Vietnam needs strong action to escape 'middle-income trap'

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Standing by her pushcart hawking cassava cakes on Ho Chi Minh City's Bui Thi Xuan Street, Anh laughs when she hears she is in the World Bank's "middle income" bracket.

She earns more than VND30 million (US$1,630) a year against Vietnam's 2008 per capita income of about $1,000, which is at the lower end of the World Bank's middle-income range. The upper end is $12,000, or VND220 million.

But many economists are beginning to feel concerned about the possibility of the country getting stuck in the so-called "middle-income trap" - growing rapidly from low- to middle-income status but then floundering and seeing growth slow down considerably.

Speaking at a meeting of Vietnam's donors in Hanoi last month, Victoria Kwakwa, the World Bank's country director, said one of the questions now is "how will Vietnam avoid the middle-income-country trap?"

Vietnam, with a population of 86 million, has managed to achieve rapid economic growth this decade, expanding by 5.2 percent in 2009 even amid the global slump.

Jonathan Pincus, dean of the Fulbright Economics Teaching Program, said Vietnam's approach to lower middle-income status is still based on growth that draws from "moving people out of very low-productivity activities."

"Most people live in rural areas and small-scale agriculture still employs many millions of people."

Growth for middle-income countries must be based on "mastering new technologies, producing more sophisticated goods, breaking into new markets and improving workers' skills," Pincus said.

A middle-income country's transformation to high-income status usually takes around 50 years, Martin Rama, lead economist for the World Bank in Vietnam, said. "But only a few [middle-income economies have succeeded in transforming]," Rama told the meeting last month.

None of the more advanced members of ASEAN except Singapore has managed to escape the trap yet, Kenichi Ohno, research director at the Hanoi-based Japanese think tank, Vietnam Development Forum, said.

Lacking internal strengths

In a series of policy papers titled "The middle income trap: implications for industrialization strategies in East Asia and Africa," Ohno wrote that Vietnam is still at stage one, which means simple manufacturing under foreign guidance.

The country's development has been "passive," dependent on the "liberalization effect" after doi moi and large inflows of investment, capital and aid, and unable to create "internal value" to ensure sustainable growth.

Economies like Thailand and Malaysia are in stage two: having supporting industries but still under foreign guidance. At stage three, the high-income South Korea and Taiwan have reached the level of mastering technology and management and can produce high-quality goods on their own.

The middle-income trap, caused by the failure to improve human skills and technology and create internal value, prevents countries jumping from stage two to stage three, according to Ohno.

Two things are needed to address the issue, he said: "the private sector's dynamism and good policies to compliment that dynamism."

The first factor is a "given, more or less," he said, pointing out that the reason for South Korea's success in becoming a high-income country is its people's industriousness.

Malaysians are "more relaxed," he said. As a result, though the country has "one of the best industrial and human resource policies in the world," its average income is not as high as South Korea's or Taiwan's, he said.

While Vietnamese may be hardworking compared to their counterparts in other ASEAN member countries, Ohno said he is more concerned about the government's slow response to the middle-income trap in terms of policy-making.

Follow-ups needed

"[The government] has started to talk about it," he said. Yet, while Vietnam has announced its vision of industrialization and modernization by 2020, there have been no concrete follow-up strategies or action plans.

The slow response could leave Vietnam wedged between low-wage competitors and cutting-edge innovators, Ohno warned.

It must renovate both policy content and structure and policy-making organization, he has suggested in his papers.

Its development policies must help Vietnam create domestic value and effectively take part in the global value chain by establishing competitive industrial human resources and support industries and services and strengthening logistics, he said.

For continued industrialization, Vietnam also needs fundamental reform to improve policy quality and ensure implementation, he said.

Criticizing the existing system under which ministries make policy, he suggested setting up a technocrat group headed by the prime minister to make key policies and oversee their implementation by ministries.

Economic restructuring plan

Deputy Prime Minister Nguyen Sinh Hung said in an interview in September 2009 that the government has begun to work on an economic restructuring plan to avoid the middle-income trap.

It is "a serious issue that needs thorough study," he told the Vietnam Economy newspaper.

"We need to make really good policies to maintain macroeconomic stability and promote sustainable economic development," he said.

"A key factor is improving leadership quality and efficiency. The country's development strategy also needs to be renovated."

The restructuring plan would introduce ways to "improve the institutional structure to further liberalize production forces, establish a socioeconomic infrastructure, and improve human resources," he said.

Pincus said Vietnam's leaders understand the need to move into new products and services, achieve greater efficiency in existing industries, and upgrade technology and skills.

"Government policy must drive all companies, including state-owned companies, toward innovation and efficiency by forcing them to compete," he said.

Vietnam is still some years away from the middle-income trap, he said, "but since it takes a long time to build the institutions of a modern economy, it is never too early to start."

Anh, the cassava-cake seller, meanwhile faces an uncertain future after city authorities said they would enforce a ban on modified, unregistered vehicles including pushcarts. A partial ban came into effect in January 2009 but remained unenforced as authorities struggled to find ways to support the people it would affect.

"[Ward authorities] have promised to grant me some money if I can prove I have found another job," Anh, a junior high school dropout who cannot think of anything else she can do except work as a domestic help, said.

"Maybe I'll drop to low-income status."

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