Right adjustment could help Vietnam back as high-performing economy: McKinsey
Hanoi (VNA) – 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./.