Overcoming a Middle Income Trapand Sustaining Growth
Prospects of Vietnam’s Development in the Context of theRegional and the Global Economy

Kenichi Ohno
Vietnam Development Forum (VDF)
National Graduate Institute for Policy Studies (GRIPS)
Ｍａｙ 2011

Summary & Conclusion Since Doi Moi, VN has made good progress inliberalization and integration, and took some steps
toward equitization (privatization).
 However, past growth has been driven mainly bytrade openings and foreign money inflows (ODA,FDI, remittances, stock & property investment…)
rather than productivity or innovation.
 To sustain growth, VN must introduce policies thatpromote (or even force) accumulation ofknowledge, skills and technology.
 VN can learn much from best policy practices ofneighboring countries in East Asia.

What Is a Middle Income Trap?
 A trap occurs when a country is stuck at theincome dictated by given resources and initialadvantages, and cannot rise beyond that level(only luck and no effort).
 Growth based on FDI, ODA, natural resources,
big projects, stock & property investments, etc.
will eventually end. The true source of growth isvalue creation by domestic citizens and firms.
 Middle income can be reached by liberalization,integration and privatization. But attaining higher
income requires strong policy effort to enhance
private dynamism.

Speed of Catching Up: East Asia
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%
90%
80%
70%

Taipei,China
Taiwan60%

S. Korea
Malaysia

50%

Thailand40%
Indonesia
30%
Philippines
20%

Viet Nam
Vietnam

10%

China

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

0%

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; theCentral Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

Latin America
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%
90%
Argentina

80%

Brazil
70%
Chile
60%

Colombia

50%

Mexico

40%

Peru

30%

Urguay20%

Venezuela

10%

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

0%

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; theCentral Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

South Asia
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%
90%
80%
70%

India

60%

Sri Lanka

50%

Pakistan

40%

Bangladesh

30%
20%
10%

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

0%

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; theCentral Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

Africa
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)100%
Botswana

90%

Cote d'Ivoire
80%
Egypt
70%

Ghana

60%

Kenya

50%

Madagascar

40%

Nigeria30%

South Africa
Tanzania

20%

Tunisia
10%
Uganda
2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

0%

ZambiaSources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; theCentral Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

Russia & Eastern Europe
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%
90%
80%

USSR

70%

Czeco'kia

60%
Hungary
50%
Poland40%
Romania30%
Yugoslavia
20%10%

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

0%

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; theCentral Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

Stages of Catching-up Industrialization
Preindustrialization

Initial FDI
absorption

Internalizing
parts andcomponents

Internalizing
skills andtechnology

Internalizing
innovation

Creativity
Technology
absorption
Agglomeration(acceleration of FDI)

Arrival ofmanufacturing
FDI

STAGE ONESTAGE ZERO
Monoculture,subsistenceagriculture, aid
dependency

Poor countries
in Africa

Simplemanufacturing
under foreign
guidance

Viet Nam

STAGE TWO
Have supporting
industries, but
still under foreign
guidance

Thailand, Malaysia

STAGE FOUR

STAGE THREEManagement &technology
mastered, canproduce highquality goods

Full capability ininnovation andproduct design as
global leader

Japan, US, EU

Korea,
Taipei,China

Glass ceiling for
ASEAN countries(Middle Income Trap)

For Improving the Quality of Growth
1. Creating the sources of growth
Past reforms

Proactive Industrial Policy

Unleash markets by:
Liberalization
IntegrationEquitization

Support accumulation of:
Knowledge
SkillsTechnology

Expansion of policy scope

2. Coping with growth-related problems
Income and asset gaps, environment, rural-urban migration,
housing, traffic…

3. Macroeconomic management under integration
Managing global and regional crisis, commodity inflation,
capital flows, asset bubbles, exchange rate pressure…

Proactive Industrial Policy:
Seven Required Features
1. Strong commitment to global integration andprivate sector driven growth
2. A wise and strong government guiding private
sector
3. Securing sufficient policy tools for latecomerindustrialization4. Constant policy learning through concrete
projects and programs
5. Internalization of knowledge, skills andtechnology as a national goal
6. Effective public private partnership7. Collection and sharing of sufficient industrial
information between government andbusinesses

Viet Nam’s Challenge
VN has reached lower middle income by 2008 (pc GDPof $1,200 in 2010). But policies to upgrade humancapital are not yet established.
 VN cannot continue to rely on simple assembly withunskilled labor. Industries will leave as wages rise andintegration deepens. Without domestic value creation,VN will surely face a middle income trap.
8%

64
2
ICO R

0TFP growth
2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

-2

Problems ofViet Nam’s Policy Making
1.

