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

Kenichi Ohno (VDF/GRIPS)
Revised June 2010

Contents
 Middle income trap and proactive

industrial policy Policy menu for enhancing industrialcapability
 Strategic issues for upgrading Vietnam’s
industrial policy

1Vietnam: Middle Income Trap
and Proactive Industrial Policy
Latecomer countries can reach middle income
by liberalization and integration, but reaching
higher income requires more positive policies
to strengthen private dynamism.
 Growth based on natural resources,
locational advantage, or FDI will eventuallyend. The true source of development is value
creation by human capital (skills, technology).
Policies and institutions must promote humancapital accumulation.
 Such policies are possible even underglobalization. But they are different from pastpolicies. I call it “proactive industrial policy.”
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

Vietnam

STAGE TWO
Have supporting
industries, butstill 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

Different Speeds of Catching Up
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%Japan80%Taiwan
S. 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).

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

3

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 latecomerindustrialization
4. Constant policy learning through concrete
projects and programs
5. Internalization of skills and technology as anational goal
６．Effective public private partnership
７．Collection and sharing of sufficient industrial
information between government andbusinesses

Information Collection and
Policy Learning
Proactive industrial policy is practiced widely,especially in East Asia.
 Policy menu for enhancing industrial
capability is common. But selectivity andadjustments are needed to fit uniquefeatures of each country.
 Detailed information should be collected on
industrial policies of other countries.
 Policy scope should be expanded in steps aspolicy capability is increased.
4

Adopting Standard Policy Sequence
Vietnam should:
 Establish a technocrat team under PM Select a few strategic issues for policy
enhancement
 Assign teams or agencies
 Collect detailed policy information fromneighboring countries
 Draft master plans with stakeholders
 Allocate sufficient staff and budget
 Monitor progress and make adjustments

Common Policy Menu for
Industrial Capability Enhancement
Policy content & policy organization
Vision-Plan-Action

Ministries & agencies

Enhancing industrial human andenterprise capability
Policy framework
Human capitalEnterprise support

Finance
FDI/cluster policy
Business linkage

Infrastructure (power & transport)
Comprehensive regional development

5Strategic Issues for Upgrading
Vietnam’s Industrial Policy
Frameworks:
 Legal and policy framework Policy documents Policy making organizations
Contents:
 Management & technical education and training
 Quality, productivity, kaizen
 Shindan and shindanshi
 SME finance Priority sectors and investment incentives
 Industrial parks and rental factories
 FDI-local linkage
SME or SI policy can cover most of these issues

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

6

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-ministerialmechanism, SME laws, etc.

Humanresource

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.

Policy Hierarchy
Description

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

Strategy-Document specifying
goals, roadmaps,
policy measures-Scope & detail dependon each case-Industrial Master Plan (Malaysia)-Automotive Master Plan Main Text(Thailand)-e-Japan Strategy-Industrial Cluster Plan (Japan)

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

Review &Adjustment-Numerical monitoring,
document report,organizational review,or no formal review-Interim & final review by jointcommittee (VJJI, ToH Zambia)-Industry specific committees(Thailand)7

Typical Structure of an Industrial Master Plan
VisionImportance, role, orientation, and positioning ofindustry in national development

Targets

Long- and medium-term numerical and/or qualitative
targets

Situation analysis

Current status, potentials and obstacles of thedomestic industry in the national, regional and global
context; tables and graphics for data, surveys,international comparisons, etc.

Policy issues

A small number of selected issues should beidentified, prioritized, and analyzed in preparation for
designing policy action

Action planoraction mechanism

A large matrix that pre-specifies actions, sub-actions,expected output, success criteria, deadlines, andresponsible organizations; procedure for monitoring
and reporting should also be specified.
Alternatively, a monthly high-level committee chaired
by top leader, or a well-focused and well-coordinatedbudgeting and project approval process may substitutethe action plan matrix.

<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

2002:policy principles

Leather/garment/flower/
food processing<Vietnam>Goal 2020  Overall industrial M/P?  Action Plan?
SEDP/SEDS(Does not exist)(Does not exist)

8Action Plan Matrix: Thai Automotive Master Plan
Strategy

Action 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.
TAIOIB/TAIA/
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.

Action Plan Matrix: Zambia Investment Promotion
Expected
Activity Respons MonitoringRecommendation
Activities
StatusStatus(action)(sub-action)
outputperiodibilityindicator
Not yet Jun.
MACO
Land forPromote investment 1. Identify land to Little
Monthly
started 2007(main),in cotton production be held in MACO progress cotton
reportMoL
production
by allocating land to trust(sub)appropriate
2. Write to MoL Not yet identified
producers
for title deedstarted andsecured
3. Develop adm Donemechanism forfarm blocks

Triangle of Hope Project, Zambia, 2007 (excerpts)

9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)

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.

10

Vietnam: Traditional M/P Drafting Process
Prime
Minister
Review forapproval

Order

SubmitDraftingTeamMinisterInterministerial
review

Submit

Data

Internalreview

MPI & otherMinistries

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)

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

Korea – Econ. Planning BoardMalaysia – 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)

11

Recommendations for MOIT
MOIT’s main industrial responsibilities should shift
from sectoral management to cross-sectoralissues such as TVET, SMEs, supporting industries,
enterprise support, quality & productivity,marketing, IPR, competition, and standards &testing.
 SME policy should be under MOIT, not MPI(ASMED/EDA).
 Supporting industry department/agency should becreated within MOIT (not in IPSI).
 Master plan drafting capability must be enhanced.
 To achieve these, MOIT’s capability must begreatly strengthened.
Capacity Building and TVET (Thailand)
Organization

PeriodRemark

King 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 & practice12

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

MIDA:Structure of Incentives
1. Manufacturing
2. Agriculture
3. Biotechnology
4. Tourism
5. Environment
6. R&D
7. Medical device
B
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)13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 ofprofessional, 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 relatedservices (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)Eligible Items - Detail(XVI. Supporting Products/Activities)

14

Business Matching and Linkage
Malaysia

Thailand

Vendor Development Program BOI Unit for Industrial Linkage(1988-1996)
Development (BUILD, 1992-)
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

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
Eligibility – SMEs with 60%
or more Malay capital

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 LumpurBatu Caves, Selangor
Kota Kinabalu
Lak Kawi, Sabah
Kuching
Kota Padawan, Kuching, Sarawak
Muara Tabuwan, Sarawak
TOTAL

Numberof plots
2320
20
20
26
15
17
18
22
20
29
22
17
12
4
15
18
38
3
14
23
15
6
5422

Type
1 floor 1.5 floors 2 floors
17

616

SemiBangalow
detached
420
16
26

415
17
16

2

22
16

4
29
22

17
12
4
11
18
38

4

3
14
23
15

91

206

3

65120

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

215