Cheap labour will not yield gains for ever. But what comes next is unclear
ON the edge of Hanoi brick-walled factories lie abandoned, weeds sprouting in their ruins. Surprisingly, this is a sign of progress. The land is slated for new housing; the state-owned textile firm that operated there is moving to an industrial park, where it can better meet booming demand for Vietnamese garments.
Exports of textiles and garments rose by 17% in the first seven months this year, to $5.8 billion, suggesting that investors still favour Vietnam as a base for cheap manufacturing.
Its advantages have been amplified by recent labour unrest and rising costs in southern China's factories. In Hanoi there is renewed talk of "China Plus One" as a strategy for multinationals keen to spread their bets. Vietnam could gain handsomely, thanks to its labour which is cheaper than China's and its neighbours' (see chart). Even after a pay rise, the monthly wage for a textile worker starts at $84, says Nguyen Tung Van, head of the Communist Party-run textile workers' union, from his office in the abandoned compound. The industry employs around 1.7m people. Makers of footwear, furniture and more also gain from supplies of cheap labour.
Vietnam has prospered as a result. GDP per head was below $100 in 1990 but is now well over $1,000, says the World Bank. But with workers getting richer, more will need to move into higher-skilled work, becoming better educated and using capital and technology more efficiently.
Even that is not enough. Vietnam's creaky infrastructure (power cuts are still common, even in the capital) and inefficient bureaucrats make it hard for exporters to compete. A wish to develop poorer provinces has led to some questionable choices: Vietnam's only oil refinery, for example, is in central Quang Ngai, far from either oil wells or industrial cities.
The government, too, needs to give up on short-term fixes. The currency, the dong, has been devalued three times since November 2009. Fiscal weakness and policy flip-flops led Fitch, a credit-rating agency, to cut Vietnam's sovereign rating in July. Foreign reserves have been run down. Many Vietnamese opt to hoard dollars, not bank them. Inflation, at 8.2%, is a worry.
More could be done to develop a domestic market, too, in a population of 86m. One problem is dominant state-owned enterprises. Some competition has appeared in sectors like banking, but too often big, state firms are morphing into conglomerates, helped by cheap credit and political ties. Party leaders speak warmly of South Korea's chaebol, but Vietnam's versions are unlikely to develop a competitive edge. Note, for example, Vinashin, a deeply indebted shipbuilding company, where the powerful ex-boss, who had been appointed by the prime minister, was arrested in August for mismanagement. The sensible decision may be to close or sell such a company. Officials, however, seem to have decided that it is too big to fail.