Productivity is the key to sustained growth and a coherent national technology policy and increased investment in higher education will pave the way for Vietnam to catch up with other Asian industrial giants, UN Resident Coordinator John Hendra writes.
This month has marked a turning point in Vietnam’s long road from isolation to international integration. Accession to the World Trade Organization as its 150th member, the country’s nomination to join the United Nations Security Council in 2008 and the opportunity to host this month’s APEC Economic Leaders’ Meeting all symbolise the country’s extraordinary re-emergence on the international stage.
This rare triple success, plus the most recent announcement by US chip maker Intel that it will invest $1 billion in Vietnam, in the process creating 4,000 new jobs in what will be the company’s largest assembly and test facility globally, reinforces that Vietnam is ready to take its place among the successful industrialisers of East Asia. This may sound like an ambitious claim, but it is justified by the country’s recent economic performance.
Over the past two decades very few countries have managed to sustain rates of economic growth as high as Vietnam’s. Of the 176 countries for which the United Nations has reasonably accurate data, only 12 have recorded average growth rates in excess of 6 per cent per year from 1985 to 2004. Of these, six are located in the East Asia region including Vietnam (the others are China, the Republic of Korea, Malaysia, Singapore and Thailand). This is a very exclusive club, and one that Vietnam can take great pride in joining.
But, economists often point out that development is not something that happens overnight. Recording high rates of growth for a year or two is great but is not enough. It is important to take the long-term view. The kind of transformation experienced by the successful East Asian industrialisers required sustained rapid growth over a long period of time. From this perspective, Vietnam’s journey towards prosperity has only just begun.

Growth spurts
Vietnam’s economy is now four times larger than it was in 1986. This is a tremendous achievement, but in comparison with East Asia’s industrialisers, it is just the beginning. Between 1961 and 2005 Singapore’s economy grew 30-fold, and the Republic of Korea’s 24-fold. Malaysia’s real economy in 2005 was 20 times larger than it had been in 1961. We have every reason to believe that Vietnam will replicate this experience. But much of the hard work remains to be done.
The UNDP Human Development Report 2006 launched recently once again emphasised that economic growth is not an end in itself, but rather a means to greater human development. In the United Nations we view human development as the realisation of human potential and the placing of well-being and dignity of people at the heart of the development agenda.
The experience of the East Asian industrialisers backs this up. Prosperity has helped most people in these countries to live longer, healthier lives, to gain access to high quality education and to enjoy a standard of living that their grandparents could only dream of. Just to cite a few revealing statistics, life expectancy at birth in Korea rose from 54 to 77 years over this period, and in Singapore from 63 to 79 years. The infant mortality rate dropped from 72 to 10 per 1,000 live births in Malaysia and from to 90 to five in Korea. Now only 11 per cent of women in the labour force work in agriculture in Malaysia, as compared to 44 per cent in 1980.
How did the East Asian industrialisers achieve such remarkable results? In order to answer this question we must first be clear about the causes of economic growth. To put it simply, growth occurs when people who are not working enter the labour force, and when people already in work produce more goods or services, or more valuable goods and services, per day, month and year. In other words, increasing productivity is the source of economic growth.
Countries at the earliest stages of development can grow very quickly because productivity levels are low. Average productivity goes up when a farmer plants improved rice seeds and thus increases rice yields on her small farm. Productivity rises even faster when her daughter, who had previously worked just a few days per year on the farm, leaves the village to work in a garment factory. Vietnam, which is still a largely agrarian economy, has achieved high rates of growth largely through these kinds of changes over the past two decades.
At the more advanced stages of development, fewer opportunities exist to increase productivity by reducing underemployment or by relocating labour from farm to factory. Sustaining growth in middle-income economies requires a continuous process of technological upgrading in all sectors, but particularly in manufacturing where the potential for productivity growth is greatest. As shown in the table taken from UNCTAD’s Trade and Development Report 2006, East Asia’s industrialisers have recorded remarkable progress in manufacturing and export markets for manufactures. Between 1980 and 2003, these countries have more than doubled their share of manufacturing value added and tripled their share of world exports of manufactured goods. Contrast this performance to Latin America and Africa, which both lost ground against Asia and the developed economies. The increase in China’s share of world manufacturing and manufactured exports is particularly striking.

