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AEC SPECIAL REPORT - VIETNAM: Bold reforms needed

Publication Date : 30-12-2013

 

The realisation of the Asean Economic Community (AEC) by 2015 will allow the free flow of goods, services, skilled labour and investment, and a market that encompasses over 600 million people and US$2 trillion in production. For a country in transition like Vietnam, participation in AEC is gilded with golden opportunities, but also fraught with risks.

Vietnam has since put in place a number of measures  and is gearing up well for regional competition. The business community, as well as academics and other individuals are under pressure to institute reforms and increase competitiveness ahead of AEC.

Progress so far

The Asean Blueprint drawn out in 2007 targets four objectives: a single market and production base, a highly competitive economic region, equitable economic development, and integration with the global economy. Within these areas, it identifies 17 core elements and 176 priority actions within a strategic schedule of four implementation periods (2008-09, 2010-11, 2012-13, 2014-15).

According to the latest report by the Ministry of Industry and Trade (MoIT), Vietnam has accomplished 84.8 per cent of these elements from 2008 to July 2013, ranking the country fourth in the bloc so far. Asean as a whole has implemented 79.7 per cent.

So far, Vietnam has reduced import duties to 0-5 per cent on more than 10,000 tariff lines, or 98.86 per cent of the tariff schedule, in accordance with the Asean Trade in Goods Agreement (ATIGA) from 2008. While it is significant progress, Vietnam still has to catch up with Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand, which cut tariffs to as low as zero per cent on 99.65 per cent of trade imported from Asean countries since 2010.

According to Industry and Trade Minister Vu Huy Hoang, Vietnam prioritises its commitment to eliminate non-tariff barriers and enhance trade cooperation, in order to accomplish the ninth and 10th packages under the Asean Framework Agreement on Services (AFAS), and to collaborate with other Asean member countries to implement agreements in the Asean Agreement on the Movement of Natural Persons (MNP), the Asean Comprehensive Investment Agreement (ACIA) and related agreements.

Once implemented, AEC is expected to raise Asean real incomes by US$69.4 billion, or 5.3 per cent over the 2004 baseline income, and raise Vietnam’s real income by $2.4 billion, or 2.8 per cent over the 2004 baseline income. These benefits could grow as the domestic economy matures and evolves to make economic integration even more productive.

Hard challenges ahead

Nevertheless, Vietnam still has many tough issues to tackle before it can be considered fully prepared.

One of these issues, saidVo Tri Thanh, Deputy Head of Central Institute for Economic Management (CIEM), is negotiating tariff reductions for taking oil and petroleum items from the General Exclusion List.

“Even though participation in the experimental Programme on Self-recognition of Origin is not compulsory at this stage, the target of implementing such a mechanism by 2015 necessitates enormous preparation attempts,” Thanh said.

He adds that another concern is the lack of utilisation of the Asean Free Trade Area (AFTA) and the Common Effective Preferential Tariff (CEPT) treatment. Usage of Form D (Certificate of Origin) remains low (below 20 per cent, but has increased from 8 per cent in 2007).

Reasons for this varies, such as lack of information about the existance of the facility, and also many Vietnam-made products failed to meet domestic standards.

Parallel to the benefits to be gained from trade agreements including tariff reductions, economists expect the continuous increase in Vietnam’s imports from other Asean states to affect the country’s trade deficit with Asean.

An increase in imports will also put a greater burden on domestic producers, even in sectors that Vietnam has been comparatively competitive in, such as agriculture, textiles and leather.

It will also mean that some markets will need to diversify in order to lessen their dependence on imports.

Vietnam now has to tackle tariff reduction policies in industries, which are sensitive to consumer surplus, such as agriculture, beverages and tobacco, and mining and oil.

