Workshop on "Vietnam's
Industrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI

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

Kenichi Ohno (VDF/GRIPS)
Revised October 2010

Contents
 Middle income trap
 Proactive industrial policy Common policy menu for enhancing

industrial capability
 Malaysia’s “New Economic Model”
 Recommended actions for Vietnam

1

Workshop on "Vietnam's
Industrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI

What Is a Middle Income Trap?
 The developmental trap occurs when acountry is stuck at the income dictated by
given resources and initial advantages, andcannot rise beyond that level (only luck andno effort).
 The level of income where the trap may
occur depends on endowment of resources
and advantages.
Low endowment  Poverty trap
Moderate endowment  Middle income trap
High endowment  High income

Middle Income Trap (cont.) Countries can reach middle income byliberalization and integration, but reaching
higher income requires strong policy effort
to stimulate private dynamism.
 Growth based on FDI, big projects, naturalresources, or locational advantages will
eventually end. The true source ofdevelopment is value creation by humans(knowledge, skills, technology).
 Policies and institutions must promote
human capital formation. Such policies are
possible even under globalization, but they
are different from past policies. I call it“proactive industrial policy.”

2

Workshop on "Vietnam'sIndustrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI

Speed of Catching Up: East Asia
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%Japan90%

Singapore

80%

Hong Kong
TaiwanTaiwanS. Korea
S. Korea

70%
60%
50%

Malaysia
Malaysia

40%

ThailandThailandIndonesia
Indonesia

30%

Philippines
Philippines
20%

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%

Brazil70%
Chile60%

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).

3

Workshop on "Vietnam'sIndustrialization and Industrial Human
Resource Development"

26 October 2010 by HaUISouth 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%

Pakistan40%

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).

AfricaPer 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

19601955

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).

4

Workshop on "Vietnam's
Industrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI

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,subsistence
agriculture, aid
dependency

Poor countries
in Africa

Simplemanufacturing
under foreign
guidance

Vietnam

STAGE TWOHave 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)

5

Workshop on "Vietnam's
Industrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI

Vietnam’s Challenge

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

1991

1990

TFP change (%)
1993

Thanks to Doi Moi and large inflows of FDI and ODA,
Vietnam has reached lower middle income (pc GDP of$1,200 in 2010). But policies to upgrade human capitalare not yet established.
Vietnam does simple assembly with unskilled labor. FDI
will leave and de-industrialization will occur as wages
rise and integration deepens. Without domestic value
creation, Vietnam will surely face a middle income trap.

1992



Proactive Industrial Policy:
Seven Required Features
1. Strong commitment to global integrationand private sector driven growth
2. A wise and strong government guiding
private sector
3. Securing sufficient policy tools for latecomerindustrialization
4. 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

6Workshop on "Vietnam'sIndustrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI

Proactive Industrial Policy (cont.)
Infant industry promotion by tariffs andexport subsidies is no longer allowed today.
 PIP strikes a balance between state andmarket, and is consistent with globalization.
But it requires policy learning.
 PIP is already practiced widely, especially in
East Asia. Systematic analysis of concrete PIP
measures is needed.
 There is a standard policy menu for enhancing
industrial capability. But selectivity andadjustment are required to adapt to theunique features of each country.
Standard Policy Menu forEnhancing Industrial Capability
Policy content & policy organization
Framework

Vision-Plan-Action

Ministries & agencies

Enhancing industrial human andenterprise capability
Software

Policy framework
Finance
Human capitalFDI/cluster policy
Enterprise support
Business linkage
Innovation

Hardware

Infrastructure (power, transport/logistics)

Application(hard+soft)

Comprehensive regional development

7

Workshop on "Vietnam'sIndustrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI

Enhancing Industrial Human and Enterprise
Capability: Standard Menu
Main objectives(1) Legal and policy frameworks(2) Local capacity building(industrial human resource andlocal enterprises)

Sub items
Laws and regulations
Ministries/agencies for promoting SMEs, FDI, etc. with sufficient capability and authority
Inter-ministerial coordination mechanisms
Effective public private partnership (PPP)
Mechanism for business-government-academia linkage
Policy system consisting of visions, roadmaps, action plans, and monitoring
Standards for quality, safety, skills, environment, etc.
Mechanisms for protecting and utilizing Intellectual property rights
Strengthening of industrial statistics
Strategic mobilization of international cooperation
Universities of technology and engineering, industrial colleges
Short-term courses for enterpreneurs
Technical support on specialized skills for engineers
Technical and vocational training for new or current workers
Skill certification, competition, and awards
Subsidies and incentives for targeted activities (worker training, technology transfer, die andmold, marketing, ITC, etc)
Management or technical advisory service (by visiting consultants, short-term)Enterprise evaluation and advice system (institutionalized shindan system or technicalextension services) - also related to SME finance
Local enterprise networks(Cont.)(3) Finance

