PART 1: THE ROLE OF THE PROCESSING AND MANUFACTURING INDUSTRY IN THE ECONOMY

Communist Review - In the process of industrialization and economic development, the processing and manufacturing industry has proven its importance, typically from the emergence  of the Great Britain in the nineteenth century to the rise of America, Germany and Japan in the mid-twentieth century or newly industrialized countries in the second half of the twentieth century and China more recently. The success of these nations when becoming a high-income country in the process of industrialization is an evidence proving that the processing and manufacturing industries are the key to creating the prosperity of each country.

The contribution of processing and manufacturing industries to GDP and job creation

A country's gross domestic product (GDP) is made up of different economic activities, normally divided into three main sectors: agriculture, industry - construction and services. Agriculture, industry - construction are the two sectors that generate wealth, tangible material while service sector creates intangible products. Intangible and tangible products are closely linked along the value chain and they all bring value to the economy. Value chain is a full range of activities that a product must go through sequentially to transform a product from  idea to reality and at each step, the value of the product increases.

Value chains typically range from R&D to product conception, manufacturing, marketing, distribution and after-sales services. The manufacturing in the middle step connects upstream and downstream activities, mainly the activities of the service sector. Although production activities creates the lowest added value in the chain, they are indispensable because without this stage, a complete value chain will not be created. Today, thanks to economic integration and globalization, the value chain goes beyond the territory of a country to become a global value chain. Low value-added and labor-intensive productions  are shifted to developing countries to take advantage of their labor cost and comparative advantage. Although being moved abroad, the production of these chains is still completely dependent on upstream enterprises - owners of products and services created from research and development activities, distribution system, product branding... located in industrialized countries.

Manufacturing provides important foundations for skill development and innovation. It is associated with research and development activities. The industrialized countries are also the birthplace of new ideas and inventions, important industries to the country's economic future, including advanced materials, biotechnology, nanotechnology and precision machine. Breakthrough technologies also came from the manufacturing and processing industries that formed the basis of industrial revolutions. The world today has undergone four industrial revolutions, each initiated by a breakthrough change in production technology. If the inventions related to mechanics lay the foundation of the first and second industrial revolution, the inventions related to electronics and mechatronics are the basis for the the third and fourth industrial revolution. Multinational corporations and upstream enterprises in the manufacturing and processing industries are the leaders in the creation of these technologies and they are mostly owned by industrialized countries.

The industrial sector consists of four main industries: extraction of minerals, manufacturing industry, production and distribution of electricity - gas and water supply and drainage, in which manufacturing plays a key role, creating the largest added value for the industrial sector. During the past 20 years, in developed or emerging countries, manufacturing industry has always contributed about 20% of GDP. In 2019, the manufacturing sector of China accounted for 27.1% of GDP compared to 25.3% in South Korea, 25.3% in Thailand, 21.5% in Malaysia, 20.7% in Japan, 19.8% in Singapore, 19.4% in Germany and only 16.5% in Vietnam. In addition, the developed countries' manufacturing companies have been delocalized in foreign countries through globalization and global division of labor through foreign investment. Therefore, in fact, the potential of manufacturing industries in these countries may be even higher.

In terms of the share in the GDP distribution of economic sectors, statistics from 2010 up to now show that Vietnam economic structure is undergoing a strong transition in the form of accelerated industrialization  of the economy,  gradual decline of agriculture and progressive increase of industry and services. The four sectors that contribute the most to the national economy are manufacturing, agriculture, wholesale, retailtrade and minerals. The remaining industries all contribute less than 5%. Thus, it can be seen that the manufacturing industry has played a driving role for the development of the Vietnamese economy in recent years.

Manufacturing industry also creates long-term jobs and stable incomes. Most jobs, directly or indirectly, are dependent on manufacturing. Previously, thanks to the recovery of manufacturing industries, the United States in the 1920s and 1930s could provide tens of millions of new jobs to overcome the Great Depression and quickly become a world power. In 2019, in China, 28.2% of jobs were created by this industry. This number is respectively 26.8% in Germany, 24.3% in Japan, 24.8% in South Korea, 27.2% in Malaysia, 23.4% in Thailand and 25.8% in Vietnam. Recently, aware of the importance of this industry in economic growth and job creation, the US Donald Trump administration has taken strong measures to bring manufacturing back to the country.