Weak logistics
Vietnam’s readiness to open its logistics market to foreign players is still doubted.  Over the past decade, the logistics market has recorded annual double-digit growth, according to Vietnam Logistics Business Association (VLA) estimates. In 2012, some 10 million TEU (twenty-foot equivalent) units went through all ports in Vietnam, including more than 400,000 tonnes of air freight. On average, the market saw a growth rate of 10-15 per cent per year, which although is higher than other regional markets, is still not competitive enough.

The International Logistics Performance Index 2012 compiled by the World Bank ranked Vietnam 53rd with a score of three for its logistics performance (see Table 2&3).

Additionally, joint ventures now account for a small part of over 1,000 companies participating in Vietnam’s logistics market, but the cargo proportion handled by foreign players is much higher than local firms.
Do Dang Tan, chairman of STC Logistics Co. in the northern city of Hai Phong, one of three biggest logistics hubs in the country, describes this as a “cake which foreign investors have taken 90 per cent (of)”. He added that local companies are struggling to hold on to the 10 per cent left for the domestic market.

Local companies in this sector are facing a bottleneck situation which involves time-consuming customs clearance procedures, tax regulations, limited investment capital, high costs, technological application for governance, and the quality of human resources.
“This will mean low competitiveness and an inability to tap the sector's growth potential if the country fails to build a more transparent and effective market mechanism,” Tan said.

VLA statistics show that logistic costs accounted for up to 20-24 per cent of Vietnam’s GDP, nearly double the cost in Indonesia and Malaysia and triple that in Singapore. The cargo capacity of Kuala Lumpur International Airport in Malaysia, for example, more than tripled the combination of Noi Bai and Tan Son Nhat airports in Vietnam.

“Time is running out for Vietnamese logistics companies to consolidate their position in the domestic and regional markets,” VLA Chairman Do Xuan Quang warned.

Limited labour force
In terms of labour, industry insiders and national officials agree that the gains will be far greater than the losses. But if Vietnam is not prepared, those gains could be less than projected.

Under AEC, skilled workers and members of seven professions—doctors, dentists, nurses, engineers, architects, accountants and surveyors—is expected to be able to move freely within the region.
Deputy Minister of Education and Training Bui Van Ga said international integration in education gave Vietnam a chance to mobilise resources and experience from outside the country, to develop resources in the country.

Le Quang Trung, deputy director of the Ministry of Labour, Invalids and Social Affairs' employment bureau, said that skilled locals would be given more options, while the arrival of foreign workers would provide many more opportunities in trade, investment and employment, and new knowledge and advanced technology to help raise the quality of the domestic labour force.

However, there is still a shortage of such highly skilled labourers, and lack of language skills will also eventually pose problems.
A report by the Economist Intelligence Unit last June concluded that Vietnam’s higher education landscape needed to be put into context in terms of demographic and economic imperitives that affect the labour market. It needs be reformed for the country to reach its full potential.

There have been calls for reforms by the education ministry, but not much has been done—in particular in terms of preparation for AEC by the education sector. A survey by the press among universities in Ho Chi Minh City showed that many participants did not have a clear knowledge of AEC.

Another poll conducted among various academic and training institutions showed that they have not been informed to prepare for the implementation of AEC.

Poor command of the English language and lack of soft skills including presentation, teamwork and the ability to think critically were some problems Vietnam still needs to overcome, said the Navigos Search and Manpower Vietnam.

Because of this, even university graduates like Nguyen Hai Nam, who holds a degree in nuclear engineering, are struggling to find a job in a multinational companies.

Introspection
These challenges point to chronic weaknesses in the regime, and shows how crucial it is for Vietnam to move forward more aggresively with its long-delayed institutional reform plans—that is to improve the country’s competitiveness and reinforce market-oriented mechanisms and transparency.

Vietnam has been calling for a postponement of lowered tariffs for certain products, after the official launch of AEC on Dec 31, 2015, due to lack of preparedness and confidence in its ability to compete—such as in the automobile sector.

