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| An outlet of Fuvimart in HCM City. The ratio of inventories to production for toothpaste in the first half of this year was 207% |
After several years of industrialization, Vietnam has effectively grown into a global subcontracting base whose real earnings often trail far behind the export turnover reported. Rosy export figures are therefore misleading and unfortunately mask the downside of mushrooming industrial parks. What has the demise of vast areas of farm land really brought about, then?
While the virtues of Vietnam’s subcontracting industry must be acknowledged, the fact remains that the sector is increasingly inefficacious, with the ratio of intermediate costs to production value jumping by nearly 10 percentage points over the past decade and the efficacy of capital use dwindling drastically. According to estimates based on statistics on investment and gross domestic product (GDP), adjusted for price parity, the incremental capital output ratio hovered around 8.36 in 2003-2008 and reached 8.59, 11.44 and 14.22 in 2007, 2008 and 2009 respectively. Such dismal inefficiency is all the more worrisome given that industry and construction absorb staggering amounts of investment every year.
In some cases, inventories even outpaced production in the first half of 2010. The ratios of inventories to production for powder coffee, nutrition powder, synthetic fiber, fabric made of synthetic fiber, vaccine, shampoo, soap, toothpaste and dining tables were 107%, 349%, 143%, 150%, 474%, 171%, 202%, 207% and 166% respectively.
This problem is ascribable to piling inventories from last year and shrinking consumption in the first half of this year. Besides, there are many products whose inventories equaled at least production in the first six months. This trend indicates the difficulty in stoking demand for locally processed products. Worse still, the surge in retail sales (26.7%, as reported by the General Statistics Office) and in imports (14.5%, adjusted for inflation) over the same period shows that consumption patterns are shifting in favor of foreign goods. If this problem persists, local production will plunge into trouble soon.
Notably, this trend may lead to a misleading analysis of GDP, which, under the final use approach, comprises inventories, final household and government consumption, and fixed asset accumulation. In other words, soaring inventories will probably push up GDP.
It is worth stressing that savings are shrinking (from 36.29% of GDP in 2006 to 29.23% in 2009) while investment as a share of GDP is on the rise. In other words, Vietnam will be increasingly reliant on external capital sources to make up for the shortfall in internal financial capabilities.
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