Educational investments and returns in Vietnam

For developing countries like Vietnam, a well-educated and mobile labour force is essential to escaping the middle-income trap.

School pupils cheer as they release balloons during a ceremony held  at a primary school in Hanoi to mark the new school year. (Photo: AAP)

Skills and mobility are also the keys to individual economic gains in the course of growth. But as Vietnam struggles with the transition to a market economy, there are signs that deep distortions that preserve the dominance of state-owned companies in domestic markets are also inhibiting the accumulation of human capital.

Capital and skills are complementary, so state-sector companies, which have been greatly favoured by Vietnam’s state banking system, typically employ skill-intensive technologies. However, their hiring of skilled workers is limited; since few of these firms produce for the world market, their growth is constrained by the expansion of domestic demand, which has increased much more slowly than exports. As in China, this combination results in the rationing of high-paying jobs in state-sector companies, which also generates rents that add to white-collar workers’ incomes. Meanwhile, the capital-starved private sector, which has generated most new employment during Vietnam’s transition, seeks mainly workers with lower-secondary school education, and offers much lower rewards to higher levels of educational attainment. This system has several implications that do not bode well for economic progress in the long run.

First, returns to schooling at upper-secondary and tertiary levels are contingent on expectations of state-sector employment. For wage-earners, state-sector jobs return 5–9 per cent higher earnings per year of education, significantly higher than the 3–4 per cent per year in non-state employment. Family connections are strong predictors of employment in state-sector companies, so for the majority of students who lack such connections, the benefit–cost ratio of an additional year of schooling after middle school and into university is much lower. Schooling is a major financial burden on families, so policy-induced segmentation of the skilled labour market results in a lower overall rate of accumulation of human capital.

Second, families with connections to state-sector employment invest much more heavily in their children’s education, whether this is measured by high school or university completion rates, or household-level spending on children’s education. As long as the dichotomous labour market persists, conditions in Vietnam are ideal for a deepening inequality of income and opportunity between those who have the right family connections and those who lack them.

Third, the requirement of a university degree for most skilled state-sector jobs appears to have sparked a race for higher education credentials, rather than for skills as such. On the positive side, diplomas are among the few tangible benefits that most students can expect from Vietnam’s largely unreformed higher education system. But Vietnam’s own Ministry of Education has estimated that only 30 per cent of university graduates are adequately trained for the jobs they seek.

An additional implication of this two-speed market for skills is that investments in Vietnam’s educational infrastructure may be less productive than the government, and the international donor community that supports it, may expect. With only a limited number of high-paying jobs for skilled workers, high school retention rates and university enrolment rates may be limited as much by low demand as they are by lack of buildings, teachers and learning materials. This is a peculiarly Vietnamese variant of a Dutch Disease phenomenon seen in other countries, where resource export wealth pushes up job growth in relatively low-skill non-tradables sectors, such as construction and personal services, while depressing it in more technologically dynamic tradable sectors, such as manufacturing. In both cases, low expectations of jobs offering high returns to education discourage high school completion and progression to tertiary training.

What are the prospects for change? Vietnam’s government has announced plans for reforms, which, if implemented, will reduce the privileges and influence of state-sector companies. But prospects for real progress in reform are clearly constrained by the complex and opaque politics of the one-party state. More positively, the capacity of private sector firms to mobilise capital from non-state financials and from the world market has increased somewhat in recent years, and this trend should also help undermine the salary gaps that so clearly drive differential returns to education. However, the private sector is still very much on the losing end of Vietnam’s financial policies, gaining little from credit expansions and suffering greatly when monetary policies are tightened to fight inflation.

The presence of wholly foreign-owned firms continues to grow (albeit from a very low base when measured by employment shares), and in time their expansion will also help create new demand for workers with applicable skills. Here, the constraint is of a chicken-and-egg type, in which greenfields investments by medium and high tech companies are discouraged by lack of a suitably skilled workforce — as the 2008 Intel case famously revealed. Firms like Intel have addressed the Vietnamese skills shortage by training their own workers abroad, and foreign institutions of higher education are also expanding in-country vocational training, but these are very costly ways to compensate for the failings of the country’s own system of education. Finally, there are a few signs that some domestic higher education institutions are finally beginning to acquire enough independence to design and offer meaningful curricula, often in partnership with foreign institutions, but their programs are also quite costly for most Vietnamese students. Vietnam’s long-rundevelopment prospects will be greatest if the problem of market segmentation leading to low educational incentives and diminished employment opportunities for skilled workers is addressed at its source.

This post was first published on East Asia Forum on 6 June 2013 (link).  More details can be found in the these papers: ‘Long-run costs of piecemeal reform: wage inequality and returns to education in Vietnam’ (Journal of Comparative Economics, in press) and ‘Princelings and paupers: State employment and the distribution of human capital investments among Vietnamese households’ (Asian Development Review, forthcoming). 


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