VIETNAM 2035 i Vietnam 2035 VIETNAM 2035 iii Vietnam 2035 Toward Prosperity, Creativity, Equity, and Democracy World Bank Group Ministry of Planning and Investment of Vietnam © 2016 International Bank for Reconstruction and Development / The World Bank and The Ministry of Planning and Investment of Vietnam 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 19 18 17 16 This work is a product of the staff of The World Bank and the Ministry of Planning and Investment of Vietnam. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent, or those of the Ministry of Planning and Investment of Vietnam (MPI) and the Government of Vietnam. The World Bank and MPI do not guarantee the accu- racy of the data included in this work. 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The State shall guarantee and promote the People’s right to mastery; to recognize, respect, protect, and guarantee human rights and citi- zens’ rights; and to pursue the goal of a prosperous people and a strong, democratic, equitable, and civilized country, in which all peo- ple enjoy an abundant, free, and happy life and are given conditions for their comprehensive development. —Article 3 of the 2013 Constitution of the Socialist Republic of Vietnam Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii Preface and Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxv Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxiii Part I Overview Vietnam 2035: Toward Prosperity, Creativity, Equity, and Democracy . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Pillar 1 Economic Prosperity with Environmental Sustainability . . . . . . . . . . . . . . . . . . . 17 Pillar 2 Equity and Social Inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Pillar 3 A Capable and Accountable State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Part II Background Chapters 1 Thirty Years of Renovation and Vietnam’s Aspirations for 2035 . . . . . . . 77 Main Messages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Ðổi Mới: Motivation, Process, and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Future Opportunities and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Vietnam’s Aspirations for 2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 2 Enabling Economic Modernization and Private Sector Development . . 109 Main Messages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Vietnam’s Growth and Economic Modernization Record. . . . . . . . . . . . . . . . . . . . . . . . . 111 Opportunities, Risks, and Challenges for Future Growth . . . . . . . . . . . . . . . . . . . . . . . . . 119 VIETNAM 2035 vii viii VIETNAM 2035 Promoting Economic Modernization and Enhancing Competitiveness of the Private Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Annex 2A Empirical Relationship among Political Connection, Firms’ Access to Credit, and Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Annex 2B Growth Accounting to Identify Sources of Growth . . . . . . . . . . . . . . . . . . . . 161 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 3 Building National Innovation Capacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Main Messages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Innovation Capacity: Where Is Vietnam Today? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Innovation: The Demand (or Firm) Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Innovation: The Supply Side. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 By Way of Conclusion: Moving Toward an Innovation-Led Economy . . . . . . . . . . . . . . . 198 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 4 Managing Urbanization for Greater Economic Efficiency . . . . . . . . . . . . 203 Main Messages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Urbanization and Economic Transformation in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . 206 Vietnam’s Urbanization in 3D: Density, Distance, and Division . . . . . . . . . . . . . . . . . . . . 209 Causes of Low and Stagnant Density, Rising Distance, and Persistent Division . . . . . . . . 221 Institutions and Infrastructure: Cities to Lead Vietnam’s Transformation into a Modern Industrialized Nation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 Annex 4A Haiphong City: The Challenges and Promises of a Gateway in Transition . . . . . 238 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 5 Achieving Sustainable and Climate-Resilient Growth . . . . . . . . . . . . . . . 243 Main Messages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 Environmental Sustainability: A Key to Growth and Development . . . . . . . . . . . . . . . . . 245 Environmental Challenges in Vietnam Today and in the Future . . . . . . . . . . . . . . . . . . . . 248 Underlying Causes and Priority Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 Growing Sustainably Toward 2035: The Road Forward . . . . . . . . . . . . . . . . . . . . . . . . . 265 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 6 Promoting Equity and Social Inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 Main Messages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 The Situation of Social Inclusion in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 The Unfinished Agenda: Marginalized Groups and Equality of Opportunity . . . . . . . . . . 287 The Emerging Agenda: Middle-Class Inclusion in a Market Economy . . . . . . . . . . . . . . . 301 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334 7 Building Modern Institutions for an Effective State . . . . . . . . . . . . . . . . . 339 Main Messages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 The Role of Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 CONTENTS ix Diagnosing Vietnam’s Institutional Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 Toward Modern Institutions for an Effective State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 Boxes O.1 Potential benefits and risks of new technologies . . . . . . . . . . . . . . . . . . . . . . . . . . 11 O.2 Aspirations for 2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 O.3 State effectiveness and development: Confluence of Eastern and Western thought . . . . 54 O.4 Webs of state connections driving the pharmaceutical industry . . . . . . . . . . . . . . . 57 O.5 Narrow interests block a master plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 1.1 A chronology of major market-oriented Ðổi Mới reforms . . . . . . . . . . . . . . . . . . . 81 1.2 The education philosophy of Vietnam under Ðổi Mới . . . . . . . . . . . . . . . . . . . . . . 85 1.3 Vietnam’s long-term growth trajectory relative to comparator countries . . . . . . . . 87 1.4 Changing attitudes of Vietnamese society toward the market and the state . . . . . . 92 1.5 The Trans-Pacific Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 1.6 Key features of aspirations for 2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 2.1 Enterprise reform in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 2.2 Global context: A golden period of growth? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 2.3 A baseline scenario for income growth up to 2035 . . . . . . . . . . . . . . . . . . . . . . . 125 2.4 Low entrepreneurial confidence in Vietnam. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 2.5 Labor productivity growth in Vietnam, China, and the Republic of Korea . . . . . 134 2.6 Secure access to land in Vietnam remains a binding constraint to firm growth . . . . .141 2.7 Deposit Insurance of Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 2.8 Vietnam Asset Management Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 2.9 Trends in global production and trade networks . . . . . . . . . . . . . . . . . . . . . . . . . 150 2.10 Vietnamese successes in ICT services industries . . . . . . . . . . . . . . . . . . . . . . . . . . 155 3.1 Four foundations of an innovation-led economy . . . . . . . . . . . . . . . . . . . . . . . . . 170 3.2 Who are Vietnam’s role models? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 3.3 How a sound national innovation system promotes firm learning . . . . . . . . . . . . 175 3.4 Many policies exist only on paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 3.5 Firm upgrading in an MNC-dominated economy: Singapore . . . . . . . . . . . . . . . 179 3.6 Efficiency and risk management in rice: An Giang Plant Protection Company in the Mekong Delta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 3.7 Capital market development and exit facilitation: Brazil’s Novo Mercado . . . . . . . 184 3.8 Vietnam should strengthen staff capacity and promote the resolution of IPR infringements by civil measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 3.9 The United Kingdom research output and impact: Systematically evaluated under the Research Excellence Framework . . . . . . . . . . . . . . . . . . . . . 189 3.10 Using research funds to promote progress on key thematic challenges of national importance: Mexico’s fondos sectoriales . . . . . . . . . . . . . . . . . . . . . . 190 3.11 The Higher Education Reform Agenda, 2006–20 . . . . . . . . . . . . . . . . . . . . . . . . 193 3.12 Rapid expansion of private higher education satisfies demand for skills in India . . . .196 4.1 Underused industrial parks proliferate despite high costs . . . . . . . . . . . . . . . . . . 214 4.2 The Republic of Korea’s secondary cities are important for manufacturing jobs . . . . 215 4.3 Some urban centers near the two metropolitan areas have been successful in attracting investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 4.4 Unplanned growth has been expensive in Latin America . . . . . . . . . . . . . . . . . . . 223 4.5 Some advanced regional economies have adopted efficient systems of developing their cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 x VIETNAM 2035 4.6 A portfolio of modern and livable cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 4.7 Shanghai moving away from GDP as a driving indicator of urbanization policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 4.8 Poland’s spatial planning transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 4.9 Potential for high-speed rail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 5.1 Gains from sustainable, inclusive, and resilient growth . . . . . . . . . . . . . . . . . . . . 247 5.2 Agricultural growth has a growing environmental footprint . . . . . . . . . . . . . . . 249 5.3 Costs of poor sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 5.4 Sustainable Development Goals related to environmental issues . . . . . . . . . . . . . 266 5.5 Co-management is crucial for sustaining marine fisheries . . . . . . . . . . . . . . . . . . 267 5.6 Payments for ecosystem services: A market-based approach to environmental management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 7.1 State effectiveness and development: Confluence of Eastern and Western thought . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 7.2 Other countries’ experience in managing talent in the civil service . . . . . . . . . . . 361 Figures O.1 Rapid and inclusive growth in Vietnam has yielded shared prosperity and strong gains in poverty reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 O.2 The share of population over 65 will more than double between 2015 and 2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 O.3 By 2035, more than half the Vietnamese population will enter the global middle class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 O.4 Income per capita growth scenarios for Vietnam to 2035 . . . . . . . . . . . . . . . . . . . 15 O.5 Keeping on course for catch-up: Vietnam and global comparators . . . . . . . . . . . . 18 O.6 Productivity growth has been trending downward . . . . . . . . . . . . . . . . . . . . . . . . 19 O.7 Firm-level asset productivity has declined sharply for the Vietnamese nonpublic enterprise sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 O.8 Urbanization in Vietnam appears to be on a path as strong as in the Republic of Korea and in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 O.9 Ethnic minority children face higher inequality of opportunity . . . . . . . . . . . . . . . 40 O.10 Triangle of unequal opportunity for ethnic minority children . . . . . . . . . . . . . . . . 40 O.11 Large gaps in child health and nutrition by ethnicity persist . . . . . . . . . . . . . . . . . 41 O.12 Total fertility rate has fallen over time, and the sex ratio at birth has increased sharply since 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 O.13 A large gap in upper secondary school attendance remains between the poorest and richest 20 percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 O.14 Vietnam can follow the Republic of Korea’s path in high school completion rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 O.15 The old-age dependency ratio will increase rapidly . . . . . . . . . . . . . . . . . . . . . . . . 48 O.16 As countries move to upper-middle-income status, pension coverage usually increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 O.17 The robust long-term correlation between prosperity and the quality of governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 O.18 Worldwide Governance Indicators, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 1.1 Vietnam: Reform, growth, and inflation, 1977–2015 . . . . . . . . . . . . . . . . . . . . . . 80 1.2 Per capita GDP growth, 1991–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 B1.3.1 Vietnam has performed well on its long-term income trajectory . . . . . . . . . . . . . . 87 1.3 Household poverty rate, Vietnam, 1993–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 CONTENTS xi 1.4 The Human Development Index in selected countries, 1990–2012 . . . . . . . . . . . . 89 B1.4.1 Perceptions about the preferred economic system . . . . . . . . . . . . . . . . . . . . . . . . . 92 B1.4.2 Perceptions of the pace of transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 1.5 Regional shares of global GDP (baseline scenario) . . . . . . . . . . . . . . . . . . . . . . . . 94 1.6 Change in Vietnam’s real GDP as a result of the Trans-Pacific Partnership, 2015–35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 1.7 Projections for surface air temperature increase . . . . . . . . . . . . . . . . . . . . . . . . . . 99 1.8 Income per capita growth scenarios for Vietnam to 2035 . . . . . . . . . . . . . . . . . . 102 2.1 Strong growth has enabled Vietnam to narrow the income gap with the world average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 2.2 Vietnam has had 25 years of fast, stable, and equitable economic growth . . . . . . . . . . 112 2.3 Large-scale sectoral shifts have been at play in Vietnam for at least 25 years . . . 113 2.4 Vietnam’s structural changes are broadly consistent with global patterns . . . . . . 114 2.5 Consolidation of agricultural land has happened at a slow pace . . . . . . . . . . . . . 115 2.6 In comparison with China, Vietnam has given heavy policy and invest- ment attention to rice production—despite food consumption and expenditure patterns rapidly shifting away from rice . . . . . . . . . . . . . . . . . . 115 2.7 Livestock and aquaculture production is gaining share in agriculture . . . . . . . . . 116 2.8 Rise of wage employment and its sectoral shifts, 2004 and 2012 . . . . . . . . . . . . 117 2.9 Vietnam’s exports have consistently grown faster than global and regional averages for the past 15 years, led by manufactured and high-technology products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 2.10 Trade and investment liberalization has allowed industrial clusters to emerge with both local private and foreign-invested firms . . . . . . . . . . . . . . . . 119 2.11 State-owned enterprises have seen a declining role in the economy since the early 2000s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 2.12 The state has retained a virtual monopoly or oligopoly in several sectors . . . . . . 120 2.13 The number of newly registered domestic private companies has risen sharply since the 2000 Enterprise Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 B2.2.1 Global living standards took off after the eighteenth century . . . . . . . . . . . . . . . 123 B2.2.2 Vietnam’s share of global GDP relative to its share of global population has been recovering since the late 1980s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 2.14 Labor productivity growth has been on a declining trend since the late 1990s . . . . 127 2.15 Low firm-level asset (capital and land) and labor productivity measures reflect Vietnam’s long-inefficient state sector and worsening performance of private enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 2.16 Domestic private firms are overwhelmingly small and mostly informal, preventing productivity gains through scale economies, specialization, and innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 2.17 Large domestic private firms have, on average, been less productive than smaller private firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 2.18 Land and capital assets have been accumulated in sectors that have made the least productive use of them . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 2.19 Labor productivity in agriculture remains low, even after growing strongly since 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 2.20 Vietnam’s ranking on the rule of law measure has declined since 1996, while its per capita GDP has increased sharply . . . . . . . . . . . . . . . . . . . . . . . . . . 140 2.21 Vietnam’s performance on rule of law seems to be especially lagging on property rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 B2.6.1 Share of firms perceiving a low risk of land appropriation . . . . . . . . . . . . . . . . . 141 xii VIETNAM 2035 2.22 Four global value chains—agribusiness, textiles and apparel, transport equipment, and electronics/ICT equipment—will continue to be export generators for Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 2.23 High import content of electronics exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 2.24 Vietnam’s Services Trade Restrictions Index scores are better than the Association of Southeast Asian Nations’ average in all subsectors, reflecting progress on related regulations, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . 155 3.1 Countries’ research and development expenditure tends to rise with overall development level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 3.2 Vietnam performs better than expected on management practices, given its income level. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 3.3 Vietnamese entrepreneurs view scientific institutions and university–private sector collaboration as lagging . . . . . . . . . . . . . . . . . . . . . . . . 176 3.4 Managers in Vietnamese firms are strong on monitoring but weak on setting long-term targets, introducing new technologies, and reforming human resource policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 3.5 Even the best firms in Vietnam fall below the average firm on the frontier benchmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 4.1 Urbanization goes hand in hand with structural transformation . . . . . . . . . . . . . 207 4.2 Urbanization trends in Vietnam appear as strong as in the Republic of Korea and in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 4.3 Urbanization and the transition from slow to fast growth in China . . . . . . . . . . 208 4.4 Urbanization and the transition from slow to fast growth in Vietnam . . . . . . . . . 208 4.5 Vietnam’s urban population growth in the global picture . . . . . . . . . . . . . . . . . . 210 4.6 Low-density spatial expansion can dampen agglomeration economies . . . . . . . . 210 4.7 Productivity is higher in industrial zones than in neighboring cities. . . . . . . . . . . 212 4.8 Industrial zone occupancy rates are lower, the farther from the center, in the Ho Chi Minh City region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 4.9 Fragmented and stealth urbanization in Ho Chi Minh City metropolitan region . . . . 215 4.10 Share of Vietnam’s population, by city size, 2009 . . . . . . . . . . . . . . . . . . . . . . . . 216 4.11 Change in share of Vietnam’s population, by city size, 1989–2009 . . . . . . . . . . . 216 4.12 Urban wage premiums are small outside Hanoi and Ho Chi Minh City . . . . . . . 217 4.13 Urban and rural poverty headcount rates are falling . . . . . . . . . . . . . . . . . . . . . . 219 4.14 More households have a permanent home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 4.15 After receiving Class I status in 2009, Thai Nguyen’s local receipts nearly doubled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 5.1 Making water available in the future means addressing today’s water exploitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 5.2 Vietnam has lost an alarming percentage of “primary” forest over the past 20 years, although its overall forest cover is around 40 percent . . . . . . . 251 5.3 The prominence of aquaculture in Vietnam’s economy requires close coordination, biosecurity investments, and efforts to stem water pollution and water use in fisheries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 5.4 Wastewater treatment needs low-cost solutions, regulatory certainty, and market incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 5.5 The economic implications of Vietnam’s wastewater cleanup gives pause . . . . . . 256 5.6 Fine particulate matter, driven by industry and coal-fired power plants in the north, is approaching Chinese levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 5.7 Projected reduction in aquaculture income as a result of impacts of climate change without adaptation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 CONTENTS xiii 5.8 In only one decade, the three measures of carbon dioxide emissions— greenhouse gas emissions, per capita emissions, and carbon intensity of GDP—increased by 50 percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 5.9 Urban areas have seen a rapid increase in motorcycle ownership, 2000–11 . . . . 262 5.10 Developing in each region a single coordinated multisectoral plan, similar to the Mekong Delta Plan, will facilitate better coordination with the center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 6.1 Poverty has plummeted in Vietnam in the past two decades . . . . . . . . . . . . . . . . 284 6.2 Vietnam has managed to contain the rise in inequality even as its economy grew rapidly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 6.3 Vietnamese citizens express high rates of satisfaction with public amenities . . . . . .286 6.4 Vietnam’s 52 ethnic minorities are much more likely to be poor than the Kinh–Hoa ethnic majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 6.5 Poverty rates vary by ethnic group, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 6.6 The historically poor in Vietnam are much more likely to be poor today . . . . . . 288 6.7 Individual ethnic groups with higher migration rates are economically more successful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290 6.8 Ethnic minority children lag the Kinh’s near-universal primary completion rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 6.9 Ethnic minority children score lower on tests than Kinh but show large gains with time in school . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 6.10 Large gaps in child health and nutrition by ethnicity persist . . . . . . . . . . . . . . . . 292 6.11 Ethnic minority children face inequality of opportunity, 2010–14 . . . . . . . . . . . . 292 6.12 Triangle of unequal opportunity for ethnic minority children . . . . . . . . . . . . . . . 292 6.13 Disability rises quickly after age 65, with two-thirds of those age 80 reporting some form of disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 6.14 Wealthier countries are more likely to report being a good place to live for people with intellectual disabilities, 2014 . . . . . . . . . . . . . . . . . . . . . . 295 6.15 Most children with severe disabilities in Vietnam never attend school, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 6.16 Employment rates vary widely across disabilities . . . . . . . . . . . . . . . . . . . . . . . . 296 6.17 Percentage of population without permanent registration in four major urban centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 6.18 Net school enrollment rate by school level and hộ khẩu status . . . . . . . . . . . . . . 298 6.19 Vietnam runs close to India and China as having the world’s highest sex ratio at birth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 6.20 By 2035, more than half the Vietnamese will have entered the global middle class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302 6.21 Even with rapid change over the last 25 years, family farming still employs the largest share of Vietnamese workers . . . . . . . . . . . . . . . . . . . . . . . . 304 6.22 The nongovernment minimum wage in Vietnam is high relative to the median wage, compared with other countries . . . . . . . . . . . . . . . . . . . . . . . . 305 6.23 Vietnam—following labor code changes in 2012—is more restrictive in hiring and dismissing workers than France and China . . . . . . . . . . . . . . . . . . 306 6.24 The high frequency of wildcat strikes is a symptom of a weak industrial relations system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308 6.25 A large gap in upper secondary school attendance remains between the poorest and richest 20 percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 6.26 Over the past 25 years, Vietnam has greatly expanded access to education . . . . . 311 6.27 Vietnam excels in international tests, scoring above many rich countries . . . . . . 312 xiv VIETNAM 2035 6.28 Vietnam can follow the Republic of Korea’s path in high school completion rates . . . .314 6.29 Vietnam needs to sustain its progress in raising life expectancy of its citizens . . . . 316 6.30 The poor use grassroots health care, while the rich use higher level hospitals . . . . 316 6.31 Creating a basic road map to strengthen primary care entails many steps . . . . . . 318 6.32 Out-of-pocket health expenses push many Vietnamese into poverty . . . . . . . . . . 319 6.33 Reliance on out-of-pocket health expenditures declines as countries develop and move toward universal health care . . . . . . . . . . . . . . . . . . . . . . . . . 320 6.34 The current approach to expanding insurance coverage is unlikely to achieve 100 percent coverage by 2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 6.35 The old-age dependency ratio will increase rapidly . . . . . . . . . . . . . . . . . . . . . . . 325 6.36 The Vietnamese people expect the state to be their primary source of support in old age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326 6.37 Pension coverage should increase as Vietnam moves to upper-middle-income status, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 6.38 Vietnam currently has low pension spending, but this is expected to rise quickly in coming years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 6.39 Vietnam has a large “missing middle” of old-age support . . . . . . . . . . . . . . . . . . 328 6.40 Social assistance coverage and generosity vary across provinces but were in line with or slightly above East Asia Pacific neighbors . . . . . . . . . . . . . . 329 7.1 There is a long-term correlation between good governance and prosperity, 1996–2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342 7.2 Corruption is a continuing challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 7.3 Rule of law continues to be weak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 7.4 Where private business interest ends and government begins is still being negotiated in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 7.5 Transparency and preferential access to information are major hindrances to economic efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 7.6 Corruption in public administration is a widespread concern . . . . . . . . . . . . . . . 352 7.7 A comparative assessment shows relatively weak protection of property rights in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 7.8 Membership of mass organizations and other voluntary groups is growing . . . . . 354 7.9 Vietnam has low levels of transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 7.10 Comparative ratings show relatively low judicial independence in Vietnam . . . . . .356 7.11 Vietnam’s legislature and judiciary do not constitute strong checks on the executive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357 7.12 A strengthened center will serve Vietnam well in streamlining resources and operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 Maps 4.1 Urban expansion in the Ho Chi Minh City agglomeration . . . . . . . . . . . . . . . . . 211 4.2 Many industrial zones are empty in the periphery of Ho Chi Minh City metropolitan region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 4.3 Industrial output values per km2 are highest in Hanoi and Ho Chi Minh City . . . . . 216 4.4 Hanoi’s street space is ill suited for urban transport . . . . . . . . . . . . . . . . . . . . . . 227 6.1 Geography alone does not explain poverty in Vietnam . . . . . . . . . . . . . . . . . . . . 289 CONTENTS xv Tables O.1 Logistics Performance Index rankings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1.1 Average annual growth in real GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 1.2 Overview of the Trans-Pacific Partnership and Free Trade Area of the Asia-Pacific impacts on Vietnam, 2015–35 . . . . . . . . . . . . . . . . . . . . . 96 B2.3.1 Structure of the economy, supply side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 B2.3.2 Structure of the economy, demand side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 2.1 Sources of growth in Vietnam, 1990–2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 2.2 Sectoral GDP and productivity growth, 1990–2035 . . . . . . . . . . . . . . . . . . . . . . 128 B2.5.1 Labor productivity growth in Vietnam, China, and the Republic of Korea . . . . . 134 2.3 Logistics Performance Index rankings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 2A.1 Main results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 2A.2 Selected agribusiness sectors and upgrading potential in Vietnam . . . . . . . . . . . . 159 2A.3 Vietnamese unit prices for key export crops compared with world averages . . . . . 160 2A.4 Main global motor vehicle parts suppliers in Vietnam . . . . . . . . . . . . . . . . . . . . . 160 2A.5 Classification of sectors for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 2B.1 Sources of GDP growth in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 3.1 Vietnam’s ability to identify, adapt, and invent new technologies and to become more productive and diversify into new goods is weak . . . . . . . . . . . . 172 3.2 Vietnam is far behind comparator countries in patenting activity, reflecting weak research and development activity . . . . . . . . . . . . . . . . . . . . . . . 174 3.3 Workforce skills suffer from structural deficiencies in the tertiary education system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 3.4 Vietnam is weak in ease of paying taxes and starting a business, protecting investors, and resolving insolvency—all essential to doing business. . . . . . . . . . . 183 3.5 Vietnam’s doctoral students are an increasing presence in the United States, but their numbers fall short of Asian competitors . . . . . . . . . . . . . . . . . . . . . . . 191 3.6 The share of the age cohort attending tertiary education has grown in many national systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 3.7 University faculty have improved qualifications, with one in six faculty now having a doctorate and more than half a master’s degree . . . . . . . . . . . . . . . 193 4.1 Urbanization of land and people, 1995–2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 4.2 Occupancy rates of industrial zones with comparable zoning and boundary definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 4.3 Access to services is converging for urban and rural residents . . . . . . . . . . . . . . . 220 4.4 Criteria assessment of cities upgraded from Class II to Class I . . . . . . . . . . . . . . 224 4.5 Types of master plans and plans in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 B5.2.1 The downside of agricultural growth is a large and extensive environmental footprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 B5.3.1 The estimated cost of poor sanitation-related impacts is US$780 million . . . . . . 255 5.1 Vietnam has a high and increasing exposure to gradual-onset impacts of climate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 5.2 Climate change and sea-level rise will affect yields and production of key crops . . . . 260 5.3 Cumulative inflation surpassed tariffs and percentage increase show that real electricity prices are among the lowest in the region . . . . . . . . . . . . . . . 264 5.4 Trade-offs should be balanced with the urgency required for the measures . . . . . 276 xvi VIETNAM 2035 6.1 Vietnam has experience dramatic improvements in a range of social indicators . . . . 285 6.2 Countries have different criteria in setting minimum wages . . . . . . . . . . . . . . . . 309 6.3 Comparator countries averaged a 0.7 percent increase in total health expenditure, with out-of-pocket expenses decreasing 9 percent, 1990–2015 . . . . 321 6.4 Alternative routes to 100 percent insurance coverage . . . . . . . . . . . . . . . . . . . . . 322 6.5 International experience indicates that strong accountability matters most in delivering health care—not public or private provision . . . . . . . 323 6.6 Vietnam has a high social contribution rate for pensions. . . . . . . . . . . . . . . . . . . 328 7.1 A demographic snapshot of the civil service . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361 Foreword A fter 30 years of economic reforms Motivated by these aspirations, in July since the launch of Ðổi Mới in 1986, 2014, the Government of Vietnam and the Vietnam has recorded significant and World Bank Group jointly initiated the historic achievements. From a poor, war- Vietnam 2035 report. ravaged, centrally planned economy, which The report recognizes six key transfor- was closed off from much of the outside mations that will help Vietnam achieve its world, Vietnam has become a middle-income goals for 2035: (1) to enable economic country with a dynamic market economy modernization with a competitive private that is deeply integrated into the global econ- sector fi rmly in the lead; (2) to improve the omy. Vietnam’s economic growth has been country’s technological and innovation not only rapid but also stable and inclusive, capacity; (3) to reshape urban policies and translating into strong welfare gains for the investments for more dynamic cities and vast majority of the population. This is an urban centers; (4) to chart an environmen- impressive record of success—one that the tally sustainable development path with Vietnamese people take justifiable pride in, increasing adaptation and resilience to while appreciating the support of the inter- changing climate patterns; (5) to promote national community. equality and inclusion among marginalized But 30 years of success from reforms groups for the development of a harmoni- raises expectations for the future. The coun- ous middle-class society; and (6) to estab- try’s ambitions are aptly captured in the lish a modern rule-of-law state and a Vietnamese constitution, which sets the goal democratic society. of “a prosperous people and a strong, demo- Vietnam 2035 structures these transfor- cratic, equitable, and civilized country.” mations and the reform agenda around There is a fi rm aspiration that by 2035, three key pillars: balancing economic pros- Vietnam will be a modern and industrialized perity with environmental sustainability; nation moving toward becoming a prosper- promoting equity and social inclusion; and ous, creative, equitable, and democratic enhancing the capacity and accountability society. of the state. VIETNAM 2035 xvii xviii VIETNAM 2035 We are delighted by the close partnership other development partners will continue between the experts of Vietnam and the the effective collaboration in incorporating World Bank Group and other international the report’s relevant recommendations in the scholars that has characterized the prepara- Socio-Economic Development Plan 2016–20 tion of the report, Vietnam 2035: Toward and the Socio-Economic Development Prosperity, Creativity, Equity, and Strategy 2021–30, as well as in the oversight Democracy. We hope that the Government and evaluation of the implementation of Vietnam, the World Bank Group, and process. Nguyễn Tấ n Dũ ng Jim Yong Kim Prime Minister President Socialist Republic of Vietnam World Bank Group Preface and Acknowledgments T he report, Vietnam 2035: Toward to coordinate the line ministries, agencies, and Prosperity, Creativity, Equity, and research institutes, and to collaborate with the Democracy, is a joint initiative of the World Bank Group in the preparation of the Government of Vietnam and the World Bank report. A joint Vietnam–World Bank Group Group formally forged between Prime coordination team was established, which Minister Nguyễn Tấ n D ũ ng and President was led by Dr. Cao Viet Sinh (former Vice Jim Yong Kim in July 2014. Minister of Planning and Investment), The report was written by a Vietnamese– Victoria Kwakwa (Country Director), and World Bank Group team under the supervi- Sandeep Mahajan (Lead Economist). sion and guidance of Deputy Prime Minister The Government of Australia, the Korea Vu Duc Dam; Minister of Planning and International Cooperation Agency (KOICA), Investment Bui Quang Vinh; Axel van and the U.K. Department of International Trotsenburg, World Bank Group Vice Development (DFID) provided financial sup- President for East Asia and Pacific; Victoria port for the report, which is gratefully Kwakwa, Country Director for Vietnam; acknowledged. and Sudhir Shetty, World Bank Group Chief The report benefitted from invaluable Economist for East Asia and Pacific. comments from World Bank Group peer Gratitude for insightful advice is extended to reviewers Ted Chu (Chief Economist), Mario members of the Steering Committee for the Marcel (former Senior Director), Martin Vietnam 2035 Report: Prof. Nguyen Xuan Rama (Chief Economist), and Ana Revenga Thang (President, Vietnam Academy of (Senior Director), as well as reviewers who Social Sciences), Nguyen VanTung (Vice provided comments on the concept note and Chairman of the Office of Government), decision draft. We extend special thanks for Nguyen Ngoc Bao (Vice Chairman, the insights and recommendations on the Economic Commission of the Central Overview and chapters of the report from an Committee of the Communist Party of advisory panel that comprised David Dollar Vietnam), Bui Thanh Son (Vice Minister of (Brookings Institution), Ravi Kanbur (Cornell Foreign Affairs), Truong Chi Trung (Vice University), Homi Kharas (Brookings Minister of Finance), Nguyen Toan Thang Institution), Danny Leipziger (Growth (Deputy Governor), and Prof. Bui Tat Thang Dialogue and George Washington University), (President, Development Strategy Institute). Vikram Nehru (Carnegie Endowment for The Ministry of Planning and Investment International Peace), Mari Pangestu was assigned by the Government of Vietnam (Columbia University), Graham Teskey (Abt VIETNAM 2035 xix xx VIETNAM 2035 JTA), and Mme Ton Nu Thi Ninh (Former (Vice President, Central Institute for Vice Chairwoman, Committee for External Economic Management [CIEM]), and Doan Affairs, National Assembly of Vietnam). Hong Quang (Senior Economist). The report benefitted from the synergies The Overview builds on background between international expertise and local papers and notes prepared by Manu in-depth knowledge through effective team Bhaskaran (Centennial Asia Advisors), Claus collaboration and valuable contributions of Brand (Consultant), David Dapice (John international and local consultants. The F. Kennedy School of Government, Harvard preparation process was broad-based and University), Do Thien Anh Tuan consultative, with active engagement of (Lecturer, Fulbright Economics Teaching Vietnam’s government ministries and agen- Program), Sebastian Eckardt (Senior cies, academic research institutions, and Economist), ImpactECON, LLC, Nguyen international experts in numerous work- Xuan Thanh (Director, Fulbright Economics shops and focus group discussions. Public Teaching Program), and Dr. Vu Thanh Tu engagement in the preparation of the report Anh (Director of Research, Fulbright was facilitated through an online website, Economics Teaching Program). on-line discussions, live chats, as well as a national essay competition in Vietnam. The English version of the report was Thirty Years of Renovation and edited by Bruce Ross-Larson and a team at Vietnam’s Aspirations for 2035 Communications Development Incorporated that included Jonathan Aspin, Joe Caponio, Lead authors: Prof. Bui Tat Thang (President, and Mike Crumplar. Production and publi- Institute for Development Strategy), Sandeep cation of the English version was managed Mahajan (Lead Economist), Ray Mallon by Rumit Pancholi, Susan Graham, and (Consultant), Nguyen Van Vinh (Vice Patricia Katayama of the World Bank President, DSI), and Dr. Vo Tri Thanh (Vice Group’s Publishing and Knowledge Division, President, CIEM). External Communications. The chapter builds on background papers The Vietnam 2035 report has seven chap- and notes prepared by Dr. Nguyen Duc Thanh ters and an Overview written by individual (Director, Vietnam Institute for Economic and chapter teams, whose members are listed Policy Research), Dr. Nguyen Quang Thai below in alphabetical order of their surnames. (Secretary General, Vietnam Association of Economists), and Prof. Tran Dinh Thien (Director, Vietnam Institute of Economics). Overview Capable research assistance was provided Lead authors: Dr. Cao Viet Sinh (former by Dang Huyen Linh, Vu Thu Trang, Vice Minister of Planning and Investment), Nguyen Dang Hung, Nguyen Thi Huong Gabriel Demombynes (Senior Economist), Giang, and Nguyen Thi My Hanh (DSI). Victoria Kwakwa (Country Director), Sandeep Mahajan (Lead Economist), and Sudhir Shetty (Chief Economist). Enabling Economic Modernization Core team: Prof. Hoang The Lien (former and Private Sector Development Vice Minister of Justice), Dr. Nguyen Quang T hai (Secretary General, Vietnam Lead authors: Mona Haddad (Practice Association of Economists), Nguyen Van Manager), Sandeep Mahajan (Lead Vinh (Vice President, Development Strategy Economist), Pham Chi Lan (former Vice Institute [DSI]), Pham Chi Lan (former Vice President of the Vietnam Chamber of President of the Vietnam Chamber of Commerce and Industry [VCCI]), and Pham Commerce and Industry), Dr. Vo Tri Thanh Thi Thu Hang (Secretary General, VCCI). PREFACE AND ACKNOWLEDGMENTS xxi Core team: Doan Hong Quang (Senior Building National Innovation Economist), Claire Honore Hollweg Capacity (Economist), Steven Jaffee (Lead Rural Development Specialist), Nguyen Van Lan Lead authors: Dr. Banh Tien Long (former (Senior Operations Officer), and Daria Vice Minister of Education and Training), Taglioni (Senior Trade Economist). Michael Crawford (Lead Education The chapter builds on background papers Specialist), Dr. Le Dinh Tien, (former Vice and notes prepared by Alwaleed Fareed Minister of Science and Technology), and Alabatani (Lead Financial Sector Specialist), William Maloney (Chief Economist). Guillermo Arenas (Consultant), Reyes The chapter builds on background papers Aterido (Consultant), Ruth Banomyong and notes prepared by Nicholas Bloom, (Consultant), Dr. Dang Kim Son (former Raissa Ebnerb, Kerenssa Kayc, Renata Director of the Institute of Policy and Lemosd, Raffaella Sadune, Daniela Scurf, Strategy for Agriculture and Rural and John Van Reeneng (World Management Development [IPSARD]), David Dollar Survey), Hyunho Kim (Chonnam National (Brookings Institutions), Dang Hung Vo University), Dr. Hyungsun Kim (Inha (Consultant), Mary Hallward-Driemeier University, Korea), Dr. Nguyen Van Duong (Senior Principal Specialist), Stacey Frederick (Senior Expert, Ministry of Education and (Consultant), Gian Thanh Cong (Consultant), Training), Mr. Nguyen Vo Hung (Head of James Hanson (Consultant), Tanja Goodwin Reform Policy and Technology Market (Private Sector Development Specialist), Department, Vietnam Institute of Science and Claire Honore Hollweg (Economist), Victor Technology Policy), Mr. Nguyen Manh Quan Kümmritz (Consultant), Dr. Le Dang Doanh (Vice President, Vietnam Institute of Science (former President, CIEM), William Mako and Technology Policy), Dr. Pham Thi Thanh (Consultant), Miles McKenna (Consultant), Hai (lecturer, Hanoi National University), Martha Martinez Licetti (Lead Specialist), Joonghae Suh (Korea Development Institute), Martin Molinuevo (Consultant), Ben Shepard Dr. Tran Thi Ha (former Director General, (Consultant), Dr. Nguyen Do Anh Tuan, Education Department, Ministry of (Director, IPSARD), Dr. Nguyen Dinh Cung Education and Training) and Deok Soon Yim (President, CIEM), Dr. Nguyen Thi Tue Anh (Science and Technology Policy Institute). (Vice President, CIEM), Georgiana Pop The team is grateful for comments and (Senior Economist), Timothy Sturgeon advice from: Prof. Dr. Hoang Van Phong (Massachusetts Institute of Technology), (Chairman, National Council for Science and Prof. Tran Van Tho (Waseda University, Technology, former Minister of Science and Japan), Vu Kim Hanh (Director, Center for Technology) and Dr. Tran Ngoc Ca (head of Business Research and Support), Deborah office, Office of Science and Technology, Winkler (Consultant), Dr. Vu Thanh Tu Anh Vietnamese Embassy in Washington, DC). (Director of Research, Fulbright Economics Teaching Program), Chunlin Zhang (Lead Private Sector Development Specialist), and Managing Urbanization for Greater Ezequiel Zylbeberg (University of Oxford). Economic Efficiency Capable research assistance was provided Lead authors: Dr. Huynh The Du (Fulbright by Gian Thanh Cong (Consultant). School of Public Policy), Somik Lall (Lead The chapter team is grateful for useful Urban Economist), Dr. Nguyen Do Anh comments and advice from: Danny Leipziger Tuan (Director, IPSARD), and Madhu (Growth Dialogue and George Washington Raghunath (Senior Urban Specialist). University), Catherine Martin (Principal The chapter builds on background Strategy Officer), and Daniel Street papers and notes prepared by Luis Blancas (Operations Officer). (Senior Transport Specialist), David xxii VIETNAM 2035 Bulman (Consultant), Dr. Dang Kim Khoi The chapter team is grateful for useful (IPSARD), Edward Leman (Consultant), comments and advice from: Carter Brandon Dr. Nguyen Anh Phong (IPSARD), Truong (Lead Economist), Christophe Crepin (Sector Thi Thu Trang (Deputy Head of Faculty, L eader), R ichard Damania (L ead IPSARD), and Pablo Vaggione (Consultant). Economist), Douglas J. Graham (Senior The chapter team is grateful for useful Environmental Specialist), and Iain Shuker comments and advice from: Zoubida Allaoua (Practice Manager). (Senior Regional Advisor), Judy Baker (Lead Economist), Abhas Jha (Practice Manager), Danny Leipziger (Growth Dialogue and Promoting Equity and Social George Washington University), Paul Vallely Inclusion (Senior Transport Specialist), and Anna Wellenstein (Practice Manager). Lead authors: Prof. Dang Nguyen Anh (Director, Institute of Sociology), Gabriel Demombynes (Senior Economist), and Philip Achieving Sustainable and Climate- O’Keefe (Lead Economist). Resilient Growth Core team: Michael Crawford (Lead Education Specialist), Puja Vasudeva Dutta Lead authors: Diji Chandrasekharan Behr (Senior Economist), Prof. Giang Thanh Long (Senior Natural Resources Economist) (Director, Institute of Public Policy), Dr. Nguyen and Prof. Truong Quang Hoc (former Thang (Director, Center for Analysis and Director of the Center for Research Forecast), Dr. Nguyen Thi Lan Huong (Director Resources and Environment, Vietnam General, Institute of Labour, Invalids and Social National University). Affairs), Truman Packard (Lead Economist), Core team: Anjali Acharya (Senior Achim Daniel Schmillen (Economist), and Environmental Specialist), Prof. Bui Quang Owen Smith (Senior Economist). Tuan (Director, Vietnam Institute for The chapter builds on background papers Regional Sustainable Development), Todd and notes prepared by Reena Badiani- Johnson (Lead Energy Specialist), and Prof. Magnusson (Senior Economist), Kari Hurt Nguyen Trung Thang (Vice Director, (Senior Operations Officer), and Vu Hoang Institute of Strategy and Policy on Natural Linh (Economist). Resources and the Environment). Capable research assistance was provided The chapter builds on background by Tran Thi Ngoc Ha (Consultant). papers and notes prepared by Tijen Arin The chapter team is grateful for useful (S enior Environ mental E conom ist), comments and advice from Ravi Kanbur Christophe Crepin (Sector Leader), Richard (Cornell University) and Ana Revenga Damania (Lead Economist), Franz Gerner (Senior Director). (Lead Energy Specialist), Sarath Guttikunda (Consultant), Steven Jaffee (Lead Rural Development Specialist), Iain Menzies Building Modern Institutions for an (Senior Water and Sanitation Specialist), Tae Yong Jung (Yonsei University), Sung Jin Effective State Kang (Koera University), Joo Young Kwak Lead authors: Prof. Hoang The Lien (former (Yonsei University), and Truong Thi Thu Vice Minister of Justice), Jonathan Pincus Trang, Dang Kim Khoi, Kim Van Chinh, (Rajawali Foundation, Indonesia), and Charles Nguyen Thi Cam Nhung, Nguyen Van Undeland (Senior Governance Specialist). Lam, and Pham Kim Dung (all IPSARD). Core team: Soren Davidsen (Senior Public Capable research assistance was provided Sector Specialist), Dr. Nguyen Van Cuong by Nguyen Phuong Nga (Consultant). (Deputy Director, Institute of Legal Science), PREFACE AND ACKNOWLEDGMENTS xxiii and Tran Thi Lan Huong (Senior Public The administrative coordination was car- Sector Specialist). ried out by the Administration Office of the The chapter builds on background papers Vietnam 2035 Steering Committee set up at and notes prepared by Maridel Alcaide the DSI. The Committee included: Prof. Bui (Consultant), Dr. Bui Nguyen Khanh Tat Thang (President), Nguyen Van Vinh (Deputy Director, Institute of State and (Vice President), Nguyen Thi Huong Giang, Law), Noah Buckley (Consultant), Professor Bui Thi Thuong, Dang Huyen Linh, Dinh Yoon Je Cho (Consultant), Dr. Duong Thanh Thi Ninh Giang, Doan Thanh Tung, Le Mai (former Director, Institute of Legal Quang Dao, Nguyen Quoc Truong, Nguyen Science), Prof. Nguyen Nhu Phat (Director, Thi My Hanh, Nguyen Dang Hung, Nguyen Institute of State and Law), Prof. Pham Duy Quynh Trang, Pham Le Hau, Pham Le Nghia (Fulbright School of Public Policy), Hoang, Pham Minh Thao, Pham Thanh Dr. Thang Van Phuc (former Vice Minister Hien, and Vu Thu Trang. of Home Affairs), Vu Hoang Quyen (Senior In addition, administrative activities were Economist), Vu Thanh Tu Anh, David coordinated with by the officials of the Dapice, Nguyen Xuan Thanh and Do Thien Government Office, including: Le Hong Lam Anh Tuan (Fulbright Economic Teaching (Director, Department for International Program, Vietnam). Relations), Nguyen Huu Lam Son (Expert), The chapter team is grateful for guidance Ho Anh Tai (Expert, Department for and advice from: James Anderson (Country International Relations). Manager), Robert Taliercio (Practice Administration and communications Manager), and Graham Teskey (Principal activities from the World Bank Group side Technical Lead, Governance, Abt JTA). were managed by Bo Thi Hong Mai (Senior Additional editing of the report was han- Communications Offi cer), Tran Kim Chi dled by a Vietnamese editorial team with (Communications Asso ciate), Vu Lan participation of Dr. Cao Viet Sinh (former Huong (Communications Associate), Vice Minister of Planning and Investment, Nguyen Hong Ngan (Communications team leader), Prof. Hoang The Lien (former Offi cer), and Vu Thi Anh Linh (Program Vice Minister of Justice), Dr. Nguyen Quang Assistant). T hai (Secretary General, Vietnam It is with great pleasure that the Ministry Association of Economists), Nguyen Van of Planning and Investment and the World Vinh (Vice President, DSI), Pham Chi Lan Bank Group introduce the report Vietnam (former member of Prime Minister’s 2035: Toward Prosperity, Creativity, Economic Advisory Board), Dr. Vo Tri Equity, and Democracy with the hope that Thanh (Vice President, CIEM), and Doan Vietnamese leaders and policy-making agen- Hong Quang (Senior Economist). cies will find it useful. Bùi Quang Vinh Axel van Trotsenburg Minister of Planning and Investment Vice President for East Asia and Pacific Socialist Republic of Vietnam World Bank Group Executive Summary T he year 2015 marks 70 years since benefit from measures to enhance the com- V i e t n a m ’s Declaration of petitiveness of domestic enterprises, scale up Independence, 40 years since the benefits of urban agglomeration, and nur- Reunification, and just short of 30 years ture a creative and innovation-led economy. from the launch of Ð ổi M ớ i, which cata- Maintaining the record on equity and social pulted the nation from the ranks of the inclusion will require lifting marginalized world’s poorest to one of its great develop- groups and delivering services to an aging ment success stories. Critical ingredients of and urbanizing middle-class society. And success have been visionary leaders, a sense to fulfi ll the country’s aspirations, the insti- of shared societal purpose, and a focus on tutions of governance will need to become the future. Starting in the late 1980s, these modern, transparent, and fully rooted in the elements were fused with the embrace of rule of law. markets and the global economy, setting the nation on the path to becoming the mid- Balancing Economic Prosperity dle-income country that it is today. Its spec- tacular growth since then, one of the fastest with Environmental Sustainability in the world, has all but eliminated extreme The goalposts for Vietnam’s future economic deprivation and lifted tens of millions of success are set broadly and aspirationally— people out of poverty. the 2013 constitution sets the objective of Looking forward to 2035, which will a “prosperous people and strong country,” mark 60 years since Reunification, Vietnam marking little deviation from its 1992 ver- now aspires to modernity, industrialization, sion. Party and government documents and a higher quality of life. These aspirations couch the income objectives in similarly and the supporting policy and institutional aspirational terms, with an annual gross agenda stand on three pillars: balancing domestic product (GDP) per capita growth economic prosperity with environmental target of 7 percent (equal to around 8 per- sustainability, promoting equity and social cent annual growth). Growth rates in this inclusion, and bolstering the state’s capacity range would produce by 2035 an upper- and accountability. The rapid growth needed middle-income country on the cusp of high to achieve these aspirations will be sustained income— at the level of Malaysia or the only if it stands on faster productivity growth Republic of Korea in the mid-2000s. But this and reflects the costs of environmental deg- target is extremely ambitious, far surpassing radation. Productivity growth, in turn, will VIETNAM 2035 xxv xxvi VIETNAM 2035 Vietnam’s past growth and with few global landholdings in agriculture are depress- precedents. ing small- landholder profits and sector The Vietnamese qualities of thrift, disci- productivity. pline, and hard work will have to be deployed The sustainability of Vietnam’s long- in full measure for the country to stay close to term growth is further threatened by envi- its aspirations. The national savings rate needs ronmental stresses. Growth in the past 25 to remain high while the investment rate rises years has imposed significant environmental slightly. Discipline and hard work can help costs. Rapid depletion of natural resources counter the projected rapid aging of the pop- is a particular concern. Environmental pol- ulation. But more is needed. Productivity and lution from urban and industrial wastewater innovation will eventually have to become the leaves waterways toxic, while urban water main drivers of growth. That will require pol- and air pollution are beginning to pose seri- icies to tackle the stagnation in productivity ous health hazards, especially near Hanoi and long-term investments, especially in urban and Ho Chi Minh City, and particularly for infrastructure and innovation capabilities. children. Vietnam is also one of the coun- What explains the stagnation in produc- tries most vulnerable to climate change, with tivity? Public investment is not as efficient as settlements and economic activity in the it needs to be because of uncoordinated and Mekong Delta at especially heightened risk. often incoherent investment decisions of a Exacerbating the risks is rapidly growing fragmented state structure. There also is lit- energy consumption, increasingly reliant on tle doubt that most state-owned enterprises coal-powered electricity generation. In recent (SOEs) are inefficient producers. So wide- years, Vietnam’s increase in greenhouse gas spread inefficiencies in state investment per- emissions has been one of the world’s fastest. petuate the weak productivity trends across The reform agenda to unleash strong and the economy. But they do not fully explain the sustainable economic growth will have four decline in productivity growth, reasons for essential elements: which are especially worrisome. A steady ero- sion in the productivity growth of the domes- 1. Create an enabling environment for tic private sector leaves it just as inefficient as domestic enterprises. The immediate the state sector —for two reasons. First, the emphasis needs to be on ensuring more institutional foundations for an advanced competitive and productive domestic market economy are insufficiently developed, enterprises. Restructuring and equitiz- undermining private property rights and ing SOEs will remain important, but will competition in product markets. Second, fac- not be enough — fixing the nascent and tor markets are governed by an unclear mix weak domestic private sector commands of allocation by markets and by fiat. Com- even greater policy attention. This will mercialized state institutions—whereby the involve strengthening the institutional state is directly involved in economic activ- foundations of the market economy, with ity through SOEs and indirectly through the emphasis on protecting property rights influence of vested interests—have ensured and enforcing competition policies. A stable, that land and capital allocations are guided as well- regulated, and inclusive financial much by arbitrary administrative decisions as sector and transparent and functioning by efficient market signals. land markets will also be crucial. A more Productivity is also hurt by malfunction- capable and confident domestic private ing land markets in at least two other ways. sector will deepen links with foreign fi rms, First, the urbanization of land is outpacing enabling the transfer of technology and the urbanization of people, reducing urban know-how that are critical for higher pro- population density and suppressing pro- ductivity growth. More rewarding par- ductivity gains from urban agglomeration. ticipation in global value chains will also Second, obstacles to consolidation of small come from a stronger services sector and EXECUTIVE SUMMARY xxvii more extensive transport and network 4. Sustain the environment. There are three connectivity across the country and with core elements of the reform agenda to sus- trading partners. Finally, a more market- tain the environment: protect the quality driven and commercial approach will be of natural resources (air, land, and water); needed to modernize agriculture. Com- build climate resilience in economic plan- mitments under major international trade ning, sectoral policies, and infrastructure agreements (the Trans-Pacific Partnership investments; and find ways to tap more in particular) offer a real opportunity to clean energy sources, including through carry out many demanding and politically regional power trade. Such a sustainable, sensitive reforms. inclusive, and resilient growth path calls for strong policies and institutions to 2. Spur learning and innovation. Sustaining coordinate actions and investments, smart high growth over an extended period will investments (with private participation) depend on an aggressive agenda to spur that internalize environmental and cli- learning and innovation. Neither enter- mate costs, and more accessible data and prises nor knowledge and research insti- information for decision making and tutions are currently motivated to focus monitoring progress. adequately on this agenda. A national inno- vation system can improve the situation. Promoting Equity and Social On the demand side, it will encourage firms to seek out the best available knowledge Inclusion and strengthen the technical and financial Vietnam’s emphasis on equity and social support to facilitate their learning. On the inclusion has always been strong. And it supply side, such a system will help build is one of the few countries to achieve high the skills of the workforce beyond its cur- growth with equity. Its record rests on a foun- rent proficiency in basic education, while dation established by equitable land distri- raising the quality and relevance of research bution in the late 1980s, effective delivery of and advanced training in universities and basic services such as health and education, government research institutes. and public policy choices that equalized fiscal transfers across provinces with different lev- 3. Reshape urban policies and investments. els of development. Vietnam wants to main- For Vietnam to succeed in its growth and tain that record. Its central socioeconomic economic modernization ambitions, its philosophy—a market economy with socialist cities need to do more to nurture private orientation— captures the balance in its pref- enterprise and innovation, support the erences for equity and market-led growth. growth of industrial clusters integrated Past performance and societal preferences with global value chains, and attract and notwithstanding, sustaining the positive agglomerate talent. Playing this role cred- equity trends is not something that Vietnam ibly will involve reshaping policies and can take for granted, especially as the forces investments to amplify economic density in of urbanization, globalization, and the ris- and around large metropolitan areas such ing skill intensity of production take fi rmer as Ho Chi Minh City, Hanoi, Haiphong, root. Looking toward 2035, Vietnam needs and Da Nang, as well as a network of to pursue a dual agenda for equity and social dynamic secondary cities; reduce the dis- inclusion. tance to markets to enable specialization; The unfinished inclusion agenda is ensur- and equalize access to services between ing equality of opportunity. While Vietnam migrants and urban residents. Fulfilling has taken long strides in lifting living stan- this agenda will require functioning land dards since Ð ổ i M ớ i, significant groups markets, coordinated urban planning, and remain marginalized, and the gaps in oppor- improved connective infrastructure. tunity for children are wide between poor xxviii VIETNAM 2035 and wealthy households. An ethnic minority system would place all citizens on an equal child is four times more likely than a Kinh footing. child to die before her fi rst birthday. More than half the children with severe disabilities 4. Reduce gender gaps. More opportunities never attend school. for women in public leadership roles could Such exclusion stands in stark contrast be created by eliminating gender discrim- to the fortunes of those at the top: over the ination in the retirement age and using last decade, the number of millionaires in affirmative action as a short-term mea- Vietnam has tripled while malnutrition rates sure. Also critical is reducing the imbal- among ethnic minority children have hardly ance in the sex ratio at birth, now one of budged. Rectifying such inequities will require the world’s highest, with 114 boys born renewed efforts. Four elements of the equality for every 100 girls. The preference for sons of opportunity agenda for 2035 are key: would be reduced through expanding the pension system, reforming the population 1. Reduce the barriers to opportunities for policy, and campaigning to highlight the ethnic minorities. Targeted initiatives in value of daughters. education, nutrition, and sanitation can close the large gaps in opportunities for Two social megatrends will shape the ethnic minority children. An approach of emerging inclusion agenda unfolding in experimentation and evaluation, building Vietnam. The fi rst is the rise of the middle on new insights from behavioral econom- class, which will be increasingly urban and ics, could develop effective interventions employed in the formal sector. By 2035 more in these areas. Policy actions would also than half of the Vietnamese people will become more effective through greater be part of the global middle class (up from voice for ethnic minorities. just over 10 percent today), with needs dis- tinct from those of the mass of rural poor 2. Make people with disabilities full partici- that characterized Vietnam in the past. pants in society. Vietnam has made strong The second is an extreme demographic commitments to the inclusion of people shift, with the size of the elderly population with disabilities but lags severely in imple- climbing dramatically — making Vietnam mentation. Following the example of other one of the most rapidly aging countries in countries, it can realize these promises by the world —and the working-age share of the regularly monitoring commitments and by population shrinking. Around 2035, the old- creating opportunities for people with dis- age dependency ratio —the number of people abilities and their families to be their own 65 years of age or older for every 100 people advocates through social organizations. aged 15–64 —will have risen to almost 22 (from under 10 today), while the working-age 3. Delink the household registration system population will begin to decline in absolute from access to public services. At least terms. Four elements of the middle-class and 5 million Vietnamese lack permanent reg- aging population agenda are key: istration in their place of residence and thus have limited access to public ser- 1. Expand the pension system to cover a vices, including schooling, health care, majority of the population. Given the and such administrative services as regis- challenges of rapid aging, expanding cov- tering a vehicle and applying for a birth erage to those in the informal sector will certificate. While the force of the system be possible only through a diversified sys- has waned, it remains a source of inequal- tem and a major reform to make it finan- ity of opportunity and an effective tax on cially sustainable, including raising the migration. Phased reform of the hộ khẩu retirement age. EXECUTIVE SUMMARY xxix 2. Ensure that nearly all children complete mechanisms to ensure checks and balances in upper-secondary school with job-rele- the government and broad public participa- vant skills. One policy priority will be tion. All three legs of the state effectiveness ending the exam-based allocation of upper- tripod are necessary for satisfactory results. secondary-school places and replacing it Reforming state structures but rejecting mar- with universal secondary-school atten- ket discipline, or assigning a larger role to the dance. Another is to continuously improve market mechanism while insulating govern- the quality and relevance of what students ment decision making from the community, learn, to help them develop the noncogni- are unlikely to generate positive outcomes. tive and complex problem-solving skills The relationship between state effec- they need for a competitive labor market. tiveness and development outcomes is evi- dent in Vietnam. Many early achievements 3. Establish effective representation of work- emerged from the country’s state capacity, ers through independent unions. Vietnam which was unusually strong for its level of needs to move toward an industrial rela- income. Today, the productivity stagnation tions system suited to a mature market and the weak environment for private-sector economy, where the interests of workers, development are attributable to gaps in state employers, and the state are more properly effectiveness. Vietnam’s unique history has represented in a true bargaining process, produced state institutions that are commer- following the recent commitments in a cialized and fragmented and face insufficient Trans-Pacific Partnership side agreement. scrutiny by citizens. In addition, labor market regulations State commercialization in Vietnam refers could better balance the protection of to the continued strong engagement of the workers with the flexibility to promote a state in economic activity directly through vibrant formal sector. SOEs, particularly through large state eco- nomic groups, and indirectly through very 4. Achieve universal health coverage with close links with an exclusive segment of the a rebalanced delivery system. Ensuring domestic private sector. Vietnam is not alone access to good quality health services with- in having influential vested interests, but the out imposing financial hardship will entail degree to which relationships to the state are both reforming the insurance regime and integral to economic success appears to be shifting health care from its current focus unusually high. State fragmentation refers on hospitals toward high- quality primary to the lack of clear hierarchy and assignment care at the center of an integrated system. of roles and responsibilities both within the central government and between the center Bolstering the State’s Capacity and the provinces— and the inertia and inef- ficiencies this generates in formulating and and Accountability implementing policy. Horizontal and verti- Political and institutional reforms need to cal fragmentation of power has resulted in keep pace with Vietnam’s development. Evi- overlapping mandates with conflicting rules dence from a large number of countries indi- and decisions. The result is often gridlock or cates that state effectiveness, or the capacity decisions that are suboptimal from society’s of government to set objectives and attain point of view. The absence of merit-based them, is closely associated with better devel- management of public servants exacerbates opment outcomes. State effectiveness rests the adverse effects of commercialization and on three supporting pillars: a well-organized fragmentation of the Vietnamese state on the government with a disciplined, merito- quality of public administration. cratic bureaucracy; an adherence to market Vietnam’s legal framework provides rationality in economic policy making; and some space for citizens to participate in xxx VIETNAM 2035 governance. “Government of the people, by of government could be strengthened to the people, and for the people” and “Peo- improve policy coordination and over- ple know, people discuss, people do, and sight of execution of policies by public people monitor” are well known affi rma- agencies. A clearer allocation of powers tions in the constitution. In practice, there and responsibilities is needed among is a gap between these statements and the central bodies to have greater effective- actual space that is available for citizens to ness and accountability. Public adminis- influence decisions. Citizen participation in tration practices need to be reformed to social organizations not sponsored by the ensure that merit drives the deployment government is growing rapidly, but this does of human resources by the state. not mean a corresponding improvement in the quality of their participation. Election 2. Apply market rationality to economic processes and mechanisms for engaging cit- policy making. State–market relations izen organizations are not robust enough will have to be characterized by a clearer to provide true citizen representation, and division between the public and private Vietnam lacks a system of effective checks spheres. Specifically, government agencies and balances between the three branches of involved in economic regulation should government. Access to information, which not engage in business of any kind, to is key to citizens exercising their voice to avoid the appearance and reality of con- hold the state accountable, is still lacking. flicts of interest. The state’s role in the The result is a government that often fi nds economy needs to be transformed from it difficult to articulate coherent economic a producer to an effective regulator and policies, that is open to extensive bargain- facilitator, focusing on providing a level ing among state institutions and between the playing field in the economy with enforce- state and private sectors, and that is shielded ment of free and fair competition and from public scrutiny of policy decisions and more secure and transparent property public reaction to the consequences of eco- rights, particularly around land issues. nomic policy. This will require the state not only to sig- Modernization of Vietnamese institu- nificantly reduce its SOE portfolio and tions will involve an overhaul of the state strengthen corporate governance of the and its relationships to the market and soci- remaining SOEs but also to stop giving ety. Efforts to enhance state capacity and preferential treatment to SOEs and closely accountability will need to move concur- linked private companies. In addition, rently on a three-point agenda: there needs to be an independent and more capable, trained, and meritocratic 1. Develop a more rationally organized judiciary to enforce rules and provide the government structure with a merito- level playing field. Creating the space for a cratic bureaucracy. The government genuinely independent private sector will needs more rational organization, and require reduced state control over business greater coherence on roles and respon- and professional organizations, including sibilities among state institutions. This the Vietnam Chamber of Commerce and will involve decentralization embody- Industry. Allowing these organizations ing clearer functional assignments for to operate as authentic representatives of the different levels of government, with independent business interests would give corresponding adjustments in the inter- voice to the domestic private sector and governmental fi nancial framework that enable these groups to do more in moni- clarify and improve accountability and toring government policy. overcome ineffi ciencies in coordination and use of public resources. The center EXECUTIVE SUMMARY xxxi 3. Strengthen state accountability. The state functioning. A large and diverse set of can be organized in a way that provides citizen organizations could be allowed to for genuine checks and balances among participate in decision making and hold the executive, legislature, and judiciary. the state accountable. The state could The National Assembly could be trans- provide a legal framework to promote the formed into a professional body (consist- right of citizens to associate. It could also ing of full-time deputies and supported adopt legislation requiring public bodies by expert staff), with oversight of all the to be transparent and provide mecha- state’s operations. The judiciary needs to nisms for citizens to interact effectively be similarly strengthened, with empha- with the state by enhancing citizen access sis on its independence from the exec- to accurate and timely information and utive and enhanced transparency in its by providing greater media independence. Abbreviations 3D three dimensional AFTA ASEAN Free Trade Area AIIB Asian Infrastructure Investment Bank ALTC aged and long-term care ASEAN Association of Southeast Asian Nations CEO chief executive officer CMI climate moisture index CVT continuously variable transmission DIV Deposit Insurance of Vietnam EAP East Asia and Pacific EDB Economic Development Board FDI foreign direct investment FSQL Fundamental School Quality Level GCM global climate model GDP gross domestic product GERD gross expenditure for research and development GRI government research institute GSO General Statistics Office GVC global value chain HDI Human Development Index HSR high-speed rail ICT information and communications technology IFC International Finance Corporation ILO International Labour Organization IMF International Monetary Fund IPCC Intergovernmental Panel on Climate Change IPR intellectual property rights IT information technology VIETNAM 2035 xxxiii xxxiv VIETNAM 2035 KOSIS Korean Statistical Information Service LMIC low- and middle-income country LPI Logistics Performance Index MARD Ministry of Agriculture and Rural Development MDC matching defined contribution MITI Ministry of International Trade and Industry MOET Ministry of Education and Training MOHA Ministry of Home Affairs MOHRSS Ministry of Human Resources and Social Security MOLISA Ministry of Labour, Invalids, and Social Affairs MONRE Ministry of Natural Resources and Environment NAFOSTED National Foundation for Science and Technology Development NBSC National Bureau of Statistics of China NCCD National Coordinating Council on Disability NDC Nationally Determined Contribution NHSO National Health Security Office NIS national innovation system NPL nonperforming loan OECD Organisation for Economic Co-operation and Development OOP out-of-pocket PAR Public Administration Reform PCI Provincial Competitive Index PES payments for environmental services PFES paying for ecosystem services PISA Programme for International Student Assessment PPC Provincial People’s Committee PPP purchasing power parity R&D research and development R&E research and exploration S&T science and technology SBV State Bank of Vietnam SDG Sustainable Development Goal (of the United Nations) SME small and medium enterprise SOE state-owned enterprise SRB sex ratio at birth SSF State Shareholding Fund STI science, technology, and innovation STRI Services Trade Restrictions Index TFP total factor productivity TiVA Trade in Value-Added TPP Trans-Pacific Partnership UCS Universal Coverage Scheme ABBRE VIATIONS xxxv UN United Nations UNDP United Nations Development Programme UNICEF United Nations Childrens’ Fund VAMC Vietnam Asset Management Company VAT value-added tax VCA Vietnam Competition Authority VGCL Vietnam General Confederation of Labour VHLSS Vietnam Household Living Standards Surveys VLSS Vietnam Living Standards Surveys VPI Vietnam Productivity Institute WDI World Development Indicators WGI Worldwide Governance Indicators WTO World Trade Organization Part I Overview Vietnam 2035 Toward Prosperity, Creativity, Equity, and Democracy Introduction S haking off the legacy of colonization not only against ability, effort, or even and long, brutalizing conflicts is hard— the performance of peers, but also against and forging an uninterrupted pathway ambition. to modernity, perhaps even harder. Only a The Vietnamese people have always set a handful of nations have succeeded at both. high bar for success. The 1992 constitution Their winning formula? Usually some com- exemplified this early on by setting forth the bination of strong leadership and good gov- goal for the state to build “a prosperous life ernance, a sense of common purpose and for its people, a strong country, and an equi- future orientation, a reliance on markets to table, democratic, and civilized society, ensur- allocate resources, and active engagement ing the well-being, freedom, and happiness with the world on trade, investment, and of all citizens as well as conditions for their knowledge flows (Commission on Growth all-round development.” Success thus defined and Development 2008). Since the launch of was both multifaceted and aspirational. There the Ðổi M ới (economic renovation) reforms is also the strong sense that the journey may in the late 1980s— to move from a closed, be just as important as the destination. The centrally planned economy to a globally inte- tenets of thrift, discipline, and hard work are grated, socialist-oriented market economy— cherished means to higher living standards Vietnam has deployed these ingredients to in the Vietnamese value system, not to be good effect. diluted or lost along the way. So are societal To any external observer, Vietnam is a values of equity, compassion, filial responsi- major development success story. One of bility, respect for social norms and the rule of the world’s poorest countries at the onset law, and the authority of elders and teachers. of the reforms, it has, in a single genera- The motivations that fuel Vietnam’s tion, leapfrogged to middle-income status, ambitions are both external and internal. while achieving social outcomes typically Externally, the driving force is Vietnam’s seen at much higher incomes. Vietnam’s neighborhood — the world’s most dynamic economic growth since the early 1990s has region. Vietnamese mind-sets are steeped been among the fastest in the world, and its in the rapid ascents of Japan and the East pace of poverty reduction almost unprece- Asian Tigers. They not only serve as pow- dented. But the Vietnamese people, keenly erful examples but also stoke fears of being aware of the big challenges left, are not yet permanently left behind. Internally, there is ready to declare success. And for countries pride in a rich past—justifiable for a society as for people, success needs to be measured with one of the world’s longest continuous 3 4 VIETNAM 2035 histories and civilizations.1 As recently as the Maintaining the record on equity and social early 19th century, Vietnam was a regional inclusion will require lifting marginalized powerhouse, with a much larger economy groups and delivering services to an aging and than those of Thailand, Malaysia, or the urbanizing middle-class society. And to ful- Philippines (The Maddison Project database, fill the country’s aspirations, the institutions 2010). The drive to reclaim the country’s of governance will need to become modern, place in the community of nations is accord- transparent, and fully rooted in the rule of ingly strong. law. Energized by past success but by no means content, Vietnam now aspires to modernity, A Record of Strong and Equitable industrialization, and a higher quality of life. The aspirations reflect an emphasis on clean Growth, with Emerging Concerns water and clear blue skies; a healthy, secure, Vietnam is a major development success learned, and equitable society; and an effec- story. Its per capita GDP growth since 1990 tive state accountable for improving material has been among the fastest in the world, sur- welfare. passed only by China. Growth has also been Achieving these aspirations will require remarkably stable and inclusive, which, bold and decisive action, both to grasp with major gains on human development, the opportunities and to manage risks. has contributed to impressive progress in The notable opportunities are an emer- alleviating poverty and improving nonin- gent domestic middle class, proximity to come dimensions of welfare. But declining a rapidly rising China, and megaregional productivity growth, insufficient progress t rading ag reements — par ticularly the in including marginalized groups in the Trans- Pacifi c Partnership (TPP), in which country’s development (ethnic minorities Vietnam is the only lower-middle-income in particular), and degradation of the envi- member. The major risks are the rapid ronment call into question the durability of aging of the population, the less hos- the current development model. Vietnam’s pitable global economy, and the threat governance structure could also be at an of climate change, to which Vietnam is inflection point. The institutions that were heavily exposed. Global technological adequate to carry the country to its lower- and business innovations, powered by middle-income level are now exposing gaps the information revolution, will remain that, unless addressed with boldness and disruptive — presenting more opportuni- urgency, are likely to impede the journey to ties and risks, with Vietnam’s net benefits upper-middle-income status. depending on its responses. In 1986 an impoverished Vietnam, on The country’s aspirations and the sup- the brink of an economic crisis, embarked porting policy and institutional agenda thus on a path of economic renovation (Ð ổ i stand on three pillars: balancing economic M ớ i ). It was an explicit recognition that prosperity with environmental sustainability, the “fence-breaking” reforms of the pre- promoting equity and social inclusion, and vious decade — opportunistically initiated bolstering the state’s capacity and account- to test the limits of central planning — had ability. The rapid growth needed to achieve shown promise and that the situation was these aspirations will be sustained only if it dire enough to demand a more systematic stands on faster productivity growth and approach. Annual inflation was running at reflects the costs of environmental degra- more than 400 percent (Rama 2014), the real dation. Productivity growth, in turn, will economy on a downward slide and heavily benefit from measures to enhance the com- dependent on foreign aid (Tran 2015), food petitiveness of domestic enterprises, scale up in short supply, the budget chronically short the benefits of urban agglomeration, and nur- of resources (Vu et al. 2015), and the vast ture a creative and innovation-led economy. majority of the population in poverty. OVERVIEW 5 Ð ổi M ớ i thus began a process of mac- investment, with the stocks standing at more roeconomic stabilization, unshackling the than $250 billion, sourced from a diverse economy from state controls and gradu- group of more than 100 countries. And ally but steadily integrating with the global growth has been inclusive, as seen in a fairly economy. 2 More durable foundations for a small increase in the Gini coefficient (panel d) market economy were built over time. And and the faster income growth of the bottom in competently managing the transition from 40 percent (panel e). As a result, poverty has a planned to a market-economy structure, fallen rapidly (panel f). Vietnam succeeded where many countries Vietnam in 2015 is an unrecognizably that had been part of the former Soviet Union transformed, dynamic, middle-income econ- have failed. omy. Social outcomes have improved dra- Four aspects of the approach to reforms matically across the board. Using a variety proved most effective. First, Vietnam chose of international and national poverty lines, to be pragmatic and flexible, both in the poverty has fallen rapidly since the launch sequencing and the pacing of reforms. of Ð ổi M ớ i. The $1.90-a-day poverty rate Reforms were introduced incrementally, after fell from 50 percent in the early 1990s extensive consensus building, and wholesale to 3 percent today. Not only are incomes shock therapies were avoided (Rama 2008). higher, but the Vietnamese population is And if internal or global experience suggested better educated and has a higher life expec- course correction, the system proved adapt- tancy than most countries at a similar per able. Second, Vietnam played to its strengths capita income. In recent international tests, by focusing on labor-intensive production and Vietnamese students outperformed the aver- agriculture. Third, the emphasis on building age for countries in the Organisation for human capital was early and effective. Viet- Economic Co-operation and Development nam already had relatively high levels of liter- (OECD), with remarkably little variation acy and life expectancy (Arkadie and Mallon across income groups and urban–rural 2003). The human-capital base was further locations. The maternal mortality ratio has expanded following Ðổi Mới, enhancing the fallen below the upper-middle-income coun- returns on the market-oriented reforms that try average, while under-five mortality has followed. Fourth, where a domestic consensus fallen by half, to a rate slightly above that was harder to forge, Vietnam used its com- average. Access to basic infrastructure has mitments under external trade agreements to also improved substantially. Electricity is good strategic effect, particularly to usher in now available to almost all households, up some of the more complex enterprise reforms. from less than half in 1993. Access to clean Each of these four aspects of the approach water and modern sanitation has risen from remains important for the next generation of less than 50 percent of all households to reforms—a subject of this report. more than 75 percent. Less than three decades after the start of In some areas, however, Vietnam has fallen the Ðổi Mới reforms, Vietnam has built up an short. Labor-productivity (output per worker) impressive record of strong economic growth growth has been on a declining trend since the that has also been equitable and stable, as end of the 1990s, seen across most industrial shown in figure O.1. GDP growth per capita subsectors, as well as in mining, finance, and has averaged 5.5 percent a year since 1990 real estate. In agriculture, labor productivity (panel a), yielding a three-and-a-half-fold has grown robustly, but its level is still lower increase in average income. Only China per- than in most of the region’s middle-income formed better. Growth has benefitted from countries. With almost half the workforce still its remarkable stability (panel b) and a strong engaged in agriculture, Vietnam has too many external orientation of the economy. Exter- workers on its farms. Remedies include con- nal trade has been a major driver (panel c), solidating agricultural landholdings (which much of it powered by strong foreign direct are too fragmented and small) and moving 6 VIETNAM 2035 FIGURE O.1 Rapid and inclusive growth in Vietnam has yielded shared prosperity and strong gains in poverty reduction a. Vietnam has had one of the fastest GDP per b. . . . catalyzed by economic stability . . . capita growth rates since the early 1990s . . . Vietnam China Guatemala Vietnam India Bangladesh Korea, Rep. Australia United States Poland Malaysia Norway Singapore Sri Lanka Thailand Indonesia China Ghana Brazil Nigeria Israel India Turkey Philippines Egypt, Arab Rep. Kenya Chile Philippines Cambodia Colombia Korea, Rep. Brazil Malaysia United States Indonesia Mexico Singapore Thailand Russian Federation Argentina Kenya Cuba Russian Federation Cameroon Ukraine Zimbabwe United Arab Emirates Iraq –4 –2 0 2 4 6 8 10 0 5 10 15 20 25 Average GDP per capita growth, 1991–2014 (%) Standard deviation of GDP per capita growth, 1991–2014 c. . . . and a very strong external orientation . . . d. . . . accompanied by fairly small increases in inequality . . . 200 42 Vietnam 40 Thailand Share of trade in GDP (%) 150 38 Gini coefficient 100 36 34 Korea, Rep. 50 32 China 0 30 0 500 1,000 10,000 25,000 50,000 100,000 1992 1995 2000 2005 2010 2014 GDP per capita (2005 PPP US$) (figure continues next page) OVERVIEW 7 FIGURE O.1 Rapid and inclusive growth in Vietnam has yielded shared prosperity and strong gains in poverty reduction (continued) e. . . . and faster income growth for the bottom f. . . . yielding strong reductions in poverty 40 percent of the population . . . 10 80 8 60 Growth rate (%) Poverty rate (%) 6 40 4 2 20 0 0 8 4 6 8 0 2 4 2 1993 1996 1999 2002 2005 2008 2011 2014 –9 –0 –0 –0 –1 –1 –1 00 93 –2 03 05 07 09 11 13 19 20 20 20 20 20 20 99 $3.10/day General Statistics Office– 19 Mean Mean of bottom 40% of population World Bank poverty line $1.90/day MOLISA poverty line Sources: World Development Indicators; General Statistics Office of Vietnam; Penn World Table 8.0; and World Bank and Ministry of Planning and Investment of Vietnam calculations. Note: Dotted lines in panel f indicate periods when substantial changes were made to poverty lines or methodologies. MOLISA = Ministry of Labour, Invalids and Social Affairs; PPP = purchasing power parity. farmers to the more productive industry and in the region, while the environmental qual- service sectors. But it does not help that job ity of its air, land, and water has deterio- creation in manufacturing has plateaued at a rated considerably. Water and air pollution relatively low level and that services involve have reached serious levels, especially near mostly informal activity.3 Hanoi and Ho Chi Minh City, posing major Although Vietnam has avoided the large health risks. In addition, a large part of increases in inequality in other fast-growing Vietnam’s protective mangrove forests has countries, the differences between rich and been destroyed, while overfishing has seri- poor are still significant. While members ously depleted the nearshore fi sheries, pos- of ethnic minorities have experienced gains ing threats to livelihoods. Removing natural in welfare since the early 1990s, they face a forests in some upland areas has contrib- growing gap relative to the majority popula- uted to more frequent and severe flooding of tion. With 15 percent of the population, they lower altitude farms and human settlements. now make up half the poor. And in recent Finally, Vietnam is one of the world’s most years, progress for ethnic minorities has vulnerable countries to climate change, with stalled on poverty reduction, child mortality, adaptation challenges accordingly severe, and nutrition. Many ethnic minority citizens especially in the Mekong Delta. With almost remain largely disconnected from the coun- all large-scale hydropower potential tapped try’s larger economic success. and with limited development of other Growth has to a large extent come at the renewable sources, greater reliance on coal cost of the environment. Vietnam’s green- is a growing threat to environmental sustain- house gas emissions have grown the fastest ability and to energy security. 8 VIETNAM 2035 Last but not least, Vietnamese institutions Four global megatrends will be impor- have failed to keep up in important ways tant for Vietnam to consider in the next two with the needs of an increasingly demand- decades:4 geopolitical, economic, technologi- ing market economy and rising aspirations cal, and climatic. of a growing middle-class society. In par- ticular, the country’s unique history has Geopolitical Megatrends produced public-sector institutions that are The current shift in the world’s economic commercialized and vertically and horizon- and geopolitical axis from west to east and tally fragmented and that face insufficient from north to south will define the com- scrutiny by citizens. Despite reforms, the ing decades. The rise of China is partic- state is still strongly engaged in economic ularly significant. The geopolitical shifts activity— directly through state-owned enter- will, however, be even more complex. Other prises (SOEs) and indirectly through very regional powers—including developed econ- close links with an exclusive segment of the omies such as Japan and the Republic of domestic private sector. State fragmentation Korea, and emerging powers such as Brazil, arises from the lack of clear hierarchy and India, Mexico, the Russian Federation, and assignment of roles and responsibilities both Turkey—are also likely to try to expand their within the central government and between own spheres of influence. the center and the provinces. The absence The emergence of a multipolar world of a merit-based management of public ser- order would give rise to multiple possibilities, vants exacerbates the gaps in public institu- among them more such collaborations as the tions. Election processes and mechanisms for Asian Infrastructure Investment Bank (AIIB) engaging citizen organizations are not robust and the New Development Bank of the enough to provide true citizen representa- BRICS states (Brazil, Russia, India, China, tion, and Vietnam lacks a system of effec- and South Africa). There could also be ten- tive checks and balances between the three sions or even conflicts among the rising pow- branches of government. ers, or among rising and existing powers. Cooperative relations with a rising China will remain essential. Vietnam is one of the Opportunities and Risks signatories to and founding members of the AIIB. Its infrastructure financing needs over Global Megatrends and External Risks the next several decades will run into tens of and Opportunities billions of dollars a year. With most bilateral Vietnam’s location on the easternmost edge partners reducing their presence in Vietnam, of the Indochinese peninsula makes it a vital the AIIB could cover some of the emerging link between East, Southeast, and South financing gap. Asia. The physical connection to these Asian Of the geopolitical risks particularly rel- regions and the maritime connections to the evant for Vietnam are maritime issues with rest of the world have shaped Vietnam’s his- China that go beyond just territorial con- tory and will remain crucial for its future. cerns. The maritime waters have considerable But geography very likely will not be destiny economic and strategic value, containing a in the same way that it was in the past. wealth of fish stocks and energy and min- After all, the hyperconnectivity of the mod- eral reserves. They are also critical for ship- ern world (which Vietnam has signed on to) ping and communications. With the Middle overcomes many of the binds of geography. East in turmoil, the geopolitics of energy will Moreover, future opportunities and risks also have implications for Vietnam both as are projected to be largely supraregional. a producer and exporter of crude oil and as That will require geopolitical and economic a rapidly growing consumer of petroleum outreach well beyond the neighborhood. products. OVERVIEW 9 In the midst of this fast-evolving world Growth prospects in East Asia will also order, Vietnam will need to continue building be underpinned by the ongoing shift toward its alliances judiciously with a clear eye on its multilateral (often regional) trade agree- long-term economic and political interests. ments. The ASEAN integration — starting with the ASEAN Economic Community that Global Economic Megatrends became a functioning trading bloc in 2016— The global economy is projected to grow at can bring considerable economic benefits. an average of 3.2 percent annually between Estimates for Vietnam range from a 1 to 2015 and 2035, with continuing expan- 3 percent cumulative increase in national sion in trade integration, urbanization, and income (ERIA 2012 and Thanh 2015). Even technological advances the main drivers. so, ASEAN integration is seen in Vietnam The rise of China, India, and members of as a stepping stone for locking in even more the Association of Southeast Asian Nations promising partnerships beyond the region (ASEAN) matched by the (relative) decline of (Thanh 2015). Especially noteworthy is the the United States, Europe, and Japan would TPP. Also significant are the Free Trade Area be the most apparent shift in the global eco- of the Asia-Pacific and the Regional Com- nomic structure in coming decades. 