Vietnam, technology and the middle-income trap

“Vietnam’s economic moment may have finally arrived,” proclaimed the Financial Times of London in a recent editorial.

The rapid growth of agricultural and manufactured exports has propelled economic development for three decades, lifting millions out of poverty.

Now Vietnam is diversifying into high-tech products like electronics and components, including semiconductors, as major global corporations relocate production facilities to Vietnam.

At the annual Vietnam Economic Pulse held today, a policy forum jointly sponsored by UNDP and the Central Institute of Economic Management (CIEM), experts from higher education, research institutes and the private sector discussed prospects for sustaining economic growth through technological deepening and innovation.

Growth has slowed this year because of a post-pandemic falloff in external demand.

Yet long-term prospects are still favourable.

Average GDP growth of 6.5 % over three decades has established Vietnam as one of the best performers in the region, enabling the country to achieve High Human Development status at a relatively low level of national income. Exports have increased at double-digit rates over the same period.

Vietnam has emerged as a vital hub in East Asian supply chains, and its relations with the United States—Vietnam’s largest export market—were recently upgraded. The country’s young population, rising educational attainment and region-leading female labour force participation rates will continue to attract investors.

However, success is not guaranteed. On the eve of the East Asian Financial Crisis in 1998, Malaysia and Thailand were widely seen as the next generation of East Asian Newly Industrializing Countries (NICs), following in the footsteps of the Republic of Korea, Hong Kong, Singapore and Taiwan (China).

Yet productivity growth slowed in the new millennium, weighed down by competition in traditional export markets from mainland China and Vietnam, and weak linkages between foreign and domestic firms.

The “middle-income trap” affects countries in the process of moving from heavy reliance on the production of labour-intensive goods and services to higher value-added, often more technology-intensive production.

Middle-income countries face competition from lower-cost producers for their traditional exports and at the same time from advanced economies in markets for high-tech goods and services.

Relatively few middle-income countries have managed to sustain high rates of productivity growth through the transition and ultimately achieve high-income status.

Most of the successful countries since 1990 were new members of the European Union benefiting from unfettered access to the single market and other forms of EU support.

Vietnam officially achieved lower middle-income status in 2011 and has targeted upper middle-income status by 2030. To achieve this milestone, Vietnam needs to accelerate GDP growth to more than seven per cent per year for the rest of the decade, sustain its export growth, and substantially increase the share of investment in GDP.

Although export growth has slowed in traditional exports like garments, footwear and furniture, Vietnamese companies are still competitive in these markets. However, as living standards rise, wages—and therefore unit production costs — will inevitably follow.

This is good news, as it means that Vietnamese workers will increasingly be employed in higher productivity occupations and earning more money.

But like Malaysia and Thailand, Vietnam will come under pressure from low-cost economies, while diversifying into higher value-added, more technology-intensive production.

To escape the middle-income trap, countries must develop technological and managerial capabilities to help them realise increasing returns to scale, especially in export industries.

Successful countries created robust national innovation systems at an early stage in their development.

Vietnam is a young nation of 100 million people with exceptionally high literacy levels and a deep respect for education. Vietnam’s secondary school system is a global leader among developing countries, and students display a high level of readiness for scientific and technical education.

When it comes to tertiary education, however, university enrolments and public spending on higher education, research, and vocational education lag behind neighbouring countries.

UNESCO data reveal that public expenditure on higher education as a share of national output is about ten per cent below the world average and half of the levels achieved by regional competitors like Malaysia.

Vietnam’s expenditure on research and development as a share of national output is 0.5%, higher than Indonesia and the Philippines but half the level of Malaysia and Thailand, and far below regional leaders like the Republic of Korea, Taiwan (China) and mainland China.

Spending levels aside, Vietnam’s national innovation system suffers from fragmentation and weak linkages to international and domestic private firms. Vietnam has hundreds of public research institutes, but they are small by international standards, under-resourced and lack clear performance targets.

Like other countries in the region, Vietnam can draw on a diaspora of international scholars and technologists, many of whom have acquired advanced degrees overseas and now work in international universities and corporations.

Attracting these individuals back to Vietnam, to teach in universities and lead strategic research projects, could help jump-start the process of building the national innovation system.

Vietnam can achieve a higher growth trajectory through the adoption of new technologies and penetration of export markets for higher value-added goods and services.

Government will need to lead the new push into high tech, increasing spending on higher education and research, and setting performance standards to make these institutions more effective.

However, the government cannot build a national innovation system on its own.

The international and domestic private sector will play a key role, partnering with universities and research institutes to build domestic capabilities, identify new products and processes, and train a new generation of technologists.

Escaping the middle-income trap will require focus, commitment and an unprecedented investment public and private investment effort. International partners—including financial and development institutions, universities and multinational corporations—can also play an important supporting role.

Ramla Khalidi

Ramla Khalidi is the UNDP Resident Representative in Vietnam