The Middle Income Trap: A Case Study of Korea and Lesson for Vietnam

Nội dung text: The Middle Income Trap: A Case Study of Korea and Lesson for Vietnam

1. VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 Original Article The Middle Income Trap: A Case Study of Korea and Lesson for Vietnam Nguyen Minh Trang Diplomatic Academy of Vietnam, 69 Chua Lang, Dong Da, Hanoi, Vietnam Received 03 June 2020 Revised 4 November 2020; Accepted 26 November 2020 Abstract: In the 20th century, Asia was not only famous for war, poverty and backwardness but also for the emerging of Asian dragons like South Korea, Taiwan, Hong Kong and Singapore. These economies have successfully escaped from the middle income group to join high income economies with amazing growth rate. In 2008, Vietnam officially entered the group of middle-income countries, escaping from poverty and underdevelopment with rapidly increasing average income. However, the signs of "middle income trap" have also emerged. Among the four Asian dragons, South Korea has many similarities with Vietnam, such as devastation by war, low-income and poor resources, strong dependence on foreign aid and especially the separation between the North and the South. After the Korean War (1950-1953), South Korea was one of the poorest countries in the world. However, over the past nearly four decades, South Korea has demonstrated incredible growth and global integration and become a high – tech industrialized economy. By analysing the South Korean policies, Vietnam can learn from their success and failure to overcome the middle-income level that has trapped it for almost 10 years with a focus on improving Government’s role, capital control, human resource and technology. Keywords: Middle income trap, Vietnam, South Korea. 1. Introduction including the criterion of per capita income. The World Bank distinguishes the income based on Currently, international organizations the measure of prosperity, including: the poverty classify countries according to different criteria, ___ Corresponding author. Email address: trangdav@gmail.com 93
2. 94 N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 rate, infant mortality rate, and per capita income. the resources and certain early advantages (only Accordingly, countries are divided into four luck without effort). Countries that fall into the income groups: (1) Low-income countries are middle-income trap tend to have low rates of those with per capita income of USD 1,025 or investment, slow-growing manufacturing, less less; (2) Lower-middle-income countries are diversified industries and less active labor those with per capita income between USD markets. Certainly, many developing countries 1,026 and USD 4,035; (3) Upper-middle-income have enjoyed the benefits of transitioning, some countries are those with per capita income rapidly, from a low-income country to a middle- between USD 4,036 and USD 12,475; and (4) income country, but out of 101 middle-income High-income countries are those with per capita countries, only 13 countries have seemed to income of USD 12,476 or more. According to manage to escape the middle-income trap. These this classification, there are 31 low-income countries and regions are Equatorial Guinea, countries, 52 lower-middle-income countries, 56 Greece, Hong Kong, Ireland, Israel, Japan, upper-middle-income countries and 78 high- Mauritius, Portugal, Puerto Rico, South Korea, income countries in the world. Vietnam belongs Singapore, Spain, and Taiwan [2]. This is a sad to the group of lower-middle-income countries situation, where the growth of a country simply with the GDP per capita is $2.590 in 2018 [1]. stagnates or even decreases, ensuring the The United Nations (UN) also assigns the country’s economy will remain in the middle- world’s economy into four income groups: Low- income level for a very long time and has little income countries have a per capita income of hope of seeing it reach high-income in the close less than USD 765; Lower-middle-income future. countries have a per capita from USD 765 to After World War II, many countries and very USD 3,000; Upper-middle-income countries notably, the Asian Tigers developed rapidly to have a per capita from USD 3,000 to USD 9,100; turn into middle-income countries. In a general High-income countries have a per capita of more term, the factors that led the escape from being a than USD 9,100 (this level varies according to low-income country were according to the the global economic situation and the current World Bank, “low-cost labor and easy price of the low - income level is USD 875 per technology adoption.” These important factors year [1]. however no longer contributed to the The “middle-income trap”, in general terms, aforementioned rapid growth once the countries is an economic development situation in which a left their low-income status for middle-income middle-income country has been unable to status. Instead, the countries had to find other transit to a high-income country in a certain sources of growth, mainly, as the World Bank number of years and potentially into the future. argues, through innovation. Other researchers The concept of "middle income trap" indicates have also pointed out several factors why the economic downturns occurring in developing countries remain stuck in a middle-income trap. countries in East Asia, which after a period of Chang-yong Rhee from the ADB claims that rapid growth have reached middle income levels, countries that are stuck have the following cannot become high income countries for characteristics: “low investment ratios, slow decades. Then, the rate of economic growth is manufacturing growth, limited industrial declining. Thus, getting rid of the middle income diversification and poor labor market trap is important for countries on the path of conditions.” Ejaz Ghani also states two factors to development. According to the World Bank, the which middle-income countries “cling too long middle-income trap occurs when a country that to past successful policies” or they “exit has been stuck for 42 years does not overcome prematurely from the industries that could have the basic per capita income of $4,000- served as the basis for their specialization $6,000/year, which the country gained thanks to process”. Some of these factors are inter-
