# **Summary and conclusions**

Between 1992 and 1997, Vietnam was one of the fastest growing economy in the world. This growth was led by the industrial sector which expanded at 13% per annum. However, Vietnam's strong manufacturing growth has only had a moderate impact on industrial employment, which grew by 4% per annum. This represents less than 30% of the rate of industrial growth. In stark contrast, Asian countries which followed export oriented growth strategies during the last three decades were able to raise industrial employment at annual rates close to 80% of their industrial growth.

One explanation of this difference lies in the capital intensive and inward looking nature of much of Vietnam's industrial sector, which is still dominated by State owned enterprises concentrated in heavy industry. The surge of foreign direct investment into Vietnam in the mid to late 1990s has not altered this situation to any significant degree. Although the share of foreign capital flowing into light industry has increased in recent years, close to 90% of the stock of foreign investment is still in capital-intensive industries. This pattern of growth in large part reflects Vietnam's high barriers to heavy industrial imports, which not only protect State enterprises but also attracts foreign investors into importsubstituted and capital-intensive activities, often in joint ventures with State enterprises.

In the future, however, growth promises to be much more labor-intensive. Between 1992 and 1997, real export earnings increased by an impressive 19% per year and the share of light manufactures in total exports rose from 13.5% to 36.7%. Had manufacturing exports earnings continued to grow at their pre-crisis rates Vietnam might have exported an additional $1.2 billion of light industrial goods and created up to 300,000 manufacturing jobs in 1998.

In addition, Vietnam's high human capital and its large supply of labor relative to land suggest that there is scope for significantly raising manufacturing exports in the near future through a better allocation of resources. Cross-country statistical evidence shows that Vietnam's untapped export potential represents roughly 25% of its GDP and that up to 1.6 million jobs could be created in the next few years through labor-intensive exports. With high export growth rates, these jobs could be created in the next 3 to 6 years.

The paper also shows that current regulations regarding minimum wages and non-wage benefits are unlikely to harm private sector development. Their impact on foreign invested companies are, however, more ambiguous. For these companies, the minimum wage is above market wages and non-wage benefits further increase labor costs. Whether this deters foreign investment or induces a relocation of production to more competitive countries is unclear. The presumption is that at less than $2 a day, labor costs in Vietnam remain low and attractive. Finally, in theory, Vietnam's new Labor Code ensures labor mobility. Restrictive interpretations of the Labor Code may, however, deter foreign investment in joint ventures and slow Vietnam's adjustment process from an inward looking State-led economy to a more market based economy specialized along the lines of its comparative advantage.

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