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Managing natural and policy-driven comparative advantage:The growth of the cassava industry in Vietnam

by Jeniffer Lin, Joanne Kwok, Minh Nguyen & Sharon Sim

Good morning Prof and class. Today my group will be discussing thetopic of natural and policy-driven comparative advantage with afocus on the growth of the cassava industry in Vietnam.

Background


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Cassava

Also known as Tapioca

A tropical Root Crop

Warm Weather:

Require at least 8 months

to grow

High Rainfall:

Require at least 18

months to grow

Best harvest yield from fields

with average soil fertility

levels

regular moisture

Fresh Root: 30% Starch, low

protein level

Now, cassava is actually what you would normally know as tapioca, atropical root crop. That means it can only grow in warm temperatureswith a relatively high rainfall. Cassava adapts well to a wide range ofclimates & soils, requiring only low inputs of rainfall. Its fresh rootcontains 30% starch with a low protein level, making it an imperfectsubstitute of potato and maize.

Uses & Products

starch & starch derivatives

food & feed processing

pharmaceutical industry

biofuel

automotive fuel

ethanol

flour

paper

textiles

biodegradable plastics

MSG

The uses for cassava are actually very diverse, which provides manyavenues of production for the industry. It can commonly be used for foodand feed-processing, but more recent developments have allowed it toexpand into the biofuel, biodegradable plastics and evenpharmaceutical sectors.


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Main Exporters & Importers

Thailand

Indonesia

Vietnam

Europe

China

Japan

South Korea

2001

The main exporters of cassava we will be touching on today areThailand, Indonesia and Vietnam. Minh will later elaborate on acompetitive analysis of these three nations. Main importers are Europeancountries, China, Japan and South Korea.

Vietnams Cassava

Industry Growth Chart

1988

1990s

1996

2000

2010

Cassava used for

noodles & other

consumption purposes

Cassava processed forms

a cottage industry

Farmers plant more varieties of cassavafor pig feed; large scale cassava starch

factories start appearing

Bio-ethanol plant being built

as biofuel industry emerges

A quick look at Vietnams Cassava Industry Growth Chart will show thatcassava started off as a cottage industry in the 1990s, its main usesbeing consumption and farming purposes; for example, an ingredient in

noodles as well as cassava chips for feeding pigs.It was only in the newmillennia when new commercial purposes for starch such as biofuelappeared did the growth of the Vietnam industry truly take off.


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Yield Charts

India

ThailandChina

IndonesiaVietnam

Looking at the yield and production charts of South East Asian cassavagrowth, Vietnam can be seen to have indeed experienced a sharpgrowth in the new millennia, one that is at a much faster rate than othermore experienced cassava producers such as India, Thailand andIndonesia.

Production Charts

ThailandIndonesia

IndiaVietnamChina


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Types of CANatural: A country can be considered to

have a natural comparative advantage ifthat advantage arises#om permanent

natural factors.

Policy-driven: Also known as artificialcomparative advantage. It arises#om

factors that are not permanent and can bealtered through policy decisions.

Now I would like to point out the differences in the two types ofcomparative advantage we will be using as a basis of our discussiontoday. Natural comparative advantage can be defined as an advantagearising from permanent natural factors. On the other hand, policy-drivencomparative advantage is a form of artificial advantage, arising fromfactors that are not permanent and can be altered through policy decisions.

Situational Analysis


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Vietnams

CArelatively cheap labour, relatively

new technology, enthusiasticgovernment, successful and extensive

R&D, cooperative farmers,Chinas big demand

These are a few condensed comparative advantage factors forVietnams cassava industry which we will covering today - mainly,relatively cheap labor, relatively new technology handled by anenthusiastic government which has resulted in successful and extensiveR&D, cooperative farmers and an important external demand in theform of China.

Vietnams natural CA

Labor/Agricultural Comparative Advantage

Post-war baby boom led to labor abundance, cassava

industry is relatively labor-intensive (60-70% of total

production costs are labor costs)

No Land Comparative Advantage

Although Minh will be talking on greater detail about the comparativeadvantages Vietnam has compared to two large Southeast Asiancassava exporters, Thailand and Indonesia, I just want to point out thatVietnam experienced a post-war baby boom after the Vietnam Warthat led to an abundance of labor. Because the cassava productionindustry is a relatively labor-intensive one, with 60-70% of totalproduction costs being labor costs, and according to Heckscher-Ohlin(HO) theory, this gives Vietnam a natural comparative advantage in anagricultural industry. Unfortunately, as Minh will mention later, it does nothave a comparative advantage in land, unlike Thailand and Indonesia.


