Lead Economist for World Bank in Vietnam Sebastian Eckardt (Photo: VNA)
The economist has granted an interview to the Vietnam News Agency onseveral FDI-related issues.
Question: Pleasekindly assess the general impacts of FDI inflows towards Vietnamese economy inthe last 30 years.
Answer: SoVietnam has beenquite successful in attracting FDI ever since the country opened up to foreigninvestment and if we look at the impact, we can say that FDI has reallycontributed in various ways, including industrialization, where a lot ofinvestment went into manufacturing sector, building capacity across a range ofsectors including electronics but also more traditional industries such asgarment and shoe factory, and so on, really fueling Vietnam strong exportperformance and also creating jobs, higher productivity, better paying jobs,hundreds of thousands of them directly and of course also indirectly, by thencreating demand for services, for construction, for even agriculture products thatare used to supply some of these factories.
So I think it’s a very successful part of Vietnam’s overalleconomic development over the last 3 decades.
Question: What do you think about Vietnam’spotential for FDI attractions compared to other countries in the region?
Answer: Vietnam isdefinitely one of the leaders in the region in terms of whether you look at theFDI for capital, you look at FDI as a share of GDP, Vietnam is performing quitewell. It also attracted FDI across a quite diversified set of economicactivities. About 12,000 different firms are operating here, either producingor of course also you have companies that are here to sell products to theVietnamese market. So there is a lot of inflows and Vietnam has been quitesuccessful.
Nowwhat is important to note though is that a lot of this investment is currentlyin labour intensive with relatively low skills, final assembly so Vietnam iscompetitive in one particular part of the value chain where the value added perworker is relatively low, because a lot of the components are imported, andVietnam is only doing the final assembly.
SoI think there is still in the agenda in terms of moving to the next level ofattracting different types of FDI, diversifying across the value chain and particularlymoving into higher value component of the value chain, being R&D ordownstream issues like marketing and brand development. That adds a lot morevalue and would generate higher benefit to the economy of Vietnam.
Question: What is the main reason that makes Vietnam still unableto move up or down the value chain?
Answer: Vietnam has successfullyentered the global value chain, and it is doing that at the rate/level that’smore successful than other countries in the region but also if you look atcountries at the level of Vietnam’s income. So it’s more of the continuance,now that you have participated and integrated into global value chain, it isimportant to use that and to build on that and to reach the full potential.
Ithink Vietnam is not underperforming but it needs to continue to become morecompetitive, that means investing in skills, and in infrastructure, goodconnected infrastructure particularly, because how quickly you can import andexport goods is absolutely critical in the value chain that depends on verytight and timely supply chain.
Soit’s important to have such infrastructure, both physical infrastructures,meaning ports, roads rail and transport network, but also soft aspects such asborder clearance and so on, so that’s absolutely critical. And finally ofcourse investing in skills so Vietnam’s workforce has been a big factor inattracting FDIs, because the workforce is relatively young, more than half ofthe population are below 35, the workforce is growing, Vietnam is doing well incertain aspect of the education system, but I think if you want to compete athigher level it’s important to have, for example, a good vocational training soyou can skill up the workforce so that Vietnam has the people that can performhigher value jobs. That’s really the agenda for Vietnam going forward.
Question: Over the last 30 years, Vietnam has activelyimproved its business environment in order to attract more foreign investment.How do you assess the results achieved from this and please kindly analyze thechallenges that Vietnam is facing on this matter?
Answer: If we look at whatare the ingredients why Vietnam has being successful so far we can say thatthere are some natural advantages, geographic location, and as I mentioned,the population. What Vietnam did quite well is capitalizing on thosefundamental advantages it has, and it did so by, first of all, liberalizingtrade, I think what Vietnam has done extremely well is opening up to trade, ofcourse the WTO access in 2007 and also several multi and bilateral tradeagreements, in fact, more agreements than any other economies in East Asiaexcept for Singapore. So Vietnam is really one of the most open economies, mostinvestor and trade friendly economies in the world and that’s a criticalelement of why Vietnam has been successful.