3. N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 95 connected and the lack of industrialization and production including management, technology, productivity as mentioned earlier are certainly design, factory operation, logistics, quality outcomes of these aforementioned reasons [3]. management and marketing. Because of the The process of falling into the "middle decreasing dependence on foreigners, the income trap" of the economy seems to be a intrinsic value has increased dramatically. The necessity, and any country starting with an country has become an exporter of high quality economy based on the exploitation of available manufactured products, challenging its resources, exports of monoculture products, self- predecessors and re-establishing itself in the sufficiency agriculture and expectation of aid, global industrial market. needs to industrialize for development. The - Stage 4: The country has the capacity to process of the catch up industrialization described create new products and lead the global market by Professor Kenichi Ohno (National Graduate trend. Among the four above-named stages, Institute for Policy Studies) includes four stages Kenichi Ohno said that with the available natural [4]: resources, geography, and so on, each country - Stage 1: Begin with the mass appearance of could reach the lower middle income level from foreign direct investment (FDI) manufacturing Stage 1 and grows to the upper-middle income companies, undertake simple assembly or level in Stage 2. When stepping into Stage 3, process the light industrial products for exports they will reach high income. There is nothing to such as textiles, footwear, food, In this stage, say if every country goes through those stages all activities such as design, technology, smoothly. But the fact is that many countries, production and marketing are led by foreigners, after crossing the low-income threshold, grow the main materials and spare parts are slower and are stuck there for several decades. imported while the recipient country only They become a victim of the "middle income trap". contributes simple labor source and industrial Starting at a very low level, Vietnam is land. That leads to a very small internal level, currently in the early stage of industrialization and overwhelmed by the value created by is trying to advance to Stage 2. In South East Asia, foreigners despite of the fact that employment many countries such as Indonesia, Malaysia and and income for the poor get improved. Thailand have been stuck in the middle income - Stage 2: As the amount of FDI is trap for years though they are at higher level of accumulated and the scale of production is development than Vietnam. In this context, there is expanded, the domestic supply of spare parts and a great concern that Vietnam will be in the same components begins to increase. This is partly due situation. Thus, it is necessary for Vietnam to find to FDI providers investing in and partly due to out solutions to overcome the middle income trap the appearance of local suppliers. The assembly and pursue sustainable development. South Korea companies become more competitive and the has many similarities with Vietnam and has linkage between the assembly company and the successfully become a developed nation after few supplier starts to appear. This industry is growing decades. Vietnam can learn from their policies and strongly in volume due to the increased supply of practice to shorten the way to become a developed domestic inputs. Manufacturing is still under the country. management and guidance of foreigners so the value of the increase is not much. Obviously, 2. South Korea Middle Income Trap wages and incomes in the country are the same. After the Korean War (1950-1953), Korea - Stage 3: This is the stage of internal skills was one of the poorest countries in the world, and knowledge through human capital having many similarities with other accumulation in the industry. Domestic workers underdeveloped countries such as: devastation must replace foreign workers in all areas of by war, low income, poor natural resources,
4. 96 N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 strong dependence on foreign aid and especially, after 1963, Korea has risen strongly, quickly the separation between the North and South. standing on par with the rich countries in the Even after the post-war reconstruction period world. Specifically, Korea with a low average (1953 -1960), Korea's per capita income was income level in 1969, achieved a high average only of 80 USD (1960). South Korea’s income level in 1988 and reached the threshold “economic miracle” began under the military of high-income countries in 1995. Thus, in just government of General Park Chung Hee, who over three decades, Korea has achieved a came to power in a coup in May 1961. Several miraculous leap, prompting the country to steps were taken during this period to direct the quickly escape the middle income trap. South state toward economic growth through 7 five- Korea’s income per capita increased more year economic plans, which brought certain significantly since 1985 with the Fifth Five-year achievements for the economy. Particularly from Economic Plan. Table 1. The five-year economic plans of South Korea (1962-1995) Plans Content Detail policies First Five-Year - Concentrate on the textile - Nationalize all commercial banks and allow the Plan (1962-1966) industry and make South Korea banking system control over credit self-sufficient - Provide low interest loans to business - Encourage the development of light industries for export Second Five-Year - Shift to the heavy industry - Modernize the industrial structure and develop Plan (1967-1971) - Attract FDI and improve the substitute industries, including steel, machinery basic infrastructure and chemical industries Third Five-Year - Follow export-orientation - Promote heavy and chemical industries Plan (1972-1976) - Focus on less developed areas including: iron and steel, transports machinery, - Implementation of the Heavy household electronic, shipbuilding and Chemical Industrialization Plan petrochemicals (HCI Plan) - Supply new industries with raw materials and capital goods - Construct new industries in the southern part of the peninsula Fourth Five-Year - Developed competitive - Focus on technology-intensive and skilled labor- Plan (1977-1981) industries in the world’s industrial intensive industries such as: machinery, export markets electronics and shipbuilding - Focus on large heavy and chemical industries (iron, steel, petrochemicals and nonferrous metal Fifth Five-Year - Change from heavy and - Make high-technology products (precision Plan (1982-1986) chemical industries to machinery, televisions , and information) technology-intensive industries Sixth Five-Year - Shift to technology-intensive - Accelerate import liberalization Plan (1987-1991) industries - Remove restrictions and non-tariff barriers on imports. Seventh Five-Year - Develop new high-technology - Government and industry work together to build Plan (1992-1995) fields such as microelectronics, high-technology facilities in seven provincial new materials, fine chemicals, cities to better balance the geographic distribution bioengineering, optics and of industry throughout South Korea aerospace.
