Vietnam seeks gains as China labor costs rise

A skills gap

The sharp pickup in exports has created a labor shortage in the textile industry. More broadly, analysts say Vietnam must tackle a skills gap in other industries if it wants to stick to its path of rapid industrialization. Foreign companies that recruit graduates often send them overseas for the type of training that vocational colleges are supposed to provide, says Matthias Duhn, executive director of the European Chamber of Commerce in Vietnam.

Around 60 percent of workers hired by multinational companies need to be retrained for 6 to 12 months before they can start work, according to a report by a Dutch educational nonprofit. “The lack of qualified human resources is the single biggest factor limiting Vietnam’s future development and economic growth,” the report said.

Mr. Duhn says that new recruits often switch jobs after they return to Vietnam, to the frustration of their employers. This and other obstacles to doing business outweigh crude comparisons of wages between China and its rivals. “There’s no such thing as cheap labor. You have to look at productivity,” he says.

Beyond textiles

In many Asian countries, textiles are seen as a steppingstone to more sophisticated, capital-intensive manufacturing. Vietnam has already started on that transition: Intel has built a $1 billion chip assembly plant in a new technology park in Ho Chi Minh City that has also attracted Japanese investors. Intel is due to open its plant this fall.

Vietnam’s Communist leaders take pride in their newfound status as a middle-income borrower from the World Bank, a category for countries with a per capita income of $995 or above. Last year, the World Bank and other donors pledged more than $8 billion in development aid to Vietnam, which is classified as a lower middle-income economy (upper-middle status starts at $3,945).

In speeches, Vietnamese leaders now make frequent reference to the so-called middle-income trap for emerging economies that fail to outgrow a low-wage, export-led growth strategy. Economists say Vietnam hasn’t reached that stage yet, but is wise to pay attention to the pitfalls of rapid growth without a serious investment in productivity gains.

“You can’t assume that because you’ve made progress in the last three decades … that you’re going to continue that trajectory and perhaps [arrive] at the higher end of the middle-income range. It’s very important for them not to be complacent and to draw the lessons of other countries that have actually gotten stuck at some point,” says Victoria Kwakwa, country director in Vietnam for the World Bank.

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