In terms of job creation of economic sectors, statistics from 2010 to present show that economic structural changes have resulted in changes in labor structure with a significant decrease of employment in agriculture, from 49.5% (2010) to 37.7% (2018) and an increase in employment in industry and services. Thus, the processing and manufacturing industry has shown its leading role in the employment of labor shifting from the agricultural sector, with the labor participation rate increasing from 13.5% to 17.9% followed by the wholesale and retail sector with the labor force participation increasing from 11.3% to 13.5% in the same period. The remaining industries all have the rate less than 10%. Thus, more than 60% of workers nationwide are working in three main sectors: agriculture, processing and manufacturing industry and wholesale and retail services. With the decreasing labor force participation in the agricultural sector, in the coming period, the processing, manufacturing and wholesale - retail industries must create more jobs to meet the employment needs of society.

Vietnam is entering in a period of golden age with the working age population accounting for over 50% of the total population. This is both a resource for development and also a pressure on job creation. Most jobs are created in processing and manufacturing industry but within this industry, the role of each secondary sector is also different. Garment, footwear and food processing are still the main job-creating sectors for the economy with an average employment growth rate of 6% in the 2014-2017 period. Electronics have recently emerged as a labor intensive sector with the employment growth rate of 21% in the same period. Other sectors such as rubber and plastic, mechanics and automobiles also tend to increase demand for labor, which is consistent with the industrial structure shift with an average growth rate of over 8%.

To effectively take advantage of the golden age period, in addition to creating many jobs to meet employee needs, it is also necessary to prioritize the quality of jobs that generate high productivity and income because this is a factor contributing to economic growth, bringing Vietnam from a middle-income country to a high-income country. If we only focus on quantity growth and develop labor-intensive industries to create jobs without paying attention to job quality and restructuring sector of manufacturing industry from labor intensive sector with low productivity to capital and technological intensive sector with higher productivity, when this golden period ends, the scarcity of labor becomes more acute, the Vietnam population gets older and the country will face the risk of “getting old before getting rich” and the middle income trap.

Thus, it is not really effective if job creation is based solely on the employment structure in manufacturing because labor-intensive sectors such as textiles and footwear generate the most jobs but they have the lowest labor productivity. This is a true reflection of the current situation of Vietnam's garment and footwear sector which heavily depends on foreign businesses. The stages that create high added value are all held by foreign enterprises while domestic enterprises only process for foreign brand products, are still engaged in  the lowest value-added processes in the value chain. Some emerging industries such as electronics, chemicals, machinery, equipment and automobiles have increased their labor scale and maintain parallelly stable productivity growth. This shows that the Vietnamese processing and manufacturing industry is undergoing a better structural transformation and should be promoted more strongly in the coming time.

Processing and manufacturing industries and the goal of becoming an industrial country of Vietnam

With the current growth of the manufacturing industry, in the next few years, Vietnam is expected to join the group of developing and emerging industrial economies according to the criteria used by the United Nations Industrial Development Organization (UNIDO). UNIDO considers Manufacturing value added  per capita (MVA) as a key indicator reflecting the level of industrial production in relation to the population scale of a country. This concept has been used consistently in Industrial Development Reports series published annually by UNIDO. Learned from experiences of the development of countries around the world, UNIDO concludes that the share of MVA in GDP does not increase beyond a certain point once the country has reached its highest level of industrialization.  GDP per capita at this point is estimated to be 13,000  dollars (purchasing power parity - PPP, 2010). The share of MVA is around 20 percent. Based on UNIDO’s statistics, an economy is considered industrialized if its adjusted MVA per capita exceeds 2,500 dollars (PPP, 2010).

A country is classified as a “developing and emerging industrial economy” if it has obtained significant achievements in industrialization and had an adjusted MVA per capita between 1,000 USD and 2,500 USD or GDP per capita is between about 10,000 USD and 20,000 USD. Another criterion has been included in the definition to supplement the list of some economic contributors to global industry. In absolute terms, these countries fully meet the above criteria of an emerging industrial economy. However, relatively, due to their large scale of population, they have not reached the rate of MVA per capita as  other countries. So this list includes the world's factories (which contribute 0.5% or more of the global MVA) such as India and China.

Currently, Vietnam is classified in the group of developing economies with the adjusted MVA per capita around 1,000 USD. If Vietnam maintains the MVA over 8% as in the past, it is expected that within the next 5 to 7 years, it will meet requirements to join the group of developing and emerging industrial economies according to the classification criteria by UNIDO.

Correlation between processing, manufacturing and service industries - future policy direction

Recently, when observing that the industry shows signs of decline compared to service sector and the goal to become an industrialized country by 2020 is difficult to achieve, some people think that in the current context, with the availability of new technologies in the Fourth Industrial Revolution, the manufacturing will no longer be as important as it once was. Instead, service sector will be regarded as engine of economic growth, turning middle-income countries into high-income countries and  the development path based on industrialization is no longer appropriate in the context that technology and tertiary industry are developing day by day. This observation can be based on realities of developed countries with the declining share of manufacturing industry and the increasing share of service serctor. And in Vietnam, although manufacturing is still growing, the service sector is growing faster and making a larger contribution to the economy. However, this assessment is only based on the superficial figures of the service sector but not on the structure of the entire value chain because in fact, the service sector depends heavily on the scale and development level of the manufacturing industry. Without manufacturing, the service sector has no opportunity for growth.

