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Manufacturing TransformationComparative Studies of Industrial Development in Africa and Emerging Asia$

Carol Newman, John Page, John Rand, Abebe Shimeles, Måns Söderbom, and Finn Tarp

Print publication date: 2016

Print ISBN-13: 9780198776987

Published to Oxford Scholarship Online: August 2016

DOI: 10.1093/acprof:oso/9780198776987.001.0001

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The Evolution of Vietnamese Industry

The Evolution of Vietnamese Industry

Chapter:
(p.235) 12 The Evolution of Vietnamese Industry
Source:
Manufacturing Transformation
Author(s):

Nguyen Thi Tue Anh

Luu Minh Duc

Trinh Duc Chieu

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198776987.003.0012

Abstract and Keywords

Transition from an import-substitution to an export-orientation strategy has been in effect in Vietnam since the reform process, Doi Moi, necessitating the re-formulation of macroeconomic, trading, and sectoral policies. The industry sector has experienced gradual growth, as the country’s economy is becoming more open and gaining deeper integration with regional and the world economies. Export processing zones, industrial zones, and economic zones have been set up to attract the interest of multi-sectors, including foreign and non-state investors. The capacity and productivity of the industrial sector has improved considerably. But three main problems arose during the industrial development process: minimal contribution from current policies to improve competitiveness; policy failure to encourage firm restructuring; and lack of a well-coordinated framework for industrial policy.

Keywords:   Vietnam, macroeconomy, industrial sector, reform, Doi Moi, industrial policy

12.1 Introduction

One of the most important policy decisions for Vietnam during the Doi Moi process was the shift from a strategy of import substitution (IS) to one of export orientation. Obviously, Vietnamese policy makers wanted to avoid the failure of the Latin American economies and to learn from the successes of the industrialized nations and newly industrialized economies (NIEs) of East Asia, the renowned ‘flying geese’. As a result, during the past decade, Vietnam’s industrial output has grown at an average annual rate of 15.2 per cent and total annual exports have increased 18.1 per cent (GSO various years).

Undeniably, the industrial and export performance has been the key driver of economic growth, radically changing the country over the past two decades. Dynamic foreign direct investment (FDI) and the private sector played key roles in manufacturing and exporting activities, in contrast to the earlier monopolistic behaviour and inefficiency of the centrally planned state-owned enterprises (SOEs). Today, the remaining SOEs have become more active and competitive exporters, certainly a reflection of Vietnam’s continued learning process at both country and cross-sector levels.

The industrial sector in Vietnam contributes to approximately 34 per cent of GDP, and manufacturing is by far the most important industrial sub-sector, accounting for 87 per cent of total industrial gross output. Within manufacturing the food and beverage industry stands out as the most important industry with around 19 per cent of total industrial output. However, other industries are growing rapidly and gaining importance, and include, for example, fabricated metal products, apparel, and pharmaceutical industries.

This chapter describes the evolution of Vietnamese industry, as well as its current characteristics, and is structured as follows. Section 12.2 delineates (p.236) historical episodes of national industrial change, divided into four periods: 1954–75 (Vietnam’s war); 1976–85 (socialist industrialization to the initiation of the Doi Moi); 1986–2005 (transition to a market economy); and from 2006 onwards (World Trade Organization (WTO) accession and further industrialization). Section 12.3 describes the current structure of Vietnam’s industrial sector by industry composition, employment and firm size, ownership structure, and geographical distribution. The industrial policy framework is described in Section 12.4, including the macroeconomic policy, trade policies, labour market policies, the institutional and regulatory framework, and sector specific policies. In Section 12.5, so-called sunrise and sunset industries are identified. The final section (Section 12.6) concludes by exploring the main challenges facing current industrial development and presenting an outlook for the future.

12.2 The Evolution of Industry

Table 12.1 Vietnam’s industrial policy matrix

1965–75

1976–85

1986–2005

2006–

Policy plan

Socialist industrialization in the north

Socialist industrialization in the centrally planning economy

Doi Moi process and industrialization in the transition towards market-oriented and open economy

Industrialization in post-WTO entry period and economic restructuring issues

Objectives and key industries

To prioritize the development of heavy industry; the industry sector was exclusively led by the SOEs

Shift from heavy industry (1961–5) to light industry and agriculture (1966–73)

To overcome consequences of the war and restore the country’s infrastructure network and industrial bases, including the state entrepreneurship

To concentrate on heavy industry

1991–5: Development of prioritized sectors: heavy industry (cement, steel) and natural resource-based industries (oil exploitation and mining). Manufacturing sectors for domestic demand (food stuff industries) and simultaneous export of manufactured labour-intensive products

1996–2000: Continuation of earlier priorities, but with greater selection; development of light export-oriented industries (textiles and garments, footwear, paper production)

2001–5: Followed the objectives of the previous period, but expansion of manufacturing sector with a focus on development of high-tech sectors

Policies of boosting economic structural change towards industrialization and modernization; more export-oriented: continuation of earlier priorities, but with greater selection.

(p.238) 1965–75

1976–85

1986–2005

2006–

Instruments

FFYP 1961–5

To continue the North’s interrupted FFYP (1960–5) by incorporating the nationwide Second Five-year Plan (1976–80)

Planning economy, no market-based price mechanism

+ Protectionism for some certain industries through tariff and non-tariff instruments such as quota and import/export duties and export subsidies

+ Encourage private businesses and foreign-owned enterprises with Law on Foreign Investment in 1987 and Company Law in 1991

+ Implementation of Public Investment Programme (1996–2000)

+ Equitization of SOEs and building of state economic groups to enhance the competitiveness of the SOE sector in the industry

+ Development of IZs, EPZs to encourage export production (1996–2001)

+ Specified many leading industries for development. Strategies approved for about 39 industries

+ Promotion of technology transfer via foreign investment

+ Continued export production of manufactured products

+ Promulgation of Law on Investment and Law on Enterprise in compliance with WTO commitments

+ Removal of non-tariff, but application of export tax rate at 0% continued for most export products to motivate export activities

