Structural Reform with Digitalization and Participation in the Global Value Chain

9:32:31 AM | 7/6/2020

The current crisis due to the impact of the Covid-19 pandemic has exacerbated structural weaknesses of Vietnam’s economy. According to a report by the World Bank (WB), these weaknesses can be overcome by accelerating the pace of reform identified by the Government in the national development strategy. One focus on structural reforms is to digitalize the economy and bring Vietnam's economy to the global value chain.

Effective online training strategy and e-commerce development

The assessment by the World Bank shows that Vietnam is at risk of falling behind other countries in the region in terms of developing the digital economy. The development of digital operations not only reduces transaction costs and ensures the efficiency of the entire economy, but also mitigates the nation's vulnerability caused by restrictions with movement of people and goods.

Therefore, according to the World Bank, the Government can adopt various solutions such as investing more in online education and learning systematically. Some social media platforms, such as Zalo and Viber, are used by parents and teachers to assign online exercises to pupils and students. However, these platforms work only in urban areas with developed connectivity infrastructure and high levels of smart device usage. Meanwhile, in rural areas, they are less effective. And more importantly, these platforms are not designed to serve the learning goals of teachers and students. Therefore, in reality, students do receive homework but cannot interact with teachers to acquire new knowledge.

This issue will open up opportunities for the Government to systematically invest in the strategy of developing online education and training for public schools, with innovative platforms and methods to support online teaching and learning. An effective online training strategy will improve teaching methods in the current context, creating an important foundation for Vietnam to promote the benefits that the digital economy will bring.

In addition, Vietnam needs to encourage e-commerce and e-payment to offset the growing barriers to physical mobility. This will help ensure that households and businesses continue to receive supplies of food, medicine and other goods and services. E-commerce is growing in Vietnam and is expected to increase from US$2.8 billion in 2018 to US$15 billion in 2025.

In order for e-commerce to be effective in the current context, according to the World Bank's analysis, Vietnam needs to limit the use of cash to conduct transactions through electronic channels to limit person-to-person contact and restrict access to cash via ATMs and banks. Most e-commerce transactions in Vietnam are paid by cash. This rate in Vietnam is 90% compared to 51% and 48% in Indonesia and Malaysia respectively. Therefore, Vietnam needs to promote the encouragement and use of electronic payment in the field of e-commerce through regulatory reforms and encouraging innovation. The recent developments in the field of e-wallets and Fintech are encouraging, but the adoption of e-payment platforms needs to be accelerated.

Notably, the process of developing a digital economy needs to be supported by a digital government based on data. An effective data and information system will assist the Government in making timely and adaptive decisions. The effective sharing of information and data will enable the government to stay informed about shortcomings in the production chain, which areas are most affected by the disease, which areas need the immediate support of the Government and the optimal way to minimize disruptions. Similarly, well-interactive information systems with time records can also identify bottlenecks throughout the decision-making process. These can be public investment, disbursement or management of public sector personnel. Updated and reliable data can support credible reforms to help unleash the potential for further growth of Vietnam’s economy, whether in a time of crisis or not. The urgent issue is that the Government needs to emphasize the importance of data to the business model.

Promoting FDI and integration into global value chains

The ongoing U.S.-China trade tensions have created opportunities for Vietnam to attract foreign companies that want to shift production and business activities from China to other countries like Vietnam to access the U.S. and global market. There is evidence that some foreign companies have begun to move in this direction, especially in the field of electronics manufacturing. Foreign direct investment (FDI) in Vietnam continues to increase, including capital investment in domestic companies. FDI from China, especially newly committed investment, seems to be increasing. The current Covid-19 outbreak has shown the growing dependence of global trade on the input supply chain from China. As one of the most open economies in the world and an organic link in the global value chain, Vietnam is one of the countries that are most vulnerable to disruptions in the supply chain. While many companies participating in the global value chain only maintain sufficient reserves for a short period of time, Vietnam's economic activity is "importing for export", so the current crisis is very concerning.

The data of OECD’s inter-country input-output (ICIO) tables presenting the import content as a percentage of total exports, show that Vietnam has the highest import ratio in the region (mostly from China) at 44.6%. The industries most dependent on input materials in Vietnam are textiles, fabricated metals and automobiles. In the short term, the current disruption in the supply chain from China indicates a threat to Vietnam's economy due to the lack of input materials for the factories. In the medium-to-long term, this could be an opportunity for Vietnam to encourage global value chains to reduce and manage the risks of high dependency on factories in China by identifying Vietnam as a competitive destination among input suppliers. This requires Vietnam to shift from current low-skill assembly production to value-added production with higher-skill.

To achieve this, Vietnam needs to address some major issues such as increasing the number of skilled workers, especially technical skills (welders, mechanics, etc.) through innovation post-secondary education; encouraging and introducing preferential policies to apply more technology, especially in small and medium enterprises. In addition, it is necessary to continue improving the business environment, promoting more services in production and application of services (research and development, design and integrated logistics services and solutions) which are increasingly playing an important role in production competitiveness and account for the majority of added value in products.

By Quynh Anh, Vietnam Business Forum