VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar2010

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

Kenichi Ohno (VDF/GRIPS)
Revised March 18, 2010

Agenda1. Middle Income Trap and Proactive
Industrial Policy
2. Vietnam’s challenge
3. Issues in policy content and policy
organization
4. Concrete lessons from Malaysia
and Thailand

1

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Middle Income Trap
 Development must be based on skills andtechnology, not a lucky endowment of
natural resources or geographicaladvantage. Growth will slow down if thecountry fails to build a mindset andinstitutions to encourage constantupgrading of human capital (K. Ohno).
 “The [Malaysian] economy seems to becaught in a middle-income trap—unable toremain competitive as a high-volume, lowcost producer, yet unable to move up thevalue chain and achieve high growth)”(World Bank, 2009).

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 of
manufacturing
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 foreign
guidance

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)

2

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

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).

Breaking the Trap Requires
Human Skill and Effort
If growth is caused by external forces(geography, natural resources, FDI, ODA,
overseas Chinese), a developmental trap
will eventually occur.
 Low income trap – Laos, Ethiopia (noresource, no sea, no manufacturing FDI)
 Middle income trap – Thailand, Malaysia(have FDI, seaports, Chinese capitalists)
 High income trap – Brunei, Kuwait,
Saudi Arabia (a lot of oil; no big problem) Breaking the trap requires value creation
by domestic human capital (hard work
based on skill and technology)

3

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Improving Business Climate Is
Not Enough Some argue that removing bureaucratic

impediments and providing free businessenvironment is crucial (Good GovernanceApproach, Doing Business Approach).
 But in low-income countries, this may notstimulate private investment unlessconcrete growth sources are found or
created (Kyrgyzstan, Bolivia, El Salvador).
 Wise state guidance is crucial for earlyindustrialization when private investors
are weak and markets are undeveloped.

Proactive Industrial Policy Under globalization of the 21st century,

industrial policy is still possible. But it isdifferent from and more sophisticatedthan past models.
 Proactive industrial policy must satisfy thefollowing:- Commitment to global and regional integration- Proper and ever-changing balance between
state and market- Constant policy learning and informationcollection

4

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Requirements for
Proactive Industrial Policy
1. Private sector-driven development underactive globalization (SOEs are not themain engine of growth)
2. A strong state guiding private sector
3. Retaining sufficient policy instruments forlatecomer industrialization
4. Constant learning for executing concrete
projects
5. Internalizing skills and technology as top
national priority

Requirements (cont.)
6. Substantive Public Private Partnership(PPP), not just formal dialogue
7. Deep knowledge of industries shared bybusinesses and policy makers- PIP is different from past models such associalist planning, infant industry
promotion, FDI-led industrialization orlaissez-faire.
- PIP is already practiced in many East Asian
countries.

5

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

How to Overcome the Trap
Private Sector
Dynamism

Proactive
Industrial Policy

Industrial
HRD, TVET

Supporting
industries

Strong top
leadership

Given in short-term

Efficientlogistics

Constant
policy learning

Public Private
Partnership

Strategic useof FDI, ODA

Vietnam’s New Era
 Vietnam is entering a new era where

productivity breakthrough and value
creation are needed.
 Opening up and receiving FDI can attain
middle income ($1,000+), but higher
income ($10,000+) requires proactive
industrial policy and private dynamism.
 The question is how to level up skill andtechnology embodied in human capital.
Money and machines are not the problem.

6

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

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

products (esp. Japanese brands) may
destroy Vietnam’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 tocompete in global markets and 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 (%)

7

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Problems with Vietnam’s
Industrial Policy Formulation
 Policy content and structure are

outdated and unresponsive to market or
private needs. They are not proactive.
 Policy making procedure andorganization are primitive and cause
these weaknesses.
 Government trap--inertia and difficulty
in reforming policy formulation are notedby Vietnamese officials and experts.

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 by
concrete strategies or action plans.
- Only small part of approved policies andmaster plans are implemented in Vietnam.

