The key to growth and the danger of the low-value trap

Vietnam’s GDP growth rate in the first half of 2021 stood at 5.64% which surprised many people.

According to the Ministry of Planning and Investment’s report, the processing and manufacturing industry achieved a high growth rate of 11.42% during this period. This contributed to helping Vietnam's economy stand firm in 2021 and is expected to be a premise for growth recovery in the following years.

The "key" to prosperity

The key to growth and the danger of the low-value trap



However, this figure reveals some problems. Although the growth rate of the processing and manufacturing industry is higher than other industries, it is still quite low compared to the criteria of an industrialized country. The structure of Vietnam’s processing and manufacturing industry is problematic as the supporting industry has developed very slowly and the foreign-invested sector accounts for more than 50% of production value and about 80% of export turnover.

The Ministry of Planning and Investment forecasts that the world economy will recover strongly after the end of the Covid-19 pandemic. The epidemic has disrupted many supply chains. Therefore, this is an opportunity for Vietnamese enterprises to participate in the global supply chain. However, it is difficult for the manufacturing and processing industry, with most Vietnamese firms still doing outsourcing.

The processing and manufacturing industry has long proved its importance in the process of industrialization and economic development. From the rise of Britain in the 19th century, to the rise of the United States, Germany, and Japan in the 20th century and the newly industrialized countries in the second half of the 20th century, the success of these countries in the industrialization process proves that the manufacturing industry is the "key" to prosperity.

Reality also indicates that when the Covid-19 pandemic occurred all economies were affected, but the countries with a high proportion of manufacturing industries in their GDP were affected more slowly and mildly.

According to the Ministry of Industry and Trade, the proportion from the processing and manufacturing industry in Vietnam's GDP increased from 13.4% in 2016 to 16.58% in 2020.

Meanwhile, for industrialized countries, during the past 20 years the manufacturing industry has always contributed 20% or more to GDP. For example, China's manufacturing and processing industry contributes 27.1% of GDP; South Korea 25.3%; Thailand 25.3%; Malaysia 21.5%; Japan 20.7%... Developed countries have moved their production bases abroad, so the manufacturing capacity is much larger.

Vietnam with 100 million people, in order to be independent, self-reliant and prosperous, needs to have a strong and developing processing and manufacturing industry.

The Resolution of the 13th National Party Congress set a goal to increase the proportion of processing and manufacturing industry in GDP to over 25% in the period of 2021-2025.

FDI dependence and the low-value trap

The key to growth and the danger of the low-value trap
 



However, there are concerns that Vietnam can easily fall into the "low value-added trap". The United Nations Conference on Trade and Development (UNCTAD) says a country trapped in a low value-added trap attracts FDI from businesses that do not intend to form links with the domestic economy, cannot create spillover effects, and operate with short-term goals.

In recent years, Vietnam has led Southeast Asia in attracting foreign investment. Among foreign-invested projects in Vietnam, there are many projects of leading multinational corporations in many fields.

However, foreign-invested groups are creating their own economy, lacking connections to Vietnamese firms, and thus they do not bring in spillover effects. Many investors believe that low labor costs and energy prices as well as attractive tax incentives are the main reasons to invest in Vietnam. Very few foreign-invested corporations think that highly skilled workers or competitive domestic supply chains are Vietnam's strengths.

Vietnam needs to renew its strategy to attract foreign investment in general and the processing and manufacturing industry in particular to escape the middle-income trap.

With the manufacturing and processing industry, growth is mainly based on external resources (foreign-invested sector), and when domestic advantages no longer exist (low labor costs, attractive tax incentives...), foreign investors shift to countries with better advantages, which will lead to the process of industrial disarmament.

A country may be caught in the "low value-added trap" due to other reasons, mainly a weak and self-reliant domestic private sector which is unable to mature or become independent, or unable to master the economy and have enough competitive power in the global market. In essence, the “low value-added trap” is also a manifestation of the “middle income trap”.

In fact, in the period from 1951 to 1989, newly emerging economies in Asia all attracted large investment sources from developed countries. However, after 20-30 years, South Korea and Taiwan have built a strong industry that is no longer dependent and has global competitiveness.

