Vietnam’s Demographic Dividend and the Race to Build a Productive Economy

In North America and Europe, we are worrying about how the next generation is going to support our aging population and who will pay down the National Debt that we leave behind. That’s because most of the so-called developed nations are about to enter a phase of demographic ‘debt’: where a declining number of adults of working age have to support an increasing proportion of ‘unproductive’ retired workers and children.

Young, aspiring and ready to work...

Meanwhile, in Vietnam, the demographic trend for the next 10 years is quite different. The rapid fall in the birth rate over the last 30 years has meant a smaller cohort of dependent children, while an increase in life expectancy is only now beginning.  This means that in 2018, the proportion of working age adults in Vietnam will peak at 70%, representing a significant demographic ‘dividend’.

Revering the past but heading full tilt into the future.

The next eight years, therefore, are critical to the Vietnamese economy. After 2018, the relative size of its productive population will begin to decline as life expectancy increases and the birth rate stabilizes.  The government is faced with some crucial questions, not least how best to harness the considerable economic power of its young aspiring population,  as workers, as consumers and as savers. For, although North America and Europe are aging, the productivity of their shrinking workforces and highly integrated and sophisticated economies continue to provide their citizens with comparatively high standards of living that are only too apparent to young Vietnamese.

This week, Vietnam’s government acknowledged the current shortcomings of the local economy and explained how it plans to address them. Its stated priority is to remedy the lack of ‘support industries’ for the nation’s ‘core products’. The poor link between Vietnam’s industrial and agricultural sectors highlights a problem that is common in developing countries. While half of the country’s considerable agricultural output is exported, most of the relatively expensive machinery (or ‘input’) required to produce it is imported.  The government would, rightly, prefer a more balanced local economy, where the same machinery is produced by the local industrial sector.  To compound this inefficiency, 90% of Vietnam’s agricultural exports leave the country as base commodities, ‘unbranded’ and without any value having been added. Vietnam is one of the world’s largest exporters of coffee and the largest exporter of pepper but few, if any, of us would know that.

There is a sense of urgency in the government’s statements, reflecting the ticking demographic clock and the political need to provide jobs for Vietnam’s growing workforce. There is even an admission that national resources have been wasted and distributed inappropriately thereby creating an unbalanced economy.  When Philip and I visited Quy Nhon, we saw a startling example of the kind of mis-allocation to which the  government refers.

No cars, no people, no buildings. Nhon Hoi waits for the investors.

The Nhon Hoi economic zone lies on the edge of Quy Nhon, within Binh Dinh Province. It includes land for industry, homes and tourism. Its industrial area has been laid out, with roads and other infrastructure already in place, much of it on reclaimed land. The provincial government has ambitions to expand the current port, build a sea terminal for importing and transshipping of oil and lease out 12,000 hectares (30,000 acres) of land.  It’s difficult to fault the basic principals underlying the Province’s policy.  However, the vast scale of their plan is what shocks, especially when you see the miles of empty industrial boulevards and land already prepared, ready for tenants yet to be identified. Nhon Hoi Economic Zone is just one example, among many, of regional governments upgrading port facilities, industrial parks and other economic infrastructure. In a recent press statement, the Ministry of Planning and Investment lists 228 industrial parks in Vietnam and bemoans the fact that only 48% of their total area has been leased;  ‘Weak infrastructure and the shortage of qualified laborers are among major reasons hindering (secondary) investment in (industrial parks) and (economic zones)’ the article goes on to say.

Unique craftsmanship. But not quite what the government needs right now.

It is this lack of ‘secondary’ investment, in manufacturing, distribution and support services (much of it in the form of foreign direct investment) that the government worries about when it states that there has been too much concentration on land and real estate. Vietnam must, it says, cope with the world financial crisis while catching up with new opportunities to reinforce its industrial and agricultural economies.  It must develop the market economy through administrative reform, develop its technological sector, enable fair competition and abolish monopolies. All laudable ambitions but, one wonders, can the economy  be repositioned quickly enough to take full advantage of the demographic dividend? Meanwhile, what can be done to ease the social tensions that inevitably arise within a populace that recognizes its own potential yet sees investment generate only a modest increase in labour productivity?

Tomorrow's workforce...

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