Vietnam's economy, now driven by cheap labor, needs productivity push: official

By Nhung Nguyen November 4, 2016 | 01:17 am PT

Vietnamese workers are seen at a shoe factory in Hanoi, November 2014. Photo by Reuters/Kham.

A knowledge-based growth model requires better training to upgrade the workforce, Deputy PM Pham Binh Minh has said.

Vietnam is going to expand its skilled workforce for the country’s new economic growth model, which emphasizes on technology application and productivity, Deputy Prime Minister Pham Binh Minh said Thursday.

"Vietnam’s economic development has relied heavily on low-cost labor and capital-consuming sectors," Minh said. "However our economy has reached a point where such elements have become insufficient."

Vietnam needs a new growth model that focuses on quality, labor productivity and knowledge, he told members of the government and the business community at a summit hosted by the Economist Group and Vietnam's foreign ministry in Ho Chi Minh City.

"We believe those are the key factors that drive the economy to grow both extensively and intensively," he said.

Taking agriculture as an example of a labor-intensive sector that employs 70 percent of the local workforce, Minh said the government aims to reduce that ratio to 40 percent by applying high technology and developing the industrial and service sectors.

“The process requires us to train and re-train our labor force, reform university education and improve vocational training to create a talent pool with higher skill and expertise levels," he said.

"We are stepping in the world’s fourth industrial revolution, where advanced technology will be applied,” Minh said, pointing out that 86 percent of the workers in the textile industry could be affected by automation.

Vietnam's economy has been growing at a fast pace over the past decade. But as growth is still mostly driven by low-cost labor and low-value exports, a new model that can help transform the economy is believed to be critical for the next phase of development.

For now, cheap labor remains a major competitive edge to pull in investment. In a recent survey among U.S. companies, Vietnam has become the first market they are looking to expand in across ASEAN, due to many advantages like low labor costs, good personal security and a stable government and political system.

At Thursday summit, experts said Vietnam's educational performance in primary and secondary levels is impressive. Last year, Vietnam’s schools scored higher than the average for the OECD, a grouping of industrialized nations, in the Program for International Student Assessment, better known as PISA.

“But if you look at post-secondary education, that’s where the weaknesses are in terms of the numbers of graduates and the quality and relevance of the curricular and the educational skills set up in that sector,” said Stephen Groff, a regional vice president for the Asian Development Bank.

Sebastian Eckardt, a lead economist and program leader at the World Bank, said the country, particularly the manufacturing sector, could lose its cost advantage to other competitors such as Cambodia and Bangladesh due to low productivity.

"One of the challenges is raising wages while productivity still lags behind," he said.

Labor productivity is growing at an annual rate of more than 4 percent and wages are outpacing it, Eckardt said.

Vietnam raises the minimmum wage every year. It will increase the basic wage level by 7.3 percent next year, following a 13 percent bump this year.

The Economist Intelligence Unit has estimated Vietnam’s economic growth at 6.8 percent in 2016 and potentially higher in 2017. That is higher than the World Bank's projection of 6 percent.

> How long can Vietnam's IT industry thrive on low-cost labor?