Article by Mr. Dinh Hong Ky, published in Nhip Cau Dau Tu Newspaper on February 27, 2012. Textile and garment is the largest export industry in Vietnam but also ranks second in import (textile and garment raw materials).
Textiles and garments are the largest export industry in Vietnam but also the second largest import industry (textile and garment raw materials).
One day at the end of the year of the Cat, on a flight from Hue to Hanoi, I happened to read an article in the Saigon Economic Times, providing information on the import and export situation in 11 months of 2011. It included two charts of export and import turnover for the 10 largest commodity groups. I was surprised when I compared and saw that Vietnam’s largest export industry was textiles and garments, reaching 12.8 billion USD, while textile and garment raw materials and accessories ranked second in the import chart with 11.3 billion USD (this comparison is only relative). I called a friend at the Vietnam Textile and Garment Group and was confirmed that textile and garment exports were mainly processed garments and almost 100% of raw materials and accessories were imported from abroad.
So, with the largest export industry, what does the country gain? The simple answer is to solve the problem of jobs for hundreds of thousands of workers who are working hard in processing factories (mostly foreign). The revenue from corporate income tax is not worth much, when the difference between output and input is insignificant. That is not to mention the transfer pricing of some foreign enterprises to evade taxes.
Saigon Economic Times on November 24, 2011 also reported: The Central Institute for Economic Management (CIEM) statistics show that Vietnam currently has 1,872 industrial clusters planned on an area of 76,000 hectares. Of which, 918 clusters have been established with an area of 40,600 hectares. However, the area currently put into use for lease is only 7,500 hectares. That is, less than 19% of the invested area and 10% of the planned area.
So, should we continue to convert hundreds of thousands of hectares of agricultural land to build industrial parks, witnessing millions of farmers losing their fields and moving to the city to work as hired laborers? Is that price worth the results as above? Or are we falling into the low productivity trap or the middle income trap that Professor Kenichi Ohno, University of Policy Studies (Japan) warned: “We cannot continue to rely on simple assembly with unskilled labor. Industries will withdraw from Vietnam as wages increase and integration deepens. Without creating domestic values, Vietnam will certainly encounter the middle income trap.”
What is the national competitive advantage?
Prime Minister Nguyen Tan Dung wrote an article on the country’s development direction in early 2012. A series of new macro development directions were outlined by the Prime Minister, in which I am particularly interested in the restructuring of manufacturing and service sectors. The Prime Minister placed industry first, followed by services and finally agriculture.
So in these three sectors, what is Vietnam’s national competitive advantage?
Regarding industry, since the country’s reunification in 1975, Vietnam has put forward a policy of industrialization and modernization. After nearly 40 years, the industry is still far behind the world. The Prime Minister has correctly identified the issue of “shifting from an assembly industry with low science and technology content and added value to developing manufacturing and processing industries with high added value”. But is that the key direction for national development?
To develop a high-tech manufacturing industry, a country needs two basic factors: quality human resources and good infrastructure. However, we are lacking and weak in both of these factors. Christopher Twomey, President of the American Chamber of Commerce (AmCham), once said: “It is necessary to promote and improve the quality of human resources. If human resources are still poor, untrained and unqualified, Vietnam may fall into the trap of low productivity, limiting Vietnam’s competitiveness in the global market. In addition, Vietnam continues to face unreasonable and delayed development of key infrastructure, especially inter-provincial bridges and roads”.
Compared to neighboring countries that directly compete with Vietnam such as China, Thailand and Singapore, our infrastructure is 25-40 years behind. The quality of human resources is also much lower. So do we have the ability to compete with them in the high-tech industry in the medium term, or even the long term? In a flat world, with increasingly deep globalization and tariff barriers being gradually eliminated, it is not feasible to hope to build Vietnamese brands for automobiles, electronics, or steel to compete with neighboring countries.
When I witnessed Chinese factories producing on a huge scale (not only for 1.3 billion Chinese people but also for the rest of the world) with the motto of “economy through scale”, I realized why the selling price of their similar products when brought to Vietnam is much cheaper than the production cost of Vietnamese enterprises.
