What Vietnam needs to do to become a digital powerhouse

Digital revolution has never been just about discovering breakthrough technologies. Countries like USA and China, leading the innovation in this field, account for almost two thirds of new IT patents and computer related technologies registered every year.[1] Yet, for most countries in the world, including Vietnam, the future will not be determined by their drive for innovation but rather by their capacity to make the most of digital technologies developed elsewhere .

To become a digital powerhouse, Vietnam will need to offer the conditions that will enable its local operators to adopt and adapt new global digital technologies . So far, the country has done a good job. Today, it compares well to peer and aspirational comparators in penetration of mobile phones (figure 1) and its citizens and enterprises are well connected to the Internet. Its digital infrastructure is quite modern, covering all provinces, and funded by forward looking national telecommunication companies. It also hosts several world leading IT firms such as Apple, Samsung, Intel, etc… This demonstrates Vietnam’s competitiveness and offers a unique platform for local firms and developers - the model adopted by Japan and Korea in the 1970s and 1980s, and more recently by China.

The latest edition of the World Bank’s Taking Stock report argues that Vietnam will need to do more if it wants to become a digital powerhouse envisioned in the socio-economic development strategy adopted by the Party in February 2021. The emphasis should be on three market failures that will require smart interventions by the government. As a reminder, a market failure prevents an optimal result that could have been achieved given the available resources.[2] The social task then becomes to correct the failure which means Vietnam needs to ensure the development of a digitally skilled labor force, the emergence of a dynamic and agile local private sector, and good but secure access to information.

The first intervention is to ensure the availability of a labor force with digital skills (figure 2). This is central because up to one third of existing jobs in Vietnam are at risk to be lost in a five-year span due to digitalization.[3] While digital transformation will create new jobs, those will require a new set of skills. One can expect the labor market to adjust gradually as the excess demand for skilled labor will lead to higher relative wages. This will in turn incentivize workers and firms to further invest in education and training. However, international experience has demonstrated that workers may not have the information or the financial resources to invest in longer education paths., In addition, firms may be reluctant to train workers who could bring their new skills to competitors. At the current pace, it might take 25 years for Vietnam to catch up with the number of students registered at the university in Thailand today. In successful countries, the government has acted to address the market failure by (i) removing legal obstacles to labor mobility; (ii) providing information to workers on labor market trends and demands to inform their decision making ; (iii) improving the quality of technical/vocational education programs; and (iv) supporting financially firms and workers in their efforts to acquire sets of new skills.

The second intervention aims at guaranteeing that the domestic private sector remains dynamic over time as the innovation cycle is very short in the digital economy. To keep the private sector agile and motivated to adopt new technologies, the government should act to preserve competition when some markets are almost naturally dominated by digital champions because of their know-how, network externalities, and economies of scale. Such concentration is already observed in the fixed broadband market and rises sharply in social media (with the dominance of Facebook) and other digital subsectors, including e-commerce, fintech, digital financing, and data management. The reduction of barriers to entry and the strengthening regulations is often a necessary policy to avoid abuses. Concurrently, at the other hand of the spectrum, the authorities should support local startups and small and talented investors who face financing constraints by offering them alternative funding options as done successfully in several countries, including Singapore.

The third and last intervention by the government is to facilitate access to data and information. This is a public good by definition as the benefits of sharing information largely exceed the cost of collecting it. The government can improve access to information by developing inter-operability across its databases and through open data initiatives – which consist of sharing online public data in a user-friendly manner. The government can also encourage the private sector to collect and share data as new digital tools and platforms have eroded the monopoly of the State. All these efforts should also consider data and data-users privacy and security.

Vietnam would need to correct these three market failures urgently to set the country on the path to achieve its ambitious digital economy goals. However, it will also be important to be careful not to create new government failures as well-intended but misguided government interventions could exacerbate rather than address initial market /incentives distortions. For example, resources could be spent on public training programs that are not aligned with the needs of the market. They can also protect companies from competition unduly discouraging them to develop over time. As a principle, the government’s interventions need to be designed and implemented in close collaboration with the private sector and with maximum transparency to avoid their capture by either vested public or private interests.
 

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