5 China prehensive Economic Partnership, each in clearly is the biggest part of this story. In this less advanced negotiations than the TPP. report’s projections, it would overtake the The TPP agreement includes the world’s United States as the world’s largest economy largest and third-largest economies (the (in market prices) around 2032. It has been United States and Japan), with TPP countries the world’s largest exporter since 2009, and accounting for 36 percent of world GDP and the second-largest importer of goods. It is set more than a quarter of all world trade. Viet- to become an important source of investment nam is well positioned to benefit. According fi nancing for emerging economies, particu- to this report’s analysis, implementing the larly regionally. TPP could add a cumulative 8 percent to Trade with China already accounts for Vietnam’s GDP by 2035. Others have esti- 20 percent of Vietnam’s total, up from 10 per- mated double-digit gains for Vietnam, many cent in 2000. The significant flow of foreign times larger than for any other TPP country direct investment into Vietnam is linked, in (Petri and Plummer 2014). Vietnam could part, to a shift in low-wage production from also usefully leverage commitments under the China. As real wages in China continue their TPP to lock in policy reforms that might oth- sharp rise, many of its production bases will erwise be politically harder to carry out. continue to look southward in search of Top-down multilateral trade integration is lower wages — the “China+1 strategy.” Viet- likely to be complemented by important subre- nam’s proximity to southern China, home gional collaborations, including that within the to many of these production networks, gives Greater Mekong Subregion. Dwindling and it a meaningful competitive edge. Produc- increasingly unpredictable water supplies along ers can benefit from its low wages and from with a rising demand for water and energy will being part of the Chinese supply chains at the require greater regional cooperation for energy same time —a highly attractive combination. and water security. The agglomeration of a nascent electronics- industrial cluster in the north-central parts New Technological and Business of Vietnam (around Hanoi) is an early sign Megatrends6 of these possibilities. Moreover, with a rap- Technological innovations, fueled and sup- idly emerging middle class, the Chinese con- ported by the information revolution, will sumer market (the world’s fastest growing) disrupt production and trading patterns will be increasingly attractive for Vietnamese across the world. Advances in digital tech- producers. nologies ranging from three dimensional 10 VIETNAM 2035 (3D) pri nti ng, prog ra m mable m icro - can view these disruptive innovations with controllers, and second- generation com- optimism (box O.1). But to maximize the puter numerical control milling and routing benefits, long-term investments will have to make it easier and less expensive to manu- upgrade the technical skill sets of the next facture customized high-quality products. generation, and the domestic business envi- Major advances in renewable energy (partic- ronment will have to be the focus. Some ularly solar) are posing a growing challenge technologies will have associated risks that to conventional and usually environmen- require careful management. tally more damaging energy sources. Next- generation genome sequencing and other Global Climate Change advances in the biomedical fi eld are set to Climate change is among the most conse- open a trillion- dollar industry in the next quential global issues. Greenhouse gas emis- decade, enhancing and extending human sions are on a path to a 3.5– 4.0 degrees life. Advanced robots are being deployed on Celsius (°C) warmer planet by the end of the shop floors at an exponential rate, boosting century. Climatic conditions, heat, and other productivity and driving costs down. weather extremes considered highly unusual T he information revolution is also or unprecedented today could become the enabling major disruptive innovations in new normal. The impact of global climate business models. The Internet eradicates change is already being felt, with the num- many of the information advantages of ber of category 4 and 5 storms having risen colocation and cost sharing. Raw materi- sharply over the past 35 years. The Arctic als and other inputs to various degrees of Sea’s ice has shrunk to its lowest on record, preprocessing are available for sourcing on and global sea levels have risen about 10–20 the Internet. Online platforms such as Ali- centimeters in the past century, with an accel- baba.com, Etsy, and Maker’s Row make erating rate of shrinking. Rising sea levels it possible for manufacturers to search for increase the risk of storm surges and the fluc- customers without having to spend a lot on tuations in precipitation. advertising and distribution. Crowdfunding Vietnam has been ranked among the five sites such as Indiegogo and Kickstarter can countries likely to be most affected by cli- aid in attracting fi nance. mate change. A high proportion of its pop- For the most part, these trends bring ulation and economic assets are in coastal upside opportunities. But some unintended lowlands and deltas. Temperature increases consequences have to be managed. Skill- in Vietnam have averaged about 0.26°C intensive and labor- efficient technology is per decade since 1971, (Nguyen, Renwick, set to eliminate the more routine middle-in- and McGregor 2013) twice the global aver- come vocations while complementing highly age.7 On current trends, annual average skilled and thus higher-income jobs. Already, temperatures will (depending on the loca- new technologies have displaced handicraft tion) be 0.6–1.2°C higher by 2040 relative producers in numerous industries ranging to 1980–99 (MONRE 2012). The predic- from textiles to metalworking. The progress tions show intensified heat and cold waves, of technology may also increase inequality in and 28–33 centimeter increases in sea level society, as those leveraging technology gain around Vietnam’s shores. 8 Seasonal vari- higher incomes. The gap between labor pro- ability in precipitation is also projected to ductivity and wages may also widen. Some increase, with the wet season getting wetter even raise the specter of premature deindus- and the dry season drier. Extreme rainfall trialization in the developing world, partly and flooding would also become more likely, because of automation (Rodrik 2015). particularly in the northern region, includ- Vietnam, with its well-deserved reputa- ing Hanoi, with increased risk of landslides tion as a dynamic and adaptable economy, in mountainous areas. A southward shift OVERVIEW 11 BOX O.1 Potential benefits and risks of new technologies Solar energy. Solar energy is largely available 2011 and 2014. Environmental and consumer groups year round, especially in southern and central are demanding more transparency on health risks Vietnam. The potential market for solar panels and and increased regulation of such products. water-heating systems is signifi cant, but progress E-commerce. Opportunities are abundant, as is slow due to high development costs. Solar pan- foreign companies enter the market and local els have been installed in the Nha Trang and other e- commerce firms consolidate. E-commerce sales urban areas along the south-central coast and in were estimated at more than $15 billion in 2015, rural, mountainous, and other remote areas that are driven by rapid Internet uptake and even faster difficult to reach with grid electricity. adoption of smartphones. A lack of apps for pur- Social mobility, analytics, and cloud services. These chasing online, slow online payment growth, and services present opportunities to catch up with the concerns over the security of online purchases need developed countries, if close cooperation among sci- to be rectified, and logistics services for traceable entists, enterprises, and the government is established and timely shipping of small packages upgraded. for the long term. E-commerce logistics are more demanding and operationally complex than those for import-export Genomics and life sciences. Potential benefits come operations — the current setup in Vietnam. from genetically modified foods and other advances in the life sciences. Improved varieties of corn can be Additive manufacturing (3D printing). This tech- used as feed to fatten hogs, which should have strong nology can broaden opportunities but undermine commercial prospects, especially with Vietnam fore- Vietnam’s traditional manufacturing. As it advances, cast to consume 33 kilograms of pork per person by manufacturing will likely turn small-scale, widely 2020 (more than China and the European Union). distributed, and customizable, prompting investors Genetically improved crops could also reduce the from developed economies to relocate production country’s feed imports, which quadrupled between back home. has been seen in the typhoon trajectory in water- and vector-borne diseases and diar- the past five decades. If this continues, Ho rheal illnesses (Coker et al. 2011). Flooding Chi Minh City would be at greater risk of would compound the risks. The poor and being directly hit. Coastal erosion and salin- elderly would be especially vulnerable to ity intrusion are other unfolding risks likely heat extremes, compounded by the rapid to accelerate. increase in Vietnam’s elderly population. Agriculture, particularly rice production, is projected to be hit hard, most severely Domestic Trends, Risks, and around the Mekong Delta, where much of Opportunities the land area is less than 2 meters above sea level (Wassmann et al. 2009). Climate Demographic Megatrends change could reduce annual rice production Over the past t wo decades, Vietnam by 3–9 million tons by 2050, and highly cashed in its “demographic dividend”— productive areas of coffee plantations may the economic growth boost generated by a become unsuitable for the purpose (Bunn bulge in the share of the population of work- et al. 2015). The marine ecosystems in Viet- ing age. The dividend is now nearly spent; the nam are also likely to be severely affected. working-age share peaked in 2013 and is now And climate change impacts are also likely to in decline. Based on United Nations (UN) have adverse health consequences, including projections, the absolute number of people of 12 VIETNAM 2035 working age will start to fall soon after 2035. Vietnam’s Emerging Middle Class More important, Vietnam reached a turn- Vietnam’s rapidly emerging middle class, ing point in the size of its older population also increasingly more urban, will offer in 2015 and will become one of the world’s another significant opportunity. Vietnam is a fastest-aging societies. The number of Viet- country of 90 million people, the 14th most namese older than 65 years will grow from populous on the planet. Its $200 billion 6.3 million today to 15.5 million. The share economy is likely to be close to the trillion of the population older than 65 years will dollar mark (in 2015 prices) by 2035, with rise from 6.7 percent in 2015 to 14.4 percent more than half the population projected in 2035 (figure O.2), transforming it from a to join the ranks of the global middle class young to an aged society. with consumption of $15 a day or more in This demographic transformation has 2011 purchasing power parity (PPP) terms stark consequences. First, the decline in the (figure O.3), compared with 11 percent working-age population will mean that a key today, giving new potency to the domestic driver of Vietnam’s rapid per capita growth market as a driver of growth. will diminish, making human capital deep- In addition to being a major opportu- ening and other sources of productivity nity, a rising urban middle class will shift growth even more vital for sustaining robust expectations and bring new challenges. The growth. Second, serious fiscal challenges will majority of that population will aspire to for- be driven by the rising burden on the pen- mal jobs and will want to gain high-quality sion and health systems. Third, institutional skills through tertiary education. And the arrangements for the provision of care to the expansion of wage employment without well- old-age population will quickly become a functioning industrial relations institutions major concern. will expose the economy to the risk of sub- stantial worker-employer conflict, evident in the large increase in strikes since 2006. The FIGURE O.2 The share of population over 65 will more than urban middle class will also demand greater double between 2015 and 2035 political openness and more accountable gov- ernment, which the existing system would 80 struggle to meet. Unfinished Economic Modernization Agenda and Rising Political Economy 60 Challenges Share of total population (%) Perhaps the biggest and most important oppor t u nit y — necessar y for all other opportunities and to mitigate risks — lies in 40 completing the unfi nished economic mod- ernization and structural transformation agenda. Part of this relates to maximiz- 20 ing the gains from the ongoing structural transformations that have been a major contributor to grow th since the early 2000s. With agriculture still accounting 0 for almost half the labor force, and with 1975 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 significantly lower labor productivity than in the industry and services sectors, future Ages 15–64 Ages 0–14 Ages 65 and older gains from structural transformation could Source: UN 2015. be substantial. OVERVIEW 13 FIGURE O.3 By 2035, more than half the Vietnamese population will enter the global middle class 100 80 Share of total population (%) 60 40 20 0 19 20 21 22 23 29 30 31 32 33 18 28 24 34 35 25 26 15 16 17 27 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Global middle class (>$15.00 PPP/day) Emerging consumer ($5.51–15.00 PPP/day) Near poor ($3.10–5.50 PPP/day) Global poor (<$3.10 PPP/day) Source: General Statistics Office of Vietnam. Note: Figures here reflect the projected distribution of per capita consumption, based on 2014 VHLSS data, assuming 4 percent annual growth in per capita consumption. PPP = purchasing power parity. T he t ra nsfor mat ion f rom st ate to well be that the political economy of some private ownership of the economy is even of the needed reforms has become a bind- less advanced. The state-owned enterprises ing problem. Reforms are likely to face and commercial banks continue to inhale too greater resistance than in the past, from much oxygen out of the business environ- interest groups that perhaps have more to ment, undermining economywide efficiency lose now than 25 years ago. And the bene- and crowding out the productive parts of the fits are more uncertain than they were when private sector. The state also wields too much reforms warded off widespread economic influence in allocating land and capital, giving crisis. Deploying homegrown and politically rise not only to opportunities for corruption feasible solutions— a strength of the first- by handing over arbitrary power to officials generation reforms—will remain important but also to heavy economywide inefficiencies. for next-generation reforms. So, adjusting the role of the state to support a competitive private sector–led market econ- omy remains a major opportunity. And while Aspirations for 2035 global integration has advanced well, with By 2035, 60 years after Reunification, Viet- Vietnam embedding itself in global value nam aspires to become a modern, industri- chains, the benefits are constrained by the alized economy— next in a succession of absence of links with domestic firms. East Asian economies to have made the Many policy actions to grasp these oppor- transformative journey to upper-middle or tunities are well known. What has been high-income status. The many achievements mostly lacking is follow-up action. It may since the launch of the Ð ổ i M ớ i reforms 14 VIETNAM 2035 have certainly contributed to the ambitious countries for living standards, the rule of goals. The strong record of regional peers law, and creativity, as reflected in the broad such as the Republic of Korea, Singapore, aspirations for 2035 (box O.2). Vietnam Malaysia, China, and Taiwan, China— has also signed up to the UN’s Sustainable together with the fear of being permanently Development Goals (SDGs), which set a left behind in the region— has further fueled comprehensive global development agenda Vietnam’s ambitions. There is still an inher- for the next 15 years and will give more ent desire to “catch up” with the world and concrete shape to some of Vietnam’s key the modern institutional norms of OECD long-term goals. BOX O.2 Aspirations for 2035 Vietnam’s aspirations may be broadly defi ned in the and executive branches for adequate checks and following ways: balances on the government. • A prosperous society will be at the upper • The National Assembly will comprise full-time reaches of upper-middle-income status. Its deputies with the technical capacity and insti- market economy will be private sector–led, tutional autonomy to represent the sovereign competitive, and intensively integrated with people, exercise oversight over the executive, the global economy. Modern industries and a and pass quality legislation. The judiciary will knowledge-based economy, housed in an effi - similarly be suitably positioned, with autonomy cient and well-connected network of modern and strong capacity to resolve disputes in a more cities, will drive growth. diverse society and economy. The executive will be well integrated horizontally and vertically, • A modern, creative, and democratic soci- with clear functions for central and subnational ety will be the driving force for future devel- authorities. opment. The emphasis will be on creating an open and free environment that promotes • A civilized society will make every citizen and learning and innovation for all citizens, who every political and social organization (the entire will be guaranteed equal access to development political system) equal before the law. Under- opportunities and the freedom to pursue their pinning this will be robust, diverse people’s vocations, while fulfi lling their responsibilities social organizations that can exercise fundamen- without compromising national and communal tal rights, including the people’s direct demo- interests. cratic rights and the rights to information and association. • A rule-of-law state will be effective and account- able. It will clarify the relationship between the • A responsible member of the global community state and the citizenry and between state and of nations will build global alliances and fulfi ll market. It will perform its basic functions effec- global responsibilities for peace and security tively, including developing and enforcing legisla- while proactively seeking regional and global tion, managing international relations, ensuring opportunities for economic integration. public safety and national security, and ensur- ing that markets function freely while address- • A sustainable environment will protect the quality ing market failures. It will develop strong social of Vietnam’s air, land, and water. It will build cli- institutions to ensure that the power belongs to mate resilience into economic planning, social pol- the Vietnamese citizens and protect their right of icy, and infrastructure investments to reduce the pursuing creativity. It will develop clear lines of most severe risks posed by climate change. It will responsibilities between the legislative, judiciary, develop diverse, clean, and secure energy sources. OVERVIEW 15 The Ninth Party Congress adopted the 5. A score of at least 0.70 on the UN’s phrase “socialist-oriented market economy” Human Development Index as the official way to describe Vietnam’s eco- nomic system in April 2001, codified in the How well is Vietnam positioned to 2013 revision of the constitution. The 2011– become a modern, industrial economy by 2020 Socio-Economic Development Strategy 2035? Its GDP per capita — at $5,370 (in set forth the objective “to become a basic 2011 PPP) in 2014 — would need to grow industrialized country with the foundation of at a minimum of 6 percent a year to reach a modern and industrial country by 2020.” the $18,000 mark by 2035 (figure O.4). Despite broad acceptance, the precise def- This would be significantly higher than the inition of the term “modern and industrial” average per capita growth rate of 5.5 per- economy has not been announced (Tran cent between 1990 and 2014 — and well 2015). While any defi nition would be arbi- above the 3.8 percent average for all mid- trary, this report sets forth five specific quan- dle-income countries over the same period. titative criteria for meeting that objective: A lower and more feasible (but still ambi- tious) per capita growth rate of 5.0 percent 1. A GDP per capita of at least $18,000 (in (Vietnam’s average over the last 10 years) 2011 PPP) would take its GDP per capita to just under 2. A majority (over 50 percent) of the Viet- $15,000 by 2035 and put Vietnam on par namese population living in urban areas with Brazil in 2014, well poised to reach 3. A share of industry and services in GDP $18,000 by 2040. A growth path of 7 per- at more than 90 percent and in employ- cent (Vietnam’s aspirational growth target) ment at more than 70 percent would take per capita GDP to $22,200, 4. A private-sector share in GDP of at least roughly the income of the Republic of Korea 80 percent in 2002 or Malaysia in 2013. This higher growth rate would also enhance Vietnam’s FIGURE O.4 Income per capita growth scenarios for Vietnam to 2035 24,000 7% Korea, Rep., 2002 Malaysia, 2013 per capita growth 21,000 6% GDP per capita (2011 PPP int’l $) 18,000 per capita Malaysia, 2006 Turkey, 2013 growth 5% 15,000 per capita Malaysia, 2001 Brazil, 2014 growth 4% 12,000 Thailand, 2010 China, 2014 per capita growth 9,000 6,000 Vietnam 3,000 0 2001 2006 2011 2016 2021 2026 2031 2036 Source: World Development Indicators, and World Bank Group and the Ministry of Planning and Investment of Vietnam calculations. Note: PPP = purchasing power parity. 16 VIETNAM 2035 chances of catching up with Indonesia and 1. Enabling economic modernization with a the Philippines. productive and globally competitive pri- Also in 2035, at least 54 million of Viet- vate sector firmly in the lead nam’s 108 million citizens would be urban 2. Building the country’s technological and residents, almost 25 million more than innovation capacity for a creative society today. The urbanization rate, now at around 3. Managing urbanization and other forms 33 percent, would need to increase 2 percent of spatial transformation to achieve eco- a year to meet this target, matching the pace nomic efficiency of the past 20 years. The nonagriculture sec- 4. Charting an environmentally sustainable tor has grown at twice the pace of the agri- development path with enhanced capacity culture sector since 1990. This 2:1 ratio of for climate resilience growth rates is also projected over the next 5. Promoting equality and inclusion of the two decades, even with agriculture growing marginalized groups for the development at its potential 3.0–3.5 percent. That would of a harmonious middle-class society ensure a 90 percent share of the nonagri- 6. Building a modern, rule-of-law state with culture sector in the economy. The 80 per- a democratic society and a fully established cent private-sector share in GDP, if feasible, market economy would involve a departure from the past. With the share of the public sector in GDP The six breakthroughs serve as the foun- stuck at around 33 percent since the onset of dation for realizing the 2035 aspirations, and the Ð ổi M ớ i reforms, this would involve a may be summarized in three pillars: economic more meaningful attempt to restructure the prosperity balanced with environmental sus- SOEs (including equitizing bigger chunks of tainability; equity and social inclusion; and them) and providing a bigger stimulus to the a rule-of-law state with high capacity and private sector. accountability. The rest of this report is orga- Thirty years of Ð ổi M ớ i reforms have nized around these three critical aspirations broug ht many successes. Viet namese for 2035. It covers both the feasibility and development aspirations for 2035 are bold challenges of realizing these aspirations under and significant, but the challenges and risks current conditions and lays out a pathway for facing the country are also enormous. In reform to enhance the prospects of meeting the order to achieve the aspirations, six transfor- 2035 goals. Details of the six breakthroughs mations or breakthroughs will be essential: are presented in Part II of the final report. OVERVIEW 17 Pillar 1 Economic Prosperity with Environmental Sustainability Vietnam is on a trajectory of rapid growth. Some economies — like Japan, the Republic Past performance has stoked ambitions of of Korea, Singapore, and Taiwan, China — even faster growth over the next 20 years, sustained high growth for some five decades and Vietnamese leaders are keen to see per and were propelled to high-income status. capita growth accelerate from its average of Others — like Brazil, the Arab Republic of 5.5 percent since 1990 to around 7.0 percent. Egypt, Indonesia, Mexico, and Thailand— This will require the ratio of gross capital for- showed promise for two or three decades, mation to GDP to pick up to around 35 per- but then became mired in the “middle- cent (from 31 percent currently) and stay at income trap.” China’s ascent, albeit incom- that level for at least a decade —and the gross plete, seems on a trajectory similar to the national savings rate to stay at 35 percent. fi rst group’s — and to Vietnam’s. But, above all, productivity growth, which Having grasped the catch-up opportu- has been on a long-term declining trend, will nities, Vietnam is strongly positioned on its require greater attention. long-term income trajectory relative to its The reform agenda will be demanding, global comparators. A long-term compar- given that the decline in productivity growth ison with China is striking on two counts. has been broad based. The government will First, growth accelerations in both countries, need to prioritize reforms with more imme- although 13 years apart (starting around diate payoffs such as strengthening the 1977 and 1990), begin at roughly the same microeconomic foundations of the market per capita income of around $1,100 (2005 economy. The reforms with medium-term PPP). Second, 24 years into its growth accel- impacts would support ongoing structural eration (2014), Vietnam had kept up with transformations and the deepening of global China over the equivalent period (to 2001) integration by developing a market-oriented (figure O.5, panel a). and commercialized agriculture sector, The story remains broadly similar when strengthening Vietnam’s position in global looking at other successful economies (those value chains, and building more resilient with at least a three-and-a-half-fold increase in and credible macroeconomic institutions. per capita income in the first 25 years of their Those with longer-term gestation would seek growth accelerations) and considering a 50-year to create more robust learning and inno- period. The starting points for the growth vation structures, promote efficient urban accelerations were close, with Thailand at agglomeration, and ensure environmental $835 (2005 PPP) at the lower end and Taiwan, sustainability. China, at $1,365 at the upper end. About a quarter century into its growth acceleration, Vietnam’s Long-Term Growth in a Vietnam’s position is broadly at par with those successful economies (figure O.5, panel b). Global Perspective What happens from here on is even more “Catch-up growth” — in which latecom- important. At roughly 25 years into their ers benefit from investment and transfer growth accelerations — where Vietnam is of technology and know-how from richer now— the economies that made it into the countries — has produced extraordinary epi- high-income ranks pulled ahead of the rest. sodes of economic success in East Asia and The Republic of Korea and Taiwan, China, elsewhere since the end of World War II. maintained their growth records of the fi rst 18 VIETNAM 2035 FIGURE O.5 Keeping on course for catch-up: Vietnam and global comparators a. Vietnam and China b. Vietnam and other high-growth economies 12,000 30,000 10,000 25,000 GDP per capita (2005 PPP US$) GDP per capita (2005 PPP US$) 8,000 20,000 6,000 15,000 4,000 10,000 2,000 5,000 0 0 Base +5 +10 +15 +20 +25 +30 +37 Base +5 +10 +15 +20 +25 +30 +35 +40 +45 +49 year year Korea, Rep. Taiwan, China China Vietnam Vietnam (7% per capita growth) Vietnam (4% per capita growth) Brazil Thailand Egypt, Arab Rep. Source: Calculations based on data from Penn World Table, Version 8.0. Note: Base years are 1951 for Taiwan, China, and Brazil; 1958 for Thailand; 1962 for the Republic of Korea; 1969 for the Arab Republic of Egypt; 1977 for China; and 1990 for Vietnam. PPP = purchasing power parity. 25 years over years 25–50, but Brazil, Egypt, only to take its average income close to that and Thailand started to see growth rates fall. of Thailand or Brazil today, and its chances Vietnam is thus seemingly at a critical of catching up with the neighboring wealth- juncture. Decisions at this stage matter for ier middle-income countries would be lower. meeting long-term income aspirations. If the What will determine Vietnam’s path? Pro- country can carry out the reforms to pull up ductivity is fundamental. Economists gener- its GDP growth to its 7 percent per capita ally agree that countries’ inability to break target, it would match the trajectory of China out of the middle-income trap (whether or not and by 2035 stand a strong chance of reach- they have been growing fast) is almost entirely ing the incomes of the Republic of Korea and attributable to stagnating productivity Taiwan, China, in the early 2000s. At the (Eichengreen, Park, and Shin 2011; Agenor, higher reaches of upper-middle-income sta- Canuto, and Jelenic 2012). Summarizing the tus, it would be strongly positioned for the importance of productivity in development final ascent to high income. It would also economics, Nobel Prize–winning economist have a stronger chance of catching up with or Paul Krugman notes, “Productivity isn’t even overtaking its middle-income neighbors everything, but in the long run it is almost such as Indonesia and the Philippines. But if everything. A country’s ability to improve its Vietnam’s per capita growth slips to around standard of living over time depends almost 4 percent a year, that will be good enough entirely on its ability to raise its output OVERVIEW 19 per worker.” (Krugman 1994) Here, though, an even steeper decline in GDP growth after the story becomes less rosy for Vietnam. 2000. Second, decomposition of labor- productivity growth in the two periods Trends in Productivity Growth: shows that, since the early 2000s, the con- tributions of capital deepening (panel b) and A Cause for Concern structural transformation from agriculture Behind Vietnam’s impressive growth since to manufacturing and services (panel c) have 1990 are some worrying signs. Two stand picked up markedly. Conversely, growth in out in comparing the 1990s with 2000 – total factor productivity, which accounted 13. First, GDP growth was a full percent- for the bulk of labor- productivity growth in age point lower in the second period (at the 1990s, collapsed in the post-millennium 6.6 percent) than in the 1990s. While this period, and labor-productivity growth fell in slowdown was in part a reflection of the a majority of the sectors. Labor productivity weaker environment following the 2008–09 actually declined in mining, public utilities, global fi nancial crisis, a slowdown in labor- construction, and finance— all sectors in productivity (output per worker) growth that which SOEs have kept their dominant role. started in the late 1990s was also a contrib- Driven by multiple objectives (profit uting factor (figure O.6, panel a). In fact, an not high among them) and by distorted acceleration in labor-force growth prevented incentives, SOEs have stayed unproductive. FIGURE O.6 Productivity growth has been trending downward a. Labor-productivity growth has been on b. . . . as total factor c. . . . and labor productivity growth in a a declining trend since the late 1990s . . . productivity growth collapsed . . . majority of sectors fell sharply 8 120 100 7 100 80 80 6 60 60 Percent Percent Percent 5 40 40 4 20 20 3 0 2 –20 0 1991–2000 2001–13 1991–2000 2001–13 93 00 13 10 95 05 19 20 20 20 19 20 Contribution of human capital growth Contribution of productivity growth to labor productivity growth within sectors to labor productivity growth Contribution of TFP growth Contribution of structural Contribution of capital deepening transformation Source: Calculations based on General Statistics Office of Vietnam data. Note: Panel a displays a 3-year moving average. In panel b, capital deepening is measured as the change in the ratio of capital stock to GDP. 20 VIETNAM 2035 Measures of firm-level asset (capital and land) presence has been marked by worsening productivity (figure O.7) and labor produc- productivity, so much so that there is little tivity throughout the 2000s capture their daylight between the productivity of labor inefficiencies. Despite a long-running (albeit and that of assets in the domestic private uneven) SOE equitization process, the public and SOE sectors (see figure O.7). Vietnam- sector’s presence in production and its control ese private firms, on average, were using their over factor markets remain pervasive. The assets more productively than their Chinese state still retains a majority stake in more than counterparts in the early 2000s, but by 2014 3,000 SOEs, which account for about a third their asset productivity had fallen to less than of GDP (same as in 1990) and close to 40 per- half that of their Chinese peers. Vietnamese cent of total investment. The state sector also private fi rms are overwhelmingly small and maintains a virtual monopoly (or oligopoly) informal, which prevents productivity gains in critical sectors such as fertilizer, mining, through specialization and economies of utilities, banking, construction, and agricul- scale. And the relatively few large domestic ture. Under growing pressure to restructure, private firms (especially those with more than it has at least sought to ensure that its feeble 300 employees) tend to be even less produc- productivity does not deteriorate further. tive than the smaller private fi rms (on both Domestic private enterprise gives even asset and labor productivity). more cause for concern. Driven by reforms What explains these trends, and why do to first legalize and then facilitate private they differ between the two periods? The enterprise, the private sector grew exponen- initial pickup in productivity growth in the tially after the late 1980s.9 But its growing 1990s refl ected Vietnam’s move toward a market-economy structure and the removal of many distortions (multiple price con- FIGURE O.7 Firm-level asset productivity has declined sharply for trols, production quotas, collectivized agri- the Vietnamese nonpublic enterprise sector culture, trade and investment restrictions, and a ban on formal private enterprise). 2.5 Most of these restrictions were lifted in the initial phases of Ð ổi M ớ i, with systems more friendly to the market and private 2.0 sector in place by the early 1990s. These early steps gave a big boost to productivity Revenue per unit asset growth across the economy. 1.5 But by the end of the 1990s, the productiv- ity gains had been exhausted and more fun- 1.0 damental policy and institutional constraints started to bind. Two distortions in Vietnam’s nascent market economy have hurt produc- 0.5 tivity growth the most. The fi rst is the grad- ual commercialization of state institutions (discussed in more detail under Pillar 3), such 0 that the narrow commercial interests of those 2001 2003 2005 2007 2009 2011 2013 with connections now dominate and deter- China, nonpublic sector Vietnam, nonpublic sector mine business viability. The innumerable tacit China, state-owned enterprises Vietnam, state-owned and explicit preferences handed out to fi rms enterprises with connections (such as all SOEs, most Sources: General Statistics Office of Vietnam data, National Bureau of Statistics of China foreign-invested firms, and some large domes- enterprise data, and World Bank and Ministry of Planning and Investment of Vietnam calculations. tic private firms) by officials who also give Note: Asset productivity is revenue per unit of assets. inadequate attention to economic efficiency OVERVIEW 21 make it very difficult for many private fi rms Another distortion in Vietnam’s market to thrive, even if they are productive. economy that has hurt productivity has been Commercialization of state institu- the relative neglect of building critical mar- tions has produced an uneven and partial ket institutions. The greatest weaknesses are approach to market reforms, leading to two in those responsible for protecting private- imbalances. In the fi rst, a warm embrace of property rights and ensuring free and fair markets as the mechanism for resource allo- competition. These institutional shortfalls cation has coincided with a much more cau- have impeded the emergence of large, com- tious and ambiguous approach to giving up petitive, private firms and further discour- state control of production and to accepting aged small household firms from entering the domestic private ownership of productive formal sector (Malesky and Taussig 2009), assets. This has spawned an entrepreneurial even though switching from informal to for- business class within (or closely connected to) mal activity can raise firms’ productivity and the state rather than outside it and permitted profitability (Boly 2015). a continuing heavy presence of SOEs in many The adverse impact on the performance of sectors. domestic private fi rms, while unsurprising, In the second, the market embrace has has been substantial. With noncompetitive itself been two-speed. Impressive progress in and state-controlled factor markets and inad- liberalizing product markets and integrating equately developed formal market institu- them with the global economy under inter- tions, firms turn to informal institutions and national trade agreements has been accom- networks and often fi nd illegitimate means panied by a more subdued and muddled to enter the market, grow, and become more approach to developing and liberalizing fac- profitable (Steer and Sen 2010). There is no tor markets, as seen in the largely inefficient reason to believe, however, that those who allocation of land and capital. For example, are more adept at garnering political capital significant assets (land and capital) were or exploiting connections are also necessarily accumulated in the construction, real estate, better at running businesses. and banking and finance sectors between 2001 and 2013, even though these sectors A Reform Agenda to Reignite were among the least productive. Allo- cations are likely influenced by arbitrary Productivity Growth administrative decisions and connections, at The imperative to improve productivity heavy economic cost— as substantiated by a growth is therefore clear and strong. GDP considerable literature. A 2008 study fi nds growth since the early 2000s has been led that the allocation of bank credit is related by forces that compensated for weak and to connections and that the most profitable declining productivity growth but are now private firms do not even attempt to get reaching their natural limits. Rapid labor- bank loans (Malesky and Taussig 2008). force growth made up for low and declining Updating the analysis to 2013, this report labor- productivity growth economywide. fi nds that the results hold. Provinces with a Large-scale structural transformations off- high density of SOEs provide less credit to set the low and declining labor-productivity private fi rms and require more time to issue growth at the sectoral level. And an accel- land-use rights certificates than other prov- eration in capital accumulation counter- inces (Van Thang and Freeman 2009, for balanced the low and declining growth in example). Easier access of SOEs to credit, total factor productivity. In the next phase land, and export quotas in the garment and of development, each of these compensatory textile sector has reduced the profitability factors is projected to have a sharply dimin- and viability of private fi rms (Nguyen and ished impact, exposing overall economic Le 2005). growth much more to the weak productivity 22 VIETNAM 2035 trends. Moreover, the global context is by modernizing and commercializing agri- likely to be far less hospitable than before culture, strengthening Vietnam’s position the global fi nancial crisis. in global value chains, and building more Vietnam’s advantage is being at an early resilient and credible macroeconomic enough stage of development to reignite pro- institutions. ductivity growth without compromising its • Reforms and investments with impacts 2035 income objectives. At a similar stage mostly in the long term. These could be of development (the late 1970s), the Repub- phased in over the next two or three years, lic of Korea saw a major acceleration in its with payoffs expected only with a signifi- labor-productivity growth, which is encour- cant lag. They take into account the fact aging since it suggests that a turnaround in that the current growth model (supported such growth is possible. But it also highlights by the short- to medium-term reforms) is how demanding the agenda for institutional likely to start hitting diminishing returns reforms is. Some of that country’s reforms no later than a decade or so from now, as launched in the late 1970s and early 1980s — the economy reaches the upper-middle- macroeconomic stabilization, agricultural income level and environmental degra- modernization, and greater emphasis on com- dation reaches its limits. The longer-term petition and market deregulation— strongly focus would be on spurring learning and and quite quickly helped improve productiv- innovation, promoting urban agglomer- ity growth. But others—in the areas of higher ation, and ensuring environmentally sus- education, research and development (R&D), tainable development. and urbanization — operated with a signifi - cant lag, having begun many years earlier. The impacts of the reforms are not mutu- Reforms in Vietnam would need to be not ally exclusive. Functioning land markets only comprehensive (given its broad-based and strong microinstitutions will be just as slide in productivity growth) but also care- important after a decade as they are in the fully sequenced with a fixed eye on long-term next three years, although the short-term growth. The agenda, accordingly, can be bro- impact will be felt more acutely because of ken down into three broad (and overlapping) the current distortions that will get elimi- time horizons. nated. Elements of stronger macroeconomic institutions will be needed in the next two • Refor m s w ith immedi ate impac t s. or three years to ensure fiscal consolida- Strengthening the microeconomic founda- tion and greater efficiency of spending. The tions of the market economy would have to environmental agenda can also have some be the immediate priority, with the payoffs immediate payoffs through more efficient most significant over the next five years. pricing systems that internalize environmen- This should help stem the declining trend tal costs. in productivity growth and, by enabling greater and more efficient participation of the private sector, provide a strong growth Reforms with Immediate stimulus for the next decade or so. Impacts: Strengthening the • Reforms with impacts in the medium Microeconomic Foundations of term. These would comprise measures that are also carried out without delay, the Market Economy but their impact would be felt the most The immediate priorities have to be stronger between years five and ten. These would microeconomic market- economy founda- aim to support the ongoing structural tions. SOE reforms stay an important part of transformations and deepening of global this agenda, but are no longer enough: creat- integration (including the capital account) ing better enabling conditions for the private OVERVIEW 23 sector, such as strengthening market institu- increasingly to private companies with connec- tions and liberalizing factor markets, takes tions, crowding out lending to productive seg- precedence. ments of the domestic private sector. Financial inclusion has increased since the early 1990s, but remains an issue for less well-off Vietnam- Strengthening Market Institutions ese, especially those in rural areas. The evidence is compelling that well- The banking sector is struggling, having functioning markets require well- defined taken a big hit after the global fi nancial cri- rules of the game, enforced transparently sis toppled the real estate market (where the and predictably. The agenda calls for strong banks had heavy exposure). Banks’ average market institutions whose role is especially return on assets has fallen steeply since the important in the early phases when markets crisis (from 1.8 percent in 2007 to 0.5 per- are underdeveloped and small distortions can cent in 2012). Their reported nonperforming have amplified effects. The emphasis in Viet- loans (NPLs) have risen and are generally nam will have to be on enforcing competition considered understated. And their provi- policies and ensuring the security of property sions are lower than in middle-income peer rights. Restructuring the SOE sector and countries in East Asia. Many of the NPLs leveling the playing field for all enterprises— and restructured loans are related to SOEs. private or public, domestic or foreign— is Moreover, cross-ownership of banks by each an important part of this agenda (discussed other and by enterprises (including SOEs) under Pillar 3). remains significant. Compliance with Basel Core Principles is improving but still low, and many banks lack Basel II’s capital require- Liberalizing Factor Markets ments for market and operational risks— Vietnam’s financial sector is still relatively even as the country looks to move toward underdeveloped, with the banking sector Basel III. On-site inspections, particularly saddled with deep-seated structural prob- of the state-owned commercial banks, have lems and capital markets still in their infancy. been limited, and consolidated supervision Land markets are even less developed and of banks is lacking. Off-site monitoring also complete. Moreover, as noted, state influ- needs to be improved. ence on credit and land allocations seems Three items are on the agenda for the excessive, leading to significant economic financial system over the next 20 years. inefficiencies. Labor market regulations are less onerous (Pillar 2), but even those are not Reducing the risk of major fi nancial crisis. free of policy concerns. The hộ khẩu house- Vietnam’s response to potential financial cri- hold registration system (which, among other ses could be accelerated if the government problems, impedes rural–urban migration) is strengthens the National Monetary Advisory less burdensome than in earlier years but still Council. The council could meet regularly, imposes efficiency costs (Pillar 2). supported by a dedicated technical team to provide timely reports and drafts of notifica- Building Financial Markets tions and instructions to banks. Information The financial sector has expanded rapidly since on the financial system could be improved the early 1990s, but still has wide scope to take by better off-site data and supervision from on an even bigger role. It has done a reason- the State Bank of Vietnam (SBV). Improving ably good job of mobilizing savings but fallen the capacity for crisis management and the short in allocating credit to its most productive framework for bank resolution will improve uses and providing an inclusive payment sys- the crisis response in the event of illiquidity tem. Much of the lending, especially by state- or insolvency in the banking sector. This owned commercial banks, has gone to SOEs, or could be further strengthened by firming the 24 VIETNAM 2035 resources of the Deposit Insurance of Viet- Deepening the capital markets (starting nam (DIV) and legally enabling it to under- with the market for government debt) will take a purchase and assumption transaction also need changes to the legal and account- of failed banks’ assets. This measure would ing frameworks to bring them in line with require both a gradual shift in the DIV’s international standards. That would make funds from banks to government debt and foreign investment through the capital mar- legal changes that permit the government to ket more attractive. As in most developing borrow from the SBV on behalf of the DIV countries, developing contractual savings in large crises, under well-defined conditions. institutions (such as insurance companies) has only begun in Vietnam, but their role Developing a larger, more diverse, sta- will increase over the next 20 years as the ble financial sector. This requires steadily economy modernizes. Generating investor increasing bank capital and developing the interest in insurance companies will depend broader financial sector. The first chal- on improved clarity of company accounts, lenge is resolving the large NPL overhang in compliance with international accounting banks. A good starting point would be con- and reporting standards, improved corporate fidential audits (including operational audits) governance, and a strengthened Insurance by reputable international fi rms and strong Supervisory Authority. application of prudential norms, without regulatory forbearance. For banks deemed Increasing financial inclusion. Vietnam sound and viable, NPL resolution would has done fairly well in lending to individu- involve direct sales of collateral related to the als10 relative to other lower-middle-income NPLs and transfers of NPLs and collateral, countries, but not as well in deposits and under a more robust legal framework, to a remittances.11 Remittances in Vietnam strengthened Vietnam Asset Management tend to go through financial institutions, Company for management, recovery, and with much less use of mobile phones and sale. The banks deemed insolvent would be money-transfer operators. Alternative uses closed, merged with viable banks, or sold of mobile phones would improve financial (either directly or through the company). inclusion in remittances and deposits at Improving future performance in the lower cost. Although Vietnam would need banking sector will depend on better major changes in regulation—for finance and enforcement of improved regulation and telecommunications— this approach would supervision of risks taken by banks (with take advantage of the country’s large num- closer attention to state-owned banks) and ber of mobile phone subscriptions. A good by other sellers of assets such as insurance international example is Kenya’s M-Shwari, and pension fi rms. One major improvement which launched in 2012, and by end-2014 would be to apply macroprudential supervi- had 9 million accounts, total deposits of sion and better off-site supervision. A second $45 million, and outstanding loans of nearly would be a gradual shift toward interna- $18 million — and its deposit holders can tional regulatory and accounting norms. apply for short-term loans. Financial inclu- Moving toward Basel III would mean higher sion in Vietnam would also require higher- requirements for capital, including capi- quality credit information on borrowers. tal for market and operational risks, and reduced incentives for excessive risk-taking Developing Land Markets by banks (in a context where some banks Land, according to the Vietnamese consti- are struggling to meet even Basel II require- tution and law, is owned by the public and ments). Third would be to gather more managed on its behalf by the state. Land- information on business groups, which use rights for specified periods are issued to could help reduce connected lending. individuals, who are allowed under the law OVERVIEW 25 to transfer these rights to other individuals. markets also creates distortions in urban- The state may take back the land and annul ization patterns (see the later section “Using the rights in the national interest, based on Cities to Power the Drive to Modernity and compensation according to law. Industrialization”). The development of The overall legal framework for individual transparent and functioning land markets, rights to land use is subject to the interpre- therefore, is an important and urgent policy tation of numerous overlapping laws, and priority. its implementation is equally riddled with a plethora of implementing regulations and overlapping mandates. This is just at the Reforms with Impacts in the national level — provincial and municipal Medium Term: Managing administrations issue their own instructions Structural Transformations and on land use and transfers. The markets for trading land-use rights Deepening Global Integration are, in effect, missing (Cung 2015). Func- The medium-term emphasis will have a tioning primary markets for land-use rights threefold focus. First is modernizing and are virtually absent. The role of the markets commercializing agriculture, which engages is played by state agencies, often using ill- almost half the workforce in a country defi ned administrative procedures. And the almost 70 percent rural. Second is strength- “price” for issuing land-use rights bears lit- ening participation in global value chains tle resemblance to a true market-determined to maximize the chances of strong produc- price. tivity gains, given the heavy and probably Secondary land markets, more prevalent, increasing reliance on external markets. And operate under multiple constraints. Mar- third is building more resilient and credi- ket mechanisms are rarely deployed in cases ble macroeconomic institutions, which will involving reclassification of land use from become more critical with the impending agricultural to nonagricultural land. In such demographic shifts, huge spending needs in cases, land-use planning decisions by local infrastructure and social sectors, and greater administrations (and not demand-supply capital account integration with the global conditions or local preferences) determine economy. the reclassified purpose of land use. More- over, the “seller” or the individual giving up Modernizing and Commercializing land-use rights, often a farmer, is unlikely to Agriculture receive fair compensation: the benefit from the transaction is mostly captured by the A move to industrialize more deeply and local government and by the “buyer,” who modernize services is not incompatible often receives the land at prices below what with a sharp focus on agriculture. The sec- a functioning secondary land market would tor is — and will remain for the foreseeable have produced. future — an important area of Vietnam’s The missing land markets are problematic comparative advantage, and will have to from several angles. For one, their absence, perform at its high potential to support eco- alongside weak property rights, fosters a nomic modernization. patronage-based business model.12 Their While the agricultural sector has pro- lack undermines efficiency in other ways, gressed enormously since the late 1990s, too. A land-use right holder who would like emerging concerns over the quality and to change land use to a more rewarding eco- sustainability of its growth model require nomic activity will find the administrative immediate policy attention. Sectoral labor costs high, often prohibitively so, and the productivity remains much lower than in processes time-consuming. The lack of land comparator countries, despite rapid gains 26 VIETNAM 2035 since the 1990s. The fragmented, smallholder- livestock), and increased collective action in dominated character of the sector with heavy organizing farm services. The second will state involvement contributes to this outcome. modernize the agro-food system by process- Another important factor is the dominance of ing agricultural commodities (crops, live- rice in its use of the best land and much of stock, and harvested fish) into value-added the country’s irrigation capacity. Economic food products.13 issues include low smallholder profitability, Signs of these shifts are already emerging heavy underemployment among agricultural in some areas or corridors in the agro-food workers, uncertain food safety, low value complex. But how efficiently these processes addition, price-discounted commodities in occur, how inclusive they are, how disruptive international markets, gaps in multimodal they are, and whether they follow a straight farm-to-market connectivity, limitations in or convoluted path will depend heavily on storage and cold-chain logistics, and limited public policy. technological or institutional innovation. And For example, the government could facil- some agricultural growth has come at the itate a more vibrant market for agricultural expense of the environment. land and support farmer shifts from rice Agriculture is at a turning point. Major monocropping to mixed cropping, includ- opportunities will be in domestic, regional, ing livestock and aquaculture or other forms and international markets, yet the sector will of specialization. It will want to deploy no longer be able to compete on the basis of regulations, incentives, and facilitative low-cost, labor-intensive natural-resource services— combined effectively—to stimulate use. The sector will also face growing domes- and monitor a “greener” agriculture and a tic competition — from cities, industry, and system for food safety and consumer protec- services —for labor, land, and water. Future tion that inspires confidence. Supply chains growth will depend on increased efficiency capable of tracing the movement and physical and innovation. condition of perishable products — like fro- Change is also needed in the structural zen fish from an origin in the Mekong Delta patterns of production and supply-chain to a consumption market in Western Europe organization, which are highly fragmented, or North America— would contribute to with limited collective action at farmer level strengthening both trade competitiveness and and weak vertical coordination. This frag- food safety. There will be greater demand for mentation has contributed to unnecessary information and for technical and fi nancial transaction costs, unrealized economies of instruments, to better manage risks associated scale in certain functions, and poor incen- with agriculture. The government will need tives to produce and maintain higher-quality to facilitate these types of services. Improved produce and raw materials. Similarly, change educational and vocational training services, is warranted in the “state management” for instance, will quicken the adoption of model— that is, in the technical and regula- improved farm and post-harvest technolo- tory services provided by the state, in public gies. Creating and maintaining a favorable investments and expenditures in the sector, environment for agroindustrial and agribus- and in the policies applied to foster farmer iness investment and operations will also be and agribusiness investment. Demand- critical for adding value to food products and driven agriculture needs flexibility. It cannot rebranding them for quality and sustainabil- be centrally planned. ity. Vietnam can draw on and adapt to many If Vietnam’s agriculture follows global international examples of good practice. patterns, it will see two transformations. The government has played a major and, The first will modernize production meth- in some areas, leading role in the past devel- ods, change the patterns of land use (such as opment of agriculture. Some of its functions less rice, more value-added crops, and more —including land-use planner, farm manager, OVERVIEW 27 commodity trader, and technology supplier high value of imported components going —will be less important or even detrimental into final assembly—an estimated 50–60 per- as agriculture moves toward a more flexible, cent for garment and footwear exports, for market-driven, and knowledge-based system. example. Most accessories and parts going The government can undertake less direct into the export-oriented production of smart- investment in agriculture if it promotes pri- phones and tablets also come from abroad. vate agricultural services and facilitates pri- So, while retaining final-assembly pro- vate investment efficiently, including through duction for large-scale job creation in man- public-private partnerships. That should free ufacturing (at least in the medium term), resources to achieve excellence in applying Vietnam could simultaneously deepen the environmental, phytosanitary, animal health, participation of domestic suppliers into the and food-safety regulations. The government final-assembly process by developing more will, though, have a continuing role in sup- comprehensive networks of dependable tier-1 porting farmer organizations, in maintaining and tier-2 suppliers, as China has done. rural infrastructure and other elements that This may better position it to begin moving influence farmer and agribusiness transaction into more sophisticated products in existing costs, and in coordinating their activities. GVCs, increasing the value-added share in existing GVCs by moving into more sophis- ticated tasks, and shifting into new supply Leveraging External Trade chains with higher value-added shares. Opportunities Reforms would first promote competitive Vietnam has gained much from external private firms capable of establishing production trade. Deepening its participation in global links with foreign-invested firms. The key to value chains (GVCs) has given it a real head- moving up the value chain in each of the early start over other emerging market competi- industrializers in East Asia has been a vibrant tors for the potentially even more rewarding domestic private sector. Eventually, as Viet- opportunities from proposed multi- and namese firms absorb know-how and become bilateral free-trade agreements, such as the globally more competitive (through technolog- TPP. Not only is Vietnam’s export basket ical upgrading and scale economies), the coun- much bigger than before, it is also much try could aim for some of its firms to be at the more diversified, reflecting a transition from head of GVCs, where returns are far higher. exporting primary commodities to low- and Apple, for instance, retains more than 45 per- medium-tech manufactured goods (apparel, cent of the wholesale price of a new iPhone as furniture, and footwear), and then to more gross profit.14 Samsung (Republic of Korea), sophisticated products (machinery and Huawei (China), and Tata Group (India) are electronics). other examples. Growth in service exports, however, has The second policy imperative is to develop been lackluster. Nor does the current GVC a modern service sector, a critical input for model in Vietnam fully exploit the opportuni- manufacturing, especially on the export side. ties. It relies heavily on foreign-invested firms This is one area where Vietnam lags behind operating final-stage assembly operations, its competitors. The absence of a functioning with limited backward links to domestic modern financial sector is a major handicap. suppliers in key manufacturing activities and Lack of access to early-stage financing limits little transfer of technology between foreign the development of a dynamic entrepreneur- and local fi rms, which often lack the capac- ship start-up ecosystem. Insurance, telecom- ity to absorb higher technologies or jump to munications, and transport and logistics are more sophisticated tasks or value chains. A also lagging. This gap will be felt even more striking feature of Vietnam’s export-oriented as Vietnam climbs GVCs and as the value manufacturing operations is the relatively content of its trade goods rises. 28 VIETNAM 2035 Service activities such as R&D, design, on-time delivery. Connectivity has three key and engineering should be developed as a attributes, each requiring policy attention. way of upgrading participation in GVCs (see the section “Spurring Learning and Institutional connectivity. The “software” Innovation to Sustain Rapid, Long-Run side of things includes trade facilitation, Growth”). Modern services are also a direct structural and regulatory reforms, and source of exports, growth, and job creation. transport and logistics facilitation. Vietnam If the country can upgrade its human capi- performs relatively well on the World Bank’s tal base and its information and communi- Logistics Performance Index (LPI), ranking cations technology (ICT) infrastructure and 48 among 160 countries on the overall rat- connectivity, it can become a regional pow- ing and the highest among the lower-middle- erhouse in IT-enabled sectors. income countries (table O.1), although still Regulatory reforms will be essential to lagging regional upper-middle-income coun- energize services. Foreign ownership restric- tries such as China, Malaysia, and Thai- tions in strategic services such as bank- land. Its rankings have improved since 2007 ing, telecommunications, media, electricity across the board, except for customs proce- transmission and distribution, road freight, dures.15 Health and sanitation performance rail transport, air transport, and port oper- standards inspections are underperforming, ations are either prohibitive or much more below Vietnam’s ASEAN peers. onerous in costly approvals than they are in comparator countries (World Bank 2012). Physical connectivity. A well-connected coun- The restrictions need to be rationalized and try has abundant and high-quality physical eased, allowing market mechanisms to pre- infrastructure, especially international gate- dictably allocate investment among domestic ways and multimodal interfaces, including and foreign investors alike. Addressing gaps ports, airports, road and rail links, as well as in dispute resolution is another priority. For- ICTs. It also includes energy, which is vital to eign service fi rms are wary of the legal sys- the continued success of manufacturing firms, tem, and often specify dispute settlement by and can be traded among neighboring coun- arbitration in such jurisdictions as Singapore. tries. Vietnam comes out well on the infra- Vietnam can also be more proactive in engag- structure component of the LPI ranking (44), ing partner countries to lower the barriers to but many transport aspects require attention. service trade within ASEAN. Current modes are overloaded in and Finally, as Vietnam integrates more fully around the major economic clusters and these and profitably into GVCs, it can also boost its do not connect well to each other or to major connectivity. Firms that participate in value trade gateways, reflecting lack of coordination chains need to move goods across borders to develop economic zones and transport cor- cost-effectively and reliably, in order to keep ridors (World Bank 2013). Key issues include inventory carrying costs low and comply poor road conditions (see the section “Using with the strict requirements of lead firms for Cities to Power the Drive to Modernity and TABLE O.1 Logistics Performance Index rankings International Logistics quality and Overall LPI Customs Infrastructure shipments competence Tracking & tracing Timeliness Vietnam, 2007 53 37 60 47 56 53 65 Vietnam, 2014 48 61 44 42 49 48 56 China, 2014 25 27 26 10 32 23 31 Malaysia, 2014 28 38 23 22 35 29 36 Thailand, 2014 35 36 30 39 38 33 29 Source: World Bank’s Logistics Performance Index (LPI). OVERVIEW 29 Industrialization”), grossly underdeveloped and meeting the anticipated needs of a more freight-rail and inland-waterway infrastruc- open and sophisticated economy require sus- ture, and supply-demand mismatches in tained investments in resilient, credible, and deepwater maritime port infrastructure.16 well-coordinated institutions for macroeco- Although expressways require further invest- nomic management. ment, transport expenditures need to be rebal- anced from road transport (the most costly Managing Monetary Policy form of domestic freight transport) to mul- Some of Vietnam’s peers pursue very different timodal facilities (for handling and storing monetary policies but still follow sound prin- goods in high-capacity warehousing) to take ciples. Chile, the Republic of Korea, South advantage of more cost-effective modes such Africa, and Thailand pursue more classical as rail and inland waterways. Rebalancing inflation-targeting strategies, while Singapore from capital to maintenance expenditures in maintains low and stable inflation by tightly transport is also needed. managing its nominal effective exchange rate. Their central banks have been assigned price People-to-people connectivity. The third stability as the primary mandate. An opera- attribute refers to ease of movement of tionally independent decision-making body, people across borders (for service provi- following a transparent framework, con- sion, education, and tourism). Vietnam has ducts monetary policy. Decision makers are abolished caps on the number of foreign responsible to the government for fulfi lling workers that foreign fi rms can hire, and has their mandate, and they use comprehensive new procedures for them to obtain work model-based monetary and economic analy- permits. Managers, executives, and special- sis to assess the policy stance and communi- ists who enter the country as intra- corporate cate their decisions. transferees are allowed to stay for an initial The central lesson for Vietnam is that it three years, subject to extension. But there needs to overcome the current multiplicity of is still wide scope to better meet global objectives for the SBV (Brand 2015). To do businesses’ need to bring in specialist inter- this, the Vietnamese authorities can further national staff. develop the SBV’s close management of the exchange rate or, preferably, focus on domes- tic inflation. Both options require a clear Developing institutions for price stability mandate and swift develop- Macroeconomic Management ment of operational and analytical capabili- Stability of aggregate price levels, predict- ties of SBV staff. The SBV could assign the ability of relative prices, and sound man- conduct of monetary policy to an operation- agement of public resources are all critical ally independent Monetary Policy Commit- for efficient domestic markets and long-term tee, which requires that a host of analytical competitiveness. Vietnam has had episodes of and organizational aspects be resolved fi rst, high inflation, and public and publicly guar- including requirements for appointing com- anteed debt has built up fast. The efficiency mittee members, frequency of meetings, brief- of public expenditure has also been low in ing requirements, structure of policy debate, several key areas (World Bank and Ministry and external communication. In taking mon- of Finance of Vietnam 2015), while coordi- etary operations further, an operational tar- nation between the main institutions of mac- get consistent with monetary policy will need roeconomic management, both at the center to be chosen, and monetary instruments will (Ministry of Finance, Ministry of Planning need to be market oriented. Having a sound and Investment, and the SBV) and between framework for managing liquidity and fore- central and provincial governments, is rela- casting items on the central bank balance tively weak. Resolving these emerging issues sheet is also crucial. 30 VIETNAM 2035 The SBV could pursue price stability to process that prioritizes sound spending and help safeguard macroeconomic stability if it aligns fiscal resources to evolving social had more operational independence. But cen- needs. They also emphasize the more self- tral bank autonomy goes hand in hand with reliant and autonomous model of subnational transparency and accountability. Stipulating and municipal finances. regular external reporting to political stake- As Vietnam embarks on the next phase of holders and the public could ensure the SBV’s budgetary reforms, the interlinkage between accountability for its mandate. And to ensure fiscal policies and institutional arrangements that the conduct of monetary policy is unob- will become even more important, pointing structed by concerns about fiscal dominance, to four key reform priorities. the SBV would need to be prohibited from quasi-fiscal operations. Maintaining fi scal discipline and rebuilding Vietnam thus needs to reduce the SBV’s resilience to domestic or external shocks myriad objectives and strengthen its oper- (or both). Public and publicly guaranteed ational and research capacity. The current debt, having increased rapidly over the past low-inflation global environment provides an few years, now exceeds 60 percent of GDP. opportunity for getting the monetary policy While the risks of acute debt distress remain framework right before global monetary con- manageable, fiscal buffers to handle future ditions tighten. macroeconomic shocks are wearing thin, a matter of concern given rising vulnerabilities, Strengthening Budgetary Institutions including those potentially emanating from The expected economic and social transfor- contingent liabilities associated with SOE mations over the next 20 years will give rise debts (at about 50 percent of GDP). to complex fiscal challenges. Deeper global Strengthening macrofi scal management integration and further transition to a market- requires three main institutional measures. based economy will increase exposure to First, a credible fiscal consolidation plan, macroeconomic shocks and volatility, under- institutionally anchored in a medium-term scoring the importance of prudent macrofis- budget framework, is crucial to stabilize cal management to maintain fiscal buffers to and then gradually reduce public debt. Sec- cope with shocks while ensuring a sustainable ond, the budget should be more compre- debt trajectory. Vietnam will also have to hensive, since many fi scal and quasi-fi scal manage the transition from accessing mostly activities are not yet reflected in the core concessional external financing to relying on budgetary sphere.17 Third, the government’s domestic and global capital markets to meet debt-management function will have to be its fiscal fi nancing needs. While broadening upgraded to enhance the coordination and the scope of funding sources, this will inten- consolidation of debt-management respon- sify refi nancing, interest-rate and exchange- sibilities, which remain fragmented across rate risks, and expose the country more functional departments in the Ministry directly to the scrutiny of global capital mar- of Finance, the Ministry of Planning and kets and private creditors, placing additional Investment, and the SBV. demands on prudent fiscal management and transparency, and the country’s creditworthi- Mobilizing resources for development. A ness more broadly. fair, transparent, and efficient tax system The fiscal system will also be asked to that minimizes distortions and generates adjust to profound social changes, particu- adequate revenue for the budget is crucial. larly to accommodate the emerging demands Vietnam’s current revenue to GDP ratio— of an aging population and a rising, increas- about 25 percent on average over the past 10 ingly urban middle class (Pillar 2). These years—is commensurate with its income. But trends reinforce the importance of a budget its continuing economic transformation will OVERVIEW 31 shift the revenue potential of different taxes, responsibilities, expanding revenue auton- which tax policy needs to accommodate. omy, and putting in place a prudent frame- For example, trade-related revenue (about work for municipal borrowing while 10 percent of total revenue) will decline strengthening interjurisdictional coordina- sharply due to commitments under free- tion across provinces. trade agreements. In contrast, the revenue potential of personal income tax is expected Enhancing information management. A to rise as wage employment formalizes. Effi- final priority relates to developing robust cient land and property taxes could become monitoring and evaluation systems, for fi s- a more important revenue source, especially cal policy to be guided by evidence-based locally, and strengthen incentives for more decision making. This is the direction taken efficient land use. Tax-policy reforms need by most rising middle-income economies, to be accompanied by further moderniza- especially in Latin America. Vietnam has tion of the tax administration, based on invested heavily in its public fi nancial man- risk-based compliance management and agement system and capabilities, strength- modern technologies (including e-filing). ening basic transaction-related controls and Environmental taxes should play an increas- capturing data more efficiently. Yet frag- ing role, not only from a fi scal perspective mented organizational responsibilities ham- but also to encourage energy effi ciency by per full use of these systems for timely and reflecting the costs of externalities from comprehensive reporting and the disclosure natural-resource use. of key fiscal information. Beyond techno- logical changes, organizational and process Improving strategic allocations of resources changes may be required to ensure that and service delivery. The fi scal system will fi nancial and nonfi nancial data are shared, need to cope with aging-related expendi- processed, analyzed, and used well in deci- tures in the pension and health systems. sion making. And demands of a growing urban popula- tion will require smart investments in urban transport, solid waste management, water Reforms and Investments with and sanitation, and health and education. Impacts in the Long Term: The focus will have to be on adjusting the Developing an Innovation- composition of spending and enhancing Driven, Urban-Based, and its allocative and operational efficiency, by Environmentally Sustainable instituting a clearly articulated fi scal strat- egy underpinned by a robust, multiyear Economy budget framework, as envisioned in the Structural transformation is unlikely to Budget Code amendments adopted in 2015. be as rewarding after Vietnam reaches Incorporating performance information and upper-middle-income status (around the end regular spending reviews in budgetary deci- of the 2020s at its current pace). The returns sion making could also inform allocation from adapting imported technology and decisions and help in strategically realigning know-how will diminish. And the exploit- public spending. ative use of natural resources will cer- Reforms of intergovernmental fiscal tainly reach its limits. These checks require relations should continue to empower policy makers to make critical choices in local authorities to respond to local needs, three areas with longer-term gestations — financially and administratively, while developing an innovation-driven economy st reng t hen i ng ac cou nt abi l it y mecha- that is housed in modern, efficient, and com- nisms and performance incentives. Mea- petitive urban structures and is environmen- sures could include clarifying expenditure tally sustainable. 32 VIETNAM 2035 Spurring Learning and Innovation to contribution to these goals is supposed to be, Sustain Rapid Long-Run Growth and it is nearly impossible to measure success (or lack thereof). There are few links between Developing an innovation-driven economy universities or think tanks and the private will demand an unambiguous commitment sector. And the separate systems for research to cultivating and upgrading a dynamic pri- institutes and research universities creates vate sector. It will also demand far-reach- duplication, inefficiencies, and dispersion of ing reforms in the education and training scarce resources. systems for generating higher-order human Impressive gains in access to higher edu- capital. And more generally, it will demand cation have been made, but a long agenda a competitive societal climate that values remains. Tertiary education fails to meet openness to new ideas and stimulates risk demand for high-quality degree programs. taking and technology upgrading. All three Public universities are hampered by a lack were critical to the rapid growth of Japan, of de facto autonomy, which impedes set- the Republic of Korea, and Singapore — ting or changing curricula without external examples that Vietnam holds up for its own approval, raising adequate revenue, or devel- growth ambitions. oping full-time, high-quality faculty. Faculty Vietnam’s national innovation system salaries (tightly regulated for public institu- is weak and contributes little to output or tions) are inadequate, limiting the talent that growth. Still missing is a critical mass of universities can draw on and obliging staff to dynamic and innovative fi rms that provides take multiple teaching jobs, often at different the demand side for innovation. Moreover, institutions. Private universities have more fi rms’ capacity to adopt and carry out new freedom to set their curricula and tuition lev- research is underdeveloped. Also largely els, but cannot expand enrollments to match absent are longer-term strategic views on student demand. fi rm and product upgrading and the human A more consistent partnership between the resources necessary for innovation. These government and the private sector is needed, needs reflect the lack of competition in prod- as is greater ambition in reforming the uni- uct markets and the low capabilities of fi rm versity and research system. If improvements managers (Bloom and Van Reenen 2007; begin now, the system can be strong as the Maloney and Sarrias 2014). need for it grows. Today, few fi rms are fun- On the supply side, research institutes and damentally held back by the lack of indige- universities provide too little research, and nous R&D capacity, but as firms become what is produced is mostly deficient in qual- more knowledge-intensive, they will be. ity and relevance. Too few domestic knowl- edge institutions produce human capital with truly world-class skills and knowledge. Placing Enterprises at the Center of The research and graduate (PhD) training Innovation systems are separate, so the virtuous cir- SOEs are sheltered from competitive pres- cle where good research in universities also sures by government support, which applies produces high- quality PhD holders barely minimal pressure on them to innovate and functions in Vietnam. Government funding remain dynamic, so the SOE restructuring for R&D is spread thinly across more than agenda in Pillar 3 is relevant here. Foreign- 600 small government research institutes that invested firms have the option of outsourcing produce very little valuable output. The allo- their R&D production to countries with more cations, small and fragmented as they are, developed science and technology systems. are abstractly linked to meeting high-level But spillovers within Vietnam from R&D socioeconomic goals in long-term govern- carried out in such firms are weak, ham- ment planning documents. It is seldom clear pered by the generally low level of absorptive what government-funded R&D’s concrete capacity of Vietnamese firms and concerns OVERVIEW 33 about security of intellectual property rights. • Evaluating the quality and relevance of all The response requires improving the fi rms’ research outputs and related activities absorptive capacity and securing intellectual • Rewarding the best and most productive property rights. Domestic private enterprises researchers through merit- based alloca- are either too small to need innovation or are tion and awarding them enough resources so preoccupied by the business environment • Balancing the promotion of basic research that the paucity of innovation capacity is not and thematic research on national holding them back. (The reform agenda to priorities tackle this challenge was seen earlier in the • Uniting the research and university-based response to the obstacles faced by the domes- graduate education systems and build- tic private sector.) ing strong domestic graduate education through strong PhD programs Improving Enterprise Capacity for Techno- • Accessing the global knowledge frontier logical Learning through international links The emphasis here will be on helping fi rms improve their capacity for “technological Continuously Improving the Quality and learning,” to know how to use processes Relevance of Skills and technologies for production that are Improving the quality and relevance of skills in use elsewhere but new to Vietnam. This in the labor force calls for greater responsive- gradual process gives an advantage to the ness and dynamism in tertiary education—in fastest-learning firms and readies them to four areas. First, workers should raise their seek frontier knowledge, new to the world. skills by completing more and better educa- A broad system of firm extension paired with tion in a wider range of economically useful private-sector organizations, such as cham- disciplines, entering firms as lifelong learners bers of commerce and banks (as in Japan and to stay current with the leaders in their sectors Singapore), can help identify high-potential, and industries. Second, students would see an high-growth firms that may merit further expanding range of choices of high-quality, support. As firms become more sophisticated, relevant degree programs, as externally deter- they need higher-order and more tailored mined enrollment quotas would disappear knowledge from universities and government when a greater range of providers compete research institutes. They also need a mar- to give potential students the best programs ket-driven system of venture capital/private at the best prices. Third, private universities equity to fi nance high-risk and high-return and colleges would proliferate as tuition caps innovation activities. are lifted and those institutions that best meet the needs of students are allowed to easily Ensuring Relevant Skills and Knowledge expand. As part of this, fi nancial aid would Raising the quantity, quality, and rele- become routinely available to qualified but vance of research, knowledge production, needy students so expansion does not harm and advanced training of human capital — equity. And fourth, information systems while creating and deepening connections would provide aspiring students with essen- to global knowledge networks — requires tial facts about each university or college, the government’s research institutes, and such as the employment success of graduates, especially its higher education institutions, their salaries on graduation by degree pro- to achieve a new dynamism in teaching and gram, and faculty qualifications. research. The reform path includes many of the same elements that other countries have Using Cities to Power the Drive to successfully used: Modernity and Industralization • Investing more in producing research, By enabling agglomeration economies, cities knowledge, and advanced human capital enhance productivity and spur innovation 34 VIETNAM 2035 and economic diversification. Rising popu- suggests that doubling a city’s population lation and economic densities enable savings raises its productivity by 5 percent. in transport and communication costs, lead Over the past three decades, Vietnam has to frequent interactions, enable finer spe- undergone an extensive urban transformation cialization and knowledge spillovers, and that has driven its structural transformation heighten competition in product and labor and economic development. In 1986, Vietnam markets. Cities create viable markets for spe- had fewer than 13 million urban residents; it cialized business services, freeing firms to now has 30 million of them, and urban areas focus on their core competencies and take contribute over half of national GDP. Along- creative ideas to commercial scale. Cities are side rising economic density, the country also also instrumental in matching skills with job has an impressive record in keeping rural– opportunities, and density allows for an inte- urban and regional disparities in check through grated “thick” labor market. Just as many central transfers aimed at poorer areas that has Indian children who grew up to become soft- allowed for the expansion of basic services and ware engineers lined up to move to Banga- infrastructure. Even in cities, slums and urban lore, a flourishing Ho Chi Minh City can help segregation appear less of a challenge than in Vietnamese children find the firm that wants many other developing economies. them—and will pay for their skill set. As Vietnam embarks on an even more Evidence from today’s developed countries ambitious growth trajectory, cities should be and rapidly emerging economies substanti- prepared to play a greater role in nurturing a ates the tight link between economic devel- burgeoning domestic private sector, support- opment and urbanization fairly conclusively ing the growth of firm clusters that integrate (figure O.8). No country in the industrial age into GVCs, and providing the logistics sup- has sustained economic development without port and managerial capabilities to enhance rapid urbanization. International evidence productivity and accelerate growth. Policies and investments can be reshaped so that economic density is amplified around large metropolitan areas as well as secondary cities with demonstrated potential; economic dis- FIGURE O.8 Urbanization in Vietnam appears to be on a path as tance to large markets is reduced to enable strong as in the Republic of Korea and in China specialization; and social division in access to services between migrants and urban 100 residents is dissipated to encourage human- capital development for social inclusion and 80 greater agglomeration economies. Reshaping policies is important as there 60 are signals that the current urbanization model is constraining economic transforma- Percent tion. The main signal is the land conversion– 40 based urban development model, with industrial zones developed ahead of demand 20 and a proliferation of small, fragmented urban expansions that are not well connected 0 to transport networks and service delivery 0 500 1,000 10,000 25,000 50,000 100,000 nodes. The area of land for industrial zones GDP per capita (2005 PPP US$) increased by around 77,000 hectares from Korea, Rep. China Vietnam All countries 2000 to 2010, with major fiscal implications as zones need to be serviced with roads and Sources: Calculations based on the World Development Indicators database and Penn World Table, Version 8.0. infrastructure. This could still be a worth- Note: PPP = purchasing power parity. while use of public resources if the economic OVERVIEW 35 returns were there. But this is not yet the case, and bringing in market land valuation, is with an average occupancy rate in industrial a priority to reduce excess and fragmented zones of less than 50 percent. Small, frag- urban land conversion. Increasing the trans- mented development of urban industrial parency of land pricing by establishing and residential land poses an even bigger mechanisms to regularly publicize land val- problem: 70 percent of the land occupied ues obtained in auctions and individual land by industry in Ho Chi Minh City is in areas sales is a good start. These efforts could be outside formally approved industrial zones, tied to local-government fiscal reforms that damping economic density. Urban areas need promote broader use of land and property to be developed at scale. taxes as an alternative to land-conversion The second signal is the limited con- fees. nectivity between cities and markets as well as unreliable supply chains and high Enhance coordination. Local governments logistics costs. Logistics costs account for are rewarded for business expansion within 21 percent of GDP— against an estimated their boundaries, undermining potential 19 percent in China and 15 percent in clustered development or economies of scale Thailand — primarily driven by unreliable in infrastructure investment. The city classifi- supply chains. At the greater metropolitan cation system encourages local infrastructure level, bottlenecks hamper economic effi- development and fragments urban develop- ciency and diminish their attractiveness to ment. Institutions need to be strengthened prospective homeowners and businesses. It for integrated urban planning —within and takes nearly two hours to travel from the across sectors and at the corridor, metropoli- central business district of Ho Chi Minh tan, and regional levels.18 Urbanization is at a City to the center of Binh Duong New City critical juncture, and its proper management even at off-peak hours, a distance of only requires a “whole-of-government” approach. 40 kilometers. Weak regional connections The mandates within line ministries need to add to the economic distance, with Vietn- be reviewed and aligned with international am’s provinces and cities more like indepen- best practices. dent oases rather than parts of an integrated marketplace. Strengthen urban planning capabilities. The third signal that Vietnam’s spatial There is an urgent need to strengthen capa- transformation is being thwarted relates bilities in urban planning departments to to social division, where migrants to urban integrate socioeconomic realities in develop- areas have considerably lower access to urban ing physical plans. Master plans and other services and lower wages (see Pillar 2). With- physical plans could be linked to the budget out hộ khẩu, migrants face numerous diffi- process; if plans can be supported by key culties in applying for a job, trying to get a investments, their credibility will rise. Coor- loan, registering a business (or motorbike), dination mechanisms that can align provin- buying or renting a house, and signing up for cial and city plans are essential, because the medical insurance. socioeconomic development plans, urban Two main sets of policies could be master plans, and sector infrastructure plans addressed for Vietnamese cities to bet- are prepared by different departments often ter enable economic growth: upgrading running on different schedules and using institutions and expanding connective inconsistent data and projections for plan- infrastructure. ning. The timing of planning could be syn- chronized and the number of plans within Upgrading Institutions a territorial space cut heavily (ideally to two Enable land markets. Land markets need to or three). Vietnam also needs a professional emerge and flourish. Reforming land insti- cadre of urban planners who can plan and tutions, like strengthening land registration manage cities. A greater emphasis on this 36 VIETNAM 2035 discipline is required in university education market in managing the urbanization pro- and in the talent that ministries and prov- cess. In particular, they could: inces hire. • Refocus the role of the state and improve Expanding Connective Infrastructure its capabilities in areas that only the gov- Mainstream integrated transport and logis- ernment can manage. These areas include tics planning. The government could push to strengthening the capacities and coordina- mainstream integrated planning for trans- tion of urban planning, augmenting public port and logistics across modes, geographic finances, improving social services, and areas, and public-sector functions. One pri- increasing investment in infrastructure to mary reason for transport modes to be mis- support urban plans. aligned on supply and demand and relative to • Redistribute responsibilities, powers, each other is that they are planned individ- and resources among national, local, and ually, largely decentralized, and fragmented. metropolitan governments to ensure that issues addressed at the regional scale are Improve roa d qu alit y an d logi stic s . not undermined by local interests. Congestion in major urban areas has led to • Relax the state’s control of and involve- bans on trucks operating within city limits. ment in activities managed more efficiently The limited capacity of bridges and roads by markets, particularly land markets, and the overall condition of transport infra- where regulation has produced costly dis- structure increase costs. Road access to big tortions. The solution is not new regula- ports— Hai Phong and Cai Mep–Thi Vai tions but fewer restrictions. being the priority— could be rebuilt, and key road corridors and expressways need more Achieving Environmentally Sustainable investment.19 Development Expand the level and quality of urban trans- The sustainability of Vietnam’s long-term port services. These are closely tied to refine- growth is threatened by the environmental ments in urban planning. problems that have built up. These hazards are expected to worsen at an increasing pace In addition, there is a need to synchronize between now and 2035 as the current model policies for rural and urban development; of economic growth, industrialization, and currently, these policies are developed in iso- urbanization further strains the country’s lation. This is unfortunate and is leading to limited land, water, and energy resources. a growing perception that rural and urban One of the lessons of development is that areas are in competition—for example, for the environmental quality of water and water resources—or that urban develop- the air is important not only for ecosystem ment has been predatory—for example, in health and the quality of life in general, but inequitable land acquisition and compen- also for income growth. Four environmen- sation policies. It is important to see that tal challenges stand out for the last of the rural-urban relations are the venue for the longer-term gestation responses. structural transformation of the economy. A symbiotic relationship between rural areas Four Environmental Challenges and a hierarchy of urban areas will likely Deteriorating natural resources. The nation determine how inclusive Vietnam’s future depends on natural resources much more urbanization will be. than most other countries in the region. In implementing projects and support- This is most evident in employment, with ing investments, the authorities may want more than half the labor force depending on to recalibrate the roles of the state and the agriculture. In the mountainous northwest OVERVIEW 37 and central areas, poorly planned expansion the demographics, socio - economic con- of agriculture has eroded soil and removed text, political dimensions, and biophysical biodiverse natural forests, degrading the landscape when allocating resources and land. The soil erosion has, in turn, contrib- coordinating land and resource planning uted to more frequent and severe fl ooding and use, in a climate-resilient approach to of lower- altitude farms and human settle- development. ments. A significant portion of the protec- tive mangrove forests has been destroyed, Rapidly growing energy consumption. resulting in estimated losses of $34 million a Energy use is growing faster than in any year, while overfishing has seriously depleted country in the region, led by electric power. nearshore fisheries resources, threatening Reflecting current trends and policies, the the livelihoods of several hundred thousand share of coal for power generation will rise people. Agricultural output has risen, but at from 32 percent in 2014 to 54 percent by the cost of increased land use and of chemi- 2030. Around 60 percent of coal used for cal fertilizers and pesticides. Without regu- electrical generation will be imported. The latory and institutional checks, the next 20 intensity of energy consumption (the amount years are likely to see greater competition of energy used per unit of economic output) over scarce arable land, more conversion of is also among the highest in the world, and forests for agriculture, and even faster deple- inefficient energy use is one of the main rea- tion of these precious natural resources. sons. The energy policies adopted over the next few years— on energy efficiency, renew- Deteriorating e nvironme nt al qu alit y. ables, natural gas, and coal — will largely The quality of land, water, and air has determine the trajectory of the energy sector worsened considerably. Water pollution and of associated issues. has reached serious levels, especially near Hanoi and Ho Chi Minh City. Air quality Making the Right Choices has also declined due to growth in fossil Given the confluence of these four chal- fuel use for power generation, industrial lenges, Vietnam is at a juncture where the energy, and transport. A high incidence right choices can help it avoid the irrevers- of respiratory infections among children ible environmental degradation and major under age five is observed, due to poor air environmental remediation costs facing some quality, and an estimated 4,000 premature other countries. A low-carbon growth path deaths annually are related to coal-fired prioritizes investments that take account power generation. In urban areas, environ- of environmental costs and results in inclu- mental pollution from urban and industrial sive and resilient growth, and is a more sus- wastewater has resulted in toxic waterways tainable and affordable long-run option. It with impacts on economic production, and requires strong institutions to monitor and unknown — but likely severe — impacts on enforce plans, policies, and regulations for human health. sustainable natural resource and environ- mental management; incentives for sustain- Threats from climate change. Vietnam is able investments (with private participation) among the countries most vulnerable to that benefit the environment and the poor; climate change given its location, share of and improved access and use of information population in low-lying deltas, and depen- for decision making, monitoring, and trans- dence on climate-vulnerable sectors. Fore- parency and accountability. cast changes in precipitation, temperatures, and sea level all point to substantial risks in Strong policies and institutions. Much of sus- high-density and economically important tainable growth is about policies that address areas. The country’s response must consider market failures and “get the prices right” 38 VIETNAM 2035 by introducing targeted incentives such as investments. Better pricing of energy prod- environmental taxes, pricing environmental ucts (particularly electricity) will improve externalities such as carbon, creating trad- the effi ciency of their use while attracting able property rights, and reducing inappro- greater private investment. Private invest- priate subsidies. Such growth also requires ment could be permitted in renewables other reduced resistance to change with, for exam- than hydropower. It will also signifi cantly ple, information on the economic value of increase the proportion of electricity pro- environmental services provided by natural duced for renewable sources through the assets. development of hydro, wind, solar, and bio- Vietnam needs well-coordinated pub- mass, in conjunction with the expansion of lic institutions that can correct the market cleaner natural gas. failures related to the environment, and can enforce regulations and standards. They Information systems. Disclosure and harmoni- are especially needed in the Mekong Delta, zation of information must underpin effective which is highly vulnerable to climate change management of natural resources and mitiga- and is institutionally complicated, with tion of environmental pollution and land deg- planning and implementation across several radation. The systems must enhance the data ministries and agencies with little coordina- and information used for managing natural tion of investment decisions by provinces. resources, and make the information under- Institutions also need to ensure that agricul- standable and accessible to the broader public. tural promotion policies do not conflict with Vietnam could accelerate the adoption of tech- environmental goals. For example, some nology in upgrading the environment-related locations have subsidies to expand their information systems. But it must first update, fish-processing capacity or boat building scale up, and further harmonize the informa- while making efforts to conserve fisheries. tion platforms that already exist. Climate-smart investments. One move The net cost of sustainable and climate- would be to accelerate the restructuring and resilient growth is usually modest in the equitization of SOEs in natural resource sec- long run. The up-front capital investments tors, as well as in energy and heavy industry. are often recouped through subsequent sav- This would also require enforcing stan- ings from low operating costs or new mar- dards, such as food safety and biosafety in kets, and an improved skill base (if suited aquaculture or improved energy effi ciency to the needs of the market economy). Most (especially on the demand side). The govern- estimates indicate that investments to ment can establish public goods and services decarbonize energy systems often pay for to enable greater private involvement in such themselves. OVERVIEW 39 Pillar 2 Equity and Social Inclusion Equity is a deeply held value of the Vietnam- students and workers, channeling otherwise ese people. The preamble to the Constitution high precautionary savings to more produc- of the Socialist Republic of Vietnam sets the tive uses. goal of “a prosperous people and a strong, democratic, equitable, and civilized coun- try.” And Article 50 stipulates, “The State The Unfinished Agenda: Ensuring shall create equal opportunities for citizens Equality of Opportunity to enjoy social welfare.” Vietnam’s move from collectivism toward Vietnam’s economic growth, particularly a market economy has created incentives in the 1990s, rested heavily on the equitable that allow talented, entrepreneurial, and distribution of land-use rights in the early hard-working individuals to flourish. But it years of Ð ổi M ớ i, driving a rapid increase also leads inevitably to some inequality in in agricultural production. The government outcomes — the result of interaction between channeled substantial resources from this opportunities, effort, and luck. While inequal- growth to fund pro-equity spending, which ity in outcomes is expected in a market econ- helped the country avoid the spike in inequal- omy, inequality of opportunity is inherently ity experienced in some other fast-growing unfair and incompatible with the ideals in the countries. But past performance is no guar- constitution. Equality of opportunity prevails antee of future results, and signs of growing when social outcomes are independent of cir- inequality are emerging. Looking to 2035, cumstances at birth. It can be understood as Vietnam faces a dual agenda: one unfin- a “level playing field,” giving all children an ished, for equality of opportunity, and one equal chance at success. Despite significant emerging, for a rising middle class and aging social achievements, profound inequality of population. opportunity remains. Underpinning both agendas is the need The discussion here focuses on inequal- for a new vision of social policy. Histori- ity of opportunity for three marginalized cally, and especially in planned econo- groups: ethnic minorities, people with dis- mies, social sectors have been considered abilities, and urban migrants. Members of “nonproductive.” This view is changing. these groups —who collectively make up one The social sectors are very much produc- in four Vietnamese — have faced particular tive and becoming increasingly central to challenges, despite strong government com- realizing the goals of knowledge-based mitments to their full inclusion in society. and globally competitive upper-middle-in- The discussion also reviews gender equity, come countries. Education contributes to focusing on the imbalance in leadership posi- productivity growth. Labor-market insti- tions and the sex ratio at birth. tutions balance productivity growth and societal welfare. Reforming the h ộ kh ẩ u Ethnic Minorities system can help realize the full potential of structural change from low-productivity rural The single greatest equity challenge is the employment to formal- sector urban work. persistent and substantial gap in socioeco- An adequate social safety net allows people nomic outcomes between most members of to take entrepreneurial risks with the con- the country’s 52 ethnic minorities and other fi dence that they will not face destitution Vietnamese. This divide is driven in part by if their business fails. And universal health steep disadvantages in opportunities among coverage ensures that people are productive ethnic minority children (figure O.9). 