Viet Nam wrestles with labour productivity issue when heading to innovation-based development

Vo Tri Thanh

*Vo Tri Thanh

Viet Nam achieved and exceeded 14 out of 15 targets assigned by the National Assembly for 2022 with many impressive numbers including GDP growth, export turnover and the number of newly-established and re-opened businesses. Only labour productivity was under expectations.

Viet Nam's labour productivity was expected to increase by between 4.7 per cent and 5.2 per cent on average in 2022, higher than the average growth rate of 4.7 per cent in 2021 but behind the target of 5.6 per cent set for the whole of 2022.

On January 10 this year, the Government issued Resolution No 06/NQ-CP on the development of a modern, efficient, sustainable and integrated labour market serving quick socio-economic recovery, setting the average labour productivity target for 2023 at more than 6.5 per cent.

Labour productivity is an important economic indicator that is closely linked to economic growth, competitiveness and living standards within an economy. According to International Labour Organisation (ILO), labour productivity represents the total volume of output (measured in terms of Gross Domestic Product, GDP) produced per unit of labour (measured in terms of the number of employed persons or hours worked) during a given time period. This indicator provides general information about the efficiency and quality of human capital in the production process.

Paul Krugman has said: "Productivity isn't everything, but in the long run it is almost everything."

After more than 35 years of implementing Doi Moi (Renewal) policy, Viet Nam has made remarkable achievements in socio-economic development. The economy has continuously grown positively for many decades, averaging 6.8 per cent during 2016-19. Even in challenging times due to the COVID-19 pandemic, Viet Nam’s economy still maintained positive growth.

Despite 2022 being a tumultuous year for the world economy, Viet Nam's economy still grew by over 8 per cent, the highest pace since 1997.

The process of renovating the growth model has also witnessed important initial results towards gradually reducing dependence on the exploitation of natural resources, raw exports and cheap labour and slowly turning to the strong application of science, technology and innovation.

The Vietnam 2035 Report (World Bank, 2016) emphasises Viet Nam’s aspirations of modernity, industrialisation and a higher quality of life on "three pillars: balancing economic prosperity with environmental sustainability, promoting equity and social inclusion, and bolstering the state's capacity and accountability. The rapid growth needed to achieve these aspirations will be sustained only if it stands on faster productivity growth and reflects the costs of environmental degradation."

In its draft project on the national programme on increasing labour productivity to 2030, the Ministry of Planning and Investment in December 2022 pointed out Viet Nam's labour productivity improved relatively quickly and continuously in the period of 2011-21, increasing 2.5 times from VND70.3 million (US$3,004) per employee in 2011 to VND172.8 million ($7,385) per employee in 2021. The average growth rate of labour productivity in 2011-20 reached 6 per cent. However, the growth rate was not stable and has shown signs of slowing down.

Viet Nam’s labour productivity growth in the 2011-21 period in terms of million Vietnamese dong (green) and growth rate (orange). — Source: General Statistics of Office

In 2020 and 2021 when Viet Nam was hit hard by the COVID-19, Viet Nam’s labour productivity grew by 5 per cent and 3.8 per cent, respectively. World Bank data shows that although Viet Nam’s labour productivity has improved relatively quickly in the 2011-21 period, it is still low compared to other countries in the region in absolute terms.

By 2021, Viet Nam’s labour productivity reached $18,792, equivalent to 10.25 per cent of Singapore, 14.20 per cent of Brunei, 24.32 per cent of Japan, 22.67 per cent of South Korea, 33.02 per cent for Malaysia and 59.15 per cent for Thailand. In Southeast Asia, Viet Nam’s labour productivity is only higher than that of Laos, Cambodia, Myanmar and East Timor. In addition, the Asian Productivity Organisation Report (APO, 2020) also shows that Viet Nam’s labour productivity lags by 60 years behind Japan, 40 years behind Malaysia and 10 years behind Thailand.

Viet Nam has searched for solutions to boost labour productivity quickly and sustainably. However, the pandemic in the past three years has significantly affected the implementation of this task.

The report on the evaluation of the five-year socio-economic development during 2016-20 and the tasks for the next five years recognised: "Science, technology and innovation have yet to become a driving force to improve labour productivity, competitiveness and promote socio-economic development. Labour productivity remains much lower than in other countries in the region and the gap continues to widen."

Most recently, the 2022 Global Innovation Index Report of the World Intellectual Property Organisation (WIPO) ranked Viet Nam at 48th out of 132 countries and economies, a slip of four places compared to 2021, although it was still among the group that has made the greatest progress over the past decade and was one of only three middle-income economies (along with Iran and the Philippines) to have the highest innovation performance in 2022.

The Government's leader Pham Minh Chinh has affirmed that increasing labour productivity is an important factor to improve the competitiveness, independence and self-reliance of the economy. Viet Nam's labour productivity has improved significantly but not fast enough to close the gap with other countries in the region.

Prime Minister pointed out the main reasons including inadequate awareness and investment for this task while the quality of human resources is still limited. The growth rate of trained workers, especially those with degrees and certificates, is still low along with backward technology and unreasonable economic structure.

The Government is expected to approve the MPI's proposal on the National Programme on increasing labour productivity to 2030 with some key targets including raising the average labour productivity growth by 6.5-7 per cent/year, of which the growth rate of the processing and manufacturing industry is 6.5-7 per cent/year; of agriculture, forestry and fishery at 7-8 per cent/year; of service sector at 7-7.5 per cent/year; the labour productivity growth rate of key economic regions and five centrally-run cities is higher than the national average labour productivity growth rate in the 2022-30 period.

The project also targets to increase the proportion of contributions of science, technology, and innovation to the growth of total factor productivity (TFP) to 45 per cent of GDP by 2025 and 50 per cent by 2030.

By 2025, investment in science and technology will reach 1.2-1.5 per cent of GDP. By 2030, the number of enterprises meeting the criteria of science and technology enterprises and the number of innovative start-ups will increase by two-fold compared to 2020; the rate of enterprises having innovative activities reached 40 per cent of the total number of enterprises.

In terms of international standards, Viet Nam will strive to be listed in the top 40 countries ranked by the Global Innovation Index by 2025 and the top 60 of the United Nations e-Government Development Index (EGDI). It will also strive to be in the leading group of ASEAN in terms of labour productivity growth by 2030.

To realise these goals, besides many solutions such as improving the business investment environment to attract both foreign and domestic investment in high-added value industries, enhancing the competitiveness of industries, and developing regional economic linkage, the policies should focus on two key areas – the quality of human resources and promoting science and technology, innovation and digital transformation.

Viet Nam needs to build a strategy for developing human resources to meet the requirements of the Industry 4.0 and digital transformation through completing mechanisms and policies for labour market development towards greater flexibility and integration through strengthening employment services to connect workers with employers and standardise vocational training qualifications according to national and international vocational skills standards.

The country should develop mechanisms and policies to attract overseas Vietnamese experts, intellectuals and workers to return to work in Viet Nam, participate in innovation activities, cooperate in capacity building and improving labour productivity in Viet Nam, expand the network of links and promulgating policies to encourage the use of Vietnamese talents abroad.

With regard to innovation, the policymakers are expected to amend and supplement legal documents related to science, technology and innovation to remove difficulties and create a favourable environment for businesses, especially small and medium enterprises to innovate, perfecting the policy of socialising investment resources for scientific research, technology development and innovation, promote the policy of commercialising research results, technology development and improvement. VNS

*Vo Tri Thanh is a senior economist at the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. A doctorate in economics from the Australian National University, Thanh mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems. He authors Viet Nam News column Analyst's Pick.