5. N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 97 3. Policies Analysis achieved most of the goals set out in economic development plans. 3.1. Efficient and Flexible Intervention In addition to the above characteristics, of Government Korea's brilliant economic development is In the case of Korea, one of the most thanks to the right decisions of the Korean important factors helping the country escape its Government, typically the government of successful middle income trap is the flexible, President Park Chung Hee (1961-1979) when consistent and effective regulatory role of the choosing and pursuing the same strategy of government. The government continually outward export based on industrial exports or adjusted economic goals to adapt to the shift in export-oriented industrialization strategies. economic structure as well as the increase in Through this strategy, Korea can simultaneously income and changes in prioritized economic promote three goals: modernization, issues. This is clearly reflected in the Korean industrialization and internationalization. government's five-year economic plans. From Obviously, as a poor country in terms of 1961 to 1996, there were 7 five-year plans resources, limited in the domestic market, lack implemented with different orientations. The of capital and technology, Korea cannot above plans, although indicative and oriented implement its development strategy towards mainly, play a role in regulating the economy exploiting natural resources or replacing quite strongly. The Korean government is known imports. In addition, due to the need to import to be a fairly successful government in food and other materials, Korea is forced to combining a flexible market and plan. When the export manufactured goods to collect foreign market has not been able to self-operate to exchange. President Park's maxim "export first" achieve its goals, the government will apply is considered a guideline for Korea's economic strong interventions to ensure its planned activities later on. Consistency in Korean objectives. On the contrary, when the market can government policy making is also reflected in the operate effectively, the government will reduce goal of improving international competitiveness. its intervention, even by privatizing state units. From the beginning of 1965, President Park mentioned global competitiveness, which Another outstanding feature of the Korean emphasized that competition with other countries government's operating economy in the period in the export sector is not an option but a must. 1962-1996 is expressed in the following basic Since the early days of the export-oriented strategy, philosophy: economic development is achieved the government has aimed to strengthen Korea's through industrialization and being controlled international competitive position. Over the past and led by the government. The government uses five decades, the implementation of this goal has direct intervention policies such as price been maintained. controls, direct investments in specific industries such as steel and financial support to promote In general, Korea's economic development priority industries. Creating jobs, paying foreign achievements have a great contribution from the debts and promoting exports are identified as the government. This key role is expressed in many first priority issues in economic policies. Growth economic decisions, not only in development targets are more important than solving the strategies or economic plans, but also in a variety balance of income distribution as well as the of other policies. imbalance in industrial development among 3.2. Self-motivated Industrialization Policy regions. Because they think it is due to growth, these problems will then be overcome. In other For Korea, industrial policy is at the heart of words, growth goes ahead, fairness follows. development policies, helping the country to Thanks to the thorough application of the above restructure its economy towards industrialization philosophy, the Korean Government has
6. 98 N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 and modernization. The government has made Agency (KOTRA) and Korea International strong protection for industries since its early Trade Association (KITA). days of development. All monetary and financial Entering the 1970s, Korea's industrial policy policy instruments are used to support key shifted from light industries to developing heavy industries such as cement, fertilizer or and chemical industries with high added value. petrochemical industry. The government recognizes that if they continue In the period 1950-1960, Korea's industrial to develop light industries, rising wages will policy was characterized by an import reduce the price competitiveness of labor- substitution policy that focused mainly on intensive industries. Therefore, in 1973, the consumer goods. The government fully utilizes government issued a plan to develop heavy tariff barriers and import restrictions to the industry and chemicals. Accordingly, the maximum in order to protect domestic industries government selected six strategic industries, and promote domestic production. This strategy, including: steel, shipbuilding, machine tools, despite promoting South Korea's autonomy and electronics, metal, and petrochemical. This independence, reduced its dependence on the choice is based on standards such as forward and outside, but did not bring much effect. Average reverse linkages between sectors, contributing to GDP growth from 1953 to 1962 was only 3.7%. economic growth and exchange rate gains. In the early 1960s, import substitution Attached to this policy is the rise of large strategies proved to be more disadvantageous, industrial corporations. The government Korea's international competitiveness was also promotes the development of HCI sectors weakened in the sectors where it had a through policies such as providing concessional comparative advantage. In addition, due to loans, selective protection, input regulations and increased demand for imported food and input tax exemptions and reductions, among others. materials while foreign aid plummeted, Korea Therefrom, the