Evaluation

The FFYP 1961–5 was disrupted in 1964 because of US air strikes in the north: large-scale constructions, industrial infrastructure, transportation systems were severely damaged, shortage of labour force due to the war

High growth of heavy industry, but bureaucratic and unprofitable SOEs in industrial production; low labour productivity, material and technological shortfalls, and insufficient availability of food and consumer goods

-‘Picking-winner’ approach; dualistic structure of Vietnam’s industrial sector

- Export structure was changed towards increasing the share of manufactured products; the main exporting products were still mining and crude oil

- Inefficient SOE sector in industrial production; low industrial labour productivity

The IS sectors failed to grow and to provide sufficient supply for other downstream industries, including export-oriented ones

The export-oriented sector had to rely on inputs from imports

Desired spillover impacts from FDI, particularly via technology transfer and linkages with domestic enterprises, were virtually non-existent

Industrial policies failed to facilitate firms’ activities sufficiently

Remaining SOEs, including state economic groups, inefficient

Industrial policy focused too much on specific sectors and products, not on improving competitiveness of enterprises

Source: Vietnam’s Five-year Socio-economic Development Plans covering the 5-year periods from 1961–2015, as approved by the National Assembly.

The evolution of Vietnamese industry can be divided into four stages, with the main characteristics as illustrated in Table 12.1.

12.2.1 Socialist Industrialization in the North, 1954–75

Although gaining independence in 1945, Vietnam was at war with France until 1954 when the country split into two warring parts, each with a different political and economic ideology. In such a context, socialist industrialization was adopted in the North to support efforts to reunify the country.

Prior to independence, French colonial administration had pursued the development of agricultural production (rice and rubber) in the south and manufacturing and coal mining in the North. When colonial administration ended, the country was left with minimal infrastructure, a low income and mainly illiterate population, poor conditions for entrepreneurship, and an economy which overall was characterized by village-based subsistence agriculture.

Under the socialist model, the economy was entirely controlled by the state. Rural land reforms and a process of collective corporatization led the private sector to stand outside of the industrial production in the North. All state-supported technical and scientific research activities were devoted to serving heavy industry and the war effort. Most of the industrial development achievements in this period were enabled through foreign subsidies from Vietnam’s socialist allies, such as China, the Soviet Union, and other Warsaw-bloc nations. (p.237)

(p.239) The industrial policy pursued during the later part of the period, the so-called First Five-year Plan (FFYP) (1961–5), gave priority to the industrial sector. However, this plan was disrupted in 1964 when the US started air strikes in the North, preventing the development of heavy industry and tilting what economic activity remained towards light industry and agriculture.

All power stations, railway lines, roads, bridges, and sea and inland ports were seriously damaged by the US bombings during 1965–72 which interrupted transportation routes and energy supplies, including power and petroleum. Consequently, the distribution of raw materials and consumer goods was badly affected and delayed all large-scale construction. And, importantly, since the vast majority of the labour force was employed in the war effort, the rest of the economy was constrained by severe labour shortages.

12.2.2 Socialist Industrialization in the Central Planning Economy, 1976–85

Post-war Vietnam faced three major economic challenges: (1) to repair the consequences of the destructive war and restore the country’s infrastructure and industrial bases, including state entrepreneurship; (2) to adopt and unify the centrally planned system for the whole country; (3) to continue the North’s interrupted FFYP to incorporate a Second Five-year Plan (1976–80) as the nationwide strategy to achieve the ambitious target of building a socialist economy within twenty years.

During this period, industrial planning was the central function of the state’s economic administration, with the government defining input and output levels for the entire economy. There was no market-based price mechanism, as open trade and private entrepreneurship was not officially recognized. Without a company law in existence, all industrial producers and traders were SOEs, governed directly by the ministries and provincial authorities, which led to a highly bureaucratic and unprofitable situation.

In the early 1980s, more than 80 per cent of national income came from the agricultural sector which was dominated by village-level ‘collectives’. Growth of the agricultural and light industrial sectors outpaced that of heavy industry. Based on the scarce statistics that were (irregularly) published, industrial production grew at 9.5 per cent per annum from 1981–5 and income per capita at 6.4 per cent. But the economy was characterized by small-scale production, low labour productivity, high unemployment, material and technological shortfalls, and insufficiency of food and consumer goods. During the years 1976–85, when the economy faced a slowdown, national income was said to have met 80–90 per cent of needs, and inflation throughout the period remained in double digits. By 1985–6, Vietnam was on the brink of a socio-economic crisis.

(p.240) 12.2.3 The Transition from Centrally Planned to Market Economy, 1986–2005

Against this backdrop, the government launched a comprehensive reform—Doi Moi1 (renovation) in December 1986—to transform the economy from a centrally planned subsidy economy towards a socialist-oriented market economy that would combine state intervention (mainly in the form of planning) with free-market incentives and rules, where private businesses and foreign-owned enterprises would be encouraged.2

During the era steered by the Third Five-year Plan (1986–90), annual production of steel increased 8 per cent, cement 11 per cent, electricity 11 per cent, and zinc 10 per cent. New industries emerged, especially with the discovery of oil (made possible through joint ventures between the state and foreign oil companies) which increased government revenues and accounted for the greatest share of exports. In the space of a few years, Vietnam transformed from a food-insufficient country to the world’s second largest exporter of rice.

The Doi Moi process strongly influenced the development of Vietnam’s industry. During 1991–5, average annual industry growth rate reached almost 14 per cent, a pace that was maintained in later years. Remarkable growth was evident in all industrial products, for example, coal exploration topped over 26 million tons (or almost six times higher than in 1990); electricity (five times over the 1990 level); cement (ten times the 1990 level); and assembled televisions (almost eighteen times the 1990 level).

The Five-year Plan of 1996–2000 set out estimated figures for economic development, in which the targeted annual growth rate of agriculture, forestry, and fishery, industry, and service were set at 4.5–5, 14–15, and 12–13 per cent respectively. This was intended to create a structural shift in the economy in which the share of industry in total output would be increased (which, as described in Section 12.3, has indeed been accomplished).

