EXPORT GROWTH – SOLUTION TO POVERTY REDUCTION IN VIETNAM

BACKGROUNDWith an annual economic growth GDP of 8.5% in 2006, the economic ofVietnam is growing more than two times as fast as the world average 3,8%.Vietnam’s rapid economic growth is l

Hanoi university of business and technology

Hanoi, April 2013

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1 BACKGROUND

With an annual economic growth (GDP) of 8.5% in 2006, the economic ofVietnam is growing more than two times as fast as the world average (3,8%).Vietnam’s rapid economic growth is largely associated with strong exports growth.Vietnam has managed to become a key player on the global market for series ofcommodities and products, notably rice, coffee, pepper and cashew nuts Vietnam isalso a leading exporter of footwear Some of the key factors behind Vietnam’s success

in exports include the government’s efforts in shifting the economic policy fromimport substitution to export orientation, liberalizing the economy and embracing themarket economy; and the rapid response by Vietnam’s farmers to themarketliberalization of agriculture after the Doi Moo reform; the interest by the globalmarket to tap Vietnam’s cheap, diligent labor After Doi Moi , Vietnam emerged as anattractive region for outsourcing of labor intensive production such as garments,footwear and electronics from the newly industrialized countries with excalating laborcost in the region

Nevertheless, Vietnam is facing several key challenges The first challenge is thatVietnam remains a poor country, though it has been one of the most successfulcountries in the world in reducing poverty Vietnam is a developing country with aspopulation of 85.2 million and gross domestic product (GDP) of $61 billion, percapital GDP is about $715 Secondly, Vietnam’s export of manufactured products isnarrow and the transformation to a more diverse export structure is complex.According to official Vietnamese trade statistics, Vietnam’s merchandise exports were

$114.57 billion in 2012 Thirdly, Vietnam became the World Trade Organization’s

150th member on 7 November 2006 Vietnam’s biggest challenge for the next fewyears will be to ensure a steady and sustainable growth in the face of intensifyingglobal and regional competition and integration The final big challenge must beconsidered is that according to the World Economic Forum’s Global CompetitivenessReport, Vietnam ranked 77th of the 125 countries in terms of the GrowthCompetitiveness Index, and 82th of 121 countries in terms of the BusinessCompetitiveness Index Although Vietnam is recognized as having a stablemacroeconomic environment, the report highlights important weaknesses in areas such

as technology, public institution and business environment Corruption, inefficientbureaucracy and inadequate infrastructure are cited as the most problematic factors fordoing business in Vietnam

2 RATIONALE

The objective of this report is to identify sectors that have significant potential forexport growth in Vietnam It has solution, strategic focus and aims to guide thegovernment, the private sector and civil society towards the most promising sectors.This report also identifies interesting diversification markets in which enterprises inVietnam have the potential to export more.

CONTENTS

CHAPTER 1 THEORETICAL FRAMEWORK 5

I.VIETNAM’S CURRENT EXPORT ACTIVITIES 6

1 EXPORT VALUE 6

2.WORLD MARKET SHARE 8

4.Clothing and accessories 18

CHAPTER 3 PROBLEMS, SOLUTIONS & RECOMMENDATIONS 20

II.POLICY RECOMMENDATIONS 22

III.SOLUTIONS 25

CONCLUSION 27

REFERENCES 28

CHAPTER 1 THEORETICAL FRAMEWORK

This chapter seeks to estimate and compare the export potential of Vietnam in selected industries The term “ export potential ” is used here in a broad sense and is defined as the capacity to expand exports To take the gauge of the export potential, each of the product sectors is examined along two criteria including: Firstly, the current export performance of Vietnam such as value in export, the world market share and trade balance; Secondly, the characteristics of the international environment, such

as growth of world demand

I VIETNAM’S CURRENT EXPORT ACTIVITIES

The first main composite indicator for the thesis, Vietnam’s current exportperformance, gauges how successful its enterprises perform in the internationalmarkets for the selected product groups Well-performing sectors are considered tohave already proven their export capacity and to thus have high potential for futureexport

According to the newest statistics of The General Department of Customs, thetotal turnover of Vietnam’s export and import from 16/12 to 31/12 reached $10.56billion, increased 13,1 % compare to the result of six months ago.