proportion of heavy industries in was forced to export manufactured goods to Korea increased rapidly from 38% in 1973 to collect foreign exchange. Under these 54.4% in 1980 and accounted for 50% of total circumstances, Korea's industrial policy had to export value in 1980. It can be said that Korea's be changed. In 1964, export-oriented policy was fast economy growth in the 1960s and 1970s was born with the slogan "export is first". Since then, largely thanks to the increase of exports [5]. the government has focused all efforts to boost In the 1980s and 1990s, the economy began exports, considering exports to be a national to show stagnation due to the effects of the oil issue. The government increased direct subsidies and economic crisis of 1973-1975, causing an to export industries, especially labor-intensive imbalance in the industrial structure and light industries such as textiles, yarns and reducing competitiveness. Therefore, the Korean footwear - which are Korean industries that have Government was forced to make adjustments to a competitive advantage. By the mid-1960s, the industrial policy towards increasing market government introduced measures to promote liberalization, giving more autonomy to the exports such as tax exemption, reduction and private sector and developing high-tech financial support. In addition to the above industries such as semiconductor industry, measures, the government also provided the automobile, shipbuilding, aviation. Thanks to necessary infrastructure for economic the focus on investment in science and development, such as building complex technology in this period, Korea made a big industrial parks and encouraging firms to join breakthrough, quickly becoming a high-income these complexes. The Government also country. Korea's industrial policy made a established organizations to promote exports reasonable transition from light industry to such as: Korea Trade and Investment Promotion heavy industry, and then shifted to high-tech industry, based on available economic potential
7. N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 99 and context of the world economy in each public spending on higher education in GDP period. Korea also showed its wisdom to increased from 1% in 1970 to 1.9% in 2000. implement an export-oriented industrialization Meanwhile, the spending on primary and strategy very early on and gave absolute priority secondary education dropped from 4.3% to to developing these industries. 3.9%, respectively, in the same period [6]. Thanks to the investment in education, 3.3. High-qualified Human Resources Korea has achieved many great achievements. Another reason for the strong economic As early as 1970, the primary enrollment rate development is that Korea has a good education reached 100%. Illiteracy rate fell from over 10% and a qualified workforce. Starting from a in 1970 to almost zero in 1997. High school resource-poor country, Korea has nothing but enrollment rate reached 40% in 1970 and was abundant human resources. Taking advantage of almost universal in 1997. As for general this with the nation's tradition of fondness for education, Korea is ranked third among OECD learning, from the beginning, the Korean countries in terms of qualification, and up to Government appreciated the role of education, 84% of high school graduates entered considering education as a top strategic priority, universities and colleges in 1998. Thus, Korea’s a foundation for building the country. education can be seen developed quite quickly. This helps increase the capacity and Since before the economy took off, qualifications of workers, enabling them to education in Korea has been quite respected. absorb technological advances and timely meet Thanks to the enforcement of compulsory the needs of the economy. The chart below (?) education law in 1948, the enrollment rate at all shows that the level of workers by education levels has increased rapidly in 1945 - 1961. As level in Korea increased significantly in the of 1960, about 56% of the adult population in period 1960-1995. By 1995, this rate had nearly Korea had access to primary education and 20% caught up with advanced countries, like Japan achieved secondary education, much higher than and America. in most other developing countries at that time (26% and 5%, respectively). As a result, the A highly qualified workforce is a major workforce in Korea underwent basic training factor leading to rapid labor productivity growth early on. Later, despite being severely affected in Korea. If in the mid-1970s, Korea only by the war, the role of education was not reached about 40% of labor productivity neglected. Since the 1960s, Korea's education compared to that in Japanese manufacturing and policy has been constantly changing in order to 20% in the US; then by 1996, Korea's labor achieve the objectives set out in economic plans productivity had reached 70 % of Japan and and meet the changing needs of the market. In nearly 50% of the US. This is due to the rapid the early stages of economic development, the increase in labor productivity of Korea in the Korean Government places much interest in 1980s and 1990s (8% and 10%, respectively); lower secondary education to provide a suitable while in Japan and the US, the figure is only 6% and timely workforce for large-scale and 3%, respectively [7]. manufacturing in manufacturing industries. A major feature of South Korea’s economic However, since the early 1980s, the government development was its focus on acquiring has focused its attention on developing higher technical skills. The state created a number of education and higher education with the aim of centers to promote research and dissemination of creating a high-quality workforce to meet the technical knowledge to business enterprises such needs of high-tech industry development. This is as Korean Institute of Science and Technology evident in the Korean government's spending on (KIST), established in 1966. It also promoted education. According to the Korea Institute for technical education by expanding the number of Educational Development, the proportion of vocational secondary schools and two-year
