi (2009). “Avoiding the Middle-income rap: Renovating Industrial Policy Formulation in Vietnam,” ASEANEconomic Bulletin Vol. 26, No. 1, 25-43.

Porter, Michael E. (1990). Te Competitive Advantage of Nations.

uang, Phan Vinh and John Bentley (2009), “Codication: A New Approach to Reforming Vietnam’s Legal System.”

Saigon Online (2010). “Infrastructure Development for Enhancing Competitiveness,” www.sggp.org.vn.

Sai Gon Giai Phong Newspaper (2010). Interview of the SBV Governor Nguyen Van Giau on September 30, 2010.

Te Motherland (2009). “Bad Debt Is Getting More Worrisome,” http://www.toquoc.gov.vn

Te Motherland (2009). “Difficulties in Mobilizing Capital for ransportation Infrastructure Development,” http://www toquoc.go vn. Teo, http://www.most.gov.vn.

ue Anh N. . (2009). “Foreign Direct Investment and echnology ransfer in Vietnam: A case study in ue Vo Industrial Park,” A prepared for the World Bank Institute.

Vallely, Tomas and Ben Wilkinson (2008). Vietnamese Higher Education – Crisis and Response,” Harvard Kennedy School of Government, Ash Institute.

Vietnam Energy Portal, http://www.vietnamep.com/energy.

Vietnam’s Achievement Against 2015 MDG Goals, http://www.mdgmonitor.org/country_progress.

Vietnamese National Assembly’s Standing Committee (2009). “Te Implementation of Policies and Legislation on Management anof State’s Capital and Assets in State General Corporations and State Conglomerates,” November 2009.

VnEconomy (2010). Interview of Mr. Dang uyet ien, Deputy Director of the Corporate Finance Department, Ministry of Finan with the VnEconomy newspaper on 20 Jan 2010 http://vneconomy.vn/20100120093926128P0C5/co-phanhoa-cham-do-khaquan.htm.

Vu Tanh u Anh et al. (2007). “Provincial Extralegal Investment Incentives in the Context of Decentralisation in Viet Nam: MutuBenecial or a Race to the Bottom?”

Vũ Tành ự Anh (2009). “Global Financial Crisis and Its Implications for Vietnam,” in From Crisis to Restructuring, Ho Chi MinCity National University Publication, 3-18.

Vũ Tành ự Anh (2010). “Vietnam’s Macroeconomy and Fiscal Policy in 2010,” presented at a conference held by Te Institute ofFinancial raining, Vietnam Ministry of Finance: “Financial Policy Making in the Period of Post-crisis,” January 26, 2010. Ha

Vũ Tành ự Anh (2010). “Structural Reforms as the Means to Vietnam’s Development and Poverty Reduction,” presented at a confheld by Te State Bank of Vietnam and Te International Monetary Fund: “Post-Crisis Growth and Poverty Reduction in DevelopAsia,” March 22, 2010, Hanoi.



Vietnam’sCompetitivenessAgenda: FromAnalysis to Action

Chapter 4



It is much easier to describe and assess a country’scompetitiveness than to improve it. Yet improvingcompetitiveness is the only way in which the assessmenthas an impact on the standard of living that the people ofVietnam will be able to enjoy. Tis chapter therefore aimsto provide guidance on the policy recommendations to bedrawn from the assessment in chapters 2 and 3.

Competitiveness is, as was discussed in the introduction, theresult of a large number of factors, actions, and policies. Anexhaustive list of recommendations that address all of theseareas is neither feasible, nor effective. What is needed – and what is lacking in many countries that fail to make sustainedeconomic gains - is a clear prioritization that helps policymakers to identify those specic action areas that at this point of time are the most powerful levers to improve theircountry’s competitiveness.

Action priorities are not simply the result of an identicationof strengths and weaknesses as in chapter 2 and 3; they are areection of the choices that a country makes about where it wants to go. Once such a strategic direction is set, an actionagenda becomes the logical set of policies necessary to movea nation from where it is to where it aims to get to.

Where does Vietnam want to go? Ultimately, this is aquestion that only the Vietnamese can answer. Te en-yearstrategy currently under discussion denes the ambitionfor Vietnam to become a middle-income country by 2020.Te strategy identies human resources, infrastructure, andinstitutions as three critical action areas that government

policy has to focus on to reach this target.Te en-year strategy is, in its structure of ambitionsand actions, quite typical for similar documents in othercountries. While this structure provides some usefulorientation, a complete national strategy would need toidentify the specic value that Vietnam aims to offer tocompanies that operate in the country, rather than simplyset ambitions and indicators. It would need to dene morespecically the type of activities for which this offer wouldbe most attractive. For example, the specic sectors/clustersor operations targeted at specic markets. In turn, it would

then be able to deduce from this value proposition theaction priorities to guide implementation.

Te Vietnam competitiveness agenda outlined in thischapter does not describe such a complete strategy. Tis

would go far beyond the mandate of an external academicanalysis. Instead, the report in its entirety aims to make acontribution in two ways that are important steps towardsa strategy. First, it provides – especially in the previouschapters 2 and 3 - many of the facts that are necessary to havean informed debate about a national economic strategy forVietnam that is both feasible and in line with the country’sambitions and nature. Second, it identies – here in chapter4 – a set of principles and actions that are fully consistent with the long term strategic ambitions for Vietnam outlinedin the ten year strategy. Any value proposition that Vietnamdecides to adopt would most likely be consistent with theten-year strategy but there will be a need to specify thestrategy further. Te competitiveness agenda outlined hereis thus a foundation that can be further specied once anational value proposition is in place.

Te competitiveness agenda developed in this chaptercontains three parts: First, three critical tasks that require

the focused attention of policy makers in Vietnam areidentied based on the analysis in chapters 2 and 3. Teability of Vietnam to come to grips with these threetasks is going to be fundamental to its ability to deal with the opportunities and threats ahead. Second, actionrecommendations on what Vietnam should do to approachthese tasks are identied. General principles are discussedthat should guide policy making across the three tasks as well as for economic policy making in general. Specicsets of actions are then identied within each of the threetasks. Tird, an implementation strategy is outlined that can provide orientation for how Vietnam can turn these action plans into reality. Tis strategy covers both an approachfor the sequencing of different types of actions and theorganization of a governance structure that can oversee andmanage progress.

Te competitiveness agenda outlined in this chapter hasthe ambition to be a useful starting point for Vietnameseleaders to discuss the actions to take. In this process, manyof the details proposed here will inevitably be changed. TeVietnamese will have to design an action agenda that reectstheir own values, objectives, and preferences. Te structureand specic action recommendations presented here willhopefully make this task easier and enable the Vietnameseto engage in a more informed discussion about theircompetitiveness priorities. At the end of this discussion,Vietnam will have more than a clear action agenda. It willalso be able to elevate its strategy to the next level and denea clear value proposition in terms of what Vietnam is offeringas a place to do business.

Critical tasks facing Vietnam

Vietnam has – as chapter 2 has documented – achievedone of the most impressive global growth stories of thelast twenty-ve years. Te analysis also indicates that thefundamental drivers of this growth continue to be in place: Vietnam has the opportunity to stay on its currentgrowth path for the next few years. Tis positive outlook

Vietnam’sCompetitivenessAgenda:From Analysis to Action



and the complacency it can easily foster is the most difficultchallenge facing Vietnam.

Te tasks that Vietnam is facing fall into two categories:First, there are two groups of emerging challenges thatthreaten to undermine the current growth dynamics if theyremain unchecked. Second, there is a group of fundamentalchanges in Vietnamese competitiveness that are necessaryfor the country to move beyond the limitations of thecurrent growth model. While different in nature, thesetwo groups are connected and in part overlapping: Tethreats to current growth are, at their core, symptomatic ofthe growing fragilities of the current growth model. Tesefragilities are an important impetus for the need to enter anew stage of development. In turn, all progress on creatingthe foundations for higher productivity growth will also provide relief to the macro- and microeconomic pressure visible today.Macroeconomic imbalancesVietnam has registered impressive GDP growth over the lastfew years and decades, enabling a rise in standards of livingand li ing millions of Vietnamese out of poverty. However,beneath this surface of strong overall GDP growth, Vietnamfaces signicant 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. Ifimports contribute towards the upgrading of the capitalstock and therefore create opportunities for futureexports, a trade decit is temporary and justied; the datais not conclusive but suggests that fuels, raw materials,

components and supplies for exports, and increasinglyalso consumption goods dominate.

• Te ip side is a growing savings-investment imbalance; while such an imbalance is again normal for a country with a low capital stock on a fast catch-up path, the lowefficiency of the investment is worrying. Te externaldecit has to be covered through capital inows, fromforeign investment, remittances, development aid, orthrough other sources. Te increasing concerns aboutVietnam’s ability to nance the external decit, fuelledby rising external debt1 and a signicant drop in foreignreserves2, create uncertainty about the country’s futureeconomic outlook.

• Ination and exchange rate; Vietnam’s ination rate hasin the last few years become increasingly volatile, with

the trend rate of ination ratcheting upwards. Largeunsterilized capital inows and rapid growth in domesticcredit have created inationary pressure. Under anexchange rate policy that is oriented towards stablenominal rates, this has led to increasing real exchangerates and has forced Vietnam into repeated devaluations.Te high level of dollarization in the economy adds todifficulties in managing ination and exchange rateuctuations.

Te analysis in chapter 3 has revealed that the current policy approach plays a crucial role for these imbalances.