The total value of export in period 2 2012 reached almost $5.61 billion,increased 19.6% compare to period 1 2012

Chart 2 The export’s turnover of 10 commodity groups in 2012 compare to 2011

Vietnam has significant exports for clothing ( $14.4 billion ), footwear and oil(each accouting for roughly $8 billion; followed by fishery products (about $6 billion);electrical machinery and equipment, coffee, rice …

2 WORLD MARKET SHARE

This sub-index calculates Vietnam’s world market share in each individualproduct group This indicator is partly to compensate for the precious indicator, exportvalue, which favors industries and thus introduces a bias against small industriesHowever, by dividing export value by world exports, even small sectors can achieve ahigh market share, as is for example the case for honey The world market share is thus

a good indicator of the competitiveness of an industry

Vietnam has a substantial world market share in coffee (5.8%), footwear (5.4%),pepper and other spices and culinary herbs (4.9%), rice (4.7%), cashew nuts and othernuts (4.2%), fishery products (3.7%), honey (2.2%), bicycles (2.1%), clothing (1.7%)and tea (1.2%)

In contrast, Vietnam’s world market share is particularly low for electronicequipment and components, shipbuilding, measuring, checking and precisioninstruments, plastics, industrial machinery, agricultural machinery, cut flowers,communications and telecommunications equipment, dairy products, stationary andoffice machines, motor vehicles, and image and sound equipment (all with a worldmarket share of less than 0.1%)

3 TRADE BALANCE

This sub-index uses Vietnam’s trade balance as an indicator to gauge theefficiency of the productive capacity of products The trade balance for a productgroup is calculated as the difference between exports (X) and imports (M) If exportsexceed imports representing a trade surplus, national production exceeds nationalconsumption All things being equal, this suggests that the industry has efficientproductive capacity and can be considered competitive In contrast, if exports arelower than imports representing a trade deficit, national production is not sufficient tocover national consumption Rather than represent the trade balance (X-M) inabsolute terms (e.g US dollar), it is presented relative to the industry’s total trade(X+M) This reduces bias against large industries, which tend to have either strongdeficits or surpluses

On the basis of the relative trade balance in 2010, it appears that Vietnam is a strong net exporter for coffee; coal; rice; furniture; footwear; honey; tea; andfishery products Vietnam is also a net exporter for clothing and accessories; cashewnuts and other nuts; household and furnishing textiles; arts and crafts; pepper and otherspices and culinary herbs; toys and games; jute; rubber; and fruits and vegetables

In contrast, Vietnam was a net importer for plastics; industrial machinery andequipment; dairy products; measuring, checking and precision instruments; electronicequipment and components; communications and telecommunications equipment;agricultural machinery; wires, cables and conductors; and motor vehicles

Table 1 Underlying indicators for the composite index “Vietnam’s export activities”

Export value, 2010

Vietnam’s world market share

Relative trade balance

Export value growth, 2006-2010

Index Current Export Perform -ance (USD

million )

Inde x

Sub-%

inde x

Sub-% index

Sub-Per annua lly %

index Footwear 3,555 2.7 5.4 5.0 90 4.9 18 1.8 3.6 Clothing 5,802 3.8 1.7 2.4 82 4.8 52 2.9 3.5 Fishery

Sub-products

3,364 2.6 3.7 4.0 89 4.9 25 2.0 3.4

Cashew nuts 505 1.2 4.2 4.4 81 4.7 34 2.3 3.2 Honey 22 1.0 2.2 2.8 89 4.9 83 3.9 3.2 Coffee 1,101 1.5 5.8 5.0 99 5.0 -5 1.0 3.1 Rice 1,306 1.6 4.7 4.8 93 5.0 -17 1.0 3.1 Oil 8,323 5.0 0.7 1.5 31 3.6 14 1.6 2.9 Pepper 190 1.1 4.9 5.0 75 4.6 -10 1.0 2.9 Rubber 1,273 1.6 1.2 1.9 54 4.1 91 4.1 2.9 Furniture 1,904 1.9 1.2 2.0 92 5.0 34 2.3 2.8 Bicycles 110 1.1 2.1 2.7 26 3.5 48 2.7 2.5 Tea 111 1.1 1.5 2.2 89 4.9 15 1.7 2.5 Coal 927 1.4 1.0 1.8 94 5.0 19 1.8 2.5 Arts and crafts 627 1.3 1.1 1.8 76 4.6 20 1.8 2.4 Electronics 1,770 1.8 0.0

