Why is labour productivity important in economic integration?

ILO Viet Nam Director Gyorgy Sziraczki explains how the ASEAN Economic Community means to Viet Nam’s labour productivity and what the country can learn from its neighbours.

News | 28 January 2015

Q1: Why is labour productivity important?

Labour productivity is important at least for four reasons.

First, it drives economic growth – a highly productive economy means that we are able to
  • produce more goods or services with the same amount of resource,
  • produce the same level of goods and services with less resources.
Second, labour productivity affects everyone.
  • For businesses, increased productivity brings higher profit and opportunity for more investment.
  • For workers, increased productivity can translate to higher wages and better working conditions. And in the longer term, increased productivity is key to job creation.
  • For the government, increased productivity results in higher tax revenues.
Third, the current state of labour productivity is important.

During the past two decades, labour productivity in Viet Nam grew by about 4.5 per cent per year on average, which was the highest rate among the ASEAN countries. As a result, Viet Nam narrowed down its relative gaps with more advanced ASEAN economies. But challenges remain.
  • Among ASEAN countries, Viet Nam’s labour productivity level is still near the bottom.
  • Assuming that recent productivity growth rates are maintained, Viet Nam will reach the Philippines only by 2038, Thailand by 2069 and take far more time to catch up with many other countries.
Fourth, ageing population and economic integration also need to be taken into consideration.
  • Viet Nam is ageing rapidly. In 2045, Viet Nam will face the same population ageing problems as Japan does today. Vigorously boosting productivity is the only way for Viet Nam to become prosperous before its population becomes ageing.
  • Deepening economic integration, including the establishment of ASEAN economic community, is bringing additional challenges as well as opportunities.

Q2: What does AEC mean to Viet Nam’s labour productivity?

The establishment of the ASEAN Economic Community – a single common market and production base – will increase trade and investment flows. And with these, the pace of structural change from low- to higher- productivity sectors will accelerate. This could allow Vietnam to compete in regional and global markets based on higher productivity.

According to an ADB/ILO study published last year, Viet Nam could benefit significantly from the ASEAN integration. If determination and right policies are put in place, GDP could expand by 14.5 per cent by 2025 under the AEC, compared to baseline scenario without integration; employment could increase by an additional 10.5 per cent; and labour productivity could be more than double by 2025.

Some key opportunities and challenges are the following:

First, with over 40 % of the labour force still in agriculture, the move of workers from low-productivity agriculture to higher-productivity service and industry remains a source of economy-wide productivity growth. But this source will gradually dry out as agricultural employment is declining and the population is ageing. Therefore, it is critical to place increasing emphasis on improving “within sector” productivity (upgrading management, product, technology, work organization, and R&D to enhance efficiency). “Within sector” productivity is expected to become to main drivers of long-term economic and social progress.

Second, food and textile and apparel account for over half of the total manufacturing employment in Vietnam. While these labour intensive industries play an important role in absorbing job seekers, including from agriculture and rural areas, the productivity level of these industries needs to be improved and, equally importantly, the manufacturing sector needs to be become more diversified and geared towards higher value-added and higher-productivity industries. Diversification and higher value-added production hold the key to sustainable export growth and prosperity in integrated markets on the long-term.

Third, with the ASEAN economic integration, the demand for medium-skill employment will grow the fastest. This requires the improvement of secondary education and technical vocational training. The new Law on Technical and Vocational Education adopted last November provides a good basis but implementation is critical, including close collaboration between the educational and the business sector.

Fourth, as small firms and micro enterprises account for a large proportion of employment, empowering these businesses to be able to seize the opportunities of deepening integration is essential for broad-based productivity growth and social development. SMEs need better access to credit and support services (information, marketing, technology and training).

Fifth, last year, the government made significant progress in building strong institutional framework, including adoption of the revised Laws on Enterprises and Investment, for a market-oriented economy. But much needs to be done in 2015 and the years to come. Also, the year of 2015 – AEC and forthcoming trade agreement with the EU and the Trans-Pacific Partnership (TPP) – is a time to turn the attention from GDP and job growth targets to economic efficiency, labour productivity and job quality. Some successful Asian countries can provide lessons leant to Viet Nam.

Q3: What are the lessons learnt from the neighbouring countries?

Malaysia, Korea, Singapore and other advanced Asian economies have distinguished themselves in developing their workforce and establishing a competitive position based on productivity. Each country faced unique challenges, addressed by specific policies and adjusted its national productivity strategy as they developed. Perhaps, Singapore has the most comprehensive, most institutionalized and most successful system. There are some key lessons Viet Nam can learn from the Singaporean experience:
  • The basis for a productivity focused development strategy is to have a common understanding and agreement among key players (government, business, unions, media and others) on the principles of such a development strategy. These include that improvement in productivity create opportunities for employment growth in the long-term; the government must be prepared to provide support to workers and businesses to overcome short-term problems such as labour surplus in some companies and sectors; government, employers and labour should work together to implement productivity improvement measures; workers must be prepared to accept changes in the scope and requirement of their job, in addition to retraining for productivity improvement; and gains from improved productivity must be distributed fairly among businesses, workers and consumers.
  • Once there is an agreement on the principles, strong commitment and effective oversight from the highest level of leadership is critical to drive nation-wide efforts to improve labour productivity.
  • It’s essential to ensure strong collaboration among Government, private sector, trade unions, industrial associations, and educational and professional organizations.
  • To translate principles to specific action, it is critical to create institutions, mechanisms and movements to drive and sustain productivity improvements. The establishment of a National Productivity Council could be a good model for Vietnam.
  • Resources need to be spent designing comprehensive and integrated strategies. It is important to take two-pronged approach which includes both sector-specific productivity improvement strategies and economy-wide programmes to support capabilities and enablers such as R&D, SMS productivity roadmap, inclusive growth programmes.
  • The Government should support both to businesses and workers to understand any change, embrace it and adjust with it.
  • Vigorous learning from best practices through international co-operation is encouraged.
  • National outreach campaigns are needed to rally everyone to in the cause of boosting productivity.