Vietnam’s manufacturing miracle: lessons for developing countries
If you are reading this blog post on a smartphone, chances are you are looking at a device made in Vietnam. Globally, one in 10 smartphones is produced in Vietnam. Cellphones are Vietnam’s top export, generating export revenues of over $ 45 billion in 2017.
This success is a symptom of a larger trend that defies global standards. While world trade has stagnated, Vietnam’s trade soared to 190% of GDP in 2017, from 70% in 2007. As premature deindustrialisation sweeps the global economy, Vietnam’s manufacturing sector has grown steadily, creating around 1.5 million new manufacturing jobs between 2014 and 2016 alone.
Why is manufacturing experiencing a renaissance in Vietnam, when it is relapsing in many parts of the world? Given the recent call by several world leaders to create manufacturing jobs in their countries, Vietnam’s experience is instructive for developing and advanced economies alike.
There are some basic fundamentals that are clearly important. Salaries are still low and the demographics are favorable. About half of the population is under 35, and Vietnam has a large and growing workforce. The country is also politically stable and geographically close to major global supply chains. But that’s not necessarily what sets Vietnam apart. Instead, we would say Vietnam has managed to capitalize on its solid foundation through good policies.
Vietnam has achieved its success the hard way. First, he embraced trade liberalization with enthusiasm. Second, it complemented external liberalization with domestic reforms through deregulation and lowering the cost of doing business. Finally, Vietnam has invested heavily in human and physical capital, mainly through public investments. These lessons – global integration, national liberalization, and investment in people and infrastructure – while not new, need to be reiterated in the wake of rising economic nationalism and anti-globalization sentiments.
Figure 1. Made in Vietnam
Figure 2. Vietnam is open for business
First, trade policy has been arguably the most important industrial policy for Vietnam. With Singapore, it shares first place in East Asia as a member of bilateral and multilateral free trade agreements. A signatory to 16 bilateral and multilateral free trade agreements, Vietnam is a member of the World Trade Organization, ASEAN, and has bilateral agreements with the United States, Japan, South Korea, EU and Eurasian Customs Union. Earlier this year, it became one of 11 countries to join the relaunched CPTPP.
These trade deals have dramatically reduced tariffs, anchored difficult domestic reforms, and opened up much of the economy to foreign investment. Over 10,000 foreign companies, including major global players such as Samsung, Intel, and LG, are estimated to operate in Vietnam today, mainly in the labor-intensive, export-oriented manufacturing sector. .
Second, Vietnam has leveraged its demographic dividend by investing effectively in its people. Vietnam’s efforts to promote access to primary education and ensure its quality through minimum quality standards have borne fruit. In the latest OECD Program for International Student Assessment (PISA) of 2015, which tests high school students in math, science and other subjects, Vietnam ranked 8th out of 72 countries participants, ahead of OECD countries such as Germany and the Netherlands.
Third, relentlessly focus on competitiveness and the ease of doing business. Vietnam has made steady progress in improving its investment climate, as evidenced by the higher scores of the World Economic Forum’s Competitiveness Index (up five points to reach 55th in the world) and the 2018 World Bank ranking on the ease of doing business (68th in the world, up 31 places since 2014). Vietnam also reduced the corporate tax rate to 20%, from 32% in 2003.
Finally, Vietnam has invested in infrastructure, particularly in the electricity and connectivity sector. Thanks in part to high public investments, the capacity to generate, transmit and distribute electricity has been increased to meet rapidly growing demand. To keep pace with the rapid growth of container trade (which grew at a staggering 12.4% annual average rate between 2008 and 2016), Vietnam has also expanded its connection infrastructure, including ports and sea terminals. .
Not the type to bask in their glory, the Vietnamese prefer to face the remaining challenges. Overall, Vietnam’s manufacturing sector remains relatively small. Most of the sector is driven by foreign direct investment (FDI), which accounts for nearly 90 percent of manufacturing exports. Many of the newly created jobs in manufacturing are in basic assembly, which requires manual labor but does not necessarily add much value (per worker). The links between FDI and domestic firms are weak. In addition, as wages inevitably rise, Vietnam’s current comparative advantage in low-skilled and labor-intensive sectors will begin to dissipate, a trend that could be amplified by new technologies and technology. automation that saves labor.
Vietnam’s recent rise to the rank of global manufacturing hubs offers lessons about the potential for manufacturing-led growth, but also a warning about its inherent limitations.