Te public sector accounts for a disproportional share ofinvestment and is nancing it through public sector decitsthat increased quickly from 2.8% of GDP in 2001 to 8.9% ofGDP in 2009 (IMF). Despite a relatively high tax to GDPratio3, public sector revenues are not only insufficient to



cover expenditures but also overly reliant on revenue sourcesthat are either highly volatile (oil and gas taxes) or boundto fall due to policy commitments in the AF A and W Ocontext (import tariffs). Given the still shallow local capitalmarkets, the government is forced to nance its budgetthrough donor assistance or the global capital market.

Tese imbalances are costly and could turn out to becomeseriously dangerous. At the minimum, they lead investorsto require a higher risk premium to invest in Vietnam. Tisslows down the rate of growth. And it reduces the benetsthat the Vietnamese can derive from foreign capital thatis naturally needed in an economy on a rapid catch-up path. But the consequences could be much more painful.Vietnam’s macroeconomic imbalances could culminatein a crisis should sentiments shi so that Vietnam losesaccess to external nancing. Tis would require a painfuladjustment process with severe exchange rate changes, public expenditure cuts, and possibly years of lost growth.

Te current policy response has recently receivedinternational praise, which noted that the Vietnamesegovernment had responded to the concerns aboutmacroeconomic imbalances. While Vietnam has taken such positive steps, the policy response falls short of a coherentstrategy to address these challenges in a more comprehensive way. Tere is virtually no publicly announced strategy forreducing external and government nancing decit. Recent price controls in response to ination have addressed thesymptoms but not the root causes. Changes in the nominalexchange rate have been reactive and failed to outline a

clear future path that nancial markets can rely on. Tegovernment’s pressure exerted on commercial banks toreduce interest rates doesn’t take into account the marketsituation. In particular, interest rates have remained highbecause the public does not want to hold Dong balancesat lower rates. Te emerging imbalances described above will continue to grow, or even become chronic, unless thegovernment changes course.

Vietnam needs a more prudent macroeconomic policyapproach that addresses the root causes of the emergingimbalances. Monetary policy should be more transparentand forward looking. Fiscal policy should be more prudentin managing budget decit, public investment, and publicdebt. In addition, monetary and scal policies will need tobe well-coordinated to achieve macroeconomic stability.

Microeconomic bottlenecksVietnam’s current growth trajectory is driven by the natureof its microeconomic fundamentals, essentially the presenceof a large pool of low cost labor that has become more andmore accessible for integration into the global economy. While these factors continue to hold, there are increasingsigns that the microeconomic growth model is hittingbottlenecks:

• Skill and infrastructure shortages; Investors areincreasingly reporting problems in getting sufficientlyskilled employees, especially middle managers and

technicians. Tere are also growing concerns about thecapacity of the logistical and electricity infrastructure.Tese problems are locally concentrated in regionsthat have received the lion’s share of export-orientedinvestment inows, especially in the Ho Chi Minh Cityregion.

• Prole and implementation rate of FDI; foreigninvestment is increasingly focused on real estate projectsand labor-intensive activities. Tere is less upgrading fromthe induced imports of capital goods; already before,there was little, if any, evidence of positive spilloversfrom foreign owned activities to local companies. FDIrms use cheap labor in Vietnam to produce for theirown global value chains and have shallow roots in thelocal economy. While the announced FDI projectscontinue to be strong, there is an increasing gap betweenthese announcements and actual investments. While part of the gap might be explained by an interest to

“over-report” FDI attraction at the regional level, partof it is likely to be driven by increasing problems inimplementing FDI projects in line with initial plans orby speculative behavior of some investors who register projects to “reserve a seat” and later resell their licensesfor prot.

• Deteriorating ratio of investment to growth; as anaccounting measure, the incremental capital to outputratio (ICOR) gives a sense of how investment relatesto GDP growth. Notwithstanding the fact that ICORis o en criticized for its conceptual validity, it is still

notable that relative to its investment, Vietnam achieveslower GDP growth than China and India. State-owned enterprises account for the lion’s share of capitalinvestment, accentuating the low overall investmentefficiency.

Tese emerging bottlenecks are signs of the graduallydecreasing level of dynamism that the current growth modelis able to generate. While they are unlikely to result in anyimmediate crisis, they will slow down growth and with it,the rate of improvement in the standard of living of theVietnamese people. And these bottlenecks are likely tobecome more cumbersome as the economy expands.Te policy response so far has been based on a largely accurateidentication of the bottlenecks – all three main elementsof the ten-year strategy are highly relevant. However, theimpact of the steps taken in response, has so far, been clearlyinsufficient.

In the area of workforce skills, the educational system isin a transition. Relative to its GDP, Vietnam is spendingmore on education than many of its peers: According tothe World Bank, Vietnam’s public spending on educationas a percentage of GDP in 2009 was about 5.2% - higherthan most of its ASEAN peers (Malaysia – less than 5%;Tailand – 4%; Indonesia – 3.5%). But the education systemis inadequate in responding to the needs of companies,in terms of quality, quantity, and content of education.



From a broad-based shift towards market-oriented economic activityto a targeted approach of upgrading productivity

at any point in time. At the moment, Vietnam is tryingto upgrade too many things at the same time, without aclear strategy that could align and sequence these activitiestowards a coherent new goal. Te lackluster success in manyif not most of the initiatives to fundamentally upgradeVietnam’s competitiveness is the logical consequence.

Improving Vietnamese competitiveness: What todo?

Vietnam needs an action agenda that accomplishes the threemain tasks identied in the preceding section. Vietnameseleaders have to design the many specic policy programsand activities required in this context. Companies, localand foreign, international donors, and others will also haveto be involved. Te dialogue between these importantstakeholders will provide the basis for future work ondening a comprehensive national economic strategy.

Tis section contributes to their work in three steps. First,it outlines some general principles on how the nature ofVietnamese economic policy will have to evolve in this newstage of the country’s development. Second, it will identifyspecic actions recommended for early implementation ineach of the task areas discussed. Tird, it will dene importantgeneral rules for how to align ongoing government policychanges with the overall competitiveness agenda.

Guiding principles: How does Vietnamese policyaction need to change

Vietnam’s 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 means

an indication that the policies of the past were mistaken. Itis a sign that both Vietnam and the international economicenvironment in which the country operates have beendramatically transformed over the last two decades: what worked well in the past is not necessarily what will work bestin the future.

Moving from one policy approach to another is not justa matter of rening current policies. It is driven by theneed to adopt a new set of principles that can then guidethe multitude of individual changes that are required.Tese principles describe the direction and underlyinglogic of change. Clarity on these principles enables themany individual policy makers and implementers to aligntheir actions with an overall strategy. While this happensnaturally in a steady-state economy within a given growth paradigm, it becomes a critical condition for effective action when many things need to be changed in parallel.

Te following three principles outline critical dimensions ofthe Vietnamese economic transition- the economic policygoals, the role of government and the private sector prole

Growth driversVietnam’s growth since the mid-1980s has been driven bytransition and structural change. ransition has transformedthe governance of the economy from plan to market, openingup Vietnam for integration with the global economy.Structural change has transformed the composition of theeconomy, moving millions from subsistence agriculture

into manufacturing and services. Tese macroeconomic“systemic” changes have enabled underlying competitiveness,essentially the presence of low cost labor, to be revealed.

Vietnam’s future growth has to move beyond providing



access to and leveraging existing economic fundamentals.It needs to be based on a consistent upgrading of thesefundamentals. Tis will require changes on a wide rangeof macroeconomic and microeconomic conditions driving productivity.

Te current policy debate in Vietnam has not quite made thetransition to this new vision. Much of the focus is on short-term growth rates rather than on sustainable productivitygrowth. While these objectives do not need to be in conict,they easily can be. Many macroeconomic policies that fuelshort-term growth have no or even negative impact onthe longer-term productivity potential of the economy.Tis is particularly true for attempts to provide SOEs witheasy access to capital in order to keep up their investmentactivities.

Go ernment roleVietnam has experienced a signicant transformation in therole of government in the economy since the mid-1980s.Te basic institutions of a market economy, including free price setting, making decisions on buying, producing,and selling, and so forth, have been created. Governmentremains an important factor in the economy, but the natureof its involvement has clearly changed. Government is nowreeling under the strains of nding its new role within themore complex market economy that has developed. Tegovernment’s instinctive reaction remains, too o en, one ofcontrol. But the public sector’s ability to exercise this controlis not keeping pace with the changes in the environment. Tisbreeds an environment in which inefficiency, corruption,and weaknesses in the rule of law develop almost naturally.Vietnam’s government needs to dene a new role, in line withthe demands of an emerging, dynamic market economy. Tisrole is dened by the roles that government needs to play toallow the market to function. Government needs to providea transparent and effective regulatory environment in whichcompanies can compete on equal terms. Government needsto have an effective approach towards providing publicgoods, including infrastructure, education, and regulation,in ways that reects both its political will and the needs ofcompanies and the broader public. In short, it needs a planfor how government actions are contributing towards theemergence of a business location with clear and distinctcompetitive advantages.

Te current policy debate in Vietnam is too o en focusedon the size and the direct power of government, ratherthan on its ability to provide the functions needed. Butsize and effectiveness do not necessarily go hand in hand.Government that aims to directly control many actions isndings itself overburdened, even if it is large. Governmentthat focuses on setting and implementing clear rules of thegame can have much stronger impact, even if it is smaller.

Structure of the economyVietnam has in the process of transition moved froman economy in government ownership to an economy

dominated by SOEs and foreign companies, with the local private sector playing a signicant but overall still small role.Te process of “equitization” has been challenging, andthe nancing of SOEs remains non-transparent. Efforts tocreate national champions have not met with much successand in some cases, like Vinashin, seems to have providedan environment where leading executives exploited their position for private gain. Foreign companies have been ableto grow and operate successfully in Vietnam despite thesechallenges. Yet the local private sector has for the most partbeen relegated to small companies, largely serving localdemand.

