Productive workers and livable cities: keys to Vietnam’s growth

In January 2011, at its 11th Congress, the Vietnamese Communist Party is expected to approve a Socio-Economic Development Strategy (SEDS) for the decade 2011-20.  This document will set the scene for Vietnam’s third decade of modern economic development.  The first decade, in the 1990s, was a period of transition from the postwar command economy.  The second decade – the first of the new millennium – saw tremendous acceleration in economic growth, and widespread improvement in levels of living.  Though many Vietnamese still severe poverty, the country as a whole now stands at the threshold of middle-income status.  What challenges and opportunities does the next decade hold, and what should Vietnam be doing to prepare for them?  In this note I focus on the important area of employment and labor force development.

Vietnam’s accession to the WTO (in January 2007) was anticipated and accompanied by a huge boom in export earnings and foreign investment inflows.  These trends are causing fundamental changes in the way Vietnamese workers earn their living.  A country whose economy had previously depended mainly on agriculture has suddenly developed a thriving export-oriented manufacturing sector, which now employs hundreds of thousands of workers.  Compared with previous economic transitions, even in dynamic Asia, these shifts (as seen in Figures 1 and 2) have taken place almost overnight.[i]

The changing structure of production and employment is mirrored by rapid growth of urban centers – especially Ho Chi Minh City, which is poised to become Asia’s next megacity as it nears 10 million inhabitants. Many of them are first-generation migrants from rural households, where their parents and siblings (and in some cases children) remain.

Non-farm jobs and rural-urban migration have reduced somewhat the dependency ratio (roughly speaking, the number of mouths to feed per worker) in Vietnam’s countryside.  Even so, land and capital remain very scarce, and farm profits still rely on weather and world prices, both of which are increasingly volatile.  Farm incomes, though higher now in real terms than ever before, remain low and unreliable, and rural poverty is far more prevalent than in the nation as a whole.

Increasingly, however, the incomes of rural households are supplemented by savings remitted by migrants.  When migrants have steady work in factories or other formal enterprises, the relative stability of their incomes helps both to raise and to stabilize rural incomes too, through the remittance channel.  The ability and willingness of rural workers to change both occupation and location has thus played a dual role in Vietnam: it has facilitated the growth of export-oriented, labor-intensive manufacturing industries; and through remittances, it has helped redistribute the gains from Vietnam’s globalization, from cities and factories to rural and farm-based households.

The broad base of gains has helped Vietnam escape the worst distributional effects of sectorally unbalanced growth.  In fact, the most recent analyses even suggest that the average urban-rural income ratio actually declined somewhat from 1993 to 2006.  If true, this is a strong contrast to distributional trends in other transitional countries – most notably China, which has rapidly become one of the most unequal economies in the world, due mainly to huge disparities in growth between its urban/industrial and rural/agricultural populations and limited mobility between the two.

Overall, these have been deservedly impressive achievements for a poor economy in transition.  However, several indicators presage problems and policy challenges for the next decade.  Foremost among these is the need to continue creating rewarding jobs at a rate sufficient to match the growth of the labor force.  Second is the need to match these workers with productive jobs, which depends on continued (or even increased) rates of labor mobility as well as an appropriate sectoral distribution of job-creating investments.  Third, and closely related, is the need to ensure that demand growth for skilled workers in all occupations can be matched by growth in supply.  In each of these areas, Vietnam is showing signs that the relatively easy part of its transition is over.

In the last decade, approximately 1m new workers have joined the labor force each year. The total number of jobs created has on average been just sufficient to match the growth of labor supply (Figure 3).  As Figure 2 showed, however, the vast majority of workers remain in either agriculture or services.  The latter is a catchall category – it includes bankers and bureaucrats as well as construction workers, housemaids, and garbage sorters – but most service sector workers have few skills, and most service sector jobs are in the informal, or unregulated, labor market, where skill requirements are low and job security and legal protections for workers are often absent.  Lately, as Figure 3 shows, agricultural employment has contracted, and of the new jobs created, two-thirds have been in services. Services, and thus the informal sector, are absorbing the majority of new entrants to Vietnam’s labor force.  This helps keep the official unemployment rate low, but raises questions about the true success rate in job creation and the quality of new jobs created— especially for young people, among whom the official unemployment rate is three times the national average, at 9.3%.[ii]

