8 reasons behind gap in Vietnam’s productivity level and regional peers
GDP growth based on high productivity is the way forward for Vietnam to maintain rapid and sustainable economic growth, said head of Vietnam’s General Statistics Office.
Vietnam’s modest size of economy, slow progress in economic and labor force restructuring, obsolete technologies, and limited quality of human resources are factors leading to a gap between the country’s productivity level and regional peers, according to Nguyen Bich Lam, head of the government-run General Statistics Office (GSO).
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With a low starting point and modest economic size, Vietnam has achieved significant results in narrowing the gap in GDP per capita and productivity level with other countries, but the efforts remain insufficient to narrow the absolute gap in terms of productivity value compared to regional peers.
2. Slow progress in economic restructuring
Sectors serving as driving forces for the economy such as the industry, service, finance-banking or tourism still contribute modest level to the GDP growth.
Additionally, changes in productivity level are based on three factors, including a shift in the structure of the labor force, productivity changes in each sector, and simultaneous impact from the two mentioned above.
For developing countries like Vietnam, shift in the structure of the labor force proves essential for higher productivity of the economy. In reality, such factor makes sizable contribution to the economy, but is on a declining trend, reaching 39% in the 2011 – 2017 period, lower than the rate of 54% in the 2000 - 2010.
GSO’s Head Nguyen Bich Lam said the trend is normal based on the growth cycle of economies in times of transition, as an increase in overall productivity has become more dependent on growth in sector productivity.
However, there have not been significant changes in productivity in sectors, while growth in productivity mainly based on production expansion in labor-intensive sectors with low technological level.
Meanwhile, the manufacturing and processing – key for higher productivity – are relying on low to medium technological levels, Lam added.
High technologies application are brought about by FDI companies, concentrating on assembling and importing parts with low added-value generated for domestic peers.
As of 2018, Vietnam still has 20.5 million people working in the agriculture – forestry – fishery sector, accounting for 37.7% total labor force and contributing 14.7% of the GDP, while productivity in this sector is worth VND39.8 million (US$1,700) per person, equivalent to 38.9% of the overall productivity level, 30.4% of that of the industrial and construction sector, and 33.7% of the service sector.
This is considered one of major factors leading to Vietnam’s low productivity, said Lam.
3. Obsolete technologies
Most companies in Vietnam, particularly business households, have low level of technology application and innovation, staying two to three generations behind the global average level.
Vietnam was ranked 77th out of 140 countries in the Global Competitiveness Report of the World Economic Forum in 2018, down three places from the 74th a year earlier. Of the 12 pillars that made up its final score, Vietnam stood at 94th in terms of institutions and 101st in business dynamism.
According to Lam, Vietnam should continue to focus on creating favorable business condition along with new legal framework supporting innovation efforts of the business community.
4. Limited quality of human resources
There remains a big gap between quality in vocational training and demand in labor market. In Vietnam, a total of 42.4 million in the working force have not been trained to reach certain level of technical expertise, while an aging population could have a negative impact on Vietnam’s productivity in the future.
5. Inefficient utilization of resources
The total factor productivity (TFP), which is determined by how efficiently and intensely the inputs are utilized in production, remains low at 4.3% in the 2001 – 2010.
In the 2011 – 2018 period, the contribution of TFP has been improved but stayed modest at 37.7%, while the contribution of capital and labors were 62.3%, indicating the lack of development in science and technologies.
Vietnam’s economic growth in the 2011 – 2018 period are mainly based on the contribution of capital and labors. The mobilization of large capital has been instrumental for the country’s growth, but the efficiency is still questionable, due to the high incremental capital-output ratio (ICOR) - used as a measure of the inefficiency with which capital is used. The higher the ICOR, the lower the productivity of capital or the marginal efficiency of capital.
The ICOR increased from 3.5 in the 1991 – 1995 period to 6.15 in 2007 – 2008. The ratio once soared to 8 in 2009 and declined to 6.21 in 2018, however, is still higher than the World Bank’s recommendable level.
6. Slow industrial accumulation and urbanization.
The rate of urban residents in 2018 accounted for 35.7% of the total in the 2011 – 2018 period, up 3.1% in average, leading to the lack of supply in labor forces for the industrial and services sector.
7. Inefficient legal frameworks.
There remain bottlenecks in legal frameworks during the process of economic transformation towards market-based economy, particularly in the labor, technological market and property markets.
Vietnam currently ranks 68th out ot 190 countries and territories in terms of business environment, according to the World Bank’s Doing Business report.
8. Private sector has not been key driving force for greater productivity
Most enterprises in Vietnam, or 98% of the total, are of small and medium size, with limited financial capability, low level of competitiveness and corporate governance.
Moreover, expenditure for research and development (R&D) among those enterprises are still low, with only 15.7% of the total spending for R&D, according to World Bank’s report in 2015.
Lam also added Vietnamese enterprises have not been able to integrate into the global supply chain, which could have been a major benefit in taking advantage of the knowhow, technologies and high productivity from multinationals operating in Vietnam.
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