Vietnam needs to provide an environment in which a morebalanced mix of state-owned, private, and foreign companiescharacterizes the economy. Competition between thesegroups needs to be on equal terms, enabling those that makethe strongest contribution to Vietnamese prosperity to gainground.

Te current policy debate in Vietnam too o en gets hungup on political views about ownership. Academic researchclearly indicates that market structure, i.e. the exposureto competition, is more critical than ownership per se indetermining productivity levels within companies. Vietnamcan combine SOEs with a market economy and rising levelsof prosperity. However, it can only do so if the governanceof the SOEs is transparent, the role of the government asan owner clearly separated from its role as a regulator, andSOEs are exposed to the same market rules and incentives astheir foreign and local rivals.

Specic action proposals: Addressing the threecritical tasksGuiding principles for economic policy need to be translatedinto specic actions. Ultimately these actions need to bedesigned and implemented by Vietnamese institutionsand individuals to gain real traction. Te remainder of thissection provides examples of key actions to take, organized bythe three key tasks dened earlier, for upgrading Vietnamesecompetitiveness. Tese actions are meant to provide usefulinput for Vietnamese policy makers, not to constitute a fullycomprehensive list or a readily implementable action plan.

Macroeconomic imbalancesAs a small-open economy with a quasi-xed exchangeregime, Vietnam’s ability to stimulate growth throughmacroeconomic policy is limited. Monetary policyrelaxation doesn’t guarantee higher economic growth sincea large portion of the increased demand (i.e., investmentand consumption) will be satised by imports. It may alsocause ination, asset bubbles, and dollarization as Vietnamexperienced during 2009 as the result of the stimulus package5. Fiscal policy, too, faces signicant limitations in

Vietnam: Te budget decit is very high and has becomealmost chronic. And any scal stimulus will attract morecapital inows that under the quasi-xed exchange regime will force the central bank to increase money supply and thus push up ination. Instead of using expansionary scal and



monetary policy to stimulate the economy, the governmentshould follow a prudent long-term policy approach andimprove its macroeconomic management capability tomaintain sound macroeconomic foundations6.

Te overall macroeconomic policy mix has to achieve anumber of objectives: Monetary policy needs to create anenvironment in which ination, interest rates, and nominalexchange rates develop in a transparent, market-driven process that sends clear signals to market participants.Fiscal policy needs to ensure transparency and discipline inbalancing government revenues and expenditures in a waythat is consistent with the public sector’s long-term budgetconstraint. Macroeconomic management needs to alignshort-term monetary and scal policies with these long-term goals while reducing short-term cyclical uctuationsof the economy. Macroeconomic management also needsto monitor and if necessary manage the build-up ofunsustainable bubbles in the economy, for example in the

real estate, credit or equity markets, and to strengthen thesoundness of nancial market institutions.

Te following policy actions are examples of the stepsVietnam needs to take to move towards a macroeconomic policy environment in which imbalances are less likely tooccur and can be mitigated:

• ransparency of scal position of the government andSOEs; uncertainty about the economy’s scal conditions,such as budget decit, public debt (including debt ofSOEs), foreign reserve holdings, etc. undermines the

trust of market participants. Vietnam should establishan effective and independent reporting body in chargeof providing transparent and robust data in line withinternational norms on the state of the economy. SOEsneed to be subject to stringent information disclosurerequirements, especially on their economic efficiency,nancial performance and nancial relations with thegovernment.

• Strengthen budget discipline; ransparency anddiscipline in state budget management need to be enforcedto minimize off-budget spending items and maintain a

sustainable scal balance. uality and effectiveness in public debt management need to be enhanced. Publicdebt management should be considered as an organic part of the overall macroeconomic management andshould be coordinated among Ministry of Finance andother policy agencies. ransparency and independentmonitoring in public investment need to be enforced.

• Consistent and predictable monetary policy; Monetary policy needs to be driven by a transparent policyobjective and has to be consistent and predictableover time. According to Vietnamese laws, monetary policy decisions involve the National Assembly, thegovernment, and the SBV. We recommended a clearassignment of roles among these three entities: TeNational Assembly could set the ultimate objectivefor monetary policy (for instance, an ination target

rate), the government together with the SBV set theintermediate targets (for example, money supply and/orcredit growth), and the SBV is given complete autonomyin setting the operational targets. SBV then needs tosend clear signals on its main monetary target, namelyination, and the corresponding money supply andcredit growth targets. Over time, it is critical that thecentral bank’s independence, competence, and capabilityare strengthened.

• Financial market regulation; weak regulatoryframeworks and immature nancial markets are a recipefor speculative bubbles and overheating. Vietnam needsto develop a robust regulatory framework in whichthe room for speculation is reduced while the nancialsystem is gradually deepened. SBV needs to prudentiallyoversee the nancial system to ensure the soundness ofnancial markets and institutions. ransparency and faircompetition should be enforced to ensure that credit

is allocated to the rms and the areas where it can beused most efficiently. Regulatory framework should alsosupport effective surveillance of nancial institutionsand risk management to ensure soundness of the systemand reduce systemic risks.

• Coordination of overall macroeconomic policy overtime; a short-term focus and a lack of coordinationamong different macroeconomic policy instrumentsundermine the effectiveness of policy. Te CentralCommittee for Financial and Monetary Policies can playan important coordinating role to enhance alignment

of efforts across different ministries. Its operation andmandate should be upgraded and formalized to managea medium- to long-term agenda rather than to seek ad-hoc solutions to immediate crises and problems.

Microeconomic bottlenecksVietnam needs microeconomic policies that can effectivelyand quickly react to bottlenecks in the regions and clusters where they are most pressing. As discussed previously,these bottlenecks are related to workforce skills, physicalinfrastructure (including electricity) and administrative procedures.

While a fundamental solution to these challenges requiresbroader-based changes in policies and institutions, there is aneed to nd effective answers more quickly. Tis can happenin public - private partnerships where the companies affectedby the bottlenecks, the government agencies in charge of therespective issues, and – where relevant – the institutionsthat provide relevant products and services, launch targetactivities together. Such partnerships will provide usefullearning and experimental experience to convince people toembark on broader national-level policy measures.



• Cluster-based action initiatives; the lack of dialoguebetween the government agencies regulating workforceskills or providing infrastructure and the companiesusing these services is one of the most critical barrierstowards removing the bottlenecks for growth. A rangeof targeted pilot initiatives can be launched in clusters where there is sufficient critical mass for actions to affecta meaningful number of companies and willingness ofboth companies and the relevant public sector agenciesto collaborate. Central government could providespecial authority to such efforts, where needed. Suchinitiatives will showcase how different stakeholders– public and private, central and local, industries andacademia – can work together to address issues ofcommon concern. Issues could be picked and initiativescould be designed in a way so that the government andbusiness people could learn how to formulate a holistic policy mix to address not only individual issues but alsoa complex set of inter-related problems which is o enthe case in reality. International agencies with relevant

experience could provide technical support. Success willultimately depend on the willingness of the Vietnamesestakeholders to take ownership and translate suchexperimental experience into broad-based policy actions.

New competitiveness strategyVietnam needs an overall economic strategy that providesa coherent approach for upgrading competitiveness andmoving the country to the next level of development andcompetitive advantage. 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.

- Garment and textile cluster in Ho Chi Minh City’s surrounding area (Ho Chi Minh City,Binh Duong, Dong Nai provinces); the garment sector is facing a serious challenge olow value-added and low productivity. Te project will roll out a study and some actioninitiatives to enhance the competitiveness of the cluster. For example, skills training programfor technicians, engineers and line managers; capacity building for design and brandingfacilitating linkages among garment factories and local textile suppliers and developinmaterial supply zones in collaboration with industry players.

- Electronics and engineering cluster in the Red River Delta (Hanoi, Vinh Phuc, Bac NinhHai Duong); building up the local supplier base (supporting industries) is critical toincreasing the value-added of this cluster. Te initiative will collaborate with agship FDIcompanies to map out a database of potential local suppliers; identify areas of potentiallinkages and promote partnership; build capacity and provide incentives for local supplierto meet the requirements of FDI clients. Any generalizable lessons could assist governmenin formulating policy on developing supporting industries in other clusters.

- Logistics cluster in the neighborhood of Ho Chi Minh City; an efficient logistics sector icritical for all rms regardless of whether they are serving a domestic or foreign clientelAn industry assessment could be launched to identify factors impeding the sector. Tiscan be followed up with focus group discussions with all stakeholders – public, privatand institutions for collaboration so as to seek workable solutions and formulate coherent policies which remove bottlenecks and enhance both the quality and efficiency of the provision of multi-modal logistics services.

- ourism cluster in the Central region (Da Nang, Hue and uang Nam province); of latethere has been an inux of FDI in tourism-related real estate projects in the region howeverthere is a lack of coordination among provinces to develop a sustainable tourism clusterTe initiative will develop an integrated concept and strategy for the region; prioritize andattract investment in supporting industries such as transportation, recreation and healthcare;facilitate linkages and coordination among cluster participants.

- Agro-processing cluster in the Mekong Delta region; most agricultural exports comprisunprocessed or semi-processed goods which have low value-added. Te initiative will connecthe relevant stakeholders such as farmers, traders, processing factories, supermarkets anexporters, quality standard regulators, agricultural extension service providers and conducfocus groups to promote business linkages and nd ways to improve both the quality and value-added of agricultural products.

BOX 4.1:EXAMPLES OFCLUSTER-BASEDINITIATIVES



Policies

1. Education and workforce skillsSkills are critical to enable the emergence of a higher value-added economy in Vietnam. While education alone is notsufficient, there is no way forward that does not require a work force that is better trained and educated for the tasksrequired in a more sophisticated modern economy. Tereis little if any controversy about this fact in Vietnam; thequestion is how to get it done.

