How can Vietnam build on improvements in well-being?

Vietnam's success over the past two decades is undeniable. The country has moved from a largely agrarian economy to one powered by manufacturing. Food is more plentiful, health care more accessible, schooling more affordable, and disposable incomes higher than ever. But the country faces significant challenges, some of which stem from its rapid progress. And those issues will create formidable obstacles as Vietnam aims to transform itself into a modern knowledge-based economy.

To understand how far Vietnam has come—and what the country's leaders must do to sustain progress—we used The Boston Consulting Group’s Sustainable Economic Development Assessment (SEDA). SEDA is a powerful diagnostic tool designed to provide insight into the well-being of a country's citizens and how effectively a country converts wealth, as measured by income levels, into well-being.

A key finding: Vietnam is among the top performers globally when it comes to converting wealth into well-being. With GDP per capita (based on purchasing-power parity) of about $5,200, Vietnam has a well-being level that would be expected of a country with GDP per capita of more than $10,000—a clear indicator that the country has successfully harnessed limited resources for the good of its citizens.

Making the next leap in development, however, will require aggressive action on several fronts. On the basis of our SEDA analysis and our extensive work with companies and public-sector leaders in Vietnam, we have identified three key areas the country must address:

-Strengthening the links between the labor market and the education system

-Upgrading the country's infrastructure

-Improving governance

A Major Success Story

SEDA defines well-being through ten dimensions: income, economic stability, employment, health, education, infrastructure, income equality, civil society, governance, and environment. SEDA examines each dimension along two time frames:

-The current-level score uses the most recent available data to offer a snapshot of well-being on a scale of 0 (the lowest level) to 100 (the highest).

-The recent-progress score uses data from the most recent seven-year period for which data is available to examine changes in well-being. This metric also uses a scale of 0 to 100.

Vietnam's overall current-level SEDA score of 42.4 places the country in the middle—number 79—of the 149 countries we assessed. Not surprisingly, wealthy nations such as the US, Japan, Norway, Germany, and Singapore come out ahead of Vietnam, with current-level scores of 80 or above. When it comes to progress over the seven-year period from 2006 to 2013, however, Vietnam is in the top quintile, putting it in the company of countries such as Poland, Indonesia, China, Brazil, Ecuador, and Morocco, all of which have had notable achievements in the past decade.

SEDA also examines the connection between wealth and well-being through two coefficients:

-The wealth-to-well-being coefficient compares a country’s current level of well-being with the level that would be expected given its GDP per capita (based on PPP). The expected level is represented by a coefficient of 1.0, which is based on global averages.

-The growth-to-well-being coefficient compares a country's recent progress in well-being with the level that would be expected given its GDP growth rate. Again, the expected level is represented by a coefficient of 1.0, based on global averages.

Vietnam is among only 49 nations in our data set with scores higher than 1.0 for both coefficients. The country's performance in converting wealth into well-being is particularly impressive— its wealth-to-well-being coefficient of 1.48 is among the top 10% globally. (See Exhibit 1.) And although Vietnam doesn't stand out quite as much when it comes to the growth-to-well-being coefficient—which comes in at 1.04—it is still above the global average on this measure.

So, how does Vietnam stack up to its peers? We compared the country to a group of four others—Indonesia, Malaysia, the Philippines, and Thailand—that, like Vietnam, have midlevel incomes. (Myanmar is also in the midlevel-income group but is not included in our SEDA analysis, owing to the difficulty of accessing reliable data.) This group, which we dub the ASEAN 4, will not only be crucial partners for Vietnam in the 21st century but will also continue to be key competitors in attracting foreign direct investment. (See Exhibit 2.)

Vietnam matches or exceeds the ASEAN 4 in several dimensions, including economic stability and civil society. In several areas, however, including infrastructure and governance, Vietnam lags behind the group. In addition, although Vietnam's performance in employment is in line with that of its ASEAN 4 peers, the country faces a number of labor market issues, including a lack of skilled workers and low worker productivity, that could impede the next phase of its development.

Towering Ambition

Although Vietnam's gains over the past 20-plus years have been impressive, the country's goals for the coming years are even more ambitious.

-The government's primary economic aim is to increase income per capita to $8,000 to $9,000 (on a PPP basis) by 2020, roughly 2.5 times the 2010 level. This would raise Vietnam's national wealth to the current level of Indonesia's and well above the level today in the Philippines.

-The government also wants to transform the structure of Vietnam's economy so that 85% of GDP is derived from the industrial and service sectors, with high-value-added industries accounting for about 45% of GDP.

-The country is targeting an unemployment rate of around 3% and plans to build a workforce in which 70% of workers are trained (including post secondary and vocational training) and about 55% of those individuals receive vocational training.

Achieving these objectives would fundamentally transform Vietnam's economy and allow the country to shed its developing-nation status. To reach these targets while sustaining progress in overall well-being, however, Vietnam must address key gaps relative to more-developed peers in the region.

Building the Workforce of the Future

Vietnam has a sound record in education. With a highly literate population and scores in math and science that are comparable to those of many wealthier OECD countries, Vietnam's current-level SEDA score in education is above the average of the ASEAN 4.

