Harvard’s End of Year Report on Vietnam’s Competitiveness: Must Do Better

Improved training and education are central to Vietnam's continued economic transformation

Michael E. Porter and his Harvard-based Institute for Strategy and Competitiveness visited Hanoi in December to deliver the results of their 2010 Vietnam Competitiveness Report.  It makes interesting reading.  In Professor Porter’s words; “While the country can be proud of what has been achieved (over the last two decades), its performance is showing signs of fragility. Comparison with other countries reveals that Vietnam has not outperformed leading peers in the region.”  And when it comes to the importance of competitiveness, the Professor should know.  In the first half of the 1980s he wrote Competitive Strategy and Competitive Advantage, a couple of tomes that graced every aspiring manager’s bookcase and that confirmed Porter’s status as a management guru.

Harvard comes to Hanoi: Professor Michael Porter and Prime Minister Nguyen Tan Dung

In a nutshell, Vietnam’s impressive growth over the last two decades has been due to considerable improvements in labor productivity, fueled by capital inflows associated with the nation’s structural change from an agricultural to a manufacturing economy.  Foreign investment has played a central role, providing much of the capital and driving up exports.  Imports have also grown, to meet the needs of Vietnam’s new manufacturers and an increasingly prosperous middle class.

Unfortunately, this positive economic base has been undermined by several factors that threaten to stall Vietnam’s growth and neutralize its primary competitive advantage of low labor costs. First, the country’s exports rely heavily on either imported supplies or consist of natural resources and agricultural products. In both cases, very little value is added by Vietnam’s cheap, poorly trained labor.   Second, productivity in non-manufacturing sectors is chronically low.  Third, government investment is often ineffectual, targeted for reasons of fairness at less wealthy regions rather than concentrated where wealth could be multiplied several fold by improved infrastructure and education. Finally, rising local input prices combined with relatively lackluster productivity are eroding Vietnam’s competitive labor cost advantage to the extent that countries like China and Taiwan, with their higher labor costs, are out-competing local producers.  All these micro-economic issues are exacerbated by the nation’s volatile currency, high inflation, troubled banking sector and weak government finances.

Local economists and policy makers recognize that Vietnam’s impressive social and economic transformation has reached a crucial juncture and it is no coincidence that Professor Porter delivered his message to an audience that included Hoang Trung Hai, Vietnam’s Deputy Prime Minister who commissioned the study and Prime Minister Nguyen Tan Dung who has just been re-elected for a second four-year term.

The Guru speaks: Is Vietnam ready for his message?

So, in Professor Porter’s opinion, what must Vietnam do to improve its competitiveness and continue its economic transformation?  Most observant visitors to Vietnam would not be surprised by the Professor’s prescription which he provides in his informative and detailed 68-slide Power Point presentation. Here’s a summary;

Enhance education and workforce skills. It’s no surprise that Vietnam has found it tough to keep up with the educational needs of its growing population, impatient to reap the financial benefits of rapid structural change and even less patient to wait for training and education to catch up.

Improve physical infrastructure. Summer power outages and crumbling, congested roads may be commonplace to the Vietnamese but they worry existing foreign investors and frighten away new ones. Moving people and products around Vietnam is enormously inefficient and efforts to improve the road system seem hampered by poor project management and quality control.

Money wasted: Deteriorating Infrastructure, installed too far in advance of the development it's designed to support

Improve the governance of State-Owned Enterprises (SOEs). Vietnam’s SOEs absorb a considerable share of government investment but fail to deliver acceptable returns.  Vinashin, the national shipbuilding company, has become an albatross roubnd the governments neck, epitomized by its recent failure to meet foreign debt repayment covenants that in turn prompted Standard & Poor’s to lower Vietnam’s debt rating to a point now three levels below investment grade.

Do more to attract deeper rooted Foreign Direct Investment (FDI). Even though Vietnam has been successful in attracting investment from overseas, it’s the quality of this FDI that concerns Professor Porter. First of all, the issuance of licenses to foreign investors appears to be a numbers game, indifferent to whether the investor has the financial capacity to follow through. Consequently, it is not unusual to see delays of several years between investment reporting and realization.  Second, foreign investment often has ‘shallow roots’, with hardly any impact on the local economy other than to create low-paying, low-skilled jobs.

Pursue a cluster-based model. ‘Clustering’ is one of the cornerstones of Michael Porter’s theory of national competitiveness.  By co-locating manufacturers, their suppliers, sub-contractors and investing in social and physical infrastructure like academic institutions and airports, governments can spawn and attract more competitive, innovative and cost-efficient enterprises better able to compete in the international marketplace.

It is this last of Professor Porter’s prescriptions that deserves further exploration. He identifies five locational clusters and specific initiatives that Vietnam should consider when deciding how to allocate precious government investment.  In the Hanoi region, an electronic and engineering cluster would be enhanced and grown by an increase in local supplier capacity.  A tourism cluster in the Central Region would be driven by an overarching marketing vision as well as improved tourist-related services. In the Ho Chi Minh City region, two clusters are proposed.  The first is a garment industry cluster, enhanced by improved workforce skills and the second, a logistics cluster underpinned by improved road, rail, seaport and air access.  The fifth cluster is proposed for Vietnam’s ‘rice basket’, the Mekong Delta, where an agro-processing cluster would be driven by value-added activities.

One can see immediately the importance of provincial ‘buy-in’ to these ideas, as well as clear- sited and realistic regional planning.  Every provincial leader could no doubt identify a unique local cluster deserving of investment but, as Professor Porter implies, Vietnam’s national government must make difficult choices, focus ruthlessly on the potential return on the nation’s investment and provide courageous leadership rather than spread the country’s limited financial resources across 58 provinces and five self-governing cities.

There is daunting work ahead for the newly re-elected Prime Minister.  He faces a raft of macro- and micro-economic problems at a time when the nations that surround Vietnam have solved or side-stepped similar issues and have made the transition to higher levels of social and economic development.  It is time once more for the people of Vietnam – especially its leaders – to face the country’s economic shortcomings with fortitude and the kind of iron will that its regional competitors admire and fear.

Nobody wants to see Vietnam's economy stall because of a lack of competitiveness.

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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...