40 VIETNAM 2035 FIGURE O.9 Ethnic minority children face higher inequality of FIGURE O.10 Triangle of unequal opportunity opportunity for ethnic minority children Poor education Infant mortality rate (per 1,000 live births) Rate of stunting (% of children under age five) Poor sanitation Malnutrition Improved sanitation (%) Rate of enrollment in upper secondary Improving education access for ethnic school (%) minority children is the first policy priority, to be addressed by expanding current govern- 0 20 40 60 80 100 ment initiatives: high-quality early-childhood Ethnic minority Ethnic majority education programs; placing teaching assis- tants who know the local mother language Sources: General Statistics and Multiple Indicator Cluster Survey. in the first few years of primary school to ease the transition for children who do not learn Vietnamese at home; and financial Over the long term, migration will likely support—including cash transfers to house- be a pathway to economic integration for holds, conditional on school attendance—to many ethnic minorities, which points to make it possible for children to attend upper- a need to focus on providing equality of secondary school. opportunity for the next generation of eth- Improving nutrition is the second priority. nic minority children, so that they will be A vast literature has shown that early- equipped to lead prosperous lives wherever childhood nutrition has substantial effects they end up in adulthood. Three interrelated on early cognitive development and readi- circumstances generate a triangle of inequal- ness to learn in school. Despite existing ity of opportunity for ethnic-minority chil- programs, high rates of malnutrition persist dren: poor education, malnutrition, and low among ethnic minority children (figure O.11, access to sanitation (figure O.10). panel a). The National Nutrition Program The higher poverty among ethnic minor- in Thailand, which reduced malnutrition ities can be attributed in substantial part to rates by more than 75 percent in 10 years, low educational attainment. The modest shows what a concerted national effort can ethnic minority enrollment at tertiary and achieve. Such a campaign in Vietnam could upper-secondary levels is a consequence of include promotion of exclusive breastfeed- many factors, including childhood malnu- ing of infants under six months old, coupled trition, in turn driven by poor sanitation. with extension of maternity leave for women Completing the cycle, children who grow in wage employment. It could also introduce up in poor households with less-educated a comprehensive program to fortify basic parents are much more likely to drop out foods with vitamin A, iron, selenium, and of school early, be malnourished, and lack zinc. And it could develop new varieties of adequate sanitation. In these three areas, bio-fortified rice and maize and provide free focused policy interventions could close the nutritional supplements to women of child- opportunity gap. bearing age. OVERVIEW 41 FIGURE O.11 Large gaps in child health and nutrition by ethnicity persist a. Malnutrition rates b. Infant mortality 40 50 Share of children under age five who are stunted (%) 44 35 35 40 31 Deaths per 1,000 live births 30 30 27 25 22 20 20 20 16 10 10 15 10 0 2010 2011 2012 2013 2014 2002 2004 2006 2008 2010 2012 Ethnic minorities Ethnic majority Sources: Analysis of National Institute of Nutrition Surveys and UNICEF’s Multiple Indicator Cluster Survey (MICS) 2006, 2011, and 2014 reports. Note: For the nutrition figures, the ethnic-majority group includes only Kinh, while in the infant-mortality figures it includes both Kinh and Hoa. Figures shown are point estimates based on household survey data. As with any survey-based estimate, they are subject to sampling error. The sampling error—and thus the confidence interval around the point estimate—is larger for ethnic minorities because their sample size is small within the survey. The MICS reports do not specify the confidence interval for point estimates. The third policy priority is sanitation. children — and programs to address eth- Major drivers of malnutrition are poor nic minority poverty more generally — the hygiene practices and lack of access to government could benefit from experi- improved sanitation facilities. In communi- menting, monitoring, and evaluating, since ties without improved latrines, children are the evidence on what works is thin. Pilot often exposed to bacteria, viruses, fungi, approaches could be carefully evaluated and parasites that cause intestinal infection. before programs are expanded to scale. And The high rates for diarrhea and parasitic for all three points of the triangle, initia- infection are two leading causes of morbid- tives could draw on promising new insights ity in the northern mountains, and lack of from behavioral economics. Choices about access to sanitation is one reason for the per- sending children to school, feeding infants, sistently high infant mortality rates among and constructing latrines are determined by ethnic minorities (figure O.11, panel b). And a variety of factors other than cost-benefit stunting rates for children below the age calculations. Interventions in all three areas of five are high precisely among the ethnic that seek to “nudge” behavior can be effec- minority communities most likely to lack tive and cost-efficient. such facilities. A targeted sanitation pro- Policies and programs to achieve equality gram, with incentives to promote commu- of opportunity for ethnic minorities need to nitywide behavior changes, can do much to tackle prejudice and stereotyping and getting achieve universal use of improved sanitation ethnic minority voices heard. Although the among ethnic minorities. legal framework is adequate in recognizing In developing education, sanitation, and equality of status between ethnic minorities nutrition programs for ethnic minority and Kinh, prejudice against minorities is still 42 VIETNAM 2035 common (World Bank 2009). Education can training, employment, legal assistance, be the basic platform, focusing on appreciat- and access to public facilities, means of ing and respecting the diversity of Vietnam- transport, information technology and ese ethnicity and culture. cultural, sports, tourist and other services Conspicuously lacking is a strong ethnic suitable to their forms and degrees of minority presence in the Committee for Eth- disability nic Minority Affairs, and local authorities are typically Kinh even in mainly ethnic minority Many people with disabilities around the areas. Vietnam can benefit from having eth- world have been hidden from society and nic minority social organizations take part in sometimes been segregated in residential developing and implementing policy. institutions and special schools. But global policy has recently shifted toward including People with Disabilities them in society, making them subjects of the law with clearly defi ned rights rather than Vietnam has many people with disabilities, objects of charity. This approach recognizes in part a legacy of confl ict. They merit par- that disability is the result not of impairment ticular consideration in a vision of social but of the interaction between a person and inclusion for several reasons. Their number his or her environment. For example, a per- is likely to increase rapidly as the old-age son in a wheelchair might have difficulties population expands, by one projection to fi nding a job not because of her condition more than 12 million by 2035. As Vietnam but because of such barriers as staircases in reaches upper-middle-income status, it will the workplace. And a child with a disabil- face the rising expectations of people with ity might have diffi culties going to school disabilities and their families for greater due to the attitudes of teachers and school inclusion. And given greater resources, it officials who cannot adapt to students with could meet the promise of its commitments particular needs. to inclusion. Foremost among them are the On paper, Vietnam’s policies for people Law on Disabilities, passed in 2010, and the with disabilities are highly inclusive. But UN Convention on the Rights of Persons there are substantial shortcomings in imple- with Disabilities, which Vietnam ratified in menting a broad agenda. More than half the February 2015. Protecting people with dis- children with severe disabilities never pass abilities is also in the constitution. through the doors of a schoolroom. Getting The UN Convention’s purpose is “to them into schools is crucial to provide them promote, protect and ensure the full and with basic opportunities to participate in equal enjoyment of all human rights and society and to engender attitudes of inclusion fundamental freedoms by all persons with among others. disabilities, and to promote respect for their One simple step would be to regularly inherent dignity.” The Law on Disabilities monitor policy implementation. A mechanism guarantees the following rights to people for this is, in fact, one of the government’s with disabilities: commitments under the UN Convention on the Rights of Persons with Disabilities. • To participate on an equal basis in social Another step would be to create space activities for social organizations for people with dis- • To live independently and integrate into abilities. In other countries, such people and the community their families have advocated for themselves • To enjoy exemption from or reduction of through their own organizations. Such cam- certain contributions to social activities paigns have guided governments on policy • To be provided with health care, func- implementation and ensured that they follow tional rehabilitation, education, vocational through on commitments. OVERVIEW 43 Urban Migrants and the hộ khẩu differences still exist— in leadership and in System the sex ratio at birth. First, in business and particularly in gov- Urban migrants are a third group lacking ernment and political spheres, the leader- equality of opportunity, due to the hộ khẩu ship is overwhelmingly male. In the last system. More than 5 million Vietnamese do decade and a half, the share of women in the not have permanent registration where they National Assembly has been declining and is live, 2.7 million of them in Ho Chi Minh now at 24 percent (as of 2015). Few chairs City. Although the registration system has of National Assembly committees are female. less force than it once did, it perpetuates The civil service has a large share of women, inequality of opportunity. Citizens in major but their representation in leadership posi- urban centers without permanent registra- tions is low, mostly at lower levels. There is a tion face difficulties in access to services for target that all ministries should have at least health, schooling, social protection, and util- one female vice-minister, but the system for ities as well as challenges in employment and that is yet to be developed. Women’s repre- social connections. Applicants for permanent sentation also remains low in key bodies of registration face steep hurdles, including the Communist Party: the Politburo, the Cen- large unofficial payments to local officials, tral Committee, and the Secretariat. Women such that some people live in major cities as constitute only 18 percent of party leadership temporary residents for several years. in communes, 14 percent in districts, and The broad objective of policy reform could 11 percent in provinces. be to further loosen the link between service Measures to boost women’s leadership access and permanent registration status. could focus on equalizing retirement ages One option is to make it easier to obtain per- in the labor code, using affirmative action manent registration. Many countries have as a short-term measure to ensure qualified some form of local registration for service women are fast-tracked to management posi- access, and in most of them, obtaining local tions, adopting a long-term program to iden- residence requires some proof of residence, tify potential women leaders early in their such as a property title or lease. What distin- public career, and addressing gender stereo- guishes Vietnam’s hộ khẩu is that permanent types that limit women’s career choices. This registration is possible only after two or three demands a long-term approach to update the years of residence, and both the payment education system and to promote healthier and document requirements are heavy. Costs views of masculinity and gender roles in the and inequities would be greatly reduced if media, and perhaps social media. these requirements were lightened. A second The second area of difference is the sex option is to eliminate differences in service ratio at birth (SRB) — the number of male access between those with temporary and births per 100 female births. The much permanent registration. A third, suitable for higher number of boys than girls born the long term, is to replace hộ khẩu with a because of sex-selective abortion is gender national identification card, with details held discrimination and a threat to gender equity. in a unified national database. The ratio was in the normal range of 105–106 in 1979 and 1989 (figure O.12). Since around 2005 it has risen rapidly, reaching nearly 114 Gender Equity in 2013, placing Vietnam —with India and Vietnam has made impressive achievements China—among the countries with the highest in gender equity. Differences in school enroll- SRBs. This imbalance will see a large number ment and attainment by gender are minimal, of surplus men starting in about 20 years, and the gender wage gap is modest by global which may increase antisocial behavior, vio- standards. In two areas, however, sharp lence, and human trafficking. 44 VIETNAM 2035 FIGURE O.12 Total fertility rate has fallen over time, and the sex Government legislation to prohibit sex identi- ratio at birth has increased sharply since 2005 fication of fetuses to reduce sex-selective abor- tions has not proved effective. The imbalance 6 116 in the SRB probably will change substantially Sex ratio at birth (males per 100 females) only as parent preferences evolve. The govern- Total fertility rate (births per woman) 5 114 ment may be able to speed this evolution with, 4 112 for example, public campaigns to emphasize the value of daughters, or by providing suffi- 3 110 cient old-age support to lessen parents’ con- cerns about not having a male offspring to 2 108 support them in their later years. 1 106 0 104 The Emerging Agenda for the 1975 1980 1985 1990 1995 2000 2005 2010 2015 Rising Middle Class and the Total fertility rate Sex ratio at birth Aging Population Sources: General Statistics of Vietnam. The second element of Vietnam’s social- inclusion vision for 2035 is the emerging agenda of supporting the growing middle The high SRB is a result of a combina- class to manage risks and pursue opportuni- tion of factors, including the high value ties in a market economy. The country will placed by Vietnamese families on having also face a rapidly aging population, creating sons, and the ready availability of ultra- new challenges of elderly fi nancial protection, sound technology allowing sex identifi ca- health care provision, and long-term care. tion. Families prefer sons in part because Social policy should respond to the needs they traditionally have the roles of carrying of an increasingly urban but also aging mid- on the family line and worshipping their dle class whose needs are very different from ancestors. Another driver of the preference those of the mass of rural poor that charac- for sons is that they traditionally have the terized Vietnam in the past. By 2035, Viet- main responsibility for taking care of par- nam will be overwhelmingly a middle-class ents in old age. The population policy dis- society, and the focus of social policy will couraging couples from having more than have shifted from moving out of chronic pov- two children is a contributing factor. What erty to helping the middle class achieve rising would happen if that policy were loosened? prosperity and manage the risks that could Although the impact is highly uncertain, set back social and economic progress. While the slight increase in the total fertility rate poverty will have been all but eliminated, in in 2012–2014 — possibly the result of a per- the middle-class society of 2035 there will ceived policy shift— suggests that full elim- still be a substantial group of poor and a ination may well result in modestly higher larger population vulnerable to falling back fertility. The broader economic dynamics of into poverty. The growing share of elderly are fertility are probably more important deter- likely to be at particular risk. mining factors: in a more prosperous coun- By 2035 more than half of Vietnam’s pop- try, the high opportunity cost of time and ulation will be members of the “global mid- the wish to invest more in each child have dle class” ($15 or more per day consumption reduced the desired family size. in 2011 PPP), with new expectations and It is likely that easing the two-child pol- challenges. They will expect that the state icy will help reduce the sex ratio at birth will provide a minimum standard of ser- but not bring it down fully to normal levels. vices, financial protection, and conditions for OVERVIEW 45 decent work, including affordable health care, Advances in education are also critical to quality education to at least senior-secondary Vietnam’s overall economic success. High- completion (and often beyond), old-age finan- income countries have workforces with high cial protection and care services, and basic levels of advanced skills gained through edu- worker protections. They will also demand cation. These skills are essential to economic more voice, in independent-worker represen- growth. The myriad specific skills combine in tation in the workplace, citizen oversight of complementary ways with technology, and public services, and broader civic participa- the educational foundations of the workforce tion. Middle classes globally have also tended allow individuals to change and adapt more to prefer avoiding high income inequality. quickly as the changes in technology and the These changes will bring with them sub- demands of work accelerate. stantial new risks. For individuals, with The Vietnamese education system is aging and the rise of urban and sedentary inclusive, high-quality, and largely equitable lifestyles, health risks are shifting to non- through lower-secondary education. It then communicable diseases, which require more becomes exclusive, inequitable, and medio- complex treatment regimens than the infec- cre. It provides students with excellent foun- tious diseases that previously dominated dations for success, but then fails to build on Vietnam’s risk profi le. The shift from fam- those foundations. Too many students fail to ily farming to wage jobs offers the promise graduate from high school. Too few continue of a better life but also exposes workers to on to tertiary education; those who continue new risks from economic volatility. These often do not receive a high-quality, relevant individual risks are mirrored by emerging education. societal risks: the demands of health care A key policy priority will be ending the as well as social protection for an aging and exam-based allocation of upper-secondary- middle-class population will create acute fis- school places and replacing it with uni- cal risks. versal secondary- school attendance. This is consistent with global experience — the Republic of Korea and other countries Ensuring High-Quality Basic Education made high school completion universal for All as they grew richer (fi gure O.14). In Viet- In Vietnam’s increasingly market- oriented nam, this change will also mean that upper- economy, the prospects for success in life are secondary schools will have students with a far greater for those with a high-quality edu- greater range of abilities. Currently, students cation. Despite large gains over time in edu- not admitted to academic senior-secondary cation attainment among Vietnamese at all school are usually offered a place in a tech- incomes, the goalposts are constantly mov- nical and vocational high school, many of ing, and the country will require increasingly which suffer from low skill relevance, low higher levels of educational attainment to graduation rates, and low student motiva- meet its economic and social goals. The pic- tion. The fast pace of technological change ture remains mixed, however, and suggests and the increasing skill needs of industry a need for continuing improvement. A child will put even more pressure on the system. from a wealthy family in Hanoi or Ho Chi Consideration could be given to transform- Minh City will typically receive high-quality ing the two separate subsystems (academic instruction through upper-secondary school, and technical/ vocational upper-secondary supplemented by private tutoring, and go on schools) into a single system offering two to complete a university degree. In contrast, tracks to a high school diploma. a child from a poor family in a rural area A second priority is to continuously is unlikely to advance past lower secondary improve the quality and relevance of what school (figure O.13). students learn, allowing them to succeed 46 VIETNAM 2035 FIGURE O.13 A large gap in upper secondary school attendance remains between the poorest and richest 20 percent 18 17 16 Age (years) at start of school year 15 14 13 12 11 10 9 8 7 6 5 100 75 50 25 0 25 50 75 100 Poorest 20% Richest 20% Share of children attending school (%) Vocational Tertiary Upper secondary Lower secondary Primary Preschool Source: General Statistics of Vietnam. FIGURE O.14 Vietnam can follow the Republic of Korea’s path in in a more diverse and demanding tertiary- high school completion rates education system. Such gains would let them offer employers up-to-date skills and a high 100 capacity to adapt to constant change in the 2010 workplace. The Vietnamese school system Share of people ages 25–34 with 80 excels at accomplishing tasks that are more a high school degree (%) straightforward, but faces new challenges 60 in developing noncognitive and complex 1980 2015 problem-solving skills to prepare young 40 adults for the labor market of a competitive 20 upper-middle-income country. 0 Effective Labor-Market Institutions 0 500 1,000 5,000 10,000 50,000 100,000 GDP per capita (2005 PPP US$) To realize the full productivity benefits of a better-educated population, the Vietnamese Korea, Rep. Vietnam labor market will need to encourage greater Sources: Barro-Lee Education Attainment Database 2010 and General Statistics of Vietnam. formality of employment while avoiding Note: PPP = purchasing power parity. overly rigid regulation. This will depend in part on labor-market policies — and more specifically, on whether the country uses OVERVIEW 47 its current opportunity to address already- Relations, a side agreement to the TPP. apparent weaknesses as it transitions from The main provision is as follows: farms to factories and firms. Policy can help promote the growth of formal employment Viet Nam shall ensure that its laws while ensuring that workers receive a fair and regulations permit workers, with- share of the benefits of growth. out distinction, employed by an enter- One concept that characterizes the pol- prise to form a grassroots labour union icy goals toward which Vietnam might aim (to chuc cua nguoi lao dong) of their in its labor-market policies is “flexicurity.” own choosing without prior authori- This involves striking a balance between zation. . . . A grassroots labour union flexible labor regulation that maximizes registered with the competent govern- productivity growth and “creative destruc- ment body shall have the right autono- tion,” and the needs of workers for decent, mously to elect its representatives, adopt increasingly formal-sector employment its constitution and rules, organize its that is equitably compensated. In other administration, including managing its words, Vietnam can aim to protect workers finances and assets, bargain collectively, rather than jobs as it deepens its structural and organize and lead strikes and other transformation. collective actions. Improving industrial relations will be key, given the weakness of the current system, Vietnam further agreed that within five exemplified by the large number of wild- years, grassroots unions may form organi- cat strikes since 2006. In the medium term, zations “across enterprises and at the levels Vietnam could consider more proactive mea- above the enterprise, including the sectoral sures to strengthen the system and promote and regional levels.” If fully implemented, harmony in the labor market. The Vietnam these measures will address many of the General Confederation of Labor and its weaknesses in the current system, making affiliated unions could bar company exec- for effective mediation of worker-employer utives and managers from key union posi- conflicts. tions (such as head of an enterprise union), A crucial element in determining produc- following the example of other countries — tivity and labor market–equity outcomes is such as Singapore, where company manag- the minimum wage, which would be most ers cannot hold principal union positions or effective if determined primarily with ref- sometimes even union membership. Viet- erence to productivity and competitiveness. nam could also continue to simplify regula- Vietnam has so far taken a “living wage” tions for resolving workplace disputes. And approach, with a primary focus on the cost it could consider allowing fi rm-level worker of living. Shifting to a “wage floor” approach councils or labor-management councils, as in that puts a primary emphasis on productivity many European countries and the Republic and competitiveness as the drivers of mini- of Korea. mum wage adjustments should be considered. Finally, Vietnam could move more fun- To achieve this shift, in the short term, damentally toward an industrial-relations the private sector would benefit from mod- system suited to the needs of a mature mar- erating the rate of minimum wage adjust- ket economy, where the interests of workers, ments. In the medium term, existing plans to employers, and the state are more properly anchor minimum wage adjustments to real represented in a true bargaining process by productivity growth could be put in place. independent unions. Vietnam has already (Many upper-middle- and most high-income made strong commitments along those countries exemplify the elements that Viet- lines in the United States–Viet Nam Plan nam could incorporate in a minimum wage– for the Enhancement of Trade and Labour setting mechanism.) 48 VIETNAM 2035 Vietnam would also benefit from stream- population. The old-age dependency ratio —a lining regulations in employment protection common measure of the age structure of the to promote greater labor-market flexibility. population — has been roughly constant for It would benefit, fi rst, from loosening regu- decades in Vietnam but will climb from 10 lation of labor-leasing enterprises and tem- to 22 between 2015 and 2035 and continue porary and outsourcing contracts. To ensure to rise in the following decades (figure O.15.) that increased flexibility in the regulated In other words, Vietnam will soon have labor market is accompanied by adequate many more old-age people to support for worker security, Vietnam would ideally grad- every person of working age. ually expand its coverage of unemployment Overall, contributory pension coverage insurance and active labor market programs in Vietnam is currently low, though not out which, when well designed and implemented of line with countries at similar levels of (such as public-employment services), can income (figure O.16). The pension system help enhance labor-market efficiency and faces the common problem of middle-income worker welfare (World Bank 2014). Since countries of a “missing middle” in coverage: such interventions tend to have important roughly the top 20 percent are in formal pen- social-protection and fiscal implications, sion schemes, and a small bottom segment Vietnam should keep close track of the fiscal is covered by targeted social pensions, but impacts of any expansion of unemployment the majority of the population do not have insurance. It should also monitor the labor- any pension at all until age 80 when they tax wedge and explore options for financing qualify for a social pension. Countries typ- a greater share of social insurance and active ically expand contributory pension coverage labor market programs out of general tax as they move toward upper-middle-income revenue. status, and Vietnam has set a goal of 50 per- cent coverage by 2020. Currently, however, it lacks a viable strategy to achieve this goal. Pensions and the Social Safety Net As countries move up the development ladder, they typically expand their social protection FIGURE O.15 The old-age dependency ratio will systems to respond to the demands of a grow- increase rapidly ing middle class. A key social protection chal- lenge for Vietnam will be to expand pension 50 Older people as a share of working-age population (%) coverage in a fiscally sustainable manner even as the ranks of the old-age population grow rapidly. This can be accomplished through 40 diversifying the country’s approach to pen- sions, reforming the existing public pension 30 system, and gradually increasing pension spending. Separate from changes to pension policy, reforms are also needed to modern- 20 ize and defragment the social safety net sys- tem. Additionally, as the old-age population expands, policy will need to address the grow- 10 ing need for aged and long-term care (ALTC). Part of the social protection reform 0 agenda is driven by the fact that Vietnam 1975 1995 2015 2035 2055 2075 is at a demographic turning point, fac- ing a slowdown in the growth of the labor Source: UN World Population Prospects, the 2015 Revision (medium force and a sharp expansion of the old-age variant). OVERVIEW 49 Scaling up pension coverage so dramatically FIGURE O.16 As countries move to upper-middle-income status, will require a diversified approach, including pension coverage usually increases subsidized coverage for informal-sector work- Share of working age population covered (%) ers to incentivize their participation in con- 100 tributory schemes, and phased lowering of the age for access to social pensions. Changes to 80 Japan the existing contributory pension system will also be needed. The formal-sector pension 60 scheme is not financially sustainable, despite Korea, Rep. some reforms in 2014. It will begin to incur 40 deficits from the 2020s and exhaust accumu- China lated funds by around 2035. Even at current 20 Vietnam low coverage levels, the country cannot afford both the existing system and the contribution 0 subsidies and wider social pensions that will 0 1,000 2,500 5,000 10,000 25,000 50,000 be needed to expand coverage to informal GDP per capita (2011 PPP int’l $) workers. Needed reforms to the contributory Source: World Bank, Pensions database. system include raising the official retirement Note: PPP = purchasing power parity. age, gradually eliminating the difference in retirement ages for men and women, removing incentives for early retirement, further reduc- considerable resources to its social safety net ing the annual accrual rate while broadening system, but fragmentation, poor targeting, and the base for collections to full compensation, outdated delivery systems limit its effectiveness. and cutting the number of special catego- Reforms are needed along four dimensions. ries of workers entitled to preferential early First, a more coherent policy approach retirement. is needed for social transfers to households, Even with these cost-cutting measures, moving away from multiple fragmented pro- the combination of an aging population and grams with overlapping target populations ambitious pension coverage goals means that and objectives. Fragmentation leads to high pension spending is likely to rise considerably. costs and poor program delivery. Countries with old-age dependency ratios Second, better systems for beneficiary equal to Vietnam’s projected level in 2035 identification and screening in targeted typically spend 8–9 percent of GDP on pub- social-assistance programs will be needed to lic pensions, well above the 2–3 percent that improve their poverty reduction impact. This Vietnam has spent over the past decade. At the would be built on improved integration of the same time, average pension spending relative proposed national ID system in social assis- to country income and old-age dependency tance program delivery, an improved poverty rates has generally been lower in East Asia census to identify poor and vulnerable house- than in other parts of the world. Projections holds, and more systematic enrollment proce- for pension spending in Asia- Pacific Eco- dures for social-assistance programs. nomic Cooperation countries suggest spend- Third, modernization of the administra- ing for lower-middle-income countries of tive machinery of the social-assistance sys- around 6 percent of GDP by 2035. While tem is needed. This will require significant these estimates need to be treated with cau- investment in payment systems, management tion, it seems reasonable to project pension information systems, and improved client spending by 2035 of 6–8 percent of GDP, outreach and case-management mechanisms. a marked increase from current levels. Fourth, the design of area-based antipov- Changes will also be needed in the erty programs needs to be rethought to empha- social safety net by 2035. Vietnam devotes size more diversified and community-driven 50 VIETNAM 2035 income-generation approaches. Given Viet- coverage is closely linked to Vietnam’s overall nam’s rapidly aging population, these area- equity agenda, both in ensuring access to ser- based programs could also expand to include vices to promote social inclusion and in reduc- community-based care services for elderly ing poverty due to out-of-pocket payments people and people with disabilities. for health care. Health-system performance Distinct from the pension and social safety will also become increasingly relevant for net reform agendas is the need to respond to many of the broader trends facing Vietnam, rising demand for ALTC beyond traditional including meeting the expectations of a grow- family support. While there is a need for ing middle class, addressing the challenges of greater public support for ALTC, it is equally an aging population, and pursuing economic clear that the state cannot do it all, and the growth. There is now strong evidence that expressed preferences of older people in East conditions during early childhood— especially Asia and Pacific are typically for care in the child nutrition—have a substantial impact on home or community. a wide range of economic and social indica- ALTC systems should be built principally tors later in life, including schooling, learning, around a system of home- and community- employment, and productivity. Ulti mately based care, though with an enhanced financ- this reality also has implications for economic ing role for the state. The framework is the growth. Increasingly the health of older adults “continuum of care”: the large majority of will matter for economic performance, as older people in need of care receive it in the Vietnam’s aging population will pose new home, those with somewhat higher needs challenges to maintaining a healthy and pro- access community-based care, and only a ductive workforce. Healthier older workers small and very frail portion require residen- can help mitigate the impact of a rising depen- tial care. China’s national policy, for exam- dency ratio. ple, is that around 90 percent of people Two big policy questions stand out for should be cared for at home, 7 percent in the Vietnam’s health system — on service deliv- community, and 3 percent in residential care. ery and health financing. On service delivery, It is important to recognize that the gov- will the health system maintain its current ernment’s role in financing ALTC can be dis- orientation, in which too many health care tinct from the role of providing care. While services are delivered at hospitals while too the state may provide financing for ALTC little is done at primary level facilities? Or (usually with copayment for all but the poor will the system transition to focusing on and people with disabilities), the private sec- primary care, with primary providers at the tor may have a substantial role in provision center of an integrated system? On health of care. But this, in turn, will place new financing, how can the currently high level of demands on the state for standard-setting, total health expenditure be stabilized, with human-resource development in the caring a concurrent reduction in reliance on out- industry, and regulation of quality and the of-pocket spending? An important question market rules of the game. here is how the current pace of insurance enrollment can be accelerated, because by some estimates it may not be rapid enough to Universal Health Coverage and the achieve 100 percent coverage by 2035 (from Health System 70 percent today). The major policy challenge facing Vietnam’s health system over the next 20 years will Service Delivery be to achieve universal health coverage — The challenge is rooted in two interrelated that is, to ensure that everyone has access to problems: hospitals are doing too much, high-quality services without suffering finan- and primary care is doing too little. In addi- cial hardship. The objective of universal health tion, the different levels of the system are OVERVIEW 51 insufficiently coordinated. Vietnam has a public can play a role. For the government, a hospital-centric system in which referrals major factor will be to exert greater influence and self-referrals to overcrowded facilities at over hospitals through a more active role for the central and provincial levels are largely a a strategic purchasing agency (whether Viet- result of low public confidence in the quality nam Social Security or another agency) to of primary-care health systems at the district promote quality and efficiency. This objec- level and below. The primary- care system is tive will require a shift from simply paying fragmented and ill prepared to address the the bills submitted by providers to using challenge of noncommunicable diseases. information to ensure that patient care and There is a split between the preventive health cost-effectiveness are emphasized over hos- system, which primarily implements inde- pital revenues. For the public, patients need pendent disease control programs, and the recourse to grievance-redress mechanisms in curative system, which is largely responsible case of clinical or financial wrongdoing. for treating illness, but not detecting or pre- venting it. For many patients the first point of Health Financing contact is a private pharmacy, which is not The agenda over the next 20 years will be to connected to the public service delivery or stabilize the share of GDP spent on health health insurance system at all. near its current level and to shift the com- Strengthening service delivery for primary position of spending to reduce reliance on care is arguably the most important task fac- out-of-pocket (OOP) expenditures. Vietnam ing health policy makers over the next 20 now spends a larger share of its GDP on years. For quality and cost reasons, a strong health— about 6 percent— than almost any primary-care function based on a continu- other country in developing Asia, a burden ous doctor-patient relationship is central to a on household budgets and the public purse. modern, efficient health system. International About 50 percent of total health expendi- evidence shows that a disease profi le domi- tures are paid OOP. Most upper-middle- and nated by noncommunicable diseases requires high-income countries rely on OOP spend- more complex case management and coor- ing for less than one-third of the total. Some dination of care, and an integrated primary- mix of government spending and insurance care system is critical in the process. contributions will be needed to lower OOP To strengthen the primary-care system, a spending. sustained program of reforms would include Key to reducing reliance on OOP spending human-resource policies and development, will be to expand insurance coverage to the more efficient resource allocation through roughly 30 percent uninsured population, but reforms of provider payment mechanisms, the current approach may not be adequate to improved gatekeeping modalities to ensure achieve full coverage by 2035. Vietnam is rely- that people are treated at the appropriate ing on individual or household contributions level of care, coordination of care across lev- and the gradual transition to a larger formal els of the health care delivery system, and workforce. This process is slow and uncertain, quality-assurance mechanisms. This long- and there will likely be a greater need for pub- term agenda will require sustained commit- licly financed contribution subsidies to encour- ment and investment. Strengthening primary age wider participation of nonpoor informal care can also be supported by strong public workers in health insurance. health measures, especially related to tobacco The rebalancing of health expenditure control. between the state and citizens would require Strengthening hospitals can be done by higher public spending on health care by balancing hospital autonomy granted under 2035. A strong achievement would be for the “socialization” policy with greater current health spending of around 6 percent accountability. Both the government and the of GDP to remain stable over the coming two 52 VIETNAM 2035 decades, but with a gradual increase in the experience indicates that public financing share of government spending from 2.5 per- will play a dominant role in paying for health cent of GDP to around 3.75 percent and a care, but a significant role for private provi- concomitant decline in OOP spending by sion is more common. individuals from 3 percent of GDP to around There is no clear evidence from interna- 1.75 percent. Donor and private insurance tional experience that either public or pri- contributions are likely to remain modest. vate provision is “better.” What matters However, keeping overall health spending most is strong accountability. Depending stable in the face of a rapidly aging popula- on organizational and financing arrange- tion will require sustained efficiency improve- ments, the public and private sectors may ments to control cost escalation. be equally prone to under- or overprovision, Strengthening the efficiency of the health low quality, inefficiency, and other short- system will depend primarily on stronger comings. As with public providers, if private provider-payment mechanisms for hospitals providers are to receive government funds, to discourage overtreatment and reforms to they should be held accountable for their pharmaceutical procurement to control high activities. Accountability requires clearly costs. Hospitals purchase drugs at widely delegating tasks, adequately fi nancing ser- varying prices, and the high costs are passed vice provision, collecting and analyzing on to the government or the population. Cen- information on what providers are doing, tralized procurement and better use of state and enforcing the rules of the game. Regula- purchasing power to negotiate prices under tory and supervisory authorities can oversee a framework contract with pharmaceutical public and private providers. companies would help control costs. As Vietnam charts a path toward a stron- ger health system by 2035, a central chal- Public and Private Roles in Health lenge will be the difficult political economy An important question for both service deliv- of health reform. From tobacco lobbies to ery and health financing is the role of the pharmaceutical companies to doctors, vested private sector. Around the world, govern- interests are likely to resist certain reforms. ments are trying to achieve the right balance But Vietnam has made significant strides in between public and private participation in the past decade—an important foundation all aspects of health-system reform. Global for further progress. OVERVIEW 53 Pillar 3 A Capable and Accountable State Why Institutional Quality Matters There is also a surprising confluence in for Growth and Development eastern and western thinking on institu- tions and even on their desired attributes Institutions — the formal and informal rules (box O.3). of the game for interactions in society — Not only are institutions important for facilitate economic growth and develop- economic and social development—a capable ment over the long term. They constrain or and accountable state is also desirable in and condition behavior by providing incentives of itself. For a given level of income, it is safe to individuals and groups. These incentives to say that almost all societies would prefer a determine whether and to what extent activ- more accountable and less authoritarian state ities are fostered to create wealth, promote to a despotic one. The Vietnamese constitu- efficiency, and enhance welfare. For instance, tion describes the country as a “rule of law an institutional framework that allows for State of the People, by the People, and for the easy and quick business registration provides People,” reflecting its people’s desire to live as greater incentives for new fi rms to enter the an open, democratic, and rule-based society. market, increasing competition, allocating Nevertheless, while global experience is resources more efficiently, and ultimately clear on the long-term importance of good fueling economic growth. A rich literature institutions, there is less clarity both about documents the strong positive correlation the specific institutions most important at between institutions and development— such various points in a country’s development as that between property-rights enforcement and about the precise path for institutional and economic growth and between the qual- reform in different countries. The interplay ity of educational institutions and educational between political institutions — to promote attainment. accountability, transparency, and inclusion No country (barring some resource-rich in the political system— and income growth ones) has risen to high-income status without is especially complex and hard to determine. strong economic and political institutions. A strong positive link between political While there is much country variation in polit- openness and the quality of economic insti- ical and economic organization, aggregate tutions appears only at higher incomes (Dol- indicators such as the Worldwide Governance lar 2015b). In addition, the shape of political Indicators (WGI) show a robust correlation reform and how to bring it about are even between high rankings on institutional quality harder to establish. and overall prosperity (figure O.17). Advanced economies have a system of highly evolved eco- How Vietnam Performs on nomic institutions that convey prices, defi ne property rights, enforce contracts and com- Institutional Quality petition policies, and close informational gaps How should international experience be between buyers and sellers (Commission on interpreted in light of Vietnam’s positive Growth and Development 2008). Almost as record on growth and poverty reduction? a rule, they also have highly developed polit- Has the quality of its institutions kept pace ical institutions— of voice and accountability. with its economic and social progress, and All the countries that have reached 50 percent can they support sustained progress in the of productivity of the United States are either future? These questions first require delv- 1s or 2s (the highest scores) on the Freedom ing further into the various components of House civil liberties index,20 with one excep- institutional quality and comparing Viet- tion (Singapore) (Dollar 2015a). nam with other middle-income countries. 54 VIETNAM 2035 FIGURE O.17 The robust long-term correlation between The WGI dataset provides one way to unbun- prosperity and the quality of governance dle and measure different aspects of institu- tional quality (or governance). Since 1996 5.5 the WGI have measured six dimensions of institutional quality, and they now cover 215 economies. 21 Collectively, these indica- 5.0 Singapore tors measure perceptions of “the process by Taiwan, China which governments are selected, monitored Log of GDP per capita (PPP int’l $) 4.5 Korea, Rep. and replaced; the capacity of the government Russian Federation to formulate and implement sound policies; 4.0 Poland and the respect of the citizens and the state China for the institutions that govern the economic and social interactions between them.”22 3.5 Among these dimensions, Vietnam does Vietnam best on government effectiveness and on polit- 3.0 ical stability (figure O.18). On both aspects, it is close to the average for all countries. It compares well with upper-middle-income 2.5 countries and does better than other lower- middle-income countries. On government 2.0 effectiveness, which measures perceptions 0 1 2 3 4 5 related to the quality of public services and Weak Strong Average of WGI the government’s commitment to sound poli- cies in that regard, Vietnam has improved its Sources: Kaufmann, Kraay, and Mastruzzi 2010; World Development Indicators, Worldwide Governance Indicators (WGI); and World Bank and the Ministry of Planning and Investment relative performance in recent years. of Vietnam calculations. But on two dimensions Vietnam does par- Note: “GDP per capita (PPP US$)” is the average of GDP per capita in purchasing power parity in current U.S. dollars from 1996 to 2013. “Average of WGI” is the average of the six ticularly poorly. First, on voice and account- WGI Good Governance Indicators from 1996 to 2003. The scale of the WGI scores has been ability, it remains in the bottom tenth of all transformed from –2.5 (weak)/+2.5 (strong) into 0 (weak)/5(strong). BOX O.3 State effectiveness and development: Confluence of Eastern and Western thought Economists who have studied in the Western tra- that Smith described. Confucian political philosophy dition look to Adam Smith for the fi rst defi nitive is based on the creation and maintenance of a mer- statement of the role of the state in economic devel- itocratic bureaucracy, legal protection for property opment. For Smith, the proper realm of state action rights and contracts, military defense, and public was limited to defense, justice, the rule of law, the works, especially water control. The aim of govern- establishment of public institutions, and the pro- ment was to protect the general welfare of people vision of public goods (Smith 1904). While often through mechanisms like stabilizing food prices, cited as an advocate for a limited state, Smith made redistributing rice to the poor, and providing famine it clear that state action included public education, relief (Nolan 2004). The ideal monarch was expected control of monopolies, and other forms of business to govern virtuously and to give equal emphasis to regulations. He understood the importance of an administration and moral guidance. effective state to economic prosperity (Viner 1927). The characteristics of modern bureaucracy that Vietnamese economists have recourse to an older Max Weber describes would not be unfamiliar to tradition, similar in many respects to the ideal state Chinese or Vietnamese offi cials under the ancien (Box continues next page) OVERVIEW 55 BOX O.3 (continued) régime: fi xed jurisdictions, hierarchical organiza- designed to serve special interests. Appointments tion, meticulous record keeping, meritocracy, full- are made on the basis of patronage rather than time employment (no moonlighting), and rule-based merit. Hierarchical structures are undermined by authority with all citizens subject to the same treat- politics and clientelism. And overlapping responsi- ment (Weber 1946). Like the philosopher- officials bilities create confusion and lead to power strug- of ancient China, Weber had in mind an ideal type gles. The philosopher-kings of the Confucian ideal of a properly functioning state, a model that gov- were challenged in practice by regional aristocrats ernments in the real world may aspire to but rarely and warlords in China, the Republic of Korea, and achieve. In the real world, rules, often unclear, are Vietnam. Source: Pincus 2015. countries, and its relative ranking across all FIGURE O.18 Worldwide Governance Indicators, 2014 countries has fallen since 1996. Second, it also compares poorly with middle-income countries on regulatory quality, which mea- Government effectiveness sures the perceptions of the capacity of the state to formulate and implement policies Political stability and absence aimed at private-sector development; its of violence/terrorism ranking on this dimension has stagnated in the past 20 years. Rule of law On the other two dimensions —rule of law (which measures confidence in societal rules, Control of corruption including in contract enforcement and prop- erty rights) and control of corruption (which looks at perceptions of the extent to which Regulatory quality public power is used for private gain and to which the state has been “captured”) — Voice and accountability Vietnam does worse than the average of upper-middle-income countries although it is 0 20 40 60 roughly the same or better than other lower- Percentile rank middle-income countries. Its ranking has remained roughly the same on both aspects Vietnam since 1996. Upper-middle-income country average These comparisons indicate the aspects Lower-middle-income country average of institutional quality (or governance) that Source: Worldwide Governance Indicators, www.govindicators.org. Vietnam might focus on in the coming years Note: The Worldwide Governance Indicators (WGI) are a research dataset summarizing if it is to achieve the biggest development the views on the quality of governance provided by a large number of enterprise, citizen, and expert survey respondents in industrial and developing countries. These data are impact. As countries move up from lower gathered from a number of survey institutes, think tanks, nongovernmental organizations, to upper-middle-income status, their econo- international organizations, and private-sector firms. The WGI do not reflect the official views of the World Bank, its Executive Directors, or the countries they represent. The WGI mies become more complex and diversified. are not used by the World Bank Group to allocate resources. The quality of government and particularly its ability to work with and regulate the private sector efficiently become even more 56 VIETNAM 2035 important. This can be seen in the large dif- and few checks and balances within the ference between lower-middle- and upper- government, along with limited voice and middle-income countries in such indicators participation of citizens (Pincus 2015). as regulatory quality, rule of law, and con- trol of corruption. Voice and accountability Commercialization of State Institutions in turn appear to become more important as countries make the transition to high-income Commercialization of state institutions in status, even if the exact timing and nature Vietnam refers to emergence of an entre- of the relationship are hard to determine. preneurial business class within or closely In the long term, countries with more open connected to the state (rather than outside and inclusive political institutions generate it). It also refers to the continuing strong greater room for innovation and personal engagement of the state in economic activity creativity, thus stimulating productivity directly through SOEs, particularly through improvements and higher standards of living large state economic groups, and indirectly (Acemoglu and Robinson 2013). For Viet- through close links between the state and an nam, finding ways of building more open and exclusive segment of the domestic private sec- accountable political institutions will eventu- tor. Vietnam is not alone in having influential ally be essential. vested interests, but the degree to which rela- tionships to the state are integral to economic Institutional Constraints to success appears to be unusually high. Commercialization of state institutions Vietnam’s Development is not new, dating as far back as the begin- What institutional factors are likely to limit ning of central planning in the mid-1970s Vietnam’s development prospects? To answer (immediately after Reunification). Pressure this, the discussion here adopts a framework for reform started from below and grew that has three specific elements underpinning from the cracks in central planning. With state effectiveness.23 The first is bureaucratic pervasive shortages and the economy on the capacity based on hierarchy, unified jurisdic- brink of collapse shortly after central plan- tion, meritocracy, and rule-based authority. ning was instituted, individuals and entities The second is the use of market signals to with access to external aid began to trade allocate resources and fiscal discipline to outside the central planning system (Fforde match policies with the state’s financial capac- and Paine 1987; Abrami 2002). Managers ity. And the third is popular participation to of state companies became adept at trading align policies and programs with the needs in scarce commodities, and local author- and aspirations of citizens. The crucial point ities tolerated cross-border smuggling to of this framework—and one directly relevant gain access to essential supplies in exchange to Vietnam’s program of developing modern for illegal levies, with part channeled into institutions—is that all three legs of the state local government budgets to reduce defi- effectiveness tripod are necessary for satis- cits. Over time, growing tolerance toward factory results. Reforming state structures these and other “fence-breaking” activities but rejecting market discipline, or assigning created underground markets for commodi- a larger role to the market mechanism while ties and factors of production that gradually insulating government decision making from gained legitimacy and acceptance. The state the community, is unlikely to generate posi- increased the space for market transactions tive outcomes. and, more important, was itself effectively Three mutually reinforcing factors domi- marketized or commercialized (Cheshier nate in explaining Vietnam’s state effective- 2010; Fforde 2007). ness challenge: commercialization of state State commercialization has imposed effi- institutions, their excessive fragmentation, ciency costs on the economy and contributed OVERVIEW 57 to the stagnation in productivity (Pillar 1). rewarded at the expense of consumers and One set of costs arises from the poor per- more efficient firms (box O.4). Dynamic inef- formance of SOEs, which have consistently ficiencies also arise as potential investors are been inefficient users of land and capital and discouraged by regulatory risk and concerns which retain a dominant role in key sec- that markets will be captured by connected tors of the economy. Their presence is not firms. Beyond its costs to the economy, com- unusual in many economies, especially in mercialization of state institutions weakens sectors that are natural monopolies (public the effectiveness of the state itself. It creates utilities) or are capital intensive (large infra- powerful incentives for public officials to structure), with competitive markets leav- exploit their regulatory powers and alloca- ing plenty of room for the private sector to tions of property rights to lock in long-term prosper. But in Vietnam, the SOE presence benefits for themselves, their families, or their is almost across the board — from garment networks. Such abuses of public authority manufacturing to mobile telephone services undermine the legitimacy of state institutions. and to banking — in activities where private players could do a better job. Excessive Fragmentation of the State And if the state decides to keep its exten- sive role in production, it needs to be neutral In tandem with commercialization of to private competition. This argues against state institutions is their fragmentation— state subsidies to SOEs, preferential tax treat- related and mutually reinforcing. State frag- ment, and privileged access to land, fi nance, mentation refers to the lack of clear hierarchy and government procurement contracts— all and assignment of roles and responsibilities undermining the viability of domestic private within the central government and between firms. Crowding out a genuinely private com- the center and the provinces— and to the mercial class independent of the state or its inertia and inefficiencies this generates in for- functionaries is the second cost of the com- mulating and implementing policy. Horizon- mercialization of state institutions. tal and vertical fragmentation of power has The blurred division between the state and resulted in overlapping mandates, confl ict- the private sector imposes static inefficiencies ing rules and decisions, and space for inter- on the economy as high-cost producers are agency bargaining in the bureaucracy. Apex BOX O.4 Webs of state connections driving the pharmaceutical industry The pharmaceutical industry has 170 companies, allegations of high markups for producers mak- including 20 joint-venture foreign-invested fi rms, ing payments to hospital administrators. Foreign with the largest company controlling less than enterprises, prohibited from distributing pharma- 5 percent of the market. SOEs have emerged in ceutical products in Vietnam, rely on local distrib- every province to supply generic medicines to local utors. Product registration, a responsibility of the hospitals and clinics. Direct sales to hospitals Drug Administration of Vietnam, requires lengthy account for about one-third of the market, and local trials and is conducted case by case, with the pharmacies the remainder. regulator retaining considerable discretion. Under Although the largest former SOEs have been these conditions, genuinely private and foreign equitized, they continue to prosper on the basis of fi rms are disadvantaged in market access, enabling close relationships with distributors and hospitals small producers of generic drugs to survive in in their areas. Procurement is largely by individual what on the surface looks like a highly competitive hospitals, and bidding is open to corruption, with market. Source: Pincus 2015. 58 VIETNAM 2035 institutions in central government include treasury. Constraints on central budget fund- the Office of the Government, the Ministry ing meant that provinces were forced to rely of Finance, and the Ministry of Planning and on alternative sources of revenue, notably Investment. These entities formulate policies, by creating and supporting local state enter- often deploying interministerial task forces prises to raise funds and implement infra- to achieve consensus. Cohesion in planning structure projects (Vu 2014). Foreign direct is in theory provided by the guiding role of investment and international trade were no the Communist Party. However, in practice longer a monopoly of the central state units, power within the state apparatus is frag- and the high concentration of foreign partic- mented across numerous agencies at every ipation in just a few provinces strengthened level, and between the center and provinces. the hand of these localities immeasurably The absence of a clear hierarchy and distribu- since the central government relied on them tion of authority creates room for individual for the surplus needed for redistribution to agencies to resist decisions they see as against poorer areas. their interests (box O.5). The result is often Vietnam is one of the most fiscally decen- gridlock or decisions that are suboptimal tralized countries in East Asia, which has its from society’s point of view. benefits but also makes it more difficult for The origins of state fragmentation, too, central institutions to set policy and to moni- date back a few decades. The rejection of tor and enforce delivery standards. The 1996 the planned economy that started with the Law on the State Budget, revised in 2002 Ðổi Mới reforms shifted the balance of power and in 2013, recognized the increasing role from the central state to enterprises and local of local authorities and put in place a form authorities in various ways. As output and of fiscal decentralization in the unitary state prices were no longer centrally determined, budget. Decentralization has included grant- the central government had fewer resources ing provinces powers over planning public to allocate, so it became increasingly depen- investment, licensing foreign investment, and dent on provinces for contributions to the managing public-sector human resources. BOX O.5 Narrow interests block a master plan The development of the Ho Chi Minh City port sys- different companies or government agencies. Saigon tem is a good example of institutional fragmentation. Port is a subsidiary of Vinalines, the national ship- As a major producer of exported goods, Ho Chi ping general corporation. Ben Nghe port is operated Minh City and surrounding provinces need a modern by a local state-owned company under the People’s port easily accessed from the main industrial zones. Committee of Ho Chi Minh City. The Vietnam Ho Chi Minh City residents would like to move inner International Container Terminal is a joint venture city ports to places where they will cause less traffic of the state-owned Southern Waterborne Transport congestion—a change that would also free land for Corporation, the NOL Group of Singapore, and Mit- riverfront property development. sui & Co. of Japan. Saigon New Port is owned by The prime minister approved a master plan in the navy. 2005 calling for four ports to relocate to the coastal In the end, the central government could not province of Ba Ria–Vung Tau by 2010. Shortly after- implement the master plan because the individual ward the Japan Bank for International Cooperation state agencies saw it as against their interests. Each approved a loan of ¥36.4 billion ($328.6 million) for agency used the regulatory powers and political the Cai Mep–Thi Vai port complex. But each of the influence at its disposal to advance a set of narrow ports in Ho Chi Minh City is owned and operated by financial interests. Source: Nguyen and Pincus 2011. OVERVIEW 59 Provinces have been granted increasing fiscal recruitment and promotion continue largely powers to raise revenues and broad provincial on seniority rather than merit. Second, civil discretion in determining the composition of service management remains incoherent, expenditures and transfers to lower-level gov- with human- resource functions carried ernments. Subnational governments account out by three entities within the govern- for more than half the total public expen- ment plus the Central Committee Secretar- ditures and more than 70 percent of pub- iat and Organization Commission. Third, lic investments. This is accentuated by the duplication between party and government numerous provincial-level governments — 63 rules prevents deploying talent where it is (58 provinces and 5 municipalities), a large most needed and limits the development number for a country of 90 million. of talent across the services. As a result, a The growing diffusion of state power highly professional public service has yet has created tensions between the attempts to emerge that can plan, design, and imple- of central agencies to coordinate and ratio- ment policies and strategies for an increas- nalize policy and the efforts of subnational ingly sophisticated economy and society governments and subordinate units of cen- (Phuc 2015). tral government to assert their autonomy. In addition, the lack of adequate incentives for Few Checks and Balances in regional coordination on investment deci- Government—and Limited Citizen Voice sions, despite the regional steering commit- and Participation tees chaired by the deputy prime minister, has exacerbated the inefficiencies created Vietnam’s political system has adapted to by Vietnam’s nested budgeting and plan- create space for informed discussion of pol- ning systems. A prime example is excessive icy issues and assessment of government capital investment by subnational units. For performance. The institutionalization of example, almost all of Vietnam’s coastal the National Assembly, provincial People’s provinces have their own deep seaports. Councils, and “grassroots democracy” at Similarly, there are about 260 industrial the village level are examples. But Vietnam parks, in nearly every one of the 63 prov- does not yet have a robust accountability inces, with plans to build 239 more by 2020. system that can strengthen the state’s effec- Yet the average occupancy of existing parks tiveness. Two constraints are fundamental. is well below half their capacity. The first is the absence of an effective The absence of merit-based management system of checks and balances in the func- of public servants exacerbates the adverse tioning of the different branches of the state. effect of commercialization and fragmenta- The National Assembly now engages in more tion of the Vietnamese state institutions on meaningful discussion when passing legis- the quality of public administration. Devel- lation and is thus less of a rubber stamp for oping meritocratic systems takes a long time the executive’s proposals. Indeed, in a few and responds to particular political impera- recent cases it has turned down proposals by tives,24 but some features of Vietnam’s system the executive, such as rejecting the plan for a present problems for efficiently recruiting and high-speed rail link from Hanoi to Ho Chi deploying public-sector staff. While low pay Minh City. But its role in formulating policy and difficulties in recruiting people with skills and supervising government remains weak. are challenges in most developing countries, And while disseminating information and three specific features impede a more strategic attracting public interest in political affairs, approach to the civil service in Vietnam. it is not yet a vehicle that can transform inter- First, though reforms were enacted to est and opinion into accountability (Malesky, switch to a position-based system in 2008, Schuler, and Tran 2012). they have not been implemented, and 60 VIETNAM 2035 A key factor is a nomination process that integration. But the court system has not kept limits competition and the resulting compo- pace. The complexity of cases is increasing, sition of the assembly. Membership is over- given the growing sophistication of economic whelmingly part-time, with members in transactions and the body of law regulating regular jobs in the executive at national or them. The court system has remained effec- provincial levels. Quite a few are also leaders tively flat, with only a modest increase in the of SOEs, which creates confl icts of interest total number of courts and judges over the and a resulting bias to accepting whatever the past 10 years. Underlining the weaknesses in executive proposes. Part-time membership the judicial system is the low public readiness and high rates of turnover between sessions to use the courts. (70 percent of deputies are new in the pres- The second major constraint is the limited ent convocation) also constrain the assem- voice and participation of citizens. Vietnam bly’s professionalization. People’s councils, has thousands of citizen organizations, and the equivalent of the National Assembly at more than a third of the population is a the provincial, district, and commune lev- member of one or more sociopolitical orga- els of government, elect the members of the nizations. 26 The substantial increase in the people’s committees, which form the local number of business associations, credit executive.25 But constraining their autonomy groups, religious bodies, sports and cultural is an array of intersecting relationships and associations, and groups for the elderly is reporting requirements involving the Viet- good. But they are not given the chance nam Fatherland Front, the council’s party to participate in the same way as state- organization, the local people’s commit- sanctioned organizations. So, the system is tee, the standing committee of the National not inclusive enough, particularly as society Assembly, and the central government. The becomes more complex and government- supervisory function of the councils, limited sanctioned mass organizations lose their to compliance with national policies and relevance. laws, does not touch on the performance of The government has only a few formal local government in implementing policies channels for consultations with citizen orga- and programs (Vasavakul 2014). nizations on policy and planning. Grassroots The judiciary — the third branch of democracy decrees have been put in place, government— is also weak, with its impar- beginning in 1998, to constrain the behavior tiality undermined by heavy dependence on of local officials. The decrees defi ne or give the executive. Appointing judges is subject to a role to citizens in local decision making, political and administrative pressures, while including planning and managing locally the hierarchical system of control in the judi- funded projects, elaborating village codes, ciary undermines judges’ independence in and handling some aspects of sanitation, carrying out their duties. Many aspects of the village security, village boundary changes, executive’s operations expressly do not fall development plans, and complaints. These under judicial supervision, while the courts decrees require holding more meetings are beholden to the executive for adminis- between commune leadership and citizens, tering the court system. So, it is unsurpris- and making budget information available to ing that Vietnam’s rankings on its judiciary’s the public (Fforde 2011). But the mode of cit- independence are below those of regional izen participation in local governance has not peers. changed appreciably, and the ability to influ- Nor is the judiciary an effective arbitrator ence the decisions of commune governments of economic and social interests. Vietnam’s remains limited. Decision-making power formal legal framework has been augmented remains with the local people’s committees. to meet the needs of a more complex mar- Access to information, key to citizens ket economy and to support its global exercising citizen voice to hold the state OVERVIEW 61 accountable, is still lacking. The country’s government agencies to implement activities governance practices have neither encour- and programs for the public good. aged openness and transparency nor pro- moted public discussion of the state’s actions. Building a Rationally Organized State Information and data are difficult to acquire, with a Meritocratic Bureaucracy even when public officials are required by law to provide them. Limits on the independence The elimination of overlapping jurisdictions of the media constrain its ability in making is essential for reducing vertical and horizon- information available to citizens. Vietnam’s tal fragmentation, and thereby decreasing the transformation since Ðổi M ới has included scope for bargaining and foot-dragging in more openness and transparency in gover- the bureaucracy. A guiding principle should nance and more space for citizens to discuss be to see that responsibility and authority for a range of sensitive issues publicly. But a cul- various public-sector functions are assigned ture of more open public debate on the state’s to a single agency at the specified level of gov- performance will be required to achieve the ernment. Delegation of tasks between and country’s long-term aspirations. As Vietnam- among levels of government would of course ese citizens become more prosperous, they continue, but through clearly specified mech- will want to participate more effectively in anisms and on the basis of objective perfor- governance to influence policy choices. They mance targets. will also want the economic, social, and political freedoms that citizens enjoy in more Reforming Center–Local Relations advanced societies. Addressing state fragmentation will require mechanisms for efficient center–local rela- tions to clarify accountabilities and enable The Way Forward for the State both tiers to work in consonance with clearly Modernizing the state will involve address- defined national goals. Reforming Vietnam’s ing all three pillars of state effectiveness: decentralization framework is key. building a coherent and hierarchically Vietnam needs a much clearer assignment organized state, applying the rationality of public-sector responsibilities and associ- of markets in economic policy making, ated expenditures, especially between the and strengthening accountability through central and provincial governments. To the greater public involvement in decision mak- extent possible, responsibility for planning, ing and stronger accountability mechanisms financing, and implementing public-sector within the government. In 2035, the govern- functions would rest with a single level of ment will be less horizontally and vertically government. Of course, this would not rule fragmented, with a clear separation between out delegating tasks between levels of gov- public and private interests and between ernment or dividing tasks within an area of the commercial and regulatory functions public service— such as education, where of the state. Economic regulations will be personnel issues are handled centrally while based on market principles, and the gov- delivery is local. ernment will enforce clearly defi ned prop- Three adjustments to the intergovernmen- erty rights. Greater separation between the tal fiscal framework are also needed to match executive, legislative, and judicial branches these changes. First, the nested budgeting sys- will enable each to perform the assigned tem could be reformed to have financing more roles without interference. Nonstate orga- clearly follow functional responsibility. Such nizations, including social, religious, and reforms in functional assignment and the professional organizations, will participate corresponding systems for intergovernmen- actively in public life, monitoring the perfor- tal finance will likely improve accountability mance of government and partnering with both upward to the central government and 62 VIETNAM 2035 downward to citizens. Second, a closer match attract and retain the required talent. One between functions and finances could inform advantage in undertaking these reforms is capital investment plans, providing greater that more than a fi fth of civil servants will discipline in sectors where subnational gov- retire in the coming decade, increasing the ernments spend, as well as making more freedom to reorient the age composition. explicit responsibility for recurrent costs when assets are built. Third, greater incentives to Applying Market Rationality to subnational governments to raise own-source Economic Policy Making revenues should accompany their increased accountability for fi nancial management. In Vietnam aspires to be a fully fledged market addition to providing greater authority with economy and to be recognized as such by greater clarity in responsibilities for services, international partners. The legal framework building a stronger direct link between sub- for a market economy has been put in place national taxes and government outputs would incrementally, from amending the Law on strengthen accountability. Enterprise in 1999, 2005, and 2014 to giving equal treatment of all economic sectors in the Strengthening the “Center of Government” 2013 constitution. The government under- Given the scale and complexity of Vietnam’s stands the need to level the playing field for transformations in the next two decades, all economic actors and clearly separate the strengthening the center of government will regulatory and commercial activities it assigns be critical in addressing fragmented decision to itself. This will involve providing for secu- making. A stronger center will have several rity of property rights, enforcing free and roles that cut across government agencies, fair competition, and transforming the state managing strategy, coordinating policy, mon- from a producer to an effective regulator and itoring and reviewing performance, com- facilitator. The government will also need to municating results, and being accountable make sure that agencies directly or indirectly for implementation. Coordinating different involved in economic regulation do not engage agencies of government and aligning their in business of any kind to avoid the appear- objectives with the overall priorities of the ance and reality of conflicts of interest. government will be part of this role, as will Creating the space for a genuinely inde- monitoring the performance of different units pendent private sector will require political of government, whether in different sectors or commitment at the highest levels of govern- in the provinces. Communicating information ment and reduced state control over business to citizens about development outcomes can and professional organizations, including contribute to greater accountability. the Vietnam Chamber of Commerce and Industry. Allowing these organizations to Improving Public Administration operate as authentic representatives of inde- Reforming the civil service can reorient it in pendent business interests would give voice line with the changing role of the state from to the domestic private sector and enable producer and owner to regulator, facilitator, these groups to do more in monitoring and service provider. The capacity of the civil government policy. service could therefore be enhanced and its organization revamped, along three lines. Enhancing the Security of Property Rights First, merit can be a much greater factor in The reform agenda would focus on trans- recruiting civil servants. Second, the profi le parency and on more stringent guidelines of the civil service can be determined in line to reduce official discretion. The major with the functions expected of it (rather than challenge in the short to medium term is to historical trends). Third, the compensation reduce the opportunities for rents in valuing system for civil servants can be upgraded to and converting land use. OVERVIEW 63 First, publishing information on land SOEs and private firms, which is discussed in transactions in auctions and (to the extent the next section) includes the following: practical) in market sales of land-use rights needs to be enforced. All information in the • Strengthen and give more autonomy to the property cadaster, including descriptions Vietnam Competition Authority (VCA). of each type of property, of rights held over Lacking operational independence, at a the property, and of any restrictions on use, significant productivity loss, 27 the VCA is needs to be public. Any associated fees for a department directly under the Ministry access to this information could be mini- of Industry and Trade, comprising minis- mized to reflect the actual costs of providing terial representatives rather than indepen- it. Land-use planning could be fully open dent technical experts. It lacks the basic to public consultation, and changes in land authority to ask businesses for information use, rather than ad hoc, could be planned to investigate competition cases. Remedy- with lead times for public review. Oversight ing these anomalies would make the VCA mechanisms for procedural violations can be more independent and more capable in its strengthened. And the rules for the govern- regulatory and enforcement functions. ment to expropriate land could be tightened • Align the legal framework with consumer to ensure a demonstrable public purpose and protection. In addition to enhancing eco- compensation could more closely match mar- nomic efficiency, improving consumer ket terms. welfare is the other major objective of com- In the longer term, the legal frame- petition policy. The laws on competition work for property rights could include full and consumer protection and their enforce- fee-simple ownership rights. In addition, ment accordingly need to be closely aligned commercial investments could be made to maximize the impact on consumer to obtain land through property markets, welfare. But a review of the consumer with voluntary participation of use-right protection and competition laws shows owners, rather than state expropriation, that they are far from aligned. The VCA’s which would be allowed only when there is mandate could be expanded over time to a public- goods rationale such as building include aspects of consumer protection transport infrastructure. directly related to competition—following the example of the United States Federal Enforcing Competition Trade Commission, an independent fed- Vietnam needs a comprehensive competition eral agency that enforces both competition policy framework to open markets to entry and consumer protection. and competition and enforce effective com- • Rationalize exemptions to tackle car- petition policies. This policy and legal frame- tels and other forms of concentration. work would apply equally to all firms (private Addressing cartel behavior is an essen- or public). It would combat the most harmful tial part of antitrust enforcement. Car- anticompetitive practices, such as cartels. It tels have been associated with price would concentrate on deterring anticompet- increases of 10– 45 percent in develop- itive behavior and not on price control and ing countries (Levenstein, Suslow, and regulation. It would be fair, transparent, Oswald 2003) and reductions in labor rule-bound, and nondiscriminatory, and productivity and innovation (Broad- deviations from these principles would be berry and Crafts 2001; Evenett, Lev- rare, and only for meeting clearly defined enstein, and Suslow 2001; Symeonidis national objectives applied fairly and trans- 2008). Hard-core cartels in Vietnam are parently. The reform agenda associated with exempt from anticompetitive enforce- defi ning and implementing this framework ment if the market share of their partic- (besides leveling the playing field between ipants is below 30 percent. 