One of the consequences of the Sino-American trade war is the accelerating realignment of the global supply chain on many tradable goods — ranging from low-tech, labor intensive garments to relatively high-tech electronic products.
The production shift away from China, the erstwhile “factory of the world,” to the nearby lower-cost countries outside the trade war zone is noticeable. In the first four months of 2019, Chinese exports to the United States dropped by almost 14 percent, compared with the same period of 2018, while the most notable increase in exports to the US was that of Vietnam’s. The small Asian country’s exports to the US rose 40 percent in the four-month period this year.
If this export trend to the US continues, Vietnam is likely to become the seventh biggest exporter to the US by the end of the year, overtaking the United Kingdom in the rankings.
The shifting global supply chain also brought in record foreign direct investment (FDI) to Vietnam. The latest data from the Vietnam Foreign Investment Agency (FIA) shows that the country attracted $16.74 billion of FDI in the first five months of the year, a year-on-year increase of almost 70 percent. Nearly three quarters of the investment is in manufacturing, which is beneficial in mitigating the employment problem of Vietnam. The country has 60 percent of its population in the working-age bracket.
The Asian Development Bank estimates that Vietnam’s economic growth will benefit further from the migration in the global supply chain if the trade friction between China and the US continues. Vietnam’s gross domestic product (GDP) could gain a cumulative 2 percent over three years, on top of its projected growth rate, if the trend continues. The country’s growth rate of 6.71 percent in gross domestic product in the first quarter this year already looks to be trending higher to over 6.8 percent in the second quarter. This economic performance could again put Vietnam ahead as the best performing economy among the six major Asean countries.
The Vietnam success story in attracting FDI and turning itself from one of the poorest in the world to a middle-income economy has drawn much attention. Although its success story is not comparable to that of China, the country’s experience mimics very much that of China. Both countries invested extensively in physical infrastructure and human capital. It is often said that Vietnam is a good student of the Chinese economic reform even it is more at odds with the economic giant in other areas.
In an ADB report in 2017, Vietnam was mentioned as having typically spent close to 6 percent of its GDP on infrastructure in recent years, much higher than the 2 to 3 percent spent by other major Asean countries. The higher physical infrastructure investment resulted in lower business operation costs and facilitated the entry of FDI.
Both the Jokowi administration of Indonesia and the Duterte government of the Philippines took cognizance of the importance of physical infrastructure now and are taking steps to boost their countries’ investment in infrastructure. It was the Vietnamese lead, however, that has allowed them to take advantage of the global supply chain migration.
Aside from the contribution of physical infrastructure to its economic development, Vietnam’s accomplishments in education have also generated international attention. Its performance is exemplified by its high primary school completion rate of more than 97 percent, and its high secondary enrollment rate of more than 95 percent.
The more striking is its performance in the 2015 PISA (Program for International Student Assessment), a worldwide study by OECD in 70 countries of 15-year-old students’ academic scholastic performance in mathematics, science and reading. Vietnam ranked 22th in mathematics, 8th in science and 30th in reading. Its composite score of 502.3 placed the country at number 20 among 70 participating countries. Although its performance is behind that of the developed East Asian countries or territories that occupied seven of the top 10 slots, it stood above the OECD member countries’ average of 493 and ahead of the US, which placed 31st with an average of 487.70. It also outranked its much more affluent neighbor, Thailand, which took the 55th place with a 415 score and fellow Asean member Indonesia, which ranked 62th with a score of 395.30.
The 2015 PISA assessment attracted 540,000 students representing 29 million students from 70 countries. It reflected a good picture of a country’s student ability at 15 years old, the age of completion of junior high school and a career turning point for students who will decide to proceed to more academically oriented senior high school or employment geared technical school.
An excellent PISA performance is a good proxy in human capital supply in the lower value-added global supply chain, as well as the future higher value-added economic transformation. Japan, China and the four former Asian economic tigers are all in the top 10 PISA performers.
The Philippines joined the PISA 2018 assessment for the first time last year, and the result will be released in early December this year. It is an excellent opportunity for the country to gauge the necessary mathematics, science and reading skills of the general student population. The educators and business sector should watch the result and work out measures to improve the student performance down the road. Preparing a smart labor force is a crucial intangible in attracting investments.
IDSI comment: Last week, President Rodrigo Duterte’s Cabinet Secretary, as well as Finance Secretary Sonny Dominguez and Finance Undersecretary Karl Chua presented at the Sulong Pilipinas Summit what the entire national business community already knew: We are doing many things right — despite what the overactive critics say — leading to record-low poverty and unemployment, continued top growth rates for the Philippine economy, full capacity consumption of locally produced agriculture-agribusiness products, controlled inflation, increasing record levels of social services like free education, free irrigation and added health services.
An exceptional situation was pointed out: For the first time in decades, increased revenues and expenditures go to unprecedented major infrastructure projects such as rails, ports, airports and the digitalization of social services.
We are on our way up, although Vietnam is ahead in taking advantage of the US-China trade war. But our government can only do so much, so the individual Filipino has to do his share by using the newly rising infrastructure for organized productivity, enterprise and innovation in all areas, not just for consumption and entertainment.
Henry Chan is an internationally recognized development economist based in Singapore. He is also a senior visiting research fellow at the Cambodia Institute for Cooperation and Peace and adjunct research fellow at the Integrated Development Studies Institute (IDSI). His primary research interest includes global economic development, Asean-China relations and the Fourth Industrial Revolution.
IDSI (Integrated Development Studies Institute) Corner aims to present frameworks based on a balance of economic theory, historical realities, ground success in real business and communities, and attempt for common good, culture, and spirituality. We welcome logical feedback and possibly working together with compatible frameworks (idsicenter@gmail.com).
**Also published in: https://www.manilatimes.net/2019/07/07/opinion/columnists/after-infrastructure-for-manufacturing-vietnam-invests-in-human-infrastructure/580191/