AUSTRALIA-WORLD BANK GROUP STRATEGIC PARTNERSHIP IN VIETNAM Trade and Competitiveness Theme VIETNAM’S FUTURE JOBS ROLE OF THE PRIVATE SECTOR Wendy Cunningham Farima Alidadi VIETNAM FUTURE JOBS ROLE OF THE PRIVATE SECTOR The best jobs, defined by higher labor productivity and wages and social benefits, are largely in the registered firms. They are also inclusive of women and youth. These are the fastest growing jobs in Vietnam today and, if Vietnam prepares for the opportunities brought through the mega-trends, they have potential to grow, in quantity and quality, even more. Thus, the policy challenge is to foster the creation and growth of enterprises that are conducive to job creation, create high value jobs, and position Vietnam for even more as the mega-trends are realized. Three policy areas are proposed: (i) lower the barriers to growth of domestic small and medium enterprises, (ii) encourage enterprises to move into knowledge-intensive segments of regional and global value chains, and (iii) facilitate the development of Vietnam’s agro-food system. The private sector is fundamental in the job1 This note explores the role of the private sector creation process. Privately-owned enterprises in Vietnam’s job agenda in the context of the are the source of most new job opportunities, mega-trends, based on the analysis in the World which, when met by a skilled labor force, result Bank’s new publication Vietnam’s Future Jobs: in quality jobs. However, certain types of firms Leveraging Megatrends for Greater Prosperity (Box are more conducive to the creation of better 1). The note focuses on registered firms, which jobs than others. To maximize the job creation largely does not include family farms, household potential of private sector-led development, it is enterprises, and most of the self-employed. It important to understand which segments of the presents results derived from the Enterprise private sector hold the most promise and how Census 2004-2014 and policy recommendations public policy can support them to create more, that could enhance the effectiveness of the private better, and inclusive jobs. sector in creating good jobs. Transformational mega-trends may either create Where are the jobs today? better job opportunities or threaten the quality As of 2015, there are more than 8 million jobs of Vietnam’s jobs. Shifting trade and consumption in registered firms in Vietnam. Formal wage patterns will affect what Vietnam can export and job creation has been impressive. Over 6 million in which value chains it can, or cannot, continue formal non-government wage jobs were created to be engaged. The rise of the global knowledge between 2004 and 2014. About 4.7 million of economy may provide new high-value jobs but these jobs are in domestically-owned firms and will require a different skill set and export model the other 2.1 million are in foreign-owned firms. from what Vietnam currently uses. Automation The remaining jobs are in state-owned enterprises will replace jobs if workers are not equipped to use (SOEs), which have been slowly shedding jobs technology to their benefit. through the SOE consolidation process. 1 In this note, jobs refer to “labor activities that generate income, monetary or in kind, without violating fundamental rights and principles at work. Jobs can take the form of wage employment, self-employment, and farming. They can be formal or informal” (World Bank, 2012). Good jobs have high productivity, high value added, pay well, and provide worker benefits and good working conditions. 3 BOX 1: Vietnam’s future jobs: leveraging mega-trends for greater prosperity Jobs have been a key part of Vietnam’s rapid transformation to a modern, globally integrated, and middle-income country. The World Bank’s Vietnam’s Future Jobs report argues that Vietnam’s 50 million jobs, along with its transformation toward services and manufacturing, impressive labor productivity, and wage growth have contributed to plunging poverty rates and strong economic growth over the last decades. New transformational mega-trends may threaten, or could be an opportunity for shifting Vietnam’s jobs landscape. The rise of knowledge-intensive industries will require new skill sets, production processes, and export models. An aging population will demand care services from a shrinking working age population. And, automation may replace some jobs and workers, and transform others. Yet Vietnam’s jobs structure is not conductive to adapting to these mega-trends. Most of Vietnam’s jobs are in family farming, household enterprises, or low-skilled labor who may not be able to ride these mega-trends to better jobs. Few jobs are currently positioned to embrace the mega-trends: only 2.1 million jobs are offered by foreign factories that pay above the minimum wage, while registered domestic firms provide no more than 6 million jobs. But policy action today can support those segments of the economy that can leverage the mega-trends to create more, better, and inclusive jobs. Three reform areas are needed: 1) Create more jobs in