Coherent policy structure is lacking:Industrialization & Modernization – must be concretized
SEDP & SEDS – comprehensive, but too many priorities
Overall industrial master plan – does not exist
Subsector master plans – electronics, automobile,
motorcycle, etc. not effectively implemented

2.

3.

Inter-ministerial coordination is weak – budget,
staffing, legal framework, etc. necessary forexecution are not provided.
Stakeholder involvement is weak – businesses do
not support implementation.

Policy Learning It is NOT copying some policy adopted in someother country to VN without local context. Ad hocor random copying should be avoided.
 The claim that “our country is unique” should not
be used as an excuse for not learning from others.
 Learn mindset and methodology for conducting
industrial strategies effectively. Learn how tomake policies.
 Early achievers (Japan, Korea, Singapore…)
improvised through self-effort and trial-and-error.
For latecomers, more systematic learning isdesirable.

What Need to Be Learned
1.
2.
3.
4.
5.

Leadership
National movement for mindset change
Policy measures
Policy procedure and organization
Policy structure—vision, strategy, actions,monitoring Strengthen capability to create policy package
suitable for VN using foreign models as building
blocks and references

Standard Policy Menu in East Asia
 Kaizen (factory productivity tools)
 Shindan (SME management consultant system) Engineering universities (King Mongkut ITK, Nanyang

Polytechnic, Thai-Nichi Institute of Technology…)
 TVET-business linkage (Singapore, Thailand…)
 SME finance (two-step loans, credit guarantees…)
 Integrated export promotion (Korea)
 Industrial zone development (Taipei,China, Korea,Thailand, Malaysia, Singapore…)
 Strategic FDI marketing (Thai BOI, Malaysia’s MIDA,Penang, Singapore) Supporting industry promotion (parts & components;Thai auto) Innovation drive (Singapore, Taipei.China…)

Standard Policy Making Procedure
Top leader
1. Vision

2. Consensus
building process

3. Documentation
process

Brainstorming

Studies& surveys

Set broadgoals &direction

Drafting
workFinalize& approve(May beoutsourced)

Stakeholder
consultation

Ministries＆agencies

Comments& revisions

4. Participation

4. Participation

Regions &localities

Academics &consultants

Businesses& bus. assoc.

5. The entire process must be managed and coordinated by a lead ministry or agency.

Contemporary Examples ofBest Policy Practices in East Asia Singapore – New Productivity Drive
 Taipei,China – Innovation and Soft Power Korea – Presidential Committees
 Malaysia – New Economic Model for overcoming

the middle income trap; SME promotion Thailand – auto industry strategy (regional autobase, Eco-Car…)(Source: VDF/GRIPS policy research missions, 2009-2011)

Singapore: New Productivity Drive Singapore has long targeted productivity as top

national priority (including Japan-assisted
Productivity Movement in the 1980s).
 Currently, sluggish productivity performance andemerging China and India are major challenges.
Productivity of aged, SMEs and foreign unskilledworkers must be improved.
 The Economic Strategies Committee submitted areport to PM (Jan.2010). The National
Productivity & Continuing Education Council wascreated to carry out report proposals (Apr.2010).
 12 priority sectors and 3 cross-cutting issues areidentified. 3 funding mechanisms are set up.

Singapore: New Productivity Drive
EconomicStrategies
Committee: Report

Chaired by Deputy PM
Members from ministries/agencies,
business, unions
Joint secretariat: MTI, MOM(ministers)

National Productivity andContinuing Education Council (NPCEC)
Review & submit

Oversight
Review & approval

Led by MTI, MOM (PS level)
Inter-agency coordination

Working Committee for Productivity andContinuing Education (WCPCE)
Sectoral “Productivity Roadmap”
for the next 10 years
Draft & propose

Financial IncentivesScrutiny

NationalProductivity
Fund

Productivity Skills Dvt. Fund& Innovation Lifelong Learning
CreditE.F.

Sector working groups (12 priority sectors)
Construction
BCA
UnionsIndustry

Electronics
EDB
UnionsIndustry

Cross-cutting issues
Low wage workers
Research & benchmarking
Infocomm and logistics

Precision Eng. Transport Eng. General Mfg.
EDB
EDB
SPRING
UnionsUnionsUnionsIndustry
Industry
Industry

F&B
SPRING
UnionsIndustry

Retails
SPRING
UnionsIndustry

Taipei,China:
Innovation and Soft Power The Ministry of Economic Affairs (MoEA) is thelead ministry for industrialization.
 The Industrial Statute of May 2010 lowered
corporate tax to 17% and abolished all incentives(except for R&D).
 The soft power drive includes (i) supply ofindustrial professionals; (ii) promoting emerging
industries; and (iii) upgrading existing industries.
 Technology projects are the main policy tool forinnovation. Research institutes play key roles increating policies and commercializing R&D.

