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Upgrading Vietnam’s Competitiveness: Flawed Approach or Critical Imperative?

June 22, 2011 (Vietnamica.net) – Vietnam is in an important phase of its economic development. Long the darling of the international development community due to its solid growth rates and impressive success in lowering poverty, the country is facing new challenges of macroeconomic volatility and growing demands on the business environment. Vietnam still has much going for it, and there is no need for these frictions to turn into painful crisis. But Vietnam’s leaders clearly have their task set out, and they need all the advice they can get to put their country on a sustainable path to higher prosperity.

The 2010 Vietnam Competitiveness Report (VCR) aims to provide such advice. It was launched in collaboration between ACI, the Asia Competitiveness Institute at the Lee Kuan Yew School of Public Policy in Singapore, and CIEM, the Central Institute for Economic Management in Vietnam, to provide such advice. Prof. Michael Porter’s Institute for Strategy and Competitiveness (ISC) at Harvard Business School provided guidance on the conceptional framework.  A wide range of experts representing Vietnamese as well as international institutions were consulted in the VCR analysis.

The VCR contains a broad assessment of where Vietnam stands – in terms of prosperity and its components as ultimate economic outcomes, in terms of intermediary activity levels on trade, investment, and other related measures, and – importantly – many factors that are the fundamental drivers of these outcomes .  These fundamental drivers are crucial because it is at this level that policy has to act in order to achieve a sustained impact.  Based on the assessment, the report lays out specific action recommendations in three critical areas – macroeconomic stability, microeconomic bottlenecks to growth, and structural reforms – and suggests an implementation strategy to move from plan to action (see the full report and further coverage from the launch event at http://www.isc.hbs.edu/Vietnam.htm).

What action to take is a crucial question for Vietnam with important long-term consequences, so the VCR’s recommendations and the conceptual framework on which its analysis is based should be exposed to critical review and discussion. In fact, the VCR was intended to trigger such discussion rather than serve as a blueprint to be blindly accepted.  Having Prof. Riedel, a seasoned economist and well-known advisor in Vietnam, engage with the report is thus both welcome and needed (See http://www.vietnamica.net/prof-j-riedel-on-vietnam?s-international-competitiveness/).

Unfortunately, however, Prof. Riedel gets in his article from April this year tangled up into a definitional dead end that makes most of his comments irrelevant for assessing the conceptual framework of the VCR. While this could be put aside as an argument between economistsirrelevant for practitioner, it has real consequences in the policy implications this discussion leads to.

At the heart of the problem is the notion of competitiveness: The VCR defines competitiveness as the combined state of the numerous factors that influence a country’s productivity. Prof. Riedel defines competitiveness as a country’s ability to sell in global markets. But selling on global markets is not a goal per se; it can be achieved through policies like devaluation, export subsidies, or wage suppression that do not contribute to higher national prosperity. Productivity, however, does contribute sustainably to higher prosperity, arguably the most important objective public policy should target. In fact, productivity is the most critical driver of cross-country differences in prosperity, far ahead of differences in capital intensity or labor inputs.

Based on these considerations, the understanding of the appropriate definition of national competitiveness has over the last two decades evolved towards the productivity-based view.  Prof. Riedel attacks a misguided approach from the past that has nothing to do with Prof. Porter’s work on competitiveness since the mid-1980s, the competitiveness discussion of today, or its application in the VCR.

At a more fundamental level, there is a difference in opinion that goes beyond the appropriate definition of the term competitiveness. This difference relates to the role government should play in enabling economic growth. Prof. Riedel – and he rightly points out that he is in the company of many other economists – has what one can call the “black box” view of economic growth, where the invisible hand of the market functions largely automatically to generate growth. This view sees growth as a function of the level and quality of investment, driven by the technology upgrading and capital deepening investment entails. What investment materializes is a question of a country’s given economic fundamentals, including its comparative advantages at an international level. But how these fundamentals are upgraded over time to support more and better investment, what choices governments have in furthering this process, and how they should approach trade-offs between these choices remains unclear – a ‘black box’ in which market forces are supposed to lead to the right actions to be taken eventually, even where these actions require government involvement.

We see this approach as unsatisfactory and dangerous. It is unsatisfactory because it leaves countries like Vietnam without any guidance for how to move from where they are today to the more prosperous future they aspire to. The international experience shows that this process is neither fast nor assured: look at how many Latin American countries have for a long time failed to prosper, even where they adopted the necessary but ultimately insufficient sound macroeconomic policies. It is dangerous because it leaves the field wide open to the type of misguided industrial policy that Prof. Riedel rightly warns about. Left without a clear alternative on what to do, politicians latch on to simplistic policies that deal with symptoms of insufficient competitiveness by intervening into markets rather than addressing their root causes. Sadly, Vietnam has seen its some short-sighted policies that have grown from a lack of comprehensive understanding of how market economies work and how government plays an important role in enabling effective competition.

In the last few years, the academic discourse on how countries can identify and address the specific bottlenecks that hinder productivity-enhancing investments (and other activities that lead to higher productivity) has significantly intensified. The VCR falls squarely into this category: it is concerned with identifying those policies that are the most effective in creating the fundamental conditions that allow companies in Vietnam to increase their productivity, by enhancing value-added as well as by increasing efficiency in what they do today. The literature and our own experience suggest that this is only possible by thinking systematically about how this upgrading of fundamental conditions, or what international organizations like the OECD tend to call cross-cutting foundations for growth, should be sequenced in the context of a specific country; trying to do everything at once is a clear recipe for failure. The implementation strategy outlined in the VCR puts this learning into practice.

The cluster efforts recommended in the VCR are an example of this general approach. They are structured as a way to achieve improvements in business environment conditions from the bottom up. They aim to mobilize coalitions of public and private sector entities that have the capabilities and interest to identify and implement the necessary steps to do so. The VCR is nowhere making an argument to artificially support clusters or higher value-added activities against the fundamentals of the business environment conditions in Vietnam. It offers a practical way to improve these fundamentals, from the ground up and without the often unrealistic ambition to achieve the necessary changes across the entire economy in one go.

Vietnam needs a true dialogue about what the government should do to its part in putting the country on a growth towards higher, sustainable prosperity, and how the private sector – domestic and foreign – can engage in this process to create the foundations for more prosperity. There will be disagreements in this dialogue. But we are confident that it will ultimately lead to more robust advice to Vietnam’s policy makers.

* Related:

* Authors:
Dr. Nguyen Dinh Cung, Vice President, Central Institute for Economic Management, Vietnam;
Dr. Christian Ketels, Principal Associate, Institute for Strategy and Competitiveness, Harvard Business School, USA;
Prof. Kong Yam Tan, Director, Asia Competitiveness Institute, Lee Kuan Yew School of Public Policy, Singapore.

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