8. 100 N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 technical colleges as well as encouraged students changed significantly, aiming to improve to study abroad. At the same time, the Park national scientific and technological capacities administration made impressive progress in through promoting research and development professionalizing the state bureaucracy. Officials (R&D) activities. In 1982, the national R&D received appointment through a highly program was born. Since then, science and competitive civil service examination system technology activities in Korea began to flourish. and were promoted based on clear guidelines for This is reflected in data on R&D spending. R&D merit. Attracted by good pay and benefits, job spending increased from only 0.25% of GDP in security, and enhanced prestige, many of the 1963 to 1.74% in 1991 and continued to increase country’s top university graduates as well as in the following years. By 1996, R&D spending those with overseas degrees entered the ranks of accounted for 2.26% of GDP, higher than the the bureaucracy. As a result, a highly competent, average of OECD countries (2.01%).With respected set of officials were able to help guide proper investment in science and technology, the and promote economic and social development. efficiency of the Korean economy has increased. 3.4. Focus on Developing Science and We can see that the total factor productivity Technology and Constant Innovation (TFP) contributes greatly to economic growth during the period 1982-1995 (44%) - a In Korea, the role of science and technology significant increase compared to 6% in the 1970- has been noticed since the early 1960s. Along 1982 period [8]. In short, Korea has shown the with the advent of the first economic right early investment in science and technology development plan is the first five-year plan to development by a time when input factors such promote technology. Over time, the Korean as labor and capital were no longer a Government made policy adjustments to suit the comparative advantage of the country. In development stages of the economy. addition, the scientific and technical progress or Specifically, the government focused on the total factor productivity will be the factors building infrastructure for technology contributing to the promotion of sustainable development in the early stages of growth. industrialization and shifting to developing key technologies later on. In the early 1960s, two agencies were 4. Lessons for Vietnam established, including a research institute of the Korea Institute of Science and Technology Being Asian countries, Vietnam and South (KIST) (1966) and the Ministry of Science and Korea share a number of things in common. Both Technology (MOST) (1967) that paved the way Vietnam and Korea are rather small, situated on for public scientific and technological peninsulas (the Indochina peninsula and the development in Korea. The main strategy of this Korean peninsula, respectively), with 2/3 of the period is to increase the import of foreign territories are mountainous areas and long sea technology, build technical infrastructure and coasts. With the similarities in geography, the promote education and training. In the 1970s, the climate conditions in Vietnam are the same as development of science and technology was still the ones in South Korea with 4 seasons: spring, limited because the technology for labor- summer, autumn and winter. Vietnam and South intensive export industries as well as heavy Korea are at the very important strategic industries and chemicals could easily be locations and surrounded by big powers. This obtained from abroad. In general, in the early would influence their history and culture. period, Korea's science and technology policy The most outstanding different feature mainly focused on the introduction, acquisition between Vietnam and South Korea is political and application of foreign technology. Since the regime. After the war, Vietnam with the support 1980s, new science and technology policies have
9. N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 101 from the Soviet Union follows socialist regime ownership, and the economic components and is only led by the Communist Party of associated with the diversification of various Vietnam. Meanwhile, there are 7 big parties and types of business organizations are two major 13 small ones in Republic of Korea. This reasons for the economy to develop and reap the difference is one of the main cause of policy significant achievements. Basic types of markets decision as well as economic growth direction have emerged and developed step by step in the from government. In terms of geography, with whole country, linking with the regional and the area of 331.698 km2, a quarter of Vietnam’s world markets, creating conditions for exploiting territory is plain with two large plains: Red River the potentials and advantages of each region and Delta and Mekong River Delta. In contrast, the whole country, developing production and South Korea hardly has plain, mainly with circulating goods. Vietnam's economy operates lowland. That explains why Vietnam can well according to the market economy under the develop agriculture and is a leading rice management of the State through laws, policies, exporting country. strategies, planning and other macro-regulatory There is also a difference in workforce of instruments. two countries when being middle-income ones. However, the process of improving market In 1969, when South Korea started reaching economy institutions in Vietnam still faces many lower-middle-income level, it had young obstacles in terms of awareness and population and stable workforce with the implementation of policies. Specifically, there advantage of abundant cheap labor for the future. has been no consensus on ownership up to now, or Nevertheless, on being upper-middle-income defining the role of economic sectors, including country, South Korea had to face population state-owned enterprises (which are still considered aging. The working-age population is high but in to play the dominant role in the economy), 30 years without an effective measure, the alongside with low-efficiency businesses, strong population will be aging; whereas Vietnamese state intervention in the markets, corruption, population, though pretty old, is not as worrying among others. As a result, incompleted economic as that of South Korea because the percentage of institutions will also be one of the obstacles to the people under working-age is still high with quite economic development of Vietnam. large population at the age of 30-40. The case of Korea shows the important role of the government in the success of the economy. 