Shifting to Intensive Industrial Production

According to the social and economic development plans for the five-year period from 2011 to 2015, the Government will continue restructuring its market-oriented industry with a gradual decrease of the State economic sector (centrally and locally State-owned enterprises) and an increase of private sector and foreign investment. According to experts, this is the right step because industrial production, notwithstanding good growth, is going on the “old path” and may fall into the trap of unsustainable development.

Industrial production continued to assert its backbone role by maintaining a high growth rate last year. In December 2010, the growth of 16.2 percent was equal to that before the global financial crisis and economic recession. In 2010, industrial production value is forecast to rise 14 percent and beat the annual plan of 12 percent.

 

In 2010, private and foreign-led sectors still took the lead in industrial production growth, contributing significantly to the overall result. Particularly, the foreign-invested sector saw an expansion of 14.2 percent and the private sector enjoyed a 14.5 percent rise, but the State-owned sector witnessed an increase of merely 4.9 percent.

 

The modest growth of the State business sector proves the paradox that this sector gets most of capital, land and resource preferences but gives back the least. The capital of State-owned enterprises (SOEs), mainly belonging to State economic groups and corporations, is always highest in the national economy’s total capital, but its contribution to total revenues is always lower than the FDI sector.

 

Some provinces and cities with a high proportion of industrial production still maintained high growth. Hanoi, Hai Phong, Quang Ninh, Thanh Hoa, Da Nang, Khanh Hoa, Ho Chi Minh City, Binh Duong, Dong Nai and Can Tho now make up roughly 60 percent of the country’s industrial production value.

Dr Dang Duc Dam, Director of the Business Development Research Institute, pointed out that notwithstanding the good growth rate, industrial production is mainly expanding in dimension, based on the capital scale, land, natural minerals and cheap labour. This growth model has generated good effects from 1986 to date, but if Vietnam continues to follow this model its economy will fall into the trap of unsustainable development.

 

He put forth concrete data to prove the end of the dimension-based growth model. Investment capital-based production growth is proven to generate very low efficiency. Vietnam’s investment increases continuously to nearly 43 percent of GDP at present, higher than in China, South Korea and Thailand.

 

Notably, the more businesses invest the lower efficiency they get. The Incremental Capital Output Ratio (ICOR) of Vietnamese companies continued rising, from 3.5 in the 1991 - 1995 period to 6.6 in 2008 and 8 in 2009. According to recommendations by prestigious financial institutions like the World Bank, investment is good if ICOR is less than or equal to 3. Vietnam’s ICOR of 8 is too high, 2 or 3 times higher than other countries in the region.

 

The capital preference for SOEs is not as effective as expected. According to statistics, the investment efficiency of the State economic sector is significantly lower than in the private and foreign-led sectors. For example, the ICOR of SOEs is up to 8.28, much higher than the 3.74 of the private sector and 4.99 of the FDI sector. According to a report by the National Assembly Standing Committee, up to 56 out of 91 State-owned economic groups and corporations has a return on equity (ROE) lower than 15 percent, just equal to deposit rates at commercial banks in 2010.

 

In the past time, inputs have been a key driver for economic growth, but high inflation and resource scarcity will increasingly affect this factor. Although Vietnam is reported to be in the period the golden population structure, the employment rate growth is very low. The contribution of the total factor productivity (TFP) to GDP growth is modest, just 26 percent on average.

 

Mr Phan Dang Tuat, Director of the Research Institute of Industrial Strategy and Policy under the Ministry of Industry and Trade, said: The ministry’s review of ineffective industrial production projects like steel mills demonstrated that Vietnam was gradually preparing for the development of intensive industrial production. However, he noted that although production and productivity grew considerably, they were still at a low level. The improvement of labour productivity is mainly resulted from the move of labour to more capital-intensive industries rather than the improvement of working skills and production technologies. Compared with other countries in the region, Vietnam's labour productivity is only 14.9 percent of Singapore, 40 percent of Thailand and 52.6 percent of China.

 

Tuat added that consumption of materials and energy in production activities in Vietnam is very high. According to calculations by the Ministry of Industry and Trade, power efficiency in industrial production is about 20 percent lower than the world average. Furthermore, natural resources are being excessively and wastefully exploited. According to a report by Mr Dang Duc Dam, a loss of 40 - 60 percent is reported in coalmining, 26-43 percent loss of apatite mining, and 15-30 percent loss in metal ore mining. In gold mining, the degree of gold recovery is only 30 - 40 percent. At the parliamentary meeting in late 2009, deputies discussed limitation and termination of raw minerals exports. However, earlier this year, it was reported that the Government was requested to export 400,000 tonnes of iron ores, 18,000 tonnes of manganese, and 44,000 tonnes of zinc. According to statistics, coal for power plants is forecast to fall short by 9.2 million tonnes in 2013, 25.5 million tonnes in 2015 and 27.5 million tonnes in 2025.

 

Ms Pham Thi Thu Hang, Director of the Enterprise Development Foundation of the Vietnam Chamber of Commerce and Industry (VCCI), proposed that Vietnam create equal opportunities for enterprises to easily access resources. She pointed out persistent irrationalities in comparing the correlation of capital, revenue and employment in the State, private and foreign-invested economic sectors. The capital of State-owned enterprises (SOEs), mainly belonging to State economic groups and corporations, is always highest in the national economy’s total capital, but its contribution to total revenues is always lower than that of the FDI sector.

 

According to experts, restructuring industrial production to diversify forms, create a fair playing field for all economic sectors and economise resources for Vietnam is crucial to have industry with sustainable development.