Harnessing Services Sector’s Potential

The services sector has been making very important contributions to economic growth in Vietnam, but the performance still lags behind other comparable countries.

Below expectations

According to a new report released by the World Bank, the services sector has been the economy’s largest sector for the past decade. The services sector grew from 40.7% of GDP in 2010 to 44.6% of GDP in 2019. Moreover, as Vietnam’s economic structural transformation progressed, the share of workers employed in services increased from 19% in 1991 to 35.3% in 2019, absorbing a large share of workers leaving the agriculture sector and making the services sector the second largest source of jobs in the country, after agriculture.

However, the performance of Vietnam’s services sector lags behind peer countries. Productivity and employment in the services sector in Vietnam remain lower than many regional, structural, and aspirational peers. For example, Vietnam’s services sector labor productivity (measured by value added per worker) has increased by 34.3% between 2011-2019. However, at US$5,000 (constant dollar) per worker in 2019, it is still well below peers, including Malaysia (US$20,900), the Philippines (US$9,300), and Indonesia (US$7,300). Exports of high-skilled, knowledge-rich services (called global innovator services) only constitute 9% of total services exports. Only 6.4% of total employment in the services sector is in this sub-sector, including ICT, finance and professional services which are usually among the most productive in the economy.

Small-scale firms, restrictions to services trade, low technological adoption and few inter-sectoral linkages affect productivity. Vietnam’s services sector is dominated by small-scale firms. Also, the OECD’s Services Trade Restrictiveness Index (STRI) 2021 for Vietnam is relatively high compared to most aspirational peers (Singapore, South Korea and Malaysia), mostly due to restrictions on foreign entry for service delivery. In addition, according to the Firm-level Adoption of Technology (FAT) survey, both average and frontier services firms in Vietnam are far from the global frontier in terms of technology adoption. Furthermore, Vietnamese manufacturing firms are relatively limited in their use of services - the value of services as domestic inputs is only 14% with a mere 1.6% of manufacturing firms using global innovator services (ICT, professional, and financial services).

Policy reform unlocks the potential

Looking ahead, services could play a crucial role in supporting Vietnam to sustain productivity growth and achieve its ambition to become a high-income economy by 2045. All high-income economies boast large services sectors as the most significant source of job creation and the generation of economic value, playing an essential role in enhancing productivity for those economies. Services could also play an essential role in upgrading Vietnam’s development model by increasing value addition in the other sectors of the economy.

According to the World Bank, Vietnam can further reduce restrictions on services trade and foreign investment. OECD’s STRIs indicate that certain “backbone” services sectors, including telecommunications, logistics, aviation, legal services, banking and insurance, still face high restrictions and that little progress has been made in removing or mitigating them in recent years. For instance, foreign investment in freight transport is restricted in various ways, including in internal waterways freight and road freight (FDI up to 49% and 51% ownership, respectively). In the coming time, authorities may wish to consider reducing restrictions to FDI as innovation and technology adoption relies on access to knowledge and to the networks, people, goods, and services that disseminate that knowledge globally; and undertaking business environment reforms to enhance competition and access to finance for domestic firms.

Besides, Vietnam should encourage further adoption of digital technologies within firms to spur innovation. The WB’s recent assessment of Vietnam’s science, technology, and innovation (STI) policies indicates that great focus has been on promoting foreign research and development (R&D)-based innovation and the government has tried to ‘push the technological frontier” by supporting university and research institutions over domestic firms. However, these policies have a limited focus on non-R&D-based forms of innovation, such as technology adoption.

In particular, Vietnam should focus on strengthening workers’ skills (especially basic digital skills) and the capabilities of firms and managers. The country should also leverage services to promote further growth of other sectors, especially processing and manufacturing.

By Quynh Chi, Vietnam Business Forum