4.1. Enhancing the Role of the Government It can be said that the Korean Government has Growth is not just about economics, it given very appropriate, proper and timely requires a competent, trustworthy and dedicated policies. The lesson is that governments should government. However, how much government have a long-term vision, set clear goals and intervention in the economy has so far remained pursue them. The policies introduced must be the most paper-intensive question and not the carefully considered based on the available same in each country. Some researchers argue capacity or comparative advantage of the that the government should intervene as little as country and adjusted accordingly to each stage possible and support the notion of "a smaller of economic development as well as the government and a more free market." According international economic context. When realizing to Arthur Lewis, the government fail because inadequacies and failures, the government needs they intervene too little or they may intervene too to draw lessons and quickly make the necessary much. After more than 30 years of management transition. The role of the government should not reform, Vietnam has basically shifted from a overwhelm or completely replace the market but bureaucratic, centrally-planned economy to a needs to supplement and facilitate the operation socialist-oriented market economy. The of the market, keeps away from direct recognition and diversification of forms of intervention in the early stages of development
10. 102 N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 towards self-liberalization and then completes and focus resources to promote spearhead liberalization. In addition to the above factors, industries and policy redirects in time when the government needs to ensure stable recognizing the shortcomings in the macroeconomics, social justice, good development process. Thanks to detail policies connection with the private sector and facilitate focusing on technology-intensive industries business activities. In short, to successfully carried out in the sixth and seventh five-year overcome the middle income trap, the plans, South Korea’s economy grew prerequisite is that the country needs a considerably from 1986 to 1995. competent, long-term and determined Unlike South Korea, from past to present, government. Vietnam with favorable terrain and climate is known as an agricultural country. Therefore, it is 4.2. Choosing Suitable Industrial considerable for the authority to encourage and Agricultural Development Policy enterprises joining the supply chain to reduce The key to achieving Vietnam's growth over cost for all stages of the production and business the last few years is the exploitation of resources process. More Vietnamese businesses need to and the use of cheap labor. Vietnam's export invest in agriculture. It is also necessary that earnings are mainly derived from the production these businesses in the industry have a large of raw materials in mining and agro-forestry. scale to be able to compete with a competitive The 15 key export items are in these two groups. market consisting of many giant foreign Vietnam's current income is based on more than enterprises. 70% of its resources, including crude oil, coal, Vietnam should make the most of domestic minerals, timber, rice, seafood, rubber and comparative advantages to carry out coffee. What Vietnam needs to realize is that industrialization towards increasing quality and with the achievement of average income levels, decreasing in quantity. Vietnam should carefully inequalities in society have also risen to a very consider and research when selecting key high level. In addition, some real estate traders, industries based on standards such as forward stock traders are rich but do not create many jobs and reverse linkages between sectors, for the society. Environmental pollution is contributing to economic growth, opportunity occurring very seriously from rivers to ponds, costs, and international context to suit each stage lakes; forest destruction is increasingly serious, of development. Industrial policy should also be exhausting the source water; floods and droughts planned in the long term so that there can be are more and more severe. Therefore, despite the better preparation of capital, human resources worthy achievements, Vietnam needs to see all and infrastructure. In addition to developing the limitations, shortcomings, deficiencies to industry, the government, particularly the overcome. Ministry of Agriculture and Rural Development, Obviously, export-oriented industrial policy should formulate policy to develop advanced has proved quite effective in promoting agriculture. economic growth not only in the case of Korea Along with that, the ministry should co- but also in many other countries. It is noteworthy operate with enterprises to plan output products that Korea has pursued this policy since the early for the whole industry strategically in each years of development and structural period, in order to minimize the imbalance transformation is quite reasonable when moving between supply and demand. It is not uncommon from light industry to heavy industry and then for heartbreaking scenes such as dragon fruits towards developing industries with high-tech and watermelons to lose their crops, causing the content; in other words, going from developing price to escalate. On the contrary, when there are in width to developing in depth. The Korean good crops, supply almost always surpasses government also showed their ability to select demand, leading to a disastrous price drop.