“In a free-tax zone, if Vietnam fails to build an auxiliary industry which is strong enough to keep automobile manufacturers here, they will pack up and move to Indonesia or Thailand where the automobile auxiliary industries are already very advanced. In my opinion, Vietnam must be able to supply 60-80 per cent of parts and devices for the domestic automobile industry, or the sector will die,” said VCCI’s Loc.
Vietnam’s electronics industry is also facing the same issues. Although the deadline for tax cuts on electronics is still years away, some assembly lines, such as Sony Vietnam, have left the country for its neighbours.

“The question is how to reposition Vietnam as the ‘door’ for other members of the community. The only way to ensure our competitiveness is to hasten the restructuring of the available systems,” said Nguyen Hoang Hai, chairman of the Vietnam Association of Financial Investors (VAFI).

Professor Tran Dinh Thien who directs the Vietnam Economic Institute said the country needs a new national growth model where the economy is driven by domestic input and not by imports.
This would probably mean reallocating finances and manpower, which will not be easy, he said.

However, he warned, if Vietnam keeps delaying the process, issues causing the “bottleneck” will “harden” and cause serious consequences on the economy.

Others defended that the delay was due to a critical shortage of financial resources in wake of a state budget facing deficit, as well as failure to break deadlocks in business communities.

To deal with capital shortage, industry insiders suggest that restructuring state-owned enterprises must be the focus, as they hold 60 per cent of total social capital (or 900,000 dong/US$42.7 billion), contributing 33 per cent to economic growth and 30 per cent to the state budget.

Pham Chi Lan, a former government advisor, said that in the meantime the private sector should play a core role in national economic development.

“The state should withdraw capital from its business bodies and change their role from direct control to supporting the whole economy. This will encourage private groups to participate, which is key in setting up an effective growth model,” said Loc.

The VCCI and the Ministry of Planning and Investment have proposed two measures to support the process. First, the government should set up a body to manage state assets and capital, which is responsible for the restructuring programme. Second, the Vietnam Competition Administration Department should be given independent power. It is hard to produce fair assessments if this department is positioned as both a market member and a watchdog.

The government also has to keep tabs on the domestic markets and help bring out their full potential.

"If Vietnam restructures its economy and renovates the growth model, I believe that the country will be at an advantage when it integrates into AEC in 2015," said Nguyen Hong Son, Rector of the VNU University of Economics and Business.

Interview with Phu Huynh, Labour Economist, ILO Asia-Pacific

1.  What are the problems with Vietnam’s labour market structure regarding AEC entry?
A majority of jobs are poor quality with low earnings and productivity. About half of our country’s workers are still employed in agriculture, more than three out of five workers are informally employed and more than four out of five workers have no technical training or qualifications.

2.  What is Vietnam’s standing in the regional labour market? Are we ready to compete?
In comparison to its Asean neighbours, Vietnam faces significant gaps in terms of job quality and human resources. In terms of labour productivity, for example, the level in Vietnam is eight times lower than in Singapore and four times lower than in Malaysia.

3. What do you think about  the  potential mobility of inflow and outflow in Vietnam as the country joins the AEC? Which will dominate? What are the consequences?
There were an estimated 222,000 Vietnamese working abroad within Asean in 2010, with less than 22,000 ASEAN migrants working in Vietnam.

Given wage and demographic variance across the region, AEC will likely intensify these trends, so the trend of greater outflow than inflow from Vietnam will continue.

4. How should authorities and members of the domestic labour market prepare to take advantage of the opportunities brought by the AEC—or face any challenges?
The AEC has initially identified the free flow of labour in only a limited number of skilled occupations: architects, engineers, surveyors, medical doctors, dentists, nurses, accountants and tourism professionals. However, these occupations account for less than 2 per cent of Vietnam’s workforce.

Thus, it is critical that Vietnam actively engage in multilateral mechanisms and efforts to strengthen the regional certification and mutual recognition of these other skills and professions.

Domestically, the country will need to prioritise investment in its education and training system to ensure that it has a competent and skilled workforce ready to benefit from AEC.

 

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