Meanwhile, some economies in Southeast Asia such as Malaysia, Thailand, Indonesia and the Philippines have so far depended on foreign-invested enterprises in most industries.

Experts say that in order to avoid the "middle income trap" or "low value-added trap" and become a developed and high-income country, Vietnam needs to change its strategy to attract foreign investment in general and foreign investment in the processing and manufacturing industry in particular.

Vietnam must attach foreign investment attraction to national development strategies and plans, form supply chains and industrial clusters, and focus on industries and stages that create high added value, are environmentally friendly and use low energy-consumption technology.

However, foreign-invested enterprises in the processing and manufacturing industry are only a driving force. Domestic industrial enterprises are a solid foundation to help a country escape the "middle income trap". Therefore, it is necessary to build a strong domestic force that plays a leading role and forms a domestic supply chain.

Resolution 50/NQ-TW on orientations to perfect institutions and policies, and improve the quality and efficiency of foreign investment cooperation to 2030 of the Politburo emphasizes:

Firstly, the foreign-invested economic sector is an important component of the Vietnamese economy, which is encouraged and has created favorable conditions for long-term development, cooperation and healthy competition with other economic sectors. The State respects and protects the legitimate rights and interests of investors; and ensures the harmonization of interests between the State, investors and employees in the enterprise.

Secondly, it is necessary to build and perfect institutions and policies on foreign investment in line with development trends, approach international advanced standards and harmonize with international commitments, and ensure synchronization, consistency, openness, transparency and highly competitiveness.

Thirdly, the attraction of foreign investment must be selective, taking quality, efficiency, technology and environmental protection as the main evaluation criteria. Prioritizing projects with advanced technology, new, clean and modern technology.

Fourthly, as for foreign investment, Vietnam must diversify partners and investment forms, intertwine interests in foreign investment cooperation and organically connect with the domestic economic sector, in line with the orientation of restructuring the economy and sustainable development goals; protecting the environment, ensuring national defense, security, and order...

Tran Thuy

20 years for Vietnam to become rich and strong

20 years for Vietnam to become rich and strong

If developing countries do not make breakthroughs during the golden population period, they will find it difficult to overcome the middle-income trap to become developed countries.

Vietnam seeks to avoid middle-income trap before time runs out and population ages

Vietnam seeks to avoid middle-income trap before time runs out and population ages

Vietnam has become richer, but it remains a lower middle-income country facing a risk of being left behind. It aims to become a high-income country by 2045.

 
 

Other News

.
Fourth Covid-19 wave still raging, 80,000 businesses leave market
Fourth Covid-19 wave still raging, 80,000 businesses leave market
FEATUREicon  27/08/2021 

The Ministry of Planning and Investment's latest report found that production and business activities have been seriously affected by the Covid-19 pandemic.

Fighting the epidemic based on science
Fighting the epidemic based on science
FEATUREicon  27/08/2021 

At the national level, much more data in the health, economic and social fields is needed to make science-based rather than sentimental decisions for anti-epidemic and economic fronts.

Latest drastic moves in Vietnam’s vaccine diplomacy strategy
Latest drastic moves in Vietnam’s vaccine diplomacy strategy
FEATUREicon  26/08/2021 

Through vaccine diplomacy, Vietnam has so far received millions of vaccine doses from the support of the international community.

Vietnam-US relationship: comprehensive and strategic
Vietnam-US relationship: comprehensive and strategic
FEATUREicon  26/08/2021 

This is the time to review the relationship between Vietnam and the US, 

Hotels, private hospitals join fight against Covid-19
Hotels, private hospitals join fight against Covid-19
FEATUREicon  26/08/2021 

Many resources in society have been mobilized for testing, vaccination and medical quarantine, which has improved service quality and helped businesses earn revenue.

Teachers explain ’10.0 GPA phenomenon’ among primary school students
Teachers explain ’10.0 GPA phenomenon’ among primary school students
FEATUREicon  25/08/2021 

Two famous secondary schools for the gifted in Hanoi and HCM City have found it difficult to enroll students for the 2021-2022 academic year because there are too many students with a perfect 10.0 GPA (grade point average).