Then there is the matter of transportation. A 20’ container of Secoin tiles produced by us transported from Hanoi to Ho Chi Minh City, for example, costs 15 million VND, equivalent to more than 700 USD. Meanwhile, when buying tiles from China, the transportation fee from Xiamen port to Saigon port (twice as far) is only 150 USD/20’ container, or just over 3 million VND. How can we compete from production costs to transportation fees!
On the other hand, Vietnam’s supporting industry is very weak (can be considered non-existent). Therefore, nearly 100% of raw materials and textile accessories must be imported, while China can completely produce them itself. The same is true in the automobile manufacturing and assembly industry or electronics.
The same goes for the service industry. I will not go into further analysis because it is simply a newly developed industry in Vietnam, when the country follows the market economy. And it is clear that it has never been a competitive advantage for Vietnam, even in the medium and long term.
The trend of investing in industry and services and “herd investment” has led to heartbreaking results such as the stock market falling miserably, the real estate market freezing, leaving many consequences. 90% of cement and ceramic tile factories are losing money and many factories are expected to go bankrupt; 30-40% of steel enterprises are forecast to go bankrupt in 2012; the shipbuilding industry collapsed along with the sinking ship Vinashin… All of these have pushed the economy into the current difficult situation.
Investing in industry and services is right. The problem is which industry to focus on developing and considering it as a national competitive advantage. Simply put, we need to determine who we will be in this world.
The last industry in the Prime Minister’s restructuring targets is agriculture. I wonder why it is at the bottom, not at the top. Thinking back, compared to neighboring countries, in the agricultural sector, we have many more advantages. Thailand only has land, soil, and climate similar to the Mekong Delta in our country to grow rice and fruit trees, but they do not have highlands like the Central Highlands to grow industrial crops such as coffee and cashew. Thailand also does not have all four seasons like Northern Vietnam to grow tea or fruit trees, medicinal plants of cold regions or aquatic products of cold regions… Moreover, we have up to 70% of the population living on agriculture for generations. That is an extremely large source of experience in agriculture, forestry and fishery. There is no need to worry about output for agriculture, because food security is a hot global issue. In 2011, rice prices increased by 30%, corn by 35%, wheat by 50%… Meanwhile, climate change is getting worse (the floods in Thailand at the end of last year are an example). The agricultural area in the world is also shrinking, affecting the supply of food. In 2011, the world population was 7 billion people, but by 2050, this number will be 9 billion. Obviously, the demand for food is huge.
Meanwhile, Vietnam has many agricultural products that are favored by other countries. The Philippines and Indonesia, for example, both buy rice from Vietnam. China favors Vietnamese rubber and buys seafood and agricultural products in large quantities. Another example of an under-appreciated crop industry is medicinal plants. China’s annual demand for medicinal plants is 2 billion USD, while advantages in soil, terrain and climate allow Vietnam to grow many precious medicinal plants to serve this huge market.
So is it right that we underestimate our strengths (agriculture) to focus too much on our weaknesses (industry and services)?
Why hasn’t agriculture been able to take off?
On a recent trip to Tien Giang and Ben Tre to see farmers raising aquatic products, from Ben Tre city to Binh Dai, I saw bridges so small that only one car could pass through. So how can container trucks with large loads get in? It has been nearly 40 years since the liberation, but the countryside has not yet developed. Meanwhile, along the road there are many industrial parks. Apart from some seafood processing and textile factories, the remaining land is abandoned, with grass growing over the head. Farmers have lost their land and jobs. It is true that industrial parks must still be developed, but is it necessary for every province to take land from the people to open industrial parks, golf courses, eco-tourism areas, and airports for each province?
Let’s talk about rural labor. According to statistics from the Ministry of Agriculture and Rural Development, for every 1 hectare of agricultural land converted, 10 farmers lose their jobs. Up to now, after only 5 years, nearly 1 million farmers have lost their jobs and affected the lives of 2.5 million people. Going to rural areas from the North to the Central and South, everywhere people talk about labor shortages. It turns out that young people who have finished school (or even not finished) all run to big cities or industrial zones to work for low wages. When it is harvest time or shrimp and fish harvesting season, they need people but cannot hire anyone, because in the countryside there are only old people and children. Young people go to big cities not only for the wages but also because the infrastructure in the countryside is too poor, both economically and culturally, entertainment, education, health care, etc.
