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Report| McKinsey Global Institute

Sustaining Vietnam's growth: The productivity challenge

February 2012 | byMarco Breu, Richard Dobbs, Jaana Remes, David Skilling, Jinwook Kim

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Vietnam’s economy has come an extraordinarily long way in a short time. China is the only Asian economy that has grown faster since 2000. But today Vietnam's economy faces complex challenges that require a transition to a productivity-driven growth trajectory. Vietnam now needs to boost labor productivity growth by more than 50 percent to maintain its rapid growth.

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Sustaining Vietnam's growth performance

Richard Dobbs and Marco Breu, discuss the country's economic prospects and productivity challenge.

MGI finds that between 2005 and 2010, an expanding labor pool and the structural shift away from agriculture contributed two-thirds of Vietnam’s GDP growth. The other one-third came from improving productivity within sectors. Vietnam has globally competitive niches across the economy from textiles and footwear and coffee and rice to tourism.

But the first two drivers now waning in their power to drive further growth and Vietnam needs to boost its overall labor productivity growth by more than 50 percent, from 4.1 percent annually to 6.4 percent, if the economy is to meet the government’s target of 7 to 8 percent annual growth by 2020.  Without such a boost, Vietnam’s growth is likely to decline to between 4.5 and 5 percent annually. The difference sounds small, but it isn’t. By 2020, Vietnam’s annual GDP would be 30 percent lower than it would be if the economy continued to grow at a 7 percent pace.

MGI identifies areas where new measures could boost the nation’s economic performance:

  • Stabilizing the macroeconomic environment to address investor concerns about inflation, currency instability, and rising interest rates. Measures could include greater transparency and the monitoring of banks’ performance and systemic risk.
  • Strengthening productivity and growth enablers to enhance competitiveness. Measures could include long-term infrastructure development focused on private-sector needs and addressing shortages of skilled workers through the introduction of common standards for public- and private-education institutes and a certification system for graduates.
  • Shaping a coordinated, industry-specific government growth agenda by targeting investment to raise agricultural productivity; higher value-added in manufacturing; and energy efficiency. Vietnam can also establish an enabling environment at the level of individual industries and sectors by enhancing domestic competition and helping industries move up the value chain. Offshore services such as data, business-process outsourcing, and IT appear to be promising areas. Building on its expanded pool of university graduates, Vietnam has the potential to become one of the top ten locations in the world for offshore services.
  • Improving government performance to deliver a growth agenda. The government should continue to adjust its role in the economy and strengthen its organizational effectiveness and the delivery skills necessary to execute reforms. Because state-owned (SOE) enterprises still hold enormous weight, accounting for about 40 percent of the nation’s output, the report finds that continued reform of the ownership and management incentives for these enterprises is likely to be crucial to long term growth, as will the need to improve the overall capital efficiency of SOE operations.

After 25 years of strong and stable growth, the Vietnam economy is moving into a more challenging period. Although many of its economic fundamentals remain strong, companies and policy makers need to shift their thinking and approach.

McKinsey Global Institute

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About this research

This report draws on applied research carried out by McKinsey consultants. To learn more about our expertise please visit Mckinsey Global Institute, Hanoi. Mckinsey Global Institute,