jobs-intensive segments of the modern sector; 2) Enhance the quality of jobs in the traditional sectors such as family farming; and 3) Connect qualified workers to the right jobs, which requires a mix of skill upgrading, job-matching, and alleviating constraints to work. Jobs in registered firms are generally better and electronics. Youth are found to have higher rates more inclusive than those in non-registered of entry to jobs in registered firms as compared to firms. Nearly all foreign-owned and state-owned older workers. enterprises, and 70 percent of domestically-owned registered firms, pay at least the minimum wage Today’s jobs are concentrated in a small number and provide social benefits. In contrast, jobs of very large firms. More than 40 percent of in farming or household enterprises without a employees in registered firms work in the largest contract do not provide social benefits. Workers in enterprises, namely those employing more than 500 these jobs earn about 30 percent less than median employees (Figure 1) while another 25 percent work wage for those holding a wage job with a contract in large firms (100-499 workers). However, the in private sector enterprises. Labor productivity largest firms only comprise less than one percent is much lower in household enterprises and of all registered firms, while large firms are only family farms as compared to in registered firms. 3 percent of all firms. The high concentration of Women play a significant role in foreign-owned employment among the largest firms underscores firms operating primarily in textiles, apparel, and difficulties in the growth of smaller firms. FIGURE 1: Share of Jobs in Registered Firms by Size and Share of Ownership Type, Total and by Size (2014) 100% 80% 60% 43% 40% 22% 20% 9% 10% 8% 7% 0% 1-9 10 - 19 20 - 49 50 - 99 100 - 499 500+ All Firm size, by number of workers Domestic Private Foreign Public-majority Public-minority Share of Wage Jobs Source: Author’s calculations based on Vietnam Firm Survey, 2014. 4 Most jobs, and firms, are in the domestic private have been lost due to downsizing of firms and 13 sector. Approximately 57 percent of jobs are in the million jobs are destroyed because of exit. This domestic private sector (Figure 1). While a little turnover is the sign of a healthy economy and over half of jobs in the largest firms are in foreign- may improve the quality of jobs as those in less owned firms, jobs in domestically-owned firms viable firms disappear and are reallocated to new, dominate across all other firm sizes. State-owned potentially better, enterprises. enterprises are also barely present amongst SMEs. Small and Medium Enterprises Different ownership categories, and the related Most of the net job creation has been generated jobs, dominate certain sectors. State-owned firms by domestically-owned small and medium tend to dominate markets like oleaginous crops (80 enterprises (SMEs). Since 2004, small firms percent), real estate (38 percent), and construction show consistent net job gains; most of these are buildings (30 percent). Foreign firms, on the domestically owned (Figure 3). Medium-sized other hand, dominate manufacturing, especially firms also show net job gains, though this has in communications equipment (69 percent), slowed down in recent years. In contrast, net job footwear (24 percent), plastics (13 percent), creation by large firms is more volatile, even being apparel (13 percent), and manufacture animal negative in some years. feeds (12 percent). Overall market concentration is expected to evolve, with FDIs continuing to Young SMEs play a very important role in dominate in manufacturing and private domestic Vietnam, but older SMEs contribute little, sector increasing its share in services. meaning that SMEs are not growing. Most net job gains among SMEs are attributable to new firms Where are the new jobs coming from? rather the expansion of existing firms (Figure 3). The rates of job creation and destruction have Many Vietnamese micro-firms are 10 years or been increasing over time, signaling a dynamic older, having one of the largest shares of micro- jobs market. Since 2004, net job creation has firms among a 15-country random sample. This increased (Figure 2). 62 percent of jobs have been signals that while firms enter, they do not grow. created from the expansion of existing firms while In fact, following firms after entry, only 6 percent 38 percent have been created from the entry of of micro-firms were able to expand to over 10 new firms. In addition, 8.9 million have jobs employees after five years of operation. FIGURE 2: Job Flows in Vietnam, 2005-2014 FIGURE 3: Net Job Creation by Firm Age, Ownership Type, and Size (2004-2014) 2000 1000 2000 3000 1000 000 workers total (000) 0 -1000 0 -1000 -2000 1-9 10-19 20-99 100+ 1-9 10-19 20-99 100+ 1-9 10-19 20-99 100+ 2005 2007 2009 2011 2013 year Domestic Private Foreign Public creation net destruction entry age 2-5 age 6-9 age 10+ Source: Vietnam Firm Census, 2005-2014. Source: Vietnam Firm Census, 2005-2014. 