8

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010<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?
SEDP/SEDS(Does not exist)(Does not exist)

Vietnam: Traditional M/P Drafting Process
Prime
Minister
Review for
approval

Order

SubmitDrafting
Team

MinisterInterministerial
review

Submit

MPI & other
Ministries

Data

Internal
review

MPI & other
Ministries

GovernmentAppeal letter toPrime Minister whenproblems arise

Contact
Ministry whennecessary

Interviews,
symposiums(sometimes)

Technical
assistance(sometimes)

International
experts

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

9

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

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 andreportingTechnocrat Group(Policy Maker)
Policy,guidance andmonitoring

Experts
DonorsFaithful
executionand reporting

Ministries (Policy Implementers)

Lessons from
Malaysia and Thailand（Success））Impressive industrialization andgrowth led by FDI and reasonable policy（Failure））Domestic private-sector capability
is still weak after many decades ofpromotion
 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

10

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Common Policy Menu for Industrial
Capability (Malaysia & Thailand) Legal framework and policy coordination
 Master plans and action plans Investment incentives
 TVET for managers, engineers, workers

and students
 Management and technical consultation
 Business matching and linkage
 SME finance

Thailand:Supporting Industry Master Plan 1995
Proposed program

Outcome

1. Policy & legislation

1.

1.1. Basic law of SME development
1.2. Law of subcontracting promotion
1.3. Restructuring of DIP for SME & SI promotion
1.4. Preparation of industrial statistics (SI database)

1.1. SME Promotion Act 2000
1.2. (no action)
1.3. Establishment of DSIP & OSMEP
1.4. n.a.

2. Market development (Linkage)2.

2.1. Expansion of BUILD activities
2.2. Subcontracting assistance program

2.1. BUILD (1993-1997)
2.2. NSDP (1994)

3. Technology upgrading3.

3.1. Technology extension service program (shindanshi sys.)
3.2. Expansion of occupational skill standard system
3.3. Public technical center activation program
3.4. Joint industry-university training schools

3.1. (no action)
3.2. (no action)
3.3. TAI, TGI, etc.
3.4. TNI, TGI, etc.

4. Financial support

4.

4.1. Improvement of SME financing schemes
4.2. Assistance for SME in machinery leasing

4.1. SME Bank, loan agent network
4.2. Credit guarantee, machine fund

5. Upgrading of management

5.

5.1. Entrepreneur re-education program
5.2. Continuation of technopreneur development project

5.1. TNI, TGI, etc.
5.2. n.a.

6. Investment promotion

6.

6.1. Grouped investors attraction program
6.2 Entrepreneur incubation program
6.3. Assistance for new comers penetration

6.1. Amata Industrial Estate
6.2. OSMEP
6.3. OSMEP

11

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Vietnam’s Supporting Industry Action
Plan Proposed by Japan (June 2009)- Vietnam’s action and Japan’s support are specified in parallel.
- Short-term (mid 2010), medium-term (end 2011), long-term(end 2015).
Policyframework

Definitions of SI, award system, inter-ministerial
mechanism, SME laws, etc.

Human
resource

Pilot TVET projects for engineers & managers, skill
certification system, monozukuri university, etc.

Finance

Low-interest loans, subsidies, tax exemption,
shindan system, etc.

FDI
marketing

Investment seminars, SI industrial parks, linkage
between FDI and locals, etc.

Businesslinkage

SI database, trade fairs, industry associations, etc.

Key Industrial Policy Documents

Malaysia

Thailand(2009 per capita GDP $7,750)(2009 per capita GDP $3,973)

Vision 2020
National Mission 2006-2020
Industrial Master Plan 20062020
New Economic Model (PMNajib), 2010
New Automotive Plan,
revised 2009
SME Annual Report 2008

National Economic & Social
Development Plan 20072011
Automotive Master Plan
2007-2011
Supporting Industry Master
Plan 1995
SME Promotion Master Plan
2007-201112

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Thai Auto Master Plan 2007-2011:(5 Thrusts and 12 Action Plans)
Vision 2011: “Thailand is the automotive production
base in Asia which creates more value added to thecountry with strong automotive parts industry.”
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 Design
and 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

Malaysia: Key Organizations
Ministry of Int’l Trade and Industry (MITI)
Strategic Planning
Entrepreneurship
Development
Sectoral Policy &Industrial Service
Investment Policy &Trade Facilitation
Services Sector
Development

