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Labor Productivity in Vietnam

Data Analysis and Policy Recommendations

Nguyen Duc Thanh, PhD.


Vietnam Institute for Economic and Policy Research (VEPR)
UEB, Vietnam National University (VNU)

Addis Ababa, November 2017


Outline

• Vietnam Economic Performance in the last three


decades

• Low Middle Income Trap: Productivity Challenge

• Implications and Recommendations


Basics of Viet Nam

Facts:
Capital: Ha Noi
Largest cities: Ho Chi Minh City, Ha Noi, Da
Nang, Hai Phong, etc…
Area: 331,690 sq km2
Population: 92.71 millions (2016)
GDP: USD: 205.3 billion (2016)
GDP per capita: 2.214 USD (2016)
GDP per capita (PPP): 6.034 USD (2016)

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Economic Performance:
GDP and GDP per capita, 1992-2016 (bil. USD)
210000 7000

180000 6000

150000 5000

120000 4000

90000 3000

60000 2000

30000 1000

0 0

GDP (current mil. US$) (lhs) GDP per capita (current US$) (rhs)

GDP per capita, PPP (current international $) (rhs)

Source: WB (2017) 4
Economic Performance:
Merchandise Exports and Imports, 1992-2016 (bil. USD)
200

160

120

80

40

Merchandise exports (current bil. US$) Merchandise imports (current bil. US$)

Source: WB (2017)
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Openness and Net Export, 1990-2016 (% GDP)
200.00

150.00

100.00

50.00

0.00

-50.00

net exports exports imports trade openness

Source: Author’s calculation from CEIC database, GSO


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FDI inflows, 1991-2016
80000 14.00%

70000 12.00%

60000
10.00%
50000
8.00%
40000
6.00%
30000
4.00%
20000

10000 2.00%

0 0.00%

Committed FDI (left) Realized FDI (mil. USD, rhs) Realized FDI /GDP (%, rhs)

Source: Authors’ calculation from GSO, MPI and CEIC database

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Economic Structure:
Contribution to GDP by Sector, 2005-2015 (%)
50%

40%

30%

20%

10%

0%
2005 2010 2011 2012 2013 2014 2015
State Non-State Non-State: Private FDI Sector

Source: General Statistics Office (2016)

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Early Middle Income Trap: Productivity Challenges

• Economic growth rate declines

• Productivity challenges: Data analysis

• Factors:
• Structural issues
• Labor supply
• Institutions and governance
A Closer Look at Economic Growth Rate, 1990-2015 (%)

12
7.3% in 1990-2000
10
6.5% in 2000-2010
5.7% in 2010-2015
8

0
199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016
GDP growth

Source: GSO (2017)


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The trend of economic growth in Vietnam, 1991-2016 (%)
12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
1991Q1
1991Q4
1992Q3
1993Q2
1994Q1
1994Q4
1995Q3
1996Q2
1997Q1
1997Q4
1998Q3
1999Q2
2000Q1
2000Q4
2001Q3
2002Q2
2003Q1
2003Q4
2004Q3
2005Q2
2006Q1
2006Q4
2007Q3
2008Q2
2009Q1
2009Q4
2010Q3
2011Q2
2012Q1
2012Q4
2013Q3
2014Q2
2015Q1
2015Q4
2016Q3
GDP Growth De-seasonal GDP growth Trend
Source: Author’s calculations

The long-term trend of the economy’s growth has declined remarkably over the past years. The main
cause of this was the decreasing total factor productivity (TFP) rather than factors like capital,
investment or labor. Thus, macro policies in the future should aim at creating a healthy business
environment with equality and stability.
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Vietnam’s GDP growth has followed
a declining trend since 2001

