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Jury out on VN's middle-income trap status

Update: April, 14/2014 - 08:31
Viet Nam became a middle-income country (MIC) in 2008, and remains at the lower MI level. Recently, Japanese economist Kenichi Ohno stated that Viet Nam had fallen into the middle-income trap, and his diagnosis sparked a heated debate on what was the country's true economic situation.

Is Viet Nam in danger of falling into the trap? Or is the country already in a conundrum? Thuy Ha talked to officials and researchers who offered different opinions about the issue, but agreed on what would help the country sustain its growth.

Nguyen Thi Xuan Thuy

Nguyen Thi Xuan Thuy, Director of the Integration Policy and Strategy Division, Institute for Industrial Policies and Strategies

I agreed with Professor Kenichi Ohno's conclusion that Viet Nam is currently mired in a trap, following signs, such as slow economic growth and a low competitiveness ranking.

Researchers diagnose a country being in the middle-income trap based on its economic growth, productivity, industrialisation-oriented economic transition, and its period of increasing incomes moving from lower to higher. There are signs that show Viet Nam is falling into the trap. Vietnamese society reached the World Bank standard's middle-income in 2008, but has not improved much since. They also include signs such as slowed growth, low productivity, and experiencing many development-related problems.

Viet Nam became a MIC thanks, in part, to its natural reserves and other advantages, according to Ohno's analysis. Viet Nam, however, is not showing it might soon reach higher incomes for its people.

In the late 1960s and early 1970s, four nations - Malaysia, Thailand, South Korea and Chinese Taipei - all became lower MIC, as Viet Nam is now. Only South Korea and Chinese Taipei had reached higher incomes for its people 20 years later. Thailand and Malaysia have remained stuck in the trap.

One of the main reasons why Thailand and Malaysia can not get out of this trap is that it has a shortage of skilled workers, and its labour market's supply and demand are not in sync. South Korea and Chinese Taipei were successful in increasing their incomes because they invested effectively in education to improve labour skills and the quality of the workforce.

To gain what South Korea and Chinese Taipei have achieved, Viet Nam should set its own target of becoming a high-income country by 2028. It should focus on increasing labour productivity, attracting foreign direct investment to selected sectors, effectively investing in education, and connecting vocational training with labour demands from enterprises.

Ludovico Alcorta

Ludovico Alcorta, Director of United Nations Industrial Development Organisation's Development Policy, Statistics and Strategic Research Branch

I don't think Viet Nam is in the middle-income trap yet. I think it still has

potential, but it may soon get there. In any case, the way to avoid it is by investing in technology. The country should start thinking about developing technology innovation policies in order to avoid the trap.

In terms of policy making, Viet Nam should first identify what newly emerging areas are suited for Vietnamese industry. Secondly, it has to be generating industrial policies that are inclusive and transparent, that bring all stake holders together and provides ownership to stakeholders. Thirdly, it should start thinking about technology innovation policies and generating industrial products that will help sustain the country's growth in the future.

You may want to identify technology areas you want to develop. You may want to start training your workforce for those industries. The problem Viet Nam is facing is finding the right people to take that on.

It may be too early (for Viet Nam) to go to the higher tech industry, which will come eventually, but not at this stage. My advice is to strengthen your existing industries, such as textile, apparel and shoes, by investing in skills and technology in those industries for the immediate future. But at the same time, you should start identifying which industries you are going into and start planning to get into those industries in the future.

Prepare to change the industry structure. At the moment, existing industries are pulling the economy, in terms of employment and value addition. But that is not going to be possible all the time. Viet Nam has to be prepared for a shift of industry from the existing industrial structure to a new one. And that will be done through investing in human resources and industrialisation.

Industrialise your agriculture. Agriculture's processing industry has immense potential, for example, a beverage industry that can grow up to US$15,000 per capita. That is the per capita income of some of the new OECD member countries, or developed countries.

Agriculture, itself, has low productivity. It's the processing of agriculture products that brings great returns and great potential. That's what you should focus on. You should expand your agro-industry, your food industry and your beverage industry. You can sustain growth with any products that come from agriculture, because you add value to these products.

Le Huu Phuc, Deputy director general of the Ministry of Industry and Trade's International Co-operation Department

According to the OECD's definition of MIC, a country reaches the middle-income level when its people each earn between US$5-20 a day. Viet Nam's daily per capita income is slightly above $5, which put us on the lower middle-income level. This has posed a question for us of how to sustain growth.

But it is too soon to say Viet Nam has fallen into the trap. There are opinions stating that Viet Nam is already in the trap. The researchers might have looked at the unsustainability of the country's economy. But there are reports that showed Viet Nam's potential and promising areas. We are faring better than some neighbouring countries in some areas, for example, the beverage industry, in terms of productivity and industrial value, as professor Ludovico Electra put it (at the United Nations Industrial Development Organisation's conference in Ha Noi to launch its flagship industrial development report). We are even doing better than other Southeast Asian countries that are ahead of Viet Nam, in terms of per capita income and in the field of machinery. We have lots of potential in this field, in which our products are favourite exports.

We are experiencing a structural transition and we need supporting policies to do that. One of the policies is an industrial one that helps us integrate deeper into the global community and, therefore, goes through the transition well. In the past couple of decades we have not put much importance on our industrial policies.

Having said that, the policies have not been practical or effective. It is necessary for us to make a change in policy making in order to sustain growth and avoid the trap.

Looking at the "bright dots," I believe that we will not fall into the trap. If we did, we would definitely find a way out. Our young generation will take charge of that. Let's put our trust in them.

Ha Xuan Quang, Vice rector of Ha Noi University of Industry

In my opinion, we are in danger of falling in the (middle-income) trap. We have missed the chance to capitalise on a number of opportunities that would have helped us gain higher per capita income. For example, the "golden population." We missed taking advantage of our young labour force to push economic growth.

Improper policies and their poor enforcement have made us miss the chance to attract more foreign investment, for example, in electronics and auto production, among other support industries.

There are, however, still opportunities for us to take and we need the right policies to help our power thrive. We have done that in agriculture. With good policies and good enforcement, we have transformed ourselves from a country with a shortage of food to one of the world's leading rice exporters. This successful model should be applied in other sectors and areas.

With 80 million-plus people, we have potential with our labour force. Human capital is one of our promising areas to invest in. We have a big population that has skills. The connection between supply and demand in the labour force is very important, but we have not had the right policies to make it happen.

Information about strategies for training and employment should be made available to both students and enterprises to assist them in making decisions.

The education and training sector has recently started reforming, and I believe it will help a lot in improving and sustaining employment, if done properly.

We should do our best to not fall into the trap, because once we are in, it's very hard to get out. — VNS


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