Improving Labor Productivity to Power up Economy

11:33:11 AM | 8/9/2019

Labor productivity plays a central role, serves as the most accurate and meaningful measure of competitiveness and is a factor that decides the prosperity of nations,” said Prime Minister Nguyen Xuan Phuc at the National Labor Productivity Improvement Conference recently held in Hanoi.

Significant improvement in labor productivity

Prime Minister Nguyen Xuan Phuc said that labor productivity index in Vietnam is not high due to its low starting point but the potential of each citizen is huge. This is illustrated by the Vietnam’s much higher labor productivity growth than that of ASEAN peers and many countries in the world. Specifically, its labor productivity growth was 6% in 2018 and 5.8% in 2016-2018.

According to the International Monetary Fund (IMF), Vietnam’s total factor productivity (TFP) has increased significantly from 2013, averaging 1.7% a year. In the past five years, its TFP growth has always been above 1.5%, a high level since the Asian financial crisis in 1997. Regression analyses show that the main driving force of TFP growth comes with increased FDI inflows, reduced labor in agriculture and increased private investment. Reforms in this fashion will help boost TFP growth even more strongly in the coming period.

With these dynamics, TFP growth is expected to reach an average of 1.8% or higher 2018-2023, much higher than any period of Vietnam's economic growth since renovation (1986).

Prime Minister Phuc said, the General Statistics Office (GSO) with the help of IMF recalculated the gross domestic product (GDP) in 2017 and the labor productivity index was expected to be higher. By structure, agricultural labor currently accounts for a high share (about 37%), plus seasonal workers that make a large number of working people, a large denominator for labor productivity calculation.

Causes of low labor productivity

He pointed out causes of low labor productivity, including bottlenecks in economic institutions, low skills and qualifications of human resources, shortage of high skilled human resources, particularly emerging skills of the Fourth Industrial Revolution and the digital economy, weak and insufficient innovation motivations.

With his analyses, the Prime Minister stated major approaches to increase labor productivity, with the first of all being institutional reforms to clear bottlenecks, improving administrative capacity and national competitiveness, upgrading the quality of the business environment, building a mechanism for every employee to be given the opportunity to help them work with their highest capacity and contribute to the common prosperity of the economy and society.

An important approach to the current productivity matter is to promote labor restructuring from agriculture to industry and services, from simple labor to skilled labor. In addition, the banking and financial sector also needs reforming to flow capital to the region with the highest productivity.

It is necessary to carry out stronger and quicker SOE reforms to unlock resources for development, promote and support the private sector and other sectors like cooperatives to become an important driver of the economy. Especially, there is a need to encourage creative entrepreneurship, selectively attract FDI, and prioritize high-quality projects that join the domestic economic sector to upgrade production and increase the overall economic productivity, added Prime Minister Phuc.

He stressed the orientation of continued deepening international economic integration, on engagement in international trade and investment flows and global value chains for wealth, increased national competitiveness and productivity.

He stated six key tasks for higher labor productivity in Vietnam, including stronger reforms of institutional foundations of all resources; the focused improvement of the labor market both on the supply side (employees) and on the demand side (employers); the formation of a strong incentive mechanism to attract talented people, excellent experts and excellent managers to Vietnam; and increased investment in science and technology application.

Labor productivity improvement alongside economic restructuring goals

Dr. Vu Tien Loc, President of the Vietnam Chamber of Commerce and Industry (VCCI)

Increasing productivity is the only way to achieve sustainable growth goals and realize the per capita income of US$15,000 - 18,000 by 2035 as set out in the Vietnam 2035 Report.

To boost the overall productivity of the country, VCCI suggested solutions to foster institutional reforms to channel resources to the most efficient areas. At the same time, VCCI has proposed promoting a stronger shift in economic structure where the most important driving policy is enterprise development.

Increasing labor productivity should be linked to economic restructuring goals to achieve higher labor value. Indeed, it is necessary to discover and maximize potential and advantages of all integrated resources of materials, personnel, scientific and technological application and opportunities to enhance labor productivity.

Private enterprises contribute only 10% of GDP while the household economy makes up for 30%. Therefore, improving productivity in this sector with 5.1 million business households and 9 million workers is an important solution to improving the nation's productivity. If the productivity within this sector is enhanced, the overall productivity will be significantly improved. To do so, important solutions are raising governance capacity, human resource quality and transparency. VCCI advocates revising the Law on Enterprises to make this sector a type of enterprise. Since then, there will be a legal corridor for this type of enterprise, support them to improve transparency and governance and raise productivity in general.

Vietnam’s labor productivity is low

Mr. Nguyen Chi Dung - Minister of Planning and Investment

Compared with other countries in the region, Vietnam’s labor productivity is still low. Based on the purchasing power parity (PPP), the country’s labor productivity reached US$11,142 in 2018, only equal to 7.3% of Singapore’s labor productivity, 19% of Malaysia, 37% of Thailand, 44.8% of Indonesia, and 55.9% of the Philippines.

This worrying fact places pressure on fulfilment of industrialization and modernization goals, and shortens the development gap with countries in the region and the world. Low labor productivity poses a big challenge to the economy, threatens Vietnam's growth, competitiveness and progress towards prosperity.

How to raise labor productivity is an issue that needs to be solved and it should be dealt with by a more comprehensive and effective solution, especially when we are planning to set a high development goals in the next 10-year socio-economic development strategy.

Improving labor productivity is an urgent task

Mr. Nguyen Bich Lam - General Director of the General Statistics Office (GSO)

There are eight reasons for low labor productivity in Vietnam: Small size of Vietnam's economy; positive but slow economic restructuring; backward machinery, equipment and technological processes; limited quality of human resources; improper organization, management and use of resources; slow urbanization and industrial accumulation; institutional barriers; and the underperformance of the business sector which is not really a decisive driving force to labor productivity growth.

For a country, if its GDP growth is based on only simple work and low levels of technology and workmanship, it is often not high or sustainable. Productivity-driven GDP growth is a big challenge, especially for a country where the labor force has perpetual agricultural thinking and the rate of trained labor is not high as Vietnam, this direction is likely to create high growth, sustainability and competitiveness of the economy.

One of key points to promote growth is to improve labor productivity through a series of institutional and policy solutions. The general solution is to improve labor productivity to boost growth, escape the middle income trap, avoid lagging behind, and narrow the development gap with countries around the world. The Government should soon establish a National Productivity Council and launch a labor productivity movement to meet this requirement on a large scale.