The main policy priority in this period was still heavy industry, where the goal was to meet domestic demand and exploit natural resources. However, there was added emphasis on certain sectors, including steel and cement. In addition, the development of light industries (mostly for export) such as textiles and garments, footwear, paper production, and handicrafts were selected as ‘priority sectors’ because of the comparative advantage Vietnam (p.241) enjoyed, particularly due to low labour costs. Manufacturing industries were encouraged to develop the food processing industry, with priority given to sugar cane. Policies for the agricultural sector were initially focused on the processing industries supporting agriculture, forestry, and fishery to reform the industrialization of the rural economy. In the service sector, concentration was on the upgrading and new construction of key infrastructure. Initially, special attention was given to the development of telecommunications, tourism, and consultation services on technology, finance (including audits), banking, and insurance.

During 1996–2000, a new Public Investment Programme was also implemented. In addition to state investment, the government sought to attract private investment through regulatory revisions to the Law on Enterprises in 1999 and the Law on Encouragement of Domestic Investment in 1998. In 2000, Foreign Investment Law was amended to create more favourable conditions for foreign investors. Finally, the establishment of export processing zones (EPZs) and industrial zones (IZs) was regarded as an important tool for achieving the goals of industrial policies, as these would conveniently provide the necessary infrastructure for new industries. These policies were successful in enabling the continued growth of industrial output.

The 2001–5 Five-year Plan continued the previous policies geared to boosting economic structural change towards industrialization and modernization, by promoting the development of industry, encouraging the service sector, and creating linkage between agricultural advancement and rural economic development. Although protection was maintained for some industries,3 it was more selective in terms of capital and technology. In addition, small and medium enterprises (SMEs) were supported through promotion policies.

Industrial policies in the 2001–5 plan, however, marked a significant change in approach, with a greater focus on SME development. In 2001, The Orientation of Industrial Development document issued at the Ninth Vietnam’s Communist Party Congress identified eleven leading industries.4 But these priority sectors were very diverse (and not readily interlinked) and thus failed to attract industries that could leverage the development of others.

Over the period 1991–2005 GDP expanded, on average, at an annual rate of 7.6 per cent. In 2005, GDP per capita was US$640 (compared to US$200 in 1990). The savings ratio in GDP increased from 14.4 per cent (1990) to 35.6 per cent (2004). And the portion of the population below the poverty line dropped from 69 per cent (1990) to 29 per cent (2005).

(p.242) Dramatic changes were also observed in economic structure. The share of agriculture in GDP sharply declined from 46 per cent in 1988 to 21 per cent in 2005, while the share of industry increased from 22 per cent to 41 per cent. Employment in agriculture accounted for 73 per cent of total labour in 1990, but saw a reduction to 57 per cent in 2005, while employment in industry and construction increased from 12–18 per cent.

Over 48,000 private businesses were established during 1990–9, and this number soared once the Enterprise Law was enacted (1999). This development continued and in 2006 alone 45,691 new companies were registered, bringing the total number of private sector firms to over 200,000 by the mid-2000s. Private firms accounted for 42 per cent of total net turnover, foreign enterprise 22 per cent, and SOEs the remaining 36 per cent. At the same time the number of SOEs decreased from approximately 12,000 in 1990 to a fewer than 3,000 wholly SOEs in 2005.

12.2.4 Industrialization Following WTO Accession, 2006–

Vietnam’s integration into the world economy was promoted by the bilateral trade agreements (BTA) and free trade agreements (FTA) signed with other countries but also by joining the WTO in 2007. In general, WTO membership had a significant impact on the economy, where Vietnam benefited from the high growth of its major trading partners (US and China), and particularly the high economic momentum of the East Asian countries (CIEM 2010). In 1986 Vietnam’s foreign trade was valued at US$1 billion. In 2011 this had increased to US$211 billion. However, global integration has left Vietnam more exposed to world market price fluctuations. As Vietnamese exports rely heavily on imported inputs, the economy is particularly impacted by increases in the world market price of production materials and intermediates.

The goals outlined in the five-year plan for the period following WTO accession (2006–10) included: (1) enhancing economic growth, increasing efficiency, sustainability, and competitiveness of the economy; (2) active integration and creating a breakthrough in international economic integration; (3) creating a favourable environment for entrepreneurial development. The targeted economic structure during this period was output shares in the range 15–16 per cent for agriculture–forestry–fishery sector, 43–4 per cent for the industrial, and 40–1 per cent for the service sector. Because of the drive to preserve natural resources and protect the environment, mining industries are gradually losing importance, while manufacturing industries continue to grow despite stronger competition in the wake of Vietnam’s accession to WTO. Finally, industrial plans were revised to upgrade and improve the existing EPZs and IZs towards greater involvement of both domestic as well as foreign investors.

(p.243) 12.3 The Current Structure of the Industrial Sector

12.3.1 Sectoral Composition

Table 12.2 Structure of gross outputs of industrial sub-sectors and share of sub-sectors in GDP, 2000–10

2000

2005

2010

Share of industrial sectors in GDP (%)

32.3

34.6

33.5

Of which:

Mining and quarrying

9.2

10.6

11.0

Manufacturing

19.8

20.5

19.3

Electricity, gas, and water

3.3

3.5

3.2

Structure of gross production outputs of industrial sub-sectors (%)

Mining and quarrying

13.1

11.2

8.4

Manufacturing

81.2

82.8

86.5

Electricity, gas, and water

5.7

6.0

5.1

Total (%)

100.00

100.00

100.00

Share of industrial employment in total employment (%)

11.7

13.5

14.4

Mining and quarrying

0.6

0.8

0.6

Manufacturing

8.8

12.3

13.5

Electricity, gas and water

2.3

0.4

0.3

Source: GSO (various years) available at <https://www.gso.gov.vn>, accessed 30 January 2016.

The current sectoral composition is outlined in Table 12.2. It is obvious that the manufacturing sector’s share in industry has expanded. The processing and manufacturing sector accounted for 81 per cent in 2000, but had risen to 87 per cent a decade later. In contrast, the share of mining has decreased from 13 to 8 per cent. Crude oil and gas makes up the greatest share of the mining sector, which nevertheless declined gradually during 2000–10. Oil exports have been reduced since 2010 to supply crude oil to Vietnam’s Dung Quat refinery, but coal mining, on the other hand, has grown strongly, doubling its share from 1–2 per cent of total exports.