28 Even when 64 VIETNAM 2035 the shares are above 30 percent, several to earn an adequate risk- adjusted return exemptions protect them. These and on reinvested cash, the surplus cash could other exemptions in the Competition be returned to the Ministry of Finance as Law need a critical review to eliminate a regular or a special one-time dividend. most of them, if not all. They create Vietnam has too many SOEs, and the economic distortions, and in some cases government could reduce its SOE portfo- they open the door to political inter- lio to a manageable size. Many operate in ference. For instance, the decision on manufacturing activities where there is no whether to grant an exemption goes to compelling rationale for state ownership. the minister of industry and trade if the A central government target portfolio of failing-fi rm defense is used, and to the about 20 “parent” SOEs seems reasonable prime minister in some other defense for 2035, with a focus on strategic sec- such as contributions to exports. tors, but even strategic SOEs should face competition. Transforming the Role of the State in the • Strengthen corporate governance. Viet- Economy from a Producer to an Effective nam’s SOEs need an active designated Regulator and Facilitator state shareholder. In the inappropriate Consistent with international good practice, current arrangement, the government is the government could consider SOE own- the state shareholder, many ministries or ership policy with clear ownership goals, agencies exert ownership authority, and focusing first on maximizing state capital. no specific government official is respon- Globally, the best SOEs focus on financial sible for SOE performance. Taking performance. It may be useful to supplement Singapore as a model, the government this focus with explicit statements on sup- could establish four or so state share- porting goals. Three fundamental and inter- holding funds. To exercise ownership related principles would drive this policy: rights, these funds could review regular financial reports and disclosures and • Adopt a commercial approach to state participate in annual and special share- ownership. This approach requires hard holder meetings. They would vote the budget constraints and reliable and state shares in appointing directors to timely financial information, disclosing the board (and other matters for share- SOE financial statements for transpar- holder consideration). And they would ency, accountability, and fiscal discipline. help appoint an effective board at each Across-the-board improvements are also SOE , appropriately staffed and orga- needed in accounting and financial dis- nized. Except for normal matters relat- closure practices. Vietnamese accounting ing to economic, environmental, and standards could be made consistent with social regulation that affect all enter- international financial reporting stan- prises, government entities would have dards. In addition to internal audits, inde- no authority or right to intervene in SOE pendent external audits of SOEs could be affairs. conducted in accord with International The state shareholding funds could Standards on Auditing. support efforts to further professional- Each SOE could have an appropriate ize SOE management, providing market- dividend policy, approved by its board of based compensation, linking pay to directors. The state shareholder would performance, and controlling and dis- not allow an SOE to retain or reinvest closing related-party transactions. To act substantial cash surpluses without careful with authority, an SOE board will require supervision by the SOE’s board and the members to act in the interest of the com- state shareholder. If an SOE cannot expect pany, face no confl icts in doing so, and OVERVIEW 65 have relevant experience and expertise, The National Assembly could have its including in the private sector. Selecting oversight span all the state’s operations — the SOE chief executive officer (CEO) reflecting all resources, assets, and liabilities and top management should follow in which the state has an interest. It could good practice, which calls for empower- also be better equipped with full-time mem- ing the board to appoint or remove the bers, backed by trained staff. And measures CEO. This power reinforces the board’s could be put in place to address confl icts of key responsibility for overseeing man- interest that may diminish their oversight agement and ensures that the CEO is and to allow constituents to hold their legis- accountable to the board rather than to lators to account. the government. Vietnam needs a modern, independent • Level the playing field. To complement and professional judiciary. Moves in this stronger competition policies, the gov- direction include increasing its transparency, ernment needs to level the playing field disclosing more judgments and case records, between SOEs and private domestic or and clarifying the roles of judges as arbiters foreign firms. If an SOE is required to per- rather than participants in cases. Selecting form noncommercial work, the govern- and promoting judges and other personnel ment could ensure that it receives adequate could also be independent of executive influ- compensation. Relevant laws could be ence. In exchange for heightened autonomy, reviewed and amended to achieve greater rigorous laws and enforcement mechanisms consistency between the rules for SOEs could ensure ethical conduct and counter any and those for private firms. Vietnam’s conflicts of interest among judges. insolvency and creditor-debtor regime Finally, specialized oversight agencies such would also need to be consistent with as the State Audit of Vietnam, the Govern- international good practice and applied to ment Inspectorate, and ministerial and sub- SOEs. Finally, the government could seek national Inspectorates, could be strengthened greater alignment between public and pri- with greater autonomy, resources, and tech- vate laws and regulations for labor and for nical capacity. procurement. Enhancing the Ability of Citizens to Hold the State Accountable Strengthening State Accountability Vietnam has made some progress in creat- By 2035, the Vietnamese state will have a ing conditions for citizens to participate in well-functioning system of checks and bal- governance and demand accountability from ances between the different branches of government. Membership in nongovernment the state, and citizens will have the ability citizen organizations has grown rapidly— to hold the state accountable. Both should though not in all locations. The last several also promote a stronger sense of individual years have seen more public debate on devel- responsibility and accountability among state opment challenges, including corruption, officials. the performance of ministers, and the weak- nesses and poor management by SOEs. High Enhancing Checks and Balances Internet penetration now allows more use of The state will need to provide for genuine social media for public debate. Three areas checks and balances among the executive, for reform could further increase account- legislature, and judiciary. Allocating power ability to citizens: among the three branches will increase delib- erations over government policy, and greater • Relax limits on the space for people’s scrutiny of implementation should improve social organizations. Enabling citizen orga- policy making and implementation. nizations to take part in decision making 66 VIETNAM 2035 would give them a platform to take up right to request information applies to all issues and influence state action. A stron- types of information (other than specific ger legal framework would allow citizens exclusions) and to all levels of government to address their concerns and interests, and would be major gains. Greater transpar- to have organizations with the adminis- ency would strengthen people’s social trative and fiscal capacity to pursue these organizations and increase their ability to interests. The draft Law on Associations, if hold officials to account. enacted, would help autonomous people’s • Provide greater independence for the social organizations develop. media. Separating media regulation from • Enhance citizen access to accurate and management and using civil (not criminal) timely information. Enacting the Law on remedies to improve the quality of report- Access to Information, under discussion ing would allow the media to be more for several years, and ensuring that the constructive. OVERVIEW 67 Summary and Conclusions Building on the nation’s extraordinary record mobilization, and enhance access to domes- of success and energized by the aspirations of tic and external capital markets. a rising middle-class society, contemporary The country’s aspirations and the support- Vietnamese leaders are charting a bold and ing policy and institutional agenda stand on ambitious future. Their ambition is embold- three pillars. The fi rst one is balancing eco- ened by the opportunities that continue to nomic prosperity and environmental sustain- unfold for Vietnam with greater regional and ability. The immediate emphasis has to be on international integration, including through ensuring more competitive and productive the ASEAN Economic Community and the domestic enterprises, for which development TPP. In the 2035 vision, Vietnam will be at of critical market institutions is important. the higher reaches of upper-middle-income Particular attention is needed to the insti- status. It will be a modern, creative, equita- tutions that protect private property rights ble, open, and democratic society with clear and enforce competition policies. A stable, blue skies, clean water, and equal access to well- regulated, and inclusive financial sector opportunities for all its citizens. This vision and transparent and functioning land mar- also foresees a state rooted in the rule of law kets will also be crucial. And as the country with clear roles for the state, citizens, and the embarks on an ambitious growth and eco- market; economic freedoms ensured by strong nomic modernization trajectory, its cities will market institutions; and robust mechanisms to need to better nurture private enterprise and hold the government to account. innovation, support the growth of industrial The Vietnamese people realize that clusters integrated with global value chains, achieving these aspirational goals will not and attract and agglomerate talent. Sustaining be easy. Stagnation in productivity growth, high growth over an extended period will also inadequate attention to vulnerable groups, require an aggressive agenda to spur learning and growing environmental degradation and innovation. An incentive-based national are particular concerns. Current rates of innovation system, focusing on the demand labor-productivity growth, for instance, will for and supply of innovation, can be very yield per capita GDP growth in the range useful in this regard. Finally, Vietnam has to of 4.0–4.5 percent, well short of the aspira- protect its natural resources, tap more clean tional 7 percent needed to take Vietnam to energy sources and build climate resilience the higher reaches of upper-middle-income into economic planning, sectoral policies, and status by 2035. While a turnaround in pro- infrastructure investments so as to reduce the ductivity growth is yet possible, the reform most severe risks posed by climate change. agenda will be challenging. International The second pillar is promoting equity and experience on this front is also sobering, social inclusion. The main elements of the since only a handful of countries have mus- middle-class and aging population agenda tered the necessary political will to carry are expanding the pension system to cover out the needed reforms. The broader reform a majority of the population, ensuring that agenda will also be financially demand- nearly all children complete upper secondary ing. Given the state budget constraints, school with job-relevant skills, establishing the needed investments will require much effective representation of workers through greater involvement of private investment independent unions, and achieving univer- together with ways to increase the efficiency sal health coverage. To reduce the barriers to of public spending so as to free up additional inclusion for ethnic minorities, targeted ini- resources for investment, scale up revenue tiatives in education, nutrition, and sanitation 68 VIETNAM 2035 can close the large gaps in opportunities for be applied more to economic policy making ethnic minority children, along with giving by clearly demarcating the public and private them more voice. To make people with dis- spheres, implementing conflict of interest abilities full participants in society, Vietnam provisions, enhancing the security of prop- can regularly monitor implementation of its erty rights (particularly around land issues), strong commitments and create opportuni- enforcing market competition, and stream- ties for people with disabilities and their fam- lining state participation in the economy. ilies to be their own advocates through social And public accountability can be increased organizations. Eliminating the link between by allowing for genuine checks and balances the resident registration system and access to among the three branches of government, public services (currently affecting 5 million providing a legal framework to promote the people) will improve urban migrants’ access rights of citizens and improve their access to to schooling, health care, and administrative accurate and timely information, and assur- services. And minimizing gender discrimi- ing a stronger role for mass media. nation in the retirement age and using affi r- Vietnam is at a turning point on its devel- mative action as a short-term measure will opment path. There are tremendous oppor- create more opportunities for women in pub- tunities on offer, as well as major challenges lic leadership roles. and difficulties. To achieve the 2035 vision, The third pillar is bolstering the state’s the only viable choice is for the country to capacity and accountability. Today’s stag- carry out a bold program of reforms that is nant productivity and weak environment consistent with the three pillars. Without for private-sector development are attribut- this, Vietnam will fi nd it very hard to avoid able to demonstrable gaps in state effective- the “middle-income trap” and will fall well ness. Vietnam’s unique history has produced short of its significant potential. public-sector institutions that are commer- Cu rrent and f ut u re generations of cialized and fragmented and that face insuf- Vietnamese people have the strong will, the ficient scrutiny by citizens. Efforts to address spirit, and the capacity to implement the these issues will build more coherent govern- reform agenda successfully and move toward ment structures and a stronger, more meri- a prosperous, creative, equitable, and demo- tocratic bureaucracy. Market rationality can cratic Vietnam. OVERVIEW 69 Notes average lower-middle-income country has currently borrowed from a fi nan- 1. https://en.wikipedia.org/wiki/History cial institution (World Bank’s Global _of_Vietnam. Findex database). 2. Major steps included the decollectiv- 11. As per the Global Findex database, ization of agriculture in 1988, the cre- 31 percent of Vietnamese adults have ation of tradable land-use rights under accounts with financial institutions the 1993 Land Law, the 1992 Law on (the SBV estimates that 50 percent of Enterprises, the 1996 Foreign Invest- adults have accounts), much less than ment Law, and liberalization of the the lower-middle-income country trade regime, which paved the way for average of 43 percent. The gap is even World Trade Organization member- worse for poor adults —19 percent in ship in 2007. Vietnam compared with an average 3. Since 2008, the ratio of employment of 33 percent in lower-middle-income in the manufacturing sector to total countries. employment has stagnated at about 12. According to a report by Nhân Dân 14 percent. (The People), the official Communist 4. The discussion on the four global Party news agency, the government megatrends draws on Centennial Asia received more than 1.2 million com- Advisors 2015. plaints and denunciations between 5. The three Asian economies are pro- 2003 and 2010, of which 70 percent jected to contribute more than 40 per- were related to land. See http://www cent of the increase in global GDP .nhandan.com.vn /mobile/_ mobile between 2014 and 2035, with their _chinhtri/_mobile_tintucsukien/item collective share in world GDP rising /788102.html, accessed on October 19, from 22 percent in 2014 to 29 percent 2015. in 2035. 13. Changes in this realm typically involve 6. This subsection draws on Centennial a rising share of food distribution Asia Advisors 2015. through modern supermarkets and 7. Intergovernmental Panel on Climate out- of-home eating establishments, Change (IPCC) 2007 report, available greater consumption of branded from the General Statistics Office of processed/convenient foods, a con- Vietnam. solidation in agricultural collection 8. These projections do not take into and intermediate trading, the spread account land subsidence, which of cold-chain storage and logisti- further exacerbates the impacts of cal methods, and the application of sea-level rise. increasingly stringent standards and 9. Today, the government registry com- sophisticated product traceability and prises more than 650,000 domestic quality management. private enterprises, compared with 14. http://www.digitaltrends.com/mobile only 40,000 in 1999 and virtually /iphone-cost-what-apple-is-paying/. none in 1990. 15. Customs procedures were evaluated 10. Eighteen percent of Vietnamese adults before the 2014 rollout of Vietnam’s have borrowed from a fi nancial insti- web-based, single-window, e- customs tution in 2015, up from 16 percent system V NACCS/ VCIS (Vietnam in 2011. In comparison, only about Automated Cargo and Port Consoli- 7.5 percent of the population in the dated System and Vietnam Customs 70 VIETNAM 2035 Information System). This system will 22. See the World Bank’s Worldwide almost certainly lead to improved cus- Governance Indicators 2014. toms performance. 23. This follows the “hybridity” model 16. Hai Phong port in the north has capac- developed by Evans 2005. ity shortfalls, while Cai Mep-Thi Vai 24. For example, the introduction of mer- port in the south has excess capacity. itocracy in Scandinavia emerged as 17. T here are more than 30 ex tra- the absolute kings had an incentive to budgetary funds at the central and establish a rule-based, capable, and subnational levels, such as the Viet- independent—from anything but the nam Social Security Fund, the Enter- absolute monarch — bureaucracy that prise Restructuring and Development could control the nobility and landed Support Funds, and the Accumulation gentry. In the Republic of Korea, the Fund for Foreign Debt Repayment. In legitimacy of the state depended on addition, fully state-owned, quasi- fis- a capable and neutral public service cal, special-purpose vehicles — such when the meritocracy gained a foot- as the Vietnam Development Bank— hold in the 1980s. intermediate official development 25. They are also responsible for moni- assistance disbursements like lending toring local development plans and, to SOEs. since 2002, approving budget alloca- 18. In countries such as Japan and the tions for provinces, districts/wards, Republic of Korea, the institutional and communes/neighborhoods except mandates for land, infrastructure, for expenditures stipulated by central- transport, and water resources are government mandates. vested in one line ministry, which 26. According to the CIVICUS Vietnam enables better coordination of policies assessment (2006) and the VUFO- at the territorial and city levels. NGO Resource Center’s study of 19. Including the regional corridors of forms of engagement between civil Hanoi–Hai Phong, Ho Chi Minh society and state (2008). These citizen City–Cai Mep-Thi Vai, and Can Tho– organizations include sociopolitical Ho Chi Minh City and the interre- organizations under the Fatherland gional corridor between the Central Front, professional organizations, local Highlands and Ho Chi Minh City. A nongovernmental organizations, and compelling economic case has yet to community-based organizations. be made for a corridor linking Hanoi 27. De facto independence of the compe- and Ho Chi Minh City. This corridor tition authority could translate into a may emerge organically once the eco- 17 percentage-point reduction in the nomic returns of the regional corridors productivity gap with the United States become apparent. (Voigt 2009). 20. The Freedom House civil liberties index 28. Hard-core cartels include firms acting in captures freedom of speech, the press, collusion and engaging in price fixing, association, and religion, on a scale market partitioning, and bid rigging. from 1 (completely free) to 7 (unfree). 21. 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Part II Background Chapters 1 Thirty Years of Renovation and Vietnam’s Aspirations for 2035 Main Messages Ðổi Mới has been difficult and complicated, The Sixth Party Congress formally endorsed requiring bold (and sometimes controversial) the Ðổi Mới (renovation) policy in 1986, after changes in perceptions and thinking. Key fac- several years of policy experimentation aimed tors contributing to its success have included a at improving economic incentives. Ðổi Mới pragmatic approach to the sequencing and signaled a new direction in economic manage- pacing of reform—shock therapy was ment, providing opportunities for all individ- avoided, and reforms were implemented step uals and entities to contribute to, and garner by step after mobilizing broad-based public the fruits of, economic development. It pro- support (Rama 2008). Reforms built on the vided the basis for innovation and injected a country’s strengths, initially focusing on agri- new dynamism that greatly accelerated socio- cultural and labor-intensive sectors. Priority economic development. was given to human resource development. Renovations in development thinking And international commitments were used to gradually introduced under Ðổi Mới enabled push through some difficult reforms. four key transitions: from centrally planned Despite three decades of tremendous eco- and subsidized resource allocation to more nomic and social achievements, Vietnam still market-based allocation; from a predomi- faces many development challenges. Average nantly state-owned economy to a multi-actor per capita income remains well below economy with an increasingly dynamic pri- national aspirations; the rate of growth in vate sector; from a closed economy to an productivity has declined in recent years; increasingly open and internationally inte- pressing social and environmental problems grated economy; and from centralized to remain; many development programs have decentralized governance structures. Reforms not been completed; inequities are beginning gradually expanded economic rights, choices, to widen, especially in the form of unequal and opportunities for Vietnamese people, access to opportunities for ethnic minorities especially in investment, production, and and other marginalized groups; and the insti- business activity. The role of the state is still tutions of governance remain weak in critical evolving and being redefined as part of this areas. Vietnam must adapt more quickly to reform process. global opportunities and challenges if it is to 77 78 VIETNAM 2035 avoid falling into the “middle-income trap” Achieving these objectives will require and lagging behind other more successful renewed reform efforts to manage six basic regional economies. transformations or breakthroughs: enabling Future reform opportunities are consider- economic modernization and private sector able. Vietnam has learned valuable lessons development; building national innovation from 30 years of Ðổi Mới. There is a growing capacity; managing urbanization for greater national consensus on the need for reform economic efficiency; achieving sustainable and renovation for the country’s develop- and climate-resilient growth; promoting ment. Participation in global economic inte- equity and social inclusion; and building gration trends and agreements provide modern institutions for an effective state. additional opportunities for Vietnam to Each of these long-term transitions and their deepen its commitment to reform. related set of reforms are discussed in depth A key challenge is to change the mindsets in the following chapters. of policy makers and the country’s leaders, to catch up with the needs of a country that is transitioning from central planning to a Đổi Mớ i: Motivation, Process, socialist-oriented market economy. Part of it and Results entails ending the conflicted attitude to what Lead Up to Đổi Mớ i a socialist-oriented market economy is, and not allowing that to be used to justify pre- After decades of colonization and devastating serving the state’s dominance of the economy. conflicts, Vietnam faced formidable develop- The state would still have an important role ment challenges after Reunification in 1975. in a functioning modern market-economy Essential infrastructure had been destroyed, system (with the private sector at its core), by societal wounds from internal conflict were being an effective regulator and facilitator, yet to heal, food and other basic commodities correcting market failures, and providing a were in short supply, and millions of people level playing field for all, on social and eco- had been left dead, maimed, or displaced nomic fronts. (Rama 2008). Another revolution in mindsets would Facing this grim reality, the Fourth Party transform development rhetoric into practical Congress of December 1976 adopted central actions backed by strong political will. This planning as the reunified country’s basic eco- will be particularly important since the next nomic model. The choice was motivated by stage of reform is more likely to adversely the victory of socialist forces in Vietnam, and affect vested interests. Strong political deter- the apparent economic successes of the Soviet mination and more systematic, evidence-led, central planning orthodoxy. Adopting a com- and broader-based consultative approaches mon economic model for the reunited country can help make difficult reforms happen. meant enforcing a socialist structure (includ- Vietnam is aiming for a new development ing central planning) in the South, where dynamism toward “prosperity, creativity, parts of agriculture were collectivized, and a equity, and democracy” by 2035. It is mov- very large number of private enterprises were ing toward realizing national aspirations for shut down, converted into cooperatives, or “a prosperous people, and a strong, demo- nationalized. Heavy industry—rather than cratic, equitable, and civilized country, in agriculture and light manufacturing (which which all people enjoy an abundant, free, were more consistent with the country’s com- and happy life and are given conditions for parative advantage)—became the focus of their comprehensive development,” as economic policy and heavy public subsidies defined in the country’s Constitution and in (Arkadie and Mallon 2003). External eco- the “Credo for Country’s Development in the nomic assistance (largely from the former Transition Period” of the Communist Party Soviet Union) helped bankroll centrally of Vietnam (CPV). planned investment decisions (Rama 2008). THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 79 Central planning provided little informa- official prices. Farmers responded to tion for economic actors and poor incentives improved incentives, vastly raising their living (no market prices, ownership or profit incen- conditions in a relatively short time (Rama tives, or hard budget constraints). Weighed 2008). Emboldened by early successes, some down by a distorted incentive structure, the officials extended pilot reforms beyond agri- economic system failed to reach the lofty tar- culture, to state-owned enterprises (SOEs). gets of the 1976–80 Five-Year Plan. Economic Managers of selected SOEs were given some stagnation and acute shortages of food and independence under a three-tier system in consumer goods worsened the living condi- production and sales decisions (after meeting tions of an already suffering population. their central planning targets),1 leading to Many undertook perilous journeys abroad in increased production and growing trade out- search of better opportunities (Rama 2008). side official channels. Partly in response to the poor outcomes The growing tolerance for fence-breaking from attempted central planning, experimen- activities created “gray” markets for com- tation with economic reforms began in the modities and production inputs that gradu- late 1970s (Arkadie and Mallon 2003). ally gained legitimacy and acceptance (Pincus Socioeconomic targets were revised down- 2015). Local authorities began tolerating ward in 1979, and some barriers to private cross-border smuggling to access essential activity were unofficially relaxed. Some flexi- supplies in exchange for unofficial levies, bility was introduced by moves to decentral- some of which were channeled to local gov- ize decisionmaking. ernment budgets. The Fifth Party Congress in Despite early attempts to impose central Hanoi in March 1982 partially reoriented the planning, key elements of economic and polit- planning focus from heavy industry to agri- ical power were remarkably decentralized, culture and light industry, with an export ori- and even fragmented horizontally and verti- entation (Arkadie and Mallon 2003). cally (Pincus 2015). Central government bud- The partial and opportunistic approach to get resources were small in absolute terms pre–Ðổi Mới reforms boosted agricultural and as a proportion of gross domestic prod- and industrial production in some areas, uct (GDP). A large share of the central com- stemming the decline in GDP in the early mittee members owed their positions to 1980s. But the reforms did not go far enough, provincial power structures (Pincus 2015). and overall conditions for people were getting With few central resources and limited central worse. Partial and semiformal reforms magni- power to enforce central plans, subnational fied business uncertainty, with policy fluctuat- state agencies and enterprises faced strong ing between deepening and relaxing central incentives to be entrepreneurial to survive. controls, and the emergence of dual (official Thus decentralization (unintentionally) facili- and unofficial) markets for goods and assets.2 tated and provided incentives for state entities Macroeconomic stability was another to innovate and experiment with reform. casualty of partial reforms. Fiscal and exter- The stage was thus set for a series of local- nal imbalances ballooned. Fiscal deficits and ized “fence-breaking” policy experiments by SOE subsidies were monetized, contributing enterprising local officials. These measures— to triple-digit inflation in the mid-1980s. The introduced furtively and incrementally on a “price-salary-money” reform of 1985 (to pilot basis outside the official system— decontrol output prices charged by SOEs and injected elements of market mechanisms into set by the State Price Committee, and to some production and trading activities. reduce state subsidies on consumer goods) Focusing initially on agriculture, fence- failed to stabilize matters. Most of the popu- breaking local officials allocated land to farm- lation still lived in poverty in 1986, the major- ers and contracted them directly (rather than ity far worse off than at Reunification. through cooperatives) to sell their output at Even so, the fence-breaking period proved near “market” prices that were well above to be an important phase of reform. 80 VIETNAM 2035 Spontaneous responses to localized reforms stagnant and heavily dependent on foreign helped change mindsets of both the general aid (Tran 2015), food was in short supply, the population and some in the leadership. This budget was chronically short of resources helped lay the foundations for the subsequent, (Tu-Anh et al. 2015), and most people lived in more comprehensive Ðổi Mới reforms. And poverty. A growing income gap with the ris- guiding the Ðổi Mới reforms were some of the ing East Asian economies (such as the local leaders (subsequently elevated to Republic of Korea; Malaysia; Singapore; national positions) who were at the center of Taiwan, China; and Thailand) provided addi- the fence-breaking actions (Rama 2008). But tional motivation for introspection and fragmented power structures made it difficult reform. to develop a more systematic and comprehen- Facing a “social and economic crisis” sive approach to implementing more broad- (figure 1.1), Vietnam embarked on a path of based institutional reform. economic renovation ( Ð ổ i M ớ i ) in 1986 (box 1.1) (CPV 1991). Ðổi Mới reflected a fundamental shift in the country’s economic Pressures for Change and Major ideology, a recognition of the failures of cen- Đổi Mớ i Reforms tral planning, and awareness that the fence- The economic situation was dire on the eve of breaking market reforms of the previous the formal launching of Ðổi Mới. Annual decade were useful locally, but inadequate inflation was running at more than 400 per- nationally to address the dire economic cent (Rama 2014), the real economy was situation. FIGURE 1.1 Vietnam: Reform, growth, and inflation, 1977–2015 12 4.0 2008–11: Macro-instability and lower growth 1985–88: Macro 1996–99: Asian crisis and Since 2012: Improvement of macrostability, crisis slowdown of reform 3.0 10 recovered growth, efforts to restructure the economy and to deepen integration 1976–80: “Shortage” and 8 stagnated economy 2.0 6 Log(1+inflation*100) Growth rate 4 1.0 2 0 0 –2 –4 –1.0 77 79 80 81 82 83 84 86 87 88 89 90 91 93 94 95 96 97 98 99 01 02 03 04 05 78 85 92 07 08 09 06 10 11 12 14 15 13 00 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Since 1989: Market-oriented reform (with socialism 1976–80: A CPE and autarkic economy orientation) and Integration (EU: 1992; ASEAN: 1995; 1980–88: Modified Planned Economy (Microreforms APEC 1998; VN-US BTA 2000; WTO: 2007; ASEAN + 1 FTAs;… and failure of “price-salary-money reform”) VN-Japan CEP; Currently in negotiation: TPP; 1986: Đổi Mới began (“multi-components” economy) VN-EU FTA; RCEP; VN-Russia, Belarus, Kazaxtan Custom Union FTA, VN-Korea FTA..) Sources: General Statistics data and World Bank and the Ministry of Planning and Investment of Vietnam calculations. Note: The blue bars measures inflation, and the green line indicates growth rate. APEC = Asia-Pacific Economic Cooperation; ASEAN = Association of Southeast Asian Nations; BTA = bilateral trade agreement; CEP = comprehensive economic partnership; CPE = centrally planned economy; EU = European Union; FTA = free trade agreement; RCEP = Regional Comprehensive Economic Partnership; TPP = Trans-Pacific Partnership; VN = Vietnam; WTO = World Trade Organization. THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 81 BOX 1.1 A chronology of major market-oriented Đổi Mớ i reforms 1981 : Directive 100 initiated output-contracting Minh City, and later with the introduction of an inter- schemes to farmers, allowing them to keep output bank foreign exchange market. A pegged exchange rate beyond a contracted amount. regime was introduced. 1986 : Ð ổi M ới was launched at the Sixth Party 1992: Vietnam signed a preferential trade agreement Congress, signaling a move from bureaucratic central- with the European Economic Community. ized management based on state subsidies, to a multisec- 1993: The 1993 Land Law increased land tenure to tor, market-oriented economy, open to world markets. 20 years (50 years for perennial crops) and gave 1987: Rationing was abolished for many goods, and households the right to exchange, transfer, lease, administered prices of several nonessential commodi- inherit, and mortgage land-use rights. Lending to ties were raised closer to market-clearing level. rural households was encouraged. SOE equitization Domestic and external economic trade were liberal- started.a Barriers to lending by the Asian Development ized, with domestic-trade checkpoints removed, and Bank, International Monetary Fund, and World Bank the Vietnamese dong was devalued. The Foreign to Vietnam were lifted. Investment Law was approved (enacted in 1988). 1994: Economic Courts were established. The Labor 1988: The Just 1988 Land Law provided for secure Code was issued to protect rights of employees and long-term land-use rights. Politburo Resolution 10 employers, and to regulate contracts and social insur- acknowledged households as autonomous agricultural ance. An arbitration mechanism was established. production entities. Formal decollectivization started 1995: Vietnam joined the Association of Southeast with households receiving a 15-year lease on their plots Asian Nations (ASEAN). with the right to sell their produce at market prices. 1996 : The State Budget Law defined tax and 1989: The Law on Export and Import Duties intro- expenditure responsibilities of different levels of duced custom tariffs. Most remaining price controls government. and subsidies were abolished. The state monopoly on foreign trade was relaxed: Private enterprises were 1997–99 : Value-added tax (VAT) and Corporate allowed to engage in foreign trade. The Vietnamese Income Tax were introduced. dong was devalued, and the multiple exchange rate 1999: The Enterprise Law consolidated the Company system was unified. Law and Law on Sole Proprietorships, and greatly 1990 : The Company Law and the Law on Sole simplified procedures to set up new enterprises. Proprietorships established the legal framework for 2000. The U.S.–Vietnam Bilateral Trade Agreement private registered businesses and limited liability (BTA) (effective December 2001) was concluded. companies. 2000–02: The SBV introduced a base interest rate 1990: The Ordinance for the State Bank of Vietnam and abolished the ceiling on lending interest rates. (SBV) and the Ordinance for Commercial Banks, Credit Cooperatives, and Financial Companies were issued 2001: Party Resolution 5 to accelerate SOE reform with commercial banking functions transferred out of was passed. Thousands of SOEs were equitized, the SBV, shifting the banking system from a single to merged, or liquidated during the five-year plan period two tiers. Private commercial banks were permitted. 2001–05. 1991: The first export processing zone was estab- 2002: The 2002 State Budget Law (effective 2004) lished near Ho Chi Minh City. better defined intergovernmental fiscal relations and accelerated fiscal decentralization. 1991–94: There was a shift to market-based determi- nation of the exchange rate, first with the establishment 2003: A one-stop-shop system for administrative pro- of two foreign exchange centers in Hanoi and Ho Chi cedures was launched, including appraisal of (Box continues next page) 82 VIETNAM 2035 BOX 1.1 (continued) investment projects and issuance of business licenses 2013: The Master Plan on Economic Restructuring and land-use right certificates. was launched, initially focusing on banks, SOEs, and public investment. 2004: The institutional framework to promote com- petition was established: the Competition Law, the 2014–15: The New Enterprise and Investment Law Vietnam Competition Administration Department, provided the foundations for business deregulation. and the Vietnam Competition Council. The Program for Reviewing and Simplifying Administrative Procedures was launched. 2005: The legal framework for all investors was uni- fied with the promulgation of the Common 2015: Vietnam completed negotiations on the Trans- Investment Law and Enterprise Law. Policies on state Pacific Partnership (TPP) and the EU–Vietnam Free economic groups were launched. Trade Agreement (FTA). 2007: Vietnam officially became the 150th member 2016: Implementation of ASEAN Economic of the World Trade Organization (WTO). Community. a. The process can be carried out by one of the following methods: keeping the state shares intact and issuing new shares; selling part of the state’s shares; detaching and then privatizing parts of an SOE; and (since June 1998) selling off all state shares to workers and private shareholders. The Ðổi Mới reforms, introduced in a stag- agricultural reform were considerable and gered manner, focused on the following seven unlikely to harm other segments of society. areas. Measures to decollectivize production were introduced from 1988, and households began Price reforms to replace cooperatives as the basic unit of Rationing and administered prices were production. The provision of long-term land- abolished for several nonessential commodi- use rights to individuals (Land Law 1988), ties from 1987 (Arkadie and Mallon 2003). and later rights to trade, lease, inherit, and The dong was devalued in 1987 (and again mortgage land-use rights (Land Law 1993), in 1989)—to close the gap between the offi- and a land titling program,3 provided people cial and shadow-market exchange rates. with the confidence and incentive to make Reforms were initially mostly partial, with longer-term investments. With the lifting of the economy segmented between production official quotas and controls on domestic within, and outside, the central planning sys- trade, the volume of agricultural goods traded tem. More decisive and comprehensive price in private markets began to soar. With more reform was introduced in 1989 and, by secure property rights, more market-based 1990, most official prices had been brought pricing (rice had been one-tenth of the market to near market-clearing levels, and most price in 1988) (Dollar and Litvack 1998), and direct state subsidies had been eliminated stronger individual rights to make produc- (Leipziger 1992). tion, pricing, and trading decisions, sharp increases were recorded in agriculture pro- Agriculture sector reforms ductivity and output, and in rural incomes, Vietnam began Ðổi Mới as an agriculture- thereby stimulating demand for other goods dominated economy with a relatively small and services. state-controlled industrial sector. With nearly Sustained growth in agricultural output 90 percent of the population living in rural helped ensure food security, thus contribut- areas and relying mainly on agriculture and ing to economic and social stability and natural resources, potential benefits from in building support for broader reform. THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 83 Agriculture, forestry, and fishery output grew integration. Participation in the Association of by a fairly stable 3.7 percent a year from Southeast Asian Nations (ASEAN) Free Trade 1986 to 2014, despite shocks. The value of Area (effective June 1996), the U.S.–Vietnam agriculture, forestry, and fishery exports Bilateral Trade Agreement (BTA) (effective surged from about $0.5 billion in 1986 to December 2001), and accession to the World $30.9 billion in 2014, an average annual Trade Organization (WTO) (effective January growth rate of just over 17 percent. In con- 2007) were important milestones. Several trast to the food shortages of the mid-1980s, other bilateral trade agreements were signed. Vietnam now ranks in the top five global Vietnam has also recently agreed to the Trans- exporters of coffee, tea, rice, pepper, cashews, Pacific Partnership (TPP) and the European cassava, rubber, and aquatic products. Union (EU)–Vietnam FTA, and is participating Earlier agricultural reforms have largely in negotiations for the Regional Comprehensive run their course. The focus now needs to shift Economic Partnership between the ASEAN, to modernizing and commercializing agricul- Australia, China, India, Japan, Korea, and tural production, to upgrading processing New Zealand. and marketing systems, and to developing factor markets, with a more narrowly defined Macroeconomic stabilization role for the government and an expanded role The triple-digit inflation of the mid-1980s for the market (chapter 2). began to be contained from 1989 with tighter monetary policy, including higher Economic integration interest rates and limits on credit growth While foreign trade—using gold and the U.S. (especially to SOEs), aided by strong supply dollar—occurred through informal channels responses to market-oriented economic even before Ðổi Mới, the legal basis for goods reforms. Consumer price index inflation fell and currency exchange was absent, and for- dramatically, from more than 400 percent in eign private investment was virtually zero. A 1988 to 35 percent in 1989 (Leipziger Foreign Investment Law was enacted in 1992), and averaged about 30 percent in September 1988 and, combined with price, 1990–95 (Tu-Anh et al. 2015). It was then exchange rate, and property rights reforms, contained at single-digit rates until late laid the foundations for sustained strong 2007, when pressures spilled over from ele- growth in foreign direct investment (FDI) vated global food and commodity prices and inflows and FDI-led export growth. Removal sustained rapid credit growth (annual credit of the state monopoly on foreign trade, eased growth averaged more than 30 percent per restrictions on private sector involvement in year between 1999 and 2010, much of it trade, relaxation of export and import quo- channeled into real estate). A cycle of mod- tas, and reductions in trade taxes, coupled erate to high inflation followed, with a peak with the above exchange rate reform, further of 28 percent in August–September 2008, stimulated FDI and trade (Arkadie and single-digit rates from April 2009 to October Mallon 2003). Vietnam’s merchandise 2010, and another peak of 23 percent in exports amounted to $150 billion in 2014 August 2011. (equivalent to 80 percent of GDP), three- Inflation has since been retamed (less than quarters of which were manufactured goods. 1 percent in 2015) through a mix of tighter Most of these exports are powered by FDI, monetary policy, and global disinflationary the stock of which now stands at more than trends (Brand 2015). The State Bank of $250 billion, sourced from more than 100 Vietnam (SBV) needs to further strengthen countries. Links to domestic private firms, monetary policy management to ward off however, are still weak (chapter 2). future inflationary episodes: This will require Reforms linked to bilateral and multilateral it to focus its mandate more explicitly on free trade agreements (FTAs) have helped price stability and to strengthen its opera- maintain the momentum for economic tional and research capacity. 84 VIETNAM 2035 Fiscal deficits were reduced early in the SOEs more profit oriented. Attempts to impose Ðổi Mới period, initially by eliminating export hard budget constraints, however, were under- and production subsidies to SOEs, and later mined by SOEs’ preferential access to land and by focusing on revenue measures. From a low credit from state-owned banks, and other revenue base, reforms to broaden the tax base forms of preferential treatment. Early SOE and strengthen tax administration resulted in reforms in the 1990s focused on divestiture, revenue collections of 23–24 percent of GDP mergers, and equitization of small and non- by 1996.4 Remaining deficits were no longer strategic SOEs. Implementation of equitization monetized. Fiscal deficit and public debt have, has been patchy, accelerating somewhat in the however, risen sharply in recent years, as early 2000s, but even then with mixed results Vietnam sought to offset the weak private sec- (chapter 2). A strategic shift in 2005 to create tor demand with countercyclical fiscal policy. state economic groups and benefit from their With the need for fiscal consolidation now economies of scale and scope has not achieved widely acknowledged, concrete measures are intended outcomes—on the contrary, in some needed to boost revenue collection, improve cases it has led to major financial losses. the efficiency of spending, and strengthen debt Slow progress on enterprise—especially management strategy and capacity. SOE—reform is indicative of the challenges in Finance sector reforms—including the pursuing top-down reforms in a decentralized separation of commercial and central banking and fragmented power structure, especially functions and the entry of joint-stock and when vested interests, including elements of foreign commercial banks—have been an the state apparatus, stand to lose from the important complement to macroeconomic reforms. Concentrated high-level political stabilization, though a large part of the commitment is needed to secure reforms in reform agenda remains (chapter 2). such cases (chapter 7). Enterprise reforms Decentralization Key reforms centered on legalizing private Despite a stated commitment to central plan- enterprise, restructuring SOEs, introducing ning, a legacy of prolonged internal conflict regulatory reforms to level the playing field for and limited central government resources all enterprises, increasing competition among contributed to a relatively decentralized firms, and reducing compliance costs. The power structure. Provincial leaders account Law on Sole Proprietorships and the Company for the largest share of central committee Law, both of 1990, established the legal basis members, and it is the central committee that for private enterprises and limited liability appoints national leaders. Fence-breaking companies. Subsequent reforms to bring all was an early manifestation of the extent of enterprises under a single Enterprise Law decentralized power structures. Pressures for helped accelerate private sector development. formal decentralization of fiscal and decision- Ongoing regulatory reform initiatives (notably making powers increased under Ðổi Mới.5 Government Resolution 19) have been critical The 2002 Budget Law (effective January in further reducing business startup and com- 2004) with Resolution 08 (June 2004) helped pliance costs, and in tackling emerging bottle- accelerate fiscal decentralization, with more necks to the development of enterprises and of decentralized management of development more competitive markets. Progress has been investment, budget, land, and natural impeded, however, by vested interests within resources, and with greater SOE autonomy. fragmented state power structures, and con- This helped transform relationships within the siderable barriers to domestic private sector state system, and between the state and busi- growth remain (chapter 2). ness at the local level. Fiscal decentralization The government also moved to increase has had mixed results. For the dozen provinces SOE autonomy over production, pricing, and that can balance their budgets (due to a strong human resource decisions, aiming to make business base or abundant natural resources), THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 85 decentralization helped them expand their fis- socialist-oriented market economy captures cal space considerably, and so they have the balance in its preferences for equitable become more independent from central gov- and market-led growth. Thus decades of ernment. In contrast, the central government rapid growth have not widened income has greater control over the remaining prov- inequality significantly. Equitable land distri- inces that depend on net transfers from the bution in the early years of Ðổi Mới, driving a national budget. rapid increase in agricultural production, was As discussed, the fragmentation of power important in laying the foundations for equi- associated with decentralization has made it table growth. Equitable delivery of basic harder for the national leaders to adopt health and education services and provision reforms that have adverse impacts on local of basic infrastructure (such as electricity and interest groups. Excessive fragmentation of water), aided by public policy choices that investment decisions among provinces (which equalized fiscal transfers across provinces now account for almost 80 percent of total with different levels of development, and a public investment) is another major concern strong focus on facilitating small and medium (chapter 7). enterprise development, further helped the Despite its challenges, decentralization has country avoid the spike in inequality experi- allowed local governments to be more proac- enced in some other fast-growing economies. tive in improving the business environment Vietnam has always prioritized human and in meeting basic service delivery needs. resource development, achieving some equi- The more proactive provinces have consis- table outcomes in basic literacy and numer- tently performed well in Vietnam’s Provincial acy. The approach to education changed Competitiveness Index (PCI).6 with the launch of Ðổ i Mớ i, signified by a move from viewing education as part of the Social equity “ideology–culture revolution” and a form of Throughout the reform process, Vietnam has welfare to seeing it as a necessary investment retained a strong emphasis on equity in development (box 1.2). Efforts to direct and social inclusion (chapter 6). The socio- education now focus on specific solutions economic aspiration of developing a rather than general directions. BOX 1.2 The education philosophy of Vietnam under Đổi Mớ i 1. The common principle: education and training is 5. The goal is to promote positive impacts (linking the top national priority. training with the needs of the labor market) while limiting the negative effects of the market mecha- 2. The common mission of education and training: nism on education and training: resisting the ten- raising intellectual standards of the general popu- dency toward commercialization. lation, training a skilled workforce, and develop- ing talent. 6. Everybody provides education, and education is provided to everyone, promoting lifelong learn- 3. The overall objective: the people are both the ing. Equity in education requires policies that goal and the driving force of socioeconomic bring education closer to the poor and support development. outstanding students to develop their talent. 4. Investment in education and training is consid- 7. The motto for education development: stan- ered an investment for development, equivalent dardization, socialization, diversification, and to investment in infrastructure such as roads, elec- democratization. tricity, the post, and so on. 86 VIETNAM 2035 Despite good progress on maintaining FIGURE 1.2 Per capita GDP growth, 1991–2014 social equity, significant challenges remain to provide equal access to opportunities for eth- Vietnam has had one of the fastest GDP per capita growth rates since the early 1990s nic minorities and other marginalized groups, Vietnam China as noted in the next section. India Korea, Rep. Poland Đổi Mớ i: An Overall Record of Malaysia Singapore Strong Achievements with Emerging Thailand Indonesia Challenges Ghana Impressive growth on multiple fronts Vietnam has recorded fast, stable, and inclu- Nigeria Israel sive economic growth in the three decades Turkey Egypt, Arab Rep. since the launch of Ðổi Mới, emerging from being one of the poorest countries in the Philippines world to a dynamic middle-income country Colombia with key social indicators comparable to higher-income countries. Per capita GDP Brazil jumped from about $100 (current prices) in 1990 ($970 in purchasing power parity [PPP] United States terms) to about $2,200 in 2015 ($6,000 PPP). Real per capita GDP growth has aver- Mexico aged 5.5 percent a year since 1990 (figure Russian Federation 1.2). China is the only large economy to achieve a higher per capita GDP growth over Kenya this period.7 Strong growth since 1990 places Vietnam well on the long-term income trajec- Cameroon tory relative to global comparators (box 1.3). Zimbabwe While Vietnam’s growth record overall United Arab Emirates has been positive, emerging concerns need to –4 –2 0 2 4 6 8 10 be resolved to ensure its long-term sustain- Average GDP per capita growth, 1991–2014 (%) ability. Growth in labor productivity (output Sources: World Development Indicators; General Statistics Office per worker) has been on a declining trend data. since the end of the 1990s (chapter 2), and is seen across most industrial subsectors, as Vietnam’s greenhouse gas emissions have well as in mining, finance, and real estate. In grown the fastest in the region, while the envi- agriculture, labor productivity has grown ronmental quality of its air, land, and water has robustly, but its level is still lower than in deteriorated sharply. Water and air pollution most of the region’s middle-income coun- have reached serious levels, especially near tries. The reform agenda to reverse this Hanoi and Ho Chi Minh City, posing major declining productivity growth trend will be health risks. A large part of Vietnam’s protec- demanding, given that the decline has been tive mangrove forests has been destroyed, while broad based. Long-term investments in overfishing has seriously depleted the nearshore developing innovation capacities (chapter 3) fisheries, posing threats to livelihoods. and urban infrastructure (chapter 4) will be Removing natural forests in some upland areas essential with an eye to sustaining strong, has contributed to more frequent and severe productivity-led growth over the next two flooding of lower-altitude farms and human decades and beyond. settlements. Finally, Vietnam is one of the Furthermore, growth has to a large extent world’s most vulnerable countries to climate come at the cost of the environment (chapter 5). change, with adaptation challenges accordingly THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 87 BOX 1.3 Vietnam’s long-term growth trajectory relative to comparator countries Vietnam’s long-term income trajectory compares high-income ranks pulled ahead of the rest. The well against those of its global peers. A long-term com- Republic of Korea and Taiwan, China, maintained parison with China is striking on two counts. First, their growth records for the first 25 years over the growth accelerations in both countries, although 13 subsequent 25 years (years 25–50), but Brazil, Egypt, years apart (starting around 1977 and 1990), begin at and Thailand started to see growth rates fall. roughly the same per capita income of around $1,100 Vietnam is thus seemingly at a critical juncture. (2005 PPP). Second, 24 years into its growth accelera- Decisions at this stage matter for meeting long-term tion (2014), Vietnam had kept up with China over the income aspirations. If the country can carry out the equivalent period (to 2001) (figure B1.3.1, left panel). reforms needed to pull up its GDP growth to its 7 per- The story remains broadly similar against other cent per capita target, it would match the trajectory of successful economies (those with at least a 3.5 times China and, by 2035, stand a strong chance of reaching increase in per capita income in the first 25 years of the incomes of Korea and Taiwan, China, in the early their growth acceleration) and over a 50-year period. 2000s. At the upper reaches of upper-middle-income The starting points for the growth accelerations were country status, it would be strongly positioned for the close, with Thailand at $835 (2005 PPP) at the lower final ascent to high income. It would also have a stron- end and Taiwan, China, at $1,365 at the upper end. ger chance of catching up with, or even overtaking, its About a quarter century into its growth acceleration, middle-income neighbors such as Indonesia and the Vietnam’s position is broadly at par with those suc- Philippines. But if Vietnam’s per capita growth slips to cessful economies (figure B1.3.1, right panel). about 4 percent a year, its average income is only What happens from here on is critical. At roughly likely to move close to that of Brazil or Thailand, and 25 years into their growth accelerations—where its chances of catching up with the neighboring Vietnam is now—the economies that made it into the wealthier middle-income countries would be lower. FIGURE B1.3.1 Vietnam has performed well on its long-term income trajectory a. Vietnam and China b. Vietnam and other high-growth economies 12,000 30,000 10,000 25,000 GDP per capita (2005 PPP US$) GDP per capita (2005 PPP US$) 8,000 20,000 6,000 15,000 4,000 10,000 2,000 5,000 0 0 Base +5 +10 +15 +20 +25 +30 +37 Base +5 +10 +15 +20 +25 +30 +35 +40 +45 +49 year year Korea, Rep. Taiwan, China China Vietnam Vietnam (7% per capita growth) Vietnam (4% per capita growth) Brazil Thailand Egypt, Arab Rep. Source: Calculations based on data from University of Groningen (2013). Note: Base years are 1951 for Taiwan, China and for Brazil; 1958 for Thailand; 1962 for the Republic of Korea; 1969 for the Arab Republic of Egypt; 1977 for China; and 1990 for Vietnam. 88 VIETNAM 2035 severe, especially in the Mekong Delta. With Organisation for Economic Co-operation and almost all large-scale hydropower potential Development (OECD), with extremely little tapped and with limited development of other variation across income groups and urban– renewable sources, greater reliance on coal is a rural locations. The maternal mortality ratio growing threat to environmental sustainability has fallen below the upper-middle-income and to energy security. The policy agenda country average, while under-5 mortality has involves protecting the quality of natural fallen by half, to a rate slightly above that resources; building climate resilience into poli- average. Access to basic infrastructure has cies, planning, and investments; and finding also improved sharply: electricity is now ways to tap into more clean energy sources. available to almost all households, up from less than half in 1993, and access to clean Poverty reduction and improvements in water and modern sanitation has risen from nonincome welfare measures less than 50 percent of all households to more Social outcomes have improved remarkably than 75 percent. since the launch of Ðổi Mới. Based on a variety Reflecting the gains in per capita incomes of international and national poverty lines, and education and health outcomes, poverty has fallen rapidly (figure 1.3). The Vietnam’s Human Development Index (HDI) $1.90-a-day poverty rate fell from 50 percent has improved over the last 20 years. In 2014, in the early 1990s to 3 percent today. Using the its HDI score was 0.67 (figure 1.4), putting it General Statistic Office–World Bank standard, at a global rank of 116 of 188 countries and poverty incidence fell from about 58 percent to in the category of “medium human develop- 13.5 percent over the same period. ment” countries. Progress has been uneven, Not only are incomes higher, but the however, and the rate of improvement is Vietnamese population is better educated and slowing (VASS and UNDP 2015). has a higher life expectancy than most coun- Although Vietnam has avoided the sharp tries at a similar per capita income. In recent increases in inequality of other fast-growing international tests, Vietnamese students out- countries, the differences between rich and performed the average for countries in the poor are still wide. While members of ethnic FIGURE 1.3 Household poverty rate, Vietnam, 1993–2014 80 70 60 Poverty rate (%) 50 40 30 20 10 0 1993 1996 1999 2002 2005 2008 2011 2014 $3.10/day $1.90/day General Statistics Office – Ministry of Labour, Invalids, and World Bank poverty line Social Affairs poverty line Sources: General Statistics Office data and World Bank and the Ministry of Planning and Investment of Vietnam calculations. Note: Dotted lines indicate periods when substantial changes were made to poverty lines or methodologies. THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 89 minorities have experienced gains in welfare FIGURE 1.4 The Human Development Index in selected countries, since the early 1990s, they face a growing gap 1990–2012 relative to the majority population. With Difference between Human Development Index growth and 14 percent of the population, they now make anticipated impact of non-income factors, 1990–2012 up almost 60 percent of the poor. Large num- 0.3 bers of urban migrants and those with dis- Turkey Tunisia Uganda Indonesia Bangladesh 0.2 Brazil abilities find themselves similarly marginalized Mexico Korea, Rep. Malaysia 0.1 from the country’s progress. Ensuring equality India Vietnam China 0 of opportunity remains an important agenda Mauritius –0.1 for Vietnam (chapter 6), and will become Ghana Chile even more pressing as the forces of globaliza- –0.2 Thailand tion, urbanization, and rising skill intensity of –0.3 production deepen their impacts. –0.4 –0.04 –0.02 0 0.02 0.04 0.06 0.08 0.10 Emergence of a market economy with GNI per capita growth multiple types of ownership Source: United Nations Development Programme 2013. The transition toward a socialist-oriented Note: Based on a sample of 96 countries. market economy has been gradually institu- tionalized. Since the launch of Ð ổ i M ớ i , international economic agreements are likely the National Assembly has revised the to put severe pressure on more substantive Constitution three times and promulgated change and reform. Financial and real estate and/or revised more than 150 codes and markets are in place, albeit still in early stages laws, and its Standing Committee has pro- of development. mulgated 70 ordinances. This has included But much more needs to be done to meet a number of provisions that helped create a the institutional requirements of a truly com- stronger legal basis for all firms, regardless petitive and transparent market economy of ownership, to enjoy the freedom to con- (chapter 2). Reforms are needed to improve duct business and compete on a more rules- the “rules of the game” at all stages of the based playing field. Many SOEs have been business cycle (protecting ownership rights, restructured and now operate under the enforcing contracts, and ensuring market unified Enterprise Law. The number of pri- competition, participation, and exit); to vate businesses continues to expand rap- develop factor markets (land, capital, labor, i d l y, c o n t r i b u t i n g s u b s t a n t i a l l y t o and technology); and to strengthen state employment creation and economic growth. mechanisms for economic management (with An overwhelming majority, however, are an emphasis on strengthening coordination, small or medium enterprises and infor- decentralization, professionalism, and mal—and inadequately integrated with accountability). global supply chain opportunities, which prevents productivity gains through scale Public institutional reforms and economies, specialization, and innovation the rule of law (chapter 2). Another pivotal change has been the transition Goods and services markets have been to a state governed by law. The 1992 established and are being further developed Constitution broadened the scope for reforming and deepened, with growing links between central state agencies.8 With the introduction domestic markets on the one hand and of the administrative reform policy in 1994, regional and world markets on the other. reforms to administrative procedures were Prices of most goods and services are deter- launched to reduce burdens for businesses and mined by market supply and demand. The citizens. Public administration reform master labor market (in the formal economy) has plans for 2001–10 and 2011–20 were intro- also been increasingly active, although duced to modernize and improve the efficiency 90 VIETNAM 2035 of the state’s administrative capacity. The regional and international economic integra- 2013 Constitution expanded the space for leg- tion (and competition) also helped, with exter- islative, executive, and judicial reforms. nal commitments under trade agreements used Legislative drafting and policy making are to help lock in difficult reforms. Changes in becoming more evidence-based, democratic, mindsets over this period were partially and consultative, with more attention given reflected in the changing terminology, from to equity issues and impact assessments.9 But questioning the merit of the bureaucratic, although most basic areas of economic, subsidized, command economy (mid-1980s) political, cultural, and social life—and state to accepting the multi-actor commodity organizations—are now governed by laws,10 production economy (late 1980s), to forming progress has not always kept pace with needs. a market-oriented economy with state man- In particular, the country’s unique history agement (1990s), and finally to developing has produced public sector institutions that a socialist-oriented market economy with are commercialized and vertically and hori- socialism orientation (since 2000). zontally fragmented, and that face insufficient Drilling more deeply, five aspects stand scrutiny by citizens (chapter 7). Despite out. First, pragmatism replaced ideology as reforms, the state remains strongly engaged in the primary basis of policy making from the economic activity—directly through SOEs onset of Ðổi Mới (Pincus 2015). Vietnam has and indirectly through close links with an taken a step-by-step, evidence- and consensus- exclusive segment of the domestic private sec- based approach to reform that put a premium tor. State fragmentation arises from the lack on political and social stability, and avoided of a clear hierarchy or assignment of roles and potentially destabilizing shock therapies responsibilities, both within the central gov- (Rama 2008). Ðổi Mới reforms were imple- ernment and between the center and the prov- mented at two levels: the Party provided broad inces. The absence of merit-based management direction to structural reforms, with imple- of public servants exacerbates the weaknesses mentation left to the provinces. Provinces in public institutions. Election processes and often pushed the boundaries, providing mechanisms for engaging citizen organiza- opportunity for local experimentation, with tions are still not robust enough to provide the central structure drawing lessons from true citizen representation, and the country that (for example, with SOE reform). Efforts lacks a system of effective checks and balances to avoid creating “losers in the political among the three branches of government. arena” helped ensure broad political accep- tance (Rama 2014). Reforms where there would be clear losers, as with some elements Why Has Đổi Mớ i Been Such a Success? of SOE reform and administrative simplifica- Pointers for the Future tion, proved much harder to implement. Vietnam has recorded considerable success in Second, reforms were and remain home- implementing Ðổi Mới against difficult odds. grown, adding to their legitimacy and domes- In planning for 2035, it is instructive to iden- tic appeal. External advice was welcomed, but tify the key factors that contributed to that judged on its merit, rather than just accepted success, while drawing lessons from the past as a condition for obtaining external assis- approach to help guide the next generation of tance (which remained limited relative to the reforms—the core focus of the Vietnam 2035 overall economy). Lessons from mistakes in report. the former Soviet Union and successes of Overall, a pragmatic and flexible approach neighboring China and the rest of East Asia to reform that aimed to tap into the country’s were internalized, but only after adapting strengths was important to success, as was the them to the Vietnamese context. early emphasis on human development, and a Third, Vietnam framed and sequenced the willingness to experiment and consider ideo- reforms to build on national strengths. The logically difficult suggestions. A focus on country’s main endowments at the launch of THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 91 Ðổi Mới were its underused fertile land and a Starting with the 1987 Law on Foreign literate workforce, although skill levels were Investment (enacted in September 1988), still low and capital stock was in short supply. Vietnam has adjusted its legal framework not The early emphasis appropriately was on land only to meet the basic regulatory requirements reform and raising agricultural productivity in of its international agreements but also to smallholder farming, where most people were enhance the benefits of integration. Plans to employed. The focus then shifted to household further boost global integration will require business and labor-intensive manufacturing (for sustained changes in awareness, thinking, and example, garments, footwear, and electronics) the legal regulatory environment. Participation where most new jobs were being created. With in the TPP, EU–Vietnam FTA, and other inter- Vietnam’s advantageous location—close to national agreements provides opportunities for countries such as China, Korea, Malaysia, Vietnam to implement reforms in sensitive Singapore, and Thailand, which were embed- areas such as the environment, labor relations, ding themselves in global supply chains— intellectual property rights, and government regional integration also became an important procurement. focus of reform. The gradual discarding of poli- cies that encouraged and subsidized inefficient heavy industry freed scarce capital for more Future Opportunities and productive investments. Challenges Fourth, Vietnam committed early to build Domestic Factors on its already relatively high and equitably dis- tributed human capital. Literacy rates and life Vietnam’s achievements under Ðổi Mới are expectancy were already impressive for its testament that, if reforms are carried out cor- income level at the onset of reform (Arkadie rectly, the rewards to society easily justify the and Mallon 2003). Gender and rural–urban effort. The gradual and pragmatic approach gaps were contained and further investments to reform, focusing on equitable outcomes, were made in human development under Ðổi has helped minimize socioeconomic instabil- Mới: for example, the share of the public bud- ity and ensure that reforms were both in the get allocated to education has risen from about national interest and in the interests of the 5 percent in the late 1980s to about 20 percent majority of individuals. This helped sustain now. The initial emphasis was on basic educa- popular demand for reform from a citizenry tion: the net enrollment rate for primary and that associated a general improvement in lower secondary school levels increased from well-being with economic renovation. Social 87 percent and 30 percent, respectively, in consensus for market-oriented reforms is 1993 to 93 percent and 82 percent in 2010. especially strong, but with clear signs that More emphasis is now given to improving pre- people’s expectations are starting to outrun school coverage and higher education quality reform progress as they perceive it (box 1.4). and standards, although the latter needs an While pragmatism and flexibility facili- even stronger reform push (chapter 3). A con- tated reform, the lack of a comprehensive tinuing strong emphasis on basic health care is reform strategy has limited institutional reflected in relatively low child and maternal development, undermining the prospects for mortality rates, and relatively high life expec- efficient and sustained growth. There is tancy. The planning focus on human develop- growing awareness of the need for a renewed ment has enhanced the returns from subsequent focus on improving the quality of growth market-oriented reforms. during the next stage of reform. Fifth, where a domestic consensus was The broad-based support for a market econ- harder to forge, Vietnam used its commitments omy with private ownership provides a strong under external trade agreements to good effect, foundation for deeper reforms. But past particularly to usher in some of the more com- approaches that worked well in the initial stages plex enterprise and market institution reforms. of reform (benefitting most segments of society) 92 VIETNAM 2035 BOX 1.4 Changing attitudes of Vietnamese society toward the market and the state Vietnamese society would like to see a rapid transi- Respondents acknowledged that the move toward tion to a market economy with private ownership, a market economy was happening (with more than and is increasingly dissatisfied with the pace of half agreeing in 2014 that Vietnam was primarily a change. This is borne out by the recent surveys (2011 market economy, against only one-quarter in 2011). and 2014) of people’s Changing Attitudes to the But expectations for accelerated reforms are also ris- Market and the State (CAMS) conducted by the ing. The share of respondents who felt in 2014 that Vietnam Chamber of Commerce and Industry the market-oriented reforms were taking place at a (VCCI), with World Bank support. An overwhelming fast or very fast pace was significantly smaller than majority (89 percent) of respondents to the 2014 the share who thought that the pace was slow or very CAMS survey favored a market economy to a state- slow—in 2011 the latter group was shadowed by the led one (figure B1.4.1). More than 70 percent pre- former (figure B1.4.2). A similar result is seen on the ferred private ownership to state ownership, and the question of whether or not the speed of transition gap had intensified between 2011 and 2014. from state to private ownership was fast or slow. FIGURE B1.4.1 Perceptions about the preferred FIGURE B1.4.2 Perceptions of the pace of economic system transition 100 60 Share of respondents (%) 80 50 Share of respondents (%) 60 40 40 30 20 20 0 10 Prefer market economy Prefer state-led Economic system does 0 over any other economy over not matter 2011 2014 economic system market economy Fast or very fast Slow or very slow 2011 2014 Source: VCCI and World Bank 2015. Source: VCCI and World Bank 2015. will no longer be enough. Reforms from here reform process. This will require close, frank, on are likely to face greater resistance from and interactive channels for political leaders interest groups that have evolved and gained and policy makers to work with and enlist considerable power since reforms began—and business leaders, technocrats, and researchers. are likely have a lot to lose from some reforms. This served policy making under Ðổi Mới For the next generation of reforms, it will be well and will be increasingly important for even more important to consult widely, build designing and implementing future policy.11 the evidence base on the need for reform, and The mass media and society at large, too, develop more medium-term strategies for for- have to be involved in informing policy mulating, marketing, and implementing design, and in reviewing and monitoring reforms. progress and advocating a change in course Vietnamese business leaders, researchers, when results are unfavorable. and technocratic policy makers will need to Above all, the situation calls for more continue playing a major role in guiding the radical changes in the mindsets—of Party and THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 93 government leaders, and of technocrats and requiring geopolitical and economic outreach policy makers. Despite the stated commit- beyond the region. ment to transitioning to a socialist-oriented The following categories of global mega- market economy, consensus on the details of trends will be important for Vietnam to con- what that entails is still lacking. And the sider in the next two decades.12 “socialist-oriented” part of the definition often gets used to justify preserving the state’s Geopolitics dominance of the economy. An effective set- The current shift in the world’s economic and tlement of the debate would forcefully argue geopolitical axis from west to east and from against this, while unambiguously endorsing north to south will define the coming decades. the market’s role in guiding resource alloca- The rise of China is particularly significant. tion and the private sector’s role in driving Geopolitical shifts will, however, be even economic growth and job creation. more complex. Other regional powers— The state would be an equally important including developed economies such as Japan and equal partner as an effective regulator and and Korea, and emerging powers such as facilitator, correcting market failures and pro- Brazil, India, Mexico, the Russian Federation, viding a level playing field for all, on two and Turkey—are also likely to try to expand important fronts. All firms—public and their spheres of influence. private, those with connections and those The emergence of a multipolar world order without, small and big, domestic and foreign— gives rise to multiple possibilities, including would face similar incentives and disincentives more collaborations such as the Asian in the market. The government would provide Infrastructure Investment Bank (AIIB) and the equality of opportunity to succeed in life to all New Development Bank of the BRICS states people, irrespective of predetermined circum- (Brazil, Russia, India, China, and South stances such as gender, ethnicity, and location Africa). There could be tensions, or even con- of birth or family origins. flicts, between rising powers, or among rising There is a perception that “the dogma dis- and existing powers. ease is still prevalent, there is still impartial Cooperative relations with a rising China thinking, irrationality, fear of renovation; will remain essential. Vietnam is one of the renovation thinking is not resolute and signatories to and founding members of the strong” (Quy 2015). Prolonged debate about AIIB. Its infrastructure financing needs over high-level ideological issues has slowed the the next two decades will run into tens of economic transition and socioeconomic billions of dollars a year. With most bilat- development. Strong leadership is now eral partners reducing their presence in needed to provide a clear vision of the actions Vietnam and private investors still reluctant needed to build a truly competitive and to participate in infrastructure projects, the equitable market economy. AIIB could cover some of the emerging financing gap. Particularly acute for Vietnam are maritime Global Factors issues with China. These go beyond just terri- Vietnam’s location makes it a vital link torial concerns, as the maritime waters have between East, Southeast, and South Asia. considerable economic and strategic value, Physical connections to Asia and maritime critical for shipping and communications and connections to the rest of the world have containing a wealth of fish stocks and energy shaped Vietnam’s history and will remain and mineral reserves. crucial. But the hyper-connectivity of the With the Middle East in turmoil, energy modern world (to which Vietnam is commit- geopolitics will also have implications for ted) overcomes many of the binds of geogra- Vietnam both as a producer and exporter of phy. Future opportunities and risks are crude oil and as a rapidly growing consumer projected to be largely supra-regional, thus of petroleum products. 94 VIETNAM 2035 TABLE 1.1 Average annual growth in real GDP Percent 2016–20 2021–25 2026–30 2031–35 2016–35 United States 2.8 2.5 2.6 2.8 2.7 Europe 1.9 1.9 1.9 2.0 1.9 Japan 0.9 1.3 1.3 1.5 1.3 ASEAN 5.3 5.0 4.6 4.3 4.8 China 7.0 6.0 4.9 4.0 5.5 India 6.6 6.3 5.8 5.2 6.0 Rest of the world 3.5 3.4 3.1 2.9 3.2 World 3.5 3.3 3.2 3.0 3.2 Sources: Data and projections from Minor, Walmsley, and Strutt (2015) and World Bank and the Ministry of Planning and Investment of Vietnam calculations. Note: ASEAN = Association of Southeast Asian Nations. FIGURE 1.5 Regional shares of global GDP (baseline scenario) China, India, and ASEAN member countries matched by the (relative) decline of the United 35 States, Europe, and Japan is likely to be the 30 most notable shift in the global economic 25 structure in the coming decades (figure 1.5). Percent 20 The three Asian economies are projected to 15 contribute more than 40 percent of the 10 increase in global GDP to 2035, with their 5 collective share in world GDP rising from 0 22 percent in 2014 to 29 percent in 2035. pe n a a St ited ta d ta N rld China is the biggest part of this story. In this in di pa r s an r s EA ro Ch In wo es Re tes s Ja Un Eu te be AS be ia, at report’s assessment, it is expected to overtake of d em In st m , N ina the United States as the world’s largest econ- em EA Ch m omy (in market prices) in about 2032. It has been the world’s largest exporter since 2009, AS 2014 2035 and is the second-largest importer of goods. It is set to become an increasingly important Sources: Data and projections from Minor, Walmsley, and Strutt (2015) and World Bank and the Ministry of Planning and Investment of Vietnam calculations. source of investment financing for emerging Note: ASEAN member states = Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, economies, particularly regionally. China Myanmar, Phillipines, Singapore, Thailand, and Vietnam. already accounts for 20 percent of Vietnam’s trade, up from 10 percent in 2000. The large In the midst of this fast-evolving world FDI inflows into Vietnam are linked, in part, order, Vietnam will need to continue building to a shift in low-wage production from China. its alliances judiciously with a clear eye on its As real wages in China rise, producers will long-term economic and political interests. continue to seek opportunities for lower wage production bases—the “China+1 strategy.” Global economics Vietnam’s proximity to southern China— The global economy is projected to grow at home to many production networks—gives it an average of 3.2 percent annually between a competitive edge. Producers can benefit from 2015 and 2035 (table 1.1), with continuing its low wages and from being part of the advances in trade integration, urbanization, Chinese supply network. The agglomeration and technology the main drivers. The rise of of a nascent electronics–industrial cluster in THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 95 the north–central parts of Vietnam (around development and manufacturing. The rise of Hanoi) is an early sign of these possibilities. the middle class in developing ASEAN coun- Moreover, with a rapidly emerging middle tries will inject impetus into regional eco- class, the Chinese consumer market will be nomic growth. ASEAN integration is also increasingly attractive for Vietnamese seen in Vietnam as a stepping stone to help producers. lock in partnerships extending beyond the region (Thanh 2015)—especially the TPP (box 1.5) and the EU–Vietnam FTA—as well Global and Regional Economic as the Free Trade Area of the Asia-Pacific Cooperation Agreements (FTAAP) and the RCEP, which are still being Benefits of trade integration negotiated. Growth prospects in East Asia will also be The TPP countries account for 36 percent underpinned by the ongoing shift toward of world GDP and more than a quarter of all multilateral (often regional) trade agreements. world trade. Vietnam is well placed to benefit: ASEAN integration—the ASEAN Economic the TPP could add a cumulative 8 percent to Community (AEC) became a trading bloc in Vietnam’s GDP by 2030, with significant 2016—can generate considerable economic increases in exports and investment benefits. Estimates for Vietnam range from a (table 1.2).14 The main sources of these gains 1–3 percent cumulative increase in national are likely to be tariff reductions (figure 1.6), income.13 But some obstacles need to be over- especially on textiles and apparel, where U.S. come. For example, slow progress has been tariffs are now more than 17 percent ad made in dismantling trade barriers and ratify- valorem. Reductions in nontariff measures ing ASEAN-wide agreements. Companies for goods and services trade also promise to report that their ability to freely move goods, contribute heavily. Vietnam could also use people, and capital across the ASEAN’s polit- TPP commitments to help lock in sensitive ical boundaries has not improved as much as domestic policy reforms. The EU-Vietnam expected. Data from the ASEAN Secretariat FTA offers similar potential gains in eco- suggest that about 70 percent of AEC prereq- nomic advancement and reform opportunity. uisites have been adopted by ASEAN govern- While Asia-Pacific Economic Cooperation ments. The remaining tasks are the more (APEC) 15 has no mandate for conducting difficult, and matter the most for investors. trade negotiations, the FTAAP provides an Foreign investment is expected to increase intriguing possibility for wider trade inte- in the AEC, with a boost to infrastructure gration in the Asia-Pacific region.16 If the BOX 1.5 The Trans-Pacific Partnership The TPP—comprising Australia, Brunei Darussalam, environment; government procurement; intellectual Canada, Chile, Japan, Malaysia, Mexico, New property; investment; labor; legal issues; market Zealand, Peru, Singapore, the United States, and access for goods; rules of origin; sanitary and phytos- Vietnam—has been billed as a 21st century trade anitary and technical barriers to trade measures; tex- agreement, or an ambitious, next-generation agree- tiles and apparel; and trade remedies. ment. TPP agreements cover the following areas: The TPP is also being tasked with addressing over- cooperation and capacity building; services, including lapping rules and regulations of existing trade agree- financial services, telecommunications, and tempo- ments, in an attempt to bring some regulatory rary entry of service providers; customs; e-commerce; coherence to regional trade. Sources: USTR and Minor, Walmsley, and Strutt 2015. 96 VIETNAM 2035 TABLE 1.2 Overview of the Trans-Pacific Partnership and Free Trade Area of the Asia-Pacific impacts on Vietnam, 2015–35 Cumulative percentage change relative to baseline growth, unless otherwise noted 2020 2025 2030 2035 TPP FTAAP TPP FTAAP TPP FTAAP TPP FTAAP Real GDP 3.6 3.6 6.8 11.2 8.2 14.1 8.1 14.7 Real exports 5.0 5.4 13.4 14.4 16.8 20.3 17.1 23.7 Real imports 7.6 7.5 15.7 17.6 16.0 19.8 14.2 20.2 Real investment 13.6 12.9 21.3 32.2 15.0 27.0 6.3 17.8 Capital stock 3.1 2.9 9.3 11.2 12.9 18.8 11.9 20.1 Change in trade balance (USD million) −4,941 −4,648 −9,148 −13,689 −6,051 −11,313 −169 −5,166 Source: Minor, Walmsley, and Strutt 2015. FIGURE 1.6 Change in Vietnam’s real GDP as a result of the Top-down multilateral trade integration is Trans-Pacific Partnership, 2015–35 likely to be complemented by important sub- regional collaboration, including that within 9 the Greater Mekong Subregion. Cumulative percentage change relative 8 7 Water security and dwindling water supplies in the Mekong Delta to baseline growth 6 Dwindling and increasingly unpredictable 5 water supplies, along with rising demand for 4 water and energy, will require greater regional 3 cooperation for energy and water security. 2 The Mekong River flows through six coun- 1 tries (Cambodia, China, Lao People’s Democratic Republic, Myanmar, Thailand, 0 2020 2025 2030 2035 and Vietnam) with a watershed covering Tariffs Nontariff measures, goods Nontariff measures, services 795,000 square kilometers, about 6 percent of which is in Vietnam. Some 60 million peo- Source: Minor, Walmsley, and Strutt 2015. ple live in the watershed, including 21 million in Vietnam. The Mekong watershed has large FTAAP were also to be agreed and signed hydropower potential, supports the world’s following the TPP agreement, it could well largest inland fisheries, has the second-highest add another 6 percentage points to levels of aquatic biodiversity in the world, Vietnam’s GDP by 2030 (in addition to and provides water and nutrients to Vietnam’s the 8 percentage points from the TPP). In Mekong Delta. contrast to the TPP, the most significant The Mekong River offers challenges in source of economic gains from an FTAAP transboundary water management. China would be greater liberalization of nontar- became the first country to begin large devel- iff measures. Investment in Vietnam, when opment of its Mekong Basin hydropower the FTAAP is combined with the TPP, resources in the mid-1990s. Other countries is projected to add a cumulative 32 percent have built smaller projects, with larger devel- to baseline investment projections by 2025. opments planned. While investing in the THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 97 Mekong’s hydropower potential is a finan- customized, high-quality products. Major cially attractive option for governments and advances in renewable energy pose a growing private developers, it has many negative challenge to conventional, and usually envi- cross-border impacts. Hydropower dams, ronmentally more damaging, energy sources. particularly those on the mainstream, can Next-generation genome sequencing and other block migratory fish routes and reduce fish biomedical advances are set to expand rapidly stocks. Hydropower reservoirs trap sediment in the next decade, enhancing and extending that would otherwise flow downstream, pro- human life. Advanced robots are being viding nutrients to delta areas and the marine deployed on shop floors at a huge rate, boost- ecosystem that supports Vietnam’s productive ing productivity and driving down costs. offshore fisheries. Mitigating these impacts The information revolution is also enabling presents a major challenge for the region and disruptive innovations in business models. Vietnam. The Internet reduces many of the information advantages of colocation and cost-sharing. Regional cooperation and energy security Raw materials and other inputs can be Southeast Asia’s energy demand is projected sourced on the Internet. Online platforms, to increase by more than 80 percent between such as Alibaba, Etsy, and Makers’ Row, 2013 and 2035, to support a near tripling of make it possible for manufacturers to search the region’s economy and a nearly 25 percent for customers without having to spend much increase in population.17 Regional countries on advertising and distribution. Crowdfunding will need to act together to ensure energy sites such as Indiegogo and Kickstarter can security. help attract finance. Past policies are likely to increase reliance These trends bring mainly opportunities. on imports of fossil fuels. Countries that used But skill-intensive and labor-efficient technol- to be net energy exporters (such as Vietnam) ogy may eliminate routine middle-income are expected to become net importers. The vocations. New technologies are already dis- share of coal in the energy mix is predicted to placing handicraft producers in industries rise, contributing to an even higher carbon ranging from textiles to metalworking. intensity and greater environmental costs. Technical progress may increase inequality in A more sustainable pathway is feasible, based labor productivity and wages, as those with on alternative policies supporting scale-up of technical skills earn more. Some argue that energy efficiency, renewable energy, and automation may contribute to premature application of modern low-carbon technolo- deindustrialization in the developing world gies. The distribution of energy resources (Rodrik 2015). Vietnam needs to invest in among countries in the Greater Mekong upgrading the technical skills of its next gen- Subregion is unbalanced, creating opportuni- eration and further improve the domestic ties for cooperation and trade to the benefit of business environment to maximize benefits all the countries. from these opportunities—and mitigate possible risks. Solar energy. Solar energy poses a growing New Technical and Business challenge to conventional energy sources as Megatrends18 costs decline. Its share of global electricity gen- Technical innovations, fueled by the informa- eration is expected to grow from 0.4 percent tion revolution, will disrupt global production currently to 2.6 percent in 2035 (IEA 2013). and trading patterns. Advances in digital With solar energy largely available all year, technologies—including additive manufactur- especially in southern and central Vietnam, ing (3D) printing, programmable microcon- potential opportunities to use solar panels and trollers, and second-generation computer water-heating systems are tremendous. numerical control milling and routing—make Social mobility, analytics, and cloud services. it easier and less expensive to manufacture These services present opportunities for 98 VIETNAM 2035 Vietnam to catch up with developed coun- as the technology advances, manufacturing tries. The value of the cloud computing indus- may move to smaller-scale, widely distrib- try is projected to grow to $241 billion by uted, and customizable production. Some 2020 (ICTC 2013). Such services could help investors from developed economies may reduce public service delivery costs. For exam- relocate production back to their home ple, the costs of chronic disease treatment market. could be reduced by 10–20 percent through Artificial intelligence. A recent survey of better disease management (Manyika and 170 artificial intelligence researchers found a Chui 2013). But close cooperation between significant consensus around a 90 percent scientists, enterprises, and the government is probability that human-level machine intelli- needed to maximize potential opportunities. gence will be attained by 2075, 50 percent Genomics and life sciences (Battelle probability by 2040, and 10 percent by 2022 Technology Partnership Practice 2011; Drake (Bostrom 2014). As technology advances and 2011; Wadman 2013). Next-generation costs are pushed down, industrial robots are genome sequencing applications in health becoming increasingly capable and afford- care, agriculture, and biofuels have the poten- able. The new generation of advanced robots tial to boost economic output. Faster disease is set to improve productivity gains and drive detection, more precise diagnoses, new drugs, cost savings, replacing low-skilled jobs while and more customized disease treatments will requiring modern workers to be equipped extend and enhance lives. Improved under- with more sophisticated skill sets. Robots are standing of the genetic makeup of plants and likely to replace an increasing number of jobs animals will accelerate the development of in the automotive and electronics industries. agricultural crops and animal breeds that are Advances in health care. An era of digitized more nutritious, productive, and resistant to medicine, where much routine medical care disease, insects, and drought. Genetically will take place at home, with hospitals and improved crops could help cut Vietnam’s feed clinics mostly used for emergency treatments, imports and the need for so many chemicals is expected to emerge from about 2020 and other inputs. But environmental and con- (Deloitte 2014). This would revolutionize sumer groups will also demand more informa- health care productivity, as traveling and tion on the health risks, as well as improved waiting times are reduced, medical prognoses regulatory systems to mitigate them. become more accurate, and health care is E-commerce. E-commerce sales are grow- made more affordable. ing rapidly in Vietnam, driven by rapid Internet uptake and even faster adoption of Global Climate Change smart phones. A lack of apps for purchasing online, slow online payment growth, and con- Climate change is potentially the most conse- cerns over the security of online purchases quential global issue. The global mean tem- need to be rectified, however, and logistics perature increased by 0.8°Celsius (°C) services for traceable and timely shipping of between 1880 and 2012 (IPCC 2013). Ten of small packages upgraded. Potential opportu- the hottest years on record have occurred nities for domestic firms to cooperate with since 1990. The number of category 4 and 5 foreign partners in this area are manifold. storms has risen sharply over the past Additive manufacturing. 3D printer tech- 35 years. The surface area of the Arctic Sea’s nology is set to challenge business models of ice has shrunk to its lowest on record—with mass production manufacturing by making an accelerating rate of shrinking—and global mass customization possible at lower cost. sea levels have risen by about 10–20 centime- While some labor-intensive activities might be ters in the past century. Rising sea levels at risk, it may also help broaden manufactur- increase the risk of storm surges and fluctua- ing opportunities for Vietnam. A risk is that, tions in precipitation. THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 99 The recent Fifth Assessment Report FIGURE 1.7 Projections for surface air temperature increase (AR5) by the Intergovernmental Panel on 90% range of baseline Climate Change (IPCC)19 shows that green- scenario excluding extreme autonomous house gas emissions have continued to 6 energy efficiency Mean surface-air temperature increase increase (IPCC 2014). These emissions are IPCC AR5 RCP8.5 median 5.1°C in 2100 improvements above pre-industrial level (°C) 5 4.2°C averaged over 2071–99 now on a path to a 3.5–4.0°C warmer planet 80% range of baseline scenario by the end of the century (figure 1.7). The 4°C Current policy projections median 3.7°C (IPCC WGIII AR5) report warns that emissions need to go to 3 Current pledges median 3.1°C 90% range of baseline IPCC AR5 RCP2.6 median 1.6°C zero in less than a century if there is to be in 2100 scenario including extreme autonomous any hope of limiting global warming to any- 2°C 1.6°C averaged over 2071–99 energy efficiency 1.5°C where near 2–3°C. 1 Historical observations improvements 66% uncertainty range Vietnam is among the five countries likely Climate-system RCP206 to be most affected by climate change. 1900 1950 2000 2050 2100 A high proportion of its population and Year economic assets are in coastal lowlands and Source: World Bank 2014. deltas. Temperature increases in Vietnam Note: RCP8.5, RCP2.6, and WGIII. have averaged about 0.26°C a decade since 1971 (Nguyen, Renwick, and McGregor 2013), twice the global average (Trenberth Vietnam’s Aspirations for 2035 et al. 2007). On current trends, annual aver- The motivations that fuel Vietnam’s 2035 age temperatures will be 0.6–1.2°C higher aspirations are internal and external. Internally, by 2040 than in 1980–99 (ONRE 2012). there is pride in a rich past—justifiable for a Predictions show intensified heat and cold society with one of the world’s longest contin- waves, and a 28–33 centimeter increase in uous histories and civilizations. As recently as sea levels on Vietnam’s coast. 20 Seasonal the early 19th century, Vietnam was a regional variability in precipitation is projected to powerhouse, with an economy much larger increase. Extreme flooding would also than that of Malaysia, the Philippines, or become more likely, particularly in the Thailand (Maddison 2001). The period since northern region, with increased risk of land- has been one of a long, relative decline for slides in mountainous areas. The typhoon Vietnam, with its per capita GDP growing by trajectory has shifted south in the past five only about 0.4 percent a year between 1820 decades. If this continues, Ho Chi Minh and 1960, and then falling into sharp City will be at risk from typhoons. Coastal decline for more than a decade on account of a erosion and salinity intrusion are other devastating war (chapter 2). The world econ- accelerating risk factors. omy—many countries in the region included— Agriculture is projected to be hit hard, expanded at an unprecedented pace, widening with the Mekong Delta likely to be the worst the gap with Vietnam. affected (Wassmann et al. 2009). Annual Yet the post–Ðổi Mới period has lifted rice production could fall by 3 million–9 Vietnam into the ranks of the world’s middle- million tons by 2050, coffee plantations may income countries, though the country is yet to become unsuitable (Bunn et al. 2015), and close the gap with much of the rest of the world marine ecosystems will likely be severely and regional economies, such as China, Korea, affected. Climate change is also set to have Malaysia, and Thailand, on per capita income. adverse health consequences, including A major part of Vietnam’s aspirations for water- and vectorborne diseases and diar- 2035 thus derives from its desire to reclaim its rheal illnesses (Coker et al. 2011). Flooding place among the community of nations—and would compound the risks. The poor and not get left further behind regionally. That elderly would be especially vulnerable to desire is not new, nor is the idea that the desired heat extremes. convergence with the world economy will not 100 VIETNAM 2035 come without effort and investment in human modern market institutions that will ensure capital. In a letter to students on their first day free and fair competition, security of all forms at school in the newly established Democratic of private property rights, and competitive Republic of Vietnam in 1945, President Ho and transparent land and capital markets. The Chi Minh wrote, “... whether Vietnam will country’s SOEs will be relatively few (prefera- become glorious or not, the people of Vietnam bly in the double digits), and run with a com- will be abreast with other strong nations on the mercial approach that focuses on their continents or not, it is largely attributed to the financial performance and production effi- children’s effort in education....” ciency. All corporations, private and public, The global context in which Vietnam seeks will be subject to global good practice corpo- to catch up is not standing still, however. rate governance regulations enforced without Economic integration is hastening countries’ bias, and face a level playing field in all aspects. drive to competitiveness. Global technological Modern industries and a knowledge-based and business innovations, powered by the economy will thrive, housed in an efficient information revolution, are reshaping the and well-connected network of modern cities, world’s economic, political, and social struc- in which urban and rural policies are closely tures (Centennial Asia Advisors 2015), creat- synchronized. Metropolises such as Hanoi ing new opportunities and risks that have to and Ho Chi Minh City will interact with the be navigated judiciously. Building a skilled global economy and provide the urban density human resource base will remain a critical and diversity that encourage learning, innova- part of Vietnam’s arsenal for the future. tion, and new product development, connect- In addition to catching up, Vietnamese ing people and firms to the world. Cities such aspirations also involve adopting modern as Danang will allow producers to benefit institutional norms of OECD countries for liv- from clustering, because they can choose ing standards, rule of law, and creativity. workers and materials from a bigger pool, and These aspirations reflect an emphasis on clean to engage in beneficial competition. Towns water and clear blue skies; a healthy, secure, such as Buon Ma Thuot in the Central learned, and equitable society; and an effective Highlands, famous for its coffee, will let firms state accountable for the material and social and farms exploit plant-level scale economies. welfare of its citizens. Vietnam has also signed With this aspiration in mind, the 2011– up to the United Nations Sustainable 2020 Socio-Economic Development Strategy Development Goals, which set a comprehen- sets out the objective “to become a basic sive global development agenda for 2030 and industrialized country with the foundation of will give more concrete shape to some of a modern and industrial country by 2020.” Vietnam’s key long-term goals. However, despite broad acceptance, the pre- In sum, in this report’s assessment, cise definition of the term “modern and Vietnam’s 2035 aspirations entail moving industrial” economy has not been announced rapidly toward prosperity, creativity, equity, (Tran 2015). While any definition would be and democracy, as now described (and sum- arbitrary, this report lists five quantitative marized in box 1.6). criteria for meeting that objective: 1. A GDP per capita of at least $18,000 A More Prosperous Society (2011 PPP), roughly equivalent to Malaysia By 2035, Vietnam seeks to be a moderately in 2010 prosperous society, at the upper reaches of the 2. A majority (more than 50 percent) of the upper-middle-income stratum. Its more Vietnamese population living in urban mature market economy will be private areas sector–led, competitive, and closely integrated 3. A share of industry and services in GDP of with the global economy. The domestic pri- more than 90 percent and in employment vate sector will benefit from strong and of more than 70 percent THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 101 BOX 1.6 Key features of aspirations for 2035 Key features of Vietnam’s aspirations for 2035 may tive branches for adequate checks and balances on be broadly defined in the following ways: the government. • The National Assembly will comprise full-time • A prosperous society that will be at the upper deputies with the technical capacity and institu- reaches of upper middle income. Its market tional autonomy to represent the sovereign people, economy will be private sector-led, competitive, exercise oversight over the executive, and pass and intensively integrated with the global econ- quality legislation. The judiciary will similarly be omy. Modern industries and a knowledge-based suitably positioned, with autonomy and strong economy, housed in an efficient and well-connected capacity to resolve disputes in a more diverse network of modern cities, will drive growth. society and economy. The executive will be well • A modern, creative, and democratic society will integrated horizontally and vertically, with clear be the driving force for future development. The functions for central and subnational authorities. emphasis will be on creating an open and free • A civilized society will make every citizen and environment that promotes learning and innova- every political and social organization (the entire tion for all citizens, who will be guaranteed equal political system) equal before the law. Under- access to development opportunities and the pinning this will be robust, diverse people’s freedom to pursue their vocations, while fulfi ll- social organizations that can exercise fundamen- ing their responsibilities without compromising tal rights, including the people’s direct demo- national and communal interests. cratic rights and the rights to information and • A rule-of-law state will be effective and account- association. able. It will clarify the relationship between the • A responsible member of the global community of state and the citizenry and between state and nations will build global alliances and fulfill global market. It will perform its basic functions effec- responsibilities for peace and security while pro- tively, including developing and enforcing legisla- actively seeking regional and global opportunities tion; managing international relations; ensuring for economic integration. public safety and national security; and ensuring • A sustainable environment will protect the qual- that markets function freely while addressing mar- ity of Vietnam’s air, land, and water. It will build ket failures. It will develop strong social institu- climate resilience into economic planning, social tions to ensure that the power belongs to the Viet- policy, and infrastructure investments to reduce namese citizens and protect their right of pursuing the most severe risks posed by climate change. creativity. It will develop clear lines of responsibil- It will develop diverse, clean, and secure energy ities between the legislative, judiciary, and execu- sources. 