The country's current education system, however, will not be sufficient to meet the demands of a knowledge-based economy. The challenge stems from two fundamental problems. First, labor productivity in Vietnam is lower than in many peer countries. Output per worker in Vietnam was about $5,300 (based on PPP) in 2012, roughly 18 times lower than in Singapore and about 60% lower than in the Philippines.

Second, Vietnam's base of skilled workers is relatively small. For instance, 6.9% of workers in Vietnam have completed tertiary education, compared with 12.6% in Thailand and 16.4% in Malaysia. And only 25.4% of the workforce has completed secondary education, about half of Malaysia's 50.9% and below Thailand's 27.8%. As a result, the country lacks highly trained craftsmen, professional services workers, engineers, and technicians.

Addressing the labor market issues in Vietnam requires action on several fronts:

-First, the links between industry and universities and vocational institutions must be strengthened. Doing so will help drive the creation of education and training programs that teach the skills that employers are looking for. Such programs will not only produce a better and higher paid workforce, but will also help Vietnam retain the large multinational corporations that have already invested in the country.

-Second, Vietnam must improve how it communicates with parents and students about future workforce needs. Such an effort is likely to help address a key issue: the lack of interest among students and their parents in vocational training. The skills that many employers—such as electronics manufacturing services companies—are struggling to find are typically taught in vocational schools, but many students view vocational training as a last resort.

-Third, Vietnam needs to revamp its workforce planning system by developing a robust process for forecasting and monitoring labor supply and demand. This will help the country establish effective labor plans and allow for the flexibility of those plans amid constantly changing economic conditions. The government should also establish a system to assess how stakeholders such as universities and vocational institutions are faring in producing skilled and employable workers.

Bridging the Infrastructure Gap

Vietnam has invested substantially to strengthen its infrastructure, as demonstrated by its recent-progress SEDA score in infrastructure, which is among the top 10%. However, the country is behind the ASEAN 4 group in the current-level infrastructure score and lags behind its peers in areas such as electricity supply and the quality of the rail and road networks.

We estimate that in order to sustain economic growth and remain competitive with other nations in the region, Vietnam will need to invest between $113 billion and $143 billion in infrastructure from 2014 to 2020. (This estimate is based on infrastructure investment of about 9% to 10% of GDP under three growth scenarios—5%, 6%, and 8%—from 2014 to 2020.) Public capital however, is likely to cover only 50% to 60% of the sum, making it critical for Vietnam to come up with innovative ways to narrow and manage the funding gap.

We see the opportunity to act in two areas:

-First, the government should expand the role of public-private partnerships (PPPs) in infrastructure projects. Certainly, improvements in governance in Vietnam will be helpful in this regard, increasing private investors' confidence in the fairness of the legal and regulatory systems. But Vietnam must also improve both infrastructure planning and the execution of PPP projects. The government recently issued decrees that provide guidelines for implementing these partnerships. However, the country should take further steps, including establishing a toolkit for public agencies and private-sector investors.

-Vietnam should create special economic zones (SEZs) in order to get the most out of infrastructure investments by focusing them in key regions. This makes more sense than trying to upgrade infrastructure throughout the country in a relatively short period.

Raising the Bar in Governance

Vietnam's current-level SEDA score in governance is well below the scores of its peers. The country has taken steps to address the issue, including recent government initiatives that have reduced bureaucracy in tax, customs, and administrative procedures. But evidence of persistent governance problem abounds. Roughly 66% of companies in Vietnam's Provincial Competitiveness Index, for example, indicated that "they have to pay informal charges" when doing business. And two-thirds of businesses cited issues with bureaucracy.

In the years ahead, Vietnam will have no choice but to address its governance issues. A key reason: foreign investors will be unlikely to put their money to work there if they do not have confidence in how the country is run. Action should be taken in two areas:

-First, the country should adopt a system for rewarding and promoting high-performing government workers. The value of an objective performance-measurement system has been demonstrated in countries around the world. In Indonesia, public servants are now graded and rewarded on the basis of their performance. The government in Singapore has a rigorous system that links up to 40% of the salaries of senior officials to performance. In Vietnam, this sort of approach would be a powerful mechanism for attracting and retaining qualified workers.

-Second, the country should roll out digital tools in order to increase government transparency. Standardizing procedures and digitizing government services can improve transparency and reduce the need for face-to-face interaction with government. That, in turn, minimizes bureaucracy and eliminates opportunities for inappropriate payments and corruption. To tap that opportunity, however, the Vietnamese government must address a key obstacle: digitized services must be based on clear and unambiguous rules, but in many areas Vietnam's legal code remains unclear.

Vietnam is on the cusp of the next stage of its development. By targeting the right areas for improvement—including education and employment, infrastructure, and governance—the country can achieve real economic gains and enhance the well-being of its citizens.

But the focus should be on the country's achievements rather than on the higher well-being levels, greater wealth, better roads, or improved access to top-tier education that other nations may have achieved. The people of Vietnam should celebrate the leaps they have made with the resources at hand, identify where more work needs to be done, and demand action in those areas from both the government and the nation as a whole.

Authors: Douglas Jackson, Douglas Beal, Chris Malone and Nam Tran.