Digital Economy in Vietnam: Building the Foundations for Future Growth

Those who love Vietnamese street foods, like me, can now try out the experience of going cashless at some of the authentic local places like those on Nguyen Huu Huan Street in Hanoi.

You can get an egg coffee and pay with your smartphone. In the past year, consumers in Hanoi have gone cashless, and even cardless - meaning that sometimes you don’t even need conventional bank cards. Bills can be settled using e-wallet apps or by scanning QR codes.

Hundreds of thousands of small merchants across the country have joined the network of major fintech companies looking to capture Vietnam’s growing market of tech-savvy consumers.

In 2018, a report by Google and Temasek referred to Vietnam’s digital economy as a “dragon being unleashed.” This year, the same report put Vietnam and Indonesia as countries the forefront of Southeast Asia’s digital economy growth. Vietnam’s digital economy is expected to top US$43 billion by 2025. Investors have also been pouring money into the country to fuel growth across many sectors.

Despite much fanfare, there are still significant obstacles to harnessing the power of digital technology and increasing digital inclusiveness so that people outside the cities and even in the far-flung areas can also benefit from this 4.0 revolution.

As described in our recent regional report The Digital Economy in Southeast Asia-Building the Foundations for Future Growth (2019), the main building blocks for any thriving digital economy are connectivity, payments, skills, logistics, as well as  policies and regulations.

 

How does Vietnam perform in these key areas?

Connectivity: Affordable, high-speed Internet is the backbone of any digital economy. Vietnam has made great strides in expanding the reach of the Internet from virtually zero in 2000, to 64 percent of the population today. The next challenge is to get the majority of people connected to 4G and, in the future, 5G mobile networks and further expand broadband fiber optic networks, particularly for businesses, schools, and large institutions.

Payment: While more people are embracing cashless payment methods, the majority of transactions are still cash-based. Access to cashless payment methods is particularly limited among the population living outside cities. According to the World Bank’s financial inclusion survey in 2018, only 22 percent of Vietnamese made or received digital payments in the previous year. And in 2019, only 41 percent of adults had a bank account.

While usage of digital payments is growing, including through non-traditional providers, the limited usage of digital payments indicates that people still need to gain more trust in these options. Banks and regulators will need to work together to develop this enabling environment, including regulations on consumer protection, interoperability of different digital payment systems, and using secure digital payments for government services.

Logistics: Vietnam’s logistics cost is among the highest in the world, taking up 25 percent of GDP. Seamless logistics services are a major enabler for the growth of trade and commerce. The rise of e-commerce has led to growing needs for new types of logistics services including door-to-door connectivity and last-mile delivery that can meet fast-growing demand, particularly for low-value, small-size parcels.

In the World Bank’s 2018 Logistics Performance Index Rankings survey, Vietnam performed relatively well, rising by 25 places to the 39th spot. It is close to catching up with OECD countries in the lead time for import and export indicator. However, there is significant room for improvement in the quality, efficiency and cost of logistics services, not only cross-border services but also last-mile delivery.

Labor: A study by the International Labor Organization estimated that about 56 percent of all employment in five ASEAN countries including Vietnam is at a high risk of displacement by technology over the next decade. How Vietnam prepares its workforce now is absolutely crucial for its next stage of growth. Skills development is needed on multiple levels: advanced technical skills, “soft skills”, and generalized computer literacy. This will require a better understanding by policymakers of the dynamics of the digital skills labor market, and closer collaboration between the private and public sectors for lifelong learning.

Given these challenges, what are the steps for Vietnam to ensure that the growth of its digital economy can benefit all? What should the Government do to facilitate a conducive environment for all stakeholders to participate?

First and foremost, policies and regulations to protect and thereby promote trust among Internet users in the digital space must be established. The cross-cutting legal and regulatory framework should cover electronic transactions, cross-border data flows, cybersecurity, data privacy, and consumer protection. Vietnam has enacted a cybersecurity law and drafted legislation on data privacy. In this area, Vietnam and other countries will benefit from regional cooperation and harmonization (i.e., through APEC and ASEAN frameworks).

Expanding the coverage and improving the efficiency of connective infrastructure in Vietnam would be impossible without market-based regulatory reforms. To bring broadband Internet to every citizen, for example, Vietnam needs to promote further competition along the broadband value chain and facilitate infrastructure sharing within and across sectors. Further modernization of the regulatory framework for logistics also enables faster, cheaper and more reliable shipping services.

The Government should invest heavily to prepare citizens in various stages of their careers to adapt to new challenges of the digital age. This is where the private sector should be engaged closely given the rapid pace of change for relevant skillsets.

While Vietnam already has developed a master plan for the digital economy, it should consider broadening the scope and coverage to go beyond the development of e-commerce sector towards the whole economy. There is also a need to translate the plan into detailed, time-bound action plans, with adequate oversight over implementation and effective intersectoral coordination.

The Government can lead by example by becoming more digital itself.

Vietnam is on the right track by launching numerous initiatives towards building a digital government. The rollout of an E-Cabinet to streamline government business processes and a national E-Services portal for public service delivery in 2019 are encouraging moves in this direction.

 

Vietnam is also planning for the introduction of digital ID. At this stage, the proposed digital ID scheme is to enable electronic transactions with government agencies only. But in the longer term, the national digital ID system should be expanded to facilitate greater financial inclusion (enabling people to open bank accounts with much easier know-your-customer requirements), and more efficient delivery of social services through effective targeting and information management.   

Digital transformation holds tremendous potential for Vietnam to achieve not only sustained but also inclusive economic growth. To reap the full benefits while managing the associated risks and vulnerabilities, Vietnam should prioritize investment and regulatory reforms to reinforce these six building blocks.

The World Bank has been a partner on Vietnam journey to reduce poverty and build infrastructure and we are ready to support this exciting new phase of growth and ensure that new achievements in the digital economy won’t leave anyone behind.

_{This piece first appeared on Vietnam’s Banking Times.}