12.3.2 Employment and Size of Firms

The Evolution of Vietnamese Industry

Figure 12.1 Firm size distribution by year, manufacturing only

Source: GSO (various years) available at <https://www.gso.gov.vn>, accessed 30 January 2016.

For comparative purposes Figure 12.1 documents the size distribution of manufacturing firms in Vietnam, based on microdata from the Vietnamese Enterprise Survey (VES).

Table 12.3 Distribution of firm and employment shares

Panel A: Distribution of firm size (%)

2002

2007

2012

Micro (1–10 employees)

22.4

31.2

44.7

Small (11–50 employees)

38.0

38.6

34.7

Medium (51–300 employees)

26.8

21.9

15.3

Large (301+)

12.8

8.3

5.3

Panel B: Distribution of employment by firm size (%)

2002

2007

2012

Micro (1–10 employees)

0.8

1.5

2.5

Small (11–50 employees)

5.0

6.8

8.5

Medium (51–300 employees)

20.0

21.7

21.1

Large (301+)

74.2

70.0

68.0

Source: Authors’ calculations based on GSO Enterprise Survey (GSO various years), available at <https://www.gso.gov.vn>, accessed 30 January 2016.

From Figure 12.1 it can be seen that there is no reason for suspecting a ‘missing middle’ in the Vietnamese context.5 Although the VES captures (p.244) only registered firms, it is clear that the majority of firms in all three selected years (2002, 2007, and 2012) are micro-size (1–10 employees) and small (11–50 employees). In all years, the distribution of firm size is skewed to the right and is smoothly declining in firm size. There is no evidence found of bimodality or discontinuity in the firm size distribution, which can lead to the conclusion that there is no immediate evidence of a ‘missing middle’ in Vietnamese manufacturing firms.

Table 12.3 looks at the distribution of firm and employment shares by firm size category. Zooming in on 2012 it can be seen that although around 80 per cent of officially registered manufacturing firms are micro-size and small, they employ only 11 per cent of manufacturing workers. This shows that larger manufacturing firms are important for economy-wide job creation.

12.3.3 Ownership Structure

12.3.3.1 Industrial Structure by Ownership

While Vietnam’s industry was dominated by SOEs before the Doi Moi, it is currently dominated by FDI and the domestic non-state sectors. This development is largely explained by the growth differences in the three sectors. Total industrial gross output from the state sector has grown at approximately 7 per cent since 2006. Corresponding figures of domestic non-state and FDI sectors were respectively 23 and 15 per cent.

Table 12.4 Shares of total industrial and sub-sector gross output by ownership type (%)

Industrial sub-sector

Mining and quarrying

Manufacturing

Electricity, gas, steam, and air conditioning

Water supply, sewerage, waste management, and remediation activities

Total across sub-sectors

State

20.1

30.7

95.4

81.3

33.7

2005

Non-state

8.0

33.2

1.8

14.6

29.0

FDI

71.9

36.1

2.8

4.1

37.3

State

26.7

18.6

95.0

67.7

23.3

2010

Non-state

15.5

38.6

3.0

25.7

35.5

FDI

57.8

42.8

2.0

6.6

41.2

Notes: Output is valued at constant 1994 prices.

Source: Author’s computations based on data from GSO (various years), available at <https://www.gso.gov.vn>, accessed 30 January 2016.

(p.245) Due to its rapid growth, the share of the FDI sector increased from 37 per cent in 2005 to 41 per cent in 2010 (Table 12.4), while the non-state went from 29 per cent in 2005 to 36 per cent in 2010. In contrast, the state sector’s share dropped from 34 to only 23 per cent over the same period. Table12.4 indicates that growth of the FDI and domestic non-state sectors’ output was very high within the manufacturing sector, where the two sectors by 2010 came to account for 43 and 39 per cent of total output, respectively. It should be noted that within the manufacturing sector, the state-owned sector dominated output in only three industries: tobacco, media, and coke and refined (p.246) petroleum products, and accounted for only a small share in most other industries.

The story within mining and quarrying is different. Here the output share of the state-owned sector grew from 20 per cent in 2005 to 27 per cent in 2010. This shift is primarily due to takeovers of the previously entirely non-state dominated mining support services industry by the state-owned sector. There are at least two reasons as to why the non-state sector remains relatively small in the mining and quarrying context. First, most private firms are young with capital constraints, and therefore unable to compete with SOEs which can often enjoy economies of scale advantages. Second, the private sector is still excluded by law from investing in certain industries within the mining and quarrying sector. This includes, for example, the mining of coal and lignite and crude oil exploration.

The electricity, gas, steam, and air conditioning supply sector is almost entirely dominated by the state-owned sector, which accounted for around 95 per cent of total output throughout the period. Also in the water supply, sewerage, waste management, and remediation activities sector, the state-owned sector has remained dominant throughout the period; however, its share of total output has steadily declined. This structural change is largely driven by privatization of the sewerage industry, but also increasingly private takeovers of water collection and supply industries.

12.3.4 Spatial Distribution

Vietnamese industrial production is concentrated in the southeast and around the Red River Delta, particularly in the proximity of Hanoi and Ho Chi Minh City (HCMC). The southeast’s share declined over the period 2005–10, but it still accounts for half of the country’s industrial output. Ho Chi Minh City alone accounted for over 20 per cent of the country’s total industrial output in 2010 (down from 24 per cent in 2005). The Red River Delta’s regional share rose from 21.7 per cent to 25.0 per cent over the same period, and Hanoi’s share stayed around 8 per cent throughout. Together, the two regions accounted for 74 per cent of industrial output in 2010.

The spatial distribution of industries has, since the early 1990s, been driven largely by the policy of establishing different types of industrial zones (IZs). As of 2015,6 there are 295 established IZs, of which only 212 are operational. The fact that several of the IZs are significantly underutilized may suggest that firm demand for land in IZs (especially outside the provinces of Hanoi and HCMC) is declining.