Te current approach is not delivering. It fails on quantity,quality, and relevance of education and workforce skills.Public sector institutions have proven unable to providethe right skills and to extend their capacity in line withthe growing needs of the Vietnamese economy. Tis is theresult of ideological and state centric governance system ineducation combined with the lack of collaboration betweeneducational institutions and the business community. Fewforeign institutions have entered the market under the watchful and o en constraining oversight of governmentagencies. Tere is a recent rapid expansion of local privatesector institutions which has added to capacity but theirtrack record in terms of the quality of education has beenhighly heterogeneous. Te market is not transparent enoughto provide guidance to customers seeking high-quality andrelevant educational programs. Regulators focus on entrybarriers and administrative control of operational issues(e.g. how many students to enroll, how much instructorsare paid, etc.) rather than on strategic control of quality.Te policy focus on expanding access to basic education hascome at the cost of lower quality and less relevant education.A new approach towards education and in particular workforce skills development needs to focus on the roleof education as a central enabling condition for higher productivity. Entry of private sector training providers,especially of competent foreign players, needs to besimplied. Government should focus on its role as a regulatorfor public and private training providers that implementsquality standards and enforces transparency through acombination of incentives, controls, and investments.

Te collaboration between companies, training providers,and regulators at the level of clusters needs to be activelyencouraged to align education content with market needs.Government investments should be directed to areas where,based on the dialogue in clusters, the potential for increasing value-added is the highest.

Specic actions and mechanisms can build on the efforts previously mentioned as a response to local bottlenecks,and provide a pathway towards rolling them out nationally.Examples to consider include:

– Develop a national workforce strategy with rigorousstudies on the type of skills and competencies requiredfor future growth. Tis strategy should be developedin close consultation and implemented in coordination with industry and educational institutions rather than

solely by the government. It is necessary to have a centralgovernment body to champion and oversee the strategyand all efforts related to human capital upgrading. Tisbody will coordinate various issues which are currentlybeing split among different ministries, namely theeducation portfolio of the Ministry of Education and

raining, the vocational training and labour issues ofthe Ministry of Labor, Invalids and Social Affairs andindustry-specic skill issues of line ministries. A Central

askforce on Education Reform under a broadercompetitiveness watchdog agency can help coordinateand streamline efforts. Another institutional exampleis the Workforce Development Agency (WDA) inSingapore.

– Reform the regulatory framework for the educationsector. Instead of focusing on administrative control, theregulator needs to develop effective quality standards tocontrol the quality, not quantity, of instructors, students

and curriculum. Entry barriers need to be simpliedtowards smarter regulation to allow most competent players to enter the market. Educational institutions needto have more autonomy to decide their own operationaland organizational issues. A merit-based system needs tobe strengthened to encourage most talented instructorsand students, and also to alleviate corruption and fraud.Funding allocation should be tied to performance ratherthan size of the institutions. ransparency needs to beenforced to provide clear guidance for the customers who are seeking education services. Government needsto mobilize the dynamics of the market process in orderto enhance the quality of education supply, instead of working against market forces.

– Promote vocational training: Te social preferencefor university education (especially business andmanagement education) over vocational and technicaltraining has led to a serious shortage of capable engineersand technicians in the market. Te government’sadministration in this area need to be streamlined intoa single focal agency (instead of divided among threedifferent ministries as currently). Vocational training programs needs to be developed and managed inclose coordination of educational institutions, localgovernment, and the business sector, including foreigninvestors. An interesting foreign example is the WIRED program in the US, where groups of regional governmentagencies, educational institutions, and companies proposed joint workforce skills development plans forspecic clusters for funding to the federal government.

– Set up a National Productivity Fund to support cluster-based initiatives in improving productivity throughupgrading workforce skills, technology, production

management system, etc. Te Fund should embracea much broader portfolio than the current VietnamProductivity Centre (under the Ministry of Scienceand echnology) which is merely an ISO accreditationagency. A national productivity fund needs to be put



at the centre of the system to coordinate productivityupgrading efforts in different sectors and to have deepindustry-specic knowledge and expertise. Examples ofstructure and operation of such a fund can be found inKorea, Singapore and Hong Kong.

2. Physical infrastructureransportation, communication, and energy infrastructure

are another critical condition for emergence of a higher value-added economy in Vietnam. Again, there is little ifany controversy about this fact in Vietnam; the question ishow to get it done.

Te current approach has delivered a signicant upgradingof the absolute level of physical infrastructure available inVietnam. But the costs of these investments have beenhigh compared to similar projects in peer countries, andtheir impact on competitiveness is not visible. Corruptionand inefficiencies have been a signicant burden. Andthe demands of the economy have grown even faster thaninfrastructure capacity has been added. In many cases,infrastructure projects have been used as a tool of regional policy, compensating regions not fully beneting fromthe brisk growth in, especially, Ho Chi Minh-City and itssurroundings. Te Vietnamese government has now plansto massively upgrade infrastructure nationwide. Foreigndonors have provided capital, but in many cases such projectsare tied to their conditions or interests. Serious concernshave, for example, been voiced about the plans to build ahigh-speed rail link between Hanoi and Ho Chi Minh City.

A new approach for infrastructure investment needs tosystematically evaluate public infrastructure projects bytheir contribution to competitiveness, not by their rolesas demand drivers or compensation to regions. Te overallbudget control should be centralized, with decision makingon national projects centralized and other budgets forregional projects allocated to region. PPP should be used asan instrument to enhance the effectiveness of investments,not just to mobilize private capital. Relevant proposalshave been discussed in the recent past, for example at theVietnam Business Forum. It is now time to move beyond the pilot phase and start a larger scale roll out.

Te major part of infrastructure investment is currentlynanced and implemented by the public sector.Enhancement of transparency, efficiency and accountabilityin public procurement and construction is critical not onlyto reduce costs and enhance quality, but also to strengthenthe country’s creditworthiness with creditors.

Policies need to focus not only on building “hardware”infrastructure like roads, ports, airports, etc. but also ondeveloping the complementary “so ware” solutions andservices, e.g. logistical networks and services to ensureseamless and efficient connection of infrastructurehardware. As an export economy, Vietnam should placegreat importance on improving logistical and customservice efficiency where it is currently underperformingother regional peers. Electricity shortage is also emerging as

a serious impediment for growth.

Specic actions and mechanisms can build on the efforts previously mentioned as a response to local bottlenecks,and provide a pathway towards rolling them out nationally.Examples to consider include:

– Create a centralized planning mechanism to coordinate,

oversee and evaluate infrastructure development. Atransparent and enforceable system for prioritizing,selecting, managing and evaluating projects (e.g. set ofcriteria, procurement system for public infrastructure projects) is critical. Investment decisions need to bebased on rigorous assessments of public benets andcosts. Te planning mechanism does not necessarilycentralize all decision making, but should play a centralrole in developing and overseeing the implementationof the master plan for infrastructure investment,monitoring the alignment of individual projects with themaster plan and evaluating the projects’ efficiency andimpact. It would provide a framework and transparentrules and processes for other agencies and lower levels ofgovernment to follow. An example for such a mechanismis Singapore’s Ministry of National Development, which is the country’s lead agency that oversees physicalinfrastructure development (MND 2010).

– Strengthen the system for managing public procurement,including streamlining procurement procedures withthose of international agencies, development of ane-procurement system and creation of an independentsupervisory agency which reports to the NationalAssembly and which has power and authority to monitor,inspect and evaluate major projects. In Singapore allinfrastructure tenders, other public sector opportunities,and awards can be readily accessed online throughGeBIZ, the government’s one-stop-shop e-procurement portal. Te Government e-Procurement System (GePS)is a similar initiative in South Korea that centralizes public sector procurement through a dedicated portal.

– Provide viable market-based nancing options forinfrastructure investment (i.e. greater private sector

participation, nancially viable, more efficient, etc.). TePPP model for infrastructure investment is an option,but scrutiny is required to ensure that it is not abusedas a tool to provide privileges for some well-connected private groups in getting access to land (as a returnfor their co-investment) and cheap ODA credit or inovercharging the end-users of infrastructure. Besides atransparent legal framework, an effective and enforceablecompetitive bidding system with a monitoring andevaluation mechanism is key to ensuring the impact ofthe PPP model.

– Address electricity shortages through a combinationof investment, market regulation and technologicalmeasures. Gradually liberalize electricity prices toattract investment in the sector. Create a competitivemarket and put EVN subject to market disciplines.



Enforce quality control and technology standards andmeasures to reduce electricity consumption ratios ofkey industries, especially steel, cement and chemicals.Develop and gradually commercialize new and moresustainable energy sources.

3. SOE GovernanceState-owned enterprises remain are an important part ofthe Vietnamese economy and are likely to remain so in thenear future. Enhancing the capabilities of SOEs is criticalto increase value-added, to remove the drain on publicsector resources their nancing needs impose, and to createopportunities for competitive private companies to emerge.

Te current approach of SOE governance is not deliveringthe strong, competitive Vietnam-based companies that arethe objective of policy makers. Te hope was to achievehigh performance through creating economies of scale.SOEs receive special treatments and privileges in forms ofaccess to land, subsidized and preferential credit throughstate-owned banks or government guarantees, etc. Tey alsoenjoy monopoly positions and strong connections to thesectoral regulators who are also their direct reporting linein most cases. Te SOEs are also not required to adhere tothe governance standards which apply to almost all publiccompanies such as information disclosure, independentaudit, recruitment of professional management, competitivebidding, etc. It is getting increasingly obvious that lowefficiency persists in large SOEs, growth is achieved byentering into other elds, and corruption and personalenrichment remain difficult problems. While it is temptingto see such failings as the result of individual misbehavior,the experience of many other countries suggests that it issystemic. Te current policy approach not only fails to provide an environment in which SOEs improve theircompetitiveness and productivity. It also crowds out more productive players and erodes condence in a transparentand equal playing eld.

