Avoiding the Middle
Income Trap:
Renovating Industrial Policy
Formulation in Vietnam

Kenichi Ohno (VDF/GRIPS)
Revised August 11, 2009

Main Argument
1. Vietnam’s challenge:
Creating internal value and avoiding themiddle income trap
2. Vietnam must renovate:- Policy content and structure- Policy making organization
3. Where to begin?
- Draft a policy renovation plan
- Establish a technocrat group- Mobilize foreign partners strategically1Vietnam’s New Era Vietnam is entering a new era whereproductivity breakthrough and value
creation are needed.
 Opening up and receiving FDI can attain
middle income ($1,000+), but higher
income ($10,000+) requires good policy
and private dynamism.
 The question is how to level up skill andtechnology embodied in human capital.
Money and machines are not the problem.

Different Speeds of Catching Up
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%

Japan
80%

TaiwanS. Korea

60%

Malaysia
Thailand40%

Indonesia
20%

Philippines
Vietnam
2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

0%

Sources: Angus Maddison, The World Economy: A Millennium Perspective, OECD Development Centre, 2001;
the Central Bank of the Republic of China; and IMF International Financial Statistics (for updating 1998-2006).

2

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,subsistence
agriculture, aid
dependency

Poor countries
in Africa

Simplemanufacturing
under foreign
guidance

Vietnam

STAGE TWO
Have supporting
industries, but
still under foreignguidance

STAGE FOUR

STAGE THREEManagement &technology
mastered, canproduce highquality goods

Full capability ininnovation andproduct design as
global leader

Japan, US, EU

Korea, Taiwan

Thailand, Malaysia

Glass ceiling for
ASEAN countries(Middle Income Trap)

Lessons fromThailand and Malaysia（Success））Impressive industrialization andgrowth led by FDI and reasonable policy（Failure））Domestic private-sector capability
is still weak after many decades
 Foreign dependency—inability to send
foreign managers home
 Value and capability are notinternalized—middle income trap
 Risk of wage pressure and FDI shifting
to China/India/Vietnam

3Vietnam’s Challenge
 AFTA, WTO, FTAs - large inflows of ASEAN

products (esp. Japanese brands) may
destroy VN’s industrial base.
 The risk of losing manufacturing base andkeeping only sales agents (“hollowing-out”).
 Vietnam’s wage becoming too high forlabor-intensive industries, but technology
too low for knowledge-intensive industries.
 Vietnam needs a strategic partner to greatly
increase internal value in manufacturing.

Vietnam’s Changing Sources ofGrowth Doimoi to mid 1990s—liberalization effect Mid 1990s to now—externally driven

growth with large inflows of investment,
capital and aid
 From now—creation of internal value!
7
6
5
4
3
2
1
0
-1
-2

ICOR

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

TFP change (%)

4Policy Content and Structure
Successful industrial policy making in East
Asia has been characterized by Goal orientation:
Vision  Strategies  Action plans Mechanism to ensure implementation- Vietnam has a vision (Industrialization andModernization 2020) but it is not backed byconcrete strategies or action plans.
- Only small part of approved policies andmaster plans are implemented in Vietnam.

Description

ExamplesVision-Slogan-Short and Vague-Vision 2020 (Malaysia)-Detroit of Asia (Thailand)-Industrialization &Modernization (Vietnam)

Strategy-Document specifying
goals, roadmaps,
policy measures-Scope & detaildepend on each case-Industrial Master Plan (Malay.)-Automotive Master Plan Main
Text (Thailand)-e-Japan Strategy-Industrial Cluster Plan (Japan)

Actionplan-Document, action
matrix, formal orinformal mechanism,or ongoing process-Automotive Master Plan Action
Tables (Thailand)-Vietnam-Japan Joint Initiative-Triangle of Hope Project(Zambia)

Review & -Numerical monitoring, -Interim & final review by jointcommittee (VJJI, ToH Zambia)
Adjustme document report,-Industry specific committeesorganizational
review,nt
or no formal review(Thailand)5

<Malaysia>
Vision 2020  IMP  OPP/Malaysia Plan  Budget“Become fully (15 yrs)
(5-10 yrs)
(annual)developed” 1991

<Thailand under Thaksin> (2001-06)
PM’s vision  Auto Master Plan  Action Plan Matrix
Become“Detroit of Asia”Business-MOI-experts agree on
targets for car/motorcycle production & export<Ethiopia>
ADLI  Ind.Dev.Strategy  M/Ps  Exp.St.Committee
1994

2003:policy principles

Leather/garment/flower/
food processing<Vietnam>Goal 2020  Overall industrial M/P?  Action Plan?
10YS/5YP(Does not exist)(Does not exist)

Sample Format of Thai Automotive Master Plan
StrategyAction Plan

1.2 Automotive
Human
ResourceDevelopment

3. Automotive training
center project
3.1 Provide
Systematic training
to the industry fromworkers tomanagement level
3.2 Skill training

3.3 Provide training
to engineers in thefield of advanced
engineering andspecialized
technology

Key success
Main
Cooperati
indicator
resp. org. ve org.
OIB/TAIA/TAI
Standardized 1. Number oftrained persons
TAPMA/F
automotive
TI
training center 2. Number ofcompanies
sending
employees fortraining
3. Increased
income oftrained persons
4. Costreduction andprofitability
OutputSource: Executive Summary (English), Master Plan for Thai Automotive Industry
2002-2006, page 10.