(p.247) 12.4 Industrial Policy Framework

12.4.1 Macroeconomic Policies

In general, following the 1986 comprehensive reform, Vietnam’s economic policies sought to promote high economic growth and, at the same time, to sustain macroeconomic stability. During the 2000s, economic growth relied heavily on expanding capacity through investment, and less on improving efficiency. Significant increases in the money supply to accommodate rising demand created inflationary pressure which triggered macroeconomic instability. Vietnam started to suffer from the global financial crisis and economic downturn in 2008: export growth languished and foreign direct inflows decreased. This experience showed that a weakness in Vietnam’s macroeconomic policies has been excessive reliance on credit expansions to drive growth, and unfortunately, the additional credit has often gone into financing low-efficiency SOEs or real estate. The recent downfall of large SOEs and the collapse in the real estate market has caused severe problems for private companies, overturning the attempts at macro-stabilization of previous years.

12.4.2 Trade Policies

The reform of Vietnam’s trade policy, which was the cornerstone of the Doi Moi strategy, had two main objectives. The first objective was to make the transition from a centrally planned to a market-based economy by: (1) liberalizing and linking domestic prices to world prices so that they would efficiently guide the allocation of resources; (2) increasing the number of trading entities beyond the initial number of centrally controlled foreign trade companies to avoid distortions in price signals through anti-competitive behaviour or through de facto quantitative restrictions; (3) developing trade policy instruments such as tariffs, quotas, and licences; (4) removing exchange rate distortions. This redesign of the trading system was inextricably linked with reform of the enterprise sector to allow indirect regulation through market prices to replace the direct regulation of enterprise outputs. The second objective was to promote export-oriented industries by redressing the anti-export bias embedded in the protectionist regime.

Significant changes in export and import regulations were introduced in the 2001–5 period. With a few exceptions, this enabled enterprises to export all types of goods. Furthermore, the list of banned export and import goods was extended to cover a five-year period (2001–5), thus replacing the earlier practice of lists being issued on an annual basis. Quotas on rice exports and fertilizer imports were abolished, and regulations for enterprises trading in these items were lifted. This created a clearer regulatory framework for export and import. Two main export-supporting policies were also issued by the (p.248) government during this period. According to the first measure, enterprises could benefit from different types of credit. And, second, to encourage export of agricultural products, a ‘reward’ was introduced to major exporters of rice, coffee, pork, vegetables and fruit, cashew nuts, pepper, tea, peanuts, handicrafts, and plastic products.

WTO accession in January 2007 changed Vietnam’s trade policies and legal framework. A new commercial law, replacing the earlier 1997 version, came into effect in 2006. At that time, regulations with regard to national subsidies and protection, anti-dumping, and anti-subsidizing changed significantly, and a more equal playing field for all economic sectors and enterprise types was introduced. Moreover, in compliance with WTO principles, the Vietnam Development Bank was reorganized from its previous incarnation for preferential credit arrangements, and the government committed to eliminating direct export support.

In addition to agreements within the WTO framework, Vietnam has entered into a series of other FTAs.7 Overall, the opening up of the Vietnamese economy has created new opportunities, and put Vietnamese exports on an equal footing with those from other WTO members.

12.4.3 The Institutional and Regulatory Framework

Vietnam’s industrial policy framework is governed by a national Socio-Economic Development Strategy (SEDS) projected for a ten-year period.8 This is complemented by a five-year socio-economic development plan, as well as sector and industrial strategies and master plans. The Ministry of Industry and Trade is responsible for conducting and supervising industrial strategies and plans, while the Ministry of Planning and Investment undertakes the implementation of five-year plans articulated within the frame of the SEDS and national investment policy. The Ministry of Planning and Investment is further responsible for coordination with the private sector, through its Foreign Investment Agency, Enterprise Development Agency, and Department of Economic Zones. The most recent SEDS for 2011–20 highlights as priorities knowledge-intensive industrial production and higher local content in products. In addition, the document highlighted human-resources training as a central bottleneck that needs urgent attention.

(p.249) Future restructuring efforts will be concentrated on three major areas––investment, financial markets, and SOEs. As the anticipated spillover effects from FDI have been found rarely to materialize, and the decentralization of the licensing policy has proved inefficient, the government is rethinking its strategy and currently considering which sectors to single out for foreign investment and how to withdraw the excessively favourable incentives currently being offered to foreign investors. Similarly, the State Bank of Vietnam has encouraged commercial banks to focus on favourable credit schemes for firms operating within manufacturing or services.

12.4.4 Sector Specific Policies

Three key industries have been singled out as priority areas for the period until 2020: (1) mechanical engineering (automobile, shipbuilding, complete equipment, agricultural machinery, mechatronics); (2) electronic equipment, ICT; (3) products from new technologies (new energy, renewable energy, software, digital content). A further seven sub-industries have been identified as priorities: textiles, leather and footwear, plastic, agriculture–forestry–fishery processing, bauxite mining and processing, steel, and chemicals. The plastics industry was dropped from the priority industry list for 2011–15; and bauxite mining and processing as well as steel will be dropped from the list in 2016–20.

The fact that the plastics industry has expanded quickly (with an average annual growth rate of 20–25 per cent during 2005–10) thus gaining an internationally competitive position without support, may explain its removal from the priority industry list (VTIR 2011). Sustainable development seems to have been the reason for removing bauxite mining and processing from the 2016–20 list of priority industries. Finally, the steel industry’s removal from the 2016–20 priority country list is presumably based on the rationale that Vietnamese steel products lack the competitive advantage of countries with a long tradition of manufacturing these products.

Government support for priority industries has focused on three main areas: the provision of a production site, trade promotion support, and R&D activities. Production sites have been allocated promptly to support new, expansion, or intensive investment projects (including projects associated with relocating production). In terms of trade promotion, financial support has been available for building and developing enterprise brand names and improving international quality-management standards (through industry associations). Moreover, enterprises in prioritized industries have been free to introduce products on the Ministry of Industry and Trade’s website, as well as to display and introduce their products freely at trade fairs and exhibitions at national and local levels.

