International organizations and experts have recommended many measures for countries in the world to dodge the middle income trap. Vietnam relies on these textbook-styled advices to work out measures while its middle income trap has its own characters.

Textbook-style advices

When the per capita income of a country reaches from $1,000 to $10,000 per annum, that country is considered to attain the middle income level. Vietnam’s per capita income has reached more than $1,000, so it is listed as low-level middle income country.

The concept behind the “middle-income trap” is quite simple: It's easier to rise from a low-income to a middle-income economy than it is to jump from a middle-income to a high-income economy. That's because when you're really poor, you can use your poverty to your advantage. Cheap wages makes a low-income economy competitive in labor-intensive manufacturing. Factories sprout up, creating jobs and increasing incomes. Every rapid-growth economy in Asia jumpstarted its famed gains in human welfare this way.

However, that growth model eventually runs out of steam. As incomes increase, so do costs, undermining the competitiveness of the old, low-tech manufacturing industries. Countries then move “up the value chain,” into exports of more technologically advanced products, like electronics. But even that's not enough to avoid the “trap.” To get to that next level – that high-income level – an economy needs to do more than just make stuff by throwing people and money into factories. The economy has to innovate and use labor and capital more productively. That requires an entirely different way of doing business. Instead of just assembling products designed by others, with imported technology, companies must invest more heavily in R&D on their own and employ highly educated and skilled workers to turn those investments into new products and profits. It is a very, very hard shift to achieve. Thus the “trap”.

Most of scholars recommend the following solution to dodge the middle income trap: directing public investment from labor-intensive industries into education and training, renovating science and technology, research and development to progress to the knowledge-based economy.

Specifically, there are two ways. The first is opening new industries with high added values, for example the hi-tech industry. The second is among existing industries, middle income countries should try to reach processing stages of higher values while strengthening marketing, building brands to reach the world market.

In general, middle income economies have taken full advantages or get exhausted of capital and labor productivity. If they do not transmit to a new economic model with higher labor productivity, these economies will be unable to grow further.

The characters of Vietnam’s middle income trap

Vietnam attains the middle income level by the way that is quite different from common. The country reaches the middle income through exporting minerals, raw materials or processing industry of low values.

In addition, its industry and processing industry is simple and backward with the lowest added value in Southeast Asia. The exaggerated real estate prices make faster growth. These economic “drive-forces” are unstable and they do not depend highly on human, with their labor and creativeness. One more thing, developing these factors does not lead to the construction of foundation (material and non-material) for industry or a more advanced economic model. This is the first character of Vietnam’s middle income level.

If Vietnam’s economic model is similar to that of the common case of middle income trap in the world, it will have to use science-technology, renovation-creativeness, education and training to dodge the trap. But if its model is not of this type, adding more knowledge may be not good.

The second character is the reason of low competitiveness.

Vietnam’s industry is low competitive and its production and processing costs are higher than that of the Southeast Asia region. International scholars supposed that Vietnam’s production costs are high due to high wages for workers. But wages of Vietnamese workers are not higher than that of countries in the region.

In Vietnam, production costs is high due to the low effectiveness of the production-business process, meaning that the low effectiveness of capital, of labor productivity and labor.

It is obvious that Vietnam doesn’t make correct investment, does not have a consistent policy on industrialization, suffers from high losses and manages and uses capital ineffectively.

In terms of labor productivity, Vietnam has not taken full advantage of labor effectiveness, not reached its peak. But the most important thing is Vietnam has not created a favorable, market-directed environment for the entire economy. Vietnam’s production-processing costs are high because of weakness in economic management.

In that case, the simple, effective and cheap solution is improving the mechanism to create a good business environment and attaching importance to science-technology and hi-tech.

Many international scholars do not understand while the TFP (total factor productivity) increases but it does not effectively contribute to growth. The reason is that they consider the increase of TFP as the certain factor promoting growth and do not pay attention to “side-line” conditions.

At an international workshop on science and technology, Taiwanese and Malaysian experts cited statistics that they could not explain. They even doubted the statistics as wrong. This is data on the contribution of science-technology (TFP) to the economy in comparison with contribution of other factors, like mechanism and policy improvement.

The author of this article proved them that: Firstly, the data is correct; secondly, this shows that renovation of mechanism needs to be done firstly and more effectively; thirdly, investment in science and technology is still needed because investment in science and technology is a long-term task, which will not bring about good effects immediately, but it will make essential changes which other forms of investment cannot. It is important to place priority in appropriate orders. Vietnam also has similar data and tendency.

Solutions and challenges of Vietnam

The first solution is applying the right economic model and improving its operational mechanism. Investment in science and technology, renovation and creativeness at this moment will not be highly effective, even cause waste.

The fact shows that sci-tech investment in the auto, cement, steel, mechanical engineering and even animal husbandry and farming sectors have not brought about effectiveness, when Vietnam does not hold the sources of materials and the outlets.

The investment in science and technology is ineffective at this time because: with poor mechanism and infrastructure, investment in science and technology cannot take root and prove its ability. Over-investment in some key technological sectors will stretch the imbalance between sci-tech infrastructures of economic sectors, affect the inter-sector combination and lead to imbalance and collapse.

Even Malaysia, which is more developed than Vietnam, in the new economic model named “Malaysia One”, to dodge the middle income trap, it also gives top priority to mechanism improvement. The special element in “Malaysia One” or the new model of Thailand is this policy is put forward by the highest-ranking leaders.

The second solution is to raise labor productivity of existing industries and those that are planned to develop. It means that Vietnam should not upgrade technology and increase labor productivity at all sectors, but only the selected ones.

To raise labor productivity, particularly in upgrading technology, knowledge on technological management, for example technology mapping, is a must, not only experience.

The third solution to dodge the middle income trap is developing some new industries with higher added values; sustainable development to create facilities for developing the economy.

Another solution is renovating education and training to timely provide well-trained human resources for the second (raising labor productivity), and the third solution (developing new industries).

Source: VietnamNet.