So is it right that we underestimate our strengths (agriculture) to focus too much on our weaknesses (industry and services)?
Why hasn’t agriculture been able to take off?
On a recent trip to Tien Giang and Ben Tre to see farmers raising aquatic products, from Ben Tre city to Binh Dai, I saw bridges so small that only one car could pass through. So how can container trucks with large loads get in? It has been nearly 40 years since the liberation, but the countryside has not yet developed. Meanwhile, along the road there are many industrial parks. Apart from some seafood processing and textile factories, the remaining land is abandoned, with grass growing over the head. Farmers have lost their land and jobs. It is true that industrial parks must still be developed, but is it necessary for every province to take land from the people to open industrial parks, golf courses, eco-tourism areas, and airports for each province?
Let’s talk about rural labor. According to statistics from the Ministry of Agriculture and Rural Development, for every 1 hectare of agricultural land converted, 10 farmers lose their jobs. Up to now, after only 5 years, nearly 1 million farmers have lost their jobs and affected the lives of 2.5 million people. Going to rural areas from the North to the Central and South, everywhere people talk about labor shortages. It turns out that young people who have finished school (or even not finished) all run to big cities or industrial zones to work for low wages. When it is harvest time or shrimp and fish harvesting season, they need people but cannot hire anyone, because in the countryside there are only old people and children. Young people go to big cities not only for the wages but also because the infrastructure in the countryside is too poor, both economically and culturally, entertainment, education, health care, etc.
Therefore, it is necessary to review investment policies for rural areas and agriculture to keep farmers attached to their fields. In addition, with an agriculture that is highly spontaneous, the Government needs to plan macro policies to develop agriculture. We also need policies to protect agriculture and farmers. The story in Australia in 2010 is an example. That year, Australia encountered a major flood, destroying all banana growing areas. The Australian Government immediately banned banana imports to help banana farmers recover. At that time, banana prices reached 13 AUD/kg, but after recovering, banana prices dropped to only 2 AUD/kg. On the other hand, it is necessary to modernize agriculture with a high intellectual content. Speaking on the Saigon Economic Times on November 17, 2011, Professor – Doctor Bui Chi Buu, Director of the Southern Institute of Agricultural Science and Technology, said that the country’s average investment in agricultural science and technology of only about 30 million USD/year is too low compared to other countries. Not only is it necessary to modernize and mechanize cultivation and animal husbandry, but investment in post-harvest processing industry is also extremely necessary. Because currently, 90% of Vietnam’s agricultural exports are in raw form.
We need to learn from Israel’s model. After only 10 years of investing in high-tech agriculture, Israel has gone from a country of arid deserts to a leading agricultural exporter. The agricultural development model of New Zealand, Australia, the Netherlands, and closer to us, Thailand, is also worth learning.
Training human resources for agriculture also needs to be taken seriously. We only want our children to study “noble” professions such as finance, construction, or architecture, but how many people want their children to follow a profession that, according to the old concept, means “selling your face to the ground and your back to the sky”. Certainly, the University of Science and Technology and the Foreign Trade University receive more investment than the University of Agriculture! The pioneering role of business people in investing in agriculture is equally important. We cannot rely solely on the Government because reality has proven that the Government’s policies often lag behind the market. In early 2012, Mr. Doan Nguyen Duc, Chairman of Hoang Anh Gia Lai Group, announced that he would give up real estate in 2014 to focus on rubber trees. Or like Ms. Thai Huong, General Director of Bac A Bank, the financial investor for the TH Milk factory project with an investment capital of up to 1.2 billion USD (24,000 billion VND), has invested in raising dairy cows in Nghe An on a large scale to bring TH Milk Company to the world. Such efforts by businessmen will contribute to the take-off of Vietnamese agriculture.
I envision a day not far away, when I return to the countryside of Vietnam, there will be long highways, with golden rice fields stretching as far as the eye can see, and modern shrimp and fish ponds. Vietnamese farmers who have worked hard all day will drive Japanese cars, surfing the iPad to check the export price of rice. And abroad, Boeing workers in the US will eat Dong Thap rice, Honda engineers in Japan eat An Giang clean vegetables and Ben Tre shrimp every day, HSBC Bank employees in London are addicted to Buon Ma Thuot coffee… It is completely possible! Let’s start with what we have!