A new approach needs to separate the roles of governmentas an owner from that as a regulator. Government needsto dene a clear owner policy in terms of what it expectsas returns from its SOEs. Government’s measures toimprove SOEs’ performance need to focus on enhancing productivity rather than increasing short-term protability.SOEs need to be subject to the same competitive pressureas their foreign and local private sector rivals. It is crucialto ensure that SOEs compete on equal terms to othercompanies on all markets, including those for capital, andare subject to full market discipline. While equitizationneeds to remain on the policy agenda, it is more pressingto enforce modern corporate governance standards in SOEs,especially standards related to information transparency, riskmanagement, and the transparent operation of the Board of

Directors and management team.

Specic actions and mechanisms to consider include:

– Separate the role of the government as an owner fromthat as a regulator. Tis requires the government todelegate its ownership to an independent, strong body which operates purely as a commercial corporate andindependently from any political agenda. All majorstate-owned conglomerates are still reporting eitherdirectly to the Prime Minister or to the line ministriesthat ultimately also regulate their markets. Ownership ofsmaller SOEs is managed through the Vietnamese StateCapital Investment Corporation (SCIC). But SCIChas an unclear mandate, ownership policy, and does noteffectively separate regulation and control. Singapore’s

emasek is an example of clear separation between thegovernment and its linked companies.

– Dene and enforce modern governance standards forSOEs, especially those related to information disclosure,risk management, independent nancial audit, andappointment and operation of the Board of Directors(BOD) and the management team. Te BOD and themanagement team of the SOEs have to be accountablefor the enterprise’s performance. At the minimum, SOEsneed to be subject to the same governance standards andregulations as other public companies. An interestingforeign example is the initiative of the Baltic Instituteof Corporate Governance. In collaboration with theLithuanian government, it has developed governance principles for SOEs that have now been implemented.

– Ensure competition and market discipline in the marketsin which SOEs operate. All the current non-marketsubsidies and special treatments for the SOEs need tobe removed. Te government can still support the SOEsbut only under the same rule as it provides support to privately-owned companies. Te support needs to goto those who can use it most efficiently and contributethe most to competitiveness and it needs to focus onsustainable upgrading of productivity rather thanincreasing short-term protability. SOEs, therefore,should be discouraged from expanding into non-coreareas, especially into speculative nancial and real estateones as this is creating systemic risks for the economy.State resources (land and real estate, equipment, credit,etc.) which have been and will be allocated to SOEsneed to be duly revaluated by independent, competentagencies to protect those from leaking to individual pockets. Competition framework and disciplines needto be strengthened, e.g. strengthening the capacityand separating the operation of Vietnam CompetitionAdministration Department (VCAD) from sectoralregulators; enforcing competitive bidding in governmentcontracts, allowing private sector players to enter the

currently monopolized markets, etc.– Improve the equitization process and dene policy

for effective management of divestment proceedings.Equitization needs to be used as a tool for adopting



technology and know-how transfer, applying goodgovernance and creating exposure pressures, ratherthan just for mobilizing private capital. As major stateconglomerates and enterprises will be equitized over thenext few years, the amount of divestment proceedingsmay be huge which requires careful and effectivemanagement of the money.

4. FDI attractionTe attraction for foreign direct investment, especiallyGreeneld investments, has been a critical driver of recentVietnamese growth. Given the weakness of the localcompany base, FDI will continue to be a critical driver ofgrowth. It will possibly start to include more takeovers ofVietnamese companies, including SOEs, alongside furtherGreeneld investments.

Te current approach towards FDI attraction is reactive andoriented towards high announcements of FDI inows. Te value that this generates for Vietnam is insufficient. FDIattraction is essentially focused on the process of dealingadministratively with investors that have already decidedto come to Vietnam. Tis process is distributed acrossa number of national and regional agencies, with littlecoordination or alignment between them. Regions tend torace for FDI by offering excessively preferential incentives interms of land or tax, rather than by positioning themselvesto offer unique factors and advantages to investors. Tere isno proactive approach towards contacting those investorsthat might have the most to offer in terms of adding towardsVietnamese competitiveness. Tere is no systematic work tointegrate the foreign investments with the local economyonce they have materialized. Tere is also little if any follow-up in working with investors to attract their suppliers andservice providers to Vietnam. Tere is little linkage andcoordination between FDI policy and other policy areas to work out what to offer for investors as a package of solutions,and then provide feedback from investors about what needsto be developed as new competitive advantages for Vietnam.As a result, Vietnam gets mostly investments that create a very short-term return but are highly mobile in termsof moving to other locations. Luckily, Vietnam also gets

investments from long-term oriented companies like Intelor recently Boeing, that are looking at the future outlookof the region and the country. But these investments are theresult of economic fundamentals, not of a successful FDIattraction policy.

A new approach needs to focus on actual FDI, notannouncement and more effective monitoring and followup. FDI attraction needs to be separated from regulationand permitting. Investment attraction needs to evaluate FDI projects as tools to strengthen Vietnam’s competitiveness.Te needs of MNCs to improve business environment

conditions need to be leveraged to enhance the environmentfor all companies. Clusters need to be developed aroundMNCs, attracting/developing other MNCs, SOEs, andlocal private sector companies and creating incentives forencouraging FDI spill-overs. Te roles and responsibilities

of regional and national agencies in attracting and regulatingFDI need to be claried and coordinated.


– Develop a new FDI attraction strategy for Vietnam which needs to build on Vietnam’s strategic positioningand its strategy for the local economy. Te strategy should

identify and prioritize what sorts of FDI Vietnam wantsto attract; how it will add value to the local economy; what can be done next to it to move up the value chain.It should also discuss who Vietnam has to compete with to attract such FDI and so what it can offer to getthe deal. Te current FDI management system needsto be reformed, from target prioritization, attraction,coordination to follow-up, oversight and evaluation.Tis includes strengthening of the current mechanismof delegating authority to provincial governments. Acentralized coordinating and supervisory mechanismneeds to be put in place to ensure that provinces do not“fence-break” to attract any type of FDI at any price andthe licensed projects are in line with the overall master plan of each sector or industry.

– Strengthen the capacity of the Foreign InvestmentAgency (FIA) under the MPI as the central coordinatingagency for attracting and managing FDI. FIA needs tobe transformed from a purely policy making agency tobecome an active gateway agency who provides “one-stop” innovative package of investment solutions andservices for investors. In this role, FIA will not only

deal with new coming investors but also follow upclosely with existing ones to attract their suppliers orsubcontractors to Vietnam and also to get their feedbackon strengthening Vietnam’s competitive advantages asa business destination. FIA should be well-equippedand empowered to undertake the strategic and centralcoordinating tasks as mentioned above.

– Set up outreach initiatives with foreign MNCs tobuild local supplier base and clusters and to createincentive system to encourage technological spilloversand linkages between FDI and local economy. In order

to successfully leverage the MNCs as anchor rms tobuild local supplier base around and improve overall productivity, it is neither sufficient nor effective tomerely use nancial incentives or impose local-contentrequirements. Policy measures need to tackle a numberof important issues, such as: (i) absorption capacity ofthe local economy, e.g. technology level of local rms, workforce skills, quality standard system, linkages withresearch institutes, etc. (ii) a strong and enforceable IPR protection system to eliminate the risk of appropriation when MNCs share their technology secrets with localsuppliers; (iii) level of competition among rms andsophistication of customers in the local market – whensuch factors encourage rms to compete by innovationand adopting new technology rather than by reducingcosts; (iv) characteristics of sectors, etc. Especially in a



small and newly emerging market, when the risks are toohigh for both the FDI and the local rms to invest increating forward and backward linkages, there is a rolefor the Government to match the risk gap by providingappropriate incentives, e.g. credit risk sharing, labortraining or land provision, etc.

A new FDI policy needs to be put in the context of broadercompetitiveness policy framework and connect to other policy areas. Land management policy is important toredirect FDI from real estate into more fundamental value-creation manufacturing areas. Provision of workforceskills and infrastructure also need to be targeted towardsserving the sorts of FDI which contribute the most tocompetitiveness.

An interesting foreign example is Singapore’s EconomicDevelopment Board (EDB). Creating jobs throughlabor-intensive industries was once the top priority of thegovernment when the city-state gained independence fromBritish rule. Te EDB was then formed to take on thechallenge of attracting investors to do business in Singapore.EDB strategically charted the direction of policies that arecoherent with the nation’s overall development goals and itset-up overseas offices to spearhead FDI attraction initiatives(EDB 2010).

5. Cluster development/Industrial policy Higher competitiveness requires specialization in areas where the presence of related and supporting activities cansupport a level of productivity that any individual company

nds hard to achieve. Te actual specialization is the resultof the specic assets and capabilities available in a location,shaped by the way comparative and competitive advantageshave dynamically evolved over time. Government does notcreate specialization that drives higher productivity but itcontrols many policies that have a signicant impact on thespecialization dynamics.

Te current approach of the Vietnamese governmenttowards specialization and industrial policy is based oncreating national champions from SOEs, providing cheapcredit to individual companies, and creating dedicated

infrastructure (industrial parks). Tere is a plethora ofsectoral and industry plans at different levels, but nointegration and no effective follow-up or implementation.A systematic dialogue with the clusters that have emergedin the Vietnamese economy is lacking. Tere are little if anylinkages between the narrow attempts of industrial policybased on intervention and subsidies with related policieslike FDI attraction, skill development, or infrastructureinvestment.