11. N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 103 Therefore, ensuring stable output of products, technology to organizations. According to the balancing supply and demand, will help solve Asia Foundation and Central Institute for the problem of price stabilization, avoid Economic Management (2011), the technology speculation, and above all, avoid waste of effort level of most garment exporters is average, and wealth of the whole society. Moreover, the although many enterprises actively invest in new state and businesses need to regulate and manage equipment; only a few enterprises receive the effectiveness of the industry, particularly for investment support for technological innovation; individual farmers. In addition to the usual R&D support is largely driven by self- agricultural extension policies such as subsidies, employment and service purchases. For seafood seed grants, capital grants, or tax reductions, enterprises, the level of technology of seafood policies related to process management, quality processing and exporting enterprises is just control, hygiene and safety, and output above average. As for electronics enterprises, assurance also need to be considered for technology and equipment of domestic application. As a result, farmers are not only enterprises is 10-20 years backward compared to contracted, but also supported, managed and the region and the world [12]. The weakness of inspected throughout the operation of the technology has made the production capacity of integrated value chain to ensure that the products Vietnamese enterprises unable to meet the are of good quality and fully consumed. requirements of large corporations in the world. In addition, the management capacity of 4.3. Improve Human Resources Qualification, enterprises also has many points to complete. In Science and Technology Vietnamese enterprises, innovation, Although Vietnam's labor productivity improvement, creation activities have not been increased continuously from 1986 to present paid enough attention. Limited technological with an everage yearly increase by 4.67% in the capacity makes it difficult for Vietnamese period 1986-2010 and by 5.53% in the period enterprises to compete on price and quality. 2001-2010, in absolute terms, labor productivity Vietnamese enterprises, if they are involved in in Vietnam is still low compared to other the global value chain, assume the position of countries [9]. Specifically, in 2010, Vietnam's creating less value added. overall labor productivity per year reached about The Korean case study shows that thanks to $1,800 per worker, much lower than the world the early development of education and a large average of over $14.6 thousand/ worker. Or, investment in science and technology, the comparing the production in the manufacturing country quickly built a highly independent sector, while the productivity of the US is 100, economy, sufficient capacity to shift the that of Vietnam is just 2.4, of India - 4.3, of economy from low value-added industries to Indonesia - 5.2, China - 6.9, Thailand - 7, high value-added industries. As the economy Malaysia - 15.1, Singapore - 55.3 and South grows, the advantages of labor and capital will Korea - 63.6 [10]. Especially, the labour disappear, at this time high quality human productivity of Vietnam has fluctuated strongly resources along with technological advances will since 2011 and dropped by 8.23% in 2019, be factors that enhance the competitiveness of which seriouly affected the development of all the background economy and promote sectors [11]. sustainable growth. The highlight of Korea's Besides, the technological level of education and science and technology policy organizations, including enterprises in Vietnam, making is that the government uses a practical is far from the technological level of most approach and step by step in each stage of countries in the world, typically in sectors such economic development and this has shown high as textiles and garments, food processing, efficiency. The step-by-step approach here is mechanics and the application of information demonstrated by the government's creation and
12. 104 N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 upgrading of infrastructure in the early years; The experience of Korea shows that the then its aim to improve the quality of education implementation of austerity policy to increase and promote innovation. Through Korea's the savings rate, even the sacrifice of social development, it can also be seen that education welfare, is sometimes necessary to provide and economic growth have a mutual relationship capital for development in the early periods. In and promote each other. Education helps create particular, the investment should be focused, a knowledgeable workforce, thereby increasing avoiding spreading and adjusting according to labor productivity and paving the way for the nation's economic strategy. The government economic growth [13]. In contrast, the more should make the most of its capital and allocate developed the economy is, the more highly it to prioritized sectors and sectors, monitor qualified workforce it requires to acquire and activities and promote businesses to achieve apply new knowledge, new techniques, thereby their goals. Vietnam cannot wait for aid and promoting education development. loans but creating new forms of investment, Hence, the investment in education and initially with BOT, PPP, among others. In innovation should be the top priority of the addition to the above changes, according to government and should not be delayed. The William Pesek - General Director of Bloomberg government should encourage and coordinate in Vietnam, the completion of financial with the private sector to invest more and more institutions, through the formation of capital effectively in these areas. Educational and market development, plays an important role in science and technology policies should be tied developing the economy to escape the middle together and linked to the country's economic income trap. Over the past few years, Vietnam's development strategy. growth has been quite high, but the economy mainly relies on investment capital from banks, 4.4. Utilize Invested Capital while other channels in the capital market such as stocks and bonds are still slow to develop. The infrastructure system determines the Credit growth in developing countries is usually development of an economy because it provides only 0.6-0.7 times of GDP but in Vietnam it is the conditions for the activities of the economy 1.2 times of GDP [15], so it needs to be reduced to take place. Therefore, focusing on together with the restructuring of the capital and infrastructure development is always one of the money market. important requirements in the economic development of any country [14]. In Vietnam, despite over 35 years of renovation, the 5. Conclusion infrastructure is still backward. This can be clearly seen through the interrupted highway South Korea’s impressive rapid growth from system that many localities have only one type a low-income country to a high-income country of access road, the status of reconstructed road is an experience that developing countries can degradation occurs on a regular basis, the certainly learn from. Especially, the period backward railway system, inadequate transport 1960s – 1990s when South Korea extraordinarily of electricity, lack of clean water, and urban escaped from the middle–income trap. Indeed, traffic congestion is quite bad. The clear many former low-income countries that have evidence shows that as long as the infrastructure transitioned to middle-income countries, have to is not modernized and synchronized, Vietnam some extent followed similar policies or growth can hardly break through. The role of investment patterns of South Korea. Many countries that capital in economic growth is undeniable. have transitioned to middle-income status find However, how to use it to bring the best effect, themselves unable to move on to high-income to avoid wasting resources is not something status. In fact, out of the 110 middle-income every country can do.