6Vietnam’s Industrial Vision under
Global and Regional Integration
 Global re-location of manufacturing sitesby MNCs  Only attractive production
locations can survive and prosper
 Policy must progress:
1/ Basic: regulatory efficiency
2/ Intermediate: Responsiveness tobusiness needs
3/ Advanced: pro-active creation of
attractive location Vietnam’s strengths are good geographicallocation and hardworking people, but these
are not fully utilized.

Policy Must Create Three Pillars ofCompetitivenessTo create domestic value and take part inglobal value chain effectively, VN needs:
 Competitive industrial human resources(management, skill, technology)
 Supporting industries and supportingservices
 Logistics (efficient transportation)These must be achieved with concrete
timetables and action plans.

7Example: Supporting Industry
Action Plan Matrix (Proposal)
Japan proposed this matrix to MOIT/MPI forcomment and discussion (June 2009):
STF1: Legal and policy framework
STF2: Capacity building & human resource
STF3: FinanceSTF4: FDI marketing
STF5: FDI-local business linkage
It is hoped that A/P will be finalized and put
into implementation by Sep. or Oct. 2009.

Supporting Industry Action Plan
(Proposed Matrix for STF1)
TimeFrameResp.
bodiesJapan’sassistanceResp.
bodiesShort: By 1. SME survey
mid 2010 2. Priority sector list
3. Set up interministerial system
4. Create excellent
company prizes
5. 5YP 2011-2015

MPI
MOIT
MOIT

1. TA, finance
2. FDI survey
3. Expert &information
4. Japaneseexperience
5. Expert

METI,JICA
METI,JBA
METI,JICA

Medium: 1. Prepare legal
End 2011 framework

MPI/
1. Expert
ASMED

Long:
(2015?)

Vietnam’s action

1. Revise SI M/P andA/P as needed

VCCI
MPI

MPIetc.

1. Provide
information

JP Gov’t
METI,JICA
METI,JICA
JP Gov’t

8Proposed Structure of Industrial
Policy Documents
SEDS, SEDP(General directions)Overall Industrial Master Plan
(Goals, principles, priority
sectors, gov’t role, policy tools,
policy making organization, etc)

Key industry master plans

Regional development plans

Policy Making Organization
 For continued industrialization, Vietnam

needs a fundamental reform in policy
formulation. Minor repairs of current
system are not enough.
 Government trap – low efficiency, lowmorale, low salary  brain drain from thepublic sector  low-quality policies
 Strong political will and risk-taking at thetop level (Party, Prime Minister) is needed
to initiate such reform.

9Key Issues in Policy Making
Organization
 Dynamism of leadership – political will,

economic literacy, effective use oftechnocrats and committees
 Creation of focal point in policy making some organization must take lead andresponsibility
 Ensuring implementation
 Public Private Partnership (effectivecooperation with businesses)
 Inter-ministerial coordination

Vietnam: Traditional M/P Drafting Process
PrimeMinister
Review for
approval

Order

SubmitDrafting
Team

MinisterInterministerial
review

Submit

MPI & other
Ministries

DataInternalreview

MPI & other
Ministries

GovernmentAppeal letter toPrime Minister whenproblems arise

Contact
Ministry whennecessary

Interviews,symposiums(sometimes)

Technicalassistance(sometimes)

Internationalexperts

Business Community
No permanent channel for continuous policy dialogue(case-by-case, temporary, ad hoc)

10

My Recommendation for Vietnam- Elite technocrat group
under strong leadership ofPrime Minister- Choose young, welleducated officials & experts- Streamline policy authorityand procedure

Korea – Econ. Planning Board
Malaysia – Econ. Planning Unit
Thailand – NESDB
Taiwan – Kuomintang Elites
Indonesia – “Berkeley Mafia”
Chile – “Chicago Boys”
So why not Vietnam also?

Prime Minister
Direction, fullauthority forpolicy making

Faithful
execution andreporting

Technocrat Group(Policy Maker)
Policy,guidance andmonitoring

Experts
DonorsFaithful
executionand reporting

Ministries (Policy Implementers)

Technocrat Group as the Brain ofGovernment
 Work directly under Top Leader toconcretize his vision.
 Create key policies including Overall
Industrial Master Plan.
 Guide and coordinate ministries for
implementing policies.
 Invite businesses, academics, foreign
experts and donors for cooperation.
 Emphasize economic logic; counterbalance against interest groups and rent
seekers.