A new approach needs to focus on clusters and value chains,not individual companies or narrow industries. Te objectiveneeds to be improving productivity, not private protability.For existing clusters, collaboration and cluster dynamicshave to be enhanced to move them beyond the current stateof mere co-location. Alongside with strengthening linkages within clusters, it is necessary to build beyond-cluster

external linkages along the value chains in which rmsare participating. Clusters which are built around MNCscould serve as the platform for local rms to participate inthe global value chains. Policy priorities should focus oncreating an environment in which meaningful linkages and positive spill-overs can emerge in a market process. Moderncluster policies are fundamentally different from traditionalinterventionist policies targeting specic companies orindustries through subsidies or protection: they are opento all existing clusters that have the ability and willingnessto upgrade, and are based on enabling companies inclusters to compete on a higher level, not shelter themfrom competition. Several government policies (regionaldevelopment, workforce skills, infrastructure spending,FDI attraction, regulatory reform, etc.) can be organizedaround clusters to provide more coherent policy packagesaligned with the specic needs of an individual cluster. Teorientation towards clusters provides higher effectiveness ofgovernment spending while minimizing distortions.


– Re-organize existing policies around clusters, especiallyin areas linked to investment attraction, workforceskill development, industrial parks, and SME/privatesector-development. In these areas cluster-based effortscan raise the level of effectiveness and play a crucialrole in implementing strategic plans in public-privatecollaboration. Pilot efforts to develop clusters/suppliernetworks around large foreign investors and/or largeSOEs could be among the rst of these projects. aiwan’s

Hsinchu Science Park (HSP) is a good example of howcluster thinking can be used to enhance the effectivenessof an industrial park. Te government built the parkin close proximity with leading academic institutions(Chiaotung and singhua) and aiwan’s Industrialechnology Research Institute (I RI), offered attractive

nancial terms, and focused investment attraction on aset of related industries with high potential linkages.

– Conduct a national cluster mapping project toidentify and assess clusters across the country. Teresulting database of clusters can then be matched withinstruments like a Vietnam Regional CompetitivenessIndex (RCI) to provide a strong factual basis for thedesign of cluster- and region-specic policies. Suchan RCI can be designed to assess comprehensivelymacroeconomic and microeconomic competitivenessfundamentals of provinces in the contex of regionallinkages. Tis would complement the currentProvincial Competitiveness Index (PCI) which focuseson assessing governance quality and proactivity of provincial governments in creating a conducive businessenvironment for private sector businesses. Over time,

the knowledge infrastructure created through the clustermapping effort should be matched by a training initiativefocused on education for cluster initiative managers. TeEuropean Cluster Observatory 7 and Harvard’s course onMicroeconomics of Competitiveness8 are internationalexamples.



– Encourage the launch of pilot cluster initiatives throughthe creation of a Vietnamese Cluster Initiative Fundthat would allocate funds for strategy development tocluster initiatives based on a competitive process with aninternational review committee. Cluster efforts shouldbe evaluated on their current abilities and on their willingness to improve. Initial funding would cover onlythe analysis and strategy design, with implementationof efforts to be covered through existing government programs opened up for clusters.

Institutional architecture

1. Policy processMore effective policies, in the specic areas mentionedabove as well as in others that will rise in importance overtime, are more likely to emerge, if a robust process of policydesign and implementation is in place. Competitiveness isnot achieved through the one-time creation of a good policy.It requires an inherent ability to systematically upgrade andimprove policies over time.

Te current policy design and implementation process inVietnam has signicant aws. Policy design is o en basedon limited if any data. While the policy quality at higherlevels (Central Government, National Assembly) has beenimproved, especially a er W O accession, the quality andapplication of policies at lower levels (rules and regulationsissued by ministries or provincial governments) are highlyheterogeneous. Te inclusion of experts or affected groupsfrom outside of government is o en insufficient. Te

Vietnam Business Forum has been rated as one of the mosteffective public-private dialogue structures internationally(World Bank 2009). But even here there are concerns aboutsystematic follow-up and the integration of this structureinto policy planning. In general, there is no lack of policy plans in Vietnam, but these plans are o en set up in isolation,leading to a multitude of conicting guidelines. Te presenceof many aid organizations with their individual focus areasand objectives might contribute to this situation. Long-term plans exist in separation from short-term action agendas,leaving the long-term “strategic” plans without real impact.Tere is little systematic follow-up on whether policies wereimplemented and had their desired impact.

A new approach needs to provide data for fact-driven policymaking and clear procedures to monitor the relevance andquality of policy. Planning efforts have to be consolidatedand connected. Policy planning needs to be connectedto budgeting and implementation; short-term budgets/ plans need to be integrated in rolling updates of long-term plans. Tere has to be an institutionalized impactassessment for policies. Te coordination among differentgovernment agencies in design and implementation needsto be strengthened. Dialogue between government andexternal stakeholders in the policy design process needs tobe systematized. In its work with donors, the governmentneeds to be driven by a clear national economic strategy,leveraging the specic capabilities of individual donors

where they can contribute the most to the overall objectivesset by the Vietnamese.


– Creation of a central Regulatory Impact Assessment(RIA) unit to constantly review existing laws andassess new laws and regulations based on effectiveness,

clarity, consistency, relevance, etc. Project 30 on theSimplication of Administrative Procedures has achievedsignicant momentum in reviewing the existing stockof rules and regulations in term of their administrativeefficiency. Te Law on Promulgation of Normative LegalDocuments (Law on Laws) was issued to require all thenew laws and regulations to go through a systematic RIA process. Tis is a major movement in the legal reform process and is compliant with international practices.However, the Law doesn’t provide for a central RIAagency to be established and for the RIA process to beapplied to lower level laws and regulations, leading to aloophole for new regulations to skip the requirements.Te Law should also legalize the requirements for lawsand regulations to be developed based on clear factsand data. Te new centralized RIA Agency will needto streamline and coordinate different portfolios oflaws and regulations currently divided among differentagencies (Ministry of Justice, Office of the Governmentand Ministry of Home Affairs, etc.). Placing it under theNational Assembly like the Congressional Budget Office(CBO) in the United States might be an option.

– Establishment of an automatic formal review processthat invites relevant government agencies and otherstakeholders, including private sector associations, tocomment on dra laws and regulations within a giventime frame. Tere need to be a clear mechanism andscorecards to follow-up and evaluate how the comments were integrated in the new policies. An administrativeappeal mechanism also needs to be set up to allowbusinesses and citizens to appeal improper or illegal policies and regulations.

– Development of a medium-term budget planning

process with rolling updates. Te planning process needsto integrate annual budgets into medium-term planning.Te current budget needs to be design with a viewtowards longer-term scal policy objectives, especiallyover the business cycle. Medium-term budget plansneed to reect changes made in current budgets. Oneoption would be to invite the OECD’s Working Party ofSenior Budget Officials (SBO) to undertake a review ofVietnam’s budgeting system; similar reviews have beenconducted for Tailand and the Philippines.



2. Capacity More effective policies require a more capable public sector. Well trained public officials and an effective organizationand management structure of public agencies are crucial toenable government to operate more effectively.

Te current approach in Vietnam reects a very traditional public sector organization. Tere are numerous trainingand capacity building initiatives being offered, but thelack of a merit-based and performance-driven system haslimited their impact. Tere is a lack of appropriate incentivesystem to encourage good performance (salaries are wellbelow market levels, advancement and remuneration arenot driven by performance, individual accountabilityis not enforced, etc.). Leadership is o en dispersed andcoordination mechanisms across government agencies are weak. Good governance principles and code of conductsystem are not in place, giving way to corruption andmisbehavior. Government officials are o en over-occupied

with administrative and operational work, leaving little timefor strategic management and professional work.

A new approach needs to be based on an integratedefforts providing modern solution in leadership, training,incentives, and organizational structures.


– Establishment of the Prime Minister’s Policy Unit withhigh-quality staff and sufficient resource to provideaction oriented analysis and to develop implementable policy proposals. Te Unit should have signicant powers to draw on data and collaboration from all partsof government. It could be charged with following upon the implementation of tasks allocated to individualministries, and provide a central role in coordinatingactivities across different ministries and agencies. Severalcountries, like the Strategy Unit in the Prime Minister’sOffice in the UK, provide useful examples.

– Launch anti-corruption campaign; corruption is asystematic problem, not a case of individual misbehavior.Effective action against corruption requires anintegrated set of activities, and a long-term perspective.Reducing the benets of corruption by both stricter punishment and higher, more market- and merit-based wages for public employees are important elements ofthe strategy. Strong examples in behavior and rhetoricfrom the political leadership are another. Reducing thenumber of situations in which corruption can occur, forexample through the simplication and transparency ofadministrative procedures and the use of e-governmenttools, is a further element. Tere needs to be an effectiveinstitutionalized mechanism like an independent agencyunder the National Assembly to lead anti-corruption programs. Interesting foreign examples of successfullyimplemented anti-corruption mechanisms includeHong Kong’s Independent Commission AgainstCorruption (ICAC) and Singapore’s Corrupt PracticesInvestigation Bureau (CPIB). ICAC has investigative,

preventive, and communicative functions while CPIBfocuses on the investigative functions complemented with rigorous use of deterrent measures (Heilbrunn2004, 3-6). Both agencies have gained recognition forsuccessfully combating corruption both in the publicand private spheres.

