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Dinh Vu

Economic Sector

Last updated: Friday, October 19, 2018


Seeking Solutions to Foster Connectivity to Global Value Chains

Posted: Tuesday, January 02, 2018

While significant progress has been made in improving logistics infrastructure and services, there is still ample room for further improvement. Vietnam’s ranking in the Logistics Performance Index dropped from 48 in 2014 to 64 in 2016.

Mr Ousmane Dione, World Bank Country Director in Vietnam, said effective and efficient logistics and connectivity are key to Vietnam’s regional and global competitiveness. Logistics performance is particularly important for an economy like Vietnam that is highly dependent on participation in global value chains and exports. This will translate into productivity gain which Vietnam needs to achieve its ambitious development objectives.

The country’s consistent policy of openness and export-led growth has paid off. The economic reforms undertaken since the 1990s helped spur growth and reduced poverty. Over the past 20 years, Vietnam has signed more FTAs than any other country in the region, making it one of the most integrated economies in the world, with trade-to-GDP ratio of over 170 per cent. The country’s merchandise export growth averaged 15 per cent in the past five years, almost five times the global trade growth. As such, Vietnam has emerged as a global manufacturing hub and one of the world’s leading FDI destinations, attracting about US$35 billion registered capital in 2017 alone.

But quantity does not always translate into quality. Although export revenue growth has been robust, Vietnam often carries out the lowest value-added segment of production in global value chains. Export performance remains largely driven by the FDI sector, which accounts for 70 per cent of total export, showing weak linkages between domestic firms and global value chains. Moreover, Vietnam’s trade costs are higher than the ASEAN average. As a proportion of GDP, logistics costs in Vietnam stand at about 18 per cent of GDP, almost double that of advanced economies and higher than the global average of 14 per cent.
“A strategy to enhance trade competitiveness in complementarity to trade liberalisation is needed to support Vietnam’s vision of becoming an upper middle-income country by 2035 with a more sophisticated economy and exports that sustain accelerated growth,” said Mr Ousmane Dione.

He said, there is a need for the Government and the private sector to define a clear agenda for reform if the quality of logistics services is to be raised, to meet the demand of an increasingly sophisticated economy. Interventions will be required across the many dimensions of logistics, complemented with significant investments in infrastructure.

Accordingly, there is a need to enhance connectivity is necessary. With more efficient connectivity, linkages between domestic production and international markets could be strengthened. This, in turn will reduce trade costs and increase the reliability of domestic firms in delivery of orders.

Despite significant public investment, trade-related infrastructure has not kept pace with the export growth and the rapid rise in freight volumes. Vietnam’s growth potential is being constrained by weak connectivity of major growth poles to main international gateways, high transport cost, and poor quality of transport and logistics services. Investment remains unbalanced, focusing more on roads than other modes of transport. Master planning will need to reflect expanding demand of main economic activities and trade as well as to optimise investment in appropriate multimodal transport and logistics centres.

He said, the over-reliance on public investment, which is clearly unaffordable and therefore unsustainable, should be revisited. Shifting to private sector financing and establishing clear priority for essential investments are all key for better connectivity. Besides, promoting trade facilitation could be a game changer. Global trends show that gains from improving trade facilitation can easily outweigh gains from tariff reduction, especially since tariffs are already quite low in most sectors. Promoting trade facilitation by simplifying customs and specialised management regulations, estimate that 76 per cent of the time to import into Vietnam is due to border and documentary requirements, and there is a high number of rules to comply with. The recent progress in customs reform is encouraging, but reform of specialised management agencies remains slow. The current regulatory framework for trade facilitation, which covers licensing processes and administrative procedures applied before, and at borders, involves a complex set of laws and legislative documents. In addition, the guidelines are not always consistent, with possible duplication, unclear application and the involvement of different government agencies. Adopting a more holistic and integrated approach, focusing on policy actions to review and rationalise measures and procedures, apply automation, in particular for the national single window, eliminate multiple inspections, use risk-based management in specialised inspection agencies, and improve transparency are required.

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