11

Japan (late 50s-70s): Development and Industrial Vision
Formulation
PrimeMinister- MLT Economic Plans- Comprehensive National
Development Plans(physical planning)
Deliberation
Councils

Participation fromofficials, business,academia, media,
labor, consumers.

PM’s Office
Econ. Planning
Agency, Land
Agency, etc.

MOF

MITI



Deliberation
Councils

Organizational
leadership
No single superministry
Govt. formulating
MLT economicand physicalplans via.
deliberationcouncils
MITI serving as
super-ministry
for industrial
policy- Industrial vision- Industry-specific policies- Coordination & support
to business activities(e.g., finance, technology)

South Korea (60s-70s): Development Vision and Govt.Business Partnerships
President(Blue House)EconomicSecretariatsState Council

Five-year plan

KDI

Chaired by Deputy PM

Economic Minister’sCouncil

EPB
Deputy PM- Development planning- Public investment planning- Budget- Monitoring- Aid management

Govt.-BusinessMeetings:- Export promotion- Economic briefs- HCI drive, etc.

MTIBusiness FinanceDirect presidentialcontrol overeconomic policies
EPB as superministry
Research institute(KDI, etc.),
providing analysis
for MLT economic
policies
Govt.-business:very close &cooperative
relations
Performancebased rewards &penalties

Ministries/Agencies

12Malaysia: Mechanisms
for Industrial Policy
Coordination (1991-)

NPC

PM’s Dept.

PM NEAC
Deputy PM

EPU(planning)

ICU(monitoring)

CentralBank

Vision 2020
Malaysia Plan (Five-Year DP)

IMP2

MOF

Chaired by MOTI Minister,
Govt & business.

MITI

Industry Coordination
Council (ICC)
Budgetdialogue

Political Parties

Govt. only (8 ministries/agencies)

Industry Policy and Incentive
Committee (IPIC)

MalaysocietyChinesesociety

Govt.& businessAnnualdialogue

Indiansociety

Industry Cluster Working
Groups (18 CWGs)

IndustrygroupsIndividualfirms

Chambers of Commerce

Source: Adapted from Takashi Torii, “Mahathir’s Developmentalism and Implementation Mechanism:
Malaysia Incorporated Policy and BCIC,” ch.4, Higashi (2000), pp. 166, Figure 2.

Public-Private Partnership for Industrial Restructuring(Thailand after 1997)
Prime Minister
CabinetGovt.-business consultation body,established in the early 80s.

Economic Cabinet
Meeting

JPPCC

NESDB
Financial Sector
ReformChaired by Deputy PMIndustrialRestructuring
National Committee on
Industrial Development

Chaired by Deputy Minister, MOI Sub-committee on National

Industrial Restructuring

SocialInfrastructure

OthersExamine & discuss basic
policy & direction
Examine & discuss detailed
measures & actions

Operated jointly by public ＆ private
Institutes
sectors
Textile, Food, Automobile, Iron & Steel, SME,Productivity, Mgt. System Certificate, etc.

Information sharing;Specific MP formulation, etc.

Line Ministries

Thai EXIM Bank
IFCT
SICGC

Federation of Thai Industries
Industry Associations
Chamber of Commerce

Commercial
Banks

Source: Shigeki Higashi “Industry: Business and Government in a Changing Economic Structure”
ch.3, Suehiro & Higashi (2000), p.166. Figure 3

13

How to Begin Policy Renovation
 Set up a task force to study international

experiences and draft a policy renovation
plan. Get international help if necessary.
 Debate the plan for PM’s approval.
 Establish a technocrat group. This groupmust be really excellent and dynamic.
 Let technocrat group do the following:- Implement the policy renovation plan.
- Draft the overall industrial master plan
to concretize the 2020 vision.
- Cooperate strategically with foreigners.

Strategic Cooperation with ForeignPartners
 After VN’s industrial vision and roadmap

are clarified, let FDI & ODA support them.
Do not randomly accept industrial aid.
 In manufacturing, Japan wants to do thefollowing cooperation:- Supporting industry action plan (since2008)- Industrial Corridor Initiative in Northern
Vietnam (since early 2009)14

Example: Industrial Corridor Initiative(PPP Policy) by METI & ERIA
METI, Trade & Econ. Coop. Bureau
Econ. Research Institute for ASEAN & E. Asia (ERIA)“Asia PPP Policy Report” (April 2009)- Regional development with core infrastructure- PPP policy package (M/P drafting, finance, TA)- Expanded and more flexible use of ODA- Policy dialogue for better institutional framework- Mobilization of Japanese firms
Implementation (beginning)- PPP Task Force, headed by Prof. Urata- Industrial Corridor Group, headed by me – VN &India as initial cases- Global Finance Group15