Processing, Manufacturing Industry: An Approach to Escape Middle-Income Trap

1:13:51 PM | 6/25/2020

Adjusting the industrial development policy towards increasing the capacity of the private enterprise sector will help Vietnam avoid the middle income trap.

According to Dr. Nguyen Thi Tue Anh, representative of the research team for the Report "Industrial capacity of Vietnam’s private enterprise sector: Suggestions to adjust industrial policies to avoid middle-income trap", Vietnam's industrial development policies have gone through three main stages. In particular, in the third period from 2001 to the present, industrial policy has continued to be export-oriented and it has been adjusted according to international commitments and associated with the policy of economic restructuring in general and industry restructuring in particular for sustainable development.

One of the special features of this period, according to Dr. Nguyen Thi Tue Anh, is that the integration commitments have cast a great impact on both the processing-manufacturing industry and the domestic private sector, especially commitments without export subsidies and localization subsidies. Along with that is expanding business rights for foreign-invested enterprises (FDI), as well as eliminating discrimination in the application of special consumption tax, cutting import tax and gradually eliminating non-tariff barriers that private enterprises have suffered most.

At the conference announcing the research report "Industrial capacity of Vietnam’s private enterprise sector: Suggestions to adjust industrial policies to avoid middle-income trap" by the Central Institute for Economic Management (CIEM), the research team pointed out that, over the past time, private enterprises in the manufacturing and processing industry have grown rapidly in number, but mainly small and medium-sized enterprises, concentrated in the low-tech industry. Its industrial capacity is still quite low in terms of added value, labor productivity, exports, technology capacity, management capacity and development strategies skills.

In addition, the adjustment of industrial policies in stages, especially the export orientation, has facilitated the participation of private enterprises in the manufacturing and processing industry; paving the way for them to participate in export-oriented industries. The tools of industrial policy have a positive influence on the expansion of the area, but little to changes in labor productivity. These policies have the effect of increasing industrial capacity for private enterprises through incentives and support, but industrial policies still face many shortcomings, for example private enterprises have difficulty participating in priority sectors. Besides, the tools of industrial policy are scattered, insufficient and not focused.

Also according to the research team's data, currently in the fields of processing - manufacturing, domestic private enterprises rank second in terms of using labor, after the FDI sector with the proportion of 47.8% (2019). If the number of employees in the FDI sector focuses mainly on labor-intensive fields such as computers, electronics, footwear, private enterprises dominate in sub-sectors such as producing wood and bamboo products, non-metallic mineral products, medical equipment, and food processing.

International experience shows that, for countries to develop sustainably and overcome the middle income trap, the industry, especially the manufacturing and processing industry, must be considered the leading engine and an important driving force for growth. However, to play such a role, it is necessary to rely on the domestic sector, especially the private sector. Therefore, besides policies and identifying priority sectors, solutions are needed to support the domestic sector to increase its capacity to participate in this process.

Therefore, Dr. Nguyen Thi Tue Anh emphasized that the position of the domestic sector should be considered a main focus of industrial policy.

The report proposes that the adjustment of industrial policies should be in line with Resolution 10 (developing private economy to become an important driving force of the economy) and implemented synchronously with the Socio-economic Development Strategy for 10 years. At the same time, the adjustment should facilitate to take advantage of the opportunities provided by Industry Revolution 4.0.

In addition, it is necessary to improve the industrial capacity of enterprises in general and private enterprises in the processing - manufacturing sector in particular through preferential tax and credit policies, combined with environmental improvement, simplifying administrative procedures; and encourage associations and industries to train, transfer standards of quality management and product quality to enterprises, especially SMEs.

Therefore, for businesses to have the opportunity to develop, it is necessary to have a synchronous and uniformly implemented policy from the central to local levels, especially in the context of Vietnam participating in many large and open free trade agreements such as CPTPP or EVFTA. This is a motivation and a great opportunity for businesses of all economic sectors.

By Thu Ha, Vietnam Business Forum