5 Export Sector Has, and May Continue to Be, dense in jobs, and (low-scale agriculture) feeding a Source of New, Better, and Inclusive Jobs into the growing agro-processing industry. This The export sector affects nearly 20 million jobs sector has potential to grow, especially as Vietnam in Vietnam. About half of those are jobs in foreign and its neighbors (China) continue to urbanize and domestic firms that export while the other and spend their growing wealth on higher-value half are in firms that provide inputs or services agricultural products. to exporting firms (this includes non-registered firms, such as family agriculture) The overall Vietnam is in a good position right now since jobs number of jobs from exports has increased over growth and productivity increases are positively the past two decades (Figure 4). Exporting firms correlated. However, Vietnam’s most productive are more productive than domestic private or firms, and its SOEs, show a trade-off between public firms in terms of value added per workers labor and capital. Thus, Vietnam’s firms have a (Figure 4). Moreover, foreign firms (who are window of opportunity for firm productivity and exporters) offer 5.5 percent higher wages for employment to be mutually reinforcing. their workers, and as productivity increases, they share their profits more generously with workers Policy recommendations through higher wages than do SOEs, for example. 1. Reduce the barriers to SME start-up and growth for more and better jobs. A dynamic Certain industries are more conducive to role for domestic SMEs in high-value job growth than others activities will be crucial in the development While the manufacturing sector will continue of better jobs for Vietnam. First, reform laws to create more jobs, the agro-food sector and and practices so firms have equal access to services have the potential to offer more and land, capital, electricity, and other inputs, higher quality jobs. Over the period 2004-2014, regardless of ownership type. Second, simplify almost 3 million workers were absorbed into the processes of firm entry and exit to allow the manufacturing sector, mostly in textiles and for efficient and transparent labor (and other apparel and, more recently, through electronics input) flows. Third, encourage FDI-SME and transportation equipment. Employment in linkages, i.e. SMEs to produce for, connect services has grown, as well – by almost 2 million to, and do business with foreign-owned – with export-oriented services producing firms. This could extend to matchmaking particularly high-value jobs. The agro-value chain services between foreign buyers and domestic is one of the few complete value chains in Vietnam, suppliers. FIGURE 4: Number of Jobs from Exports FIGURE 5: Value Added per Workers .3 20,000 Jobs (thousands) .2 15,000 density 10,000 .1 5,000 0 0 1990 1995 2000 2005 2010 4 6 8 10 12 14 Total Jobs Direct Jobs Indirect Jobs Value Added per Worker -log Domestic-Private Public Foreign Exporter Source: Author’s calculations using Vietnam’s IO tables and employment data from Vietnam’s Statistical Yearbook. Source: Author’s calculations based on Vietnam Firm Survey, 2014. 6 2. Encourage enterprises to move into ease their integration into the domestic and knowledge-intensive segments of regional international agro-food system. Second, and global value chains for better jobs. In the through PPPs and public oversight, increase short run, it will be important to streamline food safety and food system management. the logistics regulatory environment, Third, for domestic markets, upgrade food upgrading domestic infrastructure to improve market infrastructure – sanitation, logistics, connectivity, and relaxing emigration hygiene standards – to enhance the value- regulations for foreign professional. Medium added of wholesale and urban wet markets. term policy directions should focus on Fourth, provide incentives for the food building new products and skilled workers industries to invest in cities close to the to drive a knowledge-based service economy agricultural production base, which can through: legislation and incentives to foster also generate more jobs for Vietnam’s ethnic research and development and innovation, minorities. lifting formal restrictions on service trade, and development of service professionals Bibliography who can compete to the highest international World Bank. 2018. Vietnam’s Future Jobs: standards. Leveraging Megatrends for Greater Prosperity. 3. Facilitate the development of the agro- Washington, DC: World Bank. food system for better paid and safer jobs. First, reduce the cost of inputs and facilitate World Bank. 2012. World Development Report information and trade flows to SMEs to 2013: Jobs. Washington, DC: World Bank. 7 With support from: 8 Dao Tan Street, Ba Dinh District, Hanoi, Vietnam Telephone: +84 24 37740100 Facsimile: +84 24 37740111 Website: www.dfat.gov.au 8th Floor, 63 Ly Thai To Street, Hoan Kiem District, Hanoi, Vietnam Telephone: +84 24 39346600 Facsimile: +84 24 39346597 Website: www.worldbank.org/en/country/vietnam 8