Women work at a small size garment workshop on the outskirts of Hanoi. Photo by : AFP
Samsung is set to ramp up investment in Vietnam to cash in on the cheap labor that the South Korean electronics giant no longer finds in China.
Japanese companies in Thailand are also setting their sights on Vietnam because of its low-wage workforce.
South Korea was the largest foreign investor in Vietnam over the first two months of the year, followed by Singapore and Japan, with most foreign direct investment (FDI) over the period landing in the manufacturing and processing sector - which employs a cheap labor force - according to a General Statistics Office monthly report released Wednesday (February 26).
Vietnam’s abundance of cheap labor has played an increasingly pivotal role in wooing foreign firms looking to set up overseas manufacturing operations in a country with a population of 90 million. This edge appears to be working well in the context of rising labor costs in China and political mayhem in Thailand.
But analysts say the bottom line is that competing in terms of low wages is a risky business and should only be considered an edge in the short-term for a developing country like Vietnam. The biggest challenge for the country is to ensure that the quality of its labor force improves steadily, they say.
“In the short-run, FDI may help create new jobs and attract redundant workers from rural areas. In the longer-run, however, low wages in industry may contribute to increased relative poverty,” Pietro Masina, an associate professor of economics at the University of Naples "L'Orientale" in Italy, told Vietweek.
“Industrial workers in Vietnam are often exposed to high levels of vulnerability and they may easily fall into poverty again,” he said.
A flash in the pan
Whereas unskilled workers in China make around US$300 per month, Vietnamese workers receive half to a third of that amount. A survey conducted by the Japan External Trade Organization in 2012 found that average wages in Thailand were around $6,704 for workers and $27,204 for managers compared to $2,602 and $12,245 in Vietnam.
But at the end of the day, Vietnam’s low-cost advantage will not last long, analysts say. While the median age of 27.4 years is below China’s 35.2 years, Vietnam’s population is aging, according to a report released in 2012 by McKinsey, a management consultant. The report also cited government projections as saying that Vietnam’s labor force is likely to grow by about 0.6 percent a year over the next decade, a decline of more than three-quarters from the annual growth of 2.8 percent from 2000 to 2010.
Although critics of the report dismiss such demographic fears as “overblown”, they concur that Vietnam has to upgrade its human skills so it can move away from its dependence on low-cost manufacturing.
Analysts point out that FDI in Vietnam - like the rest of Southeast Asia, with the exception of Singapore and to a limited extent Malaysia - gives a very limited contribution to technology diffusion. Typically foreign-invested firms import all the machinery and all the value-adding intermediate goods and simply employ a cheap labor force to assemble. This pattern contributes to the large trade deficit with other Asian countries. This deficit is only partially compensated by the surplus with the US and the European Union. Vietnam gains very little from this.
The fear is that the country could fall into a "middle income trap" like Indonesia, Thailand and Malaysia, analysts say. Vietnam joined the World Bank’s lower-middle income bracket in 2009, with gross national income per capita rising to $1,755 in 2012, from $110 two decades earlier.
“If Vietnam continues to try to lure cheap labor investment, it will fall into the middle income trap,” Thomas Jandl, an East Asia expert at the Washington-based American University who has published on Vietnam's development models, told Vietweek.
“It will get stuck with industries that provide jobs, but without increasing productivity and therefore without improving the lives of the people further,” he said.
It is in this context that Vietnam has to address the make-or-break question of upgrading human skills or facing the same problem that Thailand did in the mid-1990s: labor too costly for low-skill jobs, but lacking the skills for high-wage jobs.
Thailand's industrial boom from the mid-80s to the late 90s created lots of factory jobs for migrants from the farm. That lifted their earnings in the short run, but did not equip them with training or skills for a more knowledge-intensive economy. In 1995 less than half of Thai children completed high school. Skills shortages made it hard for industries to move up the product quality or technology ladder.
“The [Thailand] crisis of 1997-98 was a financial crash, but beneath that was a real-economy problem of diminished export competitiveness in traditional labor-intensive manufacturing, accompanied by a slow and costly transition to more skill-intensive activities,” said Ian Coxhead, an economics professor at the University of Wisconsin-Madison.
Your own backyard in an ‘unjust world economy’
But for some, the debate on skills shortages risks becoming unfair to Vietnam and other developing countries.
The common discussion is that it is Vietnam's fault if its working force is poorly paid as Vietnam is unable to provide better-educated workers for international investors. But the problem with this argument is that in most countries (including the US and Western Europe) employers try to push wages as low as they can using all sorts of arguments, analysts say.
“There is great difference with the way in which the international system worked before the neoliberal counter-revolution in the late 1970s. The fundamental reason for low wages is that the wealth distribution is increasingly polarized, with the richest 250 people in the world controlling the same income of the poorest 3 billion combined,” Masina said.
“Thus, while the super rich have accumulated immense wealth, developing countries are pushed to compete with one another in a ‘race to the bottom’ in terms of wages and working conditions,” he said.
In that context obviously there is no easy solution for a developing country but “at least it can try to make its own strategies and try to obtain the best possible outcomes from an unjust world economy,” Masina said.
For Vietnam, the most onerous but important task is apparently to overhaul an education system that has not emphasized innovation and independent thinking.
Experts say the biggest hurdle facing Vietnam's education sector is reform of higher education. Higher education expanded very fast, universities tend to hire their own graduates so weaknesses get prolonged, lecturers are under pressure not to fail students, curricula are not always up to date, and there is little in the way of a culture in universities of teaching quality as opposed to quantity, experts say.
They have repeatedly warned that the poor quality of universities will hinder Vietnam's economic growth. A World Bank report last December also lamented the "shortage of workers with the right skills" that has bedeviled the corporate sector.
“As long as Vietnamese students don't get the independent thinking and problem solving skills, companies will not bring the higher-end jobs to Vietnam,” a Vietnamese educator said on condition of anonymity.
“So there is a need for systemic change in the way you think about education,” he said.
As part of the across-the-board education shakeup announced last October, starting this June Vietnam will require fewer subjects, cutting the list from six to four, on the high school exam. The education ministry is also looking to give at least 30 universities across the country greater flexibility in recruitment, meaning they could apply their own criteria when judging students before deciding whether they would admit them.
These moves are indicative that Vietnam is looking to put less weight on a rigid examination system, experts say. Plans are also underway to amend textbooks that have raised academic hackles for promoting memorization and rote learning.
A national education council was set up this week with Prime Minister Nguyen Tan Dung as its chair. At the launch of the council on Tuesday (February 25), Dung again stressed that comprehensive education reform would have to deliver “feasible” and “practical” results.
Although the government may plan to turn over a new leaf for its education sector, analysts say it is too early to judge.
“The shakeup identifies many important issues to be addressed,” the Vietnamese educator said, “but the problems in the education system are structural and deep, and successful implementation will be another issue entirely.”
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