Vietnam’s labor productivity and the role of SOEs
This is the issue addressed by Manuela V. Ferro, the World Bank’s Vice President for East Asia and Pacific, in an article “To prosper, Vietnam needs to increase efficiency”. “For Vietnam to achieve the desired transformation results, it is extremely important to accelerate the transition to productivity-based growth,” she wrote.
The answer for productivity growth is familiar to Vietnam because many international organizations and domestic economists have evaluated it for years.
The risk of falling behind
The challenge regarding slow productivity growth and the widening productivity gap with other countries in the region leads to the risk that Vietnam will lag further behind in the long-distance race in terms of productivity and economic growth.
A recent study by the Central Institute for Economic Management (CIEM) said that Vietnam's labor productivity is very low compared to other countries in Southeast Asia.
Based on purchasing power parity in 2011, Vietnam’s labor productivity in 2018 reached US$11,142, equivalent to 7.3% of Singapore’s, 19% of Malaysia’s, 37% of Thailand’s, 44.8% of Indonesia’s and 55.9% of the Philippines. For the 2008-2017 period, Vietnam's labor productivity rose by an average of 4% per year.
This shows that, with the labor productivity growth rate of only 4%/year, Vietnam will lag further behind in productivity compared to that of other countries in the region, and the risk of falling into the middle-income trap is high. It is estimated that to catch up with labor productivity growth of neighboring countries and escape the middle-income trap, Vietnam’s labor productivity must grow 6.3-7.3%/year.
Meanwhile, the World Bank calculated that, after achieving the current per capita income of Vietnam in 1972, South Korea doubled its per capita income after only 10 years and increased it by 5 times after 20 years.
Such rapid achievement was the result of a combination of the increase of investment in physical and human resources, and above all the growth of operational efficiency, as evidenced by the growing contribution of productivity (measured by TFP) to GDP, from 16% in the 1970s to 43% in the 1980s and 56% in the 2000s.
Therefore, it can be argued that South Korea succeeded in its transition from a middle-income economy to a high-income economy through more efficient management of existing resources rather than simply accumulating more resources.
Growth in state-owned enterprises
Meanwhile, in Vietnam, there are many fields that can increase productivity, and make the economy grow faster and more efficiently, of which the state-owned enterprise (SOE) sector is an example.
This sector had total assets of about VND 4 quadrillion in 2021. The average asset of an SOE is about VND4,100 billion, 10 times higher than that of foreign invested enterprises and 109 times higher than that of domestic private enterprises.
The performance of SOEs is not commensurate with its resources. The SOE sector tended to gradually decrease in size and contribution in all efficiency indicators in the period 2016-2021. SOEs in general have the highest debt ratio of all types of enterprises in Vietnam; they operate effectively in very few industries with natural advantages such as mineral exploitation, oil and gas, telecommunications and finance - banking.
Although SOEs hold great resources of the economy, they do not have large enough investment and development projects to create breakthroughs and improve the competitiveness of the economy.
In the 2016-2020 period, SOEs did not launch many large-scale projects. They only continued implementing unfinished projects or dealing with inefficient projects kicked off in the previous period.
Particularly, for the 19 state-owned groups and corporations under the State Capital Management Committee and Viettel Group, which holds nearly 90% of the resources of the entire SOE sector, they only implemented three large projects, including two projects from the previous period and only one kicked off in 2016.
The failure to create additional capacity will result in the next five years, when the contribution of the SOE sector to the economy will be very limited as its current contribution to Vietnam’s GDP is about 29%.
Economists said that, with total assets of about VND4 quadrillion, the SOE sector only needed to grow by 10% to help the economy to grow rapidly. However, for many years, this economic sector has not been able to do so.
Recently, Vietnam's labor productivity has improved significantly year by year. According to CIEM, in 2016 labor productivity rose by 5.3% compared to 2015; up by 6% in 2017; 5.55% in 2018; and 6.28% in 2019. That of 2020 was about 1.5 times more than that in 2015. The average growth rate of the whole society in the 2016-2020 period reached 5.8%/year, compared to 4.3%/year in the 2011-2015 period.
However, this growth is not enough to help Vietnam go ahead, and the World Bank’s suggestion is once again very correct for reform.
So, what are the conditions for Vietnam to become a modern industrial economy in 2035?
According to the Vietnam Report 2035 made by the World Bank and the Vietnamese Government, with GDP per capita of about $5,370 in 2014, within the next 20 years, the average per capita GDP growth rate of Vietnam must be at least 6%/year to reach $18,000 by 2035.
With a lower, more feasible (but still ambitious) growth rate of 5% per year, Vietnam’s GDP per capita would reach $15,000 by 2035 and bring Vietnam on par with Brazil in 2014, and reach $18,000 in 2040.
With a growth roadmap of over 7%/year, Vietnam’s GDP per capita would reach about $22,200, equivalent to that of South Korea in 2002 or Malaysia in 2013. That higher growth rate would help Vietnam catch up with Indonesia and the Philippines.