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Vietnam’s regional economic linkages and industrial competitiveness

Vietnam’s regional economic linkages and industrial competitiveness

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Vietnam’s regional economic linkages and industrial competitiveness

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  1. Vietnam’s regional economic linkagesand industrial competitiveness Paper to be presented at the 6th Asian Development Research Forum General Meeting Bangkok, 7-8 June 2004

  2. Development Strategy 2001-10: By 2020 VN will basically become “a modern-oriented industrialized country” • The goal cannot be achieved without a successful linkage with the regional and global network, an appropriate structural adjustment and a considerable improvement of the competitiveness Outline of Contents • VN’s approach to the development (industrialization) strategy and the trade and industrial policies • The structural changes and regional economic linkages • VN’s competitiveness (ICC index, dualism and value chains) • Policy option alternatives • Case study of T&G industry

  3. Strategic development view & trade and industrial policies Strategic view • Building a market economy by socialism orientation. • Consensus: Structural reform, human resource development, infrastructure improvement, administration reform, and further international integration. But: • Policies driven by both "picking winner" and export-promotion approaches. The state sector should play a leading role in the economy. • Globalization is seen as “an inevitable trend”, but it is important to built an independent and self-reliant economy

  4. Industrial policy • Setting targets on building some selected important heavy industrial establishments... and asking for a rapid and effective development of products, sectors and industries that have comparative advantages • Determining quantitative targets for some “important” industries • Regarding the state investment as a key source for ensuring high economic growth

  5. Trade policy • Trade regime has operated with efforts to promote exports as well as to protect import-substituting production (in spite of considerable liberalization) • Average tariff rate not high, but tariff structure characterized by high dispersion ► high ERPs (though significantly declining) Table 1. Effective Rates of Protection by Sector, 1997-2003 • Counterbalance the anti-export bias (tax exemption, duty drawback scheme) to have some effects, but they are unlikely to achieve the desired neutrality in the incentive structure.

  6. FDI attraction policy • During 1990s, the focus is on incentives to maximize FDI quantity. It now seems to be in a right tract with a more liberal neutral environment • Major problems • Cumbersome administrative procedures, corruption, and unpredictability of policy changes • High cost and poor quality in many infrastructure services and lack of supporting industries • The approach based on the “positive list” and the target areas • The approved strategies of several industries point to the levels of local content be achieved.

  7. Structural changes & regional linkages • Reforms and integration have brought about a new phase of industrialization • Eco. growth: 8.3% (1991-96), 6.3% (1997-2000), 7% (2001-03) • Manuf. share of GDP: 12.8% (1991); 20.8% (2003). Manuf. export in total merchandise export: 8% (1991); 43% (2003) • At present, however, VN is only as “an average developing countries” and still far behind East Asia countries in terms of industrialization Table 2. The Levels of Industrialization in E. A., L.D.C. and Vietnam

  8. Structural changes & regional linkages • East Asia is most important market, but with declining export share and increasing import share. • Role of China increased, but of ASEAN decreased. Export to Japan declined, while import from Japan increased to mid-1990s and stabilized since then. Table 3. Regional Export and Import Flows, 1991-2003

  9. Structural changes & regional linkages • In comparison with East Asia: VN in on similar track, but at early stage of regional trade engagement • East Asia: shift from L-intensive manufactured export to more capital and tech-intensive export. VN: mainly in L-intensive export • East Asia: Increasing regional trade in intermediate goods. VN is on similar pattern (T&G + some electronics and others such as car, motobike) • East Asia: Rising regional intra-industry trade. VN: regional intra-industry trade index increased from 2.2 in 1985 to 19.0 in 2000, but still much smaller than of other East Asian economies • East Asia: Major markets for final products are developed countries and extra-regional. VN: significantly increasing role of EU and US (especially after VN-US BTA) • East Asia: increasing role of China as trade partner, especially in intermediate goods and components. VN: China becomes a key partner, but as North-South trade + huge deficit

  10. Structural changes & regional linkages • FDI became an integrated part of Vietnamese economy (2003: 14% GDP, 31% total export, excl. oil; 25% of total investment during 1990s, >18% during 2001-03) • Key investors are from East Asia (Top five from the region; accounts for about 70% committed and implemented capital). But FDI from the region has declined since 1998, especially from Japan • FDI inflows in the 1990s concentrated in large-scale projects and import substituting industries. FDI are limited in high VA sectors. Since the end of 1990s, a tendency of shift towards (export) manufacturing sector

