Inherent bottleneck in the export-led growth model and the pattern of Vietnam’s participation in the global value chain are considered two main threats to the sustainability of the country’s current growth model, according to Vietnam Institute for Economic and Policy Research (VEPR).

“The overall exports pattern of Vietnam portrays the country is following the footsteps of export-led growth model of Mexico,” said Nguyen Duc Thanh, VEPR’s director, at the launch of its annual economic report.

According to the report, Mexico has turned itself into export production platforms for foreign multi-nationals by suppressing the wages, rather than developing own indigenous industrial capacity.

This export-led growth strategy is different from the one adopted by Germany or Japan or Asian Four Tiger countries or China, focusing on enhancing their own industrial capacity, Thanh added.

Thanh said the Mexico model was considered less successful so far, pointing to sluggish GDP growth, unchanged labor productivity, and negative total factor productivity growth.

VEPR’s report suggested with the rising living standards, ultimately the comparative advantages of cheap labor force would vanish in the future, which means a wave of assembly jobs would flow out of Vietnam leaving masses of workers without jobs.

Additionally, the assembling platform strategy should be bonded with the strategy to develop own indigenous industrial capacity, and national technological base. These will help Vietnam to upgrade activities along value chains in forms of Product upgrading; Process upgrading; Functional upgrading; and/or Sectoral Upgrading so that it can switch Vietnam goals “assembling agent” to “indigenous producer”.

In 2015, global value chain’s participation rate of Vietnam is 56%, which is a significant jump in comparison to just 34% in 1995. However, increment comes from backward participation that shares 45 percentage points and the forward participation contributes only 11 percentage points.

Moreover, the contribution of forward participation has been weakening since 2000. In terms of position on the value chain, none of the industries are located in the upstream position (global value chain position indices of all industries are negative).

Only two industries including other transport and wholesale and retail trade have taken on the larger negative indices and are thus positioned downstream.

The rests of the industries including crucial industries for Vietnam such as textile and footwear, electronics and electric, automotive, among others, are positioned in the middle-stream on the value chain.

Challenges to realize Industry 4.0 potential

Adaptation of Industry 4.0 may increase Vietnam’s GDP by US$28.5 billion - US$62.1 billion (equivalent to 7 - 16% of the GDP) by 2030, while per capita income of Vietnam would also increase by an additional US$315 - US$640, according to the Central Institute of Economic Management (CIEM).

However, the report said Vietnam’s growth depends heavily on its ‘assembling based exports’. Moreover, its increased global value chain participation is primarily due to multinational enterprises operating in country.

Under this circumstance, VEPR expressed concern over the realization of Industry 4.0 in Vietnam.

The greater automation in manufacturing process will shift the work from low skilled labor market to high skilled labor market, and also the integrated model of manufacturing process will ultimately move the manufacturing plants close to the customers’ markets, stated the report.

Vietnam is at risk if multinational corporations, which are now operating in Vietnam, will prefer to move out of the country for any or both of those purposes. Hence Vietnam must push for higher position in the global value chain ladder, VEPR researchers suggested.

Nevertheless, there are many reasons to believe that the existing multinational corporations may not prefer to shift their work out of Vietnam, including Vietnam’s strategic position in the East Asia; its interests and involvement in several deep Preferential Trade Agreements (PTAs) that if ratified may give tariff-free access to the key markets such as US and EU; and highly competitive in terms of labor costs, among others. Hanoitimes

Ngoc Thuy