1 1.0 -69 1.4 129 5.0 2.3

Toys and games 68 1.0 0.3

3 1.2 73 4.6 28 2.1 2.2

Household

utensils

215 1.1 0.2

5 1.2 5.0 3.0 65 3.3 2.2

Agricultural

machinery

7 1.0 0.0

5 1.0 -57 1.6 117 5.0 2.2

Instruments 30 1.0 0.0

4 1.0 -69 1.3 122 5.0 2.1

Industrial

machinery

143 1.1 0.0

4 1.0 -84 1.0 116 5.0 2

Jute products 1 1.0 0.2

4 1.2 56 4.2 13 1.6 2

Cut flowers 5 1.0 0.0

5 1.0 4 3.0 44 2.6 1.9

Wood 1,940 1.9 0.2

1 1.1 -3 2.8 23 1.9 1.9

Motor vehicles 372 1.2 0.0

6 1.0 -45 1.9 58 3.1 1.8

Wires, cables,

and conductors

701 1.3 0.1

3 1.1 -56 1.6 53 2.9 1.7

Image and

sound

102 1.0 0.0

9 1.0 -29 2.2 24 2.0 1.6

Communication

and telecomm.

135 1.1 0.0

5 1.0 -59 1.6 51 2.8 1.6

Shipbuilding 2 1.0 0.0

1 1.0 -12 2.6 1.5

Glass 23 1.0 0.1

3 1.1 -41 2.0 18 1.8 1.5

Plastics 478 1.2 0.0

4 1.0 -86 1.0 41 2.5 1.4

Dairy products 4 1.0 0.0

6 1.0 -84 1.0 -3 1.1 1.0

Source: Comtrade, calculations by International Trade Center.

The indicator concerns the characteristic of world markets, examining whetherthe international environment is favorable for Vietnam for the selected product groups.

It is made up two sub-indices taking into account respectively

 The dynamism of world imports between 2006 and 2010

 Vietnam’s relative market access conditions

Where import markets are dynamic and access conditions are favorable, thisstudy assigns a higher potential

Based on the indicators used, the international environment is most favorable forshipbuilding; glass; communications and telecommunications equipment; coal;furniture; image and sound equipment and accessories; household utensils and

appliances; and agricultural machinery (Table 2) World markets are also favorable

for oil; electronic; equipment and components; rubber; measuring, checking andprecision instruments; packaging materials; stationery, office machine and supplies;arts and crafts; and toys and games

In contrast, the international environment is particularly unfavorable for rice;dairy products; fruits and vegetables; honey; and jute products; bicycles and clothing

Table 2: Underlying indicators for the composite index “world markets”

World imports 2010

Growth of world imports

2006-2010 Index

World markets (USD million) (Value, % per

annually)

(Volume, % per annually) Glass 18,272 14.3 10.7 4.4 Image and sound 114,484 12.0 15.6 4.2 Household textile 15,486 10.0 14.8 4.1 Shipbuilding 8,385 22.9 4.8 3.9 Furniture 84,868 8.5 8.1 3.4 Honey 1,009 21.2 1.9 3.3 Coal 31,864 10.3 6.8 3.3 Oil 581,536 43.1 0.3 3.0 Clothing 238,095 5.5 7.2 3.0 Arts and crafts 38,574 3.6 8.2 3.0 Pepper 2,161 -1.3 6.8 2.3 Fishery products 54,776 3.8 4.5 2.3 Coffee 10,310 -6.6 3.7 1.7 Tea 2,479 -0.4 1.0 1.3

Rice 6,186 -4.8 -0.4 1.0 Jute products 468 -2.4 -2.1 1.0

Source: Comtrade, calculations by International Trade Center

 Dynamism of world imports

Fast growing global markets are more likely to produce net gains for an exportingcountry than slow growing, stagnant or declining markets All things being equal, themore dynamic world imports, the higher the probability of future export growth Thedynamism of international demand for each industry is measured by the trend growthrate of world imports between 2006 and 2010 The growth rate of imports is measuredboth in value terms (e.g US dollar) and in volume terms (e.g tons) The differencebetween these two measures can be substantial For example, world imports of oilgrew on average by 43% per year between 2006 and 2010 in value terms (the highest

of all industries under review), but were stagnant in volume terms (+0.4%, one of thelowest growth rates): the strong value growth of world imports was thus exclusivelydue to increase in oil prices

World demand between 2006 and 2010 was highest for glass products; image andsound equipment; and household textiles, all with average annual growth ratesbetween 10% and 15% in value and in volume terms (Table 2) Other dynamicindustries include communications and telecommunications equipment; householdutensils; furniture; packaging equipment; and coal (volume and value growth ingeneral between 5% and 10%), and shipbuilding and honey (high value growth ofabout 20%, but low volume growth)