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SWOT Analysis

Strengths Weaknesses

Cassava processing factories are new &

modern

Vietnamese farmers willing to adopt

new technologies

Vietnam Cassava R&D projects

Lack of processing facilities & small

farms

Crop competition (Sugarcane, rubber,

coffee, fruit trees and cashew nut are

competing with cassava)

Opportunities Threats

Increasing demand in multiple products

Move from food crop to industrial crop, has

become a cash crop in Vietnam, high value export

Ability to attract foreign investment

Rapid growth of industry at 2.5% a year over

past 10 years

Buoyant internal demand for starch

Unstable prices

Cassava starch is not the perfect

substitute for more popular starch crops

Asian societies likely to reduce their

consumption of high energy staples like

rice and cassava

In order to aid our further identification of Vietnams competitivestrengths, we have put together a SWOT analysis of the VietnamCassava Industry. I would like to draw your attention to the pointshighlighted in red, such as a lack of processing facilities and farmingarea as well as the threat of crop competition from more popularcommercial crops, as these lead to the comparative advantages anddisadvantages of the industry.

Policies by Vietnam

1. Further advances in cassava breeding and in production practices

2. Improving soil fertility of cassava growing areas

3. Planning and establishing production areas for processingfactories

4. Developing post-harvest technologies

5. Expanding markets for cassava products

6. Development of high starch and high yield varieties

7. Transfer new technologies to cassava households (Farmer

Participatory Research)

8. Diversification of end-products (instant food, fast food, animal

feed, pharmaceuticals, textiles, biofuel, paper)

In order to counter weaknesses of the industry and thus boost thecomparative advantage of its cassava, Vietnam has made many effortsto improve their crops to become better substitutes of more popularstarch produce such as potato and maize. This includes planning andestablishing more production areas for processing factories, since aweakness of Vietnams young industry was a lack of processing facilities.And in order to correct its comparative disadvantage in growing area aswell being an imperfect substitute of popular starch crops, potato andmaize, much R&D effort has been placed on developing high starch andhigh yield varieties.


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Answering the Question:How did Vietnam grow so

rapidly over the past 10 years?Answer: mainly policy-driven growth

Now Sharon will continue on our quest to answer how Vietnamachieved such rapid growth over the past decade, propelling it to thefront line of cassava exports at a faster rate than other nations havedone before.

New Technologies


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To increase the yield

potential, dry matter content

and starch content, andenhance early harvestability

Identification of cassava high-

yield varieties suited to

different agro-ecological

zones and the integration of

these into smallholder

farming systems.

Bioethanol production

New factories

R&D

New Technologies

!Fast Technology Transfer


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Technologies developed to improve efficiency

likewise spread widely & quickly across

Vietnam because of cooperative behavior

Vietnam has made the fastest progress in

application of new technologies in breeding

and new cultivar propagation in Asia Trade Reforms

An artificial advantage by the VietnamGovernment


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FTAs and PTAs

Vietnam became a full member ofASEAN on 28 July 1995 (AFTA)

The General Council approved Viet

Nam's accession package on

7November2006. Viet Nam becamethe WTO's 150th member on

11January2007 (WTO)

Reaping from ASEAN PTA

ASEAN Free Trade Agreement (AFTA)

ASEAN-China FTA

ASEAN-RoK FTA

ASEAN-Japan Comprehensive Economic Partnership

Agreement

ASEAN-Australia-New Zealand FTA

ASEAN-India FTA


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Revealed Comparative Advantage (2001-2005 Average)

and the Share of

Individual Countrys Exports in ASEANs Total Exportsto member countries

Vietnam Reduction of Tariff rates

Most-favoured-nation (MFN) tariff

rates which are applied to imports

from any country that has already

had a bilateral trade agreement with

Vietnam or in fact has granted MFN

treatment to Vietnamese exports;

Preferential tariff rates are applicable

for goods under the CEPT (AFTA)

agreement

Normal tariff rates that are usually

50 percent higher than the MFN ones

are used in other circumstances


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Effects of Lowered Tariff Rates

In the reviewed period, Vietnam earned 4.2 billion USD from exports enjoying

tariff cuts offered by FTAs with other ASEAN member countries and the groupspartners, which accounts for nearly 13 percent of its total export value against 9-10

percent recorded in previous years.

After the ASEAN-China FTA took effect last year, Vietnam s exports to China rose

by 21 percent year on year to 5.3 billion USD.

As the FTA between ASEAN and the Republic of Korea lifts tariffs on 92 percent of

imports from 2010, Vietnam posted a surge of35 percent in its exports to the

country, earning 1.2 billion USD.

