Trade, Structural Adjustments and Productivity Growth in Vietnam: The Shift to Services.

• Author: Chuc, Nguyen Dinh

1. Introduction

   Vietnam's services sector was historically not seen as a priority for overall economic development due to the country's political framework and history of central planning. According to the traditional view, the manufacturing sector is the primary driver of development of the domestic economy. In such a setting, the only services that are considered important by the government are basic social services (health and education) and infrastructure services (like energy, transport, telecommunications, and postal services).

   Before the economic reforms of 1986, state ownership and government monopoly had prevented the rise of several services industries. For a long time, many services that were crucial for the efficient functioning of the market economy did not exist (Eschenbach and Hoekman 2006). Recently, however, the services sector has been opening up, especially after Vietnam's entry into the World Trade Organization (WTO). Since joining the WTO in 2007, the domestic economy has grown rapidly. Requisites for joining the country's services market, especially financial and insurance services, have been significantly eased for foreign investors, leading to greater foreign capital inflows. Similarly, real estate services and office rental markets, as well as advisory services, brokerage and advertising have witnessed unprecedented growth in recent years.

   The Vietnamese government, too, is starting to realize the vital role of the sector for national economic development. It is now widely recognized that services linkages in global production value chains are critical for: strengthening local enterprises; reducing unemployment; promoting trade; and fostering scientific and technical progress of the economy.

   This paper looks at the development of Vietnam's services sector in terms of economic liberalization and global value chain (GVCs) activities, with a special focus on e-commerce services. It employs domestic Input-Output (I-O) tables and the OECD-WTO Trade in Value-Added (TiVA) database to identify linkages between the country's services and manufacturing sectors. The study is organized as follows. The next section provides a brief overview of the overall development of the Vietnamese economy. The third section includes a discussion on the framework for the services sector and GVC activities in Vietnam. E-commerce development using the GVC framework is analysed in the following section, while the fifth section concludes.

2. The Role of Services in Vietnam

   In Vietnam, the services sector has not been given as much priority as manufacturing because of a perception that the sector does not create significant value for the economy. In 1985, services accounted for only 32.5 per cent of GDP, while agriculture, forestry and fisheries accounted for 40.2 per cent (see Figures 1 and 2). With the implementation of Doi Moi policy reforms in the 1990s, the sector has quickly become an important driving force for national economic growth.

   In 2008, the services sector accounted for only 38.1 per cent of GDP and 26.7 per cent of employment. Since the reforms, however, the share of services in GDP has gone through different stages: decline in the 1986-88 period, when Vietnam was still going through economic crisis (priority was given to agricultural development for ensuring food security); increase in the 1988-90 period, when the market policies became more efficient; sharp decline in 1991, when economic shock arising from the collapse of the socialist bloc gripped the country; and increase in the 1991-95 period, when the economy gradually exited the crisis, promoting the transition to a market economy with reform policies of industrialization and modernization that created more demand for services.

   The growth rate of the services sector rose from 2.3 per cent in 1986 to 10.2 per cent in 1990 in the first stage of the economic restructuring process driven by market orientations. In the 1986-90 period, the sector grew 5.8 per cent per year, higher than the growth rate of manufacturing and agriculture. In fact, for a short span (1991-95), the growth rate of services was higher than that of the whole economy. The sector experienced low growth during 1996-2004 when resources had to be channelled towards industrialization and modernization of the economy, before regaining its momentum during 2008-14. The services sub-sectors that have traditionally contributed the most to the growth of the national economy include: automobiles repair; transport, warehousing and communications; hotels and restaurants; business services; and education and training (see Tables 1 to 3).

   Services development has become important for Vietnam to attract new foreign direct investments (FDD. Registered foreign investment capital rose from US$6.8 billion in 2005 to nearly US$78 billion in the first half of 2009. By 2008, total registered FDI in the services sector had reached US$85 billion, mainly directed at restaurants and hotels, real estate and business activities and distribution and transport sectors (Table 4). In the medium term, with growing competition, FDI inflows are expected into specific services such as financial intermediation, health and education.

   The services sector is also important for employment creation. In Vietnam, the number of workers in the service sector has increased steadily since 1985. By 2008, the number of employees in the sector had increased by 2.8 times compared to 1985, at an annual growth rate of 4.6 per cent. During the same period, the total workforce in the country rose only 1.73 times, at an average rate of 2.41 per cent a year (MUTRAP 2009). Wholesale and retail trade, transport and communications, construction, education and training services have, so far, created the highest number of jobs in the sector (Table 5).

   Among services, tourism has emerged as an important industry. In 2015, international tourists visiting Vietnam reached about 7.9 million, nearly 1.6 times compared to the figure in 2010. Easier visa policies have proved to be instrumental here. Education is another vital area. Coupled with the advancements in science and technology, it has helped the country attain a very favourable rank in the global innovation index. Besides, many essential infrastructure projects in transport, energy, irrigation, urbanization, communication, health care and education have been pivotal in promoting the economic and social development of the country.

   Banking and financial services are also growing, diversifying and modernizing. Bad debt resolution and restructuring of weak joint-stock commercial banks have been the government's priority for some time. Until September 2015, the proportion of bad debts was 2.9 per cent, much lower than the 17.43 per cent in 2012. Today, the number of credit institutions has dropped, while financial, securities, and insurance companies are being gradually restructured. The size of the stock market has also increased, with stock capitalization reaching 33 per cent of GDP and the bond market about 23 per cent at the end of 2015.

   2.1 Enterprise Development and Linkages: Manufacturing and Services

   This section examines the backward and forward linkages in Vietnam's value chains. Backward linkages indicate how much a particular industry uses inputs for production from other industries (demand role), while forward linkages denote the function of an industry in providing inputs to other industries (supply role).

   In Vietnam, manufacturing has higher backward linkages compared to the services sector. Among services, transportation and post and telecommunication use other industries the most, whereas finance, insurance and real estate and business services seem to have minor backward linkages. With regard to forward linkages in services finance, insurance and real estate and business services have the highest such linkages, followed by wholesale and retail trade. See Table 6.

   Business services accounted for 81.4 per cent of total enterprises in Vietnam in 2013, with health, education, science and technology witnessing the highest growth. Throughout the country, the commercial sector has the highest proportion of services firms (50.6 per cent), followed by construction (17.8 per cent), real estate and consulting (13.4 per cent), transport, postal and tourism (9.7 per cent), and hotels and restaurants (4.6 per cent). See Table 7.

   In services, the public sector is still the largest player. State dominance is evident by the size of operation of major companies like Vietnam Social Insurance, Railway Corporation Vietnam, Vietnam Airlines etc. In the banking sector, for example, the five state-owned commercial banks (BIDV...