31 Jan 2011

Middle income trap lecture at ADB,
ManilaAvoiding the Middle
Income Trap:
Renovating Industrial Policy
Formulation in Viet Nam

Kenichi Ohno (VDF/GRIPS)
Revised January 2011

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

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

1

31 Jan 2011

Middle income trap lecture at ADB,
ManilaWhat Is a Middle Income Trap?
 A developmental trap occurs when a country

is stuck at the income dictated by given
resources and initial advantages, and cannot
rise beyond that level (only luck and noeffort).
 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.) Many 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, natural
resources, 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

31 Jan 2011

Middle income trap lecture at ADB,
ManilaSpeed of Catching Up: East Asia
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%
100%
Japan

90%
90%

Singapore

80%
80%
70%
70%

Hong Kong
Taipei,China
Taiwan60%
60%

S. Korea
S. Korea

50%
50%

Malaysia
Malaysia
ThailandThailand40%
40%

Indonesia
Indonesia

30%
30%Philippines
Philippines
20%
20%

VietnamViet Nam

10%
10%

China
China,
People’sRep. of

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

0%
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).

3

31 Jan 2011

Middle income trap lecture at ADB,
ManilaSouth 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).

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

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).

4

31 Jan 2011

Middle income trap lecture at ADB,
ManilaRussia & 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 of
manufacturing
FDI

STAGE ONESTAGE ZERO
Monoculture,subsistence
agriculture, 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

Rep. of Korea,
Taipei,China

Glass ceiling for
ASEAN countries(Middle Income Trap)

5

31 Jan 2011

Middle income trap lecture at ADB,
ManilaViet Nam’s Challenge

ICOR

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

TFP change (%)
1990

7
6
5
4
3
2
1
0
-1
-2

1992



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

1991



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 andbusinesses631 Jan 2011

Middle income trap lecture at ADB,
ManilaProactive 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 capital
FDI/cluster policy
Enterprise support
Business linkage
Innovation

Hardware

Infrastructure (power, transport/logistics)

Application(hard+soft)

Comprehensive regional development

7

31 Jan 2011

Middle income trap lecture at ADB,
ManilaEnhancing 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 system
Enterprise 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

31 Jan 2011

Middle income trap lecture at ADB,
ManilaThailand: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

Viet Nam’s Supporting Industry Action
Plan Proposed by Japan (June 2009)- Viet Nam’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

31 Jan 2011

Middle income trap lecture at ADB,
ManilaMalaysia’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 global
economies.” (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

31 Jan 2011

Middle income trap lecture at ADB,
ManilaPossible policy
measures

17
22
11
23
15
18
24
14
144

Strengths and Weaknesses of the
Malaysian Approach Competent leader (PM), technocrats (EPU

and 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

31 Jan 2011

Middle income trap lecture at ADB,
ManilaRecommended Actions for Viet Nam
1. Collect and study international bestpractices in chosen strategies (as building
blocks of policies suitable for Viet Namwith selectivity & modification, not for
random or blind copying)
2. Identify a small number of priority issues
for Industrialization and Modernization by2020 (up to several)
3. Adopt policy making procedure which isstrategic and participatory
４．Create policy organization to realize suchpolicy procedure for priority issues
5. Progress review by highest level(1) Study International Experiences
For example, Viet Nam 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 andThailand6. Die and mold industry promotion in Indonesia
7. SME diagnosis and advisory (shindan) system of
Japan

12

31 Jan 2011

Middle income trap lecture at ADB,
Manila(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 Viet Nam.)(3) Adopt Policy Making Procedure
which is Strategic and Participatory
1. Clear vision given by top leader
2. Consensus building (broad goals & directions)- Brainstorming by related ministries & agencies- Collection & analysis of international best practices- Discussion with non-government stakeholders

3. Documentation- Drafters can be officials, academics, or consultants- Participation of all stakeholders in drafting andcommenting

Viet Nam is weak in all these steps.

1331 Jan 2011

Middle income trap lecture at ADB,
ManilaStandard Policy Making Procedure
Top leader
1. Vision

2. Consensus
building process

3. Documentation
process

Brainstorming
Set broadgoals &
direction

Studies& surveys

Drafting
work

Comments& revisions

Finalize& approve

Stakeholder
consultation

Participation
Ministries＆agencies

Businesses

Participation
Regions &localities

Academics &consultants

Note: the entire process is coordinated by a lead ministry or agency.

Viet Nam: 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)14

31 Jan 2011

Middle income trap lecture at ADB,
Manila(3) Create a New Mechanism to
Realize Proper Policy Procedure
Different ways to design & execute policies: Semi-permanent technocrat groupdirectly under PM to make key policies
 National council/committee headed by PM
or DPM (up to a few in number) A super-ministry approach (eg. Japanese
MITI in 1960s)
 Specialized “institute” or “center” to serve
as a policy hub (eg. Thai auto policy)
Note: drafting master plans within each ministry
without involving gov’t and non-gov’t stakeholders,as currently done in Viet Nam, cannot ensure
implementability.

Technocrat Group Approach- Elite technocrat groupwith full planning authority
given by top leader- Members are selected
officials, business leaders& experts with goodeducation & experience

Prime Minister
Direction, fullauthority forpolicy making

Technocrat Group(Policy Maker)
Policy,guidance andmonitoring

Rep. of Korea – Econ. Planning Board
Malaysia – Econ. Planning Unit
Thailand – NESDB
Taipei,China – Kuomintang Elites
Indonesia – “Berkeley Mafia”
Chile – “Chicago Boys”

Faithful
execution andreportingBusinesses
Academics
Experts

Faithful
executionand reporting

Ministries (Policy Implementers)15

31 Jan 2011

Middle income trap lecture at ADB,
ManilaNational Council/Committee Approach
PM or
President

Typicalconfiguration:

Chair, give mandate

National Councilor Committee

Businesses
Academics
Experts

Plan

Supportworking groups or task forces
for specific issues and sectors

Ministries and agencies

Implement

Comparing the Two Approaches
Technocrat groupserving top leader

National councils/
committees

NumberOnly one

Up to several

Tasks

Multiple and variable

Single task

Time
scope

Semi-permanent(until this system is nolonger needed)

Temporary(until the assigned task iscompleted)

Relationwithministries

A planning body above
Ministers and officials
all ministries; the latter participate in policy
are implementing bodies making as members

Comment
on VietNam

Previously, PM’s
Research Commission
played an advisory role
without policy making
authority.

There are too many
committees. Selectivity
and strategic actionorientation are missing.

1631 Jan 2011

Middle income trap lecture at ADB,
ManilaMichael Porter’s Proposal for Viet Nam

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

My Proposal for National Competitiveness Council
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

Supporting
industries

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.

17

31 Jan 2011

Middle income trap lecture at ADB,
Manila(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.

Selected References
Ketels, Christian, Nguyen Dinh Cung, Nguyen Thi Tue Anh, andDo Hong Hanh (2010), Viet Nam Competitiveness Report
2010, Central Institute for Economic Management and Lee
Kuan Yew School of Public Policy.
Ohno, Kenichi (2009), “Avoiding the middle-income trap:
renovating industrial policy formulation in Viet Nam,” ASEAN
Economic Bulletin, 26(1), 25-43.
Ohno, Kenichi (2011), “Policy Procedure and Organization for
Executing High Priority 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 for Twenty-first Century Latecomers, Routledge.
World Bank (2010), “Avoiding the Middle-income Trap: Priorities
for Viet Nam’s Long-term Growth,” a paper presented at
Senior Policy Seminar, Hanoi, August.

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