Source: Conference Board Total Economy Dataset 12


Vietnam is no longer a stellar performer
Average
Quốc gia 2012 2013 2014 2015 2016* 2012-2016
China 7.7 7.8 7.3 6.9 6.6 7.3
Cambodia 7.3 7.4 7.1 7.0 7.0 7.2
Laos 7.8 7.5 6.7 6.8 6.8 7.1
India 5.1 6.6 7.2 7.6 7.4 6.8
Philippines 6.8 7.1 6.2 5.9 6.4 6.5
Bangladesh 6.5 6.0 6.1 6.6 7.1 6.5
Vietnam 5.2 5.4 6.0 6.7 6.0 5.9
Indonesia 6.0 5.6 5.0 4.8 5.0 5.3
Malaysia 5.6 4.7 6.0 5.0 4.1 5.1
Sri Lanka 6.3 3.4 4.9 4.8 5.0 4.9
Pakistan 3.8 3.7 4.1 4.0 4.7 4.1
Thailand 6.5 2.7 0.8 2.8 3.2 3.2
Singapore 3.4 4.7 3.3 2.0 1.8 3.0
Hong Kong 1.7 3.1 2.7 2.4 1.5 2.3
Source: ADO 2016 (Recited from Vu Minh Khuong (2016)) 13
GDP Growth: Vietnam vs. Miracle Economies
10-YMA GDP Growth
11

10

China
Percent

8 S. Korea
Taiwan
Vietnam
7%
7

t10

t11

t12

t13

t14

t15

t16

t17

t18

t19

t20
t0

t1

t2

t3

t4

t5

t6

t7

t8

t9

Source: Vu Minh Khuong (2016)


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Growth Accounting Decomposition

• 𝑔_𝐺𝐷𝑃𝑡 = 𝑔_𝐴𝐿𝑃𝑡 + 𝑔_𝐸𝑀𝑃𝑡 (1)

• 𝑔_𝐴𝐿𝑃𝑡 = 𝑘_𝑐𝑜𝑛𝑡𝑏𝑡 + 𝑔_𝑇𝐹𝑃𝑡 (2)

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GDP slowdown since 2005 was driven
by ALP growth decline
GDP, ALP, and EMP Growth
(10-YMA)
8

5
Percent

GDP Growth
4
ALP Growth
EMP Growth
3

0
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
Source: Vu Minh Khuong (2016) 16
ALP growth slowdown since 2005 was due to
declining capital deepening growth and poor TFP growth
ALP Growth and Contribution of Capital Deepening and TFP
(10-YMA)
7

4
Percent

ALP Growth
3
Capital deepening contb
TFP Growth
2

-1
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
17
Source: Vu Minh Khuong (2016)
Contribution of capital deepening to ALP growth (10-YMA)
Vietnam vs. Miracle Economies

Contribution of capital deepening to ALP growth


(10-YMA)
8

5
China
Percent

4 S. Korea
Taiwan
3
Vietnam

0
t0

t1

t2

t3

t4

t5

t6

t7

t8

t9

t10

t11

t12

t13

t14

t15

t16

t17

t18

t19

t20
Source: Vu Minh Khuong (2016) 18
TFP Growth:
Vietnam vs. Miracle Economies
10-YMA TFP Growth Rate
6

