Vietnam Needs Continued Structural Reform and Greater Participation in Global Value Chains

 

GDP growth is forecast to edge up to 6.1 percent in 2015 and 6.2 percent in 2016, with FDI being an important driver. Data from the Foreign Investment Agency (FIA) show that new FDI commitments rose to US$15.6 billion in 2014, while an additional US$4.6 billion was committed to existing foreign-funded projects. According to the report, the forecasts assume the Government will maintain expansionary fiscal and monetary policies and speed up structural reform. Inflation is projected to average 2.5 percent. It is seen quickening to 4.0 percent in 2016 as domestic demand and global oil prices rise.

 

Mr Tomoyuki Kimura, ADB Country Director for Vietnam, said: “Better economic performance in the major industrial economies - particularly the US, Vietnam’s biggest export market - will help to spur export growth, although this positive effect will be partly offset by slowing growth in China. Vietnam is also expected to be a net beneficiary of lower global oil prices which will increase disposable incomes and lower business costs.”

 

The ADO highlights that while Vietnam’s economic performance slowly improves, a number of structural factors continue to limit its ability to reach its full growth potential. In the short term, priority should be placed on strengthening the banking system and outlining a clear strategy to resolve non-performing loans. Growth will also be supported by new laws to guide divestment of State-owned enterprises and accelerate their commercialisation.

 

However, according to the report, over the longer term, achieving higher rates of economic growth depends on Vietnam’s ability to undertake deeper structural and corporate governance reform, and to facilitate local firms’ integration into global value chains.

 

The gradual opening of Vietnam’s economy over the past 30 years, including through trade pacts that culminated in membership of the World Trade Organisation (WTO) in 2007, has spurred FDI, exports, and economic development. FDI inflows averaged US$7.3 billion annually from 2007 to 2014. Rising international trade has lifted the ratio of trade to GDP to 170 percent. Exports of manufactures have surged in the past 5 years as multinational companies built factories to assemble products such as mobile telephones and electronics, or to fabricate parts, as part of their global production chains.

 

So far, Vietnam’s main contribution to these production chains is low-skilled labour. The cost of imported materials and components is estimated to equal 90 percent of the value of Vietnam’s exports of manufactured goods. Future economic prosperity will depend in large part on involving more domestic firms in global value chains so they can benefit from foreign funding and technology and gain access to global markets, as well as generate spillover to benefit the whole economy. At this stage, small and medium-sized enterprises (SMEs) in Vietnam generally lack the capacity to participate in supply chains for foreign-invested factories. Only 36 percent of all Vietnamese firms are integrated into export-oriented production networks, compared with nearly 60 percent in Malaysia and Thailand. Just 21 percent of Vietnamese SMEs participate in global supply chains, and SMEs’ contribution to exports from Vietnam is significantly less than in other countries.

 

While the government supports industrial deepening and the development of SMEs, insufficient inter-agency coordination often fragments policies and weakens implementation. A proposed new law on SMEs provides an opportunity to correct some of these shortcomings. Moreover, greater consultation with the private sector would better inform the government about constraints that inhibit links with production networks. The private sector needs to be closely involved as well in initiatives intended for its own development. For example, the success of the proposed Institute of Directors, which aims to improve corporate governance, will depend on attracting funding and support from the private sector.

 

According to the report, industry-specific strategies are also needed. For manufacturers, encouraging the development of more industry clusters could allow for economies of scale, shared learning, and lowered transaction and transportation costs. Agribusinesses would benefit from improved product certification standards and better regulation of aquatic resources.

 

Early in 2015, the Prime Minister endorsed the selection of five industries as priorities for developing industry clusters and value-chain products: electronics, textiles, food processing, agricultural machinery, and tourism. Action plans should now be drawn up for these industries with the aim of targeting support to those supply chains with maximum potential for FDI spillover into the domestic private sector, as measured by domestic value added, job creation, and tax revenue.

 

“To strengthen SME’s capacity to participate in global supply chains, efforts will be needed to strengthen inter-agency coordination, particularly in the formulation and implementation of SME policies. Greater consultation with the private sector would also help to identify constraints that inhibit links with production networks. Industry-specific strategies that support industry clusters and economies of scale are also needed,” said Mr Kimura.