At the same time, Vietnam has focused on the investment andbusiness environment by reducing hurdles to investment, hurdles to businessoperations, and lowering taxes improving taxes administration, improving borderand custom clearance procedure and so on, if we look and see for example in Vietnam’sprogressive improvement in doing businesses rating at the WB. Now if you lookat the same rating that Vietnam still has room to improve, both in terms of theoverall rating but also in certain aspects more than the others for examplepaying taxes. Despite the progress, Vietnam is still not performing at thelevel it could perform, for example insolvency procedures, meaning how quicklyyou can liquidate firms that are no longer profitable and free up the resourceslike capital, labour that are locked in these firms. It is important that this performancecontinues and I think the government has made it a clear priority to cut redtape, to streamline procedures, to get rid of those procedures that may not beneeded, and to implement that are needed in a more efficient and firm friendlyway so that regulations do not cause unnecessary burden on firms.
Question:Tryingto attract FDI, countries are facing constraints such as transfer pricing, taxevasion or even negative environmental impacts, please advise us on how toresolve this problem?
Answer: For that you needsmart regulations. I think that’s absolutely correct. I think if you have an expandinggrowing economy that is increasingly sophisticated that has a lot ofinteraction financial and real interactions with the outside world that poses achallenge and requires regulations to be adapted. For example as you mentionedtransfer pricing, we know that is an issue for multinational operation andmultinational operation invests a lot in having tax advice that helps them tominimize the tax burden across differentjurisdictions.
It’s important that you have a good leader framework to tackleall those issues, so it’s predictable for firms in the one hand but alsoempowering the authority to prevent tax avoidance or profit shifting thatbasically erode the tax base here. Because you are now having about 18% of GDPis foreign firms in Vietnam and you need to make sure that those firms pay thetax they are due and the level of playing field between those enterprises anddomestic firms. So you need a good legal regulatory framework and good capacityin tax service so you have to specialize, that’s what we see in many countriesbasically have specialised offices in the tax service that deal with theselarge enterprises, those tend to have very complex tax declaration, and that needvery sophisticated analysis to ensure they pay their due share to the tax systemhere in Vietnam.
Question: And your advices on the environmentalissue?
Answer: That’s of coursevery important. I would say the key is to have good environmental regulationsand also again good inspection, good enforcement of these regulations. Thatshould apply equally to foreign enterprises and to domestic enterprises. And ofcourse Vietnam can. I think now it’s part of its move to higher valueactivities should also increasingly take into account the cleanliness of thoseindustries. So Vietnam I think has a comparative advantage that is strongenough to actually attract the industries of the future and to may be avoidsome of the dirty industries, and I think that would be more sustainable notonly environmentally but also economically, because we know increasingly thatbasically good environmental management is also good economic management.
Question: Theworld economy is entering the 4th Industrial Revolution era and like some othercountries, Vietnam is looking forwards to attracting top foreign investors inthe information technology sector. In your opinion, what should we do tocomplete this mission?
Answer: The 4th IndustrialRevolution I think is widely seen as impacting some of the industries in which Vietnamhas traditionally been quite successful. I think there are concerns not onlyhere in Vietnam but more generally that technological changes over time willmodernise manufacturing and basically make some of the labour intensive manufacturingredundant and therefore there are some risks in terms of jobs and so on. So Ithink for Vietnam [we need to] again invest in skills. We know thattechnological progress is of course a good thing, if we look at the history andI think there is good reason to be optimistic that the 4th IndustrialRevolution, like the other industrial revolutions, will actually improve lifefor millions of people, but it is important to prepare people with the rightskills so they can find jobs and productive employment that complementthese technologies rather than compete with technology. I think investing ingood education, especially science technology, and math education is importantbecause those are really the skills that I think will be in demand in thefuture.-VNA