(p.250) Financial support for enterprises in the prioritized sectors has also been available for R&D-related activities. Central budget allocations have been directed towards: (1) efforts in technology transfers (including trial production under the technology transferred); (2) strengthening the capability of scientific and technological bodies (laboratories, laboratory standards, R&D institutions, etc.); (3) researching and adapting modern technology or equipment to improve productivity, quality, and lower production costs. At the same time, funding from local-level budgets has been allocated for test/trial production (new products, materials, and auxiliary materials to replace imports) before technology or equipment is utilized in mass production. Incentive policies for priority industries have been extended to all leading/key industries. In addition financial support has been provided for manufacturing projects aimed at environmental protection.

However, most sector specific policies seem inadequate for achieving the goals listed in the government’s planning documents. Most often these documents offer little more than a list of the general instruments such as tax reductions, protective barriers, or encouraging calls for investment. Another weakness is that not all of the necessary components of a sound strategy are included in the measures, such as research-supported reasoning, comparative advantage/disadvantage assessments, resource- and demand-supply projections, and risk management. But most importantly, an overall strategy covering the nation’s entire industry does not exist, and currently too many sectors are targeted, impeding policy coherence.

Examples of failed sector specific strategies are many. One example is the steel industry, where production has been misaligned due to an inaccurate evaluation of domestic market demand. At present Vietnamese steel producers are not as competitive as steel imported from China and the Association of Southeast Asian Nations (ASEAN). But because of preferential/strategic policies, production capacity stands at roughly 9.0 million tons (excluding 1.5 million tons from five big projects) of which 6.0 million tons are sold domestically at subsidized prices.

However, positive examples also exist. The government’s strategy for ICT is generally considered to have been better designed, with clear objectives to be achieved through relatively detailed policy instruments and focused projects. An important success factor of the ICT industry is market liberalization. At present, ICT markets are competitive, with multiple ISPs, software and hardware vendors, and several mobile phone networks. The use of computers and telecommunication devices is widespread and popular, and available at relatively low cost. Several Vietnamese ICT companies have actively invested in neighbouring countries as well as in Africa and Latin America.

The textile industry is another success story. It has been among Vietnam’s top five exports since 2001. In 2010, it was valued at US$11.2 billion, and (p.251) ranked number one. But it is still very labour-intensive, and Vietnam is gradually losing its comparative advantage to other developing countries, such as Cambodia and Bangladesh. Efforts to lift garment exports to a higher position in the value chain have not been successful so far. Presently, 60 per cent of garment exporters are FDI companies.

12.5 Sunrise and Sunset Industries

In Nguyen et al. (2014: Table 6) are listed the ten industries with the highest share of total industrial output for the years 2001, 2007, and 2011. The food and beverages industry accounted for the largest share of output in all years. However, this share has been declining, and the output gap between food and beverages and other industries is narrowing. Further, the ranking of other industries in terms of output shares has changed, and new industries have emerged in the top-ten list, while others have disappeared from it. Thus, non-metallic mineral products, which in 2001 ranked as the eighth largest industry in Vietnam in terms of share of total industrial output, was in 2007 and 2011 the second largest industry, based on the same criteria. And the metal products industry, which did not even reach the top ten in 2001, was the third largest industry in 2007 and 2011, while motor vehicles; trailers/semi-trailers, which ranked number three in 2001, had disappeared from the list in 2007.

The ranking of industry size in terms of the shares of all registered firms belonging to each industry has also undergone change over recent years. Nguyen et al. (2014) document that while the food and beverages industry accounted for 18.7 per cent of all registered firms in 2005, this declined to just 12.8 per cent in 2011, while the share of firms in the fabricated metal products industry had risen from 9.3 per cent to 14.1 per cent.

Table 12.5 Rates of industrial gross output of industries with growth at above average rates (%)

Industry

2005

2006

2007

2008

2009

2010

Average 2005–10

Pharmaceuticals, medicinal, chemical, and botanical products

15.3

27.0

16.9

14.2

48.7

25.8

24.7

Fabricated metal products (except machinery and equipment)

22.2

30.7

17.8

13.0

21.8

19.3

20.8

Manufacture of computer, electronic, and optical products

35.6

18.4

19.0

6.3

24.3

18.2

20.3

Wearing apparel

17.3

26.5

19.5

7.1

17.7

16.2

17.4

Repair and installation of machinery and equipment

30.4

−2.1

25.0

11.9

17.1

18.8

16.8

Furniture

16.8

37.0

8.6

3.3

20.4

14.3

16.7

Manufacture of rubber and plastics products

23.8

17.2

20.7

2.6

18.0

17.1

16.6

Basic metals

17.8

12.6

18.2

10.1

33.5

6.8

16.5

Other transport equipment

37.1

29.6

15.4

5.8

5.3

14.6

18.0

Water supply; sewerage, waste management, and remediation activities

23.1

23.8

21.9

10.3

15.6

12.5

17.9

Manufacture of motor vehicles; trailers and semi-trailers

38.9

−5.2

39.7

9.8

14.7

1.6

16.6

Manufacture of paper and paper products

20.6

13.3

28.2

1.7

15.5

17.5

16.1

Manufacture of electrical equipment

29.5

41.4

6.7

2.2

7.7

8.7

16.0

Average across industries

19.4

17.4

16.6

7.9

17.6

13.8

15.5

Notes: Output in each year is valued at fixed 1994 prices. The average across industries excludes ‘manufacture of coke and refined petroleum products’ and ‘manufacture of tobacco products’ as output values of these industries are inherently volatile and sensitive to world market price fluctuations.

Source: GSO (various years), available at <https://www.gso.gov.vn>, accessed 30 January 2016.

Table 12.6 Number of firms from 2005–11 in industries with above average firm number growth

Industry

Growth in number of firms (%)

Fabricated metal products

242.8

Other transport equipment

216.9

Publishing, printing, and reproduction of recorded media

196.8

Apparel

194.7

Electrical machinery and apparatus (not elsewhere classified)

175.7

Furniture

160.5

Wood and wood products

155.5

Rubber and plastics

152.9

Basic metals

149.6

Mining and quarrying

143.7

Chemicals and chemical products, including pharmaceuticals

139.3

Tanning and dressing of leather

133.5

Average across all industries

132.1

Source: GSO enterprise surveys (various years), available at <https://www.gso.gov.vn>, accessed 30 January 2016.