Concluding tariffs and

FTAs


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Comparative Analysis

Between Vietnam,

Thailand and Indonesia

Changes over yearsChanges in cassava harvested area, yields and total production in major SE Asiancountries for the

period 2000-2007 (source FAOSTAT)


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0

375

750

1,125

1,500

2000 2004 2007

Harvested Area (1000 ha)

Thailand Indonesia Vietnam

+1.9%

+136.3%

-6.0%

0

7.5

15

22.5

30

2000 2004 2007

Yield (ton/ha)


+29.6%

+89.3%

+35.5%


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0

7.5

15

22.5

30

2000 2004 2007

Production (million tons)


+21.9%

+347.2%

+38.6%

0

2.5

5

7.5

10

Ave 83-85 Ave 92-93 Ave 95-96 2000 2002 2005

World Exports of Cassava Products

World Exports Thailand Indonesia Vietnam


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Natural Advantages

Vietnams growing

environment


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Thailands growing

environment

Indonesias growing

environment


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Conclusion to natural advantages

Vietnam suffers more from

erosion.

Thailand has the most

favorable condition.

Indonesia has better

condition than Vietnam.

Most Favorable

ThailandIndonesiaVietnam

Least Favorable

Policy-driven comparative advantages


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Policy-driven comparative advantagesConclusion to policy-driven comparativeadvantages

Vietnam does not really have comparative advantages over Thailand, given

Thailands great consideration for this industry Vietnam will not take over

Thailand in the future.

Vietnam is currently ranked higher than Indonesia in this industry thanks to its

rather aggressive approach to promote cassava export. However, this is an

unsustainable development with the lack of strict control from the government

Indonesia might not be able to take over Vietnam in the future but Vietnam will

have to pay a price.


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Chinas Big Demand

Vietnams Cassava Exports

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Cassava, an edible root, has become an increasingly profitable export for Vietnamese due to the growing

demand in the Chinese market

China is the biggest importer of the Vietnamese Cassava Industry. In 2010, China accounted for 92.4% ofVietnams Total Cassava Exports.


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Huge Demand for Cassava inChina

Cassava as raw materials for Biofuel industry

China adopted 15% Biofuel targets by 2020

Shortages of Cassava

Turned to Thailand & Vietnam for more Imports

The fact that cassava is being used for biofuel in China, rapeseed is being used in Europe, and sugarcane elsewhere is definitely creating a shift in demand curves, saidTimothy D. Searchinger, a researchscholar atPrinceton Universitywho studies the topic. Biofuels are contributing to higher prices and tightermarkets.

Chinas Cassava Imports(2003 -2009)

Data from Global Agricultural Information Network Report 2009!

Example of Biofuel Targets:TheEuropean Union stipulatesthat 10 percent of transportation fuel must come from renewable sourceslike biofuel or wind power by 2020Supposedly healthier for the enviroment, a more stable source of energy since fossil fuel is depleting andoil prices are increasing


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Chinas Cassava Imports (2007 -2009) Trade seminars

Second Trade Seminar was held in HCM City on 7 Sept 2010

by the Trade Promotion Department of China & Vietnam

To promote Cassava Exports to China

Many Cassava Importers & Suppliers met local businessmen

to exchange information & seek business opportunities


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China - ASEANFree Trade Area (CAFTA)

Establishment of CAFTA in Jan 2010

New bilateral trade Agreement between ASEAN & China

Cassava-based fuel ethanol, key development item

China removed Tariff on Cassava imports from Member

countries, including Vietnam

To increase Cassava Export into China

Impact on Vietnams

Cassava Industry


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Implications on Vietnam Recap

Vietnam has Least favorable Landscape condition among

other Exporters

Vietnam rose to being the 2nd Largest Exporter with the help

of Policies-driven Comparative Advantages

Technologies & FTA contributed to Vietnams Cassava

Industry growth

Chinas Huge Demand a Pull Factor to Vietnams Cassava

Exports


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Observations,

Recommendations &

Our Conclusion

Concerns

Vietnam, not a country with advantages in developing Cassava

Industry

Only countries with large area and thin population density can

reserve many areas for growing cassava

Nigeria (3.8 million hectares)

Brazil (1.8 - 1.9 million hectares)

Thailand (1.3 million hectares)

Indonesia (1.2 million hectares)


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Good or Bad?

Farmers growing more Cassava

More income for poor Farmers Better lives

More Cassava for Exports

Benefits for Home Country or Foreign

Country?

Lesser Food Crops

Shortages of Food?

Hike in Food Prices?

More Deforestation

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