– Review of the current training system for public officials,starting with a number of pilot agencies. RegulatoryImpact Assessment (RIA) is a good example; numeroustechnical training courses are available on law makingtechniques, but little training is offered on the approachand process of developing and implementing demand-driven and market-oriented rules and regulations.Apart from designing appropriate courses, a key issueis the selection of staff for training. Tis needs to bebased on ability and the prole of the position; trainingis not primarily a benet. Singapore’s experience inimproving the public sector’s human resources is another

interesting case. Every year the government awardsseveral scholarships to top-notch students transitioningto higher education level. Tis initiative ensures thatthe government is able to absorb potential leaders ofthe public service. Meritocracy and performance-basedevaluation are considered key principles in humanresources development. Te Public Service Divisionunder the Prime Minister’s Office has a specializedresearch and strategic planning unit to plan scenariosas well as generate, test and realize ideas on improvingthe civil service system. Tey also conduct researcheson new skills needed in the civil system and launch policy venture projects to seek innovative approaches indelivering public services.

– A comprehensive civil service reform program is crucialto ensure success of all other reform efforts. A strategy for public service reform needs to be developed, specifyingmeasures to build up elements of a modern civil servicesystem. Performance and transparency need to be key principles for recruitment, salary, and advancement inthe organization.

3. National – regional structureGiven Vietnam’s size and geographic prole, the effectiveallocation of roles and responsibilities between national,regional, and local authorities is particularly important.Companies always locate in specic regions within acountry, so the cumulative effect of government from alllevels as it materializes in a specic place is what matters fortheir performance.

Te current structures in Vietnam suffer from signicant weaknesses. Te lack of coordination between nationaland regional agencies leads to high variability in the waythat rules and regulations are being implemented. Regionalgovernments o en follow me-too economic strategiesthat copy the plans of other regions instead of developinga unique strategy based on local circumstances. Regionsalso compete by “fence-breaking” central rules or offering



inherited endowments like land to attract investment.Provincial strategies and plans are not put in the contextof inter-regional linkages. Regional policy from the centralgovernment is o en taking the form of large infrastructureinvestments “compensating” those regions not growing atthe same level as Ho Chi Minh City and Hanoi.

A new approach needs to review the current mechanismof responsibility delegation and strengthen oversight andquality control by the central government. Regions needto be motivated to develop their competitiveness based ona unique positioning. It should encourage collaborationand leveraging through the cluster approach rather thancompetition among regions.


– Funding competition for development of regionaleconomic development strategies. Instead ofcompensating regions with infrastructure or nancialsupport for poor performance, central governmentcould incentivize regions to develop their own economicstrategies. Such strategies would have to be based on theunique combination of assets each region possesses, noton copying the concept of others. Despite the signicantdifferences in economic and political context, Denmark’sRegional Growth Fora could provide an interestingexample for Vietnam to review.

– Te national government could support this processby developing a knowledge and skill infrastructurefor regional development. Tis would include region-specic data – a Regional Competitiveness Index (RCI),as mentioned in the Cluster Policy section above, isclearly a key source - as well as training programs forregional decision makers.

– Review the current structure of authority delegationbetween the central and regional governments andstrengthen the oversight and quality control by thecentral government. Consider centralized mechanisms incertain policy areas (e.g. regulatory review, infrastructure,etc.) to help coordinate, prioritize, monitor and evaluateregional policies and implementation. Te OECD in particular has done signicant work on this topic inrecent years that Vietnam could draw on9.

Policy action in other areasTe policy areas and institutional changes identied in the previous sections are critical for Vietnam to address its short-and medium-term competitiveness tasks. But governmentclearly has to be active in many other policy areas as well.

Policy action in these other areas needs to be informed bythe overall competitiveness agenda as well. Decision makersacross government need to understand the country’s overallstrategy. For each of their actions, they need to consider asequence of three questions:

• Is the planned policy or program undermining efforts onthe competitiveness agenda?

• Can the activity be designed in a way that it can takeadvantage of activities that are part of the competitivenessagenda?

• Is the activity contributing towards creating thecompetitive advantages that the competitiveness strategyaims to establish?

For these questions to provide effective guidance for policymakers and administrators across the public sector, it iscrucial that the key elements of the competitiveness strategyare widely published and discussed. Alignment with thestrategy cannot be achieved by at; it requires the freedecision of many individuals to use their decision power in a way that is consistent where the country aims to go overall.Tis is easier than it sounds – individuals will nd it in theirand their entities interest to take decisions that leverage inthe best possible way the decisions taken in other parts ofgovernment and by other private and public entities.

Improving Vietnamese competitiveness: How to getit done?

Many of the recommendations covered in the preceding parts of this report have been made in one form or anotherby others before. Still, as the analysis has revealed, the issuesthat they aimed to address persist. Tis lack of effectivefollow-through is not unique to Vietnam. What are possiblereasons for it, and how can they be overcome?

• Lack of urgency; a er many years of solid growth witha corresponding rise in standards of living for millionsof Vietnamese, there is little pressure to change theeconomic policy approach.

Te analysis in this report reveals that such complacency would be dangerous. Te three critical tasks identiedall reect dangers ahead if le unaddressed. Te rst –macroeconomic imbalances – could precipitate a majorcrisis. Te second and third will progressively lead todecreasing growth rates in the short- to medium-term.Te political leadership in Vietnam needs to resist thetemptation of ignoring the warning signs. Tese are not anindication of failure, but in many ways a natural result of thehuge success that Vietnam’s economic policy over the last 25 years has delivered. Tese warning signs should instead beused to give impetus to change.

• Limited individual incentives for change; for any particular institutional structure, there are alwaysentrenched interest groups who would be disadvantagedby change. Tis is not unique to Vietnam, but a particular problem when more fundamental economic reforms areneeded. It is therefore important to create incentives and willingness strong enough to sacrice individual interests

of a small number of groups for broader commoninterests of the whole country and its people.



Tis report provides no magic formula to overcome thecomplexities of political economy that exist. But it tries to provide data and analysis to support the reforms which aremost needed for Vietnam and the Vietnamese people. Andit provides in the following section some thoughts on animplementation strategy that is designed to systematicallyalign policy initiatives with a gradually increasing impetusfor reforms.

• Weak logic behind recommendations; many action proposals are made without a clear analysis of the specicchallenges in Vietnam that they are designed to address.Tey are instead proposed as policies that are viewed asgenerically benecial for any country. Tis reduces theirability to convince policy makers in Vietnam of theirrelevance to the specic situation their country is facing.

Unlike many other reports, this report provides fulltransparency of the data and assessments that drive therecommendations. It develops recommendations thatare specic to Vietnam and mutually reinforcing in theirimpact. And it provides a holistic view on how targetedefforts in a specic set of policy areas can be leveraged tocreate a maximum combined effort. It does not purport thatreform in any individual policy area alone is sufficient, nordoes it argue that everything needs to change at once.

• Insufficient focus on implementation; external advisors,especially if they come from an academic institution, arenaturally focused on the analytical task of identifying what is wrong or not optimal. Tey then identify targets

for what a better situation would look like. But they areusually much less focused on (or trained) to understandhow to achieve these targets. And they also usually arenot experts in understanding why these steps have notbeen taken in the past.

Tis report provides some initial thoughts on how animplementation strategy might look like. Te remainder ofthis chapter discusses rst how the action recommendationsdeveloped above can be sequenced to increase the oddsof their success. It then provides some thoughts about aninstitutional structure to govern the implementation. Tese

recommendations are not a full implementation plan, norare they based on a detailed analysis of the political economyof reform in Vietnam. Tis would be far beyond the scope ofthis report. But it takes the concerns about implementationserious and aims to provide a useful starting point forVietnamese decision makers to address them.

Finally, Vietnamese policy makers have sometimes beskeptical about the motives of external advisors that theysee more beholden to the institutional interests of theirorganizations than to Vietnam. Tis report has been prepared in collaboration of a Vietnamese and a Singaporeanresearch institutions as a neutral partnership with no otherinterest than to achieve maximum impact for Vietnam by providing decision-relevant data, assessment, conceptualframeworks, and action ideas. Any remaining bias is relatedto the subjective views of the individual researchers, and not

a consequence of institutional interests.

Sequencing of activitiesTe sequencing of activities in a competitiveness agendais a crucial task and not just a matter of technicality.First, governments cannot upgrade all dimensions ofcompetitiveness in parallel. Tis overstretches their abilityto achieve change and results in most cases in failure. Tischallenge is even more acute when, as is the case in Vietnam,an economy needs to transition from one set of competitiveadvantages and policies to the next level. Second, theimpact of individual reforms o en depends on other policysteps taken in parallel or even before. Without the rightsequencing, results will take much longer to materialize. Inthe meantime, the political willingness to pursue reformscan wane if there are no positive results to point towards.Getting the sequence of reforms right is thus a criticaldimension of a sustainable competitiveness agenda.

For Vietnam, we suggest an evolutionary reform process.Changes in competitiveness will initially be driven bynarrow activities in well-dened pilot cases. Over time, thesenew solutions will then be rolled-out nationally and across abroader set of policy areas. In the last stage, the institutionalarchitecture of policy making will be upgraded.

Te only exception to this bottom-up approach is theset of activities needed to defuse the increasing risk ofmacroeconomic imbalances. Here an effective response willrequire changes at all levels – individual measures, changes in policy, reform of institutional structures – within a relatively

short time frame.Tere are two main reasons for taking a bottom-up approachto the overall competitiveness strategy. First, in the absenceof a ‘clear and present danger’ to Vietnamese prosperity, it ishard to mobilize support for a wide-ranging reform agenda.Reforms are more likely to happen if the positive results ofchanges at a lower level can over time create the motivationto attempt changes on the next higher level, where theresistance to change will be higher. Second, given Vietnam’soverall prole and political structure, a competitivenessstrategy will have to convince decision makers across many

different parts and levels of governments. A top-downstrategy process by at is unlikely to be effective in such anenvironment. A gradual process has a better chance of overtime winning support and alignment.