13. N.M. Trang / VNU Journal of Science: Policy and Management Studies, Vol. 37, No. 2 (2021) 93-105 105 countries from the 1960s, only 13 including South Slowdowns and the Middle-Income Trap, IMF Korea, have transitioned to high-income status. Working Paper 71, 2013. [4] Ohno, Kenichi, The Middle-Income Trap: After 10 years of development, Vietnamese Implications for Industrialization Strategies in East per capita income increased from $1,371 in 2010 Asia and Africa, Three Policy Discussion Papers, to $2,715 in 2020, which is not adequate by GRIPS Development Forum, 2009. potential and capability [16]. Vietnam can [5] Kim, Kwan S., Industrial Policy and escape from the middle-income trap with not Industrialisation In South Korea: 1961-1982 – only high levels of efficient government system Lessons on Industrial Policies for Other Developing Countries, Kellog Institute, Working but also modern and productivity-enhanced Paper No. 39, 1985. industrialization. These are the areas that South [6] Chung, Sungchul, Innovation, Competitiveness Korea has certainly achieved and the ones that and Growth: South Korean Experiences, Annual Vietnam can emulate. Considering the rather World Bank Conference on Development similar conditions between Vietnam and South Economics, 2011. Korea and the latter’s initial economic [7] Harvie, Charles and Lee, Hyun-Hoon, Export Led Industrialisation and Growth – South Korea’s development experience, this paper concludes Economic Miracle 1962-89, University of that (1)Vietnam needs to focus on dealing with Wollongong, Economic Working Paper Series, structural areas to utilize strength and reduce 2003. weaknesses by promoting advanced and [8] Tran Van Tho, The Middle-Income Trap: Issues for exported agricultural products and industrial Members of the Association of Southeast Asian sectors; (2) the Government needs to enhance Nations, Asian Development Bank Institute Working Paper Series, 2013. power and control over the macro policies with [9] The World Bank, How to avoid middle income suitable supports for priority sectors as well as traps, leading private firms; (3) education, human resource and technology must be upgraded to avoid-middle-incometraps, 2013 (accessed on: meet the need of market demand for the long April 20th, 2020). term development; and (4) capital, which may [10] 2018 JETRO Survey on Business Conditions of come from both domestic and international Japanese Companies in Asia and Oceania, 2019 [11] Ceicdata, Vietnam Labour Productivity Growth, sources, is also an important factor to achieve the target of becoming a high-income country. The bour-productivity-growth, (accessed on: above four groups of solution will be really November 3rd, 2020). effective if the Govrnment can work with private [12] Felipe, Abdon and Kumar, Tracking the Middle- sectors to utilize the domestic power and strength. Income Trap: What is it, Who is in It and Why?, Working Paper No. 715, Levy Economics, Institute of Bard College, 2012. [13] Flaaen, Ghani and Mishra, How to Avoid Middle References Income Traps? Evidence from Malaysia, Policy Research Working Paper 6427, World Bank, 2013. [1] The World Bank, Classifying Countries by Income, [14] Gill I and Kharas H, An East Asia Renaissance: Ideas for Economic Growth, World Bank, 2007. development-indicators/stories/the-classification- [15] The Economist, The middle-income trap, of-countries-by-income.html (accessed on: April st 1 , 2020) 12/03/focus-3, 2012 (accessed on: April 20th, [2] Daniel Kasenda, Can Asian Developing Countries 2020). Stuck In A “Middle-Income Trap” Learn From [16] World Bank National Accounts Data and OECD South Korea’s Economic Development National Accounts Data files, Experience?, GDN working paper No.86, Global Development Network (GDN), Washinton D.C, AP.CD?locations=VN, (accessed on: November 2015. 3rd, 2020). [3] Aiyar, Shekhar, Romain Duval, Damien Puy, Yiqun Wu, and Longmei Zhang, Growth