Double sided coin
But Asia’s industrialisers have done more than just produce and trade more manufactured goods. These countries have boosted output specifically in technology-intensive manufacturing. Korea, Mexico and Brazil all relied heavily on labour and resource intensive industries in 1980. But by 2003 Korea was mostly a producer of technology-intensive goods, while the structure of industrial production in Mexico and Brazil had hardly changed at all.
How did the East Asia’s successful industrialisers manage to compete so successfully in high-technology products? This is one of the questions addressed in this year’s Trade and Development Report published by the UN Conference on Trade and Development. The report, entitled Global Partnership and National Policies for Development, is freely available online in six languages at www.unctad.org.
According to UNCTAD, Asia’s industrialisers have harnessed the power of international integration to drive the process of technological upgrading at home. In combining outward orientation with national technology policies, they have maximised the benefits of trade and investment liberalisation for the domestic economy. Although the precise technology policies adopted have varied from country to country, these policies share in the common objective of promoting the efficient domestic production of technology and knowledge-intensive products and services.
East Asian industrialisation has consisted of a virtuous circle of investment leading to export growth leading to higher profits leading to more investment. The trade and investment liberalisation driven by WTO has contributed to productivity growth by providing access to the world’s largest markets and to new technologies through foreign investment and licensing, enabling firms to reap the benefits of economies of scale and scope.
But, the UNCTAD Report argues that liberalisation in itself is not enough. Countries can get stuck at low levels of productivity, specialising in cheap labour and natural resource exploitation. As the authors note, “FDI inflows and export promotion may reinforce host countries’ existing comparative advantage based on the relative abundance of natural resources or cheap labour, ignoring the importance of productivity gains and structural transformation that is at the heart of the rationale for proactive trade and industrial policies.”
East Asian countries did not rely on their traditional comparative advantage in labour and resource intensive exports. National technology policies were formulated to help national firms acquire a comparative advantage in knowledge and innovation. The specific form that these policies have taken has depended on the country’s initial conditions and institutional characteristics. However, some common themes do emerge.

Knowledge is key
A vital component of national technology policy is the development of world-class universities and research institutes, both to train engineers, scientists and managers, and to create domestic research and development capacity.
Overseas education can contribute to the development of domestic capacity. For example, there are as many Asian PhD students enrolled in the engineering departments of US universities as there are American students, and many of these Asian scholars will return to their home countries to take up teaching and research jobs once they have completed their degrees. Policies are needed to attract more of these highly skilled technologists back home.
Paying higher salaries at national universities and research institutes is part of the answer, but it is not enough. Professors and researchers need world-class laboratory facilities and working environments that place a premium on excellence and achievement. Universities and research institutes also need autonomy to work without interference and to respond quickly to demand from industry. Technology policy must also reduce the cost of acquiring knowledge to domestic firms. Competitiveness in technology-intensive industries comes from highly specialised knowledge, and this knowledge is often too expensive for small firms acting alone.

A helping hand
The government can help firms acquire this knowledge through public sector research institutions and through government programmes that link up private sector universities and research institutes to domestic and foreign companies. The government can also acquire best practice technologies and make them available to selected firms. This kind of support for domestic companies is consistent with WTO rules, and is used in advanced as well as developing economies.
Competitiveness at the firm level comes from economies of scale and scope. Larger companies have the resources to finance start-up costs, knowledge acquisition, research and development and the development of industrial processes. It is not a coincidence that high tech industries like telecommunications are dominated by massive industrial conglomerates.
WTO membership is a necessary first step to achieving economies of scale and scope, since access to the world’s largest international markets generate the levels of product demand not available in the domestic market. But, market access is not enough. Asia’s industrialisers have promoted the growth of large private sector firms through directed credit, support for venture capital funds and other mechanisms. Most importantly, they have removed obstacles to the growth of large private firms.
Foreign direct investment has played a greater role in Southeast Asia than in the earlier industrialisers in Northeast Asia.
The widespread use of performance requirements, particularly local content rules, helped to link foreign and domestic companies and to encourage technological transfer. Foreign exchange balancing, which obligated foreign companies to finance their imports through their own exports, helped to reduce pressure on the balance of payments that often accompanies upswings in FDI. As long as such provisions do not violate the principle of national treatment or impose quantitative restrictions they are still consistent with WTO rules. However, bilateral investment treaties often impose more restrictions on the use of performance requirements than WTO.
Countries must also pay close attention to the exchange rate, which is the most important macroeconomic ‘price’ in determining international competitiveness. An overvalued exchange rate encourages firms to use more imported inputs and makes exporting more difficult.
The exchange rate cannot be undervalued in an open economy, as this would lead to price inflation and impose a heavy burden on fiscal policy. But governments should not be tempted to use an overvalued exchange rate to reign in inflation.
Some tools used by the Asian industrialisers are no longer available to developing country members of WTO. The use of industrial tariffs to protect domestic industries is restricted under the terms of each country’s accession agreement. Some kinds of performance requirements on foreign investors are no longer allowed. Subsidies that target specific firms and that give them an advantage over their competitors are not permitted.
Vietnam cannot simply replicate the development strategies of the Asian industrialisers. Every economy has its own initial conditions and institutions, and policies much be tailored to meet the specific needs of each country. Nevertheless, Vietnam can learn some important lessons from successful industrialisers. Perhaps the most relevant to Vietnam is the need for a coherent national technology policy to acquire comparative advantage in knowledge and technology-intensive industries. Developing such a policy, and increasing investment in key areas such as higher education, should lead to greater levels of productivity and industrialisation, enhanced economic growth and ultimately much greater levels of human development.

Source: Vietnam Investment Review