Ho Chi Minh City
Vietnam's success over the past two decades is undeniable. The country has moved from a largely agrarian economy to one powered by manufacturing. Food is more plentiful, health care more accessible, schooling more affordable, and disposable incomes higher than ever. But the country faces significant challenges, some of which stem from its rapid progress. And those issues will create formidable obstacles as Vietnam aims to transform itself into a modern knowledge-based economy.
To understand how far Vietnam has come—and what the country's leaders must do to sustain progress—we used The Boston Consulting Group’s Sustainable Economic Development Assessment (SEDA).1 Notes: 1 Since launching SEDA in 2012, BCG has used it to assess the relative performance and progress of many countries around the world. The data set for our 2015 analysis included 148 countries plus Hong Kong, which is a special administrative region of China. For the sake of simplicity, we refer to all entities as “countries” throughout the report. SEDA is a powerful diagnostic tool designed to provide insight into the well-being of a country's citizens and how effectively a country converts wealth, as measured by income levels, into well-being.
A key finding: Vietnam is among the top performers globally when it comes to converting wealth into well-being. With GDP per capita (based on purchasing-power parity) of about $5,200, Vietnam has a well-being level that would be expected of a country with GDP per capita of more than $10,000—a clear indicator that the country has successfully harnessed limited resources for the good of its citizens.
Making the next leap in development, however, will require aggressive action on several fronts. On the basis of our SEDA analysis and our extensive work with companies and public-sector leaders in Vietnam, we have identified three key areas the country must address:
SEDA defines well-being through ten dimensions: income, economic stability, employment, health, education, infrastructure, income equality, civil society, governance, and environment. SEDA examines each dimension along two time frames:
Vietnam's overall current-level SEDA score of 42.4 places the country in the middle—number 79—of the 149 countries we assessed. Not surprisingly, wealthy nations such as the US, Japan, Norway, Germany, and Singapore come out ahead of Vietnam, with current-level scores of 80 or above. When it comes to progress over the seven-year period from 2006 to 2013, however, Vietnam is in the top quintile, putting it in the company of countries such as Poland, Indonesia, China, Brazil, Ecuador, and Morocco, all of which have had notable achievements in the past decade.
SEDA also examines the connection between wealth and well-being through two coefficients:
Vietnam is among only 49 nations in our data set with scores higher than 1.0 for both coefficients. The country's performance in converting wealth into well-being is particularly impressive— its wealth-to-well-being coefficient of 1.48 is among the top 10% globally. (See Exhibit 1.) And although Vietnam doesn't stand out quite as much when it comes to the growth-to-well-being coefficient—which comes in at 1.04—it is still above the global average on this measure.
So, how does Vietnam stack up to its peers? We compared the country to a group of four others—Indonesia, Malaysia, the Philippines, and Thailand—that, like Vietnam, have midlevel incomes. (Myanmar is also in the midlevel-income group but is not included in our SEDA analysis, owing to the difficulty of accessing reliable data.) This group, which we dub the ASEAN 4, will not only be crucial partners for Vietnam in the 21st century but will also continue to be key competitors in attracting foreign direct investment. (See Exhibit 2.)
Vietnam matches or exceeds the ASEAN 4 in several dimensions, including economic stability and civil society. In several areas, however, including infrastructure and governance, Vietnam lags behind the group. In addition, although Vietnam's performance in employment is in line with that of its ASEAN 4 peers, the country faces a number of labor market issues, including a lack of skilled workers and low worker productivity, that could impede the next phase of its development.
Although Vietnam's gains over the past 20-plus years have been impressive, the country's goals for the coming years are even more ambitious.
Achieving these objectives would fundamentally transform Vietnam's economy and allow the country to shed its developing-nation status. To reach these targets while sustaining progress in overall well-being, however, Vietnam must address key gaps relative to more-developed peers in the region.
Vietnam has a sound record in education. With a highly literate population and scores in math and science that are comparable to those of many wealthier OECD countries, Vietnam's current-level SEDA score in education is above the average of the ASEAN 4.
The country's current education system, however, will not be sufficient to meet the demands of a knowledge-based economy. The challenge stems from two fundamental problems. First, labor productivity in Vietnam is lower than in many peer countries. Output per worker in Vietnam was about $5,300 (based on PPP) in 2012, roughly 18 times lower than in Singapore and about 60% lower than in the Philippines.
Second, Vietnam's base of skilled workers is relatively small. For instance, 6.9% of workers in Vietnam have completed tertiary education, compared with 12.6% in Thailand and 16.4% in Malaysia. And only 25.4% of the workforce has completed secondary education, about half of Malaysia's 50.9% and below Thailand's 27.8%. As a result, the country lacks highly trained craftsmen, professional services workers, engineers, and technicians.
Addressing the labor market issues in Vietnam requires action on several fronts:
Vietnam has invested substantially to strengthen its infrastructure, as demonstrated by its recent-progress SEDA score in infrastructure, which is among the top 10%. However, the country is behind the ASEAN 4 group in the current-level infrastructure score and lags behind its peers in areas such as electricity supply and the quality of the rail and road networks.
We estimate that in order to sustain economic growth and remain competitive with other nations in the region, Vietnam will need to invest between $113 billion and $143 billion in infrastructure from 2014 to 2020. (This estimate is based on infrastructure investment of about 9% to 10% of GDP under three growth scenarios—5%, 6%, and 8%—from 2014 to 2020.) Public capital however, is likely to cover only 50% to 60% of the sum, making it critical for Vietnam to come up with innovative ways to narrow and manage the funding gap.
We see the opportunity to act in two areas:
Vietnam's current-level SEDA score in governance is well below the scores of its peers. The country has taken steps to address the issue, including recent government initiatives that have reduced bureaucracy in tax, customs, and administrative procedures. But evidence of persistent governance problem abounds. Roughly 66% of companies in Vietnam's Provincial Competitiveness Index, for example, indicated that "they have to pay informal charges" when doing business. And two-thirds of businesses cited issues with bureaucracy.2 Notes: 2 Vietnam Chamber of Commerce and Industry and United States Agency for International Development, The Vietnam Provincial Competitiveness Index 2014.
In the years ahead, Vietnam will have no choice but to address its governance issues. A key reason: foreign investors will be unlikely to put their money to work there if they do not have confidence in how the country is run. Action should be taken in two areas:
Vietnam is on the cusp of the next stage of its development. By targeting the right areas for improvement—including education and employment, infrastructure, and governance—the country can achieve real economic gains and enhance the well-being of its citizens.
But the focus should be on the country's achievements rather than on the higher well-being levels, greater wealth, better roads, or improved access to top-tier education that other nations may have achieved. The people of Vietnam should celebrate the leaps they have made with the resources at hand, identify where more work needs to be done, and demand action in those areas from both the government and the nation as a whole.