Development financial institutions
Subsidized commercial bank loans for targeted firms (two-step loans)
Credit guarantee system
Equipment leasing
Venture capitalEnterprise credit information systemEnterprise evaluation and advice system (same as in (2))(4) FDI marketing
List of priority products and activities and a system of investment incentives
Investment promotion seminars and missions
Effective investor information package and website
Investment promotion offices abroad
One-stop services and enteprise support (before and after investment)
Upgrading infrastructure service quality (power, transport, water, etc)
Environmental control and facilities (incl. waste water treatment)
Industrial estates with sufficient infrastructure services and administrative services (incl.
specialized industrial parks)
Labor support (training, recruiting & matching, housing/domitories, commuting, health care,etc.)
Prioritized and targeted FDI marketing
Inviting individual target company ("anchor firm") and provision of required conditions(5) Linkage (learning by working Trade fairs and reverse trade fairs
with global standard firms; market Enterprise databases (SMEs, supporting industries, sectoral)
development)
Official intermediation/promotion of subcontracting
Incentives/subsidies for FDI-local firm linkage
Domestic and export market development support
Establishment and enhancement of industry associations

8Workshop on "Vietnam'sIndustrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI

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

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.

9Workshop on "Vietnam'sIndustrialization and Industrial Human
Resource Development"

26 October 2010 by HaUIMalaysia’s “New Economic Model”(Announced in March 2010)
PM Najib
Tun Razak

 “We are caught in a middle income trap; weare not amongst the top performing globaleconomies.” (pp.3-4)
 Malaysia’s vision for 2020—(i) market-led,(ii) well-governed, (iii) regionally integrated,(iv) entrepreneurial, (v) innovative Three Goals
High income ($15,000-20,000)
Inclusiveness (everyone benefits)
Sustainability (fiscal, environmental)

Malaysia’s Old and New Approach
Old approach

New approach

Growth primarily throughcapital accumulation

Growth through productivity

Dominant state participationin the economy

Private sector-led growthCentralized strategicplanning

Localized autonomy indecision-making

Balanced regional growth

Cluster- and corridor-based
economic activities

Favor specific industries andfirms

Favor technologically capableindustries and firms

Export dependence on US,
EU and Japanese markets

Asian and Middle Eastorientation

Restrictions on foreign skilled Retain and attract skilledworkers
professionals
Source: NEAC, “New Economic Model,” p.15.

10Workshop on "Vietnam's
Industrialization and Industrial Human
Resource Development"26 October 2010 by HaUI

Possible policy
measures1722112315182414144

Strengths and Weaknesses of theMalaysian Approach Competent leader (PM), technocrats (EPUand others), and officials.
 Clear vision, goals, and policy direction.
BUT Issues and policy measures are too manyand too broad – selectivity is required due
to human and financial constraints.
 For Malaysia, the critical problem is lackof private sector response to good policies.
Improving policies further will not solve
this problem.

11Workshop on "Vietnam'sIndustrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI

Recommended Actions for Vietnam
1. Collect and study concrete international
experiences in industrial capability
enhancement
2. Identify a small number (less than 10) ofpriority issues for Industrialization andModernization by 2020
3. Create specialized mechanism for eachpriority issue
4. Let these mechanisms design andimplement policy actions
5. Progress review by highest level(1) Study International Experiences
For example, Vietnam can study:
1. Engineering education and training at TPA, ThaiNichi Institute of Technology, King Mongkut
University, Thai-German Institute (Thailand),Nanyang Polytechnic (Singapore)
2. Quality and productivity policies of SPRING(Singapore) and MPC (Malaysia)
3. National SME Development Council of Malaysia
4. Automotive Institute and Automotive Industry
Association of Thailand
5. FDI and business linkage policies of Malaysia andThailand
6. Die and mold industry promotion in Indonesia
7. Enterprise diagnosis and advisory (shindan)system of Japan

12

Workshop on "Vietnam's
Industrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI(2) Select Priority Issues for Action
Possible issues include:
1. Promoting engineering education with aroadmap and numerical targets
2. Revamping SME policy
3. Strengthening supporting industries
4. Transport and logistic efficiency
5. Agro and marine product exports with
globally highest quality and safety
6. Comprehensive regional development basedon industrial clusters(Note: promotion of high-tech or global value chain may
be too general for Vietnam.)(3) Create Specialized Mechanisms
Different ways to create mechanisms:
 Permanent technocrat group directly
under PM to make key policies
 Monthly national committee headed byPM (2 or 3 in number) Committee headed by minister andsupported by task forces Specialized “institute” or “center” to serve
as a policy making hub(Note: drafting master plans within each ministry,
as currently done in Vietnam, carries little
authority and cannot ensure implementability.)

13

Workshop on "Vietnam's
Industrialization and Industrial Human
Resource Development"

26 October 2010 by HaUI(4) Draft Concrete Policy Actions
Businesses

Ministries＆agencies

Top
leaders

Set broadgoals &direction

Drafting

Comments& revisions

Experts

Foreignexperts

Citizens &consumers

Leader’svision

Informaldiscussions

Information
sharingFinalize& approve

VietnamEnsure: Stakeholder involvement (esp. businesses)
 Inter-ministerial coordination
 Sufficient mandate, budgeting, staffing, and legal
framework(5) Monitoring by Top Leader
 Top leader must be personally committed

to priority policies and use his/herauthority to push and publicize them.
 Progress should be regularly reported to
the leader (monthly or quarterly official
meetings).
 When a problem is identified, the leader
should assign relevant minister for
immediate action and result reporting.

14