In contrast, world imports declined for jute products and rice (both in volume andvalue terms), and for coffee and pepper (in value terms, thus due to declining worldprices) World demand is also low for tea; dairy products; and bicycles

After considering the two dimensions of “world market” and “Vietnam’s exportperformance”, the industries can be divided into four cases:

∗ “Performers in attractive markets”, where both world markets and

Vietnam’s export performance are high and/or dynamic The followingindustries are part of this group: oil, furniture; rubber and rubber products;cashew nuts and other nuts; and pepper and other spices Exporters ofthese products from Vietnam have proven their competitiveness over recentyears Trade promotion efforts for these products are less risky, as there

are national success stories that can serve as reference points Promotionalefforts should particularly aim at broadening the supply capacity.

∗ “Underachievers in unattractive markets” represent the opposite site, as

both world markets and export performance for these industries are lowand/or have little dynamism This is especially the case for fruits andvegetables and dairy products, and to a lesser extent for jute products;bicycles; cut flowers; household textiles; and tea Trade promotion effortsfor product groups in this category face an up hill task, as export prospectstend to be bleak

∗ “Performers in unattractive markets”: Vietnam’s export performance is

strong, but the international environment is unfavorable for rice and honey,but also though to lesser extent for some of Vietnam’s leading industries,such as clothing, footwear, fishery products, and coffee These industriesrepresent particular challenges for trade promotion efforts in Vietnam.Niche marketing strategies are required to isolate the positive tradeperformance from an unfavorable environment in these markets

∗ “Underachievers in attractive markets”: World markets are favorable, but

export performance by enterprises from Vietnam is at present weak forthese industries; which include technology-intensive sectors, such aselectronic equipment and components; communications andtelecommunications equipment; image and sound equipment andaccessories; and measuring, checking and precision instruments Otherindustries include electrical machinery and equipment; motor vehiclesagricultural machinery; industrial machinery and equipment; householdutensils and appliances; plastics and plastic products; packaging materials;construction materials; and wood and wood products These industriesrepresent particular challenges for trade promotion efforts in Vietnam, asthe bottleneck is in general not the international environment (demand isstrong and/or markets are open), but domestic factors It is essential toidentify and remove the specific bottlenecks that impede a more dynamicexpansion of exports

CHAPTER 2 IN- DEPTH ANALYSIS IN THE INDUSTRY

This chapter provides an in-depth analysis for some individual industries Itincludes to the extent possible strengths and weaknesses analysis It will present firstmineral and mineral products (oil); fishery; agricultural products (rice); industrialproducts (clothing); and arts and crafts

1 Oil

Crude oil is one of the Vietnam’s most important export products in terms ofgross revenue According to Comtrade, International Trade Center’s study, the exportpotential of this sector is considered high

Crude oil is currently Vietnam’s most important export product in gross revenueterms Exports have grown from nothing in 1986 when production started to currently

about USD 8.3 billion in year 2010 (Table 1) Moreover, Vietnam has 3.1 billion

barrels of oil reserves1, but that total is likely to increase as exploration continues Theoil production averaged some 360,000 barrels per day, making Vietnam the third-largest oil producer in South East Asia2

Another factor advantageous to exporting crude oil is that the Vietnameseoffshore oil fields are extensive, claimed to be some of the largest outside the MiddleEast Vietnam has proven crude oil reserves of 30 billion barrels3 Vietnam’s oilproduction has been developed through FDI, first by Soviet Union joint ventures in themid 1980s Currently, Russian, Malaysian, Japanese and Canadian firms participate inthe exploration and production

Moreover, the world market for oil is immense, and has been growing strongly

in value terms Imports amounted to over USD 580 billion in 2006 and have been

increasing at a stunning 43% per annually in value (Table 2) The largest importing

countries are the United States, Japan, and China, which are the main destinations forVietnam’s exports Moreover, Vietnam’s main markets are open for Vietnamese oil.The largest market, the United States, does not impose tariffs, nor does Japan or theEuropean Union Accordingly, thank to this, Vietnam can be optimistic aboutprospects of exporting crude oil to the world in the future

2 Fishery products

According to the International Trade Center, the export potential of fisheryproducts is high First and foremost, in order to come to this conclusion, Vietnam’sexport performance must be taken into consideration Vietnam’s export performance

1 http://www.thanhniennews.com/business/?catid=2&newsid=24787

2 http://www.vneconomy.vn/?home=detail&page=category&cat_name=0809&id=694ff297e4c10b

3 http://www.pidc.com.vn/Default.aspx?