  11. Structural changes & regional linkages

  12. Industrial competitiveness General assessment • Rank of VN’s (growth) competitiveness by WEF is improved, but relatively low: 49/53 (1997), 53/59 (2000), 65/80 (2002), 60/102 (2003) ICC index (X-M/(X+M)) + (modified) “flying geese” model

  13. Industrial competitiveness • Competitive industries: Agricultural products, light industries (Garments, footwear, furniture, miscellaneous manufacturing) • Promising industries: electronics, precision apparatus and some supporting industries (metal processing, home electrical parts,...) • Uncompetitive industries: heavy machinery industries

  14. Industrial competitiveness • Dualism in industrial sector (created by industrial policy and trade regime): Competitive export sector vs. weak and protected domestic sector, incl. some FIEs

  15. Industrial competitiveness • Value chain: Cost and quality (brand name, technology) advantages Problems of VN’s firms: • Both inside (management, HR,...) and outside (cost-effective linkages) • At lowest end of value-added chain.(sub-contracters, accemblers) • Case of producer-driven chains (car, motobike industries): Supporting industries and localization policy? • Case of buyer-driven chain (T&G, fooiwear): Upstream vs. Downstream? How to efficiently have a continual creation of higher value-added?

  16. Major problems and policy choices Change in the way of thoughts. • Policy-decisions are still rooted in a legacy of a CPE. • Perkin’s arguments (2001): VN (and China) would have a great difficulty making a Korean- or Japanese –style industrial policy work efficiently even if the rules of the international economic system allowed such actions Trade and FDI policies: • The substantial uniformity into tariff structure is a most effective way? • Liberal and neutral investment environment rather than (fiscal) incentives? Problems: dealing with existing burdens regarding SOEs and some import-substitution industries.

  17. Major problems and policy choices Improvements of overall competitiveness: • Institutional improvement (legal system, enforcement and public administration) • Structural reform (SOE and financial sectors) • Improvement of business environment and cutting down of business costs Dealing with dualism and weak linkages • Upstream and downstream linkage? Supporting industries? • Public investment + various incentives vs. Exploitation of comparative advantages + FDI + HR development (to gradually take dynamic advantages) + private sector development • Also: ODA (training, infrastructure development) and some incentives for SMEs in the linkage with FIEs • Value chain and linkage with high value added services sector? • Services sector liberalization and opening: gradual vs. more radical? (including elimination of monopolies) + FDI + Elimination of monopolies

  18. Case study of Textile and Garment industry • Development of T&G industry is impressive but not outstanding • Average growth rate was high at 10.4% p.a. T&G industry created about 1.6 million jobs, accounting for 25% of total industrial labor force • In 2003, the G-export accounted for 18.4% of total export value, nearly twice larger than that in 1994 (10.6%) Characteristics and problems of the T&G industry • Asymmetrical growth within T&G industry: Growth of G-production > T-production • Technology: G-industry upgraded much better than T-industry. T-industry has to import 90% of cotton and 100% of yarn for annual production • G-industry mostly focuses on production of unsophisticated and quota-required products (such as shirt, jacket, coats, home dressing,…). Non-quota markets? • Low linkage between T- and G- industries. Imported inputs make up to 50% of total inputs for G-industry

  19. Case study of Textile and Garment industry • G-industry as sub-contractors heavily dependent on intermediary foreign firms (HK, TW, Korea) and at low end of value chain. • Major markets: US (54%) and EU (16%); Japan and Taiwan, two non-quota markets (only 19%) • Changing role of FDI, SOEs and private sector in T&G industry development Productivity at the firm level is rather diverse • Private firms outperformed the SOEs and FIEs in technical efficiency • Smaller firms achieved a higher level of technical efficiency during hard time • Firms located in the central areas have lower technical efficiency compared to thoses in the northern and southern areas

  20. Case study of Textile and Garment industry Challenge ahead • Quotas problem: They will be lifted for WTO country members by 1 Jan 2005 ► increasing competition and be loser? • Gov’t development strategy for G&T industry up to 2010 • Increasing VA by shifting production modality from CMT to FOB • Increasing local contents of G-exports by actively investing in T-industry Arguments against: VN’s advantages + invesmnet costs • Need to abolish a deep involvement of the Gov’t and VINATEX (Vietnam Textile Corporation) in the production. Instead, they play as the facilitators for the development of the industry though provision of information, development of physical infrastructure, and institutional support

  21. THANK YOU!