Implementation Agencies
under MITI:-SME Corp (SMEs)-Malaysian Ind. Dev. Authority(investment)-Malaysia Productivity Corp
(research, training, consultation)-SME Bank (finance)-Malaysian Ind. Dev. Finance(finance)-MATRADE (trade)

Service & training providers(private consultants & companies)

13

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Thailand: Key Organizations
Ministry of Industry (MOI)
Board of Investment
Department ofIndustrial Promotion
Bureau of Supporting
Industry Development- Basic Manuf. Division- Advanced Manuf. Division- Applied Technology Division- SI Technology Division
Bureau of Service
Provider Development(Assisting private businessconsultants & shindanshi)

Sector- & issue-specific institutes:- Thailand Automotive Institute- Electrical & Electronics Institute- Iron & Steel Institute- Thai-German Institute, etc.
Industry associations:- Automotive Part Manufacturer Assn.
- Tool & Die Industry Association- Foundry Association, etc.
Private organizations:- Technology Promotion Association- Thai-Nichi Institute of Technology- Service & training providers, etc.

Investment Incentives (Malaysia)
 Malaysian Industrial Dev. Authority (MIDA)

centrally approves investment licenses andincentives (no delegation of authority tolocal level).
 Incentives have two basic forms:
Pioneer Status (corporate income tax exemption)
Investment Tax Allowance Incentive approval:- Activity or product must be in the priority list
- Review by relevant industry division followed by
MIDA Weekly Action Committee- Criteria: value creation, innovation, linkage

14

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

MIDA:
Structure of Incentives
1. Manufacturing
2. Agriculture
3. Biotechnology
4. Tourism
5. Environment
6. R&D
7. Medical device)
18. Other

1. Main
2. Relocation
3. High-tech companies
4. Strategic projects
5. SMEs
6. Industrial linkages
7. Machinery & equipment
8. Auto component modules& systems
9. Oil palm biomass
10. Other (7)Eligible Items (Manufacturing Main)
I. Agricultural production (20)
II. Processing of agricultural
produce (15)
III. Forestry & forestry
products (3)IV. Manufacture of rubber
products (7)V. Manufacture of oil palm
products & their derivatives(10)
VI. Manufacture of chemicals& petrochemicals (16)VII. Manufacture ofpharmaceutical & related
products (6)VIII. Manufacture of wood &wood products (6)IX. Manufacture of pulp, paper& paperboard (11)X. Manufacture of textiles andtextile products (10)XI. Manufacture of clay-based,sand-based & other nonmetallic products (34)
XII. Manufacture of iron &steel (12)XIII. Manufacture of nonferrous metals & theirproducts (10)XVIII. Manufacture of
professional, medical,
scientific & measuring
devices /parts (6)XIX. Manufacture ofphotographic,
cinematographic, video &optical goods (4)XIV. Manufacture ofmachinery & machinerycomponents (10)XX. Manufacture of plastic
products (7)XV. Manufacture oftransport equipment,
components & accessories(29)

XXII. Hotel business & tourist
industry (6)XVI. Supporting products/
activities (17)XXIV. Manufacturing related
services (9)XVII. Manufacture ofelectrical and electronic
products & components andparts thereof (19)

XXV. Manufacture of kenaf
based products (1)XXI. Miscellanous (25)XXIII. Film industry (2)XXVI. Protective equipment &devices (3)15

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Eligible Items - Detail(XVI. Supporting Products/Activities)

Capacity Building and TVET (Thailand)
Organization

PeriodRemarkKing Mongkut’s Instituteof Technology

1961-

Top-level university inengineering, esp. ICT

Technology Promotion
Association (TPA)

1973-

Training, consultation,
publication, language

Shindanshi (businessconsultant) program

1999-2004 450 SME consultants
produced

Automotive Human
Resource Development
Program

2006-2010 Various assistance by Denso,
Honda, Nissan and Toyota

Thai-German Institute1999-

technical training in CNC,
CAD/CAM, mould & die, etc.