3
China
Percent

S. Korea
2 Taiwan
Vietnam

0%
0

-1
t0

t1

t2

t3

t4

t5

t6

t7

t8

t9

t10

t11

t12

t13

t14

t15

t16

t17

t18

t19

t20
Source: Vu Minh Khuong (2016) 19
GDP growth decomposition by sector
2000-14 2000-07 2007-2014
Vietna Vietna Vietna
China VN-CN China VN-CN China VN-CN
Sector m m m
(1) (2) (1)-(2) (3) (4) (3)-(4) (5) (6) (5)-(6)
Overall Economy
GDP growth (%) 6.7 9.4 -2.7 7.7 10.3 -2.6 5.7 8.5 -2.8
ALP Growth (%) 4.5 8.9 -4.4 5.4 9.7 -4.3 3.5 8.1 -4.6
EMP Growth (%) 2.2 0.5 1.8 2.3 0.6 1.7 2.2 0.4 1.8
Agriculture
GDP growth (%) 4.7 6.0 -1.4 4.4 5.4 -1.0 4.9 6.7 -1.8
ALP Growth (%) 4.2 9.4 -5.2 4.8 7.7 -2.8 3.5 11.2 -7.6
EMP Growth (%) 0.5 -3.4 3.9 -0.4 -2.3 1.9 1.3 -4.5 5.8
Mining
GDP growth (%) 7.8 8.9 -1.1 7.3 12.1 -4.8 8.3 5.8 2.6
ALP Growth (%) 5.4 7.8 -2.3 1.0 10.5 -9.6 9.9 5.0 4.9
EMP Growth (%) 2.4 1.1 1.2 6.3 1.5 4.8 -1.6 0.8 -2.3
Manufacturing 0.0
GDP growth (%) 4.9 8.6 -3.7 9.7 10.3 -0.6 0.1 6.8 -6.7
ALP Growth (%) -1.5 6.2 -7.6 2.3 7.4 -5.1 -5.2 5.0 -10.2
EMP Growth (%) 6.4 2.4 4.0 7.4 2.9 4.5 5.3 1.8 3.5
Utility
GDP growth (%) 7.9 7.3 0.6 8.6 11.5 -3.0 7.2 3.1 4.1
ALP Growth (%) -0.3 6.9 -7.1 -2.3 8.7 -11.1 1.8 5.0 -3.2
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EMP Growth (%) 8.2 0.4 7.7 10.9 2.8 8.1 5.4 -1.9 7.4
GDP growth decomposition by sector
2000-14 2000-07 2007-2014
Sector Vietnam China VN-CN Vietnam China VN-CN Vietnam China VN-CN
(1) (2) (1)-(2) (3) (4) (3)-(4) (5) (6) (5)-(6)
Contruction
GDP growth (%) 6.7 11.0 -4.4 10.9 10.7 0.2 2.4 11.4 -9.0
ALP Growth (%) -1.5 7.3 -8.8 -0.3 6.9 -7.1 -2.8 7.8 -10.6
EMP Growth (%) 8.2 3.7 4.5 11.1 3.8 7.3 5.2 3.6 1.6
Trade
GDP growth (%) 6.0 10.1 -4.1 8.7 9.6 -0.9 3.4 10.6 -7.2
ALP Growth (%) 2.8 6.2 -3.4 4.6 6.7 -2.1 0.9 5.7 -4.7
EMP Growth (%) 3.3 3.9 -0.7 4.1 2.9 1.2 2.5 5.0 -2.5
Transport, Storage, and
Telecomm
GDP growth (%) 6.2 7.9 -1.7 9.4 9.4 0.0 3.1 6.4 -3.4
ALP Growth (%) 5.2 5.7 -0.5 8.9 6.9 2.0 1.4 4.4 -3.0
EMP Growth (%) 1.1 2.2 -1.1 0.5 2.5 -1.9 1.7 2.0 -0.3
Financial, Real Estate,
Business Services
GDP growth (%) 5.0 12.1 -7.1 6.2 12.8 -6.6 3.8 11.4 -7.6
ALP Growth (%) -5.4 9.4 -14.8 -9.8 10.0 -19.8 -1.1 8.8 -9.9
EMP Growth (%) 10.4 2.7 7.7 16.0 2.8 13.2 4.8 2.6 2.3
Public, Community, Social,
and Personal Services
GDP growth (%) 6.7 11.5 -4.8 6.6 12.6 -6.0 6.8 10.3 -3.6
ALP Growth (%) 3.2 8.3 -5.1 -0.5 9.5 -10.0 6.9 7.2 -0.3
EMP Growth (%) 3.5 3.1 0.4 7.1 3.1 4.0 -0.2 3.1 -3.3
Source: APO Productivity Database 2016 21
Labor Productivity in Agriculture
Vietnam vs. Asian Peers
Country 2000 2005 2010 2015
Value-added/Worker (2010 US$)
Vietnam 585 661 719 806
S. Korea 9674 13067 19213 26500
Malaysia 10426 12910 15962 19818
Indonesia 1545 1777 2124 2629
Thailand 1446 1643 1860 2106
China 774 930 1160 1465
Cambodia 575 652 767 798
Vietnam Standardized to 1.0
S. Korea 16.5 19.8 26.7 32.9
Malaysia 17.8 19.5 22.2 24.6
Indonesia 2.6 2.7 3.0 3.3
Thailand 2.5 2.5 2.6 2.6
China 1.3 1.4 1.6 1.8
Cambodia 1.0 1.0 1.1 1.0
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Source: World Development Indicators Database 2016
Average Real Wage Increases Quickly

