Vietnam has the elements in place to continue as an outperformer. (Photo: VNA)
Hanoi (VNA) – COVID-19 has interrupted the country’s journey to become ahigh-performing economy, but the right structural adjustments could help get itback on track, according to McKinsey & Company, a leading US consultant firm.
Withrelatively few recorded COVID-19 cases and fatalities to date, Vietnam now hasan opportunity – and an imperative – to consider its longer-term economicaspirations, even as the country responds to a resurgence of the virus, thecompany says in a recent article looking at the pandemic’s impact on Vietnam’seconomy.
In 2018, McKinseyresearch identified Vietnam as one of 11 recent global outperformers, thanks toits GDP-per-capita growth of more than 5 percent annually for 20 years, inaddition to its successful effort to lift a significant percentage of itspeople out of poverty.
Vietnam hasthe elements in place to continue as an outperformer – for instance, growingdisposable income, continued investment in infrastructure programmes, and anattractive business environment. Adjustments in four broad areas could help thecountry get onto the required growth trajectory.
Firstly, Vietnamwas already attractive as a destination for offshore manufacturing and fortourism before COVID-19. Even as the country addresses the new virus strain,its low level of recorded cases and fatalities has shown that its systems canidentify and manage the outbreak.
This mayposition Vietnam well as international tourism resumes. The country could thenturn its attention to marketing itself as a destination in Asia, where theearliest arrivals may come from when countries open their borders.
In themeantime, tourism and hospitality operators will need to use the opportunity todiversify both tourism products and market segments. Domestic tourism could bepromoted to test the new offerings, but discounts may be needed because of therelatively lower local spending power.
Reattractingand accelerating FDI in the manufacturing sector will also be vital toaccelerate Vietnam’s path to higher growth. Vietnam is well-positioned to go onattracting FDI, especially as manufacturers seek to strengthen and diversifytheir supply chains in response to the frailties the pandemic exposed.
Secondly, thefirm advises Vietnam to expand investments in education and infrastructure toboost productivity and sustain longer-term growth. In education, Vietnam canleverage its clear strengths: a 2017 McKinsey study of the drivers of student performanceidentified it as one of Asia’s high-performing countries. Vietnam, for example,has significantly increased school enrollment at all levels over the past 20years. Primary-school enrollment is virtually universal, ranking only behindJapan’s and higher than the Republic of Korea’s and Hong Kong’s, among otherAsian high performers. Education initiatives could focus on developingcognitive, behavioral, and practical skills and on boosting vocational schools.
Investment ineducation could raise skill levels in the workforce as part of initiatives toincrease productivity, which lags behind that of Vietnam’s regional peers andhas plateaued, despite positive economic growth and ongoing competitiveness inlabor costs. A higher-skilled workforce could attract manufacturers exploringIndustry 4.0 technologies and help to move the country up the value chain intomore productive and higher-earning areas.
As forinfrastructure, investments to redevelop it could be scaled up. Ports arerunning at overcapacity. Ho Chi Minh City and Hanoi need significantinvestments in roads and airports.
Thirdly,McKinsey suggests the country continue focusing on boosting thecompetitiveness of other strategic areas at home – including state-ownedenterprises (SOEs), small and medium-sized enterprises (SMEs), and start-ups – toincrease national resilience. SMEs and the informal sector collectively form acrucial domestic demand engine and will continue to need support, especially inthe short term while growth and incomes remain depressed.
SOEs accountfor one-third of GDP yet grow much more slowly than other companies do, it says.Targeted equitisations, sustainable divestments, and transformation programmescould be considered to make SOEs competitive at home and even more competitiveon the global stage.
In addition,the country could tap the significant unrealised potential of its start-upecosystem. In 2019, 741 million USD was invested in Vietnam’s start-ups,compared with 2.38 billion USD in Indonesia’s. It’s little surprise thatVietnam has created only one unicorn, compared with six in Indonesia. A moreholistic ecosystem effort could remove structural limits on privateentrepreneurship, make financing available for high-potential projects, andprovide fertile incubation structures for high-growth businesses.
Finally, as amajor driver of new energy demand and a country likely to be heavily affectedby climate change, Vietnam could accelerate its journey toward a lesscarbon-intensive future. A new national plan signals a significant effort toenergise this transition. Under the latest proposal, coal is expected torepresent about 37 percent of energy generation by 2025, instead of half aspreviously planned. Renewables would grow to about 25 percent of the mix, from13 percent in the previous version.
This proposalembodies a significant scaling back of plans to develop coal plants, which havecome under pressure and faced challenges in financing over recent years. Vietnamcould look at opportunities to encourage significant new capital investment inthem through strong incentives and conduct a detailed grid-capabilityassessment for a new generation of assets.
♋ Withappropriate post-pandemic responses paving the way for economic recovery, suchadjustments to Vietnam’s economy could go a long way toward realising a futureas a high-performing nation./.
