Vietnam Economy: Prospects, Integration & Footwear Industry Vo Tri Thanh (CIEM) Presentation at the Vietnam Footwear Summit Ho Chi Minh City, 15-16 March 2017 12/03/2017 1
Outline of presentation 30 years of Doi Moi: Performance & Challenges Integration & FTAs: Expectations & Policy Responses Vietnam Footwear Industry: VA Creation? 12/03/2017 2
30 Years of Doi Moi: Performance & Challenges Achievements From a poor country to a (low-) middle income (GDP/pc 1990: <USD 100; 2015: USD 2200; Poverty incidence 1993: 57%; 2015: 6%) From a agriculture-based to a more industrialized economy (Agriculture share of GDP 1991: 41%; 2016: 16%) From a close to a very open economy (Economic openness 2016: (X+M)/GDP 160%; FDI sector: > 20% GDP; 70% export value; > 20% of total investment) but not outstanding: Still low quality of growth (inefficient SOE sector and public investment; high business costs; distorted production factor markets); limited spill-over from FDI; weak position in the global/regional value chains; widening income/asset gap; polluted and deteriorated environment 12/03/2017 3
Key challenges Getting out of low cost labour trap and laying down fundamental foundations for overcoming middle-income trap? VN is being now at the turning point for reforms & development. International integration is essentially an integral dimension of reforms Policy shift since 2011/12 To focus on macroeconomic stabilization To recover gradually the economic growth To initiate programs of restructuring the economy for greater efficiency (Financial & banking sector; SOE sector; Public investment, ) To deepen international integration (FTAs) VN economy 2016-2020 2016: gowth 6.2%; inflation: 4.7% Plan 2016-20: Growth 6.5-7.0% p.a.; inflation < 5%; I/GDP= 32-34% + efficiency improvement (TFP contribution: 25-30%; L-productivity growth:4-5%) 12/03/2017 4
VN Integration: Expectations & Policy Responses International integration strategy WTO as a foundation for further integration East Asia integration: AEC; ASEAN +1 & + 6 FTAs (RCEP) FTAs (esp. TPP (?), VN-EU FTAs, and 14 others)+ Cooperation with key partners ( Comprehensive/& strategic partnership ) 12/03/2017 5
Signed and pending FTAs involving Vietnam TPP: Population: 900 mill.; 28% world trade & 37% world GDP RCEP: 48% world population; 30% world trade; 30% world GDP EU: Population: 500 mill.; 20% world trade; 26% world GDP ASEAN (2013) Population: 625 mill. GDP: USD 2400 bill. Trade: USD 512 bill FDI inflow: USD 122 bill. The advantages VN can enjoy Strategic geographical location in a dynamic Asia-Pacific region and close to global manufacturing value chain Young population (60% < 35 years old) and rather low labor cost + Emerging middle class Quite large domestic market with growing middle class China + 1 investment strategy by foreign investors 12/03/2017 6
Economic Impacts of Development of ASEAN++ FTA (RCEP) 16.0 14.0 13.4 12.0 10.0 8.0 6.0 9.5 5.8 5.0 8.3 4.0 2.0 2.3 3.0 3.3 2.9 0.0 ASEAN Coexistence of Five ASEAN+1 FTAs Coexistence of Five ASEAN+1 FTAs and CJK FTAs ASEAN+6 FTA Note: Cumulative Percentage Point, deviation from baseline, 2011-15. Source: Itakura (2013) 12/03/2017 7
Income gains in TPP, EVFTA, & RCEP Projected Change in 2025 ($b) Change in 2025 (%) 2025 ($b) TPP EVFTA RCEP TPP EVFTA RCEP Real income United States 20,273 77 0 0 0.4 0.0 0.0 Vietnam 340 36 19 17 10.5 5.5 5.1 WORLD 103,223 223 26 644 0.2 0.0 0.6 Exports United States 2,813 123 0-4 4.4 0.0-0.1 Vietnam 239 68 37 30 28.4 15.6 12.5 WORLD 28,415 305 44 1,383 1.1 0.2 4.9 Source: Cited in Petri & Phuc (2015) 12/03/2017 8
FTAs as a catalyst for economic reform & development Expansion of exports & other economic activities Expansion of investment (especially FDI). A pressure/catalyst for institutional reforms & improvement of business environment (Esp. TPP; VN-EU FTA & AEC) A way for restructuring the economy (e.g. services; agricultural sector) But costs & risks of international integration could be significant Adjustment costs for some uncompetitive sectors due to fierce competition Compliance costs (for both firms and Gov t) Possibility of macroeconomic instability (e.g. due to inappropriate policy responses to a surge in capital inflows/outflows) 12/03/2017 9
Business responses (Nearly) all key trading partners & investors are in FTAs. There are also many industries under cooperation (i.e. VN-Japan: 6 sectors) A surge of FDI: Both FDI commitments & disbursements have increased since 2013. Billions of USD have been invested in T&G and electronic sectors, taking advantages of market access, ROOs, production networks. Effectiveness of TPP & Questions of RCEP negotiation? 12/03/2017 10
Despite challenges and several technical issues, the commitments under FTAs, especially TPP, VN-EU FTA, AEC, and (possible) RCEP, basically consistent with the reforms VN would like to and/or should follow in her new stage of development. Some recent observations: Changes & development of legal framework (Law of Enterprises; Law of Investment; Law of Public Investment; Law of Gov t Procurement; Decree on PPP, ) Efforts to improve business environment for supporting private sector development, esp. SMEs development (Resolutions 19/2014; it was being repeated and strengthened (the same name) in 2015, in 2016, and in 2017. Resolution 35 in April 2016) Attempts to restructure SOE, banking, and public investment sectors (and now tourism and agricultural sector) 12/03/2017 11