Annual Real Wage, 2004-2015


(deflated by GDP deflator, 2010 as base year, million VND)
• Average real wage 70

doubled during the


60
2004-2015 period.
• Increasing payments 50

on social insurance,
40
health insurance,
and unemployment 30
insurance.
20
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor Income I Labor Income II

Labor income I consists of wages, bonus and subsidies.


Labor incomes II consists of all components of labor income I and payments
on social insurance, health insurance and unemployment insurance.

23 Source: VEPR (2017)


Average Wage and Productivity Growth
An International Comparison
Wage and Productivity Growth
• Productivity growth in Vietnam in Viet Nam and Asian Countries 2004-2015
is significant (4.4%). (Average annual real wage growth deflated by the CPI, %)

• However, the average wage


Productivity Average
growth rates (5.8%) outpaced Country
Growth Rates Wage Growth Rates
the productivity growth rate.
• Calculation using Vietnam China 9.1 8.8

Enterprise Surveys show that Indonesia 3.6 2.6


during the 2004-2009 period, Malaysia 2.1 2.5
wage grew less than labor Philippines 2.6 0.4
productivity but wage growth Singapore 1.8 1.2
exceeded productivity growth Thailand 2.7 3.5
since 2009.
Viet Nam 4.4 5.8

Notes: Monthly earning is in 2014 for Thailand and 2015 for other countries.
Source: VEPR’s Calculation from International Labor Organization (ILO) Database
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Young population but soon ending
the demographic dividend
120000

100000

80000
Thousands

60000

40000

20000

0
1970
1975
1950
1955
1960
1965

1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
Year

0-14 (thousands) 15-59 (thousands) 60 or over (thousands)

Source: GSO (2014)


25
Population Pyramid, 2014

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Minimum Wage Growth Trend
o Regional Minimum Wage Growth: much higher than that of CPI and GDP per capita.
Growth Pattern of Regional Minimum Wages, CPI, and per-capita GDP, 2009-2016 (2008=100)
600

500

400

300

200

100

0
2009 2010 2011 2012 2013 2014 2015 2016
MW category I MW category II MWcategory III
MW category IV GDP per capita CPI

Notes: Before October 2011, regional minimum wage applicable to domestic enterprises.
27 Source: VEPR (2017)
Minimum Wage and Productivity Growth
An International Comparison
Ratio of Minimum Wage to Labor Productivity, 2007-2015
• Rapid increase in ratio 60%

of minimum wage to 50%


labor productivity:
40%
from 25% in 2007
to 50% in 2015. 30%

20%
• Labor productivity in
this comparison is 10%
measured as GDP/total
number of workers. 0%
2007 2008 2009 2010 2011 2012 2013 2014 2015

China Indonesia Philippines Thailand Viet Nam

Notes: a Minimum wage before 2005 applicable to Beijing. b Monthly minimum wage computed from
hourly minimum wage (8 hours x 23 days); c Minimum wage rate applicable to Non-Agricultural;
d Minimum wage rate in Bangkok; e Minimum wage rate of category I, for domestic firms.

Productivity is calculated as GDP/Labor force.