A bottom-up approach also has disadvantages. A nationalstrategy in terms of a set of specic competitive advantagesto position Vietnam in the global economy cannot emergebottom-up; it requires a top-down decision that then provides guidance to the many individual policy decisionsthat have to be made. Te recommendations in this reportby-pass the lack of such an overarching national strategy.Te actions suggested are consistent with a broad range ofmore specic strategies that seem most likely to be optionsfor Vietnam. A national strategy process can follow once theactions suggested here have successfully come under way.



Management of the competitiveness agendaCompetitiveness upgrading is a multi-faceted, cross-sectoral process that requires coordinated efforts acrossdifferent policy areas and levels of government. In manydimensions, especially in the design and implementation of

microeconomic reforms, it also requires engagement withdifferent stakeholders from outside of government. Progresson implementing the competitiveness agenda requires theassignment of clear responsibilities at two levels. First, foreach specic initiative there needs to be an institution orgroup in charge of driving the process. Second, there needsto be an overarching structure that can manage the portfolioof activities, ensuring that the most critical efforts are beingundertaken and mobilizing new efforts at the appropriatetime.

Over the last few years, national competitiveness councilshave been launched in many countries to deal with thesechallenges. Competitiveness councils differ in their mandateand in their organizational structure. Most of these councilshave been charged with developing action proposals that arethen submitted to government. Tey have a membership of public and private representatives and tend to be chaired byeither a high-ranking official or by a cooperation of publicand private sector leaders10. Tese councils are usuallysupported by a small secretariat that facilitates operations,sources analysis from government agencies and outsideresearchers, and integrates the ndings into reports and

dra action proposals.Councils that follow this general model exist in, for example,Croatia, Egypt, Peru, and Sweden11. While councils of thistype o en have been useful in raising the quality of the

national debate on competitiveness issues, their overallimpact on policy tend to be limited. Other countries haveimplemented structures that connect their competitivenesscouncils more directly with the policy process. Tis hasbeen achieved through a direct or indirect connection of

the council with the highest level of government, or throughthe integration of the Council into the administrativestructure. Korea has through its Presidential Council ofNational Competitiveness (PCNC) created a structurethat reports directly to the President. Tis has given theCouncil much more political relevance and a direct entry point into the policy process. PCNC is also charged withreviewing progress on initiatives launched as a consequenceof its recommendations. Te National CompetitivenessCouncil in the Philippines has also a direct link to thePresidency, but is less directly integrated in the policy designand implementation process. Conversely, the Councilof National Competitiveness (CNC) in the DominicanRepublic has been explicitly designed in order to oversee thecountry’s National Competitiveness Program. Denmark’sGlobalization Council and Finland’s Science and echnologyPolicy Council (renamed Research and Innovation Councilin January 2009) are both chaired by their country’s PrimeMinisters and include all relevant ministers, alongsiderepresentatives from business, academia, and trade unions.In both countries, the Cabinet members in the councils usethese fora to discuss and design policies that are then directlyturned into dra laws. Te Irish National CompetitivenessCouncil is integrated into the administrative structure ofthe government, but also includes members from outsidethe public sector. It is tasked with providing the government with objective data, analysis, and advice on competitivenessissues. Singapore’s more ad-hoc process of competitiveness



assessments, most recently through the Economic StrategiesCommittee, follows a similar approach.

Based on this international experience, Vietnam needsto choose a structure that is most aligned with its speciceconomic policy needs and the realities of its political process. Our analysis in this report identies a number of keyneeds: Vietnam needs to improve the quality of its dialogueabout policies in the design phase; Vietnam needs to makeindividual policy choices based on a strategic perspective on where the country wants to go, and what is critical to getthere; and Vietnam needs to systematically integrate policy planning with implementation and follow-up.

We suggest creating a Vietnamese National CompetitivenessCouncil to assume this role.

Mandate:

Te Vietnamese Competitiveness Council should focus onthree main tasks:

• Coordinate across the government agencies and public- private project groups that are engaged in specicactivities that are launched in the context of thecompetitiveness agenda. While the Council would notneed to control signicant own budgetary resources,it should help to mobilize the necessary funds andcapabilities when needed. Te members of the Council would also provide mentoring and guidance to theindividual project groups.

• Monitor progress on individual activities and the overall portfolio of activities. Te Council should discuss where projects should be realigned, discontinued, or wherenew activities should be encouraged. Tis would require

the Council to have robust competences to requestinformation from government ministries and agencies. It would also require a solid internal monitoring capacity within the Council or its secretariat, potentially incollaboration with other government agencies in chargeof auditing, policy analysis, and budget management.

• Report to the Party, the Government, and the general public on the progress of the competitiveness agenda.Tis would include regular updates, reviews, assessmentsas well as public events, including an annual VietnameseCompetitiveness Conference and dissemination ofannual (or bi-annual) Vietnam Competitiveness Report.

Structure and Operational Mechanism:

o perform these tasks, the Council should be comprised ofleading government and business leaders, including leadersof the Vietnamese operations of foreign companies. Given

the complexity and comprehensiveness of the Council’smission, it is essential for the Council to be led by the topleader(s) of the government. We propose that the Councilto be chaired by the Prime Minister, and be comprised of working groups of members interested in specic parts ofthe overall competitiveness agenda.

Te Council would be supported by a full-time secretariat with the resources to draw on competent experts and practitioners in different policy areas as needed. Tesecretariat operates independently from governmentalagencies but has direct link to the government leaders. Itshould have its own budget. Te Council should collaborateclosely with the Prime Minister’s Policy Unit.

As a rst step, the government of Vietnam could createa steering group to manage the pilot projects emerging



out of the Vietnam Competitiveness Report. Tis groupcould be composed of high-level officials from the relevantministries as well as representatives from companies andother institutions involved in the projects. Te group could,for example, report to a Deputy Prime Minister, who wouldassign the responsibility for providing secretarial supportto the group. Tis steering group could provide initialexperience with the public-private, cross-agency format. Itcould become the nucleus for a Competitiveness Council with broader mandate and membership.

Conclusion

Vietnam’s dynamic growth since the mid-1980s has beenone of the most impressive success stories in the globaleconomy and has transformed the livelihoods of millionsof Vietnamese people. Growth has been fueled by thetransition to a market economy, integration with the globalsystem and a structural shi from subsistence agricultureto manufacturing and services. More recently, the policyresponse has been focusing on capital investment tomaintain growth momentums. Tese drivers have enabledunderlying competitiveness, essentially the presence of low-cost labor, to be revealed.

However, this growth trajectory ultimately has limited potential hurdled by the low level of productivity and

structural imbalances facing the economy. Vietnam willneed to move beyond the current model if it does not wantto get stuck at lower middle income level and face stiffercompetition from newly emerging economies. Tis willessentially require Vietnam to put competitiveness and productivity at the core of its growth. Vietnam will need toconstantly upgrade existing competitiveness fundamentalsand create new advantages to move up to the new stage ofdevelopment.

Tere is currently a widely shared consensus and willingnessamong different stakeholder groups in Vietnam to bringthese issues into serious discussion and follow up withdecisive actions. Te Vietnam Competitiveness Report wasdeveloped with the hope to provide comprehensive fact-based analyses and concrete action proposals to inform suchan important discussion. It is unrealistic to expect that theReport could offer a panacea that could quickly remedyall the outstanding issues and challenges. Te success of

enhancing competitiveness will ultimately depend on thedetermination and efforts of the Vietnamese government,business community and the public. Yet our ambition is to provide a widely accepted foundation for policy debate andthe follow-up action agenda. Tis is the rst in its series of periodical National Competitiveness Reports for Vietnamand we intend to pursue our commitment to supportingVietnam in this important endeavor over the course ahead.

Endnotes1Vietnam’s total public debt by the end of 2009 was about 44.7% of GDP (Ministry of Finance). Public debt per head rose neartimes, from US$ 144 to US$ 548, during the 2001 – 2009 period, or 18% annually, while GDP per capita growth was only 6%the same period (EIU).2Te foreign exchange reserves fell sharply from 4.6 months of imports by the end of 2007 to less than 3.0 months of imports by tof 2009 (IMF, International Financial Statistics).3Vietnam has the highest scal revenue as a percentage of the GDP during the 2004 – 2009 period vis-à-vis its comparators in th(averaging 26.8%) – EIU.4More information on Project 30 can be found at http://thutuchanhchinh.vn.5For a more detailed discussion on the implications of the “impossible trinity” to Vietnam’s scal and monetary policy, see HFE P (2008a, b).6Important aspects of Vietnam’s macroeconomic management have been discussed elsewhere. For comments on the transparencoordination of macroeconomic policy, see Harvard/Fulbright (2008b) and IMF (2009); for the discussion of the SBV’s indepensee Vu Tanh u Anh (2010c); for an examination of the SBV’s supervision and oversight of nancial institutions, see Rosengar(2010).7See European Cluster Observatory, http://www.clusterobservatory.eu/.8See Professor Porter’s competitiveness course, www.isc.hbs.edu/moc.9

See http://www.oecd.org/department/0,3355,en_2649_34413_1_1_1_1_1,00.html.10Exceptions at the Council of Competitiveness in the US and the Private Council of Competitiveness in Colombia. Both are prsector only and perceive themselves as discussion partners for the government.11Te Swedish Globalization Council was operational between 2007 and 2009, when it ended its operation with the presentation nal report. See http://www.sweden.gov.se/sb/d/9299/a/84844 (accessed October 13, 2010).