4. A private sector share in GDP of at least well above the 3.8 percent average for all mid- 80 percent dle-income countries over that period. A lower 5. A score of at least 0.70 on the United and more feasible (but still ambitious) per Nations’ HDI capita growth rate of 5.0 percent (Vietnam’s average in the last 10 years) would take its How well is Vietnam positioned to become GDP per capita to just under $15,000 by a modern, industrial economy by 2035? Its 2035 and put the country on a par with Brazil GDP per capita—$5,370 (2011 PPP) in in 2014, and thus well poised to reach 2014—would need to grow by at least 6 per- $18,000 by 2040. A growth path of 7 percent cent a year to reach the $18,000 mark by (Vietnam’s aspirational growth target) would 2035 (figure 1.8). This would be significantly take per capita GDP to $22,200, roughly the higher than the average per capita growth rate income of Korea’s in 2002 or Malaysia’s in of 5.5 percent between 1990 and 2014—and 2013. This higher growth rate would also 102 VIETNAM 2035 FIGURE 1.8 Income per capita growth scenarios for Vietnam to 2035 24,000 7% Korea, Rep., 2002 Malaysia, 2013 per capita growth 21,000 6% GDP per capita (2011 PPP int’l $) 18,000 per capita Malaysia, 2006 Turkey, 2013 growth 5% 15,000 per capita Malaysia, 2001 Brazil, 2014 growth 4% 12,000 Thailand, 2010 China, 2014 per capita growth 9,000 6,000 Vietnam 3,000 0 2001 2006 2011 2016 2021 2026 2031 2036 Sources: World Development Indicators and World Bank and the Ministry of Planning and Investment of Vietnam calculations. enhance Vietnam’s chances of catching up compromising national and communal inter- with Indonesia and the Philippines. ests. In some areas of science and technology, While seeking greater prosperity, Vietnam Vietnam will have moved up to the advanced will work toward a sustainable environment level in the region and globally, sufficiently by protecting the quality of its air, land, and supporting the innovation needs of a dynamic, water. It will build climate resilience into eco- upper-middle-income country. nomic planning, social policy, and infrastruc- By 2035, it is foreseen that Vietnam will be ture investments to reduce the most severe host to globally and regionally recognized uni- risks presented by climate change. It will versities, attracting the best talent not just within develop diverse, clean, and secure energy the country but also regionally. More broadly, sources. And as a responsible member of the higher education system (including a strong the global community of nations, it will combination of universities, community col- build global alliances and fulfill global leges, and technical vocational institutes) will responsibilities for peace and security while flourish in a competitive environment to proactively seeking regional and global enhance education and meet the growing learn- opportunities for economic integration. ing needs of society. A student-centered approach will aim at sharpened self-learning and self-innovation capacity by students. A Creative Society In addition to high-quality teaching and A modern, creative society will be the driving ample resources (enabled by autonomous force for Vietnam’s development. The empha- structures), higher education institutions will sis will be on creating an open and free serve as the centers for cutting-edge research environment that promotes learning and inno- and innovation of direct relevance to private vation for all citizens, who will be guaranteed companies. Complementing these institutions equal access to development opportunities will be government research institutes, under- and the freedom to pursue their vocations, taking contracted applied research with indus- while fulfilling their responsibilities without try while focusing on competitive fundamental THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 103 research to serve the priorities of socioeco- The country is also aware that the future nomic development. Research institutes of inclusion agenda will be shaped by two social businesses, especially in large enterprises, will megatrends: the rise of the middle class, which be formed, improving the private sector’s will also be increasingly urban and employed innovation capacity. At the same time, a more in the formal sector, and rapid population dynamic domestic private sector, embedded in aging. It will therefore make great efforts global supply chains, will create solid demand along four policy dimensions. First, expand and absorb advanced knowledge for higher the pension system to cover most of the popu- value-added goods and competitiveness, in lation, while ensuring the system’s financial both domestic and international markets. and fiscal sustainability. Second, ensure that nearly all of its children complete upper sec- ondary school with job-relevant skills, with An Equitable Society an emphasis on developing their noncognitive Vietnam will continue to be a caring and and complex problem-solving skills. Third, equitable society, sensitive and responsive to establish an industrial relations system suited the needs of its vulnerable members and pro- to a mature market economy, where the inter- viding a security blanket to those excluded on ests of workers, employers, and the state are account of the vicissitudes of the market more properly represented in a true bargain- economy. The nation will be alert to the fact ing process. Fourth, make every effort to that sustaining the positive equity trends of ensure citizens’ access to good quality health the past is not something it can take for services without imposing financial hardship granted, especially as the forces of urbaniza- on them. This will entail expanding and tion, globalization, and the rising skills inten- reforming the health insurance regime and sity of production take firmer root. shifting health care from its current focus on By 2035, it is the nation’s intention that all hospitals toward high-quality primary care at the country’s people will have an equal oppor- the center of an integrated system. tunity to succeed in life, irrespective of their predetermined circumstances such as gender, A Democratic Society ethnicity, and location of birth or family ori- gins. The country’s ethnic minorities will be An effective and accountable rule-of-law state seamlessly integrated with its social and eco- will be in place well before 2035. The coun- nomic fabric, having closed the gap with the try’s governance structure will clarify the rela- majority population on most development tionship between the state and the citizenry indicators. Policy makers fully realize that that and between the state and market. The state will require targeted interventions in education, will perform its basic functions effectively, nutrition, and sanitation, and providing greater through a well-organized government struc- voice for ethnic minorities. Vietnam will also ture (both at the center and locally) and a redouble its efforts to fulfill its commitments to strong, meritocratic bureaucracy. An effective ensure inclusion of people with severe disabili- state would perform well at developing and ties. It will also reform the ho khau system to enforcing legislation; managing international ensure equal access to administrative and pub- relations; ensuring public safety and national lic services for urban migrants, which the security; and ensuring that markets function current system prevents for the more than freely while addressing market failures. 5 million Vietnamese who lack permanent reg- An effective state will also apply market istration in their place of residence. Finally, on rationality to economic policy making. equality of opportunity, through reform in the State–market relations will be characterized population policy and an aggressive social by a clearer division between the public and campaign to raise awareness of the value of private spheres. Specifically, government female children, Vietnam will eradicate the cur- agencies directly or indirectly involved in rent practice of sex selection at birth. economic regulation would not engage in 104 VIETNAM 2035 commercial business of any kind to avoid 2. Building national innovation capacity conflicts of interest. The state’s role in the (chapter 3) economy will be transformed from a pro- 3. Managing urbanization for greater eco- ducer to an effective regulator and facilita- nomic efficiency (chapter 4) tor, with the state focusing on providing a 4. Achieving sustainable and climate-resilient level playing field for the economy, while growth (chapter 5) enforcing free and fair competition and more 5. Promoting equity and social inclusion secure and transparent property rights, par- (chapter 6) ticularly on land issues. 6. Building modern institutions for an effec- The state will also develop strong social tive state (chapter 7) institutions, both to ensure that power belongs to citizens and to protect their right Notes of pursuing creativity. It will develop clear lines of responsibility between the legislative, 1. State enterprises were allowed to keep 85 per- judiciary, and executive branches for ade- cent of the profits from activities beyond the targets, part of which could also be distributed quate checks and balances among the three to workers as a bonus. Provisions were also branches of government. introduced for linking SOE workers’ salaries to The National Assembly will comprise full- output. time deputies with the technical capacity and 2. Arkadie and Mallon (2003) argued, “Partial institutional autonomy to represent the sover- reform had left the economy in a difficult half- eign people, exercise oversight over the execu- way house, with neither the constraints of a tive, and pass quality legislation. The judiciary tight planning system, nor the policy instru- will similarly be suitably positioned, with ments for managing a centralized economy, in autonomy and strong capacity to resolve dis- place.” putes in a more diverse society and economy. 3. Benjamin and Brandt 2004. Half of all land The executive will be well integrated horizon- had official title by 1997. 4. Estimates of revenue collection in 1991 vary tally and vertically, with clear functions for from 7.6 percent of GDP (Leipziger 1992) to central and subnational authorities. 13.6 percent (Arkadie and Mallon 2003). A civilized society will make every citizen 5. This paragraph draws on Tu-Anh et al. 2015. and every political and social organization 6. The PCI is a nongovernment initiative, jointly (the entire political system) equal before the developed by the VCCI and the United States law. Underpinning this will be robust, diverse Agency for International Development, people’s social organizations that can exercise designed to assess the ease of doing business, fundamental rights, including the people’s quality of economic governance, and progress direct democratic rights and the rights to of administrative reform in all 63 provinces in information and association, and a more Vietnam. The PCI is constructed using opinion robust and independent mass media. data provided by domestic private businesses as well as published data on 10 dimensions of * * * provincial economic governance: (1) entry costs for business startup; (2) access to land Thirty years of Ð ổ i M ới reforms have and security of business premises; (3) informa- brought many successes. Vietnamese develop- tion transparency and equitability; (4) time requirements for bureaucratic procedures and ment aspirations for 2035 are bold, but the inspections; (5) informal charges; (6) policy challenges are also huge. To achieve the aspi- biases toward state, foreign, or connected rations, the following six transformations or firms; (7) proactivity of provincial leadership breakthroughs will be essential, as examined in solving problems for enterprises; (8) busi- in more detail in the following chapters: ness support services; (9) labor and training policies; and (10) fair and effective legal proce- 1. Enabling economic modernization and dures for business dispute resolution. Since the private sector development (chapter 2) PCI was introduced in 2005, it has been used THIRT Y YEARS OF RENOVATION AND VIE TNAM’S ASPIRATIONS FOR 2035 105 by provincial governments to monitor and barrels a day in 2035, about 20 percent of benchmark the competitiveness of their busi- projected world growth. Having grown at dou- ness environment. The PCI is, however, rarely ble-digit rates each year since 1990, coal used by the central government as an input to demand is set to triple over 2011–35, with the policy formulation. http://eng.pcivietnam.org. increase accounting for nearly 30 percent of 7. This comparison excludes economies with a global growth. Natural gas demand is pro- population of less than 1 million, and Bosnia jected to increase by 80 percent to 250 billion and Herzegovina. cubic meters over the same period. The share of 8. The number of focal point agencies of the renewables in the primary energy mix is set to government was reduced from 70 before Ðổi fall as rapidly increasing use of modern renew- Mới to 30 now (including 22 ministries and ables, such as geothermal, hydropower, and ministerial agencies, and eight government wind, is offset by reduced use of traditional agencies). biomass for cooking. Southeast Asia’s energy- 9. These are well reflected in the Law on the related carbon dioxide emissions would almost Promulgation of Legal and Regulatory double, reaching 2.3 gigatonnes in 2035. Documents in 2008 and 2015. 18. This subsection draws on Centennial Asia 10. The number of laws and ordinances promul- Advisors (2015). gated by the National Assembly and the 19. The IPCC is the leading body of global climate Standing Committee of the National Assembly change assessments. It comprises hundreds of over 29 years of Ðổi Mới (from January 1, 1987, leading scientists worldwide and publishes reg- to June 30, 2015) increased eightfold from the ular assessment reports with the most recent number of laws and ordinances issued in the 41 scientific, technical, and socioeconomic infor- years before Ðổi Mới. Notably, from September mation on climate change and its implications. 2, 1945, to December 30, 1986, Vietnam pro- 20. The projections do not take into account land mulgated 63 laws and ordinances, but from subsidence, which further exacerbates the January 1, 1987, to June 30, 2015, 524. impacts of sea level rise. 11. Experience with the Enterprise Law is an example. The government established a Task Force (of technocrats and researchers) for Enterprise Law Enforcement, which acceler- References ated implementation. Arkadie, Brian Van, and Raymond Mallon. 2003. 12. The discussion on the four global megatrends Vietnam: A Transition Tiger. 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World Bank. 2 Enabling Economic Modernization and Private Sector Development Main Messages could result in several decades of economic stagnation—a pitfall that many developing The world around Vietnam presents unprece- countries can attest to—in a global context dented possibilities as well as risks and develop- that is no longer as hospitable as before the ment traps that can cause prolonged economic global financial crisis. stagnation. Vietnam has done well in exploit- Development traps invariably are about ing its opportunities and managing the risks productivity stagnation, and this is where and pitfalls coming its way. Since 1990, it has Vietnam’s growth record gives cause for been among the world’s fastest growing econo- concern. Growth of labor productivity mies, steadily narrowing the income gap with (output per worker) has been declining since more developed parts of the world. Even more the late 1990s, explained by a sharp decline remarkably perhaps, the country has achieved in total factor productivity (TFP) growth. growth with equity rather than at the cost of Moreover, the decline in labor productivity it, unlike many other fast-growing economies. growth has been seen across most sectors, but Vietnam still has a lot to learn from the world especially in mining, construction, public utili- as it ascends the development ladder. But the ties, and finance and real estate, where state- global community, in its search for broader owned enterprises (SOEs) have retained their development solutions, could also learn from dominant role. Thus far it has been easy to Vietnam’s many successes. overlook these trends. GDP growth since the Yet Vietnam’s development story is far early 2000s has been led by forces that com- from over. Its gross domestic product (GDP) pensated for weak and declining productivity per capita in 2013 was less than 40 percent of growth but are now reaching their natural the world average in purchasing power parity limits. Rapid labor force growth made up for (PPP) terms (figure 2.1) and less than 20 per- low and declining economy-wide labor pro- cent in market prices. Vietnam could reach ductivity growth. Large-scale structural trans- parity with world average income by 2035 formations offset the low and declining labor if it could raise the rate of per capita growth productivity growth at the sectoral level. And to 6.0–6.5 percent a year (from the current an acceleration in capital accumulation coun- 5.0–5.5 percent a year). It would have to terbalanced the low and declining TFP growth. remain alert to future development traps that 109 110 VIETNAM 2035 FIGURE 2.1 Strong growth has enabled Vietnam to narrow the gains from scale economies, specialization, income gap with the world average and innovation—ingredients for sustained long-term growth (World Bank 2007). 40 Moreover, small firms have become increas- 35 ingly capital-intensive, which—without 30 scale economies—has led to a sharp decline 25 in their capital productivity. The few large Percent 20 domestic firms are usually even more unpro- 15 ductive than the smaller ones. This reflects their short-term view on investment and 10 profits and their rising concentration of land 5 and capital assets in construction, real estate, 0 and banking and finance—sectors that have shown some of the country’s lowest levels 90 92 02 12 14 00 08 10 94 98 04 96 06 19 19 20 20 20 20 20 20 19 19 20 19 20 Vietnam’s GDP per capita (PPP, 2011 int’l $) relative to world average and growth of productivity. Foreign-invested Vietnam’s GDP per capita (PPP, 2011 int’l $) relative to U.S. average income fi rms have grown their presence in Vietnam and led the country’s rapid growth in manu- Source: Calculations based on the World Development Indicators. facturing and exports. But links with domes- tic firms have been lacking in key sectors, But in the next development phase, each of impeding productivity-enhancing transfers of these factors is expected to weaken sufficiently technology and management practices. There to expose economic growth to weaknesses in is an emerging concern about a “Mexican underlying productivity trends. phenomenon.”1 Several factors explain the weak produc- Reviving productivity growth is imperative tivity growth. The public sector’s presence in if Vietnam is to meet its ambitious income production and control over factor markets objectives for 2035. The reform agenda will remain pervasive, with the state still mak- be demanding, given that the productivity ing up about a third of GDP. Public invest- growth decline is widespread. An immediate ment is not as efficient as it should be because focus is needed on four fronts. of the uncoordinated and often incoherent First, Vietnam needs to create an enabling investment decisions of a fragmented state environment for a more productive and com- (chapter 7). Further more, SOEs—driven by petitive domestic private sector. This will distorted incentives and by multiple objec- require the microeconomic foundations of tives that rarely include profit—are nearly all the market economy to be strengthened, with inefficient producers. Widespread inefficien- emphasis on protecting property rights and cies in state investment thus perpetuate the enforcing competition policies. Correcting economy-wide productivity weakness. But distortions in the factor markets— capital they do not explain the worsening productiv- and land markets primarily—will also be ity growth. Their performance, though still important. (Factor markets are restrictive, weak, has been stable because of a series of underdeveloped, and overly controlled and restructuring measures. managed by the state.) The main reason for the drop in produc- The second reform priority is a compre- tivity growth is especially worrisome. Steady hensive overhaul of the SOE sector. Increased erosion of the productivity growth of the attention is needed to reduce the number of domestic private sector—universally viewed enterprises under majority state control, from as the main engine of future growth—has more than 3,000 now to fewer than 100 ensured that it is now just as inefficient on later. The government could also issue a clear average as the state sector. Why? SOE ownership policy that focuses on rais- Domestic private firms are overwhelm- ing the value of state capital (barring excep- ingly small, which prevents productivity tional cases), enforced by obligating the SOEs ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 111 to face direct market competition pressures The fourth reform priority is to improve and hard budget constraints. They should the links between more productive exporting also be required to uphold global standards firms and local suppliers, enabling domes- for reporting requirements and be insulated tic fi rms to increase productivity. Reviving from any bureaucratic interference. The pol- the domestic private sector is a prerequisite icy could also delineate and streamline own- for success. But reform extends to removing ership and regulatory responsibilities within barriers to profitably participating in global the government. And staffing the SOEs with value chains (GVCs) in key sectors. Reform competent professional managers and board also covers addressing the cross-cutting members is also needed. issues of strengthening the modern services Equal treatment of all enterprises is criti- sector, an important input for manufacturing cal for success on both these reform priori- production, and improving the connection ties. Notably, equal tax and dividend policies of supply chain centers within Vietnam and and access to land, capital, and government between the country and its trading partners. procurement contracts for all enterprises are Beyond these “more immediate payoff” crucial. Firms with all-important connections— reforms, the government will also need to SOEs, most foreign-invested firms, and some complete those that take longer, preempting large domestic private firms—have an unfair bottlenecks to growth a decade or so from advantage over the domestic private sector now. These reforms would seek to create (which does not have them). The problem more robust learning and innovation struc- with this model is that the connected fi rms tures, promote urban agglomeration, and are not necessarily the most productive. This ensure environmental sustainability—topics undermines the quality of the enterprise sec- addressed in depth in their own chapters. tor and carries larger costs for innovation, productivity, and economic growth. The third reform priority reorients agri- Vietnam’s Growth and Economic culture toward a market-driven, commer- Modernization Record cially oriented system, with far less state Đổi Mới and Economic Growth interference. Just under half the Vietnamese labor force is engaged in this sector. And In less than three decades since the launch even though this ratio could shrink by half of Ðổi Mới (economic renovation), Vietnam in the next two decades, agriculture’s per- has built an impressive record of fast, stable, formance will have a major impact on econ- and inclusive economic growth. First, GDP omywide labor productivity. Two major sets growth per capita has averaged 5.5 percent of changes are needed. The fi rst—agricul- a year since 1990 (figure 2.2a), yielding a tural transformation— involves mechaniza- three-and-a-half-fold increase in average tion, land consolidation, organized farm income. Worldwide, only China recorded services, and flexible and market-determined faster rates of per capita growth over this land-use patterns (with less administratively period. 2 Second, growth has been remark- imposed focus on rice). The second is cen- ably stable, with volatility declining mark- tered on modernizing and commercializing edly (figure 2.2b) and becoming among the the entire agro-food system, from procure- lowest in the world.3 Had Vietnam’s growth ment at farm gate to processing and distrib- been as volatile as Thailand’s, it would have uting commercially valued food products been 1 percentage point lower each year.4 and enforcing safety standards. To promote Third, growth has been highly inclusive. Per the two transformations, the state should capita income of the bottom 40 percent has invest more selectively and efficiently, focus- grown by 9 percent annually since the early ing on basic public goods and services, while 1990s, outpacing income growth of the top facilitating greater investment by farmers 60 percent, thereby ensuring shared prosper- and the private sector. ity and significant reductions in poverty. 112 VIETNAM 2035 FIGURE 2.2 Vietnam has had 25 years of fast, stable, and equitable economic growth a. GDP per capita level and growth b. Volatility of per capita GDP growth 9 8 2.5 Vietnamese dong (millions, 2005 prices) 8 7 7 2.0 6 Annual percentage 6 5 1.5 5 4 4 3 1.0 3 2 2 0.5 1 1 0 0 0 91 93 95 97 99 01 03 05 07 09 11 13 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 19 19 19 19 19 20 20 20 20 20 20 20 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 GDP per capita GDP per capita growth Source: Calculations based on the General Statistics Office of Vietnam. Note: Volatility in year x is measured as the standard deviation of annual per capita growth over five consecutive years—year x and the four years preceding year x. The strong growth record has been under- 2. Outward orientation of the economy has pinned by rapid accumulation of factors of lodged Vietnam more deeply in GVCs. production, with the labor force almost dou- 3. Transition from a centrally planned and bling in size and the capital stock growing six- state-dominated economy to a market- fold in real terms since 1990. Growth has also oriented system has allowed the private been reinforced by impressive gains in human sector taking an increasing role. capital and a strong initial burst of TFP 4. Spatial transformation has shifted popu- growth.5 The rapid increase in the labor force lation from rural to urban areas. reflects favorable demographics. The share of the working-age population (15–60 years) in Spatial transformation is discussed the total population has shot up from 53 per- in chapter 4. The other three are briefly cent in 1985 to close to 68 percent. This demo- described below. graphic dividend coincided with economic Growth and economic transformations liberalization and a rising demand for labor, were rooted in a sequence of reforms after enabling productive absorption of the labor the onset of Ð ổi M ới (chapter 1) to remove force increase. That translated into higher market distortions, stabilize macroeconomic GDP growth. The reduction in the dependency conditions, leverage the forces of global inte- ratio also helped increase the national savings gration better, and deepen human capital rate—from 3 percent in 1990 to more than 30 development. percent now—which, in turn, helped finance a major surge in investment expenditure. Accelerated Structural Transformation Economic growth has brought economic transformations and modernization, mani- As national incomes rise, the employment fest in four mutually reinforcing ways. and GDP shares of agriculture fall and those of industry and services grow. These trends 1. Structural transformation have shifted have been seen with empirical regularity in resources from agriculture to manufac- developing countries and are grounded in turing and services. sound economic theory (Lewis 1954; Fei and ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 113 Ranis 1964; Chenery 1979). This pattern has FIGURE 2.3 Large-scale sectoral shifts have been at play in characterized East Asia, including Vietnam, Vietnam for at least 25 years especially well.6,7 As in the rest of the region, structural transformation in Vietnam has 50 45 been an outcome and a facilitator of eco- Sectoral share in GDP (%) 40 nomic growth. While responding to the dif- 35 ferent opportunities generated by economic 30 development and modernization across sec- 25 tors, the process has reinforced economic 20 growth by reallocating resources from the 15 more traditional, less productive sectors (such 10 5 as crop cultivation and informal trading 0 activity) to the more productive sectors (such 90 92 94 96 98 00 02 04 06 08 10 12 as modern manufacturing and services). 19 19 19 19 19 20 20 20 20 20 20 20 Large-scale sectoral shifts have been Agriculture Mining Manufacturing at play in Vietnam since at least 1990 Utilities Construction Services (figure 2.3). The shift out of agriculture has Source: Calculations based on General Statistics Office of Vietnam. been dramatic, with the sector’s share in GDP falling from more than 40 percent in the late 1980s to less than 20 percent in recent years. by structural changes within agriculture and That decline has been mirrored by a rise in the rural economy. These include consolida- services and industry shares. These sectoral tion of landholdings, increasing commercial- GDP trends have been broadly matched by ization of agricultural production, reduced sectoral trends in employment. labor and increased mechanization and use Structural transformation trends in of purchased inputs for production, and Vietnam have been broadly consistent with shifts in land-use patterns. They also include global patterns. Compared with the Republic changes in the commodity composition of of Korea in particular, Vietnam has, how- agricultural GDP and a growing importance ever, retained a far larger share of employ- of nonfarm employment and other income ment in agriculture relative to its income sources within rural areas (Dawe 2015). (figure 2.4). The share of agriculture in GDP The pace of these rural structural changes has been more in a “normal” range, high- has been uneven. For example, the consolida- lighting Vietnam’s lower labor productivity tion of commercial agricultural production in that sector. The reverse is true for industri- and the movement of labor from farm to non- alization. While the share of employment in farm activity has happened quickly. But agri- Vietnam’s industry sector has been in a nor- cultural-land consolidation remains at an early mal range, the share of GDP in the sector has phase (figure 2.5).8 Shifts in land-use patterns been significantly higher than in the average have also been relatively slow, and crop diversi- country. This reflects higher labor productiv- fication is still at an early stage. A comparison ity, likely because of greater capital intensity with China reflects the historical importance in the sector. Vietnam’s transformation to and the policy and investment attention given services has been characterized by a steeper to rice production— despite rapidly shifting increase in the employment share than in the food consumption and expenditure patterns GDP share. This move reflects slow growth within Vietnam (figure 2.6).9 Even with these in services’ labor productivity. Vietnam’s constraints, an increasing share of agricultural structural transformation patterns have been output comes from the faster growing noncrop broadly similar to China’s, after adjusting for subsectors, mainly livestock and aquaculture differences in income. (figure 2.7). Consistent again with global patterns, The most significant change is the the sectoral shifts have been accompanied rapid rise of wage employment—even if 114 VIETNAM 2035 FIGURE 2.4 Vietnam’s structural changes are broadly consistent with global patterns a. Employment share of agriculture b. GDP share of agriculture 100 100 90 90 Employment share of agriculture (%) 80 80 GDP share of agriculture (%) 70 70 60 60 50 50 40 40 30 30 20 20 10 10 500 1,000 10,000 25,000 50,000 100,000 500 1,000 10,000 25,000 50,000 100,000 GDP per capita (2005 PPP US$) GDP per capita (2005 PPP US$) c. Employment share of industry d. GDP share of industry 100 100 90 90 Employment share of industry (%) 80 80 GDP share of industry (%) 70 70 60 60 50 50 40 40 30 30 20 20 10 10 500 1,000 10,000 25,000 50,000 100,000 500 1,000 10,000 25,000 50,000 100,000 GDP per capita (2005 PPP US$) GDP per capita (2005 PPP US$) e. Employment share of services f. GDP share of services 100 100 90 90 Employment share of services (%) 80 80 GDP share of services (%) 70 70 60 60 50 50 40 40 30 30 20 20 10 10 500 1,000 10,000 25,000 50,000 100,000 500 1,000 10,000 25,000 50,000100,000 GDP per capita (2005 PPP US$) GDP per capita (2005 PPP US$) Vietnam China Korea, Rep. All Countries Sources: Calculations based on the General Statistics Office of Vietnam (for Vietnam) and World Development Indicators (for all other countries) for sectoral shares of GDP and employment; http://www.rug.nl/research/ggdc/data/pwt/ for GDP per capita. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 115 FIGURE 2.5 Consolidation of agricultural land has happened at a slow pace a. Distribution of farms, by land size, 2001 b. Distribution of farms, by land size, 2011 Farm plot ≤0.2 hectares <0.5 hectares Between 0.5–2 hectares ≥2 hectares Source: Calculations based on the General Statistics Office of Vietnam. FIGURE 2.6 In comparison with China, Vietnam has given heavy policy and investment attention to rice production—despite food consumption and expenditure patterns rapidly shifting away from rice a. China b. Vietnam 100 100 90 90 80 80 Selected crop area as a share of Selected crop area as a share of 70 70 total crop area (%) total crop area (%) 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1990 1995 2000 2005 2013 1990 1995 2000 2005 2013 Maize Rice Wheat Fruits, vegetables, pulses Oil crops Roots and tubers Source: Calculations based on the General Statistics Office of Vietnam. 116 VIETNAM 2035 FIGURE 2.7 Livestock and aquaculture production is gaining share in agriculture a. Share of agricultural gross output, 2000 b. Share of agricultural gross output, 2011 Crops Livestock Capture fisheries Aquaculture Forestry Source: Calculations based on the General Statistics Office of Vietnam. self-employment still dominates (figure Measured by the ratio of total trade to GDP 2.8a). Vietnam created 5.6 million net new (figure 2.12a), Vietnam is one of the world’s formal wage jobs between 2004 and 2012, most open economies. Most of its trade is increasing the share of formal wage workers powered by strong foreign direct investment by 10 percentage points (at the expense of (FDI), the stock of which stands at more than the self-employed) (Aterido and Hallward- $250 billion sourced from more than 100 Driemeier 2015). The shift in the wage countries. Participation in the Association employment composition out of agricul- of Southeast Asian Nations (ASEAN) Free ture into industry and services is striking, Trade Area (AFTA) (effective June 1996), with the share in industry almost doubling the U.S.–Vietnam Bilateral Trade Agreement over the period (figure 2.8b). Job creation (effective December 2001), and accession was largely in the private sector, achieved to the World Trade Organization (WTO) through entry of new fi rms and expansion (effective January 2007) were important of existing ones. Few large fi rms (more than milestones. Several other bilateral trade 300 workers) exist in Vietnam (see “What agreements have been signed, including a Explains the Stagnation in Productivity? recent one with the European Union. The Three Primordial Policy and Institutional Trans-Pacific Partnership (TPP) promises to Issues”). But they still employ almost half be the next big stimulus to Vietnam’s global the formal wage workers in the country. integration. Vietnam’s exports have grown rapidly over the past decade and a half (figure 2.9a)— Rapid Outward Orientation Integration significantly faster than global and regional Vietnam has done extremely well in deepen- averages. Manufacturing exports have led ing its integration with the global economy the export boom. Having grown at more and leveraging the opportunities presented. than 20 percent a year on average—in ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 117 FIGURE 2.8 Rise of wage employment and its sectoral shifts, 2004 and 2012 a. Share of total employment b. Share of total wage employment 80 60 60 40 Percent Percent 40 20 20 0 0 Employers Self-employed Wage-salaried Agriculture Industry Services 2004 2012 Source: Aterido and Hallward-Driemeier 2015. nominal dollars—since the early 2000s, food processing cluster is growing fast in the they were recorded at more than $100 bil- Mekong Delta. Large investments by Intel in lion in 2014. Their share of total merchan- Ho Chi Minh City—and by Samsung and dise exports increased from 43 percent in Canon in the northern provinces around 2000 to more than 75 percent (figure 2.9b). Hanoi—are beginning to attract other inves- Not only much bigger, Vietnam’s export bas- tors in support and related industries. This ket is also much more diversified than in the signals the rise of electronics and informa- early 2000s.10 It partly reflects a successful tion technology (IT) clusters. Tourism in sev- transition from exporting primary commodi- eral coastal regions still has a great growth ties (such as crude oil and rice) fi rst toward potential. low- and medium-tech manufactured goods (such as apparel and footwear) and later Uneven Pace of Transition to a Market more sophisticated products (such as machin- Economy ery and electronics) (figure 2.9c). Service exports, however, have remained lackluster Vietnam is an economy in transition, (figure 2.9d). transforming from a state-dominated, Trade and investment liberalization has centrally planned system into one increas- allowed industrial clusters to emerge with ingly driven by market forces and owned the presence of local private and foreign- by the private sector. This third major eco- invested fi rms (figure 2.10). The concentra- nomic transformation is also happening on tion of labor-intensive garment companies is a large scale, although its pace has been high in the southeast region in Ho Chi Minh more uneven than the fi rst two transfor- City and the provinces of Dong Nai and Binh mations, generating important imbalances Duong. That region also attracts local invest- along the way. ment in plastics, rubber, and chemicals, and Product markets have been largely liber- foreign investment in electrical equipment alized. Before Ðổi Mới, product prices were and machinery. Outdoor furniture products set by the state with little regard to market and animal feed are concentrated along the demand–supply conditions; not that prices south-central coast. An export-oriented had much meaning for enterprises that 118 VIETNAM 2035 FIGURE 2.9 Vietnam’s exports have consistently grown faster than global and regional averages for the past 15 years, led by manufactured and high-technology products a. Trade-to-GDP ratio for Vietnam and b. Manufactures as a share of merchandise exports comparator countries (for Vietnam and comparator countries) 500 100 450 90 400 80 350 70 300 60 Percent Percent 250 50 200 40 150 30 100 20 50 10 0 0 00 02 04 06 08 10 12 00 02 04 06 08 10 12 20 20 20 20 20 20 20 20 20 20 20 20 20 20 c. High-technology exports as a share of d. Exports of services as a share of total exports manufactured exports for Vietnam and of goods and services for Vietnam and comparator countries comparator countries 70 30 60 25 50 20 40 Percent Percent 15 30 10 20 10 5 0 0 00 02 04 06 08 10 12 00 02 04 06 08 10 12 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Vietnam China Singapore Other ASEAN Source: Calculations based on World Development Indicators. Note: Service exports are calculated as the difference between total goods and services exports and merchandise exports. ASEAN refers to the Association of Sotheast Asian Nations (Indonesia, Malaysia, the Philippines, Singapore, and Thailand). needed to respond mainly to state-imposed underdeveloped and distorted, weighed down production quotas. Now only a handful of by heavy state involvement. prices in product markets are administered, The state’s withdrawal from direct produc- and state-determined production quotas tion has been substantial, if fitful. The num- are a thing of the past.11 Trade and foreign ber of enterprises fully owned by the state fell exchange controls were lifted early in the Ðổi from a little more than 12,000 in 1989 to Mới process. This allowed domestic product less than 750 in 2014. The scale and scope of prices to align with global prices and effec- SOE equitization have, however, not always tively ended the system of multiple exchange been uniform. They have gone through sev- rates. Factor markets have also been liberal- eral phases from the closure and merger of ized, though at a notably slower and more several thousand small loss-incurring SOEs uneven pace than product markets. Land in the early 1990s—often accompanied by and capital markets in particular remain large-scale layoffs—to more gradual progress ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 119 later in the decade. Another acceleration FIGURE 2.10 Trade and investment liberalization has allowed cycle was in the early 2000s, followed by a industrial clusters to emerge with both local private and foreign- invested firms slowdown that started in 2008. In Vietnam’s case, equitization does not mean privatiza- 14 tion. An enterprise is considered equitized if 20.5% Change in world market share = 0.33% the state holds anything less than 100 per- 12 Cameras Rice 15.7% cent of its capital. Indeed, the state still holds –3.3% a majority stake in more than 3,000 SOEs, 10 Rubber Coffee World market share, 2013 (%) more than 2,000 of them equitized. Even so, 8 Footwear the share of SOEs in output and various fac- tor inputs has declined sharply since the early 6 Seafood Telecom equipment Garments Office machines 2000s (figure 2.11). Fruits and nuts But the state’s participation as an owner 4 Textile of productive assets is more encompass- Furniture Travel goods 2 ing than just the SOEs. It has a heavy—and Crude oil Electric wires Vietnam’s share growing—presence in activities such as gov- 0 Computers in world exports = 0.72% Tourism ernment services, public administration, and Transport security and defense. The share of the state –2 0 –1 0 1 2 3 4 5 in GDP is therefore still high at around one- Change in world market share, 2008–13 (percentage points) third, less than its 40 percent share in 1995 but the same as in 1990. The state’s share Area = Export value of US$2 billion in total employment and investment has not Source: Tu Anh et al. 2015. changed notably. And the state has retained a virtual monopoly or oligopoly in sectors such FIGURE 2.11 State-owned enterprises have seen a declining role in as coal, banking, construction, fertilizer, the economy since the early 2000s utilities, and rubber and plastics (figure 2.12) (World Bank 2011). 70 The decline in importance of SOEs is mir- 60 Share of state-owned enterprises in rored by expansion of the domestic and for- 50 eign private sectors. Driven by a sequence of select indicators (%) reforms to legalize fi rst household and then 40 nonhousehold enterprises (box 2.1), the 30 private sector has grown at an exponential 20 pace since the early 1990s. The government 10 registry lists more than 650,000 domestic private enterprises, a dramatic rise from 0 just 40,000 in 1999 and virtually none in 01 02 03 10 11 12 13 09 08 04 14 05 06 07 20 20 20 20 20 20 20 20 20 20 20 20 20 20 1990. Millions more household enterprises Total capital Net turnover Employees are unregistered.12 The 2000 Enterprise Number of firms Fixed asset Banking credit Law proved to be a major turning point, Source: Calculations based on the General Statistics Office of Vietnam and the State Bank of catalyzing a more than 15-fold increase in Vietnam. registered private firms (figure 2.13). The domestic private sector made up only 12 capital-intensive and saw its share in assets percent of assets in the enterprise sector fall from 22 to 20 percent. in 2001, a share that increased to half in 2013, while the sector’s share in employ- Opportunities, Risks, and ment rose from 33 to 61 percent over this period. Concurrently, the share of foreign Challenges for Future Growth fi rms in employment increased from 12 to Vietnam’s success heavily reflects the catch- 26 percent, though the sector became less up growth that has produced extraordinary 120 VIETNAM 2035 FIGURE 2.12 The state has retained a virtual monopoly or oligopoly in several sectors Coal Electricity and gas Fertilizer Water supply Mining and quarrying Share of Cement state-owned Beer enterprises Steel in gross Refined sugar output in the sector Chemicals Rubber and plastics Textiles Rubber and plastics Chemicals Share of state-owned Construction enterprises Insurance in total Water transportation revenue in Telecommunication the sector 0 20 40 60 80 100 Percent Source: Calculations based on the General Statistics Office of Vietnam. BOX 2.1 Enterprise reform in Vietnam In April 1992, Vietnam adopted a new Constitution existed was illegal and informal, though still under that redefined its economic regime as “a multi- the watchful eye of the state. sectoral commodity economy functioning in Even so, private business has a long history in accordance with market mechanisms under the Vietnam. At the height of central planning, most management of the state and following a socialist Vietnamese workers were engaged in the informal orientation.” For the fi rst time market mechanisms private sector. The state was aware of the illegal and private property rights—user rights in the case private activity but also recognized its usefulness in of land—were acknowledged in the Constitution. creating jobs. It largely turned a blind eye in a prac- Business—at least its formal side—until 1990 tice called “fence-breaking.” This history of and was mostly the business of the state and its vast mixed attitude toward private business still marks network of SOEs, which made up about half of the state of mind of Vietnam’s entrepreneurs, who industry and services sector output in 1989 and place a heavy premium on having political connec- employed about half of the nonagricultural work- tions to do well—if not to survive,—in business force (Dodsworth et al. 1996). The banking sec- (Malesky and Taussig 2009). tor had only four state-owned banks, whose credit The cost of suppressing private enterprise was rec- flowed only to the public fi nances and SOEs. Private ognized early in the reform process. One of the reform business was not yet legal. Whatever private activity actions (under Decree 27/ND and Decree 29 in 1988) (Box continues next page) ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 121 BOX 2.1 (continued) was therefore to legalize private business and establish having excessive discretionary power. Compared a registration process for household enterprises. with the state sector, private businesses also faced The turning point in the state’s formal accep- unfavorable treatment on credit, trading rights, tance of a market-based approach and adoption of access to land, and tax applications. This bias con- a more tolerant view of private owned and man- tinues to dog private enterprise development. aged commercial activity came in the early 1990s, The 2000 Enterprise Law made it easier for pri- first by way of the 1990 Company Law on Sole vate enterprises to register and enter sectors that Proprietorship. This law gave legal recognition to were earlier reserved for SOEs. It also encouraged the right of the domestic private sector to operate more existing businesses to register. in stipulated areas. Then in April 1992 Vietnam The 2005 Enterprise Law marked another mile- adopted a new Constitution, Article 15 of which stone. For the fi rst time, the regulatory framework redefi ned its economic regime (see above). “Market for different ownership categories of enterprises was economy,” however, was still considered an inap- unified. Differentiated legal treatments of SOEs, for- propriate term. It took another 10 years—until eign direct investment (FDI), and domestic private the Ninth Party Congress of April 2001—for the enterprises were essentially removed. This action system to accept the “socialist-oriented market paved the way for Vietnam’s accession to the World economy” as the offi cial way to describe its eco- Trade Organization (WTO) in 2007. Protection of nomic system. the rights and freedom to do business also improved In the 1990s private enterprises were still the with the 2005 Enterprise Law, which nullifi ed all subject of “socialist rehabilitation” and were only licenses and business conditions that were not speci- allowed to do business in areas stipulated by law. fied in laws, ordinances, or decrees as of September And starting and operating a formal private busi- 1, 2008. ness was not made easy. To establish a business, pri- The 2005 Enterprise Law was recently replaced vate entrepreneurs needed to acquire a license from by the 2014 Enterprise Law, which removed the the provincial planning committee, after securing overlaps between the 2005 Enterprise Law and the approval from the provincial people’s committee. 2005 Investment Law. The new law further simpli- During this process entrepreneurs also had to obtain fi ed business licenses, introduced online business many sublicenses from different government agen- registration, and moved regulations on corporate cies with authorities at several government levels governance closer to international practice. expansion in East Asia and elsewhere since FIGURE 2.13 The number of newly registered domestic private the end of the Second World War (box 2.2). companies has risen sharply since the 2000 Enterprise Law Some economies—such as Japan, Singapore, 90 Korea, and Taiwan, China—sustained high growth for some five decades and were pro- 80 Number of new firms registered during the year (thousands) pelled to high-income status. Others—such 70 as Brazil, Indonesia, Mexico, Thailand, and 60 the Arab Republic of Egypt—showed prom- 50 ise for two or three decades, but then became 40 mired in the middle-income trap. China’s 30 ascent, though incomplete, is on a trajectory 20 similar to that of the fi rst group. Grasping 10 the catch-up opportunities, Vietnam is well 0 positioned on its long-term income trajectory –9 e, 11 01 12 13 03 00 02 10 08 09 04 14 05 06 07 91 ag 9 20 20 20 20 20 20 20 20 20 20 20 20 relative to its global comparators. 20 20 20 19 ver A A strong growth record has led to ambi- tious goals for the future. Noted in chapter 1, Source: Tu Anh et al. 2015. 122 VIETNAM 2035 BOX 2.2 Global context: A golden period of growth? A rapid rise from impoverishment to modernity, or In Korea, the world’s fastest growing economy since from agrarianism to industrialization, is a recent 1960, GDP has risen at an average annual 8 percent, artifact of economic history. Global living stan- increasing by a factor of almost 30 over the period. dards did not change at a perceptible pace in the Taiwan, China, the world’s second fastest grow- preindustrial world but have since surged remark- ing economy, has expanded at an average 7 percent ably (figure B2.2.1). While income per person in the since 1960. In comparison, over 1870–1960, the West nearly doubled between 1 CE and 1820, it has two fastest growing economies were República since grown by more than 20 times (Jones 2015). In Bolivariana de Venezuela (3.2 percent growth) and 1820, the per capita income gap between the rich- Sweden (2.1 percent).c est and the poorest nations stood at roughly a 5:1 But simply being present in the golden period of ratio.a Based on sustained growth in some countries growth has not guaranteed enrichment. The prom- and relatively fl at incomes in others, the difference ise of faster growth and rapid convergence with is now 300:1.b industrialized nations has proved elusive for all but Two major phenomena explain why living stan- a handful of emerging economies that were able to dards have taken off in the last two centuries. The show the necessary resolve. The report of the 2008 fi rst is technological growth. Remaining at nearly Commission for Growth and Development found zero through the end of the 18th century, technolog- that only 13 economies—nine in East Asia—grew at ical growth accelerated by way of the industrial rev- an average 7 percent or more over at least a 30-year olution. It gathered pace in the 19th century, fi rst in stretch between 1950 and 2006. If the report were the United Kingdom and then in the rest of Western written in 2015, it would likely have included Europe, the United States, and a few other countries Vietnam and India among the successful econo- (Commission on Growth and Development 2008). mies—a possibility that the 2008 report foresaw. Still, the “magic potion” of industrialization was What were the main elements of high-growth imbibed by only a handful of nations, resulting in economies’ resolve? The Growth Commission massive divergence between their productivity and identified five: living standards and those in the rest of the world (Pritchett 1997). 1. They fully exploited the world economy. The second phenomenon is rapid catch-up 2. They maintained macroeconomic stability. growth of the late industrializers. During catch- 3. They mustered high saving and investment rates. up growth, latecomers benefit from investment 4. They let markets allocate resources. fl ows and the transfer of technology and know- 5. They had committed, credible, and capable how from richer economies. This phenomenon governments. was enabled by a surge of globalization and hyper- connectivity, starting with Japan and extending to But even 30 years of unimpeded rapid growth is not Taiwan, China; the Republic of Korea; Singapore; enough to close the gap with high-income economies. M alaysia; and China, and more recently to The Growth Commission identified only six of the 13 Vietnam and India. Still, while accounting for successful economies (five in East Asia) that achieved almost half the world’s population, the late indus- high-income status. Of the remaining seven, four— trializers are relatively few. This means that the Brazil, Indonesia, Malaysia, and Thailand—are strug- income gap among countries continued to diverge gling in the middle-income trap. The story of China’s until late in the 20th century. ascent to high-income status is still being penned. C at c h - up g r ow t h h a s p r o du c e d g o ld e n Economists have blamed stagnant productivity on possibilities for economic development in the last the inability of countries—not just the fast-growing 50–60 years. Growth rates recorded by the world’s ones—to break out of their middle-income status fastest-growing economies during this period (Eichengreen, Park, and Shin 2011; Agenor, Canuto, far surpass anything ever seen in human history. and Jelenic 2012). (Box continues next page) ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 123 BOX 2.2 (continued) FIGURE B2.2.1 Global living standards took off after the eighteenth century 10 100 Trillions of 1990 PPP international $ (log scale) Thousands of 1990 PPP int’l $ (log scale) 10 1 1 0 0 A.D.1 1000 1500 1600 1700 1820 1900 1950 2000 GDP per capita GDP levels (right axis) Source: Commission on Growth and Development 2008. FIGURE B2.2.2 Vietnam’s share of global GDP relative to its share of global population has been recovering since the late 1980s 1.4 1.2 1.0 Percent 0.8 0.6 0.4 0.2 0 20 28 36 44 52 60 68 76 84 92 00 08 16 24 32 40 48 56 64 72 80 88 96 04 12 18 18 18 18 18 18 18 18 18 18 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 China Vietnam Source: Calculations based on The Maddison-Project. (Box continues next page) 124 VIETNAM 2035 BOX 2.2 (continued) Vietnam’s own development trajectory refl ects growing at some 0.4 percent a year, increased by the global shifts just described and internal changes. close to 80 percent between 1820 and 1960. The Much like China, Vietnam’s share of world GDP in devastation of war over the next decade and a 1820 was slightly below its share of world popula- half eroded half of those limited gains. Vietnam’s tion (figure B2.2.2). Put another way, per capita own slow growth, however, was not the only— income in Vietnam (and China) was slightly below or even the main—reason for its relative decline. the world average. At that point Vietnam’s economy The world economy expanded at an unprece- was the fi fth largest in the region by population and dented pace, widening the gap with Vietnam (and economic heft and larger than the economies of the China). Vietnam since the mid-1990s—and China Philippines and Myanmar combined. And it was a since the late 1970s—have been closing the gap third larger than Thailand’s economy. rapidly. China has already gone past the position Then more than 150 years of relative eco- it held in 1820. Vietnam at its current pace could nomic decline began. Vietnam’s GDP per capita, look to do that by 2035. a. The Maddison Project 2013. b. Penn World Tables 8.0. c. The Maddison Project 2013. Vietnam aspires to become a modern industri- 10 years) would take GDP per capita to just alized economy by 2035. This report outlines below $15,000 by 2035 and put Vietnam on five quantitative criteria for meeting that goal. par with Brazil in 2014 (figure 1.8). The coun- try would be well poised to reach $18,000 by 1. A GDP per capita of at least $18,000 2040. A 7 percent growth path (Vietnam’s aspi- (in 2011 PPP), roughly equivalent to rational growth target) would take per capita Malaysia in 2010 GDP to $22,200, roughly Korea’s income 2. A majority (over 50 percent) of the in 2002 or Malaysia’s in 2013. This higher Vietnamese population living in urban growth rate would also enhance Vietnam’s areas chances of catching up with regional compara- 3. A share of industry and services in GDP tors Indonesia and the Philippines. at more than 90 percent and in employ- What will determine Vietnam’s path? Its ment at more than 70 percent ability to grasp the significant future oppor- 4. A private sector share in GDP of at least tunities while managing equally signifi cant 80 percent risks (described in chapter 1) will be cru- 5. A score of at least 0.70 on the United cial. But international experience suggests Nations Human Development Index that its performance in productivity growth will be fundamental. Economists agree that Vietnam’s GDP per capita—$5,370 (2011 behind countries’ inability to break out of PPP) in 2013—would need to grow at least 6 the middle-income trap is stagnating pro- percent a year to reach the $18,000 mark by ductivity (Eichengreen, Park, and Shin 2035. This would be higher than the 5.5 per- 2011; Agénor, Canuto, and Jelenic 2012). cent average per capita growth rate between The trap is countries’ inability to move 1990 and 2014, and well above the 3.7 percent beyond an economic model that generates average for all middle-income countries over growth mainly from factor accumulation the same period. A lower and more feasible— and structural transformation. These forces but still ambitious—5.0 percent per capita have finite lives and weaken well before growth rate (Vietnam’s average over the last the economy is close to moving beyond ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 125 middle-income status, resulting in a future Vietnam’s Productivity Challenge: of economic stagnation. A Tale of Two Growth Episodes The significance of productivity perfor- Productivity isn’t everything, but in the mance is not just a lesson of global experience. long run it is almost everything. A country’s Vietnam’s future growth scenarios bear it out. ability to improve its standard of living At least 90 percent of future growth will have over time depends almost entirely on its to come from labor productivity in any realistic ability to raise its output per worker scenario. The contribution of labor force growth (Krugman 1994). will shrink to less than 10 percent because of projected demographic changes. Moreover, A breakdown of economic growth trends TFP growth would need to be revived to make since 1990 shows two starkly different a meaningful contribution. Underlying these growth models: one in the 1990s, and the outcomes, sectoral productivity performance other in the “long” 2000s (table 2.1).13 GDP would also need to increase sharply (box 2.3). growth in the 2000s (6.6 percent) was a full Long-term patterns of Vietnam’s pro- percentage point lower than in the 1990s. ductivity growth have been deteriorating. The decline was because of the slowdown in For example, labor productivity growth labor productivity growth, which was only has been on a downward trend since the partly offset by higher labor force growth. late 1990s (figure 2.14). Other measures of The most striking difference in the two Vietnam’s productivity performance give sim- periods, however, is not the decline in labor ilar results. The rest of this section unbundles productivity growth but the shift in its the productivity challenge further. determinants. BOX 2.3 A baseline scenario for income growth up to 2035 An average GDP growth of around 6 percent (or before tapering to 27 percent over the next decade. around 5 percent per capita) will take Vietnam’s This decrease refl ects a gradual decline in domes- GDP per capita to just below $15,000 (2011 PPP) tic savings and a rising role of domestic consump- by 2035. Such change will put Vietnam on par with tion, which would account for three-quarters of Brazil in 2014 or Malaysia in 2001. Tables B2.3.1 demand-side GDP by 2035. Export and import and B2.3.2 describe how the demand- and supply- shares in GDP would each gradually taper toward side structures would evolve. 80 percent, lower than today but still represent- On the supply side, agriculture’s share of employ- ing significant outward orientation compared ment would fall to 25 percent—roughly the same with peer countries. The current account would as China in 2015, Turkey in 2012, and Mexico in move from a small surplus in 2015 to a balanced the late 1990s—while rising to 37–38 percent for account in 2016–17. It would then gradually slip industry (including mining) and for services. The into a slight defi cit of around 1 percent of GDP, share of GDP in agriculture would fall to under funded mostly by sustained FDI inflows and rising 10 percent— similar to China in 2010 —while portfolio infl ows. This would happen sometime increasing in industry and services. These struc- after 2025, once the domestic financial sector tural changes would be matched by an increase in has been sufficiently developed and the capital the urbanization rate, from 33 percent to more than account liberalized. 50 percent by 2035. What would be the main implications of this On the demand side, the investment rate would baseline scenario for labor-productivity growth and remain strong at just over 30 percent until 2025, its determinants? (Box continues next page) 126 VIETNAM 2035 BOX 2.3 (continued) First, this scenario would require 5.6 percent average transformation is expected to stabilize at around annual labor productivity growth. Between 2013 and 20 percent. 2035, 92 percent of GDP growth would result from such Third, TFP growth would need to account for growth. This marks a large shift from 2000–13, when it close to half the labor productivity growth. Capital accounted for 55 percent of GDP growth. deepening will still retain an important role (though Second, the scenario would need a significant less than before), contributing about one-quarter increase in labor productivity growth across all to the labor productivity increase. The rest would major economic sectors (table 2.2). Productivity come from growth in human capital. This, again, growth within sectors will need to account for would be an uphill task considering how differ- close to 80 percent of future labor productiv- ent the relative contributions have been in the past ity grow th, as the contribution of structural decade and a half. TABLE B2.3.1 Structure of the economy, supply side Percent Share of total employment Share of GDP Agriculture Industry and mining Services Agriculture Industry and mining Services 1990 73 11 16 34.6 23.2 42.2 2000 68 12 20 24.8 34.8 40.4 2013 49 23 28 17.6 38.6 43.9 2025 32 31 37 12 40 48 2035 25 37 38 9 41 50 Source: Calculations and projections based on the General Statistics Office of Vietnam. TABLE B2.3.2 Structure of the economy, demand side Percent Consumption Investment Exports Imports Gross national savings Current account balance 1990 93.5 15.9 23.7 33.4 0.0 2000 73.3 30.5 50.0 53.7 0.0 3.4 2013 71.1 30.5 90.0 91.5 31.0 5.6 2025 72.3 30.1 82.7 83.7 29.2 −1.0 2035 74.6 27.1 79.7 80.5 26.4 − 0.8 Source: Calculations and projections based on the General Statistics Office of Vietnam. First, more than 70 percent of Vietnam’s 60 percent, reflecting a sharp increase in the labor productivity growth in the 1990s can investment rate from 26 percent in the 1990s be explained by TFP growth (annex 2B). to 33 percent over 2000–13. In the later The rest came from improvements in human period, TFP stagnated, making no contribu- capital (measured by returns to rising years tion to labor productivity or GDP growth. of schooling). Capital deepening (measured Human capital accelerated its pace of growth by the capital-output ratio) made a negligibly because of rising education among workers. negative contribution. In the 2000s, the con- Second, labor productivity growth in the tribution of capital deepening rose to almost 1990s stemmed from productivity growth ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 127 within sectors, with structural transforma- FIGURE 2.14 Labor productivity growth has been on a declining tion playing a negligible role (table 2.1). The trend since the late 1990s situation reversed in the 2000s as labor pro- 8 ductivity growth declined sharply in a major- ity of economic sectors (table 2.2). But the 7 pace of structural transformation increased 6 with an acceleration in the movement of labor 5 from agriculture to services and industry (see Percent table B2.3.1). In the four sectors dominated 4 by the public sector—mining, construction, 3 public utilities, and finance and real estate— 2 labor productivity growth was negative in the 1 latter period. The scenario in table 2.2 also makes clear the sharp turnaround in labor 0 productivity growth needed in each sector 01 11 03 13 93 09 99 05 95 07 97 20 20 20 20 19 20 19 20 19 20 19 if Vietnam is to achieve 6 percent average Source: Calculations based on the General Statistics Office of Vietnam. growth (5 percent per capita growth) in the Note: Three-year moving average. next two decades. For higher growth trajec- tories, the turnaround needed in labor pro- ductivity growth at the sector level is even These issues included inefficient SOEs, more spectacular. weak and worsening domestic private sec- tor performance, and fragmented, small- holder-dominated agriculture with heavy What Explains the Stagnation in state involvement. Productivity in Vietnam? Three Primordial Policy and Institutional SOE inefficiencies have widespread effects Issues Vietnam’s state sector has a long history Despite its seemingly robust economy, of inefficient resource use, dating to the Vietnam faces a serious problem of low (and days of central planning when all formal falling) productivity growth. This could productive activity was in the public sec- stymie its 2035 income aspirations. What tor’s hands. Accounting for 40 percent of explains these trends? And why do they dif- total investment, the sector contributes fer between the 1990s and 2000s? just 30 percent of GDP growth. It refl ects Initial productivity gains in the earlier the weak performance of the SOEs as cap- period refl ected the country’s move toward tured by the low, fi rm-level asset (capital a market economy and removal of many and land) and labor productivity measures distortions imposed under central plan- throughout the 2000s (fi gures 2.15a and ning. These included production quotas, b). Ineffi cient resource use by the SOEs is multiple price controls, collectivized agri- glaring but not surprising. SOEs have little culture, trade and investment restrictions, incentive to be at their productive best. and a ban on formal private enterprise. They are sheltered by protected markets Most of these restrictions were lifted in the and from stringent reporting requirements. initial phases of Ð ổ i M ớ i . Systems more They benefit from preferential access to friendly to the market and the private sec- land, capital, government contracts, and tor were in place by the early 1990s. These other tacit and explicit privileges. And they early steps gave a big boost to productiv- are laden with unclear social and political ity across the economy. But by the end of objectives. Yet under growing pressure to the 1990s, their induced benefits had been restructure, they have at least sought to exhausted. More fundamental policy and ensure that their feeble productivity does institutional issues become more binding. not deteriorate further. 128 VIETNAM 2035 TABLE 2.1 Sources of growth in Vietnam, 1990–2013 Percent 1991–2000 2001–13 Average annual GDP growth 7.6 6.6 Labor productivity growth 5.2 3.8 Labor force growth 2.2 2.7 Determinants of labor productivity growth Contributions of within-sector productivity and structural transformation Within-sector labor productivity 99.8 37 Structural transformation 0.2 63 Contributions by factors of production to labor productivity a Capital deepening (growth of capital–output ratio) −3 59 Human capital 30 40 Total factor productivity 72 0 Source: Calculations based on the General Statistics Office of Vietnam. a. Annex 2B, using the scenario with increasing value of α. TABLE 2.2 Sectoral GDP and productivity growth, 1990–2035 Percent Public Wholesale and Finance and Other Period Agriculture Mining Manufacturing utilities Construction retail trade real estate services Aggregate GDP growth 1990–2000 3.9 7.6 10.3 11.1 8.9 7.4 6.8 4.5 7.6 2000–13 3.5 2.3 9.9 10.6 8.1 7.8 5.7 10.4 6.6 2013–35 (projected) 2.9 2.7 7.9 3.0 6.8 7.0 6.4 6.5 6.1 Labor force growth 1990–2000 1.5 −1.9 3.4 0.6 3.4 6.7 3.9 2.9 2.2 2000–13 0.1 2.7 6.9 15.9 10.4 5.5 10.0 5.6 2.7 2013–35 (projected) −2.6 0.5 2.9 −1.1 3.0 2.1 2.2 1.3 0.4 Labor productivity growth 1990–2000 2.7 17.1 7.1 11.0 6.3 0.1 4.1 1.6 5.2 2000–13 3.4 −0.4 2.8 −4.6 −2.1 2.1 −4.0 4.6 3.8 2013–35 (projected) 5.6 2.3 4.9 4.1 3.7 4.8 4.3 5.1 5.6 Source: Calculations and projections based on the General Statistics Office of Vietnam. The performance of domestic private by 2014, their asset productivity had fallen to enterprises gives even more cause less than half that of Chinese nonpublic firms. for concern Given its hesitant emergence, Vietnam’s Driven by a sequence of reforms to first legal- much lower entrepreneurial confidence than ize and then facilitate private enterprise, the many of its developing-country peers is private sector grew exponentially after the late hardly surprising (box 2.4). 1980s. The sector’s growing presence, how- A comparison across firm sizes and sectors ever, has been marked by worsening produc- throws further light on the weak produc- tivity since the early 2000s (figure 2.15) to such tivity performance of Vietnamese private a degree that there is little daylight between enterprises.14 Domestic private firms are over- labor and asset productivity in the private and whelmingly small (figure 2.16) and informal, SOE sectors. A comparison with asset produc- which prevents productivity gains through tivity of nonpublic firms in China is revealing. scale economies, specialization, and innova- Vietnamese nonpublic firms, on average, were tion. Of those registered, 94 percent had 50 or using their assets more productively than their fewer employees in 2013, up from 89 percent Chinese counterparts in the early 2000s. But in 2001. Millions of nonregistered (informal) ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 129 FIGURE 2.15 Low firm-level asset (capital and land) and labor productivity measures reflect Vietnam’s long-inefficient state sector and worsening performance of private enterprises a. Firm-level asset productivity, 2001–14 b. Firm-level labor productivity, 2001–13 2.5 500 450 Revenue per employee Revenue per asset unit 2.0 400 350 (currency) (currency) 1.5 300 1.0 250 200 0.5 150 0 100 01 03 09 11 13 05 07 01 03 05 07 09 11 13 20 20 20 20 20 20 20 20 20 20 20 20 20 20 State-owned enterprises (China) State-owned enterprises Nonpublic sector (China) Domestic nonstate sector State-owned enterprises (Vietnam) Nonpublic sector (Vietnam) Source: a. Calculations based on the General Statistics Office of Vietnam, and the National Bureau of Statistics of China. b. Calculations based on the General Statistics Office of Vietnam. Note: Revenue per employee is estimated after controlling for the effects of the asset-to-labor ratio and total assets. BOX 2.4 Low entrepreneurial confidence in Vietnam While propensity and aptitude for entrepreneurship On all these scores, Vietnam trails Thailand, have increased in Vietnam, they remain lower than Indonesia, and the Philippines by a fair margin. On in regional comparator countries. Of Vietnamese the fl ip side, 57 percent of Vietnamese adults feared adults surveyed in 2013, 37 percent perceived an failure, almost double the average of 31 percent in opportunity to start a new business, and 24 percent comparator countries. This lack of confidence in showed an intention to start a business. This com- their abilities and in the business environment around pared with respective averages of 61 percent and 45 them belies their desire to become entrepreneurs. Of percent in countries at similar development. Some surveyed adults, 63 percent wanted to become entre- 49 percent felt that they had the required entrepre- preneurs (75 percent for the comparator group) while neurial capabilities, compared with 69 percent in 82 percent saw entrepreneurship as socially presti- the comparator group. gious (80 percent for the comparator group). Source: Global Entrepreneurship Monitor 2013. household enterprises operate at even lower Performances are strikingly low on the subcat- scales. Household firms can raise their labor egories: paying taxes (rank 168), ease of start- productivity and profits from entering the ing a business (119), access to electricity (108), formal sector and becoming growth ori- dealing with business insolvency (123), and ented (Boly 2015). Many have taken that protection of minority investors (122). path, but millions more choose not to. They Over time smaller firms have also been are reluctant to endure bureaucratic scrutiny building capital intensity (proxied by the and withstand rent and regulatory prob- asset-to-revenue ratio, which grew fourfold lems. These regulatory issues are reflected in over 2001–13). Given their lack of scale econ- Vietnam’s modest ranking of 90 (of 189) in omies, capital investment is not a compara- the World Bank’s Doing Business Indicators. tive advantage of small firms. This factor was 130 VIETNAM 2035 evident in their sharply declining asset and firms (figure 2.17). This is contrary to expec- labor productivity (figures 2.17a and b). tations because scale economies should allow On the other hand, few medium-large and the larger firms to operate more efficiently. large domestic private firms exist, especially What explains the domestic private in manufacturing. And their share in the total sector’s weak and declining productivity per- number of enterprises continues to shrink. formance? The most fundamental distortion Only 3 percent of all registered enterprises in Vietnam’s nascent market economy may employed more than 100 workers in 2013, be the gradual commercialization of the state compared with 6 percent of all such fi rms in (chapter 7). Narrow commercial interests of 2001. And the few medium-large and large those with connections rather than enterprise domestic private firms have, on average, been performance determine business viability. even less productive than smaller private Firms with connections—SOEs, most for- eign-invested firms, and some large domestic FIGURE 2.16 Domestic private firms are private firms—receive unspoken and explicit overwhelmingly small and mostly informal, preferences from those in power without ade- preventing productivity gains through scale quate consideration of economic efficiency. economies, specialization, and innovation This makes it hard for many private firms to 0.8 thrive, even if they are productive. Vietnam employment density (log) Benefitting from the relatively safe and 0.6 welcoming environment in Vietnam as well 0.4 as the many mentioned preferences, foreign- invested fi rms have grown their presence in 0.2 Vietnam, leading the country’s rapid growth in manufacturing and exports. By 2015, the 0 2 4 6 8 10 12 FDI sector was contributing over half of lnL (unit) manufacturing output in over 70 percent of Public firms Domestic-private firms export turnover in Vietnam. But links with Foreign firms domestic firms have been lacking in key Source: Aterido and Hallward-Driemeier 2015. sectors, impeding productivity- enhancing FIGURE 2.17 Large domestic private firms have, on average, been less productive than smaller private firms a. Revenue per unit asset, domestic nonstate b. Revenue per employee, domestic nonstate sector, by firm size sector, by firm size 3.5 700 3.0 600 Revenue per employee Revenue per unit asset 2.5 500 2.0 400 1.5 300 1.0 200 0.5 100 0 0 01 03 05 07 09 11 13 07 01 03 05 09 11 13 20 20 20 20 20 20 20 20 20 20 20 20 20 20 <51 employees 51–100 employees 101–300 employees >300 employees Source: Calculations based on the General Statistics Office of Vietnam. Note: Revenue per employee is estimated after controlling for the effects of the asset-to-labor ratio and total assets. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 131 transfers of technology and management than outside the state. It has also resulted in a practices. There are few joint ventures continued heavy SOE presence in many eco- (around 80 percent of FDI in Vietnam is in nomic sectors. 100-percent foreign invested companies), Second, embracing markets has been and the vertical link between FDI and local uneven. Progress has been impressive in open- companies is weak (only about a quarter of ing product markets and integrating them inputs in FDI are purchased in Vietnam, of with the global economy under international which a significant proportion is from other trade agreements. But this progress has been foreign-invested companies). Hampered by accompanied by a more subdued and mud- limited capabilities in both the SOEs and dled approach to developing and relaxing domestic private enterprises, the internal factor markets, evident in inefficient land and business forces in Vietnam are proving too capital allocation. For example, significant weak to effectively take advantage of exter- land and capital assets were accumulated in nal forces.15 The situation raises concerns of the construction, real estate, and banking and a possible “Mexican phenomenon”—which finance sectors between 2001 and 2013. But warns of overreliance on FDI and a few large these sectors were among the least productive companies leading to an outcome of “two (figure 2.18). Allocations are likely influenced economies in one country.”16 by arbitrary administrative decisions and The state’s commercialization has pro- connections, at onerous economic cost and duced an uneven and partial approach to as substantiated by a considerable literature. market reforms, leading to two imbalances. A 2008 study, for example, finds that the allo- First, embracing markets as the mechanism cation of bank credit relates to the presence or for allocating resources coincides with a absence of connections (Malesky and Taussig more cautious and ambiguous approach to 2008). The most profitable private fi rms do giving up state control of production and not even attempt to get bank loans. Updating to accepting domestic private ownership of the analysis to 2013, this report finds that the productive assets. This has led to a growing results still hold (annex 2A). Many provinces entrepreneurial business class within rather with a high density of SOEs provide less credit FIGURE 2.18 Land and capital assets have been accumulated in sectors that have made the least productive use of them a. Share of assets in domestic private enterprises, b. Revenue per unit asset for domestic private Vietnam, 2001–13 enterprises, Vietnam, 2001–13 18 5 16 4 Revenue per unit asset 14 12 Share of assets 3 10 8 2 6 4 1 2 0 0 01 01 03 11 13 03 11 13 09 09 05 07 05 07 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Textiles and garments Electronics Banking and finance Real estate Communications Food processing Wholesales and retail Construction Source: Calculations based on the General Statistics Office of Vietnam. 132 VIETNAM 2035 to private firms and require more time to issue Under prevailing market conditions, use land-use rights certificates than other prov- of social and political capital—and not nec- inces (Freeman and Nguyen 2006, for exam- essarily talent—explains private firms’ entry ple). Easier access of the SOEs to credit, land, and profitability (Malesky and Taussig 2009; and export quotas in the garment and textile Kinghan and Newman 2015). The adverse sector reduces private firms’ profitability and impact of these factors on domestic private viability (Nguyen and Le 2005). These imped- fi rms’ performance should not surprise any- iments require vigorous efforts to develop and one. In the presence of noncompetitive and ease competitive markets for land and capital, state-controlled factor markets and inade- as per the reform agenda described below in quately developed formal market institutions, “Liberalizing factor markets.” firms turn to informal institutions and net- Neglect of essential market institutions works. In these environments, they often find has also hurt productivity. The greatest illegitimate means to enter the market, grow, weaknesses are in the institutions responsible and become more profitable (Steer and Sen for protecting private property rights and for 2010). Those more adept at garnering political ensuring free and fair competition. These capital or exploiting connections, however, are institutional weaknesses have impeded the not necessarily better at running a business. emergence of large, competitive private firms and have further discouraged small house- Agricultural labor productivity remains low hold firms from entering the formal sector Agriculture has made enormous progress (Malesky and Taussig 2009). This occurred since the late 1990s, but emerging concerns even though switching from informal to for- about the quality and sustainability of its mal activity can raise firms’ productivity and growth model require urgent policy atten- profitability (Boly 2015). (The reform agenda tion. Sectoral labor productivity remains to develop these market institutions is dis- low against comparator countries despite cussed in the next section.) rapid gains since 1990 (figure 2.19). This is FIGURE 2.19 Labor productivity in agriculture remains low, even after growing strongly since 1990 a. Agricultural value added per worker b. Agricultural value added per worker, 2013 250 1,400 230 1,200 210 1,000 US$ (constant 2005) 190 Index 1990 = 100 170 800 150 600 130 400 110 200 90 70 0 90 92 94 96 98 00 02 04 06 08 10 12 14 m h a a ia s d ne di in es an es 19 19 19 19 19 20 20 20 20 20 20 20 20 na Ch In ad pi ail on et ilip gl Th Vi d China India Indonesia In n Ph Ba Malaysia Philippines Thailand Vietnam Source: Calculations based on the General Statistics Office of Vietnam and World Development Indicators. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 133 mainly because of fragmentation of agricul- exposing economic growth to weak pro- tural land ownership and the dominance of ductivity trends. rice in the use of the best land and much of Vietnam has one key advantage. It is early the country’s irrigation capacity. Productivity enough in its development stage to reignite of agricultural land—measured by value productivity growth without compromis- added per hectare—is higher in Vietnam ing the 2035 income objectives. At a simi- than most regional peers, including China, lar development stage in the early 1980s, Indonesia, the Philippines, and Thailand. Korea saw a major acceleration in its labor This is because of intensive farming practices, productivity growth. This suggests that a involving high concentration of workers and turnaround in such growth is still possible heavy use of chemicals, fertilizers, water, and (box 2.5). But it also highlights how demand- other inputs. But the growth of land produc- ing the institutional reform agenda is. tivity has slowed—and has been slower than A demanding reform agenda can, how- most regional peers since 1990—because ever, easily overwhelm and immobilize the returns from intensive land use have reached government’s technical and capacity ele- their limits. And water resource management ments and its financial capabilities. It is there- from rivers originating from other coun- fore crucial to apply a prioritizing filter to tries is becoming increasingly challenging.17 sequence the reforms. In Vietnam’s case, the Important issues facing the sector include priority must be to revive the domestic enter- low value-added, uncertain food safety, and prise sector’s productivity. Reforming the low smallholder profitability. Issues also SOE sector is important for this. It will cor- include price-discounted commodities in rect the widespread inefficiency in resource international markets, little technological allocation by the SOEs. It will also consoli- or institutional innovation, and consider- date their presence in a few strategic areas able underemployment among agricultural while freeing space for the private sector. The workers. current environment, however, does not sup- port the emergence of productive domestic private firms. SOE reforms, then, must be Promoting Economic matched by urgent measures to improve the Modernization and Enhancing enabling conditions for the private sector. Competitiveness of the Private Emphasis must be on strengthening market institutions and liberalizing factor markets. Sector These foundational reforms will run along- The imperative to improve productivity side two other broad policy actions. One is growth to meet Vietnam’s income aspira- to modernize and commercialize agriculture, tions for 2035 is clear and strong. GDP which engages almost half the workforce in growth since the early 2000s has been led a country almost 70 percent rural. The other by forces that compensated for weak and is to strengthen participation in GVCs, given declining productivity growth but are now the heavy and likely increasing reliance on reaching their natural limits. Rapid labor external markets. force growth made up for low and declin- These pillars broadly constitute the reform ing labor productivity growth across the program to revive Vietnam’s productivity economy. Large-scale structural trans- growth in the short to medium term, with formations offset low and declining labor their impact likely to be most acutely felt over productivity growth at the sectoral level. the next 10 years or so. The country’s 2035 A nd accelerated capital accumulation income aspirations need, however, to take counterbalanced low and declining TFP account of constraints that are farther down growth. In the next phase of develop- in time and require reforms with long-term ment, each of these compensatory factors gestation. These reforms include building an will have a sharply diminished impact, innovation-led economy, developing modern 134 VIETNAM 2035 BOX 2.5 Labor productivity growth in Vietnam, China, and the Republic of Korea Vietnam seeks to emulate the growth experiences in industry and services and lower in agriculture. of the Republic of Korea and perhaps even China. Strong labor force growth was thus a crucial part Therefore, we compare the sectoral labor produc- of that country’s GDP growth in the 1970s. After tivity performances of the three countries at simi- 1980, however, its labor productivity growth lar development stages. China’s labor-productivity increased sharply, especially in industry and agri- growth in the period leading up to 2000 (when its culture. This occurred on the back of a series of GDP per capita was similar to Vietnam’s in 2013) stabilization and structural reforms. Some reforms was far stronger than in Vietnam in the 2000s launched in the late 1970s and early 1980s imme- (table B2.5.1). The difference was particularly diately helped improve productivity grow th. noticeable in the industry and service sectors. China These included agricultural modernization, mac- had the momentum to support the strong productiv- roeconomic stabilization, and greater emphasis ity growth that has followed since. on competition and market deregulation. Other Comparison with Korea is instructive in a dif- reforms—such as those related to urbanization, ferent way. Its aggregate labor productivity growth higher education, and research and development in the 1970s was almost the same as Vietnam’s in (R&D)—operated with a significant lag, having the 2000s: Korea’s productivity growth was higher begun many years earlier. TABLE B2.5.1 Labor productivity growth in Vietnam, China, and the Republic of Korea Vietnam China Korea, Rep. 1990–2000 2000–13 1978–90 1990–2000 2000–13 1970–80 1980–95 Aggregate 5.2 3.8 5.4 8.5 9.4 3.5 5.4 Agriculture 2.7 3.4 2.8 3.7 7.5 2.0 7.5 Industry (including mining) 9.0 − 0.6 3.6 11.1 7.8 3.1 9.1 Services 2.1 1.9 6.1 5.0 7.2 2.6 1.3 Sources: General Statistics Office of Vietnam; Economic Statistics System of the Bank of Korea and Korean Statistical Information Service; National Bureau of Statistics of China and Ministry of Human Resources and Social Security of China. and efficient urban structures to promote conditions—the SOEs can even contribute to economic agglomeration, and ensuring envi- national development objectives. ronmentally sustainable development. Consistent with international good practice, the government could issue an SOE ownership policy that includes clear goals.18 Restructuring SOEs: Creating a Level The policy would focus, first, on maximizing Playing Field state capital.19 The best SOEs in the world Despite past contributions and reforms, focus on financial performance. 20 It may Vietnam’s SOEs are faltering. They use labor, be useful for the government to supplement land, and capital inefficiently. Some State this policy with explicit statements on sup- Economic Groups have destroyed state capital porting goals. For example, New Zealand’s through imprudent expansion, diversification, SOEs have been directed to be good employ- and debt financing. Vietnam will need a thor- ers, as profitable and efficient as comparable ough reform of its SOE sector to become an private sector businesses, and socially respon- advanced market economy by 2035. Through sible by responding to local communities’ well-structured reforms—and under certain needs and interests. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 135 Further contribution from Vietnam’s in manufacturing activities, such as beer, SOEs will depend on three aspects of chemicals, food processing, and textiles and reform measures: take a focused commercial garments. No compelling rationale for state approach to state ownership, apply good cor- ownership exists in these areas. A central porate governance practices, and ensure that government 2035 target portfolio of about all enterprises—public or private, foreign or 20 parent SOEs seems reasonable. Most of domestic—play by the same rules. these parent corporations would be holding companies with subsidiaries in related busi- Commercial Approach to State Ownership nesses and proper arrangements for corpo- A commercial focus requires hard budget rate governance at the holding company and constraints and reliable and timely fi nancial subsidiary levels. The target of 20 or so par- information. A hard budget constraint will ent SOEs is a compromise between China imply, in most cases, no soft fi nancing from and advanced social-market economies. 21 the state budget or implicit or explicit guar- These parent SOEs could include many of antees of SOE commercial debt. Exceptions Vietnam’s existing State Economic Groups. would be few and based on well-defined and A final decision on the size of Vietnam’s SOE transparent criteria. Each SOE would have portfolio would require detailed analysis and an appropriate dividend policy, approved by government deliberation. its board of directors. The state shareholder The government’s majority SOE hold- would not allow an SOE to retain or rein- ings could focus on strategic sectors, though vest substantial cash surpluses without care- even strategic SOEs should face competition. ful supervision by the SOE’s board and the These sectors could include steel, cement, state shareholder. If an SOE cannot expect mining, oil production, power generation, to earn an adequate risk-adjusted return on water and air transport, and certain telecom- reinvested cash, this surplus cash should munications subsectors. be returned to the Ministry of Finance as The government would benefit from sell- a regular or a special one-time dividend. ing shares in most of the 20 SOE parent Cash requirements will vary depending on companies down to about a 36 percent own- whether an SOE is in a growth, cyclical, or ership stake. Vietnam’s Company Law could stable business. These should factor into the allow a 36 percent owner the power to block dividend policy recommended by each SOE’s extraordinary corporate events that require management to its board of directors. 65 percent shareholder approval. 