Industrial Technology Research Institute (ITRI)

Korea: Presidential Committees
 Presidential Committees are the key policy tool in

Korea. Each president establishes committees todesign and implement his priority agenda.
 President Lee Myung-bak has 4 such committees.
Among them, the Future and Vision Committee ismost important in setting national goals andstrategies. It is chaired by the Dean of Korea
University and attended by vice ministers,
academia, NGOs, experts and business leaders.
 The other committees cover Green Growth,
National Competitiveness, and Nation Branding.

Korea: Presidential Committees
Vision & Priority
AgendaPresident

Chairman
Co-chaired byPrime Minister

Chairman

Chairman

ChairmanPC.
Green Growth

PC.
Future & Vision

PC. National
CompetitivenessPC. Nation
Branding(Feb. 2009)(May 2008)(Feb. 2008)(Jan. 2009)

Secretariat

Secretariat

Secretariat

Secretariat

about 60 staff(seconded officials
from various govt.
agencies

about 30 staff(seconded officialsfrom various govt.
agencies)

PolicyStaffing

Ministry A

Drafting, Inter-ministerial coordination, etc.

Ministry B

Ministry C

Ministry D

Implementation

Ministry E

Ministry FMalaysia: Overcoming the Middle
Income Trap
 Malaysia feels trapped: “We are caught in amiddle income trap - we are not amongst the top
performing global economies” (NEAC, vol.1, pp.3-4)
 Goals for 2020:
High income ($15,000-20,000)
Inclusiveness (everyone benefits)
Sustainability (fiscal, environmental)
 Under PM Najib’s leadership, New Economic
Model was launched (Mar.2010) and elaborated(Dec.2010) with 8 Strategic Reform Initiatives.
 SME promotion is one of the key entry points.

Possible policy
measures

1722
1123
15
18
24
14144

Malaysia: National SME Dev. Council
National SME Development Council

14 OtherMinistries
MITI’s key departments
Strategic Planning

Est. 2004,
chaired by PM

Ministry of Int’l Trade and Industry(MITI, lead ministry for SMEs)
Implementing agencies under MITI
-SME Corp. Malaysia (lead agency for SMEs
and secretariat to National SME Dev. Council)

Entrepreneurship
Development
Sectoral Policy &Industrial Service
Investment Policy &Trade Facilitation
Services Sector
Development-Malaysian Ind. Dev. Authority (investment)-Malaysia Productivity Corp (research,training, consultation)-SME Bank (finance)-Malaysian Ind. Dev. Finance (finance)-MATRADE (trade)
Private sector partners
Service & training providers (privateconsultants & companies)Thailand: Auto Industry Strategy
 Policy making is coordinated competently byThailand Automotive Institute (governmentcreated but self-funded NPO).
 Vision—“Asia’s auto production base with valueadded and strong parts industry” (since 2002)
 Open market; no national brand is promoted.
 Very good relation between government andFDI/local producers.
 Eco-Car drive – seems successful.

Thai Automotive Master Plan, 2007-2011
Five Thrusts and 12 Actions Plans are summarized as follows:
4. Human Resources
Development Thrust

9. Automotive Industry
Human Resources
Development Program

10. Automotive Production &Engineering Education
Strengthening Program

1. Productivity Thrust

2. Market Expansion
Thrust1. Supplier Development
Program in Lean Production

4. Domestic Market
Development Program

2. Lean Supply Chain
Development Program

5. ASEAN and International
Market Development Program

3. Best Practice Benchmarking

6. Infrastructure and ITS
Development Program

3. Technology and Designand Engineering Thrust

5. Investment and Linkage
Promotion Thrust

7. Technology Roadmapping &Technology Development Program

11. Investment Promotion

8. Centers of Excellence
Development

12. Linkage Promotion

Source: Thailand Automotive Institute, The Automotive Industry Master Plan 2007-2011 Executive
Summary, p.4.