Thai-Nichi Institute ofTechnology (TNI)2007-

Private university to teachJapanese style production intheory & practice16

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Business Matching and Linkage
Malaysia

Thailand

Vendor Development Program BOI Unit for Industrial Linkage(1988-1996)
Development (BUILD, 1992-)
Industrial Linkage Program(1996-)
1. Financial incentives
2. Business matching
3. Support package (R&D,
technology, marketing, etc.)
4. Allowances for anchor
firms (assemblers) providing
training & TA for SMEs

1. Vendor-meet-customers(BOI intermediates anchor
firms & vendors)
2. Marketplace (monthly
meetings of anchor firms &vendors)
3. Sourcing (MNCs present
their component needs)
4. ASEAN Supporting Industry
Database

Eligibility – SMEs with 60%
or more Malay capital

SME Finance(Malaysia, end 2008) 54 commercial banks providing loans of

RM54.4b to 117,524 SMEs.
 6 development finance institutions
providing loans RM4.8b to 31,220 SMEs.
 5 Bank Negara (central bank) special
funds for SMEs (RM7.6b outstanding).
 114 government funds and schemes for
SMEs (RM9.7b outstanding).
 Credit Guarantee Corporation since 1972.
 SME debt resolution scheme, 56 venture
capital companies, leasing and factoring

17

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Rental Factory Scheme for
SMEs
Thailand- Ota Techno Park for inviting Japanese
high-tech SMEs (private, since 2006).
Malaysia- SME Bank Factory Scheme for Bumiputra(ethnic Malay) SMEs (public, since 1984).
 Both offer temporary factory space until

SMEs graduate to larger plots.
 Administrative and other supports areprovided to renting SMEs.

Malaysia: SME Bank Factory Scheme
Location
Kota Bharu

Factory Scheme

Pengkalan Chepa 1, Kelantan
Pengkalan Chepa 2, Kelantan
KuantanBandar Pusat Jengka, Pahang
Gebeng II Kuantan, Pahang)
K. Terengganu
Chndering, Kuala Terengganu
Kampung Raja, Besut, Terengganu
Mergong Barrage, Alor Star, Kedah
Alor Setar
Sungai Petani, Kedah
Johor Bahru
Tampoi, Johor Bahru, Johor
Sri Gading II, Batu Pahat, Johor
Ipoh
Menglembu, Perak
Seremban
Seremban, Negeri Sembilan
Bandar Bayan Baru Seberang Prai, Pulau Pinang
Simpang Ampat, Pulau Pinang
Bayan Lepas, Pulau Penang
KangarKuala Perlis, Perlis
Bandar Melaka
Telok Mas, Melaka
Shah AlamShah Alam, Selangor
Sungai Buloh, Selangor
Sunway Damansara, Selangor
Kuala Lumpur
Batu Caves, Selangor
Kota Kinabalu
Lak Kawi, Sabah
Kuching
Kota Padawan, Kuching, Sarawak
Muara Tabuwan, Sarawak
TOTAL

Numberof plots
23
20
20
20
26
15
17
18
22
20
29
22
17
12
4
15
18
38
3
14
23
15
6
5
422

Type
1 floor 1.5 floors 2 floors
17

6
16

SemiBangalow
detached
4

20
16
26

4

15
17
16

2

22
16

4
29
22

17
12
4
11
18
38

4

3
14
23
15

91

206

3

6
5
120

Plot area(sq ft)1,000-1,800
4,400-6,500
900-4,500
4,960-7,300
1,800
1,800-2,700
1,800
3,500
1,800
4,200-6,250
1,750
1,690
1,800-3,200
3,000
2,303
1,800-3,200
1,800-3,200
2,000-5,040
4,500
3,700-4,800
3,336-4,410
2,500
2,275
3,200-3,800

218

VDF Annual Symposium on "Avoiding
the Middle Income Trap: Opportunities& Challenges for Vietnam" 18 Mar
2010

Malaysia: “New Economic Model”
Prime Minister Najib’s Strategy to Overcome Middle Income Trap

Source: Economic Planning Unit, Jan.2010

Conclusion for Vietnam
 Policy experiences of neighboring countries

must be studied selectively and in detail.
 Clear policy vision and targets must be set
in SEDP 2011-15 and SEDS 2011-2020.
 An integrated and concrete policy package
must be designed and implemented torealize SEDP/SEDS goals. Vietnam must
learn how to draft this policy package.

19