The service sector includes 15 different industries and is divided into 4 main groups: 1-Distribution services (including industries such as wholesale, retail trade, transportation, warehousing); 2-Services for manufacturers (including media, finance, insurance, equipment rental, advertising); 3-Social services (including public administration, security - defense, education - training, healthcare); 4-Personal services (including hotels, restaurants, entertainment, culture). In the service industries of most developed or developing countries, the distribution services group usually accounts for the largest proportion (about 15% - 20% of GDP). However,  retail and wholesale trade are the activities of buying and selling goods produced by the processing and manufacturing industries. Logistics, transportation, and warehousing cannot be developed without the exchange of goods created by these manufacturing industries. The same goes for real estate, which has the large share in GDP (about 10%). Purchasing residential real estate such as apartments or buildings are also generated from the goods of the manufacturing industry (cement, iron, steel, furniture). Although trade and services are developing day by day, according to the World Trade Organization (WTO), 80% of world trade between regions today is still mainly trade in goods, meaning that only 20 % of global trade is trade in services. Therefore, distribution services cannot be developed without trade in goods. It is noticeable that logistics, transportation, and warehousing are both a service sector contributing to GDP and a component of the input costs of the manufacturing and trade in goods. If these industries are ineffective, they will increase costs and reduce the productivity of the manufacturing. Even healthcare or tourism sector consume products from manufacturing industries such as medical equipments, drugs, pharmaceuticals in medicineand products used in hotels and restaurants. Finance, a service sector that many consider unrelated to manufacturing because it operates on the circulation of unused resources of the non-financial sector in the economy. But the non-financial sector is also the manufacturing sector, which means that finance depends indirectly on the manufacturing sector for development. Professional services (such as consulting, research and development, education - training...) aim mostly at enterprises in the manufacturing sector. The more it develops, the greater the demand for qualified labor and research and vice versa.

In short, the health of the economy depends a lot on the health of the manufacturing sector. The recent US-China trade war and the COVID-19 pandemic has clearly demonstrated the importance of self-reliant manufacturing and value chains with the close connection between manufacturing and service - producing industries. China has not mastered the original technologies, so even though it is the world’s factory, when the technology supply chain is interrupted and investors withdraw from the market, the Chinese economy is facing multiple challenges. In developed countries such as the US, the European Union (EU), the shift of production out of the territory has broken the domestic value chain. As a result, when a pandemic occurs, these countries cannot actively meet their demand for necessity goods due to their heavy dependence on foreign production. Obviously, defining economic growth model is not about choosing between industry or services, but it is to determine that production is the core and service – producing sector must always accompany production and create added value for manufacturing industries. A country or a small- territory (urbanized country) such as Singapore or Hong Kong (China), due to limited resources, has geographical and historical advantages. So it can  focus more on services and depend on the production of other countries (however, the share of the manufacturing industry in Singapore's GDP distribution is approximately 20%). On the contrary, with a population of some 100 million people and a young age structure, high employment demand and nearly 70% of rual population, if Vietnam wants to be independent and prosperous, it must develop its manufacturing industry strong enough so that the modernization and urbanization of the country could be accelerated and sustainable. The growth of the manufacturing and processing industry will create a shift of employment from agriculture to industry and service sector, facilitating the accumulation of agricultural land and enhancing value-added and efficiency in the agricultural sector through the application of science and technology.

The above data and assessments show that the processing and manufacturing industries play an important role in the economy. In the coming time, in order to maintain economic growth and avoid middle income trap, Vietnam needs to continue pursuing the goal of industrialization, with processing and manufacturing industries as the key and develop efficiently distribution services and services to manufacturers to create an engine of economic growth. The development of the processing and manufacturing industry creates a market for service industries to develop. Therefore, community resources should be used to building and enhancing the capacity and productivity of domestic industrial enterprises, forming and developing strong industrial enterprises, building supply chains and domestic value chains (including production and service activities across the entire value chain) that are globally competitive, creating an open and favorable business and investment environment for domestic industrial enterprises to grow, maximizing domestic value added, connecting to the foreign investment sector with greater  participation in the global value chain. Developing a strong domestic processing and manufacturing industry provides also a solid foundation to expand markets for service industries and vice versa, the effective development of services – producing sector contributes to improve the productivity and efficiency of the processing and manufacturing industry./.

(To be continued)

This article was published in the Communist Review No. 951 (October 2020)