Incentives don’t boost industry

March 14, 2017 - 09:00

Vũ Thành Tự Anh, Research Director at the Fulbright Economics Teaching Programme in Việt Nam, tells Thời báo Kinh tế Việt Nam ( Việt Nam Economic Times) that Việt Nam should no longer give priority to certain industrial products.

Vũ Thành Tự Anh
Viet Nam News

Vũ Thành Tự Anh, Research Director at the Fulbright Economics Teaching Programme in Việt Nam, tells Thời báo Kinh tế Việt Nam ( Việt Nam Economic Times) that Việt Nam should no longer give priority to certain industrial products.

What should Việt Nam give priority to in order to further develop its industrial sector?

Việt Nam has been implementing policies that give priority to particular industries for the last few decades. But this has not been as effective as expected. For example, Việt Nam wanted to boost its steel industry. But, in fact, in 2016 it imported about 22 million tonnes of steel and prices in Việt Nam are much higher than global ones, especially China’s.

In general, Việt Nam’s prioritised industries are not in line with the country’s comparative advantages. They usually rely on protective measures rather than developing their own competitive capacity, for example the automobile industry.

However other industries, including garment and textile, footwear and aqualculture products, have been developed fruitfully without State subsidisation. And more importantly, Việt Nam has comparative advantages in such industries.

In early 2000, after the first Law on Enterprises was approved and the US and Việt Nam signed a Bilateral Trade Agreement (BTA), Vietnamese enterprises took advantage of the agreement and made it a competitive advantage.

At that time, many asked why prioritised industries were not developing while non-prioritised ones were. The answer depends on enterprises’ competitive capacity.

In order to have an effective industrial priority policy, I think that Việt Nam should select competent enterprises, especially those doing a good job in domestic and international competition. The Government should then assist them so that they can develop further.

The automobile industry in Việt Nam receives Government incentives but it doesn’t seem to be progressing. In you opinion, what should be done to boost the industry?

For the last 20 years, the automobile industry has enjoyed incentives in investment and protection measures. In the mid-1990s, automobile producers like Toyota, Nissan arrived Việt Nam and promised to achieve a localisation rate of 40 per cent  in 10 years. But so far, their localisation rate is about 10 per cent. This means the producers got incentives but what they have done for Việt Nam is not as much as the Government expected.

Automobile enterprises are too reliant on protective measures. Whenever they hear about plans for import tax reductions, they immediately deliver a message saying that they will import cars instead of assembling them in Việt Nam. As a result, enterprises lose their competitive capacity.

Automobile producers usually blame the low localisation rate on the modest support industry and lack of local suppliers.

Medium-sized enterprises in other countries are usually important suppliers to the automobile industry or other manufacturing/processing industries as they can easily connect with the global supply chain. But medium-sized enterprises in Việt Nam are not given proper attention.

The competitive capacity of enterprises is ruined because they have to pay “tea money” - or facilitation fees - which account for 5-10 per cent of their operating costs, according to the Việt Nam Chamber of Commerce and Industry. The rate squeezes their profit margins and prevent them from improving technology and increasing their competitive capacity.

Fewer protective measures, improved support industries and a transparent healthy business environment are keys for the automobile and other industries to develop.

Can you say more about the “ailing” support industry of Việt Nam?

Việt Nam has made efforts to develop its support industries, such as trying to help international producers connect with local providers. The problem is that the support industry needs its eco-system. One of the important factors of the eco-system is the development of medium-sized enterprises which - with their size, resources and capacity – can connect with big corporations/groups and, at the same time, engage small enterprises in value chains.

Ninety-six per cent of enterprises inViệt Nam are small-sized, less than two per cent are big and about two per cent are medium sized. Just two per cent, that’s a rate too low to pull up small-sized enterprises and connect with big ones. What needs to be done is to help medium enterprises become stronger. — VNS