22 This SOE fi nancial statements will need to be blocking minority approach—followed in disclosed, for transparency, accountabil- Austria by Österreichische Industrieholding ity, and fiscal discipline. Across-the-board (the Austrian industry administration)— improvements in Vietnam’s accounting and would establish market values for these financial disclosure practices are needed. companies and facilitate follow-on access to Vietnamese Accounting Standards will need capital market fi nancing. The sale of major- to be consistent with International Financial ity (not absolute) control to private investors Reporting Standards (World Bank 2014). would increase proceeds from share sales In addition to internal audits, independent and attract serious qualified—and possibly external audits of SOEs would be conducted foreign—investors.23 in accordance with International Audit Standards. It will be important to upgrade Corporate governance professional training for the state shareholder The SOEs need an active designated state and SOE accountants and auditors. shareholder. The current arrangement is inap- The government will need to reduce propriate. The “government” is designated as its SOE portfolio to a manageable size. the state shareholder. And many ministries or Vietnam has too many SOEs. Many (espe- agencies exert ownership authority to review cially the General Corporations) operate financial statements, approve investment 136 VIETNAM 2035 plans, and hire CEOs, for example. This state shareholders to support efforts to raise occurs without any specific government offi- the quality of SOE management. This would cial being responsible for SOEs’ performance. include providing market–based—rather than Taking Singapore as a model, the government civil service–based—compensation, and link- could establish four or so State Shareholding ing it to performance in fi xed-term manage- Funds (SSFs) to act as the state shareholder ment contracts. This effort also would include in SOEs, with portfolio responsibilities as controlling and disclosing related-party trans- follows: actions. SOE managers should regard SOE management as a desirable career choice, not • Financial Services Fund—This fund could simply as a means for promotion within the include state-owned commercial banking, government or the Party. development banks, and insurance com- Boards of directors play a central function panies and any other nonbank fi nancial in SOE governance. The board carries ulti- institutions. mate responsibility for SOE preservation and • Network Services Fund—This fund could performance, and thus preserves or maxi- include road, air transport, rail transport, mizes state capital. An effective board must inland water transport, and post and tele- comprise highly qualified directors capable communications SOEs. of exercising objective, independent judgment • Energy Fund —This fund could include to guide strategy development and monitor mining, petroleum, and electricity SOEs. management. To act with authority, a modern • Industry Fund —This fund could initially SOE board requires members who act in the include heavy and light industry SOEs interest of the company, face no confl icts in and SOEs engaged in agriculture and doing so, and possess relevant experience and agroprocessing. expertise, including from the private sector. To establish strong SOE boards, the govern- The government should avoid any bureau- ment needs a strong policy and procedural cratic interventions in SOEs on the basis of framework for director nominations. Key ele- ownership. To exercise its ownership rights, ments of such a framework include standards the designated state shareholder—an SSF, for board objectivity, professional criteria for for example—could review regular fi nancial director selection and removal, and a struc- reports and disclosures. The designated state tured nomination process that includes timely shareholder could participate in annual and appointment and disclosure of results. special shareholder meetings. It could vote Selection of each SOE’s chief executive state shares in selecting board directors and officer (CEO) and top management should handle other matters for shareholder consid- follow good practice. This increasingly calls eration. This entity could also help establish for empowering the board to appoint and— an effective board of directors (appropri- subject to clear criteria—remove the CEO. ately staffed and organized) for each SOE. This reinforces the board’s key duty for over- Except for routine economic, environmen- seeing management. It also ensures that the tal, and social regulation matters that affect CEO is accountable to the board rather than all enterprises, government entities would to the government. have no authority or right to intervene in The SSFs’ authority to use cash balances SOEs’ affairs. and to borrow would need to be strictly con- The Ministry of Finance would hold a trolled, at least initially. Experiences from majority—likely 100 percent—of the shares advanced countries are a sharp warning in each SSF. Little can be gained by distribut- about giving state investment funds too much ing SSF shares to other ministries. Other min- flexibility to borrow and to initiate invest- isterial interests could be recognized through ment projects. SSFs would be free to sell and intragovernment consultations and direc- trade existing SOE shares and assets. But tor appointments. It would be important for the government, as SSF shareholder, could ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 137 prohibit or limit SSF borrowing and require development. They involve well-functioning each SSF to forward cash proceeds from divi- institutions for enforcing free and fair com- dends and share/asset sales to the Ministry of petition and protecting property rights and Finance. Each SSF could retain a portion of competitive factor markets, discussed in the cash proceeds to cover its operating expenses, next two subsections. as agreed with the fund’s shareholder. Efficient markets also require stable and predictable price signals and sustainable Level playing field macroeconomic balances, which call for The government should provide a level play- resilient and credible macroeconomic institu- ing field between SOEs and private domestic tions to manage monetary and fiscal policies. or foreign fi rms. First, if an SOE is required This reform agenda is covered in the report’s to perform noncommercial work, the govern- Overview. ment would ensure that the SOE receives ade- quate compensation. Second, the government Strengthening market institutions would further eliminate any preferential treat- The evidence is compelling that function- ment for SOEs, including. subsidies, favorable ing markets require well-defined rules of the antitrust or tax treatment, or favored access to game, enforced transparently and predict- land, credit, or public procurement opportuni- ably. The agenda calls for strong market insti- ties. Third, the government would also review tutions whose role is especially important in and amend laws to achieve greater consistency the early phases when markets are under- between the rules for SOEs and those for pri- developed and small distortions can have vate firms. Fourth, the government would amplified effects. In Vietnam, the emphasis ensure that the insolvency and creditor/debtor must be on enforcing competition and ensur- regime is consistent with international good ing the security of property rights. practice and that it applies to SOEs. Fifth, the government would seek greater alignment Institutions for free and fair competition between public and private law/regulation on Effective competition is essential for private labor and on procurement. sector development and economic competi- tiveness. 24 Firms typically acquire many of Strengthening Microeconomic their inputs—transport, energy, financial Foundations to Enhance services, telecommunications—in local Competitiveness of the Private Sector markets. If these upstream markets lack com- petition, goods and services for production With insecure property rights, poorly are not priced competitively. New domes- enforced laws, barriers to entry, and tic fi rms may then fi nd it difficult to enter. monopolistic restrictions, the profit maxi- Existing fi rms may become less competitive mizing firms will tend to have short time than their foreign and SOE rivals. Reforms horizons and little fixed capital, and will that open markets and remove anticompeti- tend to be small scale. The most profitable tive regulation thereby lead to significant pro- businesses may be in trade, redistributive ductivity gains. activity, or the black market. Large firms with substantial fixed capital will exist Well-functioning markets have shown only under the umbrella of government positive results across the world. In transi- protection with substantial subsidies, tariff tion economies, fi rms facing more competi- protection, and payoff to the polity—a tion have seen faster sales growth (Carlin, mixture hardly conducive to productive Schaffer, and Seabright 2004). In Africa, the efficiency. (North 1990) entry of an additional mobile phone opera- tor, for example, was found to increase sub- This section focuses on the microeconomic scriptions by 57 percent (Gebreab 2002). market economy foundations for creating Higher markups reduced productivity growth better enabling conditions for private sector in Jordan and Morocco (Sekkat 2009). 138 VIETNAM 2035 Weak competition in telecommunications allow for back-hauling services. But the quota alone cost the Mexican economy around of 500 Vietnamese trucks is not assigned $129.2 billion in 2005–09 (OECD 2012a). competitively. At airports, the slot alloca- Healthy competition in domestic markets tion policy is not competitive. State-owned also enhances export growth (Goodwin Vietnam Airlines has grandfathered rights and Pierola Castro 2015). Further, weak com- on international routes, while charter fl ight petition can be more harmful to the poor than rights on domestic routes are granted case by to the rich, as found in Mexico (Urzua 2009). case. Despite a decline in market concentration Vietnam needs a comprehensive compe- since the early 2000s (Aterido and Hallward- tition policy framework to open markets to Driemeier 2015), Vietnam still ranks in the entry and competition, and then to enforce middle ranges of cross-country comparisons competition policies. This framework would of competitiveness in domestic markets. reflect four key principles: For example, it ranks 65th in the world on Intensity of Local Competition and 69th 1. Apply policies equally to all firms (private on Extent of Market Dominance (World or public, domestic or foreign). Economic Forum 2014). In the region, 2. Combat the most harmful anticompeti- Vietnam ranks behind China, Indonesia, tive practices, such as cartels. Malaysia, Thailand, Singapore, and in cer- 3. Concentrate on deterring anticompetitive tain cases the Philippines. Comparisons show behavior rather than on price control and concerns not just with the quality of competi- regulation. tion-related institutions but also enforcement. 4. Operate in a fair, transparent, rule-bound, On this measure, the country ranks 87th in and nondiscriminatory manner. the world and 12th in the region. The dominant position of SOEs in many Deviations from these principles should be markets is a major constraint on competi- rare and only for meeting national objectives tion. Their presence is not unusual in many that are clearly defined and applied fairly and economies, especially in sectors that are transparently. The reform agenda that defines natural monopolies (public utilities) or are and implements this framework includes the capital intensive (large infrastructure), with following: competitive markets leaving plenty of room for the private sector to prosper. In Vietnam, • Strengthen and give more autonomy to however, SOE presence is almost across the the Vietnam Competition Authority (VCA). board, including sectors such as garment The VCA lacks operational independence, manufacturing, mobile telephone services, which causes a great productivity loss and banking, where private players can do for the economy. 25 It is a department- a better job. And if the state does keep its level entity directly under the Ministry extensive role in production, at the very least of Industry and Trade and composed of that role needs to be neutral to private com- ministerial representatives rather than petition. This argues against the privileges independent experts selected on techni- extended to Vietnam’s SOEs, which under- cal criteria. These representatives are not mine the viability of domestic private firms. protected by immunity against dismissal Regulations in key network services— for legitimate exercise of their functions. especially electricity and transport—further The VCA lacks basic authority to ask busi- thwart private competition. For example, nesses for information to investigate com- Vietnam Electricity’s position as the sole pur- petition-related cases. chaser of wholesale electricity, combined with • Align the legal framework with consumer price regulation, creates an unviable environ- protection. Besides enhancing economic ment for private fi rms. In transport, Vietnam efficiency, the other major objective of and Cambodia have signed agreements to competition policy is improving consumer ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 139 welfare. The laws on competition and policy is important for preserving mar- consumer protection—and their enforce- ket competition, and has been found to ment—thus need to be closely aligned. result in major savings for a number of A review shows that this is not the case. countries.27 The merger control framework VCA’s mandate could be expanded over in the Competition Law in Vietnam dif- time—after strengthening its autonomy and fuses authorities’ attention too thinly, not capacity—to include aspects of consumer allowing them to focus on—potentially— protection that directly relate to competi- the most harmful transactions. Merger pre- tion. This follows the example of the United notification thresholds are based on market States Federal Trade Commission, an inde- shares (article 20), and participants in even pendent federal agency that enforces com- minor transactions must be notified if trans- petition and consumer protection. actions result in more than 30 percent of • Rationalize exemptions to tackle car- market share, while concentrations that tels and other forms of concentration. achieve a joint market share of more than 50 Addressing cartel behavior is an essen- percent are prohibited (article 18). A notifi- tial part of antitrust enforcement. Cartels cation threshold based on market share is have been associated with price increases more uncertain for the private sector than of 10–45 percent in developing countries objective thresholds such as turnover. (Levenstein, Suslow, and Oswald 2003) • Ensure a level playing fi eld for all firms, and lower labor productivity and innova- public and private, foreign and domestic. For tion (Broadberry and Crafts 2001; Evenett, reforms to level the playing field between Levenstein, and Suslow 2001; Symeonidis private firms and SOEs, see the section 2008). In Vietnam hard-core cartels are below on “Restructuring the SOEs.” To exempt from anticompetitive enforcement level the playing field between domestic if participants’ market share is below 30 private and foreign firms, policies will percent (article 9).26 Even when the shares have to equalize tax and other incentives are above 30 percent, several exemptions given to the two groups and level their protect them (article 10). These and other access to land. exemptions in the Competition Law need a critical review to eliminate them. Not only do these exemptions create economic dis- Institutions for security of property rights tortions, in some cases they also open the and contract enforcement door to political interference. For example, For a well-functioning market economy, the decision on whether to grant an exemp- participants need to have confidence that tion goes to the Minister of Industry and their transactions and property rights will Trade if the failing firm defense is used. be enforced. The Rule of Law Index in the The decision goes to the Prime Minister in World wide Governance Indicators is a good other forms of defense, such as contribu- measure of these microinstitutions. The index tion to exports (article 25). “captures perceptions of the extent to which • C on side r m arket contest abilit y in agents have confidence in and abide by the establishing market dominance . The rules of society, and in particular the quality Competition Law establishes market domi- of contract enforcement, property rights, the nance based on market shares but not mar- police, and the courts, as well as the likeli- ket contestability (article 11). This needs hood of crime and violence.”28 Its earliest year to be revised to consider entry, exit, and is 1996, when Vietnam had good rule of law expansion barriers; the company’s fi nan- for its income level and relative to its peers. cial power; and the duration of market This may be why it has seen strong growth power in establishing market dominance. (figure 2.20a). • Increase the threshold for intervention in Institutional development needs, however, merger control. Effective merger control to keep pace with economic change. Vietnam 140 VIETNAM 2035 FIGURE 2.20 Vietnam’s ranking on the rule of law measure has declined since 1996, while its per capita GDP has increased sharply a. Institutional quality relative to development, b. Institutional quality relative to development, 1990s 2013 2.5 2.5 2.0 2.0 1.5 Singapore 1.5 Singapore Rule of Law Index 1996 Rule of Law Index 2013 1.0 1.0 Korea, Rep. Korea, Rep. 0.5 Thailand 0.5 Malaysia Malaysia 0 0 Vietnam Vietnam Thailand –0.5 –0.5 1996 China Vietnam China –1.0 –1.0 –1.5 –1.5 –2.0 –2.0 –2.5 –2.5 5 7 9 11 5 7 9 11 13 Log of GDP, 1996 (2011 PPP) Log of GDP, 2013 (2011 PPP) Source: Calculations based on the Worldwide Governance Indicators and World Development Indicators. FIGURE 2.21 Vietnam’s performance on rule of law seems to be sharply (figure 2.20b). Korea and Singapore especially lagging on property rights are excellent examples of economies that con- tinue to get richer while improving the rule of 80 law. They are growing well for their cohort. On the rule of law, Vietnam is espe- Heritage Foundation property rights score 70 cially lagging on property rights, according 60 to the Heritage Foundation (figure 2.21). 50 It ranks a more creditable 74 of 189 coun- tries on the Contract Enforcement measure 40 of the World Bank Group’s Doing Business 30 Indicators, but still trails China, Malaysia, and Thailand among the region’s middle- 20 income countries. Vietnam’s main property rights challenge 10 relates to security and tradability of land-use 0 rights, which disproportionately—and in dif- ferent ways—affect domestic private firms . m a ia sia ia p y d il Ko nd in e Re es d az na an y rk Ch In a ala n (box 2.6). The state’s power to take back Br et a, ail l Tu Po do re Vi M Th In land from private users under broadly defined Source: Heritage Foundation 2015. “public interest” weakens confidence of the holders of land-use rights. Recourse mecha- is now competing with more developed peers, nisms to challenge the state’s decision, how- but it does not have especially good institu- ever arbitrary it may be, are largely absent. tions among that group. Vietnam’s ranking Security of property rights, a precondition on the rule of law measure has declined since for private enterprise development, is a casu- 1996, while its per capita GDP has increased alty in the end. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 141 BOX 2.6 Secure access to land in Vietnam remains a binding constraint to firm growth Secure access to land has consistently been a major day. In 2006, it submitted the plan—together with barrier to private enterprise growth in Vietnam. The its application—for a large parcel of land in an Provincial Competitiveness Index (PCI) series—intro- industrial park managed by the Provincial People’s duced in 2006 and based on an annual survey of about Committee (PPC) of a province near Ho Chi Minh 7,000 domestic private firms—highlights the problem. City. Its application was rejected because land par- In 2014, about a third of all surveyed firms expressed cels of the size needed were not available in the concern about land appropriation by government. park. Most had been allocated to foreign-invested This figure while high was a sharp improvement from fi rms. Company A received a parcel that was only earlier years, when more than half the surveyed firms large enough for a plant half of its planned capacity. expressed similar fears (figure B2.6.1). The 2013 In 2009, the company decided to implement the Land Law made a difference in perceptions. Proper second phase of its plan. But land was still unavail- implementation, however, still has some way to go. able. It had to buy the rental rights of a second parcel The law has added some unnecessary complications, from another domestic company to build a second as shown in Case 2 below. In contrast, land tenure is steel plant in the same industrial park, about 1 kilo- more secure for foreign-invested firms, only 18 percent meter from the fi rst plant. Company A now must of which expressed such a concern in 2014. Concern incur additional overhead costs and between-plant among SOEs is by all accounts even less widespread, transportation costs. Its direct competitor, a foreign- putting domestic private firms at a disadvantage. invested firm with similar capacity and products, Land rentals in industrial parks offer domestic pri- faced little trouble acquiring a large piece of land in vate fi rms a solution. But even these places mitigate the same industrial park. The foreign-invested fi rm the problem only up to a point. In the following cases has even secured its own seaport in the park. of companies A and B, each is performing strongly in Case 2 : One of Vietnam’s leading paper pro- an industrial park but is unable to expand because of ducers, Company B has faced a different land-use issues with access to or security of land use. rights security issue. In the early 2000s it moved to Case 1: Company A is a domestic private steel an industrial park near Ho Chi Minh City, renting producer with an investment plan to build addi- two large land parcels and paying the rental fee for tional production capacity of about 4,000 tons a 50 years. The upfront payment made the company eligible to borrow from commercial banks, using its long-term land rental as collateral. This allowed FIGURE B2.6.1 Share of firms perceiving a low rapid production expansion, with an increase of sev- risk of land appropriation eral hundred times in charter capital since the com- pany was established. It also allowed the company to 75 reach export markets in more than 20 countries. But 60 the 2013 Land Law, for all its benefits, also brought an unexpected twist for Company B and others like 45 Percent it. A common interpretation of the law is that indus- 30 trial park tenants can only use their land-use right 15 certificates (“red books”) as collateral if the park’s developers have paid the land-use fees in full to the 0 state. Many park developers (including the one for 2010 2012 2014 Company B) are unable to pay. This adversely affects Small and medium enterprises hundreds of private enterprises such as Company B, Large enterprises curtailing their ability to use their factory land as col- Sources: Calculations based Provincial Competitiveness Index lateral, again putting them at a disadvantage against 2010, 2012, and 2014. foreign-invested fi rms. 142 VIETNAM 2035 Liberalizing factor markets economic development. The sector has done Vietnam’s financial sector remains rela- a reasonably good job of mobilizing savings. tively underdeveloped, with the banking But it has fallen short in allocating credit to sector saddled with deep-seated structural its most productive use and in providing an problems and capital markets still in their inclusive payment system. Much of the lend- infancy. Land markets are even less devel- ing—especially by state-owned commercial oped. Moreover, state influence on credit and banks—has gone to SOEs or, increasingly, land-allocation decisions is excessive, lead- to private companies with connections. This ing to widespread and steep economic inef- often crowds out lending to productive domes- ficiencies. Labor market regulations are less tic private sector segments. Financial inclu- onerous, but even those are not free of policy sion has increased since the early 1990s but concerns (chapter 6). remains an issue for less well-off Vietnamese, especially those in rural areas. A healthier Building financial markets domestic financial sector will be necessary also The financial sector has expanded rapidly, for effectively conducting monetary policy and coinciding with rapid GDP growth since liberalizing the capital account in the future. the early 1990s. 29 Assets are now large for Banks are struggling after taking a hit a lower-middle-income country (LMIC). But when the global fi nancial crisis toppled the commercial banks continue to dominate the real estate market (where banks had heavy fi nancial sector. Their assets are larger than exposure). Their average return on assets fell Vietnam’s GDP, and the average ratio of by more than 1 percentage point after the assets to GDP is much larger for Vietnam crisis (from 1.8 percent in 2007 to 0.5 per- than for most other low- and middle-income cent in 2012). Their reported nonperforming countries. And state-owned commercial loans (NPLs) have risen and are generally banks continue to play an oversized role in considered understated. And their provisions the banking sector. are lower than middle-income peer coun- Following an expansion period, domestic tries in East Asia. Many of the NPLs and private banks have experienced a reduction restructured loans are related to SOEs. Cross- of their share in total assets since 2011. This ownership of private banks by each other and reflects mergers, reforms (including higher by enterprises (including SOEs) remains high. capital requirements), and limits on short- Moreover, the legal definition of related par- term deposit rates to prevent weak banks ties is narrow and information on it is limited. from bidding for deposits. The government These problems affect bank licensing, capital has allowed entry of more foreign banks. adequacy measurement, approval of owner- Their number climbed from 38 in 2007 to ship and acquisition transfers, and assessment 62 in 2014, but their overall share in bank- of large exposures and related-party lending. ing assets has not increased much. Vietnam’s Compliance with the Basel Core Principles capital markets and nonbank financial insti- is improving but is still low. Many banks lack tutions have also evolved. They represent a Basel II’s capital requirements for market and potential source of funding for investment operational risks, even as the country looks in the next couple of decades. The two stock to move toward Basel III. Onsite inspections, markets in Ho Chi Minh City and Hanoi particularly of the state-owned commercial have a combined listing of around 700 fi rms, banks, have been few. Consolidated bank a high figure compared with other LMICs. supervision (of banks and their associated Market capitalization, however, is low for business groups) is lacking. And offsite moni- the number of fi rms. This reflects the small toring also needs to improve. size of listed firms and the sales of only small The government has taken steps to deal portions of SOEs’ equity capital. with these banking sector problems and Significant scope exists for the financial sec- reduce the risk of crisis. These actions tor to play an even stronger role in Vietnam’s have tightened risk classification of loans ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 143 BOX 2.7 Deposit Insurance of Vietnam Founded in 1999 Deposit Insurance of Vietnam capacity to insure bank deposits. It may even inten- (DIV) is a potentially important part of the safety net sify the liquidity problem if these members face for banking. But it needs to strengthen its fi nances a liquidity or solvency crisis. The 2012 Law on and its resolution policies for weak banks. It cov- Deposit Insurance allows DIV to invest in govern- ers individual deposits of up to D 50 million (about ment bonds and structured investment vehicle bills US$2,500).a It is a pay-box system, with each insured and deposits. But it is unclear how much DIV’s institution paying a premium of 0.15 percent of its investment policy has changed. DIV also does not average insured deposit balance. DIV’s financial bal- have the capacity to take over and run an insti- ance is less than 1 percent of bank deposits. Over the tution. (Many deposit insurance institutions in next 20 years this basic approach is reasonable. But as other countries also lack this capacity.) The Credit the GDP per capita and deposit size grow, decisions Institution Law complicates DIV capacity to merge will need to be made on increasing DIV’s fi nancial institutions, take over an institution, or even assume base and on increasing covered deposits. collateral on bank loans. Although DIV has existed for over 16 years, it DIV could be strengthened in three ways. First, has never been used to resolve NPLs or liquidate its funds could be transferred into government insolvent banks. It has mainly helped with People’s bonds. Structured investment vehicle bills and Credit Funds. The DIV policy has been to merge deposits in the SBV could be transferred within a institutions to address problems, as is done by the reasonable time, following the 2012 Law on Deposit U.S. Federal Deposit Insurance Corporation. The Insurance. The transfer should not, however, be current approach may reflect government con- done so rapidly that it creates liquidity problems. cern that closure and pay-off of a weak bank’s Second, if more funds are necessary for systemic depositors might trigger more general bank runs. support, the DIV should have access to govern- It may also reflect DIV’s limited funds, which ment funds in a well-defi ned manner from SBV, for are too small to liquidate even two medium-size example, as in Peru. Third, the Credit Institution Vietnamese banks. Law and the DIV Law need to be strengthened to Moreover, DIV’s resources have been invested give DIV capacity to purchase and assume assets, in its member banks, which pose a risk to DIV’s and then to sell them. a. The maximum deposit insured is about 50 percent larger than GDP per capita. and other financial assets. They have also and instructions to banks. Information on strengthened bank regulation and supervi- the financial system could be improved by sion, government institutions to help clean better offsite data and supervision from the up the problems, and financial reporting and State Bank of Vietnam (SBV). Crisis response capital adequacy requirements. It would be to liquidity problems could be strength- beneficial to deepen implementation of these ened by firming the resources of the Deposit and other actions and to adopt international Insurance of Vietnam (DIV). This measure accounting standards. would require a gradual shift in the DIV’s Four key items are on the reform agenda funds from banks to government debt. The for the financial system over the next 20 years: measure would also require legal changes Reducing the risk of major fi nancial cri- that permit the government to borrow from sis. Vietnam’s response to potential financial SBV on behalf of the DIV in large crises, crisis could be accelerated if the govern- under well-defined conditions (box 2.7). ment strengthens the National Monetary Advisory Council. The council could meet Stabilizing and developing the banking regularly, supported by a technical team to sector. The immediate priority is to resolve provide daily reports, drafts of notifications, the large NPL overhang in banks while 144 VIETNAM 2035 BOX 2.8 Vietnam Asset Management Company The Vietnam Asset Management Company (VAMC) VAMC likely needs yet more resources beyond was established in 2013 with a capital of D 500 bil- those it received when the government quadru- lion (about US$25 million),a which increased to D 2 pled its capital to D 2 trillion in Decree 34. It also trillion in April 2015. The VAMC can buy bad loans requires greater flexibility, with its operating capac- from banks at book value or market prices, making ity and activities widened beyond the current use purchases with VAMC special zero-interest bonds. of the liquidity support approach and supported A bank can use these bonds to access liquidity from by changes in laws and regulations. In particular, SBV or to refi nance loans through SBV. The bonds substantial changes in the legal framework will must involve annual provisions of 20 percent by the be needed to strengthen claims enforcement, ease bank on the refinanced loan. If a bank with high obstacles to voluntary workouts, and increase sales NPLs refuses to sell bad debt to the VAMC, SBV can of collateral on the NPLs. Changes in the legal carry out a special inspection or hire an independent framework will also improve VAMC’s operations auditor to assess the quality of the bank’s assets. (including management of its holdings of assets) and The VAMC approach holds promise but needs improve its management of collateral on weak bank to be greatly strengthened to reduce the banks’ loans extended to the SOEs. NPLs significantly, in four areas. First, the VAMC’s The experience of Indonesia and the Republic of capital remains small relative to the amount of the Korea in dealing with weak banks after the Asian NPLs. Second, substantial legal reforms are needed crisis may interest Vietnam. Indonesia established to improve workouts and claim enforcement by an agency similar to VAMC to handle weak banks the VAMC, for example, to manage the collateral and manage collateral on the NPLs. But once the well and to sell it. Third, the management capacity agency got going, it was effective in handling the needs improvement. The NPLs sold to VAMC will bad debts and their collateral and in selling the col- lose value unless they are managed well and sold. lateral and the banks that were taken over (Enoch Fourth, the VAMC’s restructuring capacity requires 2000, 2001). Indonesia’s experience suggests the changes in legislation to improve its capacity to sup- need to improve VAMC and the treatment of weak port state-owned commercial banks. This is mainly banks promptly. Korea’s response involved not true of their SOE NPLs, which could be better han- only improving bank management but also closing dled by the government under a new system backed many “merchant” banks, which focused on loans by the necessary laws. The ability of the government to industrial corporations. That country’s experi- to deal with these NPLs may, however, be compli- ence suggests that some bank closures may even- cated by the new relations between the state-owned tually be necessary in Vietnam, undertaken with commercial banks and the SBV. caution. a. A centralized asset management company (DATC) was created in 2003 to reduce the NPLs in the system, but has had limited impact. steadily increasing their capital. A good start- sales of collateral related to the NPLs and ing point would include confidential (includ- transfers of the remaining NPLs and related ing operational) audits by international fi rms collateral, under a more robust legal frame- and strong application of prudential norms, work, to a strengthened Vietnam Asset without regulatory forbearance. These early Management Company for their manage- measures can be effective in cleaning up ment, recovery, and sale (box 2.8). Private NPLs, as shown in Korea and Indonesia after banks deemed insolvent would need to be the Asian crisis in the late 1990s. They would closed, merged with viable banks, or sold be especially desirable for state-owned com- (either directly or through the company), mercial banks. with an injection of capital from the owners, For private banks deemed sound by the new owners, DIV, or (in exceptional cases) audits, NPL resolution would involve direct the government. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 145 The state-owned commercial banks, par- connected lending and cross-ownerships ticularly Agribank, need additional new cap- across financial and nonfinancial institutions. ital and extensive treatment of their NPLs Consolidating the shift from state- to to clean them up and allow an increase in private-owned banks needs to continue. their lending, based on relevant legal revi- Foreign—especially regional East Asian— sions. The treatment of state-owned banks’ banks have an important role. Regional banks NPLs and the collateral on their NPLs, both have increased their presence worldwide, and of which may involve SOEs, are likely to the pattern is reflected in East Asia, includ- need special legal amendments, especially ing Vietnam. The trend is likely to continue, since at least some of the collateral sales may at least in the near future, which suggests that involve sales to the private sector. At a mini- foreign banks’ increased presence in Vietnam mum, the treatment of their NPLs is likely is likely to come from within the region. This to involve a special administrative track for trend may get a boost from the government’s SOEs’ NPLs to the state-owned banks. This recent decision to allow foreign ownership may be handled by setting up a program of more than 30 percent of domestic bank within the government, with qualified staff capital, on the prime minister’s approval. to resolve bad loans. Such increases, however, have not yet been For undercapitalized state-owned banks, made. Regional banks’ rising role also sug- the government could put in capital, as has gests a need for greater information exchange been done in India, for example, and some between SBV and other regional bank super- capital could be raised from sales through visors to reduce risks of spillovers of bank additional equitization. The second option problems from one country to another. would depend on expectations of better prof- itability and returns on these banks’ shares, Developing a larger, more diverse financial especially because the role of private inves- sector. Deepening the capital markets (start- tors in state-owned banks’ management is ing with the market for government debt) will likely to remain light. be important, which will also need changes to Beyond resolving NPLs, banking sector the legal and accounting frameworks to bring reforms would also include steps to improve them into line with international standards. performance and higher capital requirements Three important measures (carried out suc- for the banks. This will depend on better cessfully in Peru, for example) would be the enforcing improved regulations. It will also government’s maintenance of a predictable depend on supervising risks taken by banks pattern of its debt offers, further development (especially state-owned banks) and by other of a benchmark rate index on government assets sellers, such as insurance and pension debt, and the development of new types of fi rms. One major improvement would be to government or private debt instruments. For apply macroprudential supervision and bet- example, legal changes could permit govern- ter offsite supervision. Another improvement ment or private firms to sell new bonds—such would be a gradual shift to international reg- as infrastructure bonds—under well-defined ulatory and accounting standards. Moving conditions. toward Basel III would mean higher require- Other capital-market reforms should ments for capital—including capital for focus on the medium term and the need market and operational risks—and fewer for more foreign investment in the equity incentives for excessive risk-taking by bank market to support investment and growth. owners (as noted, in a context where some Cooperation and coordination between the banks are struggling to meet even Basel II various agencies responsible for financial requirements). A third improvement would supervision—SBV (for banks), the Ministry be greater information on business groups, of Finance (for insurance), and the State which would enable consolidated supervi- Securities Commission—could be strength- sion of bank groups while helping reduce ened, with the supervisory institutions 146 VIETNAM 2035 of Peru as a good example. 30 Accounting bank deposits based on the information rules that more closely follow international used for mobile phone purchases (to satisfy accounting standards would make such the Know-Your-Customer regulations). Still investment more attractive. As in most devel- later, linked banks could offer small, short- oping countries, development of contractual term loans, as in Kenya. Legislation would savings institutions (such as insurance com- also require that bank deposits related to panies) has only begun in Vietnam. But their mobile phone activities be invested only in role will increase over the next 20 years as safe assets in trust funds, which would be the economy modernizes. Generating inves- easier to implement if the government bond tor interest in insurance companies will market were improved. Bank deposits would depend on improved clarity of company also be eligible for deposit insurance, for accounts, tighter compliance with inter- which fees would be paid. national standards, and a strengthened Higher-quality credit information on Insurance Supervisory Agency. That agency borrowers is needed. All lenders could could be improved by developing a self- be required to submit credit information fi nanced supervisory system, which consid- on their borrowers to a central registry. ers governance, valuations, market conduct, Information on potential borrowers should internal controls, and insurance companies’ also include their payments to public utilities, involvement in business groups. which is useful for first-time loan applicants. The borrower must be uniquely identified Increasing financial inclusion. Among through a system that, for example, creates LMICs, Vietnam has done relatively well in a unique, easily accessible, computerized lending to individuals, but not as well in tak- number linked to a photo that cannot be eas- ing deposits and remittances.31,32 This likely ily forged. 34 The link between remittances, reflects Vietnam’s fewer bank branches per mobile phone activities, and an account/loan capita and limited use of mobile phones and application can also be used to provide infor- money-transfer operators for remittances. mation on the loan applicant’s activities. More branches—particularly in rural areas— would support more remittances, but they Developing land markets would be costly. Banks lack funds for such a Land, according to the Vietnamese consti- large expansion of branches. tution and law, is owned by the public and Alternative uses of mobile phones for managed on its behalf by the state. Land-use remittances and deposits could be done at rights for specified periods are issued to pri- low cost, although Vietnam would need vate individuals, who have the right to trans- major changes in regulation—for finance fer these rights to other individuals. The state and mobile telephony—to take advantage of may take back the land and annul the rights the country’s large number of mobile phone in the national interest, based on compensa- subscriptions. A good international example tion according to law. is Kenya’s M-Shwari, which by end-2014 had The legal framework for individual rights added 9 million accounts since its launch in to land use is subject to the interpretation of 2012. It also had total deposits of $45 million numerous, overlapping laws. And its imple- and outstanding loans of nearly $18 million. mentation is equally riddled with a plethora Its deposit holders can apply for short-term of implementing regulations and overlapping loans. Legal changes are required to allow mandates. This is just at the national level. remittances through mobile phones and pro- Provincial and municipal administrations issue vide security for the remitter through related their own instructions on land use and transfer. trust accounts at banks.33 The markets for trading land-use rights Going to the next step, additional laws are, in effect, missing (Cung 2015). There would be necessary to allow phone com- are virtually no functioning primary markets panies to link to banks for opening small for land. The role of the markets is played by ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 147 state agencies often using ill-defi ned admin- use of land, labor, water, environmentally istrative procedures. And the price at which harmful inputs, and other natural resources. land-use rights are issued bears little sem- This will require greater effi ciency in land blance to what the true market-determined and water use, a shift toward more knowl- price would be. edge and skill-based agricultural practices, Secondary land markets are more preva- better realized economies of scale and scope lent, but they operate under multiple con- within value chains, and marked shifts in straints. Market mechanisms are rarely the functions—and performance of those deployed in cases involving reclassification functions—by government. of land use from agricultural to nonagricul- Many of the challenges Vietnamese agri- tural land. In such cases, land-use planning culture faces as it transitions to an efficiency- decisions by local administrations—and based and higher value-added sector cannot not demand-supply conditions or local pref- be addressed through changes in agricultural erences— determine the reclassified purpose policies alone. Addressing the sector’s longer- of land use. Moreover, the “seller”—or the term transitional challenges of competitiveness private individual (often a farmer) giving and sustainability requires broader economic up a land-use right—is unlikely to receive reforms, especially for land (ownership/tenure fair compensation. The benefit goes mostly and use rights), the role and operating condi- to the local government and the “buyer,” tions of the SOEs and banks, policies, and who often receives the land allocation at institutions including those associated with prices below what a functioning secondary science and technology, and approaches to land market would produce. government decentralization and coordina- The missing land markets are problematic tion. (The policy agendas for these matters are from several angles. For one, their absence— covered in this and other chapters.) with weak property rights—fosters a patron- Beyond these broader changes the follow- age-based business model. 35 This model ing sector-specific policy shifts will be essen- allocates land to those with connections or tial. The state should: access to the state and state officials rather than to the most productive or innovative • Lead less and facilitate more. To help firms. Their lack undermines efficiency in modernize agriculture, the government other ways, too. A land-use right holder who will need to narrow its focus to provid- wants to change land-use purpose for a more ing core public goods and services while rewarding economic activity will find admin- enabling much greater investment by farm- istrative costs high, often prohibitively, and ers and the private sector.36 On food safety the processes time consuming. Missing land and environmental standards it may need markets also create distortions in urbaniza- to cautiously calibrate the regulatory side, tion patterns. The development of function- allowing firms to adopt practices incre- ing and transparent land markets, therefore, mentally rather than introducing abrupt is an important and urgent policy priority. measures that demand immediate com- pliance. Effective government programs Modernizing and commercializing the will involve targeted subsidies, technology agriculture sector transfer programs, and capacity-building Agricultural growth and development over interventions. All are preferable to simply the past decade was based on highly inten- de-licensing or otherwise penalizing lag- sive use of production inputs and of human ging firms. and natural resources. In the future, a unify- • Facilitate more efficient use of agricultural ing motto for the sector should be “achiev- land. Land consolidation in various forms ing more from less.” The sector will need to will be crucial for more efficient agricul- yield greater producer, consumer, ecosystem, tural land use, which will require a better- and economic benefits with less intensive functioning land market. This would make 148 VIETNAM 2035 land allocation more efficient and achieve to improve the ministry’s accountability greater security of land tenure, encourag- and oversight and its incentives to deliver ing farmers to undertake fixed investments requested and reliable irrigation services. while offering them flexibility to lease Measures are also needed to strengthen the their land to more productive users. Land relationships between these companies and consolidation will also allow increased water-user organizations. mechanization, increasingly important as • Foster knowledge-based agriculture labor costs rise. Flexibility is needed partly through a radical reform of extension ser- because the paddy land designation policy vices. Shifting from resource-intensive to has led Vietnam to far overshoot its food knowledge-based agriculture will require security objectives. This has generated a major changes in the ways farmers learn massive exportable surplus that produces and gain access to technical and commer- only modest incomes for farmers and net cial information. Government and public returns to the country. The government extension services will still be important, has set goals for converting some paddy but less as the main provider of central- land and—with Decree 35—has estab- ized advisory services and more as a lished rules that should provide farmers broker, mobilizer, and funder of services and local leaders with greater scope to others provide. For many extension agen- convert land to other agricultural uses or cies, moving into these roles will require introduce rotations between seasons. The them to embrace structural and cultural revised policy still restricts farmers from changes. They can accomplish this by converting paddy land for more permanent building new skill sets, reframing their purposes, such as planting tree crops. This mission, and modifying staff incentives by restriction should be reconsidered after the changing performance-measuring criteria. impacts of the current reform are observed. Other countries are adopting an “exten- • Facilitate more efficient and sustainable sion-plus” concept, which policy makers use of irrigation water. Irrigated agriculture could consider for Vietnam. The approach needs to increase factor productivity and centers more on brokering relationships better account for its water use. In 2014, and facilitating reciprocal knowledge an irrigation restructuring scheme was flows than on providing direct, one-way announced, adopting sustainable devel- information and technology (as from opment objectives and pointing toward knowledge institutions to end users). a combination of technical advances and • Strengthen systems and capacities for institutional reforms. It also called for managing emerging food safety risks. The upgrading and modernizing the existing ongoing shifts in consumer diets toward irrigation schemes and for fully decentraliz- animal products and other high-value and ing their management to the provinces. As processed foods have increased consum- the subsector fully decentralizes, the focus ers’ exposure to food safety risks. This of change and modernization practice will has led to demands for higher food safety be among the provinces. They are respon- standards. The government has responded sible for irrigation investment planning, by streamlining institutions, revamping its implementing government investments on food safety regulations, and investing in irrigation, and operation and maintenance. laboratories. It also plans to task agencies Yet the Ministry of Agriculture and Rural previously in charge of export food safety Development, working with provincial and to take more responsibility for the domes- user agencies, will need to facilitate a more tic area. The government, however, has yet service-oriented approach. Reforming the to identify new financial and human subsector will be a long-term effort with resources, which in the meantime put measures to resolve the long-term financ- severe pressure on regulatory agencies. It ing of irrigation and drainage manage- also needs to do more to encourage fi rms ment companies. Measures are needed to actively use the issued quality standards ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 149 that apply to their goods and supplies, and incomes but contribute to improper water facilitate their efforts in this regard. management, often in ways that increase • Manage climate change risks to agricul- greenhouse gas emissions. Through incen- ture. Domestic agriculture is expected tives and information—whether from to be heavily affected by climate change procurement, R&D, extension, quality through sea-level rise, saltwater intrusion, management systems, or environmental higher temperatures, modified rainfall pat- service payment schemes—the government terns, and heightened storm intensity. Such can enable and encourage private sector risks require land-use changes, improved investment and action in environmental early-warning systems, more flexible and protection. It can directly invest in envi- resilient infrastructure, and—perhaps ronmentally protective infrastructure, or most important—improved capacities of help others mobilize such resources. What farmers for adaptive management. Faced is suitable and feasible depends on the type with similar risks, more countries have and scale of the environmental problem embraced “climate-smart” agriculture, and the prevailing institutional context a concept that integrates or mainstreams within the location or value chain. adaptation and mitigation objectives into sector development efforts. Leveraging External Trade • Foster collective action. Common types of Opportunities for Growth collective action organizations—including cooperatives and industry associations— Vietnam’s participation in GVCs has been have often served political rather than tech- highly rewarding. Given that trends in global nical or commercial functions. Yet in recent production and trade networks are always years, the government has recognized the unfolding (box 2.9), the country has much importance of institutional collaboration room to enhance its role in GVCs. Moreover, for fostering innovation and improving its export production for many key products is industry performance. The Agricultural mainly at final assembly stage, as in electron- Restructuring Plan advocates a broader ics GVCs. That is to be expected in the early application of public–private partnerships stages of participating in GVCs. It will likely and contract-farming models. The govern- remain important given Vietnam’s large pool ment can also support producer and indus- of unskilled labor still waiting to move into try organizations in two broad ways: it can manufacturing (and services). However, since invest in institutional strengthening, and it only 64 percent of Vietnam’s export value can use its legal and regulatory authority to added comes from domestic inputs (down from create a supportive environment. 79 percent in 1996)—a figure that is much • Strengthen green agriculture policies and lower in sectors such as electronics—it has implementation capacities. Several promo- ample scope to develop upstream industries. tion policies confl ict with environmental While retaining the niche for assembly protection goals. Examples include efforts production (at least in the medium term), to conserve fisheries while promoting fish- Vietnam could also profitably expand into ery resources, with comanagement in the production of supplies. This will require pro- same locations as where fuel or boat-build- moting and establishing competitive private ing subsidies are offered to expand local fi rms (see above for that policy agenda) that fish-processing capacity. Similarly, efforts can implement production links with foreign- to restrict farmers from cutting trees and invested firms and supply them with inter- cultivating steep slopes may be under- mediate products for assembly. Eventually, mined by promoting new investments in as Vietnamese firms get savvier and globally nearby ethanol plants with large feedstock more competitive (through scale economies requirements. And government waiv- and technological upgrading), the country ers and subsidies for water and irrigation should look for the emergence of some domes- service fees temporarily increase farmer tic lead firms at the head of their GVCs. This 150 VIETNAM 2035 BOX 2.9 Trends in global production and trade networks In today’s industrial era, business systems are being confi dence to embrace the twin strategies—often formed in detailed and rapidly evolving global and intertwined—of outsourcing and offshoring. regional labor divisions, generally referred to as Industrial policy in Vietnam, as elsewhere, will GVCs. It has become more common for value to be thus need to fit into strategic decisions by lead firms added to a product in two or more countries before and global suppliers on how to organize global pro- fi nal use (Feenstra 1998). This boosts trade in inter- duction, which business functions could be hived off mediate goods and services and the share of imports and offshored and outsourced, and which locations in exports (“import intensity”) for countries deeply make sense. Decisions on outsourcing and offshor- engaged in GVCs. It also means that countries can ing are strategic, but corporate boards and bosses do specialize in narrow business functions in the chain, not make them in a vacuum. Country policies and such as innovation or manufacturing. international agreements set the background to these Lead firms in specific industries are driving decisions. The form and effects of industrial policy economic integration. Faced with slow growth at have evolved along with changes to GVCs’ business home, large lead fi rms from developed countries are networks. As GVCs continue to grow rapidly, it will likely to continue establishing operations in large take time for the underlying business systems to emerging economies, such as China, India, Brazil, mature. In recent years, retailers and branded manu- and Vietnam. These economies have a huge poten- facturers in wealthy countries have gained experi- tial consumer base and competitive labor markets. ence in international sourcing. Developing countries Another trend is the growing importance of large have acquired the infrastructure and capabilities suppliers and services providers. GVC actors that needed to sustain larger operations. And their sup- can operate in multiple locations absorb risk for lead pliers have upgraded their capabilities in response to fi rms and increase capacity use in facilities that can larger orders for more complex goods. produce for multiple buyers. In the 1990s, the most GVCs can drive rapid development, but they can successful United States and European suppliers— also wall off domestic companies that specialize in such as Siemens, Valeo, and Flextronics—quickly assembly from innovation, new industry creation, and became major global players with facilities around high profits. They can also become an obstacle for the world. A handful of elite East Asian suppliers— workers seeking highly paid, technologically sophisti- such as Pao Chen, Quanta, and Foxconn—and trad- cated, intellectually satisfying work. Successful devel- ing companies—Li & Fung, for example—also took opment will depend on how quickly and how well on more tasks for multinational affi liates and global entrepreneurs and policy makers understand these buyers. These global suppliers are expanding pro- emerging dynamics, grasp opportunities in promising duction not only in China but in other Asian coun- niches, take advantage of inputs and capabilities from tries and more recently in Africa, Eastern Europe, outside the country, and develop innovative corporate and Latin America. As resources in the global sup- strategies and policy solutions in concert with a wide ply base improve, more lead fi rms are gaining the range of actors, domestic and foreign. will mark the end of the chain where returns in different sectors. Key features of GVCs rel- are multiple times higher. Think of Apple (the evant to Vietnam must, therefore, be identi- United States), which retains more than 45 fied separately to provide meaningful policy percent of the wholesale price of a new iPhone recommendations. This final section high- as gross profit. 37 Samsung (Korea), Huawei lights the reform agenda through four impor- (China), and Tata Group (India) are other tant GVCs for Vietnam. Within these four names to keep an eye on. GVCs, growth in value added in exports has How can Vietnam deepen its participa- been strong (figure 2.22). They will remain tion in GVCs? The characteristics of GVC important export generators for the country. activity, including the potential for future The section also considers two cross-cutting growth and barriers to growth, are different GVC-related themes that affect all sectors. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 151 FIGURE 2.22 Four global value chains—agribusiness, textiles and apparel, transport equipment, and electronics/ICT equipment—will continue to be export generators for Vietnam a. Agribusiness b. Textiles and apparel Vietnam Vietnam China China Malaysia Malaysia Thailand Thailand Korea, Rep. Singapore Singapore Korea, Rep. Taiwan, China Taiwan, China –5 0 5 10 15 20 –5 0 5 10 15 20 Average growth (%) of domestic value added Average growth (%) of domestic value added embodied in exports, 1995–2011 embodied in exports, 1995–2011 c. Transport equipment d. Electronics/ICT equipment Vietnam Vietnam China China Thailand Taiwan, China Korea, Rep. Korea, Rep. Singapore Malaysia Malaysia Thailand Taiwan, China Singapore 0 5 10 15 20 25 30 35 40 45 0 5 10 15 20 25 30 Average growth (%) of domestic value added Average growth (%) of domestic value added embodied in exports, 1995–2011 embodied in exports, 1995–2011 Source: Calculations based on OECD/WTO Trade in Value-Added database. Opportunities in four key GVCs Strengthening Vietnam’s position in agri- Agribusiness. Domestic value added embod- business GVCs raises important policy issues, ied in Vietnam’s agricultural exports has been however. First, institutional gaps in quality expanding rapidly (figure 2.22a). As global and food safety standards disadvantage the agribusiness GVC activity intensifies over country. Domestic standards—for exam- the next two decades, Vietnamese farmers ple, Vietnam Good Agricultural Practices and businesses will have openings to upgrade (VietGAP)—are typically below those required production into higher value-added activi- by global players, which usually follow Global ties, especially in some half-dozen sectors Good Agricultural Practices (GlobalGAP). (table 2A.2). Foreign investment will often be This is reflected in lower unit prices for important. Vietnamese producers (table 2A.3). 152 VIETNAM 2035 A second hurdle arises from a recent legal Moves toward greater equitization—includ- regulation banning foreign-owned firms from ing that of the market leader Vinatex, which purchasing directly at the farm gate (Circular employs more than 200,000 workers—have No. 08/2013/TT-BCT). 38 The restriction— the potential to spur private development. only partially enforced—has been more of a Second is the issue of labor standards, nuisance than a true barrier to foreign par- toward which developed-country consum- ticipation. Still, it inhibits buyers and suppli- ers are showing increasing sensitivity. Better ers from developing close relationships, and it Work Vietnam, a collaborative project with is one factor in the low GlobalGAP applica- the International Labour Organization (ILO) tion and the low quality of products in some launched in 2010, is an example of how subsectors. Vietnamese suppliers can demonstrate com- A third issue involves high transaction pliance with basic labor standards. There costs. Agricultural holdings in Vietnam are is still much work to be done, however. relatively small and dispersed, reflecting diffi- Vietnam has labor regulations in place, but culties in acquiring and transferring land-use implementation and enforcement are weak. rights for agriculture. Foreign fi rms cannot The latest Better Work Vietnam compliance acquire such rights. Global buyers typically report, for example, indicated that more than favor arrangements that assure them an unin- half the assessed factories in the country were terrupted supply of high-quality goods, which noncompliant on paid leave regulations (ILO in Vietnam requires them to contract with and IFC 2014), and 91 percent violated over- many farmers, which is costly. Liberalizing time limits. Widespread noncompliance was and further developing agricultural land also found in the occupational health and markets could help ease matters. Similarly, safety area. This issue threatens to damage encouraging more structured farmer orga- Vietnam’s image with developed country nizations—a process already under way— consumers if major and widespread incidents could also help reduce transaction costs. occur and are reported widely. Third, the focus has to be on further Textiles and apparel. Vietnam is the world’s developing backward links, a process likely fourth-largest apparel exporter. Apparel to intensify under TPP. TPP’s yarn forward accounts for around 14 percent of total rules-of-origin would require Vietnamese exports by value, and textiles and apparel apparel exports to incorporate TPP-zone together provide 1.2 million jobs, mainly for intermediates from yarn onwards, which women. Given the country’s surplus of low- would potentially alter current sourcing skilled labor, the labor-intensive production arrangements. This may provide a stimulus in the sector works to its benefit. The TPP to domestic backward links, but it would first agreement will add to this advantage, as require upstream investments. The environ- Vietnam gains duty-free access to the United mental costs associated with textile produc- States, Japan, and other TPP markets. tion will also need to be factored in. Outstanding issues remain, however. The fourth area is functional upgrading— Vietnam specializes in low value-added or developing service industries linked to activities, in line with the “cut, make, trim” apparel—including sourcing, supply chain model, aiming more at basic market seg- management, design, product develop- ments rather than the upper end where mar- ment, marketing, and branding. For this, gins are greater. local human capital needs to be enhanced. Four reforms are forthcoming for upgrad- Upstream firms can become more productive ing in garment GVCs. First, the SOEs only if they have access to a pool of skilled still retain a prominent role in the sector. engineers and technical workers with indus- Distortions that create space for the SOEs try-specific skills. Such workers are in short may be crowding out the domestic private supply, in part because the strategy of lead sector, including in upstream subsectors that foreign fi rms has been to undertake higher could potentially have higher added value. value-added activities at their headquarters. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 153 Transport equipment. Transport equip- stimulate supporting industries. Production ment exports have been growing well. Strong should be concentrated in those assembly domestic demand for motorcycles provides the plants with the highest volume and largest basis for high-volume production, high local domestic supply base. content, and growing exports.39 Vietnam is becoming an export platform for motorcycles Information and communications tech- and motorcycle parts. Motorcycle exports nology. Vietnam has emerged as a major have grown at 10–20 percent annually in hardware assembly hub in information and recent years. The expansion of the motorcycle communications technology (ICT) GVCs, market—and of the local supply base to sup- with rapid export growth since 2009. By 2013, port it—is reflected in the product focus of the 80 percent of ICT hardware production was largest motor vehicle suppliers in the country for export, and ICT-related products now (table 2A.4). Aside from a large cluster of wire account for more than 30 percent of the coun- harness producers, Vietnam has several impor- try’s exports. Vietnam is well integrated into tant suppliers of motorcycle parts (including regional value chains, with most intermediate tires, ignition switches, and clutches). goods imported from regional countries. Most Passenger vehicle production, by contrast, final goods are exported to advanced mar- suffers from excessive fragmentation, over- kets—such as the United States, Japan, and capacity, and lack of supporting industries. Europe—though export destinations are not as This leads to high costs, excess capacity, low- concentrated as sources of intermediate goods volume production, and low profitability at imports. The top 10 destinations account for most facilities. In 2013, total passenger vehicle roughly 60 percent of final ICT goods exports. production capacity in Vietnam’s 14 assembly In recent years, Vietnam’s ICT hardware plants was about 60 percent of the capacity of export growth has depended heavily on a typical plant in a large market such as the imported components, more than in com- United States (Berger 2014). Even so, average parator countries (figure 2.23). A large share capacity use for passenger vehicle assembly in of its hardware exports can be linked to for- Vietnam is estimated at around 40 percent. eign investors. Production consists mainly of Moreover, most parts are imported from high- imported intermediate inputs assembly. volume facilities abroad. Because auto parts The challenge now is to move up the constitute about 90 percent of the value of GVCs in ICT. Higher value-added activi- finished vehicles, Vietnam’s passenger vehicle ties—particularly design, R&D, and com- industry is unlikely to pick up strongly as long ponent production—are attractive over the as the market suffers low domestic demand and negligible exports. FIGURE 2.23 High import content of electronics The roots of Vietnam’s poorly perform- exports ing passenger vehicle industry can be traced 100 to 1996, when investment licenses were 80 issued excessively. Steps to rationalize the Percent 60 passenger vehicle manufacturing sector are 40 needed, mainly by discouraging the con- 20 tinued operation of low-volume produc- 0 ers. Such producers contribute to extreme m ia d 5 a d Sin ep. Re uth re th ica ilip ld do s sia ne in N– an Ko lan ys r So po na ne o r Ch R fragmentation and eliminate any chance pi Af ala ail ew EA Po et ga a, Th Vi re M AS In Ph of of developing a healthy supporting parts st industry. Assembly of these brands could Foreign value added share of gross exports possibly be shifted to contract manufactur- Domestic value added share of gross exports ers to increase volumes at these plants and Source: Calculations based on OECD/WTO Trade in Value-Added ensure that domestic customers have access database. Note: ASEAN-5 refers to a subgroup of five members of the to a variety of products. But as vehicle mod- Association of Southeast Asian Nations (Indonesia, Malaysia, the els share few common parts, this will not Philippines, Singapore, and Thailand). 154 VIETNAM 2035 long run. A strong case exists for promoting country. As in goods sectors, services are out- greater R&D. But ICT is not the only sector sourced based on sophisticated contractual where R&D activities can have positive spill- arrangements. This means that areas such as overs. Thus, measures such as tax credits contract enforcement and the rule of law are should be applied generally to avoid unduly again important foundational areas. favoring ICT or any other sector. Upgrading An effective innovation startup ecosystem participation in the GVCs would also mean needs to be established to exploit opportu- incorporating more and higher value-added nities in ICT-enabled services. Vietnamese services in the chain. This progress toward innovative startups will need reliable access “servicification” is needed in the existing to risk capital from launch through the domestic electronic manufacturing industry growth phases. Infrastructure is another defi- and in its nascent ICT-enabled business ser- ciency in the technology startup ecosystem. vices, which hold considerable promise. The country now has some 20 accelerators and incubators, but they do not have much Cross-cutting themes important for all of a track record. These efforts need to be GVC sectors expanded with assistance from partners who Developing a strong modern service sector. understand local and global markets. Vietnam needs a robust modern service sector This area would benefit from connections for continued success in leveraging external with the diaspora community, an influence opportunities. This is one area where it lags that was important in developing advanced behind its competitor countries. Services services in India, Singapore, and Taiwan, account for about 43 percent of all eco- China, among many other economies. Many nomic activity, a figure essentially unchanged of some 4 million overseas Vietnamese have since 2000. This share is similar to that in settled in the United States. The technology China and other ASEAN countries but much professionals among them can bring con- lower than in most middle- and high-income nections to foreign capital, markets, man- countries. agement teams, and other tools that would Modern services such as finance, insur- help local entrepreneurs build and grow their ance, telecommunications, and transport companies. While some have returned to and logistics are critical inputs for manufac- start firms, they have generally found support turing exports. Also, direct service exports difficult to come by (box 2.10). offer the opportunity to diversify exports. If The foreign investment regime recognizes Vietnam can develop its human capital with three categories of sectors. Some are uncondi- its ICT infrastructure and connectivity, it tionally open to foreign investment, while oth- can become competitive in ICT-enabled sec- ers are either prohibited or conditionally open. tors. These include design services, software Conditionally open means that screening pro- and programming, and business and profes- cedures are in place. A wide variety of service sional services. Market players such as India sector investments fall under the conditional and the Philippines have demonstrated that category (table 2A.5). It will be important to business process outsourcing—which relies rationalize this list to provide a level playing on a strong ICT framework—can be a major field for all investors, domestic and foreign. source of employment and economic activity. Dispute resolution is an important issue. To be competitive, Vietnam would need to Investors, wary of the legal system, often develop its human capital through technical specify dispute settlement by arbitration skill acquisition and, crucially, strong English- in other jurisdictions, such as Singapore. language skills. It has already made progress The increasing complexity of services sec- in reducing barriers to establishing skilled tor transactions and links to manufacturing personnel and individual services. And the make it important to reinforce the rule of ASEAN Mutual Recognition Arrangements law and contract enforcement. The GVCs are for professional services, for example, will based on complex webs of contracts among help facilitate the movement of talent into the participating fi rms. So contract enforcement ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 155 BOX 2.10 Vietnamese successes in ICT services industries Although the environment for Vietnam’s ICT-related markets including Cambodia, India, Indonesia, and businesses is challenging, some success stories provide the Lao People’s Democratic Republic. models for emulation. One is Mobivi, which started Other successes include V NG Corporation, as a mobile payment platform designed by an over- which began in game development and recently seas Vietnamese entrepreneur. But given low mar- shifted into social networking. Appota began by gins in that market, however, the company changed licensing games from China and has now created its tack in 2011 to develop iCare, an employee benefits own mobile platform for digital content. company focused on the market segment of workers The list of such stories is not, however, as long making $200–$250 a month. It facilitates purchase as it could or has to be given Vietnam’s ambitious of consumer goods by factory workers using inter- development plans. The technical talent exists, but est-free installment plans. It relies heavily on ICT, managerial skills are harder to fi nd. Similarly, some including through SMS and website-based purchas- venture capital firms from the United States and ing. Mobivi’s business model is to sell at the retail Japan are in Vietnam. But the network is not strong price and purchase at the wholesale price, which enough to support the potential volume of activity. allows for a wide margin (20–30 percent). Success at Nor are exit strategies obvious: the only ICT fi rms home has provided the basis for moving into other on the stock exchange are large SOEs. is important for joining—and especially FIGURE 2.24 Vietnam’s Services Trade Restrictions Index scores moving up—higher value-added chains. are better than the Association of Southeast Asian Nations’ average in all subsectors, reflecting progress on related regulations, 2012 Vietnam could also leverage its mem- bership in ASEAN to push services-related 100 Services Trade Restriveness Index reforms regionally. ASEAN remains restric- 90 tive on services trade: the average Services 80 Trade Restrictions Index (STRI) for the region 70 60 is 60 percent higher than the global average. 50 Vietnam’s STRI scores fall below (better than) 40 the ASEAN average in all subsectors, which 30 reflects healthy progress on related regula- 20 10 tions (figure 2.24). Given the importance of 0 the sector to growth prospects, Vietnam has sia s d DR ia m ar a re ne di an much to gain from giving more impetus to ys m po na ne oP bo pi ala ail n et ga do ya ilip m La Th Vi M Sin broad-based service trade facilitation within M Ca In Ph ASEAN. Although ASEAN is committed to Financial Telecoms Retailing Transport Professional liberalizing service trade, the focus has been on formal barriers. But even then implemen- Source: Gootiiz and Mattoo 2015. Note: STRI = Services Trade Restrictions Index. tation has been mixed. Attention will need to turn from clear restrictions to more challeng- with the strict requirements of lead firms for ing issues, such as harmonizing regulations. on-time delivery. Connectivity has three key attributes, all requiring policy attention. Improving connectivity for trade As Vietnam integrates more fully and profit- Institutional connectivity. This is the ably with GVCs, it must also boost its con- “software” side of things and includes nectivity. Firms in value chains need to be able trade facilitation, structural and regulatory to move goods within Vietnam and across its reforms, and transport and logistics facilita- borders cost-effectively and reliably. This will tion. Vietnam performs relatively well on the keep inventory carrying costs low and comply World Bank’s Logistics Performance Index 156 VIETNAM 2035 (LPI), ranking 48th of 160 countries on the abundant and high-quality physical infra- overall rating. It is also the highest among the structure, especially international gateways lower-middle-income countries, although still and multimodal interfaces. It also includes lagging regional upper-middle-income coun- energy, which is vital to the continued success tries such as China, Thailand, and Malaysia. of manufacturing firms and can be effectively Its rankings have improved since 2007 across traded among neighboring countries. the board, except for customs procedures While Vietnam comes out well on the (table 2.3). infrastructure component of the LPI (rank- Some areas of weakness remain. The ing 44th in the world), many aspects of the critical bottleneck relates to hundreds of transport infrastructure require attention complicated noncustoms regulations permit- to keep pace with rapidly rising demand. ting trade activities across the border. These Current modes are overloaded in and around activities are managed and granted by a raft the major economic clusters and these do not of state management agencies.40 The overall connect well to each other or to major trade regulatory approach is piecemeal, at times gateways. This reflects lack of coordination to overlapping and contradictory. Despite the develop economic zones and transport corri- recent progress in customs reform and the dors. Key issues include poor road conditions implementation of the National and ASEAN and grossly underdeveloped freight-rail and Single Window, compliance costs in time and inland-waterway infrastructure. Another key money for goods clearance on and behind the issue includes supply–demand mismatches border remain high. And development of the in deepwater maritime port infrastructure. trade logistics sector—a core part of the con- Lingering shortcomings in connective infra- nectivity agenda—still has no national action structure explain why the country faces plan. Local logistics service suppliers, while elevated logistics costs—roughly 21 percent numerous, do not always have the capacity of GDP, against an estimated 15 percent in to handle complex multimodal transactions. Thailand and 19 percent in China. They Another underperforming aspect touches also explain why global investors consider on health and sanitary and phytosanitary Vietnam-based supply chains unreliable. inspections, where the country is rated below From a trade competitiveness angle, freight its ASEAN peers. Addressing these insti- and logistics are not yet key drivers of direct tutional deficiencies would help Vietnam investment, whether foreign or domestic. meet its commitments on WTO’s Trade Though Vietnam’s expressways require Facilitation Agreement and the TPP’s trade further investment, transport expenditures facilitation standards. need to be rebalanced from roads (the cost- liest form of domestic freight transport) to Physical connectivity. This attribute refers to multimodal facilities (for handling and stor- “hardware” aspects, such as ports, airports, ing goods in high-capacity warehousing). road and rail links, and ICT infrastruc- This will be needed to take advantage of ture. A well-connected country is one with more cost-effective transport modes, such as TABLE 2.3 Logistics Performance Index rankings International Logistics quality and Tracking and Overall LPI Customs Infrastructure shipments competence tracing Timeliness Vietnam 2007 53 37 60 47 56 53 65 Vietnam 2014 48 61 44 42 49 48 56 China 2014 25 27 26 10 32 23 31 Malaysia 2014 28 38 23 22 35 29 36 Thailand 2014 35 36 30 39 38 33 29 Source: Calculations based on World Bank Logistics Performance Index. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 157 inland waterways and rail. Rebalancing will foreign fi rms can hire. It has also introduced also be needed from capital spending to trans- new procedures for obtaining work permits port assets maintenance. Some 80 percent of for them. Managers, executives, and spe- public spending on transport goes primarily cialists who enter the country as intracor- to expanding and then preserving the road porate transferees are allowed to stay for an network alone. Simultaneously, government initial three years, subject to extension. But departments meet only about 50–60 percent there is still wide scope to better meet global of maintenance spending needs for water- businesses’ needs to bring in specialist inter- ways nationally. As a result, the average size national staff, since any restrictions affect of barges plying Vietnam’s vast waterway Vietnam’s attractiveness as a production des- network in the Mekong and Red River del- tination. Improving proficiency in English, tas—estimated at 100 deadweight tons at especially in the study of technical topics, year-end 2010—is well below the internation- and narrowing the skills gap of Vietnamese ally recognized minimum threshold for eco- workers with international and regional nomic efficiency of 1,000 deadweight tons. standards will further improve opportuni- This reduces the cost efficiency, reliability, ties for the country. Vietnamese workers and and environmental advantage of waterways businesses could also be encouraged to seek against roads. better opportunities abroad, especially in A push to mainstream integrated plan- markets with strong commercial links with ning for transport and logistics across modes, Vietnam. As shown by India and other glob- locations, and public sector functions should ally integrating developing countries, this be near the top of the government’s agenda. can be an effective path to learn and absorb technology, foreign cultures, and good prac- People-to-people connectivity. The third tices—and improve capabilities to work in a attribute refers to ease of movement of people global environment. Finally, Vietnam could across borders (for service provision, educa- make easier the visa procedures for foreign tion, and tourism). Vietnam has abolished tourists to better exploit its immense tour- caps on the number of foreign workers that ism potential. Annex 2A Empirical Relationship among Political Connection, Firms’ Access to Credit, and Profitability The purpose of this research note is to Specifically, the current analysis confirms estimate the relationships among politi- a strong, statistically significant relationship cal connection, access to credit, and fi rm between political connection and credit access. performance in Vietnam. It does so by Results show that, while a firm with no con- updating the results of an earlier published nections has a 51 percent chance of receiving a paper by Malesky and Taussig that pur- loan, a firm with one connection to the provin- sued a similar line of inquiry (Malesky and cial government has a 58 percent chance. Those Taussig 2008). Using a two-stage empiri- with two and three connections, however, have cal approach, Malesky and Taussig found chances of 67 percent and 71 percent, respec- statistically signifi cant evidence that con- tively. Firms with better credit access are found nections influenced banks’ credit alloca- not to be more profitable. The current analy- tion decisions in Vietnam (see table 2A.1). sis supports Malesky and Taussig’s conclusion Updating the Malesky and Taussig analysis that the most profitable investors in Vietnam with more data, this note gets even stronger have forgone the formal banking system, pre- results of how connections influence credit ferring to finance their activities out of rein- access. vested earnings or informal loans. 158 VIETNAM 2035 TABLE 2A.1 Main results Key variables Malesky and Taussig Current note Political connections variables (instruments) Share of firms with connection with local authorities 0.320 0.287 Share of firms with 1 connection 0.316 0.274 Share of firms with 2 connections 0.004 0.012 Share of firms with 3 connections 0.000 0.001 Share of firms with credit*independent variable) 0.512 0.546 Firm performance (outcome variables) Net profit or losses after taxes and operating expenditure 4.37 3.50 (8-point scale in 2006 but 5-point scale in 2009–14) Employment size (8 categories) 2.98 2.69 Capital size (8 categories) 2.87 3.09 Empirical strategy Having land-user-right certificate, firm age, Other firm control variables equitized, share owned by the government, sector PCI, SOE share of credits, Other province control variables Province fixed effects firm distribution Method used to address selection of credit Heckman selection Instrumental variable Period observed 2006 2009–14 Number of observations 6,319 36,089 Impact of political connection on credit (first-stage estimates) Connection (dummy) 0.034** 0.054*** Connection (scale variable) 0.036** 0.044*** Impact of political connection on profitability (reduced form estimates) 0.0431 0.006 Impact of credit on profitability (second-stage estimates) 0.046 0.308 Impact of credit on investment growth (between year t and t−1) 0.0894*** 0.112*** (second-stage estimates) *p < 0.05, **p < 0.01, ***p < 0.001. Note: PCI = Provincial Competitiveness Index; SOE = state-owned enterprise. Data Access to credit is defined as having a loan from a formal bank (whether a state-owned The note uses data from 2009–14 Provincial or private commercial bank). Competitive Index Surveys of the domestic Outcome variables include: profitability private enterprises. The data are representa- (scale from 1–5), growth in investment, or tive at the provincial level. The final repeated growth in number of employees. cross-sectional dataset includes 36,089 obser- vations covering the five-year period.41 Political connection is defi ned based on Empirical Method information about employment history of a The empirical strategy is a two-stage instru- business owner before the fi rm is established. mental variable (henceforth IV) estimation.42 It contains (i) whether the owner was a gov- ernment or military officer, (ii) whether the Correlation estimation owner was working as a manager in an SOE Reduced form. Relationship among political enterprise, or (iii) whether the owner was connection, credit access, and a firm’s perfor- working as an employee in an SOE enter- mance—ordinary least square estimation. prise. The variable, therefore, is either a dummy indicating whether a fi rm has one of Causal estimation (addressing the selection these characteristics or a categorical variable bias of credit access) indicating whether a fi rm has none, one, or First stage. The impact of political con- all three characteristics. nection on a firm’s credit access—political ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 159 connection is an instrument for a firm’s credit respectively, of receiving loans.45 Though access. the magnitude of the impact decreases— Second stage . The impact of whether as low as 3.0 percent—if we account for fi rms having loans (predicted from the fi rst provincial fixed effects, the coefficient stage) on the firm’s performance. on political connections remains highly All estimates control for province-fi xed significant. effects (which reflect the difference in the The reduced form regressions find that Provincial Competitiveness Index, the neither access to bank credit nor a firm’s nature of loan market, and development) “connectedness” correlates with profitability. and time-fixed effects (which account for The IV estimation, which accounts for the infl ation and economic cycles).43 The stan- selection bias, reveals no causal impacts of dard errors are adjusted for heteroskedastic- credit access on profitability. ity and within-cluster correlation (clustered Other important determinants of prof- by province). itability, according to the ordinary least squares reduced form, are sector (manu- facturing and agriculture are less profitable Empirical Results than services), land-user-right certifi cate, Political connections have a strong and and especially employment size. Unlike the statistically significant effect on a firm’s Malesky and Taussig analysis, higher capi- credit access. In the ordinary least squares tal (measured as total asset) is not associ- estimation with full-scale measure of con- ated with being more profitable. nection—holding other things constant— having one connection to the provincial Potential Limitations government increases the probability of a loan by about 4.4 percent.44 Whereas a Selection bias is the main source of concern for fi rm with no connections has a 51 percent this type of analysis. More profitable firms are probability of receiving a loan, a fi rm with likely to have more retained surplus to rein- one connection to the provincial govern- vest, potentially offsetting their desire to seek ment has a 58 percent probability. Those bank credit. This note has sought to address fi rms with two or three connections have the reverse causality by using the IV technique 67 percent and 71 percent probabilities, mentioned above. TABLE 2A.2 Selected agribusiness sectors and upgrading potential in Vietnam Sector Key reasons for selection Specialty rice mills • Little need for investment in general rice mills because local investors continue to expand mills and have access to requisite capital, technology, and skills • Sufficient general rice grades from local mills for current buyers • Investors are keen to build specialty rice mills (fragrant, glutinous, etc.), if local authorities and farmer groups are ready to work with them to organize farmers to grow these rice varieties • Investors see rising demand and prices and want to secure supply • For Vietnam, these investments offer potential to increase higher-value rice exports, raise farmer incomes, and reduce costs (since investors will want to work with farmers to introduce new varieties, minimize fertilizer and pesticide usage, and improve agronomy) Rice-product • Growing demand for gluten-free products is raising global demand for rice-based products manufacturing • Lead firms or investors with the latest gluten-free technologies and market-intelligence can assist in tapping into this market • The usual limitations on shipping bulky or fragile items may limit some opportunities. But for global food companies seeking to tap into this growth trend, Vietnam could be a natural choice (Table continued next page) 160 VIETNAM 2035 TABLE 2A.2 Selected agribusiness sectors and upgrading potential in Vietnam Continued Sector Key reasons for selection Specialty (arabica) • Investors see little value in investing in Robusta processing mills. Professional wet or dry milling does not add coffee mills sufficient value to beans over standard farmer-processed beans • Investors are interested in building mills for arabica in suitable area if local authorities and farmer groups are ready to work with them to organize farmers to grow more arabica • Investments offer potential to increase higher-value coffee exports, raise farmer incomes, and reduce costs (with improved varieties, fertilizer and pesticide usage, and agronomy) • Suitable arabica areas are in remote parts of the Central and Northern Highlands, where farmers have fewer income opportunities Fruit, vegetable, and • Compared with other agri-export leaders, Vietnam currently exports limited volumes of fresh fruit, vegetables, and flower farms—storage, flowers grading, and packing • Even for the domestic market, modern chilled warehousing, transport, and packing operations are surprisingly underdeveloped • Attracting lead firms to help establish state-of-the-art, fresh-produce handling centers near Hanoi and Ho Chi Minh City airports—for domestic and export markets—would create increased income opportunities for Vietnam’s fruit, vegetable, and flower farmers Fruit and vegetable— • Similarly, development of fruit and vegetable processing facilities (juicing/drying/canning/ freezing) will assist in secondary processing expanding exports and enable farmers to generate revenues beyond fresh sales during harvest season Aquaculture—primary • Numerous local firms already doing well and expanding fast processing • Sector could benefit from new investment in latest technologies, market access, brands, etc. • Particular opportunity in new areas where Vietnam has not yet developed significant expertise, such as marine and seaweed farming Aquaculture— • Significant opportunity to attract investors with technology and know-how to tap into underdeveloped high-value secondary processing segments, such as smoked fish • Opportunity to attract investors with technology and know-how to develop improved fish-oil and fish-meal processing facilities • Despite volumes, feed producers complain that current fish-meal quality in Vietnam is inferior and they still need to import fish-meal Source: McKenna 2015 based on International Finance Corporation. TABLE 2A.3 Vietnamese unit prices for key export crops compared with world averages Average export revenues (US$ per ton) Value gap Major export products World Vietnam n % Rice 639 514 125 20 Aquaculture products 2,100 1,967 133 6 Rubber 5,307 4,189 1,118 21 Coffee 4,037 2,191 1,846 46 Tea 3,333 1,594 1,739 52 Source: McKenna 2015 based on IFC (FAOSTAT, FAO Fisheries & Aquaculture Statistics Yearbook 2012, UNCTAD/ITC Trade Map). TABLE 2A.4 Main global motor vehicle parts suppliers in Vietnam Company Product(s) Nationality Year of major investment(s) Sumitomo, various companies including Sumiden VN Automotive Wire harnesses and wiring components Japan Various years Wire; Sumi-Hanel Wiring Systems; SEWS Components Yazaki, Wire harnesses and wiring components Japan 2001 (Table continued next page) ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 161 TABLE 2A.4 Main global motor vehicle parts suppliers in Vietnam Continued Company Product(s) Nationality Year of major investment(s) Hitachi Cable Wire harnesses Japan 2008 Denso San Pham Various engine parts, gas pedal assemblies, etc. Japan 2001 Bridgestone Tires for passenger vehicles Japan 2014 Yokohama Tires for motorcycles, light trucks, and industrial vehicles Japan 1997 IRC Tires for motorcycles Japan 1997 Kumho Tires Tires for passenger vehicles Korea, Rep. 2008 Hyundai Kefico Sensors and actuators for vehicles Japan 2010 Toyota Boshoku Seats and interior parts; side curtain airbags Japan 1996 and 2004 Robert Bosch Pushbelts used for continuously variable transmission (CVT) in 2008: Gasoline Systems Division automobiles. Embedded software and mechanical design, as well Germany 2011: Engineering and Business as IT and IT-enabled services for local and regional customers. Solutions Division Asahi Denso Ignition switches and locks for motorcycles Japan 2006 Exedy Clutches for motorcycles Japan 2006 Kyocera Vietnam Ceramic components and connectors Japan 2014 Toyoda Gosei Bags for airbag modules Japan 2005 TABLE 2A.5 Classification of sectors for investment Prohibited for all investors Conditional for all investors Conditional for foreign investors • Projects detrimental to national • Sectors impacting national defense, security, • Radio and television broadcasting defense, security, and public interest and social order • Production, publishing, and cultural products • Projects detrimental to historical and • Banking and finance distribution cultural traditions and ethics • Sectors impacting public health • Mining and minerals processing • Projects detrimental to people’s • Culture, information, press, and publishing • Telecommunications and Internet services health or that destroy natural • Entertainment services • Public postal networks, postal and delivery resources and the environment • Real estate services • Projects for treatment of imported • Mining and natural resources exploitation • Construction and ports and airports operation toxic wastes • Education and training • Goods and passengers transport • Other projects banned by law • Other sectors in accordance with law • Fishing • Tobacco production • Real estate • Import, export, and distribution • Education and training • Hospitals and clinics • Other sectors as per international treaties Source: Molinuevo 2015, based on the United Nations Conference on Trade and Development (UNCTAD) 2008. Annex 2B Growth Accounting to Identify Sources of Growth This annex develops a growth accounting where Y symbolizes real GDP, K is the physi- framework to estimate the contributions of cal capital stock, A is the Solow residual that capital (physical and human), labor, and total represents TFP, α is the share of capital stock factor productivity (TFP) to long-term GDP in output under perfect competition, L is and labor productivity growth. the employed labor force, and H a measure The starting point is the standard neoclas- of human capital based on education stock sical constant-returns-to-scale Cobb-Douglas and returns on education. (A more accurate production function to describe overall proxy for human capital would also include production: learning-by-doing, but lack of data precludes this here.) L*H therefore may be viewed as (2A.1) Yt = AtKt α (LtH t ) (1− α) effective labor. 162 VIETNAM 2035 Following Klenow and Rodriguez-Clare Divide both sides of (2A.3) by L to get (1997), H is further defined as = e 0.rS , S is the average number of years of schooling per (2A.4) Yt /Lt= (Kt /Yt ) α/(1− α)Ht Zt worker, and r is the rate of return on a unit increase in S. The left hand side of (2A.4) is output per The initial stock of capital in Vietnam in 1989 worker or labor productivity. is assumed to be twice the size of GDP. The capi- All data except for S are from the General tal stock data are then extended through 2013 Statistics Office of Vietnam. The data on S, using the perpetual inventory method. the average years of school attainment by population aged 15 years or more, are from (2A.2) Kt = (1−geometric depreciation rate) the updated Barro and Lee (2013) database Kt−1 + Gross Fixed Capital Formation on education attainment. The frequency of (t−1). the Barro-Lee database is every five years and their data extend until 2010. The annual data Dividing both sides of (2A.1) by Yt α and solv- within each five-year period is filled using the ing for Yt gives assumption of a constant geometric growth rate within that period. (2A.3) Yt = (Kt /Yt ) α/(1− α)(LtHt )Zt Assume r = 0.1, which is the general assumption in the literature. Where Zt = At1/(1− α) is total factor productiv- From (2A.4), the growth rate of labor pro- ity measured in labor-augmenting units. ductivity may be written as TABLE 2B.1 Sources of GDP growth in Vietnam 1990–2000 (%) 2000–2013 (%) 2013–2035 (%) Labor productivity (GDP per worker) growth 5.2 3.8 5.6 Human capital growth 1.6 1.5 1.3 α = 0.4 TFP growth 4.2 0.1 3.6 α/(1−α)*Capital-output ratio growth −0.5 2.2 0.5 Contribution of TFP growth to labor productivity growth 79.8 1.7 65.2 Contribution of capital deepening −10.2 57.3 9.2 Contribution of human capital growth 29.8 40.1 24.2 α = 0.33 TFP growth 4.0 0.6 3.8 α/(1−α)*Capital-output ratio growth −0.4 1.6 0.4 Contribution of TFP growth to labor productivity 77.0 16.5 67.7 Contribution of capital deepening −7.6 42.2 6.8 Contribution of human capital growth 29.8 40.1 24.2 α = 0.33 in 1990 gradually increasing to 0.38 in 2014 and 0.42 in 2035* TFP growth 3.8 0.0 3.1 α/(1−α)*Capital-output ratio growth −0.5 2.2 0.5 Contribution of TFP growth to labor productivity 72.1 0.1 55.0 Contribution of capital deepening −2.9 58.8 19.2 Contribution of human capital growth 29.8 40.1 24.2 Note: (1) r = 0.1, a standard assumption in the literature for Mincerian return to education. (2) Average annual GDP growth for 2015–35 assumed at 6.1 percent. (3) Average annual capital stock growth for 2015–35 assumed at 6.9 percent (compared with 8.5 percent for 1990–2015). (4) Average annual human capital growth for 2015–35 = 1.4 percent (compared with 1 percent for 1990–2015). (5) Average annual labor force growth for 2015–35 = 0.5 percent (compared with 2 percent for 1990–2015). *α gradually increases as the production function become increasingly more capital intensive with the changing structure of the economy from farming to industry and services. