Vietnam needs ‘miraculous’ changes to industrialize

There were two events at the end of 2021 that left a strong impression on me and motivated me to write this.

The first was an online meeting Prime Minister Pham Minh Chinh had with economists on November 8 that I was a part of. Discussing reforms, the PM commented that our policy-making process is not good, and fails to properly consult the agencies, localities or businesses that implement or are affected by those policies.

I gave him a brief introduction to Japan’s policy-making process.

I had found instances of drafted policies possibly being affected by local interests and failing to receive support from other sectors, making their implementation ineffective.

In many cases experts were consulted but mostly as a formality.

The second event, which happened on November 17, was my receiving a request from the Ministry of Industry and Trade to comment on an industrial policy that was being drafted.

Looking into it, I was surprised to learn this was the first time a complete set of industrial policies had been prepared even though Vietnam’s stated goal is to become an advanced industrial country by 2045.

Though I have been a researcher in this field for many years, I only know about the drafting of policies for a few industries and have no idea how their implementation went.

Many of the Politburo and Party Central Committee’s policies for industry stopped at the resolution stage and were never turned into specific decisions.

Most recently, on August 20, 2019, the Politburo issued a resolution on strengthening mechanisms and policies and improving the quality and efficiency of foreign investment by 2030. However, more than two years have passed and I still see no sign of this policy being concretized for implementation.

The global economy and technology change very rapidly, requiring policies to be implemented expeditiously. But in our current situation, how can we achieve our goals?

Japan had a period of development considered to be « miraculous » lasting from the mid-1950s to the early 1970s.

In this period its economy grew at an average of 10 percent a year for 18 straight years. Following this, from being a middle-income country, Japan straightaway became a high-income industrial powerhouse.

Below are some of the main features of Japan’s experience in formulating industrial development policies during this period.

This policy set consisted of three parts. The first provided a vision of the industrial structure in the medium and long terms with the aim of shifting the economic structure upward.

The second part included policies to nurture and develop key industries in the form of tax and loan support. These policies were to be in force for a limited time, and after that the beneficiary industries had to grow on their own and compete with the world.

The third part outlined the way industries were to be organized, with the government allowed to intervene to preclude situations where too many businesses competed in a small market, preventing each from reaching the optimal level and achieving economies of scale.

This point was very important for large industries such as steel and automobile. Specifically, when the number of businesses was determined to be sufficient to ensure a competitive market without being too fragmented, the government would either restrict more players from entering the market or advise businesses to gather into groups to compete with each other.

The goal of the industrial structure in the second half of the 1950s was to shift from labor-intensive industries such as apparel and footwear to capital- and technology-intensive industries such as synthetic fibers, petrochemicals, steel, automobile, and electronics.

Japan created policies to nurture these industries, issued laws or ordinances for each industry alongside tax and credit support measures.

Some examples of these were the five-year plan to nurture the synthetic fiber industry issued in April 1953, the policy for the petrochemical industry issued in July 1955, the Law Concerning Provisional Measures for Development of the Machinery Industry in June 1956, the Law on Temporary Measures for the Promotion of Electronics Industry in June 1957. Most of them were valid until 1971, giving enough time for the industries to develop and become self-sufficient.

In a market economy where private companies are the leading factor, Japan managed to build a special mechanism to create a healthy and effective relationship between the state and businesses and benefit from the wisdom prevalent in all parts of society.

The two main tools to achieve this were advisory councils and ‘administrative directives’.

Advisory councils (shingikai) are established by the government with representatives of businesses, intellectuals, journalists, and former officials in them to discuss and recommend policies to the government.

There are shingikai for the prime minister and for ministers as well as for lower-level consultative groups (kondankai) that discuss matters of a narrower scope.

‘Administrative directives’ are tools for the state to intervene in the market when necessary for the purpose of safeguarding the country’s interests or increasing the competitiveness of a certain industry.

For example, when preparing to open up and integrate with the global economy in the 1960s, the Japanese Ministry of International Trade and Industry realized that it was necessary to have several large steel companies in order to be able to compete with Europe and the U.S.

So in 1968 the ministry arranged for two companies, Yawata and Fuji, to merge and form Nippon Steel.

Such administrative interventions are of course selective, well thought out and usually persuasive rather than coercive.

The state is where information is gathered and situations are analyzed thanks to talented staff members and the collective wisdom gathered via shingikai and kondankai.

Administrative directives are therefore often convincing.

The government also uses financial and tax incentives to encourage businesses to act in the suggested direction.

A common issue in many developing countries is that the policies of a ministry might not be implemented due to a lack of support from other ministries.

To avoid this situation, industrial policy making and implementing are done in the following manner: the Ministry of Industry and Trade decides the policies through shingikai and kondankai and then transfers them to the legal departments of the Government Office and Ministry of Finance for confirmation.

Since the policy preparation process is very thorough and transparent and involved the participation of former officials from relevant ministries, there has been almost never an objection from other ministries.

Vietnam should consider the following four points:

The planning of strategies should be discussed between relevant ministries, sectors and an advisory council comprising many parts of society as detailed above.

This approach will help draw on the public’s wisdom while increasing transparency and limiting interest groups.

Policies need to be concretized with time-limited laws so that agencies can speed up their implementation while businesses will not rely on incentives and instead strive to improve their competitiveness for the time when the support ends.

A policy might be drafted by one agency, but its implementation must be smooth with a high level of consensus and cooperation from many agencies.

Once consensus is reached, all agencies must execute it and be accountable to the head of the government.

A set of industrial policies consisting of three parts as above, structure, development and organization, is worthy of being referred to when seeking to industrialize.

In short, if Vietnam wants to achieve miraculous development, it will need ‘miraculous’ changes.

By Tran Van Tho – VnExpress.net – January 18, 2022