Case of Resolution 19 Before 2014: Slow economic growth (a reason: slow reforms of microeconomic foundations) + Pressure from FTAs. Simplification of administrative procedures is necessary (But not without good regulatory management, among other) Key features Simplify procedures and time costs in various areas (starting businesses, paying taxes, getting electricity, trading across borders, etc.); Self-assessment of legitimacy of regulations/procedures + Adoption of internationally comparable indicators (Then target: Average of ASEAN-4) Early results Abolition of 5 procedures, shortening of time for business regulations; shortening time to pay taxes and get credit Nullifying requirement, procedures and costs for supplementing and adjusting business registration Freedom to do business: enhanced and facilitated Problems: Existing gap between reality & announcements by authorities. A need for strengthening supervision over and responsibility of authorities. Lack of necessary (accompanied) administration reform 12/03/2017 12
Case of SOE reforms SOE: Inefficiency + High cost of budget + Possibility of crowding out private sector + Pressure for being recognized as market economy (commitment under WTO) Several attempts to restructure and equitize SOEs since earlier 1990s but not so effective Programs of SOE Restructuring since 2012: Ensuring information disclosure & transparency Strengthening effectiveness of corporate governance Accelerating equitization, esp. that of the big corporations Separation between State ownership function and State management function Slow process and performance has been not as expected. Reasons: The role of SOEs in the economy? Overcoming the interest/vested groups? Technical issues (land pricing; corporation valuation & strategic partner(s); social impacts & compensations )? Directions of improvement (TPP, VN-EU FTA could help!!!) Enhancing competitive neutrality between SOEs and private sector Separating State ownership function and State management function over SOEs Strengthening institutional and technical capacity of Vietnam Competition Authority 12/03/2017 13
Vietnam Footwear Industry: VA Creation? Global context & Meaning(?) Markets & Consumers Manufacturing & Services (GVCs & Production networks) Skills & (New) Technology 12/03/2017 14
Some key characteristics of VN footwear industry L-intensive industry export-oriented (Position in VN s export: 4 th place after Moblie phone & parts ; T&G ; Computers, electronic prods & parts ; Output: Top 4 in the world; Export value: 2 nd after China) High import dependency, rather low VA Dominated by FDI Buyer-driven supply chain Footwear export growth: tends to be declining (According to LEFASO: rising protectionism & geo-political problems/uncertainty; competition from some other developing countries) 12/03/2017 15
Footwear export (value & growth) Footwear Export 2016: Market share (%) 25 20 15 41.0 34.5 10 5 0 Total value (USD bill.) Growth (%) 2011 2012 2013 2014 2015 2016 5.2 US China Belgium Germany Japan Rest of the World 5.9 6.4 7.0 12/03/2017 16
World Market Share, 2013 (%) Emerging industrial clusters 12% Rice Change in World Market Share = 0.33% 20,5% Cameras 15,7% 10% 8% -3,3% Rubber Coffee Footwear 6% Seafood Garments Telecom equipment Office machines 4% 2% 0% Crude Oil Fruits & nuts Furniture Transport Tourism Textile Travel goods Electric wires Computers Vietnam's Share in World Exports = 0.72% Area -2% -2% -1% 0% 1% 2% 3% 4% 5% = Export Value of US$2 billion Change in World Market Share, 2008-2013 (percentage points) 12/03/2017 17
Approaches to VA Creation An industry with comparative advantages Meeting ROOs (TPP: fully accumulated ROO; FTAs with various ROOs: Utilization of existing capacity in SR together with investment for meeting new ROOs such as in TPP) Ensuring technical & other standards (TBT &SPS, IPRs, environment; labor) Connecting distribution systems Taking into account other variables (income, exchange rates, ) 12/03/2017 18
value added Participation in production network and supply chains Supply chains Process upgrading Functional Upgrading Concept Fabrication Logistics Concept Fabrication Logistics R & D Sales/ Services R & D Sales/ Services Branding Marketing Branding Marketing Design Manufacturing Design Distribution Manufacturing Sourcing Packaging Sourcing Packaging stage in the production process Downstream & Upstream & supporting sub-industries? 12/03/2017 19
Products (producing higher-value products) Demands of consumers Smarter products Greener products More emblematic products Individually customized products New industries/sectors Smart /IT industry Green sector Creative industry New design (3-D printing) + new way of production (Robots & automatics) Challenges High skills and expertise + entrepreneurship and start-ups 4th technology revolution and possible very negative impacts on labor market 12/03/2017 20
Concluding Remarks VN is being at a decisive point of time for transforming the paradigm of development by establishing foundations for overcoming middle-income trap. VN needs to have a new impetus for reforms. Interaction between domestic reforms and integration (TPP; RCEP; VN-EU FTA; ) becomes much more profound VN seems to have prerequisite conditions to become a manufacturing hub, e.g. for electronic, T&G, and footwear industries. But there are a number of challenges VN needs to overcome (esp. in terms of institutions, human resources, and infrastructure) But the success is only guaranteed as VN continues to realize the people s potentials, to implement institutional reforms, and to promote innovation 12/03/2017 21
Thank you! 12/03/2017 22