These developments attest to the speed of change in the structure of Vietnam’s industrial sector. Against this background, the relevance of distinguishing ‘sunrise’ and ‘sunset’ industries when targeting industrial policies in Vietnam is evident. Sunrise industries are defined as emerging, fast-growing industries that are expected to become important for the economy, and replace the mature and declining sunset industries. Although sunset industries may continue to play an important role in the economy, their stagnant productivity and declining competitiveness and profitability gives way to new sectors. In the present analysis, three criteria are used to identify sunrise industries:9 (1) an average annual growth rate over the period 2005–11 which is above average in the industrial sector; (2) a growth rate above the industrial sector average in (p.252) at least three of the six years within the period; (3) above average growth in the number of firms operating within the industry during 2006–11. Tables 12.5 and 12.6 present the industries that fulfil each criterion individually.

The average annual growth rate of industrial output over the period 2005–11 was 15.5 per cent. Thirteen industries had average annual growth rates above this rate,10 twelve of which had growth rates above the average for at least three of the six years. Notably, and in accordance with its declining share of total industrial output, the food and beverage industry does not live up to the first criteria of being a sunset industry. However, it is clear that it remains an important sector. The pharmaceuticals, medicinal, chemical, and botanical products, and fabricated metal products merit highlighting as the industries with the highest average annual growth rates of output. While the former has been growing quickly from a very low base, and thus by 2011 had (p.253) not reached the top ten list of industries described earlier in this section, the latter has quickly become the third largest industry as its share of total industrial output, and was the only industry growing at a higher than average rate for all six years.

In part, as a result of the processes of deregulation and market liberalization under WTO entry, the number of enterprises in the industrial sector as well as the whole economy has grown massively in recent years. As such, the average growth in the number of firms from 2005–11 across industries within that sector was 132.1 per cent. Twelve industries grew at higher than average rates. However, a direct link does not always exist between an increasing number of new firms and industry growth; for example the cases of mining and quarrying, and the publishing, printing, and reproduction of recorded media industries both experienced growth in the number of firms above the industry average, while their gross output grew at rates well below the industrial average, at just 1.0 per cent and 9.7 per cent respectively. Meanwhile, the fabricated metal products sector once again emerges as top of the list, with a firm number growth of 242.8 per cent over the period. Based on the criteria mentioned, a further five industries qualify as ‘sunset’ industries: wearing apparel, furniture, other transport, equipment, and basic metals.

Table 12.7 Rates of gross output of industries with growth at below average rates (%)

Industry

2005

2006

2007

2008

2009

2010

Average 2005–10

Manufacture of food products and beverages

18.5

18.8

16.0

7.2

12.7

17.0

15.0

Manufacture of wood and of products of wood and cork (except furniture)

24.8

7.9

12.1

11.6

18.2

15.3

15.0

Manufacture of leather and related products

9.8

17.2

14.1

2.1

25.7

18.4

14.6

Electricity, gas, steam, and air conditioning supply

10.9

12.2

11.5

13.6

14.1

11.4

12.3

Manufacture of textiles

7.0

24.4

5.9

5.4

14.5

14.3

11.9

Manufacture of other non-metallic mineral products

8.6

18.2

12.6

14.9

7.3

8.9

11.8

Manufacture of chemicals and chemical products

16.7

18.6

7.5

9.2

0.5

12.2

10.8

Manufacture of machinery and equipment not else classified (nec).

35.0

−22.6

24.2

4.2

13.1

9.8

10.6

Printing and reproduction of recorded media

2.0

−1.4

12.6

6.9

25.4

12.5

9.7

Mining and quarrying

−1.9

−1.4

−3.4

9.2

1.1

2.5

1.0

Average across industries

19.4

17.4

16.6

7.9

17.6

13.8

15.5

Note: Output in each year is valued at fixed 1994 prices. The average across industries excludes ‘manufacture of coke and refined petroleum products’ and ‘manufacture of tobacco products’ as output values of these industries are inherently volatile and sensitive to world market price fluctuations.

Source: GSO (various years), available at <https://www.gso.gov.vn>, accessed 30 January 2016.

Table 12.7 presents rates of gross output of industries with growth at below average rates. Given the high average growth rate of Vietnamese industries, it would be a mistake to conclude that industries growing at below average rates are under stress. In fact, based on Table 12.7 only mining and quarrying stands out as a low-growth industry, which given its previous high share of total industrial output may be classified as a sunset industry.

(p.254) 12.6 Conclusion

12.6.1 Main Challenges

Vietnam has successfully implemented the programmes outlined in its SEDS for the period 2001–10. Yet the economy is faced with insufficient quality improvement, changes in important economic structures that are too slow, and little potential for current modality of growth. The industrial sector has been the key driver of growth in Vietnam during the last decades, accounting for a larger share of GDP and employment, and there has been a shift towards products with higher value added and technological content. Overall, Vietnam’s industrialization strategy and industrial policy, however, seem to have placed greater emphasis on achieving a high rate of economic growth and economic structural change than on building up industrial competitiveness and new competitive industries for future growth.

Currently, Vietnam is working within the framework of the new SEDS (covering 2011–20). The plan strives to achieve three goals, including improvement of market-oriented institutions, infrastructure, and human resources for industrialization and modernization. Since the overall goal of the 2011–20 SEDS is to transform Vietnam into an industrialized country by 2020, the debate on current industrial policy is now focused on three major issues.

(p.255) First, industrial policy in the past has made little contribution to improving Vietnam’s competitiveness. The dual nature of Vietnam’s industrial sector is a weakness rather than a strength. The IS sectors have failed to grow and provide sufficient input for downstream industries, including export-oriented ones (e.g. textiles or chemical industries). Similarly, the export-oriented sector has had to rely heavily on imports, rather than input from domestic industries, because of the absence of local suppliers and supporting industries. Furthermore, desired spillovers from FDI, particularly via technology transfer and linkages with domestic enterprises, have been rare.

