Right adjustment could help Vietnam back as high-performing economy

 COVID-19 has interrupted the country’s journey to become a high-performing economy, but the right structural adjustments could help get it back on track, according to McKinsey & Company, a leading US consultant firm.

With relatively few recorded COVID-19 cases and fatalities to date, Vietnam now has an opportunity – and an imperative – to consider its longer-term economic aspirations, even as the country responds to a resurgence of the virus, the company says in a recent article looking at the pandemic’s impact on Vietnam’s economy.

In 2018, McKinsey research identified Vietnam as one of 11 recent global outperformers, thanks to its GDP-per-capita growth of more than 5 percent annually for 20 years, in addition to its successful effort to lift a significant percentage of its people out of poverty.

Vietnam has the elements in place to continue as an outperformer – for instance, growing disposable income, continued investment in infrastructure programmes, and an attractive business environment. Adjustments in four broad areas could help the country get onto the required growth trajectory.

Firstly, Vietnam was already attractive as a destination for offshore manufacturing and for tourism before COVID-19. Even as the country addresses the new virus strain, its low level of recorded cases and fatalities has shown that its systems can identify and manage the outbreak.

This may position Vietnam well as international tourism resumes. The country could then turn its attention to marketing itself as a destination in Asia, where the earliest arrivals may come from when countries open their borders.

In the meantime, tourism and hospitality operators will need to use the opportunity to diversify both tourism products and market segments. Domestic tourism could be promoted to test the new offerings, but discounts may be needed because of the relatively lower local spending power.

Reattracting and accelerating FDI in the manufacturing sector will also be vital to accelerate Vietnam’s path to higher growth. Vietnam is well-positioned to go on attracting FDI, especially as manufacturers seek to strengthen and diversify their supply chains in response to the frailties the pandemic exposed.

Secondly, the firm advises Vietnam to expand investments in education and infrastructure to boost productivity and sustain longer-term growth. In education, Vietnam can leverage its clear strengths: a 2017 McKinsey study of the drivers of student performance identified it as one of Asia’s high-performing countries. Vietnam, for example, has significantly increased school enrollment at all levels over the past 20 years. Primary-school enrollment is virtually universal, ranking only behind Japan’s and higher than the Republic of Korea’s and Hong Kong’s, among other Asian high performers. Education initiatives could focus on developing cognitive, behavioral, and practical skills and on boosting vocational schools.

Investment in education could raise skill levels in the workforce as part of initiatives to increase productivity, which lags behind that of Vietnam’s regional peers and has plateaued, despite positive economic growth and ongoing competitiveness in labor costs. A higher-skilled workforce could attract manufacturers exploring Industry 4.0 technologies and help to move the country up the value chain into more productive and higher-earning areas.

As for infrastructure, investments to redevelop it could be scaled up. Ports are running at overcapacity. Ho Chi Minh City and Hanoi need significant investments in roads and airports.

Thirdly, McKinsey suggests the country continue focusing on boosting the competitiveness of other strategic areas at home – including state-owned enterprises (SOEs), small and medium-sized enterprises (SMEs), and start-ups – to increase national resilience. SMEs and the informal sector collectively form a crucial domestic demand engine and will continue to need support, especially in the short term while growth and incomes remain depressed.

SOEs account for one-third of GDP yet grow much more slowly than other companies do, it says. Targeted equitisations, sustainable divestments, and transformation programmes could be considered to make SOEs competitive at home and even more competitive on the global stage.

In addition, the country could tap the significant unrealised potential of its start-up ecosystem. In 2019, 741 million USD was invested in Vietnam’s start-ups, compared with 2.38 billion USD in Indonesia’s. It’s little surprise that Vietnam has created only one unicorn, compared with six in Indonesia. A more holistic ecosystem effort could remove structural limits on private entrepreneurship, make financing available for high-potential projects, and provide fertile incubation structures for high-growth businesses.

Finally, as a major driver of new energy demand and a country likely to be heavily affected by climate change, Vietnam could accelerate its journey toward a less carbon-intensive future. A new national plan signals a significant effort to energise this transition. Under the latest proposal, coal is expected to represent about 37 percent of energy generation by 2025, instead of half as previously planned. Renewables would grow to about 25 percent of the mix, from 13 percent in the previous version.

This proposal embodies a significant scaling back of plans to develop coal plants, which have come under pressure and faced challenges in financing over recent years. Vietnam could look at opportunities to encourage significant new capital investment in them through strong incentives and conduct a detailed grid-capability assessment for a new generation of assets.

With appropriate post-pandemic responses paving the way for economic recovery, such adjustments to Vietnam’s economy could go a long way toward realising a future as a high-performing nation./.