Directorate of Market Surveillance officials arrested for abuse of power
Directorate of Market Surveillance officials arrested for abuse of power
FEATUREicon  25/08/2021 

While many officials have been honored for their excellent fulfillment of official duties, many others have been prosecuted for their involvement in trade fraud.

Experts warn of high risks from real estate firms' corporate bond issuance
Experts warn of high risks from real estate firms' corporate bond issuance
FEATUREicon  25/08/2021 

Corporate bonds issued by real estate firms account for a high proportion of securities that mature in three years. Experts warn of high risks if the real estate market cannot recover by that time.

People lose everything as they fall into consumer-loan trap
People lose everything as they fall into consumer-loan trap
FEATUREicon  27/08/2021 

Some people who have not earned enough money because of Covid-19 and have had to borrow money have fallen into traps set by usurers.

State revenue from registration fees increases
State revenue from registration fees increases
FEATUREicon  24/08/2021 

The registration fees collected for the state budget increased from VND11,816 billion in 2012 to VND40,194 billion in 2019, up by 240% or VND28,378 billion.

Hanoi protects green zones from the core
Hanoi protects green zones from the core
FEATUREicon  25/08/2021 

Each residential area, commune and ward are considered the core level – the ‘cell’ that needs to be protected. Many places in Hanoi are effectively promoting the "green zone" model for safe residential areas.

More medical data needed to fight Covid-19
More medical data needed to fight Covid-19
FEATUREicon  24/08/2021 

Data from epidemiological studies using antibody tests to measure the proportion of the population who have acquired protective immunity will help to make more accurate assessments about the epidemic situation.

Street-front high-rise owners incur losses as renters leave
Street-front high-rise owners incur losses as renters leave
FEATUREicon  24/08/2021 

The long fourth Covid-19 outbreak and social distancing regulations have posed great challenges to the office leasing market.

Businesses seek interest rate cuts, banks worry about declining profits
Businesses seek interest rate cuts, banks worry about declining profits
FEATUREicon  24/08/2021 

Business associations and industries have repeatedly asked commercial banks to ease lending interest rates to share difficulties with them in the Covid-19 pandemic.

Six production options offered to companies amid pandemic
Six production options offered to companies amid pandemic
FEATUREicon  23/08/2021 

The HCM City Department of Industry and Trade has released guidance on safe production in the conditions of the fight against Covid-19 pandemic. There are six options:

Four-day campaign suceeds in stopping vegetable price chaos in HCM City
Four-day campaign suceeds in stopping vegetable price chaos in HCM City
FEATUREicon  21/08/2021 

A campaign deployed within four days helped rescue the vegetable distribution network in HCM City and stop price fluctuations during social distancing.

Discarded fruit peels recycled into valuable products
Discarded fruit peels recycled into valuable products
FEATUREicon  27/08/2021 

Many types of fruit peels, considered such as cocoa and shrimp shells and rice husks, can be processed into useful products, thus increasing product value, regenerating resources, and protecting the environment.

A breath of fresh air in literature textbooks for sixth graders
A breath of fresh air in literature textbooks for sixth graders
FEATUREicon  21/08/2021 

Teachers say sixth graders this year will be able to access literature works that their parents and grandparents did not have in their textbooks.

Highly contagious Delta variant lengthens outbreak in Vietnam
Highly contagious Delta variant lengthens outbreak in Vietnam
FEATUREicon  20/08/2021 

The Delta variant of the SARS-CoV-2 virus, with its rapid and strong spread in a very short time, has put huge pressure on the health system.

A midnight call from a pregnant woman, and return trips to hometowns
A midnight call from a pregnant woman, and return trips to hometowns
FEATUREicon  20/08/2021 

On the evening of August 15, Pham Thi Minh Hien, deputy director of the Phu Yen Department of Labor, War Invalids and Social Affairs, received a call for help from a young couple.

 
 
 
Leave your comment on an article

OR QUICK LOGIN