Second, earlier industrial policies failed to facilitate change in firm structure and the building of large-size private enterprises. Furthermore, facts on supporting policies (especially for exports) remained scattered among many different documents and were inconsistent, particularly with respect to the range and type of financial incentives and instruments used. Industrial policy also failed to stimulate enterprises to actively build partnerships as well as production linkages to reduce costs and improve productivity. Policy overemphasized specific sectors and products at the expense of improving the competitiveness of enterprises. In addition, Vietnam’s firm structure has remained relatively unchanged: while the number of newly established private firms increased steadily after the Law on Enterprises took effect, most firms are SMEs.

Last, Vietnam still lacks a well-coordinated framework for industrial policy (sector specific policy, trade policy, macroeconomic policy, and other policies). Individual sector strategies and plans are developed in isolation, without coordination. With regard to investment policy, there is no discrimination among sectors, with the exception of sectors with investment priorities. Moreover, while production projects and export-oriented sectors have access to preferential credit policies the majority of beneficiaries are SOEs, rather than private enterprises.

12.6.2 Outlook

Industrial development, as outlined in the 2011–20 SEDS, can only be achieved by restructuring industrial production (such as increasing technology, local content, and linkages in regional and global production network; developing supporting industries and industrial clusters). But the SEDS has failed to provide adequate guidelines on sector strategies. Each development strategy and/or master plan sets out ambiguous targets/objectives and broad implementation measures without sufficient detail and feasibility assessments. Moreover, there is no industrial strategy extending beyond 2020.

Vietnam is regarded as a relatively open economy following its WTO accession. Industrial policy should, therefore, aim to facilitate productivity gain (for example, learning by exporting) from export activities rather than simply endorse export expansion, to ensure the long-term growth of the economy. (p.256) The policy is also expected to improve firm structure and build linkages between domestic and foreign-invested firms. This is an important point for Vietnam because the main beneficiary of past industrial policies has been the SOE sector which has enjoyed protectionist measures but remained relatively inefficient and uncompetitive.

Vietnam’s SEDS for the period 2011–20 strongly underscores an export-oriented strategy for improving competitiveness at both aggregate- and firm-level. While the manufacturing sector has expanded at a high rate of growth and made a considerable contribution to export and growth performance, the question of whether or not manufacturing firms could learn from exporting to increase productivity and competitiveness remains open.

References

Bibliography references:

Central Institute for Economic Management (CIEM) (2010). ‘Impacts of International Economic Integration on Vietnamese Economy Three Years after Joining WTO’. CIEM Policy Report. Hanoi, Vietnam.

General Statistics Office (GSO) (various years). The Real Situation of Enterprises. Hanoi: Statistical Publishing House, available at <https://www.gso.gov.vn>, accessed 30 January 2016.

Hsieh, C.-T. and Olken, B. A. (2014). ‘The Missing “Missing Middle”’. Journal of Economic Perspectives 28(3): 89–108.

Liedholm, C. and Mead, D. C. (1999). Small Enterprise and Economic Development. The Role of Micro and Small Enterprises. Routledge Studies in Development Economics. London and New York: Routledge.

Nguyen Thi Tue Anh, Luu Minh Duc, and Trinh Duc Chieu (2014). ‘The Evolution of Vietnamese Industry’. WIDER working paper 2014/076, available at <https://www.wider.unu.edu/sites/default/files/wp2014-076.pdf>, accessed 12 February 2016.

Tybout, J. R. (2000). ‘Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?’ Journal of Economic Literature 38: 11–44.

Vietnam Trade and Industrial Review (VTIR) (2011). Master Plan on Development of the Plastics Industry, Vision 2020–2025. Proceedings from the Seminar, available at <http://tapchicongthuong.vn/hoi-thao-quy-hoach-phat-trien-nganh-nhua-viet-nam-den-nam-2020-tam-nhin-2025-14462p12c152.htm>, accessed 15 February 2016.

Vu Ngoc Lan, Phan Le Nga, Khong Van Tuyen, and Nguyen Viet Thang (2008). ‘Steel Industry Analysis Report’, available at www.wss.com.vn, accessed 30 January 2016.

Notes:

(1) Doi Moi was announced by the Vietnam Communist Party at its Sixth Party Congress in 1986.

(2) This transition entailed several major changes in economic policy, including: (1) developing a multi-sector economy with the official recognition of the private sector; (2) removing subsidies and planning mechanisms, forcing state enterprises to become self-reliant; (3) abolishing price controls for consumption goods—importantly, industrial production was focused on three immediate needs including foods, consumer goods, and export goods; (4) encouraging foreign investment, since export-orientation was viewed as an important strategy for economic growth.

(3) Mining and oil, metallurgical, cement, manufacturing mechanics, electronics, and primary chemical industries.

(4) These included: agricultural processing, paper, textiles, leather and footwear, electronics, information and communications technology (ICT), mechanical engineering, chemicals (chemical fertilizers), steel, gasoline, coal mining, and other mining.

(5) Since the work of Liedholm and Mead (1999) and Tybout (2000) there has been much discussion about the ‘missing middle’ of medium-sized firms in developing countries. However, as documented in Hsieh and Olken (2014) there is surprisingly little empirical backing for the existence of such a missing middle.

(7) ASEAN–China Free Trade Agreement (ACFTA), ASEAN–Korea Free Trade Agreement (AKFTA), Agreement on ASEAN–Japan Comprehensive Economic Partnership (AJCEP), and ASEAN–Australia–New Zealand Free Trade Agreement (AANZFTA). In addition, Vietnam signed the Vietnam–Japan Economic Partnership Agreement (VJEPA) which may affect textile and garment export performance in Japanese markets.

(8) Vietnam had completed two SEDSs in the last two decades: SEDS covering 1991–2000 and the other for 2001–10. The SEDS for 2011–20 was approved by the National Assembly in January 2011.

(9) Bearing in mind that in Vietnam, where most industries display a strong upward trend from an originally low base, it is hard to distinguish true sunrise industries.

(10) An industrial sub-sector labelled ‘other manufacturing’ also grew at a higher rate (24.0 per cent) but is excluded due to the vagueness of its content.