Trends in skills improvement are also cause for concern.  In 1990, the average Vietnamese workers had 6.3 years of schooling—0.7 years less than the next lowest SE Asian country, Indonesia.  This improved to 7 years (a gain of 11%) by 2000, but all the other regional economies did better; Indonesia’s gain was 20%, to 8.4 years.  Projections of current trends to 2010 and 2020 show more of the same pattern: improvements in average schooling, but a widening education gap between Vietnam and its neighbors.[iii] This presages a loss of competitiveness within the regional trade network, and also flags future difficulties for the growth of skill-intensive industries within Vietnam itself; the projected 2020 schooling rate (7.8 years) is comparable to those for China and Thailand in about 1990.  In its 2008 report, the government’s leading economic think-tank (CIEM) estimated that only 30-40% of skilled labor demand was being met.[iv] The university system offers low salaries and few rewards for professional achievements, and is chronically short of places; it has not been effective at responding to higher education demand.  State-funded vocational programs, meanwhile, seem to be missing their mark by a wide margin, turning out too few trained workers and focusing on occupations and skills sets that are mismatched with the requirements of the more dynamic industries.[v]

Managing urbanization is another looming issue.  Vietnam’s government appears consistently to underestimate the population and growth rate of its largest and most economically dynamic metropolis, Ho Chi Minh City.  All of the country’s large urban areas are net contributors to the central government’s budget, while almost all rural areas are net recipients.  This resource transfer inhibits city growth, and in particular the provision of public services and urban infrastructure, such as roads, schools, sanitation, and mass transit.  If cities cannot offer such services and instead become congested, polluted, and underserviced, then workers must demand higher rewards to more there; this raises industry costs and reduces international competitiveness.

The alternative strategy is for individual migrants rather than entire households to relocate.  This is acceptable for unattached individuals, such as the young workers, mainly young women, who make up a large part of the low-skill manufacturing workforce.  However, older (and thus more experienced) workers face the choice between migrating for a better living or retaining an intact household with their spouses, children, and other dependents in the countryside.  So building better cities is an important element of maintaining and encouraging occupational and spatial labor mobility— and therefore, to maintaining the momentum of economic growth.

In its first two development decades, Vietnam grew in part by exploiting opportunities created by one-time reforms such as the reintroduction of markets to agriculture, the relaxation of binding trade policy constraints, and the opening of key sectors to private and foreign investment.  But many of these are changes that can occur only once.  Sustaining economic growth requires ongoing commitment and creativity.  In Thailand, a decade of very fast economic growth 1985-96 encouraged policy complacency, which led to underinvestment in schooling and skills as well as urban congestion, all of which rapidly raised labor costs.  This has been identified as a key factor contributing to a decline in export earnings that helped precipitate the 1997 exchange rate crash and financial crisis—and a growth slowdown that has continued to this day.

After employment creation, the most important growth challenge facing Vietnam is to support expansion of an adequate and productive human capital endowment.  Labor productivity increase is the mainspring of long-run economic growth, and a country that fails to promote and sustain expansion of labor skills risks falling into a ‘lower-middle income trap,’ in which firms do not innovate or invest because there are not enough skilled workers, while workers do not acquire education or training beyond a basic level because there is insufficient demand for skills.  Long-term, such an economy is doomed always to compete for low-skill jobs and low-tech industries in the global manufacturing system.  Fixing it calls for a coordination of efforts that is beyond the capacity of private actors alone.  It requires policy action, and so the government should address it as part of its development strategy.  Fixing higher and vocational education is one urgent task.  Making cities livable and affordable is another.  The two, as this note suggests, are strongly complementary.

A much longer and more detailed version of this post is available (in English and in Vietnamese) here

[i] Data in all figures are from the Asian Development Bank’s Key Indicators series.

[ii] CIEM (Central Institute for Economic Management), 2009. “Vietnam’s economy in 2008: a reference book.” Hanoi: Finance Publishing House.

[iii] Goujon, A., and Samir.A.C., 2006. “Past and future of human capital in SE Asia: 1970-2030.” Vienna Institute of Demography, Working Papers No. 2006-07.

[iv] CIEM, ibid.

[v] Mori, Y.; Nguyen Thi Xuan Thuy, and Pham Truong Hoang, 2009.  “Skill development for Vietnam’s industrialization.”  Manuscript, Hiroshima University.


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