Thailand:Automotive
Industry MasterPlan 2007-2011
Brainstorming;
agreeing on goals& directions“CEO Forum”
FDI & local firmsExporters
MoI, MoST, MoEdu
Professors’ team(Chulalornkorn Univ)• The whole process (about 1 year) is managed
by Thailand Automotive Institute (TAI).
• Goals are set by private firms; no government
approval is needed for final M/P.

Set up formal
committee fordrafting M/P
M/P Steering
Committee
Organized by MOI

Subcommittees
study identified
issuesHuman resource

Productivity

M/P
Drafting
By TAI staff

Businesses
Officials
Experts

MarketingEngineering

Business
Gov’t

Experts(Informal)

Business
Gov’t

Experts(Formal)Investment& linkage

Comment &dissemination

ImplementationRecommended Actions for Viet Nam
1. Identify a small number (up to several) of key
industrial strategies toward 2020.
２．Study international best practices in chosen
strategies as building blocks of a policy
package suitable for VN.
3. Create appropriate policy procedure and policy
organization to implement chosen policies.
４．Progress review by highest level.

Need for Policy Focal Points
 Too many priorities is equivalent to no priority. A few

strategies should be chosen for vigorous action.
 Each chosen strategy must have lead ministry/agency,
master plan, budgeting, staffing, monitoring, andinternational cooperation.
 Strategies may have overlaps. Coordination must be
done at above-ministry level (PM or DPM).
Engineeringuniversities

TVET

Supportingindustries

Industrialclusters

SMEs

Michael Porter’s Proposal for Vietnam

Source: M. Porter’s Presentation at Vietnam Competitiveness Report launching seminar,Hanoi, Nov. 2010.

Vietnam: My Proposal for NCC
Prime Minister
Direct, give mandate

Plan

National Competitiveness Council

Commission
studies, reports

Chaired by PM (or DPM)
Secretariat: Government OfficeMembers: Heads of concerned
ministries

Support, report, draft

Working groups for specific issues or sectors

SMEs

Supportingindustries

Clusters

TVET

Higher Educ

Secretariat:
MPI

Secretariat:
MOIT

Secretariat:
MOIT

Secretariat:
MOLISA

Secretariat:
MOET

Ministries,businesses,experts

Ministries,businesses,
experts

Ministries,businesses,experts

Ministries,businesses,experts

Ministries,businesses,experts

Ministries and agencies

Implement

Note: This is a preliminary idea of K. Ohno to initiate discussion; listed issues and ministries
are suggestions only; everything is subject to addition, deletion or change.

A Proposal for NCC (cont.)
 Full-day NCC meeting, chaired by PM, should beorganized every three months or so.
 PM should give concrete instructions and ask forreports, studies, and solution of problems. He
should coordinate among issues and ministries.
 NCC members are ministers, prominent experts,
and business representatives.
 NCC secretariat to be created within Government
Office to offer administrative support.
 Issue-based working groups should be formed
and lead ministry should be assigned. They must
work constantly with stakeholders and reportresults at every NCC meeting.

References
GRIPS Development Forum (2010 and 2011), “Mission Reports” for Singapore,
South Korea and Taiwan.
Ketels, Christian, Nguyen Dinh Cung, Nguyen Thi Tue Anh, and Do Hong Hanh(2010), Vietnam Competitiveness Report 2010, Central Institute for
Economic Management and Lee Kuan Yew School of Public Policy.
National Economic Advisory Council (2010), New Economic Model for Malaysia,
March and December.
Ohno, Izumi, and Masumi Shimamura (2007), Managing the Development
Process and Aid: East Asian Experience in Building Central Economic
Agencies, GRIPS Development Forum, March.
Ohno, Kenichi (2009), “Avoiding the middle-income trap: renovating industrial
policy formulation in Vietnam,” ASEAN Economic Bulletin, 26(1), 25-43.
Ohno, Kenichi (2011), “Policy Procedure and Organization for Executing HighPriority Industrial Strategies,” a paper prepared for the NEU-National
Assembly Conference on the Quality of Growth, Hanoi, Feb. 24.
Ohno, Kenichi (forthcoming), Learning to Industrialize: Catch-up Strategies forTwenty-first Century Latecomers, Routledge.
Vietnam Development Forum, and Goodwill Consultant (2011), “Survey on
Comparison of Backgrounds, Policy Measures and Outcomes forDevelopment of Supporting Industries in ASEAN, JICA and VDF, Publishing
Houseof Communication and Tranport.
World Bank (2010), “Avoiding the Middle-income Trap: Priorities for Vietnam’s
Long-term Growth,” a paper presented at Senior Policy Seminar, Hanoi,
August.