28 Source: VEPR’ Calculation using Data from WDI and CEIC Database
Business Climate Indices
INDICES 2017 2016 2015 2014 2013

TI Corruption Perceptions 113 119 119 116

Heritage Foundation Index of 147 131 148 148 140


Economic Freedom (points) (52,4) (54) (51,7) (51,7) (51,0)

WB Doing Business 82 90 78 99 99

WEF Global Competitiveness 55 60 56 68 70


(points) (4,36) (4,31) (4,3) (4,18)

Source: Transparency International, Heritage Foundation,


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World Bank, World Economic Forum
World Bank’s Doing Business Index
Rank 2018 (China) 2017 (China) 2016 (China) 2015 (China) 2014 (China)

Overall rank 68 (78) 82 (78) 90 (84) 78 (90) 99(96)


Starting a business 123 (93) 121 (127) 119 (136) 125 (128) 109 (158)
Construction permits 20 (172) 24 (177) 12 (176) 22 (179) 29 (185)
Registering property 63 (41) 59 (42) 58 (43) 33 (37) 51 (48)
Getting electricity 64 (98) 96 (97) 108 (92) 135 (124) 156 (119)
Getting credit 29 (68) 32 (62) 28 (79) 36 (71) 42 (73)
Protecting investors 81 (119) 87 (123) 122 (134) 117 (132) 157 (98)
Paying taxes 86 (130) 167 (131) 168 (132) 173 (120) 149 (120)
Trading across borders 94 (97) 93 (96) 99 (96) 75 (98) 65 (74)
Enforcing contracts 66 (5) 69 (5) 74 (7) 47 (35) 46 (19)
Resolving insolvency 129 (56) 125 (53) 123 (55) 104 (53) 149 (78)

Source: World Bank (2017)


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Policy Discussion
• Weak TFP growth was the main culprit of Vietnam’s GDP
growth slowdown.
• Weak TFP growth is due to several factors:
• lack of vigorous efforts in knowledge acquisition and
innovation;
• Ineffective control of corruption, which causes inefficiency in
resources allocation and management
• Ineffective coordination in promoting structural change,
shifting resources from lower to higher value activity.
• The private sector to take a lead in productivity
movement.
• Opportunities from the ICT revolution and the strong
presence of FDI in the country’s productivity drive.

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Way Ahead
• Set forth the productivity targets.
• The minimum labor productivity level of OECD countries can be used the
benchmark, for the overall economy as well as for individual sectors.
• Establish a Vietnam National Productivity Council (VNPC), comprising
representatives from government, business, industrial associations,
unions, and academia.
• Create a productivity fund to promote productivity improvement,
technology acquisition, and R&D activities.
• Launch Vietnam’s Productivity Movement.
• Monitor the nation’s progress in narrowing productivity gaps with the
strategic benchmarks, making this information public and accessible to
all people through the internet and mobile technologies.
• Vigorously disseminate international best practices on productivity.

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Japanese and International Experiences-Based
Policy Measures
• VDF/GRIPS – JICA – MPAC to promote the policy ideas and develop
contents.
• Introduction and classification of policy measures; identifying key
factors for success extracted from international experiences and
cautious applications to Vietnam.
• Introducing: Five S, Keizen, Shindan and handholding, Kosetsushi,
• TVET-industry linkage, FDI-local firm linkage, Benchmarking, Twinning,
• Ginno Jisshusei (technical internship abroad),
• Productivity institute (or center),
• Funds, subsidies and support for productivity enhancement,
• Mindset change,
• National productivity movement

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Thank you!
Q&A

Contact:
Nguyen Duc Thanh, PhD.
Email: nguyen.ducthanh@vepr.org.vn
Vietnam Institute for Economic and Policy Research (VEPR),
University of Economics and Business -Vietnam National University, Hanoi.
R.707, Building E4, 144, Xuân Thủy Street, Cầu Giấy District, Hanoi.
Email: info@vepr.org.vn
Tel: 04.37547506 ext 714/ 0975608677
Fax: 04.37549921

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