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 163 (2A.5) Labor productivity growth = TFP certain periods, with substantial periods when growth + a/(1− a)*capital-output ratio few hours of work are needed, leading to fewer growth + human capital growth overall hours worked in agriculture. Thus value added per person remains lower, even if value added per hour worked is the same. Applying (2A.5) and assuming 6.1 average 8. The share of rural household income derived percent GDP growth between 2015–2035 from primary agriculture fell from 43 percent gives the results shown in table 2B.1. in 2002 to 32 percent in 2012 as the number of agricultural households fell from 10 mil- Notes lion to 9 million, reflecting farm to nonfarm movement. 1. The “Mexican phenomenon” refers to the for- 9. An explicit policy bias toward growing rice mation of “two economies in one country,” to meet national security needs explains the with a modern high-productivity economy led inertia in crop diversification. For example, by multinational companies, and an outdated much of the irrigated lowland areas have been low-productivity economy created by a mass designated as rice lands, while the expansion of small domestic businesses. The overall of irrigation and a high proportion of public economy still grows, even though long-term research and advisory service resources have growth is not sustainable. also been geared toward meeting national or 2. This comparison excludes economies with a provincial rice production goals. population less than 1 million and Bosnia and 10. In 2010, Vietnam exported 2,580 products to Herzegovina. 141 countries, more than twice as many prod- 3. The standard deviation of Vietnam’s annual ucts as a decade earlier (1,264), which were per capita growth over 1991–2013 was 1.21. exported to 109 countries. Across the world, out of a sample of 175 11. The ones that remain cover the sale of gaso- economies that had comparable data, only line, diesel, and other fuels; electricity; liquid Guatemala and Swaziland’s growth had a petroleum gas (LPG—cooking gas); chemical lower standard deviation than Vietnam’s. fertilizer (UREA and NPK); plant and vege- In other words, growth in 172 out of the table insecticides; vaccination for husbandry; 174 comparator economies countries was eating salt; milk for children under 6 years more volatile than in Vietnam. old; sugar (white and refined); paddy and 4. A substantial literature has established a ordinary rice; and preventive and treatment negative causal effect of volatility on growth medicine for humans (defi ned on the list of (for example, Ramey and Ramey 1995; basic and essential medicines). Hnatkovska and Loayza 2004). In estimat- 12. The number of household businesses— ing the impact on growth if Vietnam had registered and unregistered—grew rapidly, Thailand’s growth volatility, we use coeffi- from 1 million in 1992 to close to 4 million by cients estimated in Hnatkovska and Loayza 2010 (Malesky and Taussig 2009). (2004). 13. Although productivity performance started 5. TFP growth reflects a combination of improved to deteriorate after 1997 (likely triggered by resource allocation, innovation, technologi- the Asian crisis), we choose 2000 as the break cal upgradation, institutional reforms, and a point to separate the cyclical effects from the whole host of other factors that growth in fac- long-term trend effects. tors of production leaves unexplained. 14. This chapter defines large enterprises as those 6. McMillan and Rodrik (2011) show a posi- employing over 300 workers, medium-large tive impact of structural transformation on 101–300, medium-small 51–100, and small labor productivity in East Asia but a negative 50 or fewer. impact in Latin America and in Africa. 15. Tran Van Tho and Nguyen Thi Tue Anh, 7. McCullough (2015) also challenges this Background paper for Vietnam 2035 Report. finding that agriculture is marked by lower 16. In 2009, labor productivity in small and productivity. Once the hours worked are con- medium-sized enterprises in Mexico was 8 trolled for, agriculture is as productive on aver- percent of that of large enterprises (most of age as manufacturing or services. The issue is them multinationals), down from 28 per- that agricultural hours are concentrated in cent in 1999, even as Mexico became the 164 VIETNAM 2035 5th largest carmaker in the world by reap- these parameters to Vietnam’s population of ing the benefits of the American Free Trade 93 million suggests a target portfolio of any- Agreement (NAFTA). This was an important where from nine to 214 centrally owned SOE factor in the low productivity growth (0.8 per- parents. Twenty would allow for Vietnam’s cent per year) of the country as a whole in the current state economic groups and some period 1999–2012 (Bolio et al 2014). important SOEs beyond those. 17. The two largest rivers in Vietnam—the 22. These may include change in the controlling Mekong and Red Rivers—originate from shareholder, relocation, major asset sales, China. The Mekong flows through Myanmar, merger, liquidation, or equity dilution. Thailand, Lao PDR, and Cambodia before 23. Not every SOE parent/subsidiary will be flowing into Vietnam. The dozens of large appropriate for mixed private–public owner- hydropower projects built upstream, espe- ship. Exceptions may include SOEs involved cially in China and Lao PDR, have had a huge in defense production or those of little or no impact on water resources and ecosystems in interest to private investors. the Mekong Delta, exacerbating the effects of 24. This section draws on a background note pre- climate change in this region. Besides the com- pared by Martha Martinez Licetti, Georgiana prehensive and long-term measures in manag- Pop, Tanja Goodwin, and Tuvshee Bold. ing water resources and living conditions in 25. De facto independence of the competition the Mekong Delta, Vietnam also needs to pro- authority could translate into a 17 percentage- mote regional cooperation and argue for the point reduction in the productivity gap with role of international organizations to improve the United States (Voigt 2009). responsibilities and coordination between the 26. Hard-core cartels include fi rms acting in col- countries in the basin and ensure a system lusion and engaging in price fixing, market that is fair for all. partitioning, and bid rigging. 18. Ownership policy should also define the state’s 27. For example, the consumer saving from role in the corporate governance of SOEs and merger control was estimated to be at least how the government will implement its own- £640 million in 2000–05 (OECD 2012b), ership policy. OECD 2005 Guidelines, p. 13. while in the United States, the Department of 19. There will be special situations where the focus Justice reported consumer savings of about $1 of an SOE is not amenable to maximization of billion for fiscal year 2009. state capital. This could include SOEs involved 28. http://info.worldbank.org/governance/wgi/ in, for example, armaments production or index.aspx#doc cultural preservation. In such cases, it may be 29. This subsection on capital market reforms appropriate for the state shareholder to focus on draws on Hanson (2015). productivity and technical efficiency measures 30. In Peru, the supervisory agencies are physi- as well as qualitative indicators of administra- cally grouped together, and in addition to tive, service, and corporate social responsibility separate agencies for banks, insurance, and performance, as SOE monitoring systems in the equity markets, a separate agency is included Republic of Korea and New Zealand have done. for systemically important institutions. 20. For example, in Sweden, each SOE is expected 31. Eighteen percent of Vietnam’s population to provide “economic value added” by earn- borrowed from a financial institution in ing more than the cost of its debt and equity 2015, up from 16 percent in 2011. By com- capital. In Singapore, the Temasek state share- parison, in the average lower-middle-income holding fund expects its government-linked country, only about 7.5 percent of the popula- corporations to maximize their fi nancial per- tion has current borrowings from a fi nancial formance on economic value added, return on institution (Global Financial Development assets, and return on equity. Database). 21. China now has 0.1 centrally owned SOE 32. Per the Global Financial Development for every million population. Advanced Database, 31 percent of Vietnamese adults have social-market jurisdictions range from 14.2 accounts with financial institutions (although (Norway) to 0.4 (Netherlands) SOEs per mil- SBV puts that figure at 50 percent), much less lion population, with a median of about 2.2. than the average of 43 percent in lower-middle- Low ratios are also found in Switzerland (1.0), income countries. The gap is even worse for Singapore (2.0), and Sweden (2.0). Applying poor adults—19 percent versus 33 percent. ENABLING ECONOMIC MODERNIZATION AND PRIVATE SEC TOR DE VELOPMENT 165 33. While the remittance or the transfer to a the Ministry of Defense (MOD), the Economic deposit is being completed, typically within Police of the Ministry of Public Security one day, the funds should be invested in a (MPS), the Ministry of Science Technology well-defi ned, trust account, as is best practice and Environment (MOSTE), the Ministry of in countries that have developed remittances Culture, Sports, and Tourism (MCST), the through mobile phones. Ministry of Construction (MOC), and the 34. India, for example, is undertaking a coun- State Bank of Vietnam (SBV). trywide provision of computerized personal 41. The PCI surveys started back in 2006 but the identification. question about performance of an enterprise was 35. According to a report by Nhân Dân (The changed in 2009, which makes it inconsistent to People), the official Communist Party news pool together the data of the whole period. agency, government bodies at all levels 42. T he M alesky a nd Taussig paper uses received more than 1.2 million complaints Heckman selection model (maximum likeli- and denunciations between 2003 and 2010, hood estimation), which relies heavily on the of which 70 percent were related to land. nonlinearity assumption without identifying http://www.nhandan.com.vn/mobile/_mobile the exclusion restriction. _chinhtri/_mobile_tintucsukien/item/788102 43. The Malesky and Taussig paper includes a .html accessed October 19, 2015. series of province-specific variables but does 36. Including nonagricultural investment to not report the province-fi xed effects. Since we enhance the rural institutional environment are mainly interested in the impact of politi- and improve human well-being; such invest- cal connection other than local variables, we ments relate to education, sanitation and clean adopt the fixed-effect model which absorbs water supply, and health care. such province differentials. 37. See http://www.digitaltrends.com/mobile 44. The marginal effect in the Malesky and /iphone-cost-what-apple-is-paying/. Taussig paper is 3.6 percent. 38. This, according to the government, was in 45. For ease of estimation, we employ a linear response to the perception that foreign fi rms model for all estimates. In fact, the probit were overpaying at the farm gate, while failing model indicates a nonlinear relationship with to invest in farm-extension services, as required the marginal effects decreasing across politi- by law. Domestic enterprises, which had sup- cal connection levels. posedly invested more in extension services, were unable to match the foreign firms’ higher purchasing prices. This encouraged farmers to References break contracts with domestic fi rms (that is, Agénor, Pierre-Richard, Otaviano Canuto, and they benefitted from the extension services but Michael Jelenic. 2012. “Avoiding Middle- then failed to honor the terms of sale). 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As the previous chapter require employees possessing the knowledge showed, the majority of new gross domes- and skills to produce goods and services that tic product (GDP) will need to come from are several times more valuable than what higher labor productivity. Most of that, in they produce for each hour they work today. turn, will have to come from resuming total This process requires the support of institu- factor productivity (TFP) growth—from tions that allow continual updating of knowl- growth in new and better ways of combining edge and skills. labor and capital. Since 1990, Vietnam has In an innovation-led economy, new knowl- grown mainly by expanding the labor force edge is used in most economic sectors and and both foreign direct investment (FDI) and by most firms. Some firms conduct classic domestic capital. But demographic shifts and research and development (R&D). Others limit of capital mobilization are now closing occasionally upgrade technology through cap- that option. Future growth will have to come ital investments or labor reorganization. Some from a labor force that works smarter with added value will come from increased output higher quality capital resources. volumes—making more with less. Some will How will Vietnam achieve this? Following come from increased quality—making prod- the path outlined in the previous chapter, ucts and services better than they are now. improved policies, removal of distortions, Firms will make products that did not exist better allocation of production factors, and before, and will use production techniques a level playing field can provide the initial previously untried. The reiterative process of impetus for sustained, higher growth. These seeking new technologies to improve produc- alone, however, cannot be the basis for long- tion is at the heart of an innovation-led econ- term, sustained improvements in productivity omy, where success is marked by TFP gains. and growth. They need to be complemented Such learning requires firms—the demand by widespread, intensive learning by workers side for innovation—to show greater urgency in firms and on farms and by researchers, in pressing for new technologies and in rais- faculty, and students at research institutes, ing their ability to absorb and use them. 169 170 VIETNAM 2035 Some gains come from putting firms under produced in Vietnam through R&D in its greater pressure to compete (Foundation I, fi rms and universities. box 3.1). Gains also come from helping them Making this system function well is a identify, adapt, and use knowledge and tech- decades-long process. Vietnam’s NIS is weak nology (Foundation II), including ensuring a and contributes little to output or growth. sound, enabling environment. On the supply The good news is that if improvements begin side, some gains entail raising R&D quality now, the system can be strong as need grows. and relevance. Other enhancements involve Few firms are held back by lack of indigenous improving the advanced human capital R&D capacity. Failure to capitalize on spill- training system (Foundation III), such as the overs from existing knowledge investments is tertiary education system (Foundation IV). a more binding constraint. As firms gradually Success also includes ensuring that the demand become more knowledge-intensive, R&D will and supply sides are appropriately linked. play a more decisive role in productivity and In its most basic sense the national inno- competitiveness. Vietnam needs to strengthen vation system (NIS) encompasses organi- its NIS right away. zations and policies that allow firms and The proliferation of trade agreements, workers to produce in new and better ways, such as the Trans-Pacific Partnership, will continuously adding knowledge to prod- affect knowledge production in Vietnam. ucts. At first much of the new knowledge It will deregulate labor markets and allow will exist elsewhere in the world but will be firms to import skills. But for the country to new to Vietnam. Later more and more of it avoid being only a low-wage, low-skill labor will be new to the world (frontier knowl- provider in the Association of Southeast edge). Some of that new knowledge will be Asian Nations (ASEAN), it must recommit to BOX 3.1 Four foundations of an innovation-led economy The path to such an economy would build on four Foundation III: Raising knowledge production, foundations: advanced human capital training, and R&D quan- Foundation I: Raising the demand for knowledge tity, quality, and relevance. The tertiary educationa in fi rms, mainly by increasing the competitive pres- and research sector would expand and improve qual- sure under which they operate. Many noneconomic ity while creating and deepening connections to the factors—political connections, bureaucratic inef- rest of the world. Vietnam’s government research ficiency, lack of competitive pressure—mean that institutes (GRIs) and tertiary education institutions firms that are not the best producers can survive, would achieve a new dynamism of responding to the sometimes comfortably. Labor productivity does not need for relevant knowledge and skills. have to grow to ensure a fi rm’s survival, so produc- Foundation IV: Continuously improving the tivity has stagnated. Raising competitive pressures quality and relevance of labor force skills through will force fi rms to seek knowledge to stay in business. increased responsiveness and dynamism in tertiary Foundation II: Helping firms improve their education. The average worker raises his or her skills capacity for “technology learning.” This gradual and human capital by completing more and better process educates Vietnamese fi rms in the process and education in a wider range of economically useful production technologies used elsewhere. It gives an disciplines. These workers enter fi rms not only with advantage to the fastest-learning fi rms and prepares current skills, but as lifelong learners who update them to seek “frontier knowledge”—information their knowledge and skills to stay current with lead- that is new to the world. ers in their sectors and industries. a. Throughout the chapter “tertiary education” will be used to refer to all formal postsecondary education leading to a recognized credential. Tertiary education institutions include universities, colleges, and postsecondary technical, and vocational institutions, among others. The term is used to emphasize that universities and university-level education should not be the sole focus of policy in this educational subsector. B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 171 developing a successful NIS. This would help guarantee a business and education climate it close the gap in technology and knowledge that values openness to new ideas and risk- with the world’s fast-growing and prosper- taking. These elements were critical to the ous economies, one that threatens to widen rapid growth in reference economies, such rather than shrink. The next 20 years will as the Republic of Korea, Singapore (with see unprecedented challenges. Vietnam’s China, Vietnam’s role models—box 3.2), and response to climate change and environmen- Taiwan, China. The Vietnamese government tal and energy concerns requires it to draw has, however, been a weak and inconstant on the best (and continuously advancing) partner to fi rms. And it has not sufficiently global knowledge. implemented reforms in the tertiary educa- The acceleration of information tech- tion and research systems. Both arenas need nology, robotics, and artificial intelligence far greater dynamism to meet the challenges will pose challenges and opportunities for of the next 20 years. domestic manufacturing and communi- This chapter reviews the state of the inno- cations. Vietnam is an increasingly open vation system and proposes an agenda for economy, enmeshed in international markets improving it. It begins by assessing where and competition. Disruptive technological Vietnam now stands in innovation capacity. breakthroughs anywhere will affect it, but a It next looks at the demand side and exam- modern NIS will prepare it to maximize the ines how the need for knowledge and the opportunities while managing the challenges. absorptive capacity of firms can be improved. Faster productivity growth that under- It then considers how the supply of knowl- lies continuing prosperity gains will require edge and skills from higher education and an unambiguous commitment to a dynamic research can be at its best. The last part of private sector. Fundamental reforms to the this chapter proposes a three-stage approach tertiary education systems that produce for developing national innovation capacity, higher-order human capital require the same with the goal of creating an innovation-led clear commitment. Vietnam also needs to economy. BOX 3.2 Who are Vietnam’s role models? East Asia’s economies can offer lessons to Vietnam. to move up the value chain, Singapore poten- The Republic of Korea and Singapore, for instance, tially offers many lessons in how to integrate into proved successful in transitioning across sectors and global value chains (GVCs) and develop the service promoting sectors of high value added. China is fol- sector. With a population of 5.4 million, it is per- lowing a similar path. haps a model for the large urban areas of Hanoi Korea. With a population of 50.2 million, Korea and Ho Chi Minh City. As with Japan and Korea, seems closer to Vietnam in scale than Singapore or Singapore put tremendous emphasis on upgrading China. A key difference is that Korea relied little its private sector by improving productivity and on FDI and developed its national champions from quality. scratch. The Korean government had independence China. China, like Vietnam, faces great chal- and disciplinary capacity to enforce a system of lenges in developing an autonomous, high-quality fi rms’ access to government support based on their innovation system to support local fi rms. Also like export performance. This helped create the Korean Vietnam, China’s development model has relied miracle. Vietnam’s experience with state-owned heavily on FDI. But unlike Vietnam, China’s popu- enterprises suggests that its government does not lation of 1.4 billion gives it bargaining leverage with have such independence or capacity. MNCs in transferring technology and developing Singapore. With a large multinational company backward links. (MNC) presence and a well-documented ability 172 VIETNAM 2035 Innovation Capacity: Where Is invent technologies to become more produc- Vietnam Today? tive and diversify into new goods—point to mixed performance. The Global Competi- Vietnam’s performance on innovation is tiveness Report 2015–16 ranks Vietnam 56th weak on both the demand and the supply out of 140 countries on overall competitive- sides of the innovation equation. ness (a massive improvement over a ranking of 68 in the previous year), while coming in 95th on higher education and training, 92nd Foundation I: Demand for Knowledge on technological readiness, and 88th on in Firms innovation and business sophistication. This Current demand for knowledge by fi rms is places it broadly in the same realm as India negligible, manifest in a slowdown in pro- and Mexico but far below Chile, China, ductivity growth, aggregate competitive- Korea, Malaysia, Thailand, and Taiwan, ness that lags regional comparators, and China (table 3.1). negligible fi rm demand for and production of R&D. R&D Vietnam does not publish reliable, inter- Productivity nationally comparable statistics on gross Labor productivity grew in the 1990s, led expenditure for research and development by sharp increases in TFP. After 2000, TFP (GERD) or subcomponents—itself a policy halted and stayed flat, and the labor produc- gap to be closed. The best estimates of tivity increases that followed the Ð ổi M ớ i comparable GERD figures put spending at slowed down significantly. Firms have added about 0.3 percent of GDP.1 This is low and more workers and machinery. But because inadequate, worsened because the majority they are not improving their knowledge of spending is for staff salaries at govern- or technology, growth in output per hour ment research institutes (GRIs). Perhaps worked is slowing down. Vietnam will be three-fourths of these staff members may unable to close productivity gaps with the not be directly involved in research. This region’s more advanced economies unless it means that Vietnam is only spending about raises its innovation performance. $1 per person a year on science and tech- nology (S&T). Advanced Organisation for Competitiveness Economic Co-operation and Development Crude measures of Vietnam’s innovation (OECD) countries may spend closer to capacity—its ability to identify, adapt, or $1,000 per person. TABLE 3.1 Vietnam’s ability to identify, adapt, and invent new technologies and to become more productive and diversify into new goods is weak Country GCI 2015–16 rank (of 140) Score (1–7) GCI 2014–15 rank (of 148) United States 3 5.61 3 Taiwan, China 14 5.28 14 Malaysia 18 5.23 20 Korea, Rep. 26 4.99 26 China 28 4.89 28 Thailand 32 4.64 31 Chile 35 4.58 33 Vietnam 56 4.30 68 Mexico 57 4.29 61 Brazil 75 4.08 57 India 55 4.31 71 Source: World Economic Forum 2015. Note: GCI = Global Competitiveness Index. B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 173 T he gover n ment ’s t a rge t to sp end The fi gure suggests, fi rst, that Vietnam 1. 5 percent of GDP on research and is below the average for R&D spending as exploration (R&E) by 2015 and 2 percent a share of GDP against countries at similar by 2020 — outlined in the Strategy for levels of development. It is worth noting that S cience and Technolog y Development China’s and India’s unusually high GERD 2011–20 —cannot be achieved by a mas- and patenting rates (table 3.2) are caused sive government R&D push alone. The by the vast R&D and patenting activities quality of spending—and the policies that of multinational corporations and cannot define it—will be at least as important be compared to Vietnam’s (Branstetter, as the quantity. In advanced countries, Li, and Veloso 2013). Second, the figure private companies conduct the majority suggests that raising GERD productively of R&D. Firms translate new knowledge accompanies a rise in national income and into value-added productivity and growth. removal of barriers to investment in physical GERD tends to rise with development, and knowledge capital. Reflecting in part refl ecting that fi rms’ decisions to invest in the low levels and quality of R&D activity, knowledge and R&D cannot be separated Vietnam is far behind comparator coun- from decisions to accumulate physical tries in patenting activity, with 0.01 patents capital (figure 3.1). 2 per 100,000 people (table 3.2). FIGURE 3.1 Countries’ research and development expenditure tends to rise with overall development level 50 45 40 Predicted and observed R&D per GDP (%) 35 30 25 20 15 10 5 0 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 Log GDP per capita (2014 US$) Brazil China Finland India Israel Japan Korea, Rep. Mexico Vietnam Source: Goni and Maloney 2014. 174 VIETNAM 2035 TABLE 3.2 Vietnam is far behind comparator for E conomic Management survey of countries in patenting activity, reflecting weak 352 employers showed that only 10 percent research and development activity had a dedicated R&D unit with modest Patents average spending. Even this seems high, given Total Per 100,000 population aggregate spending measured (OECD–World United States 277,835 88.52 Bank 2014). Both studies draw samples of Korea, Rep. 14,548 29.09 firms that represent the formal private sector China 5,928 0.44 or state-owned enterprises (SOEs). But the India 2,424 0.19 Brazil 254 0.13 two types of fi rms employ only 7.4 million Mexico 155 0.13 workers, 15 percent of Vietnam’s labor force Thailand 77 0.12 of 52.6 million. Demand for and produc- Chile 54 0.31 tion of R&D in the rest of the firms (most of Vietnam 5 0.01 them in the informal sector) is likely to be Source: U.S. Patent and Trademark Office Database (http://www miniscule. .uspto.gov/learning-and-resources/open-data-and-mobility). Foundation III—The Quantity, Quality, Foundation II—Firms’ Capacity for and Relevance of High-Order Knowledge Technology Learning Production Vietnamese fi rms are better managed than R&D is conducted almost exclusively in expected, considering the country’s level of the public sector, within a system of many development. They rank between firms in small GRIs. Official statistics list more than India and China and about equal to those 600 GRIs and more than 2,000 registered in Brazil (figure 3.2). But they suffer from science and technology organizations. Yet, short planning horizons and weak human only a few dozen have reputations for doing resource policies. While Vietnam has numer- useful, high-quality work. Korea’s experi- ous interventions and programs for acceler- ence shows that much of the expanded gov- ating technology learning in fi rms, few are ernment spending on R&D through GRIs effective. Many are too slow or bureaucratic, can be wasted if it does not reflect indus- and they lack experienced, successful tech- try needs and is not linked tightly to fi rms nology entrepreneurs and managers. Unlike (OECD 2009). Korea, Singapore, and to some extent China, Private sector perceptions of the quality Vietnam is not boosting fi rm learning and of research and the amount of collaboration absorptive capacity. between fi rms and the research sector show The agenda to improve national innova- Vietnam lagging comparator countries. tion capacity has to cover the environment Entrepreneurs in Vietnam have a globally that enables firms’ investment in physical poor opinion of GRIs’ research quality and and knowledge capital (box 3.3 and “The of their collaboration with the private sec- enabling environment for accumulating tor (figure 3.3). Substantial reform in GRIs knowledge and physical capital”). Massive and universities—and tighter links between state R&D investment to achieve the 2 per- them—should be a central element that pre- cent target is likely to receive very low rates cedes funding increases. The Ministry of of social return. 3 The majority of GERD at Science and Technology’s efforts to bring the moment is public spending. Evidence coherence to research fi nancing and incen- of firm spending on knowledge or R&D is tivize private sector involvement have yet to scant. One study reports that only around bear fruit. A 2012 joint CIEM and World 8 percent of their sample did any form of Bank survey found that only 6 percent of R&D—about 3 percent performed frontier the firms surveyed had collaborated with research, and most (55 percent) did new- an outside partner and only 1 percent with to-the-fi rm research (Rand and Tarp 2012). a university or GRI (OECD–World Bank A 2012 World Bank and Central Institute 2014, 118). B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 175 Research productivity is also low for the FIGURE 3.2 Vietnam performs better than expected on country’s income. In 2011, researchers in Viet- management practices, given its income level nam published only 432 articles in journals 3.5 included in the Science Citation Index and United States Average management practices scores Social Sciences Citation Index.4 This puts Viet- Japan Germany nam ahead of Indonesia and the Philippines Sweden Canada France but comes to less than one article a year for 3 Italy Australia Mexico Poland each GRI, which should concern policy mak- New Zealand Singapore ers. Low- and middle-income countries—such China Chile Portugal Spain Ireland Argentina Greece as Jordan, Kenya, and Morocco—are around Vietnam India Turkey Brazil Kenya Nigeria Colombia the same absolute output, despite populations 2.5 several times smaller than Vietnam’s. Viet- Myanmar Nicaragua Zambia nam’s publications nearly doubled between Tanzania Ghana Ethiopia 2006 and 2011, but in any given year tiny Sin- gapore still publishes 10 times more articles. 2 Mozambique Dome st ic g radu ate educ at ion a nd 7 8 9 10 11 advanced training of human capital are Log of 10-yr average GDP per capita based also weak, although a bright spot is appear- on PPP (current international $) ing as the government sends qualified stu- Source: Bloom et al. 2015. dents abroad for PhD training. But Vietnam Notes: April 2013, World Economic Outlook (IMF); PPP = purchasing power parity. maintains separate systems for conducting BOX 3.3 How a sound national innovation system promotes firm learning In a well-developed national innovation system, knowledge through R&D and capable employees. R&D is not an end in itself. It is the way fi rms con- And they spend time and energy to make sure they stantly improve the quality of their products, lower can use it well. Early in this process governments prices, and gain advantage over their competitors. can often selectively accelerate fi rm learning by pro- Businesses become “learning firms” not because viding technological consulting services, tax breaks they want to, but because they must to stay in busi- for R&D, and intellectual property right protection. ness. If they stop learning and improving, their com- They can also accelerate firm learning by linking petitors will offer better products at better prices, knowledge suppliers in universities and government taking away market share, revenues, and profits. research institutes. The product cycle for smart phones shows how An effective NIS allocates funding to basic research concretely fi rm learning is tied to these three funda- for the next generation of advances. Simultane- mental aspects of firm health. Converting research into ously, it exploits the commercial potential of current the powerful computing and communications technol- knowledge—balancing long- and short-term goals. ogies of smart phones, leading firms such as Apple and Policies fund the most productive researchers and Samsung expect to keep improving. Samsung steals ensure continuous review of the quality and relevance Apple’s customers with its larger display screen, and of research results. Career advancement for researchers Apple steals them back with a fingerprint recognition should depend on the extent to which they meet these lock. A relentless drive to incorporate more knowledge goals and make knowledge ready for firms to use. into their products puts these two firms at the forefront Human capital, some representing specialized of innovation—not because they find R&D interesting research skills, is as important as R&D. The grow- but because they need its results to survive. ing ranks of complementary skills—such as man- An NIS is healthy and effective when it supports agement, marketing, and logistics—are equally the highest number and quality of competitions important. They help the fi rm synergize everything among fi rms to see which can commercialize knowl- into a knowledge-intensive product designed to edge best. Under pressure to improve, firms seek impress customers. 176 VIETNAM 2035 FIGURE 3.3 Vietnamese entrepreneurs view scientific institutions research (mostly in GRIs) and for training and university–private sector collaboration as lagging researchers and advanced human capital (through the graduate education system). Israel This raises the costs of both systems while lowering effectiveness. United States Sweden Finland Foundation IV—The Quality and Australia Relevance of Skills in the Labor Force Ireland The quality of workforce skills suffers from Turkey structural deficiencies in Vietnam’s tertiary Korea, Rep. education system. Total undergraduate Malaysia enrollment increased by 57 percent between India 2005 and 2012. But the country barely kept pace with its competitors in G20 and OECD China countries (table 3.3). Students’ choice on Brazil whether to attend—plus what and where to Spain study—continues to be hampered by various Chile bureaucratic and regulatory obstacles. Colombia Recent reforms have sought to create more autonomous and responsive tertiary Mexico education institutions, but intentions have Vietnam run ahead of accomplishments. Policies 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 to increase institutional autonomy have Executive Opinion Survey, scale from 1 (low) to 7 (high) devolved some decisions, but far too many institutional decisions are still subject to Quality of scientific institutions governmental review or approval. Even Collaboration between university and private sector the most independent tertiary education Source: World Economic Forum 2010. institutions operate within narrow confi nes TABLE 3.3 Workforce skills suffer from structural deficiencies in the tertiary education system 2005 2010 2011 2012 Growth (%) Population (18–24 years old) 9,168,000 9,245,400 8,465,200 7,887,800 Share of tertiary enrollment (%) 15.1 23.4 26.1 27.6 Undergraduate Total enrollments 1,387,107 2,162,106 2,204,313 2,177,299 57 Colleges 299,294 726,219 756,292 724,232 142 Universities 1,087,813 1,435,887 1,448,021 1,453,067 34 Total graduates 210,944 318,345 402,277 425,208 102 Colleges 67,927 130,966 169,400 176,917 160 Universities 143,017 187,379 232,877 248,291 74 Postgraduate Total enrollments 34,982 67,388 85,504 72,731 108 Doctoral 3,430 4,683 6,233 5,958 74 Master 31,552 62,705 79,271 66,773 112 Total graduates 5,780 15,630 18,834 17,204 198 Doctoral 359 504 549 343 −4 Master 5,421 15,126 18,285 16,861 211 Source: Ministry of Education and Training 2013. B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 177 for spending, generating revenue, and from the government, however, do not yet establishing salary and enrollment policies. reflect awareness of this. Domestic private The burdens of bureaucratic oversight fi rms feel the government’s lack of response make it almost impossible to accomplish to their needs. the primary task: give students the skills These challenges vary by firm type. For employers need. That means giving students each—SOEs, foreign firms, and domestic good jobs and providing employers with enterprises—Vietnam needs to remove the a way to raise productivity. Accelerating barriers to productivity growth and govern- technological change means that this prob- ment support. lem will worsen unless bolder and quicker reforms are adopted. The government’s SOEs effort to create new model universities in The SOE sector is large but lacks dynamism. partnership with economically advanced It needs more competitive pressure if it is countries is a step in the right direction. to be a growth driver. Some argue that This experiment should be replicated and these firms could be the basis for national rapidly scaled up throughout the system. champions—similar to chaebols, Korea’s The central argument of this chapter is large family-owned conglomerates. But that improving the NIS requires a broad despite their huge government subsidies and approach that covers demand for innovation support, they have failed to show sustained by fi rms and supply of high-quality human or aggressive export growth. An ongoing capital, knowledge, and R&D. The demand government program for increasing pro- and supply aspects of innovation capacity are ductivity and upgrading quality would discussed next. guarantee strong demand for technological knowledge and innovation. But the codepen- Innovation: The Demand dent relationship between the government and SOEs—exchanging protected markets (or Firm) Side for shared profits—is no formula for driving The private sector generates wealth and dynamic, competitive growth. must be at the center of the policy focus over the medium term for strengthening Foreign firms innovation capacity. Vietnam has made Vietnam’s substantial FDI, which has fueled progress in many of the factors that encour- growth and provided millions of jobs, offers age fi rms to innovate. Ðổi M ới reforms have the potential for domestic firms to inte- exposed fi rms to external ideas and compe- grate into global value chains (GVCs). The tition and created myriad opportunities at competition implicit in these firms’ export home and abroad. The FDI sector makes up orientation remains a constant incentive more than one-third of all formal private to productivity growth and innovation, sector employment. And export growth has although not always at home. Vietnam’s consistently been an important driver of position in the value chain is in assembly growth in the past two decades. These foun- work. Such work limits technological spill- dational steps have to be capitalized on. overs for the country’s domestic firms. An emerging applied research/programming Dynamizing a Critical Mass of Firms industry in Ho Chi Minh City and Da Nang may lead to the type of R&D established in The main priority is to develop a critical China and India. But although these fi rms mass of dynamic and innovative firms that provide job opportunities for those with an provide the demand side for innovation. information technology education, the spill- Otherwise all efforts on the S&T side will overs are not automatic. be supply-push and, in the worst case, costly Foreign enterprises enjoy established com- and worthless high-tech ventures. Signals munication channels with the government, 178 VIETNAM 2035 and their weight in the economy guaran- unfamiliar with them or who obstruct the tees a certain regulatory response. But as businesses’ efforts. Countries such as Korea Singapore’s experience shows, domestic firms and Singapore at similar stages of develop- seeking to integrate into the supply chain ment were more consistent, targeted, and require—at least at fi rst—a support system effective in their support. Some firms— to raise their ability to meet the price, qual- usually SOEs and MNCs—are large enough ity, and timeliness requirements multinational to communicate their concerns about the companies (MNCs). Domestic firms also business environment or government policy. need a well-developed NIS to move beyond But the fragmented SME sector lacks direct assembly tasks into activities that contribute connections or business associations to lobby more value. the government. Domestic enterprises Vietnamese Firms’ Capacity to Innovate Roughly 96 percent of Vietnamese fi rms are small and medium enterprises (SMEs). Viet- Increasing fi rm capacity is essential to adopt nam’s domestic private firms—established technologies from abroad or from MNCs, SMEs and burgeoning high-tech outfits— and to ensure that government-sponsored face challenges in exports, management, research is effective. This involves devel- and the business climate. But entrepreneurs oping fi rms’ capacity for technology adop- claim that government does not take the tion and, eventually, invention (Rand and enterprising and nurturing approach of the Tarp 2012). Asian miracle economies. Rather it acts Vietnamese fi rms’ capacity to innovate is like a paper tiger (box 3.4). The plethora weak. Responding to a survey on research dif- of laws on fi nance, tax rebates, intellectual fusion, 42 percent of GRI and university per- property rights (IPR), and property grants sonnel report that firms lack the technological to high-tech fi rms are on paper only. When capacity to use research (Oh 1997). Many firms or new entrepreneurs try to take advan- respondents felt the private sector was unin- tage of the laws, they fi nd officials who are terested in using their research and stressed BOX 3.4 Many policies exist only on paper Vietnamese law offers numerous measures to sup- which costs roughly a fifth of the imported product. port the private sector. Entrepreneurs in a cross It shows promise in becoming a profitable product section of fi rms, however, consistently respond that in export and domestic markets. But scaling up has these measures exist only on paper. been hampered by weak marketing skills, scant For example, high-tech start-ups—in theory—are access to credit, slow approval processes, and unre- guaranteed property-tax exemptions and access to sponsive government support. Despite the product’s credit. But in reality they consistently report that huge price advantage, a preference for imported tech- none of these benefits exist. Worse, they hesitate to nologies and an inability to scale up rapidly mean its fi le for patent protection because they often see their future is uncertain. ideas stolen rather than protected. Approval pro- The contrast with the more successful Asian cesses for new products are wearingly long. tigers is stark. In the Korean economy’s high-growth For example, the Vietnam National University, phase, the government guaranteed credit lines to Ho Chi Minh City, may lose the opportunity to com- fi rms that met export targets. And the Korea Trade mercialize “bio X-ray fi lm.” Vietnamese hospitals Investment Promotion Agency offered strong export- successfully piloted this newly developed product, network support to young small fi rms. B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 179 BOX 3.5 Firm upgrading in an MNC-dominated economy: Singapore Singapore has relied to a great extent on large The EDB also worked with MNCs to establish inflows of foreign multinational companies (MNCs) training centers for skills that could be used across rather than on indigenous companies. In the 1990s, many industries, thus ensuring interindustry spill- about 75 percent of its manufacturing output and overs. The government financed the project but 80 percent of its exports came from foreign MNCs. left training to MNCs rather than institute its own Large parts of the service sector even today are training centers and schools. foreign-owned, especially hotels, transport, and Among several financial and technical assis- fi nancial services. tance schemes, the Local Industry Finance Scheme In response, the Economic Development Board extended loans to buy machinery and equipment. (EDB) successfully cultivated foreign MNC links The Local Enterprise Technical Assistance Scheme and spillovers, working closely with the firms gave grants to external experts to upgrade opera- represented on its advisory board. This gave the EDB tions and management. The Skills Development direct information on MNC preferences, obstacles, Fund shared the costs of investing in upgrading and desired policy changes. workforce skills. Realizing in the 1980s that spillovers from MNCs The government also identified and supported to domestic SMEs were weak, the Singapore govern- 14 clusters, many of them cross-cutting. They ment launched a nationwide campaign to promote included finance, shipping, tourism, construction, awareness of the importance of productivity growth. electronics, insurance, commodity trading, precision It contracted with the Japanese Productivity Center engineering, heavy engineering, information technol- to help establish what would eventually become ogy, general support industries, and petroleum and an extensive system of SME support services: the petrochemicals. Each cluster was tested for efficiency Singapore Standards, Productivity, and Innovation and competitiveness. And each had some common Board (SPRING). core comparative advantage, whether natural, cre- The EDB introduced the Local Industry Upgrad- ated, or in industry structure. These clusters provided ing Program in the early 1980s to leverage MNCs. high-end tasks while assembly work progressively Under the program it selected a few local supply went to other countries. industries essential for upgrading activities in the The Agency for Science, Technology, and Research foreign MNC. It also paid for MNC experts to work sponsored 12 research institutes to undertake R&D in local fi rms. projects related to industry needs. Source: Blomström, Kokko, and Sjoholm 2002; Maloney and Sarrias 2014; Toh 2005; Wong 2008. the lack of fi rms’ absorptive capacity, illus- and put in place some effective programs. trating the critical need for firm upgrading in Similarly, in Korea, SMEs did not enjoy many an NIS. And domestic firms lack production spillovers from the chaebols that dominated and knowledge links with FDI firms. the economy. Recognizing that spillovers are Ensuring that FDI firms do not simply greater with more domestic fi rm capacity, 5 constitute an enclave but actually “pull” that country employed fi rm-upgrading pro- the domestic private sector requires a strong grams that showed positive results. domestic SME sector and the right skills The same problem is now apparent in mix. It is also vital to use GVCs because, for Vietnam. Most spillovers are from providers some time yet, Vietnam may rely on MNCs of goods sold in the Vietnamese market. as private sector leaders—a precedent seen But only a few come from providers to local in Singapore in the 1980s (box 3.5). At that producers for export, even though this is time, the Singaporean government realized a major economic activity (Newman et al. that, despite a massive MNC presence, local 2014). For example, Samsung Vietnam found firms were not benefitting or upgrading that—among the 200 prospective SME 180 VIETNAM 2035 suppliers responding to a call for interest— and GDP (figure 3.3). (The academic lit- none could generate the combination of price, erature increasingly supports this fi nding.) quality, and timeliness needed to be part of Second, Vietnam is substantially below the the supply chain. Important lessons may be world average but better than expected, learned from the Singaporean and Korean given its income level. It is about the same examples in this regard. as Brazil, Chile, China, India, and even Greece. Third, weak results for India and A proxy for measuring Vietnamese firms’ China are consistent with the view that capacity to innovate: management quality their high R&D and patenting numbers are Measures of domestic firms’ capacity to driven by MNCs, and their true innova- innovate are scarce and hard to compare tion capacity is far below that suggested by internationally. To rectify this, the Lon- these indicators. don School of Economics and Stanford Breaking down these management scores, University conducted the World Manage- figure 3.4 suggests that Vietnam is strong on ment Survey. Researchers interviewed monitoring. But the country is weak on set- Vietnamese firms using a methodology ting long-term targets, introducing new tech- the two institutions have used around the nologies and best practices in operations, and world. This permits comparisons with developing human resource policies. Inter- other countries and a deeper diagnostic of views with firms reveal that many manag- limitations. ers meet their targets all the time. Anything First, the exercise reveals a broad positive less than 100 percent target achievement is relationship between managerial quality unacceptable for senior management. But regardless of forward-thinking and strategic policies, Vietnamese managers emphasize that their principal objective is profit. The FIGURE 3.4 Managers in Vietnamese firms are strong on focus is always on the short term (Bloom monitoring but weak on setting long-term targets, introducing et al. 2015). new technologies, and reforming human resource policies This is consistent with the report that 2.71 84 percent of firms surveyed had no technol- China 2.49 2.90 ogy adaptation or R&D programs (Rand and 2.62 2.69 Tarp 2012). A longer time horizon express- 2.11 2.61 ing a vision of long-term fi rm and product India 2.59 2.84 upgrading is largely absent, as are the human 2.60 resources for innovation. For example, devel- 2.37 2.05 oping talent is expensive and often unnec- Myanmar 2.47 2.08 2.64 essary because it is perceived to be easy to 2.86 replace workers and even managers. This 2.74 Singapore 2.79 3.07 creates a gap as active innovation requires a 2.79 dominance of best practice and a multiyear 3.31 3.30 strategy for the firm. United States 3.55 3.21 3.19 Management quality thus becomes an 2.66 important complement to stimulating R&D. 2.55 Vietnam 2.58 2.82 2.62 What drives management quality? 1.5 2 2.5 3 3.5 4 As with most developing countries, Viet- Average management scores for manufacturing nam lags across the fi rm spectrum. Even its best—top 10 percent—fi rms lag behind the Management Operations Monitoring average fi rm in the United States, the fron- Targets People tier benchmark (figure 3.5). Two critical Source: Bloom et al. 2015. factors in average management quality have B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 181 been identified. One is the level of competi- FIGURE 3.5 Even the best firms in Vietnam fall below the average tion in that it both trims the left tail, and firm on the frontier benchmark nudges the rest of the distribution to be bet- ter. The other is the ownership structure 1.0 (Bloom and Van Reenen 2007). Human capital and management training quality is 0.8 important across the distribution, though mainly at the bottom. 6 This fi nding under- Kernel density 0.6 lines the need for a variety of high-quality skills— as for Foundation I V—beyond 0.4 research and technical skills promoted under Foundation III. 0.2 Technological extension services Vietnam faces important fi rm-capacity con- 0 straints. Innovation cannot develop without 1 2 3 4 5 a sophistication threshold among its fi rms Firm average management score and farmers, beginning with the basics. Vietnam China India Throughout the advanced world, govern- Myanmar Singapore United States ments have employed extension services Bottom to facilitate technological transfer to fi rms U.S. quartile and farms. These programs are impor- Source: Bloom et al. 2015. tant for upgrading fi rm capabilities. They Note: Sixty-four percent of Vietnamese firms score within the range of the bottom quartile are also useful in identifying high-growth of U.S. firms. gazelles—the small group of fi rms respon- sible for most employment growth. In the United Kingdom, these fi rms were termed to room for design and staffing improve- “the vital 6 percent,” which accounted ments. The Japanese, Korean, Colombian, for more than half of all jobs created.7 It and Singaporean systems rely heavily on may be obvious that these fi rms should be “extensionists” with ample private sec- supported, ensuring access to credit and tor experience. The VPI is staffed almost improving their organizational capabilities. entirely by Hanoi Business School graduates But it is extremely difficult to identify these with little real-world experience. Most of firms beforehand, since there is no typi- the Colombian extensionists, by contrast, cal high-growth fi rm. Their heterogeneity had worked in MNCs or large national spans sectors, business models, ownership firms, often in high positions. Only this structures, and trajectories. 8 A broad sys- kind of expertise will promote private sec- tem of fi rm extension paired with private tor demand for these services. Without large sector organizations—such as chambers of government subsidies, the VPI’s survival is commerce and banks working across the questionable. private sector, as in Japan and Singapore— Japan helped develop Singapore’s formi- can help identify potential gazelles that may dable firm-support services (see box 3.5). merit support. The Japan International Cooperation Agency The Vietnamese government recognizes undertook an evaluation of the VPI and rec- the need to raise quality and productiv- ommended possible reforms. A fi rm-support ity in such fi rms. Doing this involves some system review at different sophistication lev- programs that are similar to those in Japan, els is proper. In Japan, Korea, and Singapore, Singapore, and elsewhere, including those such “5S/ Kaizen”–type programs, which of the Vietnam Productivity Institute (VPI). stress continuous and gradual improvements, Interviews with the VPI, however, point have been crucial to upgrading.9 182 VIETNAM 2035 Higher-order support to upgrading and in accumulating knowledge capital are no innovation different. And invention risks can be even As firms become more sophisticated, provid- higher because the distribution of returns is ing higher-order and more tailored knowledge unlikely to be well understood. Institutions becomes vital. Tertiary education and GRIs and skills that ease risk management are become important on the escalator of fi rm- essential (box 3.6). support services and innovation-promotion For instance, it is important to reduce programs, as in Korea, Japan, Singapore, and risks for adopting agricultural technolo- other advanced countries. This is discussed in gies (Foster and Rosenzweig 2010). The “Innovation: The Supply Side.” rate of quality upgrading—a crucial inno- vative activity—is close to the variance in quality growth rate. And rich countries are The Enabling Environment for undertaking the riskiest—and thus highest- Accumulating Knowledge and return—investments in quality upgrading.10 Physical Capital Therefore investment in knowledge for qual- Low innovation can reflect barriers to fac- ity (or productivity growth) appears facili- tors needed to accumulate knowledge and tated to the extent that fi rms and countries physical capital. This section focuses on inno- can manage this risk (Acemoglu and Zili- vation issues such as poor business climate, botti 1997). risk-management difficulties, and insufficient To enable risk-taking, Vietnam needs to early-stage financing. It also focuses on firms’ work on the following three areas: ineffectual investment readiness, poorly run government financial support programs, and 1. Improve entrepreneurs’ ability to evalu- weak IPRs protection. ate and manage risks through the types of programs discussed earlier. Managing risks 2. Reduce risks in the system by assuring Development is a process of placing wagers, consistent and supportive rules over the as any investment has risks. Investments long term.11 BOX 3.6 Efficiency and risk management in rice: An Giang Plant Protection Company in the Mekong Delta Established in 1993, the An Giang Plant Protection and marketing process—thus providing better tech- Company creates a value chain for rice export. It nical assistance—further reduces the costs and risks includes providing input services, transferring the farmers face. cultivation-control process, and supporting har- It alleviates credit constraints. The company vesting. The value chain also includes drying and lends to farms for input purchases. transporting rice, grinding, free storage, and mar- It resolves market failures in research and inno- keting. The company integrates 25,000 paddy fields vation. The Vietnam Academy of Agricultural Sci- into large fields that make up 2.5 percent of the ences reports that new technologies have allowed the Mekong Delta. But it expects to more than double farmers in the Mekong Delta to increase from one to that amount by 2018. Integration in this value chain three crops per year. Productivity is rising through increased smallholder household income by 50 per- new seed types and more, but it is hitting limits. An cent in one year. Giang’s agricultural research center collaborates with An Giang addresses three key innovation and the government-supported Omon Rice Institute to production issues. develop new seeds and fertilizers. It reduces transaction and information costs and There is substantial room for scale-up and the risks. An Giang reduces farmers’ information costs government could promote it. Nineteen more similar through researching and choosing seed and fertil- fi rms could cover 40 percent of the Delta by 2020, izer. It also manages transport. Managing the input with expected impacts on productivity. B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 183 3. Assist in managing risks through insti- phase to being established and listed publicly. tutions or approaches that help diversify Vietnam has tentative representation in most them. Such assistance includes support- lifecycle phases, but it is miniscule. Inter- ing tertiary education and GRIs, devel- views with start-up personnel suggest that oping a modern financial sector, and domestic intermediaries have weak capacity aiding information collection. Assistance to evaluate risk. also includes help offsetting appropria- Government programs to mitigate market tion externalities, such as export-support failures and provide financing over the inno- agencies and innovation support funds. vation life cycle are fragmented, deficient in coverage, and poorly coordinated. Private Improving the business climate capital markets require greater public sup- Doing Business indicators capture some port to meet the needs of SMEs and highly dimension of the enabling environment innovative start-ups. Such support mainly and how it aids investment in physical and includes providing technical assistance and knowledge capital. Table 3.4 shows that developing an exit strategy for private equity Vietnam ranks better than Brazil overall, funds. (Technical assistance, when delivered but lags far behind regional middle- and with private equity, can unlock more invest- high-income economies, as well as Mexico ment commitments. But Vietnam’s small and Chile in Latin America. It is weak in private equity funds limit the government’s entrepreneurs’ ability to start a business, ability to provide technical assistance.) protect investors, pay taxes, and resolve Such twinning is the rule in venture capi- insolvency—all essential to doing business. tal in the United States, where managerial Only 3 percent of Vietnamese fi rms reported resources are often scarce in young, growing no barrier to upgrading processes and tech- firms. The most innovative entrepreneurs nology: fi nancing constraints, technological are not necessarily endowed with manage- know-how, and basic infrastructure proved rial talent. A major role of venture capital important issues, but not communication is to field good managers (De Carvalho, infrastructure (Rand and Tarp 2012). Calomiris, and Matos 2008). Government programs that simply provide risk financ- Innovation and start-up finance ing without experienced managers are miss- Entry opportunities—mainly for innovative ing an important part of the equation. The young fi rms—diminish without a developed Malaysian government purchased part of system to support early-stage financing. Such a U.S.-based venture capital firm to secure firms require a spectrum of financing sources finance and expertise. Brazilian success in as they move from the proof-of-concept developing venture capital is largely because TABLE 3.4 Vietnam is weak in ease of paying taxes and starting a business, protecting investors, and resolving insolvency—all essential to doing business Ranking Ease of Dealing with Trading doing Starting a construction Getting Registering Getting Protecting Paying across Enforcing Resolving Economy business business permits electricity property credit taxes taxes borders contracts insolvency Korea, Rep. 4 23 28 1 40 42 8 29 31 2 4 Taiwan, China 11 22 6 2 18 59 25 39 65 16 21 Malaysia 18 14 15 13 38 28 4 31 49 44 45 Mexico 38 65 67 72 106 5 57 92 59 41 28 Chile 48 62 24 51 56 79 36 33 63 56 58 Thailand 49 96 39 11 57 97 36 70 56 57 49 China 84 136 176 92 43 79 134 132 96 7 55 Vietnam 90 119 12 108 58 28 122 168 99 74 123 Brazil 116 174 169 22 130 97 29 178 145 45 62 Source: World Bank 2015. Note: These are global rankings based on Doing Business 2016 scores. 184 VIETNAM 2035 of Novo Mercado and Bovespa Mais, which Government financial support programs to provide an exit strategy to private equity firms investors by taking companies public (box The government can provide fi nancial sup- 3.7). Vietnam should consider similar exit port to firms through indirect and direct opportunities. channels. For indirect support, it can ease the collection of information that financial insti- Investment readiness tutions require before giving a loan, thereby Established SMEs and start-ups need to over- lowering the cost of borrowing for qualifying come an important hurdle: they must present firms. For example, collateral laws and regis- a solid business case to financial intermediar- tries help firms leverage their assets for loans, ies. Many entrepreneurs lack the most basic and credit information systems can document financial statements. They do not understand young firms’ creditworthiness. Few start-ups, what banks and other fi nancial intermediar- however, have much of a track record. The ies are looking for. And they may not under- government can help through direct subsidies stand how financial instruments—such as (taking on risk) or tools that identify poten- angel or venture capital—function. Issues tial success (based on personal characteris- cut across all sectors of the economy. Many tics, for example). A well-developed system of start-ups lack the collateral and track record firm support combined with business associa- that fi nancial entities need to make invest- tions can greatly increase an entrepreneur’s or ment decisions. a firm’s information (see World Bank 2014). New investment-readiness programs, Direct support to firms for innovation is sponsored by a government or by fi nancial also justified, mainly on the grounds of market intermediaries, redress the demand side of failure arising from the appropriability exter- the financing problem (see Mason and Kwok nality. For example, a firm may invent a tech- 2010). These programs may take a year or nology—or invest in identifying and adopting more to be effective. They require important an existing technology—and then be copied business diagnostics and come at, possibly, by its competition. This eliminates much of high costs to the public purse. They may the intended profit of investing in knowledge. be considered part of the entire package of Financial incentives from the government can firm-support programs linked to technologi- raise the private return to equal the social cal extension programs and incubators and return, taking the form of direct subsidies, tax accelerators. For example, Vietnam Silicon write-offs, matching grants, and patents. Valley, a start-up accelerator mentors other start-ups to structure and prepare them to Tax Write-Offs. Many countries allow firms pitch their proposals to potential investors. to deduct R&D or related expenses from their BOX 3.7 Capital market development and exit facilitation: Brazil’s Novo Mercado Private equity eventually needs an exit. Brazil has Bovespa Mais , which broadly holds to Novo radically increased flows for initial public offerings Mercado standards, targets small and mid-cap through Novo Mercado, a premium listing tier that firms. It hosts companies with a gradual strat- requires fi rms to adopt governance standards that egy of access to capital markets. It helps them are stronger than legally demanded. Increased trans- with transparency, shareholder-base growth, and parency is important to stimulate the venture capital liquidity. Novo Mercado and Bovespa Mais are and private equity market. In 2007, Novo Mercado crucial to developing the venture capital/private celebrated its 100th company, hosting 81 of Brazil’s equity market in Brazil. 113 initial public offerings since its founding. B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 185 income taxes. Vietnam’s Law on Technology combine mentoring, business plan preparation, Transfer (2006) permits tax write-offs for and links to potential finance in a common S&T development and technology transfer. environment. This encourages networking But such write-offs often lead to firms merely and mutual learning. Shorter-term accelerator reclassifying activities and workers. In Korea, programs may help in the adolescence phase for example, such measures were only margin- where technical issues are consolidated, but ally helpful in stimulating innovation activi- strategic guidance is in demand. ties. Nor do they help build links among NIS Three caveats for incubators are in order. actors. Finland abandoned its tax write-offs First, gazelles often are targeted to the in favor of matching grants to create incen- high-tech sector, but the sector itself is not tives for collaboration among private firms necessarily a good predictor of these fast- and research bodies. growing companies. In the United States, incubators often pair with small-business Matching Grants. Evaluations reveal mixed development centers. These centers serve results for developing countries with modest firms from any sector and provide a one- take-up by firms. Vietnam’s system has little stop shop for all new fi rms. Half the funds funding. Interviews at the National Univer- for these centers come from the Small Busi- sity in Ho Chi Minh City in 2015 showed ness Administration. The other half comes that excessive paperwork is a great problem. from such entities as state legislatures, pri- And even for those that qualify, disbursement vate sector foundations, and state and local tranches are small. chambers of commerce. The Singapore Stan- Matching grants also require sophisticated dards, Productivity and Innovation Board actors on both sides of the match. Without developed the Incubator Development Pro- vibrant fi rms, even the best research entities gramme, which provides up to 70 percent can have no partner. And in the end the firm grant support to incubators and accelerators. is looking for a research body that can add Vietnam might consider expanding beyond value. the sectors served by Vietnam Silicon Valley, Collaboration between firms and research a start-up accelerator. A matching grants institutes is low in Vietnam. At an earlier system, for example, could leverage emerg- point in its development, Korea found that ing areas of expertise. its private sector believed that tertiary edu- Second, the easiest part of such programs cation and GRIs did not produce the neces- is to provide real estate, but the services and, sary knowledge. SMEs, on their part, lacked more profoundly, the quality of the profes- the ability to use knowledge generated by sionals offering them are what make the research bodies. Korea’s Science and Technol- programs effective. ogy Policy Institute concluded that the best Third, incubator services cannot replace approach was direct technology transfers the broader business framework the govern- from GRIs and tertiary education. Rotating ment sets. A weak fi nancial framework will personnel from the research sector into firms inhibit the emergence of angel investors or or having masters and doctoral students venture capital providers. It will also constrain work in fi rms were sound forms of technol- the more mainstream fi nancial services that ogy transfer. In Finland, rotating masters and incubators may match with entrepreneurs. PhD students through firms created the high- est ranked university–firm interactions. Intellectual property rights Vietnam needs to strengthen its IPR proce- Incubators and Accelerators. Many startups dure and adapt it to the needs of entrepre- have marketable ideas but lack experience in neurs, mainly its SMEs . A well-enforced organizing a firm, training managers, access- method is crucial in fostering innovation— ing credit, and developing a long-term vision. through patents, trademarks, copyrights, Incubators such as Vietnam Silicon Valley can and geographic indications. Firmly protected 186 VIETNAM 2035 IPRs are a must for MNCs to share their fi nd their patents are not enforced. They are technologies with local fi rms and undertake wary of applying for patents because ideas higher-order R&D in Vietnam. High-tech may be stolen. Thus, the patent office now companies are explicit about not taking does the reverse of what is expected: secur- their cutting-edge technologies to China, ing property rights for the inventor while which lacks IPR protection and a trustwor- disseminating new knowledge. Once the thy judiciary to enforce the rights. U.S. mul- patent office is functioning well, an inde- tinationals respond to changes in reforming pendent judiciary will be needed to resolve countries’ IPR regimes by increasing technol- IPR disputes. ogy transfers to them (Branstetter, Fisman, It is unclear how benefits from commer- and Foley 2006). cializing new ideas should be divided. Cash- Enforcement of IPRs has always played strapped research programs and low-paid an important role in the intellectual property academics should benefit from accessing a system. Countries may use civil, administra- share of returns to products they develop. tive or criminal measures, depending on the For example, the consensus is that they get nature and seriousness of the infringements. nothing from the farmers’ use of their new In many nations, the laws do not stipulate rice varieties. The Law on Science and Tech- the application of administrative measures nology (2000) and the Intellectual Prop- to deal with IPR infringements. However, in erty Law (2005) that govern ownership of Vietnam today, IPR infringements are mainly research outputs and copyright are only resolved by administrative measures, leading occasionally useful. to inadequately compensated damages of IPR holders (box 3.8). Establishing this transparency and reli- Innovation: The Supply Side ability is essential for Vietnam to be a full Dynamic firms require access to the best partner in the global knowledge market. global knowledge through research, smart But this is not the case. Interviews with capable workers, and product or process Vietnamese start-ups reveal that inventors technologies. Fast-growing and high-income BOX 3.8 Vietnam should strengthen staff capacity and promote the resolution of IPR infringements by civil measures In Vietnam, most IPR enforcement is through copyrights, trademarks, and unfair competition. administrative agencies. Courts play a small role. Meanwhile, the staff allocated to IPR enforce- Between 2006 (the IP Law came into effect in 2005) ment has been inadequate. Only 7.7 percent of and 2013, the courts handled 200 IPR cases, just 1 IPR enforcement offi cers have received training in percent of the administrative agencies’ cases. Mean- this field. while, in 2013 and 2014, the inspectors handled Jurisdiction over IPR infringement has been given 32,474 cases nationwide with D 139 billion worth to many different agencies—Inspectorates, Market of fi nes. Administrative sanctions, where the highest Management, Customs, and the Police and People’s fi ne is D 500 million (around US$22,000) for organi- Committees at all levels. But there is a lack of close zations and D 250 million for individuals, are insuf- coordination among them, diluting accountability. ficient to deter repeated violations. Protecting one’s intellectual property is a civil Administrative measures of IPR infringement are right. Vietnam should promote the resolution of IPR intended solely to deter and prevent future violations, infringements by civil measures rather than admin- not to pay damages to IPR holders. The administra- istrative ones. tive fines are paid into the state budget. The infringements have become more sophisti- Source: Electronic Nhan Dan Newspaper, April 25, 2015 (http://en.nhandan cated in many fields, such as patents, trade secrets, .com.vn/). B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 187 economies continuously demand more and made the deepest sustained commitments to better knowledge and skills. This drove these policy goals and have reaped the largest a near-doubling of global expenditure on rewards. If Vietnam can learn from and imi- R&D from about $750 billion in 2001 to tate the most successful countries’ policies, it more than $1.4 trillion in 2011.12 China, for could be recognized as a leading country for one, has gone from conducting little R&D human capital and research by 2035. Achiev- a generation ago to becoming the world’s ing this will, however, require changes to the second-largest research funder. It is increas- trajectories of several policies. ingly recognized for its ability to exceed international quality standards. Despite mas- Investing More While Concentrating sive increases in tertiary education world- Resources on the Nation’s Best and wide, returns to higher education are rising Most Productive Researchers in dynamic economies. Demand for educated workers continues to grow faster than supply Vietnam has made great efforts to improve (Carnoy et al. 2013). the framework for its S&T research system. An NIS supply side provides firms with It now includes the Ministry of Science and most of the highest-quality, firm-relevant Technology and the National Foundation knowledge. When Foundation III is strong,13 for Science and Technology Development GRIs and research universities produce the (NAFOSTED). It also includes agencies such knowledge and advanced human capital as the National Agency for Science and Tech- needed (such as PhD scientists and research- nology Information and policy plans such ers). They are linked tightly enough to fi rms as the Strategy for Science and Technology to allow them to be routinely transferred. Development 2011–2020. Yet these efforts When Foundation IV is strong,14 the tertiary have not smoothed the path to stronger S&T education system imparts relevant, high- capacity, which includes many of the ele- quality skills to a broad range of young peo- ments other countries have used. ple before they join the workforce. Making the supply side work requires Investing more in research, knowledge, and coordinated efforts across policy subar- advanced human capital eas, directed primarily down two main Vietnam’s GERD is low (about 0.3 percent paths. First, invest more while concentrat- of GDP), with most going to GRI staff sala- ing resources on the nation’s best and most ries. Korea was investing significantly more productive researchers. Second, deregulate on R&D at Vietnam’s per capita income. tertiary education so that more providers— Its R&D expenditure went up from 0.25 including more private providers—can com- percent of GDP in 1963 to 2.8 percent in pete to serve students’ needs. the early 1980s, and investment quality Countries that have improved their NIS improved enormously (KOICA Vietnam supply side have charted a multidecadal Offi ce 2015). Many contemporary econo- course through policy formulation and mies in East and South Asia have similarly implementation. In its science, technology, committed to creating innovation-led econo- and innovation (STI) development, Viet- mies through sustained investments in S&T nam is not far behind where these successful research. In 2001, China, India, Japan, countries were at Vietnam’s current income Korea, Malaysia, Singapore, Thailand, per capita. Similar to basic education indica- and Taiwan, China, made up 25 percent of tors, many of Vietnam’s key STI indicators global R&D spending. By 2011 their share are now where successful countries were 20 had grown to 34 percent.15 Vietnam will not or 30 years ago. Building STI research capac- become an innovation-led economy unless ity and excellent tertiary education institutes it invests more while improving spending is a decades-long process. Countries such as quality. It risks losing more ground to global Brazil, China, Korea, and Singapore have and regional competitors. 188 VIETNAM 2035 Concentrating resources and rewarding the Part of improving the funding system is best through merit-based allocation reducing the bureaucratic burden on research- Extreme fragmentation is a serious chal- ers. Time spent managing grants subtracts lenge for the research system. Vietnam has from research time. Many researchers in 642 officially recognized GRIs and more Vietnam feel that the government microman- than 2,000 S&T organizations. Dispersing ages grant funding, and not constructively. resources and talent makes conducting high- The head of researchers at the Van Neuman quality research difficult. The GRIs man- Institute in Ho Chi Minh City reports that for aged by the Vietnam Academy of Science and a $10,000 grant, he must report a product for Technology have the best infrastructure and every $1,000. So the institute does not work highest prestige, yet only 7 percent of person- with the government. In other instances, new nel hold PhDs (OECD–World Bank 2014). funding mechanisms have been created but Creating the National Foundation for suffer debilitating implementation delays. Science and Technology Development is a As early as the 1990s, leading research agen- positive step toward removing the GRIs’ cies from the developing world—such as monopoly. It can place research resources the Research Foundation of the State of São under competitive, peer-reviewed, and merit- Paulo—were measuring themselves against based allocation. It can also promote evalua- the world’s best research funding agencies tion and accountability measures for research and working to eliminate red tape. Vietnam funding. And it can break down barriers should imitate these efforts. between tertiary education– and GRI-based researchers. Its main drawbacks are its small Evaluating the quality and relevance of funding allocations and research grants. research output and activities New policies should ensure that future Vietnam’s research outputs are modest. In funding is provided only to GRIs with good 2011, it published less than one article per records on output and research impacts. GRI GRI on the Science Citation Index and in the performance should be evaluated routinely. Social Sciences Citation Index. More impor- Korea and Singapore fund and manage tant is the near-total absence of research out- GRIs more efficiently in two ways. First, they put and impact evaluation. GRIs are funded concentrate on a few high-quality institu- largely for proposed tasks. It is unclear tions. Korea has far fewer government-related whether there is any systematic quality and research institutes (along with a small num- impact measurement, creating debilitating ber of high-quality science and engineering negative incentives when GRI funding does research centers tied to tertiary education).16 not reflect productivity. The United King- Singapore’s research strategy places biomedi- dom provides a model for Vietnam to con- cine as the priority. The country lists about sider (box 3.9). a dozen GRIs in this field and half as many in engineering and physical sciences managed Balancing funding for basic and thematic by the Science and Engineering Research research Council. Policies in both countries ensure a The best research funding allocation should critical mass of qualified infrastructure and promote measurable progress on key the- research staff. matic challenges of national importance. It Second, they seek to match the key GRIs is unclear whether Vietnam’s funding does with their most pressing economic and social this. All countries must decide how to bal- challenges. To assimilate foreign technolo- ance spending on basic research relative to gies rapidly, Korea designed and managed the thematic research, promoting excellence Korean Institute for Science and Technology, through open competition and funding spe- the Korean Institute of Machinery and Met- cial projects and programs. Successful coun- als, and the Electronics and Telecommunica- tries achieved this balance by ensuring the tions Research Institute. following: Funds are allocated to solve key B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 189 BOX 3.9 The United Kingdom research output and impact: Systematically evaluated under the Research Excellence Framework The United Kingdom’s three Higher Education was comprehensive, combining analysis of research Funding Councils allocate more than £2 billion outputs, impacts, and environment into an index of annually for research. To calculate the resulting overall quality. value, the Research Excellence Framework under- The assessment found that in 2014, 30 percent takes continuous and consequential assessments of of U.K. research was world-leading, with 46 per- its quality and impact. In a three-year exercise, large cent “internationally excellent,” 20 percent “inter- samples of research are examined in detail. The nationally recognized,” and 3 percent “nationally results are fed back into the allocation process, help- recognized.” ing to ensure future resource allocations go to the Perhaps the most important aspect of the exer- best and most productive researchers. cise concerns the incentives it creates for researchers, The 2011–14 assessment had four main panels whether as individuals, or in teams, departments, with 36 subpanels to review almost 200,000 items or tertiary education. They know their work will be of research output from more than 50,000 research- reviewed and measured against their peers, and their ers at over 150 universities. The panels relied heavily scores are likely to influence future funding success on international members and used uniform crite- and career directions. Not least, U.K. citizens have ria to ensure that their judgments were valid across information on the value of their tax investments disciplines and from year to year. The assessment in research. problems, not support institutions. GRIs 2. It suffers multiple overlaps at national, do not have a monopoly on funding; any departmental, and local levels (with high qualified researcher or research group can administrative costs at each level). compete (box 3.10). Line ministries cooper- 3. It is tied to centrally allocated budgets ate with S&T ministries to ensure that they that are not subject to competition or use peer-reviewed, merit-based allocation accountability for outputs. procedures and that researchers are account- 4. It fails to coalesce around important able for outputs. Resources are sufficient and research themes or to be cross-disciplinary. not fragmented among many small grants. Research and advanced training (chiefly PhD Uniting the research and university-based training) can be linked. graduate education systems Without systematic evaluation in Vietnam, Developing countries face a dilemma: they it is difficult to link GRIs’ research funding must expand the number of researchers while and performance to the main national priori- improving research quality. Most countries ties in, for example, economic development, concentrate resources among the most pro- agriculture, or the environment. A compre- ductive researchers, getting a double payoff hensive international review of STI policy when the best researchers generate research in 2014 found that planning still follows the productively and train the next generation algorithms of central planning. Research is through graduate education. ostensibly connected to socioeconomic goals, Vietnam’s research and university-based as expressed in 5-year development plans or graduate education systems are separate, 10-year development strategies. But planning which increases costs while often lowering labors under four constraints: quality and productivity. The biggest down- side, though, is the failure to leverage 1. It is conducted by bureaucrats and admin- research resources to increase the number of istrators who lack subject-area expertise. high-quality researchers through domestic 190 VIETNAM 2035 BOX 3.10 Using research funds to promote progress on key thematic challenges of national importance: Mexico’s fondos sectoriales In 2002, a new S&T law gave Mexico’s National different federal agencies. Any researcher or research Council for Science and Technology (CONACYT)— group—in a GRI or based at a tertiary educational equal to a ministry of science and technology— institute—could compete for the funds. The fondos responsibility for coordinating S&T activities removed existing monopolies on funding sources. and budgets for federal agencies. The law stressed In doing so, they raised quality and relevance while applied research linking scientific activities to increasing advanced research training. Many insti- national problems and directing science into areas tutional weaknesses in the S&T system hampered of social value. implementation. But creating these funds and per- It created sector funds ( fondos sectoriales)— formance contracts with GRIs was an important operated with federal agencies—to fi nance projects step in overcoming traditional inertia and monopo- that addressed, for example, health needs, agricul- lies on research funding. ture, and the environment. The fondos operated with matching funds from CONACYT and the Sources: OECD 2009 and Gonzalez-Brambila, Veloso, and Lever 2007. PhD programs. As Vietnam moves toward But these ratios vary greatly across industries 2035, the country should unite its research and among firms, even in the same industries. and graduate education systems. Simulta- Whatever the ratio, a critical mass of human neously, it should cut the number of less capital in an NIS is not limited to research effective GRIs and promote strong, research- talent or to the higher education research linked doctoral programs. subsector. Policies must promote success in Merging the two systems will help research and even broader success in higher reach the ideal number of qualified staff education, based on a strong domestic gradu- for the expanding tertiary education sys- ate education system. tem and—more broadly—for fi rms and the labor market. Countries with successful Building high-quality domestic graduate NISs have achieved the desired number for programs and research universities these two groups. Researchers and profes- Vietnam is building its links to the best global sors fi ll faculty positions in tertiary educa- knowledge, which will allow it to train more tion institutions, raising the share of PhD advanced human capital domestically. It will holders and the quality of teaching. Aver- also help solve problems of low research qual- age graduates from first-degree tertiary ity and low qualifications among higher edu- programs receive better teaching and can cation faculty. Converting international links bring more knowledge and relevant skills to into domestic quality requires upgrading the their firms. number and quality of graduate programs Improving the quality of human capital domestically and promoting high-quality in these groups is necessary to drive produc- research at home. Vietnam has not done well tivity and add production value. Advanced- in this area. knowledge workers cannot make fi rms more Doctoral enrollments have grown but productive without a base of qualified and graduate numbers have not kept pace, sug- capable employees. Some analytic tradi- gesting weaknesses in doctoral programs. tions in STI policy note a ratio of 1:10:100 Master’s degrees, though, have been a researchers to engineers to employees with bright spot, with enrollment and gradu- good skills in fi nance, accounting, manage- ates more than doubling over 2005–12 (see ment, marketing, and human resources. table 3.3). Evaluation of specific programs has B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 191 confirmed the positive impact on higher edu- to global knowledge networks, mainly the cation quality of more master’s degrees among frontier. Accessing it is a long-term, continu- teaching and research faculty (Vietnam Edu- ous process that creates research networks cation Foundation 2014). through sending national PhD students Brazil and Mexico, countries with rela- to work with the world’s best researchers. tively few doctoral students abroad, have The process promotes research excellence upgraded their own graduate education at home in tertiary education institutes and programs. Brazil has gone from producing GRIs. And it produces attractive career con- fewer than 1,000 PhDs domestically in the ditions at home for researchers and knowl- late 1990s to more than 10,000 a year, while edge workers. maintaining attention to quality. Coordina- China is the leading country to reach the tion for the Improvement of Higher Edu- global knowledge frontier by sending citizens cation Personnel (CAPES), Brazil’s quality to study with top researchers abroad. For assurance agency for graduate programs, has more than 25 years, Chinese students have built a reputation for consequential evalu- dominated the ranks of foreign graduate stu- ation. It assesses all masters and doctoral dents in PhD programs at top- and middle- programs on a seven-point scale using such tier universities worldwide. The government criteria as faculty qualifications and research has borne much of the costs of sending these output and quality. High-scoring programs students, even though fewer than one in are allocated more scholarships, but low- five may return home within 10 years. But scoring ones risk losing access to government it believes the web of knowledge ties gained funding. Tying funding to performance has from creating a pool of international Chinese paid off handsomely for Brazil. research talent more than justifies the costs of Vietnam’s quality assurance systems, the investment. however, have been slow to develop, focus- Vietnam fares well in accessing global ing on undergraduate programs and based knowledge, with government-supported pro- at institutions tied to the two fl agship uni- grams to send students abroad for PhDs. Its versities. Experience from Uruguay sug- doctoral students are an increasing presence gests that quality-assurance agencies should in high-quality graduate education programs be fully independent of any given tertiary in Australia, Europe, Japan, Korea, and the education institution to be neutral in judg- United States. Numbers earning doctorates at ing quality of their peers (who are also their the United States’ research universities, how- competitors). ever, are far behind those of Asian competi- Vietnam could adopt the Brazilian model tors (table 3.5). of CAPES for improving its quality in gradu- ate education. The quantity and quality of Vietnamese domestic graduate education TABLE 3.5 Vietnam’s doctoral students are an are below the corresponding benchmarks increasing presence in the United States, but for Brazil some 20 years ago (CAPES began their numbers fall short of Asian competitors evaluating graduate programs in 1998). But Earned doctorates in the United States, 2013 if Vietnam institutes and follows a rigor- Country Number Per million population ous evaluation regime that guides expanded Korea, Rep. 1,381 27.54 funding, it can imitate Brazil’s success in Singapore 91 16.85 achieving a critical mass of human capital China 4,789 3.53 produced in its own universities. India 2,205 1.76 Vietnam 141 1.57 Accessing the global knowledge frontier Mexico 154 1.26 through international links Brazil 142 0.71 A strong domestic research and graduate Source: Calculations based on U.S. NSF data and World education system thrives when it is connected Development Indicators. 