Labor Productivity in Vietnam

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) 3

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 0 Merchandise exports (current bil. US$) Merchandise imports (current bil. US$) Source: WB (2017) 5

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 6

FDI inflows, 1991-2016 80000 70000 60000 50000 40000 30000 20000 10000 0 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Committed FDI (left) Realized FDI (mil. USD, rhs) Realized FDI /GDP (%, rhs) Source: Authors calculation from GSO, MPI and CEIC database 7

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) 8

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 10 7.3% in 1990-2000 6.5% in 2000-2010 5.7% in 2010-2015 8 6 4 2 0 199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016 GDP growth Source: GSO (2017) 10

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 The trend of economic growth in Vietnam, 1991-2016 (%) 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% GDP Growth De-seasonal GDP growth Trend Source: Author s calculations 11 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.

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 Quốc gia 2012 2013 2014 2015 2016* Average 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

t0 t1 t2 t3 t4 t5 t6 t7 t8 t9 t10 t11 t12 t13 t14 t15 t16 t17 t18 t19 t20 Percent GDP Growth: Vietnam vs. Miracle Economies 11 10-YMA GDP Growth 10 9 8 7 7% China S. Korea Taiwan Vietnam 6 5 Source: Vu Minh Khuong (2016) 14

Growth Accounting Decomposition g_gdp t = g_alp t + g_emp t (1) g_alp t = k_contb t + g_tfp t (2) 15

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Percent GDP slowdown since 2005 was driven by ALP growth decline 8 GDP, ALP, and EMP Growth (10-YMA) 7 6 5 4 3 GDP Growth ALP Growth EMP Growth 2 1 0 Source: Vu Minh Khuong (2016) 16

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Percent ALP growth slowdown since 2005 was due to declining capital deepening growth and poor TFP growth 7 ALP Growth and Contribution of Capital Deepening and TFP (10-YMA) 6 5 4 3 2 ALP Growth Capital deepening contb TFP Growth 1 0-1 Source: Vu Minh Khuong (2016) 17

t0 t1 t2 t3 t4 t5 t6 t7 t8 t9 t10 t11 t12 t13 t14 t15 t16 t17 t18 t19 t20 Percent Contribution of capital deepening to ALP growth (10-YMA) Vietnam vs. Miracle Economies 8 Contribution of capital deepening to ALP growth (10-YMA) 7 6 5 4 3 China S. Korea Taiwan Vietnam 2 1 0 Source: Vu Minh Khuong (2016) 18

t0 t1 t2 t3 t4 t5 t6 t7 t8 t9 t10 t11 t12 t13 t14 t15 t16 t17 t18 t19 t20 Percent TFP Growth: Vietnam vs. Miracle Economies 6 10-YMA TFP Growth Rate 5 4 3 2 1 China S. Korea Taiwan Vietnam 0 0% -1 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 Sector m m m China VN-CN (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 EMP Growth (%) 8.2 0.4 7.7 10.9 2.8 8.1 5.4-1.9 7.4 20

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 Source: World Development Indicators Database 2016 22

Average Real Wage Increases Quickly Annual Real Wage, 2004-2015 (deflated by GDP deflator, 2010 as base year, million VND) Average real wage doubled during the 2004-2015 period. Increasing payments on social insurance, health insurance, and unemployment insurance. 70 60 50 40 30 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 Productivity growth in Vietnam is significant (4.4%). Wage and Productivity Growth in Viet Nam and Asian Countries 2004-2015 (Average annual real wage growth deflated by the CPI, %) However, the average wage growth rates (5.8%) outpaced the productivity growth rate. Country Productivity Growth Rates Average Wage Growth Rates Calculation using Vietnam Enterprise Surveys show that during the 2004-2009 period, wage grew less than labor productivity but wage growth exceeded productivity growth since 2009. China 9.1 8.8 Indonesia 3.6 2.6 Malaysia 2.1 2.5 Philippines 2.6 0.4 Singapore 1.8 1.2 Thailand 2.7 3.5 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 24

Year 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 Thousands Young population but soon ending the demographic dividend 120000 100000 80000 60000 40000 20000 0 0-14 (thousands) 15-59 (thousands) 60 or over (thousands) Source: GSO (2014) 25

26 Population Pyramid, 2014

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 Minimum Wage Growth Trend 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 27 Notes: Before October 2011, regional minimum wage applicable to domestic enterprises. Source: VEPR (2017)

Minimum Wage and Productivity Growth An International Comparison Ratio of Minimum Wage to Labor Productivity, 2007-2015 Rapid increase in ratio of minimum wage to labor productivity: from 25% in 2007 to 50% in 2015. Labor productivity in this comparison is measured as GDP/total number of workers. 60% 50% 40% 30% 20% 10% 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 Economic Freedom (points) 147 (52,4) 131 (54) 148 (51,7) 148 (51,7) 140 (51,0) WB Doing Business 82 90 78 99 99 WEF Global Competitiveness (points) 55 (4,36) 60 (4,31) 56 (4,3) 68 70 (4,18) 29 Source: Transparency International, Heritage Foundation, 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) 30 Source: World Bank (2017)

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. 31

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. 32

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 33

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 34