World Bank and Vietnamese productivity

The World Bank released a report on Vietnam today that looks at the future of Vietnam and what needs to happen to make sure that growth continues. The report is really large and has lots of interesting ideas. The key thing that struck me was that productivity is the name of the game going forward, because demographics may not be as big a driver.

We have talked about a few components of this in the past, but lots of Vietnam’s growth was due to 1) a demographic dividend of lots of young people and 2) a move from agriculture jobs to industry and services.

Today the employment structure in Vietnam looks very different; respective shares of agriculture, industry, and services in total employment are 39.5 percent, 25.8 percent, and 34.7 percent, compared to 68.6 percent, 12.3 percent, and 19.1 percent in early 1990s.

And while that will continue, it probably won’t drive growth, the way it did previously.

Driven by a rise in life expectancy and declining birth rates, Vietnam’s population is aging rapidly, leading to a substantial decrease in the ratio of working-age people to dependents from about 230 percent today to 200 percent in 2030 and only 165 percent in 2050….Similarly, while the shift of the labor force toward industry and services should continue, the magnitude of these intersectoral labor movements (and their associated productivity gains) should decrease.

Added to that, there are concerns that export-led growth will not be the driver it was in the past 20 years. There is some idea that Vietnam will be able to take advantage of trade tensions, but it seems like growth in trade is no longer a given, and we could see declining trade.

The report goes on to promote more domestic consumption, which goes along with my domestic tourism post yesterday. I was especially surprised by this:

Today, almost one out of six Vietnamese has already joined the global middle class (with per capita spending of more than US$15 per day) and, at the current pace, 1 million more Vietnamese will be added to this category every year.

That’s a big number: Adding 1 million consumers a year. There are a lot of products that they will need, and hopefully a lot of domestic companies can provide those products. And if they do, then they will need to employ more people and then those people will have spending money. It’s a virtuous cycle, if you can get the wheel spinning.

And one way to get the wheel to spin and keep it spinning is to move from growth based on demographics and sectoral shifts to growth based on productivity improvements, according to the World Bank.

Productivity has not been part of the story yet. Looking at the chart on the right, the green part (Human Capital) is the portion coming from productivity, not additional capital or more people. It is only about 20% of overall growth. That needs to change.

The World Bank has a similar chart for Korea that shows that productivity has become the main driver of growth. it was tiny until the 1980s, and then it just jumped. Now it accounts for 56% of growth. That’s why Korean growth has been so sustainable.

Vietnam is definitely on track to follow Korea. In fact, if you look at the chart at the bottom, it is tracking Korea very closely. And doing better than Thailand was at this point in its growth cycle.

Export-led growth is really what Vietnam is betting on, and this report probably won’t change it. Plus, there is some near term positive reinforcement from the US-China trade war pushing supply chains to Vietnam. But the overall trend is not Vietnam’s friend - the gigantic growth in trade we saw over the past 20 years may have run its course. Trade will still be big and important, but it is unlikely to grow the way it did.

Let’s hope that Vietnam can find a model to succeed in this new world.

VietEcon

World Bank and Vietnamese productivity

VietEcon