192 VIETNAM 2035 Deregulating Tertiary Education so that formerly made such decisions. Faculty quali- More Providers Can Compete to Serve fications at universities have improved: the Needs of Students between 2005 and 2012 faculty members with PhDs grew by 54 percent, and those Some areas of progress with master’s degrees by 134 percent (table The evolution of Vietnam’s tertiary educa- 3.7). One in six university faculty now has a tion system over the past 10 years is partly PhD, and more than half the faculty have at successful in expanding access. Enrollments least a master’s degree. increased 57 percent between 2005 and 2012 (see table 3.3), when the share of the age More progress needed group enrolled rose from 15 percent to more The quality, relevance, and efficiency of ter- than 25 percent. Coverage in Vietnam grew tiary education remain low, however. Policies faster between 2001 and 2011 than in eight prevent some aspiring students from access- other regional countries (table 3.6). ing tertiary education, paying tuitions at Two major legislative reforms were levels consistent with willingness- and abil- passed: the Higher Education Reform ity-to-pay, and studying what and where they Agenda in 2005 (box 3.11) and the Higher want. The number of providers is limited, Education Law in 2012.17 They set ambitious and the pace of change is slow. While the rest targets for raising quantity and quality. They of the developing world has been experienc- also grant increasing amounts of autonomy ing a sea change in tertiary education—with to higher education institutions in areas such vastly expanded enrollments and hugely as curriculum, resource use, staff hiring, increased private provision—Vietnam’s sys- admissions and enrollment policy, revenue tem is widely criticized for being stagnant. generation and tuition fees, and other admin- To earn a living, faculty must often teach istrative procedures. The reforms created a long hours of badly planned classes. An quality assurance system. And institutions increasingly complex array of fees and pay- have undertaken self-assessment, reporting ments for special classes is emerging to allow regularly to the government. An academic institutions to raise revenue while tuition credit system has been launched to lower the stays capped. These special classes absorb number of required contact hours and allow professors’ time and attention, further lower- greater flexibility in teaching. Public higher ing quality for the average student. The effect education institutions have received a new of current policies is to remove incentives for governance structure that creates university positive change and fail to reward innovative councils for institutions and transfers deci- behavior. Shaped by these policies, the insti- sions to them. The Ministry of Education tutions are unsuited to play a positive role in and Training (MOET) and other ministries an innovation-led economy. TABLE 3.6 The share of the age cohort attending tertiary education has grown in many national systems (gross enrollment rate as a percentage of the relevant age cohort) Compound annual Country 2001 2002 2005 2007 2010 2011 growth rate, 2001–11 Cambodia 2.37 2.45 3.33 7.25 14.07 15.83 13.5 Brunei Darussalam 14.25 14.53 17.69 17.95 17.60 19.72 5.5 Indonesia 14.36 15.01 17.74 18.40 24.89 27.20 12.8 Lao PDR 3.09 4.15 7.79 11.40 16.09 17.09 14.0 Malaysia* 25.05 27.41 27.92 30.25 37.13 35.97 10.9 Myanmar 10.33 – – 10.14 – 13.81 3.5 Thailand 39.23 40.04 44.18 48.11 50.03 52.58 0.34 Timor-Leste* – 8.57 – – 17.74 – 9.17 Vietnam 9.38 9.63 15.88 18.17 22.39 24.43 15.0 Source: UNESCO Education Statistics Databases. Note: *The growth is computed based on available data for given years. – = not available. B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 193 BOX 3.11 The Higher Education Reform Agenda, 2006–20 The Higher Education Reform Agenda outlines gov- research institutions, and improving curriculum ernment strategy for higher education and research frameworks and assessment of learning outcomes. through 2020. The main objectives are the follow- Goals address greater curriculum flexibility and ing: First, increase capacity to allow a higher par- student mobility via a credit-accumulation system. ticipation rate in tertiary institutions. This requires They also address developing a high-quality cul- large investments in infrastructure and in training ture within institutions, including an accreditation new lecturers and faculty. Second, increase the sys- system for all institutions (public and nonpublic) at tem’s quality and efficiency. Third, introduce or national level. reinforce research in tertiary education facilities to These goals imply greater freedom for individ- train new teachers better, enrich and upgrade teach- ual institutions and measures that create a climate ers’ skills, and upgrade the quality and interna- of competition among and within institutions. The tional visibility of Vietnamese universities. Fourth, government set the following targets for education: improve governance of the higher education and Increase revenue from S&T activities to 15 percent research system nationally and regionally, including of total university revenue by 2010 and to 25 percent universities. by 2020. Increase the proportion of university teach- Quality and efficiency goals include lowering ing staff with a master’s degree to 40 percent by teacher–student ratios, revising entrance exams, 2010 and to 60 percent by 2020. Increase the share training teachers better, and improving teaching of university teaching staff with a doctoral degree methods. They also include developing research to 25 percent by 2010 and to 35 percent by 2020. at universities that broaden teachers’ scholarship, Reduce the ratio of university students to teaching transforming selected institutions into teaching and staff to 20:1 by 2020. TABLE 3.7 University faculty have improved qualifications, with one in six faculty now having a doctorate and more than half a master’s degree (number of faculty by qualification) 2005 2010 2011 2012 Colleges 13,972 23,622 24,437 25,643 Doctor 293 586 633 693 Master 3,422 7509 8766 10015 University/college degrees 57 14939 14696 14714 Other qualifications 10,200 588 342 221 Universities 34,294 50,951 59,672 61,674 Doctor 5,744 7,338 8,519 8,869 Master 12,609 23,299 28,037 29,476 University/college degrees 15,732 20,059 22,547 23,002 Other qualifications 209 255 569 327 Total 48,266 74,573 84,109 87,317 Source: Ministry of Education and Training 2013. Defenders of the system cite increases in admission. Perceived levels of instruction are coverage as progress. But increases in cover- low. Faculty salaries are inadequate and com- age only prevent Vietnam from falling further pel staff to take multiple teaching jobs, often behind growth of coverage among its G20 at different institutions. Students must adapt and OECD competitors. Many high-school their preferences for degree programs and diploma holders who want a higher education careers to what higher education institutions cannot find a satisfactory institution. Figures offer. Required contact hours are often unjus- from 2013 indicate that only 40 percent of tifiably long but remain mandatory. Required those seeking tertiary education were offered patriotic and political curriculum reduce time 194 VIETNAM 2035 devoted to a student’s main academic focus. • Entrance exam policy was meant to ensure The government manages enrollments based that those who attend have the academic on existing space and partial and speculative ability to succeed. It now functions mainly projections of future labor market condi- to allocate students to existing spaces cre- tions. Too few faculty members have PhDs. ated by institutions. The priority is to fi ll And career advancement still favors seniority. these spaces, leaving many students to Many of the quantitative targets in the study for degrees that do not interest them Higher Education Reform Agenda 2006– and that have no labor market link. 2020 remain unmet. Most important, the • Enrollment limitations are meant to be higher education system is not innovative. An based on quality but they use metrics unclear and contradictory regulatory envi- such as spaces and faculty qualifications. ronment prevents institutions from making These are not quality indicators except key decisions on quality and relevance. They in the most serious abuses. They slow lack incentives and freedom to improve the change and force students into only the education they offer. The regulatory environ- available places. ment also discourages new providers from • Bureaucracy keeps down the number of entering, mainly the more dynamic private private tertiary education providers, limit- providers. ing student choice, retarding innovation, De facto autonomy for higher education and favoring the status quo. institutions is limited. Tertiary education institutions may propose enrollment targets These de facto policies weigh heavily on any to MOET but must calculate them accord- moves to improve quality, relevance, and ing to the traditional norms for “capacity.” coverage of the Vietnamese higher education MOET must also approve them and is will- system. The government should consider new ing to continue managing student numbers policies on deregulating tertiary education in by limiting enrollments in certain disciplines. the following five areas. Faculty salaries are still tightly regulated for public institutions. In theory, private insti- Removing restrictions on revenue created tutions set tuition as they see fit—but in by tuition caps practice, they fi nd numerous limits on their Earlier reforms changed the higher educa- ability to expand (World Bank 2016). tion system from one that was fully funded Many of the current policies fail to serve with public money. Now public and private their intended purposes. Worse, they have institutions charge tuition, and private insti- negative consequences. tutions depend almost completely on tuition revenue. But the amount they can charge is • Tuition caps were meant to make univer- limited and low internationally. Policy seeks sity affordable for poor families, but no to limit what higher education institutions reliable data exist on how effective the can charge, on public institutions through tuition limits are in allowing poor students the tuition framework and on the private side to attend. Since a student from a poor fam- indirectly.18 ily has only a 10 percent chance of entering Revenue restrictions highlight a major university compared with a student from a challenge for the system. The country cannot rich family, tuition levels are structurally afford to publicly finance the combination of below the willingness and ability to pay. coverage, quality, and relevance it requires. This results in a negative outcome: institu- Public spending for higher education is 3.5 tions lack funds while students and fami- percent of government spending. It was 158 lies who could pay more pay only nominal percent higher in real terms in 2012 than in tuition. A web of fees and other payments 2008 (Tran and Crawford 2015). Revenue has evolved in response to tuition caps, shortages prevent institutions from develop- further distorting revenue and incentives. ing true full-time, highly qualified faculty B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 195 and hamper professors’ commitment to insti- The widening gap between demand for tutions and students. They also limit the university places and approved admissions amount and quality of physical facilities. attest to unmet demand by students aspiring Yet the main avenue for raising revenue— to university degrees. The national univer- private student contributions—is underused. sity entrance exam, while slowly decreasing The government’s rationale for restrictions in importance, still determines university is to keep higher education affordable for admission. Government influence in deter- poor families. It prioritizes affordability for mining admission cut-off points and enroll- the poor over revenues that drive innovation, ment quotas remains strong. quality, and relevance. But it does so with- This policy of slowing or repressing out evidence that the policy helps the poor demand prioritizes a “consumer protec- receive a higher education. Thus, poor people tion” role that the government exercises on are unlikely to pursue higher education. The behalf of aspiring students. It rests on a two- unintended consequences of this policy are pronged rationale. First, it is better to deny to make higher education affordable for stu- aspiring students access to tertiary education dents and families who have the means—and than to allow them to enroll in programs that likely the willingness—to pay more. do not meet government-determined quality A system allowing institutions—public and standards. Second, the government’s means private—to have de facto full autonomy in for assessing quality are adequate and better setting tuition rates should be a main feature. than those of aspiring students. In reality, the It requires robust financial aid arrangements government’s instruments for judging qual- to measure the true fi nancial needs of poor ity (for example, physical space and faculty students and to provide assistance. Creating credentials) are no better than the judgments such a system poses technical challenges, but students and families can make about the the experience of many other countries pro- relative value of programs. The distorting vides options to overcome them. Limiting rev- effect of the government’s policies is to lower enues across the board can only continue to the quality of programs by removing institu- stifle incentives for systemwide improvement. tions’ incentives to heed student demand or Current government proposals to raise the improve. By protecting students from enroll- private contribution of social services ben- ing in a few bad degree programs, the govern- eficiaries create an opportunity to reform ment stifles the dynamism that comes from tertiary education tuition policies. These pol- having institutions compete to offer students icies should have three goals: require private the best programs. Many countries achieve beneficiaries (students and families) to pay as both goals with much lighter government much of the cost as possible, raise revenues regulation of institutions and by assuring to reflect beneficiaries’ willingness to pay and that institutions compete to provide students the costs of providing the service, and ensure with the best choice of educational options. that qualified but fi nancially needy aspiring The cost of eliminating perceived “fraudu- students receive fi nancial assistance. A sys- lently substandard” programs is to lower the tem that meets these goals would eliminate quality of all programs. tuition caps and would focus government Promoting unmet demand for enrollment spending on financial aid. also exacerbates revenue deficits created by tuition caps. Every aspiring student who fails Eliminating restrictions on enrollment to enroll also fails to pay revenue into the Enrollment goals in the Higher Education system. Reform Agenda—particularly for enrolling With this policy, Vietnam stands in in private higher education—have not been opposition to other fast-growing developing met. The pace of expansion has been con- countries that have allowed student demand trolled by MOET out of concern that quality to determine the rate of enrollment growth could suffer if expansion is too quick. (box 3.12). Vietnam’s main comparators have 196 VIETNAM 2035 BOX 3.12 Rapid expansion of private higher education satisfies demand for skills in India Over the last two decades, a rapidly growing Indian with falling investment by the federal government economy has led to great demand for an educated and the states. In 2001, when private unaided insti- and skilled labor force. To meet the needs of a tutes made up 42.6 percent of all higher education dynamic economy, private enterprises have sprouted institutions, 32.8 percent of Indian students stud- to complement public educational institutions, ied there. By 2006, the share of private institutes which are plagued by capacity constraints. Over had risen to 63.2 percent and their student share to the past few decades, the private sector has driven 51.5 percent. capacity creation in higher education. Source: Sudarshan and Subramanian 2013. The policy environment for private higher educa- tion improved starting in the mid-1990s, coinciding prioritized meeting demand for higher edu- to only the best and brightest. Modern poli- cation over promoting administrative mecha- cies foster the belief that any student can nisms for ensuring quality. They have made benefit—not just the brightest—and that this choice believing that aspiring students raising the skills of poor and mediocre stu- and their families can judge the quality of dents is as important as raising the skills of the programs they seek, not perfectly but at the brightest. This means promoting strength least as well as government bureaucrats. This and encouraging enrollment in universities is especially true when governments provide and nonuniversity tertiary institutions such information to students about higher educa- as colleges. tion institutions to allow informed decision making. Permitting students to enroll in the degree Instruments available to measure qual- program of their choice ity, such as faculty credentials, square foot- Higher education’s central-control legacy age of available physical space, and numbers still influences the way aspiring students are of library books are crude proxies for true allocated into degree programs. The system measures of quality. Some countries, such as is supply driven: Students fit their career Colombia, have introduced tests that assess plans to available spaces. In more dynamic changes to student learning to have more reli- systems, institutions adapt their degree pro- able quality measures. Most governments, grams to the demands of aspiring students. however, rely increasingly on labor market This arrangement obliges the student to success of graduates and institutional com- assess the future labor market value of the pletion rates as the best among crude proxy intended degree program. The back-and- measures. forth between what students seek and what Allowing institutions to expand to meet institutions offer—while imperfect—is the student demand may threaten quality in the best way to drive programs toward quality short run. But it initiates competition for stu- and relevance. dents among institutions, which ultimately When a higher education system suc- drives quality improvements. cessfully develops, students become the Some countries have also embraced open most reliable judges of future labor mar- enrollment because it promotes a value-added ket needs. They want a good return on the approach to tertiary education. Traditional investment in their own human capital. They thinking views higher education as a scarce have the most at stake and therefore should and precious resource that must be directed be informed and trusted with the decision. B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 197 Most also pay substantial tuition. When a programs rather than of institutions. The system becomes student-centered, institu- accreditation agencies are called indepen- tions pay attention to students’ demands, dent because they do not report directly to offering high-quality programs according to the government. But two of the three accredi- what aspiring students seek. tation centers are agencies within public Vietnam can create the responsiveness universities. Therefore, they do not match and dynamism it needs by loosening policy the accepted international definition of to increase revenue in the system. It should “independent.” allow enrollments to be determined by stu- Quality promotion should involve pro- dent demand and create a larger role for viding students with information about private sector providers. It should also have where and what to study, but this instru- institutions adapt to students (not vice versa). ment is underused. Such information has a The country’s traditional practices prevent strong secondary value and would provide the tertiary education system from reaching elements now missing from policy making. its full potential. These measures of degree program relevance directly relate to employment success and Expanding the number of providers to graduate salaries. Policy should promote diversify student choice on where and shaping the type of graduates required by what to study the labor market. But empirical measures By 2035 Vietnam’s higher education system do not exist to judge whether—and to what will need to double and greatly improve. The extent—this is happening. Providing infor- skill demands of the workplace will likely mation to students could improve decision continue to accelerate. Secondary school making—for them and for policy makers— graduation rates will increase, and the return by informing decisions based on empirical to tertiary education will likely remain high. evidence. Both outcomes will raise demand for higher Vietnam has taken initial steps in this area education. but has not yet achieved a strong and reli- Vietnam permits private higher education, able information system to enable students but policies are suboptimal in two important to make the best choice. Such a system gains ways. First, enrollment restrictions discour- value as student choice becomes more impor- age the best potential providers. Second, tant in policy. As students assume the main processes for obtaining permission to oper- role in choosing how to invest in themselves, ate a private tertiary education institution are they will require more detailed information, slow and not transparent. Such discourage- including the following: ment of additional providers harms students’ interests. • Graduate employment success A system without restrictions on enroll- • Average salaries of graduates by degree ment, tuition, or degree choice attracts program potential tertiary education providers. When • Faculty qualifications, accomplishments, their numbers increase, they can compete and ratios of faculty to student against each other to offer students the best • Test scores and academic qualifications of education at the best combination of price students by degree program and quality. Policy elements then combine to • Graduation and dropout rates and the produce a dynamic and responsive tertiary average time to graduation (by degree education system. program) • Student satisfaction of subject measures Making information for aspiring students a cornerstone of quality assurance For this system to be effective, nearly all The government’s main efforts in quality tertiary education institutions must provide assurance focus on accreditation of degree complete and comparable information. 198 VIETNAM 2035 Indicators of Success: Toward a System As a country moves into phase 2, higher with World-Class Universities labor productivity results from learning and applying available technology through higher Foundations III and IV form the basis of a education and training. In phase 3, increased strong research system connected to a robust productivity and economic growth come graduate and undergraduate education sys- mainly from innovation and the application tem. When these foundations are solid, a few of advanced technology, more sophisticated apex institutions—world-class universities— manufacturing processes, and a high-quality sit atop a pyramid made strong by support- workforce. ive policies. Vietnam has no universities in To achieve its 2035 objectives, Vietnam the top 500 in either of the two best-known will need to build and develop innova- ranking systems.19 More spending alone can- tion capacity appropriate to each stage of not change this. Improved policies are as development. important as increased resources if Vietnam How can Vietnam do that? First, sci- is to establish itself among countries with ence, technology, and higher education must world-class universities. reach a more advanced level, capable of pro- Policies that promote apex institutions viding knowledge and high-quality human are also beneficial to the tertiary education resources to the business sector. At the same system. In Vietnam, the tertiary education time, domestic private fi rms will experience system is intellectually uninspiring and an strong and dynamic growth. The NIS can unattractive career option for the most tal- then grow in a competitive and efficiency- ented students. As the country moves toward and incentive-driven environment and con- 2035, vigorous pursuit of the policies dis- tribute significantly to productivity. The TFP cussed stands to change that. The best success growth should account for more than 40 per- indicator will be when Vietnam’s universities cent of GDP growth. attract the best national and international tal- A more dynamic domestic private sec- ent as sought-after places to study and work. tor can create solid demand and absorb advanced knowledge for higher value-added By Way of Conclusion: Moving goods and competitiveness in both domes- Toward an Innovation-Led tic and international markets. It is also important to enhance the firms’ capacity Economy to upgrade and adopt the latest technolo- The developed economies have gone from gies, by upgrading human capital of manag- a factor-driven economy (phase 1) to an ers, deploying more effective technological efficiency-driven economy (phase 2) to an extension services, and creating an enabling innovation-driven economy (phase 3), with environment for accumulating physical transitions between the phases. Vietnam was and (risky) knowledge capital. Enterprises named by the World Economic Forum in can then participate more effectively in the 2015–16 among 16 countries that are in the GVCs, playing the leading role for domestic transition from phase 1 to phase 2.20 value chains and industry clusters. As chapter 1 noted, Vietnam aspires to the Vietnam must develop a system of research higher reaches of upper-middle-income coun- institutes that are dynamic, effective, and try status by 2035. Then, Vietnam will be at linked with private firms and the global knowl- the end of phase 2, or even at an early point edge network. Public research institutions can in the transition to phase 3 (like Malaysia be restructured toward higher autonomy to fit in 2012–2013). To get there, it must reach the market economy, undertaking contract- phase 2 by 2025. applied research with industry while focusing The growth of a factor-driven economy on competitive fundamental research to serve is mainly based on the increase of unskilled the priorities of socio-economic development. labor, physical capital, and natural resources. Research institutes of businesses, especially in B U I L D I N G N AT I O N A L I N N O VAT I O N C A PAC I T Y 199 large enterprises, will also be formed, improv- worsen, making R&D less effective in pro- ing the innovation capacity of the private moting growth. This lack of complementari- sector. In some areas of science and technol- ties offsets distance from the frontier. ogy, Vietnam will move up to the advanced 4. National Science Board 2014. Comparable level in the region and globally, sufficiently article counts are normed to include the cor- responding fractions of articles with multiple supporting innovation in economic sectors authors, to allow for accurate international and enterprises for more effective competition. comparisons. Article counts where full credit Higher education must be comprehen- for the article is given to each of the multiple sively reformed to satisfy the labor needs of a authors lead to higher totals. For Vietnam, market economy. Research and postgraduate nationals are coauthors on some 1,400 arti- education should be integrated, and public cles a year. universities should become autonomous. Pri- 5. Blomström and Kokko 1998. This is the case vate and nonprofit universities will flourish in even in countries where intellectual property a competitive environment to enhance educa- rights are weak. First, interviews with multi- tion quality and meet the growing learning national corporations reveal how careful they needs of society. A student-centered approach are about taking their frontier technologies would aim at sharpened self-learning and to countries where the technologies are not protected. Hence, the degree to which multi- self-innovation capacity by students. Quali- nationals do very high-level research is likely fied and high-quality human resources can to depend on the quality of the IPR regime. then be provided appropriately to satisfy Second, Zhao (2006) shows that, consistent social needs as the core force for innovation. with the previous section, fi rms can protect These objectives cannot be realized with- their intellectual property due to the absence out intensive and comprehensive reforms of of key complementarities needed for exploit- the regulatory and policy environment. The ing it, such as marketing networks, expertise, recommendations in this chapter should or firm capacity. Again, benefiting from R&D be translated into specific agendas and pro- and S&T spending requires close attention to grams, appropriately designed for each devel- these complements. opment phase. This will be a huge challenge 6. Maloney and Sarrias (2014) find less of an for Vietnam, but it is the logical path given the effect of competition and, like Bloom et al. (2015), find the level of human capital and development histories of successful nations. training of management is critical across the distribution. 7. High-growth firms are defined in OECD Notes (2009) as “enterprises with average annual- 1. The National Agency for Science and Tech- ized growth in employees of turnover greater nology Information has published estimates than 20 percent per annum, over a three-year of GERD as high as 0.5 percent of GDP, but period, and with more than 10 employees in by its own admission, these are not calcu- the beginning of the observation period.” lated using standard, internationally accepted 8. Brown et al. (2014) argue that they are not methodologies. Hence we choose 0.3 percent necessarily young. In the United States, the as probably a more comparable figure. average age of the firm was 25 and in the 2. See, for instance, Klenow and Rodriguez- United Kingdom 70 percent were at least five Clare (2004) and Maloney and Rodriguez- years old. Second, in the United Kingdom Clare (2007). fewer than 15 percent of United Kingdom 3. Goni and Maloney (2014) show that returns fi rms emanate from high-tech sectors. Third, appear to follow an inverted U. Initially, coun- universities suggest that very few high-growth tries farther from the frontier achieve higher fi rms have their roots in universities. Fourth, rates of return as the potential for adopt- most are not backed by venture capital or ing new technologies rises—Schumpeterian other sources of entrepreneurial finance. Fifth, catch-up. However, as countries move further the growth of high-growth firms is extremely from the frontier, the quality of entrepreneurs, uneven, undergoing longer periods of low or the business climate, and human capital also no growth punctuated by short “bursts” of 200 VIETNAM 2035 rapid growth. Hence rapid growth is rarely ownership by private institutions combined sustained in the longer term and today’s with requirements to show enough physical high-growth firms will not be tomorrow’s. space for expanded enrollment. The first lim- That is, while a particular firm may gener- its revenue per student, and the second limits ate employment-growth rates of 20 percent marginal revenue by limiting the growth of this year, its subsequent performance may not enrollment. justify supporting it over a steady, but sub- 19. Times Higher Education Supplement and stantially more modest, grower. Shanghai Jiao Tong University. 9. According to interviews, there are not sepa- 20. World Economic Forum’s Report in 2015–16 rate words for innovation and invention. It (table 2) ranked Vietnam among 16 econo- is important to stress that, for instance, the mies in the transition phase from phase 1 key concept of kaizen in Japan is a gradual (factor driven) into phase 2 (efficiency driven); increase in productivity through incremental Vietnam was in phase 1 in 2014–2015 (factor improvements rather than great leaps forward. driven) (World Economic Forum 2015). Firms are unlikely to implement large inven- tions that are not well run and that have not passed through a gradualist phase of improve- References ments. Again, in the medium term, the policy Acemoglu, Daron, and Fabrizio Zilibotti. 1997. needs to focus as much on strengthening fi rm “Was Prometheus Unbound by Chance? Risk, capacity as fomenting large innovation leaps Diversification, and Growth.” Journal of in the S&T apparatus. Political Economy 105 (4): 709–51. 10. Krishna, Levchenko, and Maloney 2015. Blomström, Magnus, and Ari Kokko. 1998. Quality as measured by export unit values to “Multinational Corporations and Spillovers.” the United States. Journal of Economic Surveys 12 (3): 247–77. 11. Recently, instability in the regulations sur- Blomström, Magnus, Ari Kokko, and Fredrik rounding the high-tech sector and the Internet Sjöholm. 2002. “Growth and Innovation have been cited as a potential barrier to the Policies for a Knowledge Economy: Experiences further development of the sector (Ives 2015). from Finland, Sweden, and Singapore.” 12. National Science Board 2014. www.nsf.gov Background report for the LAC Flagship /statistics/. Report, World Bank, Washington, DC. 13. Raising the quantity, quality, and relevance of Bloom, Nicholas, and John Van Reenen. 2007. R&D, knowledge production, and advanced “Measuring and Explaining Management human capital training. Practices across Firms and Countries.” The 14. Continuously improving the quality and rel- Quarterly Journal of Economics 122 (4): evance of skills in the labor force, through 1351–408. increased responsiveness and dynamism in Bloom, Nicholas, Raissa Ebner, Kerenssa Kay, tertiary education. Renata Lemos, Raffaella Sadun, Daniela Scur, 15. National Science Board 2014. Note that and John Van Reenen. 2015. “Management increased funding may be from a variety of Practices in Vietnam.” Background paper for sources, including multinational corporations Vietnam 2035 Report. operating in the country. Branstetter, Lee, Guangwei Li, and Francisco 16. A list of Korean Research Institutes is avail- Veloso. 2013. “The Globalization of R&D: able at: http://people.duke.edu/~myhan/c_blri China, India, and the Rise of International .html. Co-Invention.” Draft report, World Bank, 17. The Higher Education Law 2012 attempts Washington, DC. to deal with some critical aspects, such as Branstetter, Lee, Raymond Fisman, and C. 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Protection.” Management Sciences 52 (8): 1185–99. 4 Managing Urbanization for Greater Economic Efficiency Main Messages nurture and agglomerate talent. This role will Urbanization—increasing the densities of require reshaping policies and investments to people and production in cities and towns—is tackle three emerging constraints: low and one of the most striking features of economic stagnant density, rising distance, and persis- development. Incomes tend to rise, especially tent divisions. when accompanied by increases in the contri- Such reshaping is important since the bution of industry and services to economic current urbanization model is constraining eco- activity and jobs. Indeed, Vietnam’s extensive nomic transformation. The first constraint— urban transformation over the past three stagnant density—comes from the land decades has levered its economic development. conversion–based urban development model, In 1986, the country had fewer than 12 million with industrial zones developed ahead of urban residents; now it has more than demand in recent years, and the proliferation of 30 million, and urban areas contribute more small-scale, fragmented urban areas. As a than half the gross domestic product (GDP). result, the density of urban population has In the midst of urbanization and rising eco- remained unchanged since 2000, forgoing the nomic density, Vietnam has kept regional and potential boost to productivity growth that rural–urban disparities in check—mainly higher density could have provided. through central transfers aimed at poorer The second constraint—lengthening eco- areas to expand basic services and infrastruc- nomic distance—comes from limited connec- ture across the country. Even within cities, tivity between cities and markets and from slums and urban segregation appear less of a unreliable supply chains and high logistics challenge than in many other developing costs. In metropolitan areas, gridlock and bot- economies. tlenecks weigh heavily on economic efficiency As Vietnam embarks on an even more and make cities less attractive places to live ambitious growth trajectory over the next 20 and conduct business. And weak regional con- years, cities will need to do more to nurture a nections are lengthening economic distance, burgeoning domestic private sector, to sup- with Vietnam’s provinces and cities more like port the growth of firm clusters that can inte- independent oases than parts of an integrated grate into global value chains (GVCs), and to marketplace, even across short distances. As a 203 204 VIETNAM 2035 result, urban spatial development in Vietnam with demonstrated potential. It will have to is concentrated only in the Hanoi and Ho Chi shorten the economic distance to large mar- Minh City metropolitan areas. And although kets to enable specialization. And it will have the urban–rural gaps in incomes and access to to dissipate social division in access to ser- infrastructure and social services have nar- vices between migrants and urban residents to rowed, the urban–rural connectivity remains encourage human capital development for weak and fragmented. greater agglomeration economies. This will The third constraint—rising social require a mindset change about urbanization, division—relates to migrants to urban areas the benefit will be agglomeration economies receiving lower wages and having far less across a vibrant portfolio of towns and cities access to urban services. Without permanent performing complementary functions: residence under the household registration system (hộ khẩu), migrants face numerous • Metropolises such as Hanoi and Ho Chi difficulties in many daily aspects of urban liv- Minh City will interact with the global ing, such as applying for a job, trying to get a economy and provide the urban diversity loan, registering a business (or motorbike), that encourages learning, innovation, and buying or renting a house, and signing up for new product development, connecting medical insurance. These make it far harder people and firms to the world. for them to invest in their human capital and • Cities such as Haiphong, Da Nang, and durable assets, cutting the longer-term poten- Can Tho will allow producers both to ben- tial for agglomeration economies. efit from clustering because they can choose There are five main causes that restrict the workers and materials from a bigger pool positive impacts of urbanization in Vietnam: and to engage in beneficial competition. (i) unsuitable land policies have distorted land These cities will be aggregators for the hin- transfer, transactions, and effective land-use, terland economy and be part of GVCs. promoting excessive conversion of agricul- • Towns such as Buon Ma Thuot in the tural land to industrial land; (ii) the city clas- Central Highlands, which is famous for its sification system encourages localities to coffee, will let firms and farms exploit expand the size of their urban areas and make plant-level scale economies by providing excessive investments, without considering roads (for inputs and outputs) and schools critical indicators such as population density and other amenities (for workers’ families). and links to push growth; (iii) lack of coordi- nation in mass transit infrastructure develop- Two main sets of policies need to be honed ment and core urban area development is for Vietnamese cities to better support eco- coupled with institutional fragmentation in nomic growth: upgrading institutions and large cities, with limited consideration paid to expanding connective infrastructure. transit-oriented development and land use in public transit projects; (iv) lack of attention to Upgrading Institutions rural–urban links has mostly served liveli- hoods rather than modern agribusiness, Enable land markets. The core of urban pol- which has comparative advantages in icy reform is letting land markets emerge and Vietnam; and (v) the household registration flourish. Reforming land institutions— system creates discrimination against including strengthening land registration and migrants in the labor market and restricts adopting market-based land valuation—are their access to social services. priorities to reduce excessive and fragmented The signals are clear that the current urban land conversion. Increasing the trans- urbanization model is constraining economic parency of land pricing by setting up mecha- transformation and social inclusion. Vietnam nisms to regularly publicize land values will have to amplify economic density around obtained in auctions and individual land sales large metropolitan areas and secondary cities could be a good starting point. Linked closely MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 205 to land policy is the supply of land for afford- Policies and institutions need to be able housing for low-income households. reformed to better facilitate rural–urban These efforts need to be tied to local govern- migration. H ộ kh ẩ u –based management ment fiscal reforms that promote broader use needs to be amended to provide easier access of land and property taxes as an alternative to to urban services for migrants. In addition, land conversion fees for local revenues. fundamental reforms should be required in Enhance planning coordination. Local gov- vocational training and job creation for ernments are rewarded for business expansion migrants to equip them with skills to readily within their boundaries, undermining poten- meet the demand of firms and urban resi- tial clustered development or scale economies dents. Basic social infrastructure and services in infrastructure investment. The City to support migrants—such as housing, Classification System encourages infrastruc- schools, medical services, and health ture development at a very local level, frag- insurance—should be assured. And associa- menting urban development. There is need to tions that support and protect the rights of strengthen institutions for integrated urban migrants should be developed. planning—within and across sectors (land use and transport) and contiguous urban areas— Expanding Connective Infrastructure to encourage scale economies at corridor, metropolitan area/conurbation, or regional Mainstream integrated transport and logis- level. In Japan and the Republic of Korea, for tics platform. The government should focus example, the institutional mandates for land, on mainstreaming integrated planning for infrastructure, transport, and water resources transport and logistics spatially across are vested under one line ministry, helping modes. Roads to big ports, including better coordinate policies at the territorial Haiphong, and Ho Chi Minh City, need to and city levels. This step requires a “whole of be rebuilt so that cargo can reach the ports government” approach, which would require easily. The focus should be on key road cor- the central government to carefully review the ridors and expressways to tackle issues in mandates of line ministries and align them to supply chains and reduce the burden of international best practices. road transport costs on the economy. Strengthen urban planning. Urban plan- Accompanying it, attention should also be ning departments need to strengthen their paid to the development of transport infra- capabilities urgently. Master plans and other structure to connect regional-level cities physical plans need to be linked to the budget located in key agricultural zones such as the process; if plans cannot be supported by key Mekong River Delta and Central Highlands investments, their credibility will suffer. to increase connectivity and best leverage the Coordination mechanisms that can align pro- strengths of Vietnam’s agriculture sector. It is vincial and city plans are essential, especially prerequisite to attract private investments in since socioeconomic development plans, rural areas and support the formation of urban master plans, and sector infrastructure urban cores and industry-service clusters in plans are prepared by different departments, the key agricultural zones. often run on different schedules, and use Expand the volume and quality of urban inconsistent data and projections for planning. transport services. These are closely tied to The timing of planning needs to be synchro- refinements in urban planning. nized, and the number of plans that govern Develop inter regional transport system to within a territorial space needs to be rational- connect the strategic commercial agricultural ized. Vietnam also needs a professional cadre production areas in the Mekong River of urban planners who can plan and manage Delta and Central Highlands. This is the pre- cities. Emphasis on this discipline needs to be requisite for attracting investment into rural greater in university education and in the tal- areas, developing urban centers and agro- ent hired within the ministries and provinces. industry clusters in these regions. 206 VIETNAM 2035 In addition, there is a need to synchronize emerging economies shows that urbaniza- policies for rural and urban development— tion is a source of dynamism that can policies now developed in isolation. Not only enhance productivity—in fact, no country in inefficient, this also feeds the perception that the industrial age has ever achieved sus- rural and urban areas are in competition—as tained increases in national income without for water resources—and that urban devel- urbanizing. Urbanization propels the neces- opment has come at the expense of rural sary spatial transformation that accompa- development. It is important to see rural– nies the structural transformation from urban relations as the venue for the struc- agriculture to manufacturing and services. tural transformation of the economy. And a These spatial and structural shifts are symbiotic relationship between rural areas clearly unfolding in Vietnam, with the share and a hierarchy of urban areas will likely of employment in agriculture rapidly declin- determine how inclusive Vietnam’s future ing as the country urbanizes (figure 4.1). The urbanization will be. country’s experience between 1996 and In implementing these policies and sup- 2012 mirrors China’s in the 1980s and the porting investments, Vietnamese authorities 1990s. And as Vietnam has grown and may want to recalibrate the roles of the state urbanized faster over the past two decades, and the market in managing how the country the relationship between urbanization and urbanizes. In particular, they could usefully: incomes has been consistent with that of other countries (figure 4.2). • Refocus the role of the state and improve its capabilities in areas that only the govern- Cities Are Important for Economic ment can manage. These include strength- Growth ening capacities and increasing coordination for urban planning (including information By generating agglomeration economies, cit- and land use), public finances, and social ies can enhance productivity and spur innova- services, as well as increasing investment in tion and economic diversification nationally. infrastructure to support urban plans. The underlying reason is density. The most • Redistribute responsibilities, with powers basic agglomeration economy is reduced and resources, among national, local, and transport costs for goods. In the early 1900s, metropolitan governments to ensure that New York and London were manufacturing issues to be addressed at a regional scale powerhouses, places where factories located are not undermined by local interests. to be close to customers and transport infra- • Relax the state’s control and involvement structure. Toward the end of that century, in activities that are managed more effi- four-fifths of Chicago’s jobs were compactly ciently by markets, particularly the factor contained within four miles of State and markets—such as those for land—where Madison Streets, close to people’s housing state control has produced costly distor- and to infrastructure (Grover and Lall 2015). tions. Here the solution is not new regula- Many of these benefits increase with scale: tions but fewer restrictions and enhanced towns and small cities cannot reap the same use of market mechanisms to allocate benefits as larger cities do. International evi- factors of production. dence suggests that the elasticity of income per capita to city population is 3–8 percent.1 Urbanization and Economic Each doubling of city size raises its productiv- ity by 5 percent on average. Transformation in Vietnam The density and size of cities can also cre- Well-managed cities are critical for ate a market for specialized services, including Vietnam’s transformation into a modern logistics, advertising, legal support, and man- industrialized economy. Evidence from agement consulting. These services are critical today’s developed countries and rapidly for allowing young firms to focus on their MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 207 FIGURE 4.1 Urbanization goes hand in hand FIGURE 4.2 Urbanization trends in Vietnam appear as strong with structural transformation as in the Republic of Korea and in China 90 100 Agriculture share of employment (%) 80 70 80 Urban share of population (%) 60 50 60 40 30 40 20 10 20 0 20 40 60 80 100 120 0 Urbanization (%) 0 500 1,000 10,000 25,000 50,000 100,000 All countries, average, Vietnam, 1996–2012 2000–2014 GDP per capita (2005 PPP US$) China, 1980–2011 India, 1994–2012 Korea, Rep. China Korea, Rep. 1980–2010 Vietnam All countries Source: Calculations based on World Development Indicators data. Source: Calculations based on World Development Indicators data. Note: PPP = purchasing power parity. “big idea” or core competences, without hav- salary gains than workers who live in cities ing to worry about supporting functions. The where the number of college graduates stag- larger the cluster, the more specialized the ser- nates (Moretti 2004). This relationship is par- vice providers can be. Think of New York ticularly strong for workers in high-tech jobs. City, where a young fashion designer does not Given the economic benefits that cities can need an in-house lawyer to manage incorpo- provide, it is unsurprising that urbanization ration and intellectual property. She can also and economic growth go hand in hand. link to logistics firms to connect with mer- Countries that are more developed have more chandisers in Hong Kong SAR, China, and to urbanization, and countries that switch from production houses near Colombo, Sri Lanka. slow to rapid economic development also Cities are also instrumental in matching switch from slow to rapid urbanization (China skills with job opportunities, and density in figure 4.3), a generalizable fact that also allows for an integrated, “thick” labor mar- describes Vietnam’s experience (figure 4.4). ket. Skill matching will become more impor- Vietnam has paid special attention to tant by 2035 since the current generation of urbanization and urban development. In Vietnamese children will be better educated 2009, the prime minister approved the Master than their parents and will look for jobs that Plan for Development of Vietnam’s Urban more fully reward their skills. Just as many System to 2025 with a Vision to 2050. Under Indian children growing up to become soft- the plan, the urban population will reach 52 ware engineers in the 1990s lined up to move million by 2025, or more than half the coun- to India’s software hub of Bangalore, getting try’s people. This goal implies an annual cities such as Ho Chi Minh City to flourish increase in urbanization of 1.5 percentage can help Vietnamese children find the firm that points over 2010–25, up from 0.5 percentage really wants them and will pay for their skill points over 1993–2013. Based on the urban set. Research in the United States shows that population’s growth in the plan, the average workers in cities where the number of college annual growth rate in the coming decade will graduates increases faster also have faster be up to 5.3 percent. Under this plan the 208 VIETNAM 2035 FIGURE 4.3 Urbanization and the transition from slow FIGURE 4.4 Urbanization and the transition from slow to fast growth in China to fast growth in Vietnam China, 1955–1980 and 1980–2010 Vietnam, 1970–1995 and 1995–2010 15 Change in 1980 15 1995 u = 0.2% p.a Change in Log of GDP per capita u = 0.2% p.a Log of GDP per capita g = 1.9% p.a g = 3.7% p.a 10 10 Change in Change in u = 1% p.a u = 1% p.a 5 g = 5.2% p.a g = 9.3% p.a 5 0 20 40 60 80 100 0 20 40 60 80 100 Urban share of population (%) Urban share of population (%) Various countries Before 1980 Various countries Before 1980 Before 1980 After 1980 Before 1980 After 1980 After 1980 After 1980 Source: Calculations based on World Development Indicators. Source: Calculations based on World Development Indicators. Notes: u = urban share of population; g = log of GDP per capita; p.a. = per annum. Notes: u = urban share of population; g = log of GDP per capita; p.a. = per annum. portfolio of towns and cities in Vietnam electricity coverage in rural and urban areas would be larger and more sophisticated, and and has largely removed regional disparities major cities, especially Hanoi and Ho Chi in coverage. Access to water has surged from Minh City, would become highly competitive 20 percent in 2002 to 99 percent in 2015.2 global economic centers. Telecommunication has developed strongly with 133 million subscribers over the popula- tion of 90 million by end-2015.3 A Fast Road for Vietnam, but Bumps Vietnam’s urban achievements along its Ahead to Be Smoothed journey to middle-income status are impres- Other emerging economies have much to learn sive, but the challenges in its transition to from Vietnam’s (positive and negative) experi- becoming an upper-middle-income economy ences. Over the past three decades, the country are considerable. The urban challenges are has undergone an extensive urban transforma- further analyzed through the intuitive frame- tion. Since the Ðổi Mới policy was launched in work in the 2009 World Development Report, 1986, the urban population has grown which is based on three spatial dimensions 3.4 percent a year—from fewer than 12 million (density, distance, and division), three market urban residents to more than 30 million. Urban forces (scale economies, labor mobility, and areas now contribute more than half of GDP. low transport and communication costs), and Vietnam’s institutions for service provision three policy constructs (institutions, infra- have evolved to support rapid urbanization. structure, and interventions) that address The state of slums, urban segregation, and policy challenges. congestion in the cities is less problematic The three factors need to act together to than in most other developing countries, and influence three spatial transformations: market-led urban development followed by moderate government interventions has cre- 1. Agglomeration, driven by density ated an urban fabric where different income 2. Specialization, driven by reduced economic groups are largely integrated (Huynh 2012). distance Vietnam has also achieved nearly universal 3. Migration driven by dissipating division MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 209 Although urbanization in Vietnam has Although Vietnam’s urban population helped achieve rapid growth, three sets of increased by eight “Manhattans” between constraints are emerging: 2000 and 2015, the country’s urban land area increased by 75 Manhattans. This stagnation 1. Low and stagnant population density in urban population density accompanied the alongside fragmented urban development, slowdown of GDP growth in the 2000s, particularly outside the cores of Hanoi and driven by the slowdown in growth of labor Ho Chi Minh City productivity (chapter 2). 2. Increasing economic distance (in the qual- In fact, land has been converted to “urban” ity and costs of transport and logistics), commercial, residential, and industrial uses so with limited connectivity between cities rapidly that Vietnam has exceeded its urban and markets, unreliability across the sup- land expansion goals (table 4.1). The area of ply chain, and high logistics costs, new urban residential land in 2010 was almost urban expansion—particularly in peri- twice that in 2000, reaching 134,000 hect- urban areas—unconnected to transport ares, some 20 percent higher than the target infrastructure, and limited connectivity set by the National Assembly (111,000 hect- between urban and rural areas ares). Urban built land area per capita in 3. Persistent migrant–resident division (who 2010 was 185 square meters, 1.5 times higher have or do not have hộ khẩu), as migrants than the planned target. have limited access to basic services in Of Vietnam’s land area, 0.9 percent is part urban areas and job opportunities in of urban agglomerations (similar to China’s urban areas despite far lower levels of urbanization, and higher than in Indonesia and the Philippines). In fact, the land area under plan is much Vietnam’s Urbanization in 3D: higher than actual built-up land area, greatly Density, Distance, and Division affecting the efficiency of resource use. Low and stagnant urban densities with Low and Stagnant Urban Density and limited infrastructure impede agglomeration Fragmented Urban Development economies. Evidence from around the world Low-density urban development shows that the benefits from urban growth Between 1991 and 2014, Vietnam’s official come from encouraging economic densifica- urban population doubled from 14 million to tion through the substitution between land 30 million, and the proportion of the urban and nonland inputs. At the city level, eco- population in the total population increased nomic density can be increased by investing by one-third, with an annual rate of urban more capital on the same piece of land population increase well above the global (increasing the height or floor space) along- average (figure 4.5). side coordinated investments in transport that Alongside the urbanization of people, the enable movements of people and products. urbanization of land has been just as rapid, These dynamics are not happening yet on a contributing to urban population densities sufficient scale in Vietnam. stagnating at relatively low levels. Between Consider the Ho Chi Minh City metropoli- 2000 and 2015 Vietnam added 652,144 hect- tan area—Vietnam’s economic powerhouse, ares of urban land, while its urban population where the urban land expansion has been the increased by 10.2 million. Density remained fastest in Vietnam at 4 percent a year, among stagnant at 18.9 urban residents per hectare the fastest in East Asia. Population density in (table 4.1). As an illustration of the emerging its urban core is 44,000 persons/km2 and patterns of people and land urbanizations, drops to 26,000 for places within an hour’s consider New York’s Manhattan Island as a drive and to 15,000 for places at the outskirts metric. Manhattan is home to 1.6 million of the urban area, two hours’ drive from the people living on 8,746 hectares of land. core. Population densities in other major 210 VIETNAM 2035 FIGURE 4.5 Vietnam’s urban population growth in the global picture a. Vietnam’s increasing urban population, b. Vietnam’s urbanization was faster than 1960–2013 the global rate over 1991–2013 90 35 0.7 80 Urban population (millions) 30 0.6 Share of population (%) 70 25 0.5 Growth rate (%) 60 50 20 0.4 40 15 0.3 30 10 0.2 20 10 5 0.1 0 0 0 19 0 64 19 8 19 2 19 6 19 0 19 4 19 8 19 2 96 20 0 20 4 20 8 12 91 93 95 97 99 01 03 05 07 09 11 13 6 6 7 7 8 8 8 9 0 0 0 19 19 20 19 19 19 19 19 20 20 20 20 20 20 20 Urban population share Vietnam: Urbanization growth rate Rural population share Global (unweighted) average: Urban population (right axis) Urbanization growth rate Source: Calculations based on World Development Indicators. TABLE 4.1 Urbanization of land and people, 1995–2015 Total number of Total area of urban land Urban percentage of Total urban population Urban share of the Urban density (urban Year urban areas (hectares) total land area (millions) population (%) residents per hectare) 1995 420 836,117 2.53 14.9 20.8 17.9 2000 629 990,276 2.99 18.7 24.1 18.9 2005 675 1,153,549 3.48 22.3 27.1 19.4 2010 752 1,372,038 4.14 25.4 29.6 18.6 2015 775 1,642,420 4.96 31.0 34.3 18.9 Source: Vo and Van Thang 2013 (p. 33) and General Statistics Office of Vietnam. FIGURE 4.6 Low-density spatial expansion can dampen urban centers around the world are far higher: agglomeration economies downtown Singapore, 1 million persons/km2; downtown Hong Kong SAR, China, more a. Ho Chi Minh City than 6 million; and Manhattan, 3.7 million.4 50,000 2 million people Much of the development in the metropoli- (inhab/km²) 40,000 3 million people Density 30,000 1.15 million people tan areas of Ho Chi Minh City and Hanoi is 20,000 10,000 1.5 million people in peri-urban areas beyond the urban core 0 (figure 4.6). Featuring low-density develop- 100 200 300 400 500 600 700 800 900 1,000 ment with weak regional connections, Built-up area (km²) Vietnam’s urban areas are like fragmented b. Hanoi oases that do not function like economically 50,000 and physically integrated metropolitan (inhab/km²) 40,000 1.3 million people regions. For example, on an ordinary day, Density 30,000 20,000 and even at off-peak hours, it takes nearly 10,000 0.5 million people 0.6 million people 0.25 million people two hours to travel from the central business 0 100 200 300 400 500 600 700 800 900 1,000 district of Ho Chi Minh City to the center of Built-up area (km²) Binh Duong New City, a distance of only 40 kilometers. If such patterns persist, Source: Salat 2013. MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 211 Vietnam’s cities will be overwhelmed by traf- Their gross output accounted for one-quarter fic congestion and emissions. of GDP. In July 2014, industrial zones Two factors exacerbate low-density and employed more than 2.2 million workers fragmented urban expansion: government and indirectly created jobs for about decisions in locating industrial zones in peri- 2 million other workers. 5 Productivity in urban areas and the City Classification the zones is higher than in neighboring cities System, which encourages fragmented urban (figure 4.7). expansion (map 4.1). Urbanization benefits economies by increasing total factor productivity (TFP) Limited efficiency of peri-urban industrial through agglomeration, clustering, and econ- zones omies of scale. In Vietnam, TFP growth has Industrial zones have had a big part in resulted from clustering and industrial zone Vietnam’s success. According to official sta- development (Howard et al. 2014), but clus- tistics of the Ministry of Planning and tering has slowed as a result of economic Investment, there were 299 industrial zones dispersion. in September 2015, of which 212 were oper- While the number of industrial zones in ating with an occupancy rate of 66 percent. recent years has rapidly expanded, the govern- They were home to 5,964 foreign-invested ment has sited them in peri-urban locations projects with total registered capital of with little uptake. Industrial zones and clusters $96 billion and to 5,647 domestic-invested covered 23,000 hectares in 2000, increasing to projects with a total registered capital of 100,000 hectares in 2010 (equal to 39 percent around D 568 trillion (around $26 billion). of nonagricultural production land) MAP 4.1 Urban expansion in the Ho Chi Minh City agglomeration 10 Maps produced by University of Wisconsin-Madison, June 2013 Kilometers 1:250,000 Albers equal-area conic projection Urban extent c 2000 Urban expansion c 2000–2010 N Administrative boundaries from GADM, levels 2 and 3 Source: World Bank 2015a. 212 VIETNAM 2035 FIGURE 4.7 Productivity is higher in industrial zones than in 13 km from the city center. But the Tan Phu neighboring cities Trung industrial zone in Cu Chi District was 250 completely unoccupied in 2014; it is 24 km from the city center. Similarly, the Dau Giay 200 industrial zone in Dong Nai Province, 50 km Value added per worker 150 from the center of Ho Chi Minh City, has an occupancy rate of 2.5 percent (map 4.2). 100 Patterns are similar in Hanoi. Urban expansion and development of 50 industrial zones led by administrative direc- 0 tive rather than demand is thus unlikely to Total Ho Chi Minh City Hanoi Haiphong Danang Cantho All others spur economic growth. That view is but- tressed by using nightlights as a proxy for Total industrial zones Total non industrial zones economic growth: urban expansion over Source: World Bank spatial analysis by geo-referencing firm-level data for 2011. 2000–10 was not a leading indicator for sub- sequent economic growth in 2011–12. TABLE 4.2 Occupancy rates of industrial zones with comparable The massive construction of industrial zoning and boundary definitions zones that have high vacancy rates has major fiscal implications and resource allocation Occupancy rate of City industrial zones (%) Year Source tradeoffs. Assuming that all industrial zones are serviced with roads and infrastructure, the Ho Chi Minh City 56.4 2013 Government 70,810 hectares of vacant industrial land in Hanoi 44.7 2013 Government Hanoi, Ho Chi Minh City, and Da Nang rep- Da Nang 49.6 2013 Government resent a capital investment of more than $20 Metro Manila 90.2 2014 Colliers International billion, which could have been invested in Shanghai 89.8 2014 Colliers International public services in other areas. This misalloca- tion is expected to continue if proper policies Beijing 99.0 2012 Beijing Business News are not in place (box 4.1). Los Angeles 97.6 2013 Colliers International Long Island, New York 94.6 2013 Colliers International Fragmented urban expansion Another issue is the fragmentation of indus- (Vo and Van Thang 2013). By 2010, how- trial and residential development outside ever, the share of used area in industrial zones these zones. If Ho Chi Minh City’s pattern had fallen to less than 50 percent (Nguyen holds in other cities, up to 70 percent of land 2012), much lower than in global compara- occupied by industries is outside formally tors, raising concerns that diversifying such approved industrial zones. This scattered zones in less developed regions was a poor development of industrial land reflects a sys- idea (table 4.2). temic problem with Vietnam’s urban plan- In the Ho Chi Minh City and Hanoi metro- ning and development controls. Master plans politan regions, industrial zones farther from are prepared and approved by local and the city center have lower occupancy rates, national governments, but planning laws and especially beyond 10 km from the city center, development regulations are ignored in peri- where many peripheral zones have occupancy urban districts to an alarming degree. rates less than 10 percent (figure 4.8). (The Official statistics rarely pick up these exception is the 46-hectare Xa Mat Border patterns of “stealth” urbanization. The Gate Export Processing Zone on the border General Statistics Office of Vietnam defines with Cambodia.) The Tan Binh Industrial the urban population as “people living in Zone, 10 km from the city center and just west inner city areas and towns. All residents of of Ho Chi Minh City Airport, is 100 percent other administrative units (rural com- occupied, as is the Vinh Loc Industrial Zone, munes) are regarded as [belonging to the] MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 213 FIGURE 4.8 Industrial zone occupancy rates are lower, the farther from the center, in the Ho Chi Minh City region 50 km radius Occupancy rate (%) 0–10 10–25 25–50 50–75 75–100 2-hour drive time to/ from Ho Chi Minh City Source: Chreod 2015. MAP 4.2 Many industrial zones are empty in the periphery of Ho Chi Minh City metropolitan region Tan Phu Trung IZ, Cu Chi District, HCMC Dau Giay IZ, Thong Nhat District, Dong Nai Province est: 2013 est: 2008 occupancy rate: 0.0% occupancy rate: 2.5% kms. to city center: 24 kms. to city center: 50 Source: Chreod 2015. Note: IZ = industrial zone. 214 VIETNAM 2035 BOX 4.1 Underused industrial parks proliferate despite high costs The problem of underused industrial zones will of 265,000 hectares and 1,643 provincial-level worsen if all the ones in the master plan are built. industrial clusters on a land area of 73,000 hect- Despite the low use rate of current zones, nearly ares. The Ministry of Planning and Investment esti- 239 more, on 54,882 hectares of land, have been mates that the country would require, at $300,000 approved for implementation during 2011–20. In per hectare, nearly $40 billion in investment in addition, the approved master plans of national the next 10 years just to construct the infrastruc- and local governments include construction of ture for the approved industrial and economic three national economic zones on a combined area zones. Source: World Bank 2011. rural population.” But with the spatial specialized manufacturing activities. Many expansion and growth of cities, much devel- countries have been successful with this devel- opment has taken place in peri-urban areas opment pattern, as with Korea (box 4.2). beyond the officially defined urban core. Vietnam wishes to see similar successes. In the Ho Chi Minh City metropolitan Specifically, the General Plan for Urban area, for example, 48.5 percent of the popula- Systems in Vietnam and the National tion increase over 1990–2012, and 62 percent Program for Urban Development 2011–20 of urban land expansion, were in peri-urban approved by the Prime Minister, set out the communes (Kontgis et al. 2014). The Red orientation for urban development until 2025 River Delta has more than 1,000 villages (400 and a vision to 2050. Key features of the plan in Hanoi) involved in crafts and light industry are to promote urbanization in priority eco- (largely as subcontractors) that attract migrant nomic regions by 2015 and in urbanized areas workers from the Delta and beyond, particu- by 2025, creating a network of cities by larly the Northeast (Fanchette 2012). These 2050.6 trends are more pronounced around the major But the record up until now is one of spa- urban agglomerations of Ho Chi Minh City tial concentration of output and population (figure 4.9) and Hanoi, which are more urban- in the two growth poles of Hanoi and Ho Chi ized than reported by the General Statistics Minh City, with only limited emergence of Office. These areas have not been planned and secondary cities. The Hanoi and Ho Chi serviced to “urban” standards, limiting their Minh City regions (including provinces within ability to support the dense development of a two-hour drive from the center of the city) housing, industry, and commerce that can produced 84 percent of Vietnam’s industrial enable scale and agglomeration economies. output value in 2013. Densities of output per km2 are by far the highest in these two regions (map 4.3). The core municipality’s share of Increasing Distance the country’s output value declined in both Limited development of secondary cities regions between 2005 and 2013, while shares Harmonious development and appropriate of adjacent and nearby provinces increased definitions of functions among various types quite significantly, as industries located (or of urban areas are of great importance. For relocated) to lower-cost peri-urban areas, in a example, large cities should provide a diverse normal pattern of industrial spatial change in range of services and connect to external large metropolitan regions. areas, to achieve international competitive- Hanoi and Ho Chi Minh City core areas ness, while secondary cities should focus on account for more than 10 percent of Vietnam’s MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 215 FIGURE 4.9 Fragmented and stealth urbanization in Ho Chi Minh City metropolitan region a b 700 3,500,00 1.6% 4.0% 600 3,000,000 500 2,500,000 % increase of urban land (km2) % increase of population 48.5% 62.3% 400 2,000,000 300 1,500,000 200 1,000,000 46.5% 30.3% 100 500,000 20 km N 0 3.4% 0 3.4% All urban and built-up areas circa 2012 Peri-urban communes Unclassified communes Urban communes Urban core Urban Rural communes Urban core communes Peri-urban Rural Source: Reprinted from Applied Geography Volume 53, Caitlin Kontgis, Annemarie Schneider, Jefferson Fox, Sumeet Saksena, James H. Spencer, and Miguel Castrence. “Monitoring peri-urbanization in the greater Ho Chi Minh City metropolitan area,” 377–388, 2014, with permission from Elsevier. BOX 4.2 The Republic of Korea’s secondary cities are important for manufacturing jobs Secondary cities in Korea have grown as employment cities and rural areas from 26 percent to 42 percent. centers, particularly for manufacturing, and become Rising labor and land costs drove labor- and land- more important as the national economy developed. intensive manufacturing industries out of central For example, as rural–urban migration acceler- Seoul—reducing manufacturing’s share in employ- ated over 1983–93, the share of national manufac- ment for Seoul from 32 percent in 1980 to 11 percent turing employment in Seoul, Pusan, and Taegu fell in 2010, as the share of services rose from 58 percent from 44 percent to 28 percent, while rising in small to 81 percent. Source: Lee 1998. population, with 30 smaller statutory cities cities ranging from 100,000 to 200,000 (figure holding 9.2 percent (figure 4.10). The shares of 4.11). There has also been an extensive hollow- the two metropolitan regions increased by 5.6 ing out of the southern portion of the Red percent, compared with a 1.9 percent gain for River Delta and much of the Mekong Delta. the four cities ranging in population from Such population concentrations in large metro- 500,000 to 2 million (one is Da Nang), a loss of politan regions are not unique to Vietnam. 0.1 percent in cities ranging from 200,000 to Agglomeration effects have increased in metro- 500,000, and a small gain of 0.7 percent in 17 politan regions’ population share in, for 216 VIETNAM 2035 example, the Philippines, Korea, and, to less For other localities and for secondary urban extent, China’s Sichuan Plain (Chreod 2015). centers far from these two, attracting invest- There has been some sporadic movement ment, especially foreign direct investment in the development of secondary urban cen- (FDI), has been very limited. The statistics of ters, mostly in the vicinity of the Hanoi and the Ministry of Planning and Investment Ho Chi Minh metropolitan areas (box 4.3). show that the four localities including Ho Chi Minh City, Binh Duong, Dong Nai, and Ba MAP 4.3 Industrial output values per km2 are Ria Vung Tau alone have made up as much highest in Hanoi and Ho Chi Minh City as 41 percent of total registered FDI in the past three decades; localities in the two regions of Hanoi and Ho Chi Minh City accounted for about three-quarters of the reg- Hanoi istered capital. The remaining quarter is con- centrated in a few localities with large Haiphong investment projects, such as Ha Tinh, Thanh Hoa, Quang Nam, Phu Yen, and Da Nang while many localities barely attracted invest- ment from outside, despite their large areas of land planned for very large industrial zones. Danang Reflecting their higher economic concen- tration, productivity in the two metropolitan areas is also higher, leading to wage premi- ums in the two cores (9 percent for Hanoi and 16 percent for Ho Chi Minh City) in addition to the 8 percent general wage pre- 50 km radius Industrial output per sq km mium for urban areas over rural areas, con- (Vietnamese D, billions) 0.065–25 trolling for job, sector, education, gender, and 25–50 age (Demombynes 2015). These wage premi- 50–75 Ho Chi 75–100 ums reflect higher labor productivity in the Minh City 100–125 125–150 two cities (figure 4.12). These figures together >500 with evidence from many other countries Source: General Statistics Office of Vietnam. indicate that stagnation in urban density will FIGURE 4.10 Share of Vietnam’s population, by FIGURE 4.11 Change in share of Vietnam’s city size, 2009 population, by city size, 1989–2009 >2 million (n = 2) 5.6 >2 million (n = 2) 10.0 City population 500,000–2 million (n = 4) 1.9 City population 500,000–2 million (n = 4) 3.6 200,000–500,000 (n = 9) –0.1 200,000–500,000 (n = 9) 2.6 100,000–200,000 (n = 17) 0.7 100,000–200,000 (n = 17) 3.0 –1 0 1 2 3 4 5 6 0 2 4 6 8 10 12 Change in share of Vietnam’s population, Share of Vietnam’s population, 2009 (%) 1989–2009 (%) Source: General Statistics Office of Vietnam. Source: General Statistics Office of Vietnam. MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 217 BOX 4.3 Some urban centers near the two metropolitan areas have been successful in attracting investment In the North, Bac Ninh Province, to the southeast Republic of Korea.a In the South the Dong Nai pro- of Hanoi, has attracted a large Samsung mobile vincial government has granted 1,479 investment telephone assembly plant and a large Foxconn plant certificates with a total value of $27 billion. b In for assembly of Internet-protocol phones, routers, Binh Duong province to the northeast of Ho Chi and modems. Samsung manufacturing complexes Minh City, more than $20 billion had been invested in Bac Ninh and Thai Nguyen provinces have led by foreign firms and $550 million by domestic firms to investments by nearly 100 suppliers from the by end-2014. Source: http://www.sggpnews.org.vn/Business/2014/12/111928/. a. http://www.saigon-gpdaily.com.vn/Business/2015/5/113693/. b. http://en.baomoi.com/Info/Dong-Nai-ranks-first-in-FDI-attraction/3/544581.epi. FIGURE 4.12 Urban wage premiums are small final-assembly end; backward links with the outside Hanoi and Ho Chi Minh City local economy have not yet developed. That is normal at early stages of entering GVCs. 30 But as the domestic content of Vietnam’s 25 export value added rises, there will be oppor- 20 tunities to develop backward links by cluster- ing firms in related industries—stirring Percent 15 demand for secondary cities. Intermediate- 10 size secondary cities can support “localization 5 economies,” which come from the spatial clustering of buyers and suppliers in the same 0 industry. Urban Hanoi Ho Chi Minh City An important point is that secondary cities and metropolitan areas are not substitutes, City-specific wage premium they are complements. Each type and size of General urban wage premium urban settlement has its own unique func- Source: Demombynes 2015. tions, which tend to broadly complement each other. The alternative to a large city is not be conducive to enhancing agglomeration another large city, not a small town. The kind economies of scale and scope. of economic activities that give rise to a big Although metropolitan concentration has city—high-end manufacturing and services, supported productivity and economic effi- transportation nodes, government centers, ciency, policy makers are concerned about and financial centers (generating agglomera- the implications of such patterns for spatial tion economies)—if displaced will merely give equity. Some are anxious that the Ho Chi rise to other big cities, not a large number of Minh metropolitan area has become too big small towns. Activities in small towns are and that policies are needed to limit its growth related more to demand from the agriculture and that of other large cities—and to divert hinterland and rely more on scale economies economic and population growth to second- at the level of the plant. ary cities in lagging areas farther in the hinter- land. Vietnam’s rising economic integration Costly logistics and poor transport presents an opportunity toward this objective. infrastructure constrain urban development In the GVCs that Vietnam is part of, Vietnam’s investment in connective infrastruc- its contribution has been mostly at the ture has shortened many economic distances. 218 VIETNAM 2035 In manufacturing and agriculture, trade ton-kilometer, twice the cost of the equivalent costs are much lower than expected for the trips in India. economy’s stage of development, and these Lingering shortcomings in domestic and costs have fallen sharply, particularly in international connectivity are a root cause of manufacturing (Shepherd and Balijepalli Vietnam’s elevated logistics costs of 21 percent 2015), from higher to lower than China’s of GDP, against an estimated 19 percent in (whose costs also declined). Similarly, on China and 15 percent in Thailand.7 They are the Logistics Performance Index, Vietnam driven by unreliability and unpredictability in stands out as an “overperformer”—its score Vietnam-based supply chains, which suggests is much higher than expected based on its that, from a trade-competitiveness angle, income alone. freight and logistics are not—yet—a key driver These very successes, however, throw into of direct manufacturing investment, whether relief the major bottlenecks of economic dis- foreign or domestic. The primary drivers of tance. Logistics costs are high and interre- such investment appear to be political and gional transport quality is low, preventing economic stability, reliable and cost-effective secondary cities from connecting to markets, access to electricity and other basic utilities, and intrametropolitan transport is congested proximity to the supply chains in Southern and lacks mass transit. A country of 90 mil- China, and comparatively low-cost labor. lion people, Vietnam has not developed a rail- The low quantity of infrastructure con- way system with speeds of 100 kilometers an necting areas within metropolitan regions is hour. It has only 700 kilometers of opera- potentially even more problematic for pro- tional international-standard expressways. ductivity. Research elsewhere suggests that This is not only low in its own right but low one hour of travel is generally the limit that relative to Vietnam’s targets of 2,639 kilome- people are willing to spend for most journeys ters by 2020 and 3,114 kilometers by 2030. to work. Without mass urban transit and Congested and unsafe two-lane roads carry good road quality, high congestion limits this most truck shipments, at an average truck distance from the urban core. speed on the intercity highway network of roughly 40–50 kilometers an hour. Amid low Weak rural–urban links barriers to entry in the cutthroat trucking Rural transport infrastructure mainly serves market, truck overloading is rampant, service livelihoods, not commercial agribusiness quality is low, and empty backhauls average demand. More important, some strategic 30 percent. interregional transport corridors, such as rail- High transport costs hold back the devel- way and highway systems, have not been opment of urban areas outside Hanoi and Ho developed to connect the Central Highlands Chi Minh City, although many are part of the and Mekong River Delta, the two areas with metropolitan regions. High congestion costs large-scale agricultural production, or to con- hurt the attractiveness and productivity of nect poor regions such as the Northwest to locations beyond the urban periphery, given major markets, ports, and border gates. that short-distance freight trips of less than Lacking electricity for agricultural produc- 200 km account for 87 percent of all freight tion is common in the highlands, remote areas, movement in Vietnam, that 98 percent of all and ethnic minority areas. In agricultural inland waterway movements are less than production areas, such as the Southeast and 200 km, and that 73 percent of road journeys Mekong River Delta, the demand for electric- are less than 100 kilometers (World Bank ity for agricultural production, especially for 2011). Further, 60 percent of the freight irrigation, has not been matched by supply. movement of the economic centers is intrare- Information and media about agricultural gional. And intraregional costs of connectiv- science and technology and markets and poli- ity are very high. Moving freight within cies for agriculture and rural areas remain Vietnam’s metropolitan areas costs $0.20 per underdeveloped. MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 219 Weak infrastructure and poor connectivity weak. That is why the last resort for farmers between rural and urban areas are major who lack land and have low incomes is to obstacles to attracting enterprises’ investment move to urban areas. to rural areas and agriculture production. But their migration to urban areas is unco- Only 1 percent of registered enterprises are in ordinated, spontaneous, and temporary, hav- the agriculture sector, and agricultural enter- ing historically been weighed down by the hộ prises are usually small or medium-size, con- khẩu (the household registration system) (see stituting about 96.5 percent of the total “Persistent Division”). Most rural migrants number of agricultural enterprises. Compared working in urban areas only do simple jobs with the great potential of Vietnam’s agricul- such as construction worker, taxi driver, por- ture, supporting industry for agriculture is ter, assistant, without labor contracts, insur- very weak. Most of plant protection medi- ance, or accommodation. So they continue cine, veterinary medicine, agricultural to hold farmland as a hedge, transforming machinery, and so on, except for urea, have it from “production” to “hedging.” Land been imported. The processing industry has remains fallow in many areas, while capable not fully developed clusters associated with farmers face difficulties in accumulating land, material zones and had low added value. which they need to apply technology in agri- Besides, the weakness in warehouse, loading, cultural production. shipping, and payment have pushed up pro- duction costs, reducing the competitiveness of Persistent Division agricultural products. The number of process- ing enterprises—especially deep processing Vietnam has made impressive inroads in reduc- with high-quality service providers or those ing economic division. Poverty has declined classified as “science and technology” enter- dramatically in both rural and urban areas (fig- prises in agriculture—has been very low. ure 4.13). Although urban poverty rates are Moreover, very few enterprises sign con- much lower than rural poverty rates, the rural– tracts with farmers for distributing products, urban divide is much less than in other coun- providing input services, investing in material tries that grew rapidly. International experience zones, and sharing outcomes and risks. suggests that a convergence of living standards Agricultural land of households in Vietnam generally precedes a convergence of incomes, averages about 0.5 hectares per household so urban–rural disparities often increase during and is usually divided into four or five pieces. More than 80 percent of Vietnamese farmers FIGURE 4.13 Urban and rural poverty have less than 1.0 hectares. The very small headcount rates are falling production scale of farmers causes difficulties in applying new technologies, raises the pro- 70 cess management cost, and increases transac- 60 tion cost between enterprises and farmers. 50 Because the allocated land is so small and 40 Percent fragmented, farmers lack motivation for 30 investing in production and applying technol- ogy. Much labor in agriculture is underem- 20 ployed, and income from agriculture accounts 10 for only 30 percent of the total income of 0 farm households. The majority of farmers 10 00 90 95 15 05 20 20 19 have to seek income from nonagricultural sec- 19 20 20 Rural Urban tors, so they abandon their land. But the abil- ity of rural areas to generate income and Source: General Statistics Office of Vietnam 2005, 2013, and 2015. Note: Figures are based on the World Bank-GSO poverty line. employment, particularly in industry and in Dotted lines indicate a period during which the survey and poverty agricultural support services, has remained measurement methodology were changed substantially. 220 VIETNAM 2035 early stages of development (World Bank areas have improved relatively and absolutely. 2009). But Vietnam has avoided a large diver- Compared with other countries at similar gence between rural and urban incomes. incomes, Vietnam has gone a very long way Indeed, it is already seeing rural–urban incomes toward closing the rural–urban education gap. converge. According to the General Statistics Much of Vietnam’s success in rural–urban Office of Vietnam. income per capita in rural and regional convergence is attributable to areas was only 36.9 percent of that in urban public investment (as a percentage of GDP). areas in 1995, but 52.8 percent in 2014. Although expenditure per capita is still much Rural and urban areas have also con- higher in wealthier areas, central transfers are verged on some measures of noneconomic highly progressive (they are higher as a share welfare. In 2010–12, the number of house- of regional GDP) and became more so over holds in rural areas having permanent 2007–11. In addition, transfers or support dwellings was higher than in urban areas from family members or relatives contributed (figure 4.14). By 2015, 99.8 percent of considerably to reducing rural–urban income villages and 98.7 percent of rural house- and living standard gaps. holds nationwide had access to electricity. The biggest problem of division is the So almost all Vietnamese households have restriction on rural–urban migration. it, impressive in relation to many other Institutionalized in hộ khẩu (the household countries with similar or higher incomes. registration system), it has created a second- Indonesia, with a much higher GDP per cap- class citizenship. The migrant population has ita, has a rate of only 64 percent. less access to social insurance, affordable But rural areas still lag significantly behind housing, and urban health care systems, often on the shares of households using hygienic pays more for water and electricity, and faces latrines, hygienic water, and trained workers barriers to education for children. Controlling in total employment (table 4.3). In 2012, the for education, migrant income is 21 percent share of the population aged 15 with no cer- lower than that of nonmigrants (General tificate or who had never gone to school was Statistics Office 2005). Even controlling for 23.1 percent in rural areas, twice the share in household and individual characteristics the urban areas. The share of people who had (including per capita income), children aged college or university degrees in rural areas 11–18 are 40 percent less likely to be in was 3.4 percent, 4.6 times lower than in the school if they do not have permanent hộ urban areas. khẩu. This helps to explain why rural–urban In short, people in urban areas have more migrants are mostly in the informal sector education and better access to health, but rural and hesitate transferring their agricultural land-use rights to other farm households in FIGURE 4.14 More households have a the countryside. permanent home TABLE 4.3 Access to services is converging for 60 urban and rural residents Share of households with a Percent 50 permanent home (%) Indicator Urban Rural 40 Share of literate labor in the labor force 98.4 93.4 30 Share of trained workers in employment 33.7 11.2 20 Share of households using hygienic water 98.1 87.9 10 Share of households using hygienic latrines 93.7 70.0 0 Share of households using electricity 99.8 96.6 2002 2004 2006 2008 2010 2012 Source: General Statistics Office of Vietnam (2014) for 2013 and Urban Rural Whole country General Statistics Office of Vietnam (2013) for 2012. Note: Data are for 2012 or 2013. Trained workers completed three- Source: General Statistics Office of Vietnam 2013. month-equivalent (or longer) training courses. MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 221 Causes of Low and Stagnant properties. The provinces approve and make Density, Rising Distance, and available land-price tables. They routinely use set prices to transfer land, creating a dual land Persistent Division market in which industrial uses acquire land Low and stagnant urban density, rising dis- well below its true market value. This has dis- tance, and persistent division have five main torted investment projects, leading to specula- causes: inappropriate land policy, inappropri- tive land acquisition in expansive industrial ate city classification and planning policies, parks, inefficient use of scarce land, and dis- fragmentation and lack of coordination in contented land owners who feel they were infrastructure development and irrational inadequately compensated. The actual value metropolitan development, a lack of attention of land in Vietnam has been put at more than to effective rural–urban connectivity, and the $200 billion (Ho and McPherson 2010). residence policy for inhabitants. Weak land registration Policy makers have exerted enormous efforts Inappropriate Land Policy and put in place well-staffed provincial and Distorted land conversions and transactions district offices to issue land-use certificates for A lack of market-driven land pricing leads to private land and to establish a comprehensive artificially cheap industrial land and expen- cadaster of privately owned land. But short- sive urban-residential land, impeding the comings remain. There are no provisions for urbanization of people and jobs while encour- communal land—creating obstacles to mining aging that of land. Using land conversions to and industrial investment in areas with com- attract industry leads to land urbanization, munal rights or inciting conflict. And with not to economic growth that stimulates land-use leases nearing their end, the lack of greater demand for urban land. Land-use mis- clarity for renewals creates uncertainty that allocations are connected to land transfers in impedes investment. The Ministry of Natural the public sector and to the proliferation and Resources and Environment is responsible for underuse of industry-zoned urban land. the national land database—containing all Land markets in Vietnam also reflect the legal documents, cadastral records, master deeper issues of land management and gover- plans, land prices, land statistics and invento- nance. The huge discrepancies between the set ries, land cases handled by the inspectorate price for land and its market price (often 10 and the courts, and dispute-settlement times higher) cause large distortions and bot- records. But the requirements have not been tlenecks in the land market. This two-price specified for common standards and interop- system transfers huge benefits and values to erability. The focus has been on first-time developers and speculators while causing issuance of land-use certificates rather than losses to individuals (mainly farmers) who are on a sustainable system that generates fee forced to transfer land. Because land alloca- income to independently sustain its operation tions and deals related to taxes, concessions, in the long term. and permissions for developers and investors Provinces have their own systems, with dif- are based on artificially deflated land values, ferent levels of development of cadastral and the state is forfeiting considerable public ben- spatial records, and with textual and spatial efit by undervaluing one of its most valuable records often not linked. This has led to many assets. Moreover, artificially low-priced land informal transactions (at underreported stimulates land sales that contribute to wide- prices), which threaten the integrity of records spread and fragmented urban development and open the door to fraudulent transactions. with great infrastructure inefficiencies (and Integration with banks, courts, local tax maps, the associated capital costs). and land-use plans was not envisaged, so many Zonal-land prices often correspond little of the gains of a modern multipurpose land with market prices, especially for desirable administration system could not be exploited. 222 VIETNAM 2035 The 2013 Land Law aims to address these the Organisation for Economic Co-operation issues. It sets mechanisms to recognize com- and Development (OECD) average. The lack munal land and clarifies contractual terms. of a coherent land- and property-taxation sys- Land rights can be exchanged, transferred, tem prevents local authorities from tapping a leased, mortgaged, and contributed as capital stable and recurring revenue source and cre- to ventures. Land ownership limits encourage ates distortions by overtaxing investment investment (two-thirds hectares of rice land (Ho and McPherson 2010). but 10–30 hectares for perennials in delta or The potential of land taxes to more sus- midland and mountainous regions) and tainably generate revenue for local govern- lengthen the standard contract period for agri- ments has been underrealized for three cultural land to 50 years, commercial invest- reasons. The tax base is incomplete due to ment to 70 years, and residential land “for a the lack of a comprehensive cadaster. Land long and stable term.” Automatic renewal prices are undervalued because of insufficient upon expiry is established as a default, and a independent data. And local governments do limited land fund at the community level (up not systematically collect revenue. Unlike to five years) can be established. many other developing and middle-income The 2013 law makes land registration countries, Vietnam is forgoing an important compulsory and requires certificates, includ- source of revenue at the expense of not creat- ing cadastral maps, for each parcel and for ing public goods. attached assets. Provincial people’s commit- The 2013 law establishes an independent tees are responsible for this and for conduct- valuation profession. The provincial people’s ing first-time registrations (jointly to husband committees must seek advice from the pro- and wife for married couples) in a way that is fession in setting land-price tables, which are sustainable and that provides avenues for restricted to land-use levies, taxes, fees, and online access. National funding is to be made fines, among others. The law mandates case- available for the Ministry of Natural specific independent valuations to lease land Resources and Environment to provide the and to compensate land-use rights, and it technical specifications for such an exercise mandates public auctions to transfer land for and to produce a yearly report, including the residential, industrial, or infrastructure extent to which legal provisions (for example, investment. The only exemptions are for on consultation) were followed. With a new land allocated for agriculture, low-income legal framework, Vietnam needs to imple- housing, residential land for the landless or ment concrete actions in land registration and for public purposes, and mining. Purchasers management. can decide whether to pay a lump sum or annual installments. Unsustainable revenues from land distort The law also requires local governments to incentives implement a land-use levy and annual install- Land-based financing models are unsustain- ments, while creating more options to tax able. The 2013 decentralization marked a land, and to use such instruments as better- sharp increase in local transfers of land to ment levies to capture increases in the value investors in return for one-off land-use fees. of land from infrastructure investment. This financing model now contributes 20–30 Although the levy is based on the land-price percent to local government revenue. tables, the land-rental fees depend on lease Overreliance on it, as China illustrates, terms and the auction price. Clear regulations prompts local governments to acquire bad need to be established. debts backed by unrealistic prospects of The success of land acquisition motivated future land acquisition. by public interest and for economic develop- Land taxes account for merely 0.07 per- ment has led to its further use as an alternative cent of GDP, around one-tenth the develop- to market-based transfers to foreign-invested ing country average and about one-thirtieth enterprises. Compensation is mainly based on MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 223 land-price tables known to differ vastly from constructing additional infrastructure, market prices, distorting investment decisions, expanding cadastral boundaries to increase including those by companies with marginally population, and exaggerating their local GDPs viable or totally ineffective business plans, and (which may be a reason for local GDP growth eliciting more than 10,000 complaints and rates to usually be 1.5 times higher than the denunciations. national average) while ignoring more sub- stantive criteria such as population density. This policy leads local governments to pur- Inappropriate City Classification and sue a one-dimensional approach to urban Planning Policies development, focused on increasing inputs. The city classification and category upgrad- The disassociation of quantity and location ing distort motivations prevents the central and local governments The city classification and category upgrading from assessing where and how to invest and encourage localities to expand the size of their what the geographic priorities for budget urban areas and make excessive investments. allocation should be. Global experience The City Classification System was developed shows that Latin American countries have in 1990 by the Ministry of Construction and paid very high prices for poor urban planning amended in 2001 and 2009, creating incen- and massive urban development (box 4.4). tives to rapidly convert land along lines that Local authorities benefit from an expan- are inimical to development and to urbaniza- sion of business within their boundaries, tion. Its original goal was to spur the develop- undermining the potential agglomeration- ment of cities using indicators set by the based development and the economies of central government to determine budget scale in infrastructure investment. The urban transfer allocations, thus influencing local classification system encourages local infra- choices and investment allocations. structure development, leading to massive This link to the central transfers rather and fragmented urban development. At the than to strategic planning encourages end of 2014, Vietnam had 775 urban areas, unplanned urban expansion. To qualify for including 49 urban districts under 5 munici- one of the six urban categories, cities have to palities, 64 provincial cities, 47 district-level reach at least 70 of a maximum 100 points. towns, and 615 commune-level towns Most points target infrastructure, population, (General Statistics Office 2014). The system and GDP growth. Urban density’s 5-point creates incentives to reclassify land, particu- maximum is similar to the nonfarm labor larly at the fringes of consolidated urban indicator’s maximum and far lower than that areas, and produces urban sprawl. Low- of all other indicators—urban infrastructure density development in peri-urban areas is a (55), urban population size (10), urban func- profitable venture for developers, since land tion (15), architecture of urban land- can be acquired cheaply from farmers. The scape (10). A city can easily reach 70 by conversion of peri-urban land without a BOX 4.4 Unplanned growth has been expensive in Latin America The rural–urban migration of the 1960s and 1970s conditions for traffic congestion, inequality, and low demanded serviced land much faster than the speed productivity. The cost to improve these unplanned the planning and development system was delivering urbanized areas was three to five times what it would it. Lacking a framework for growth, this demand led have cost to urbanize the land originally with better to informal land dealers and others developing land planning. in cities in an unplanned manner, creating structural 224 VIETNAM 2035 spatial planning structure means that any Class I status. Of these, only one (Nha Trang) classified agriculture land, even far from the met minimum density standards (table 4.4). consolidated urban areas, can be developed. Having cities compete for the same objec- The higher the ranking, the more power tives and governments allocate funding to cities have to issue land-use certificates and to individual cities hampers the opportunity to allocate land for and to lease land to house- create clusters. The current CCS awards a holds and individuals (Urban Solutions 2011). maximum of 2 points for public transport and After the upgrade of Thai Nguyen (metropoli- 1 for education facilities. There are no mecha- tan Hanoi) to Class I, central transfers nisms for cross-jurisdictional cooperation. remained stable while local receipts—fueled Indeed, in large cities, districts compete to by a spike in land sales and use rights— attract population and investors, often incon- markedly increased (figure 4.15). sistent with the city’s master plan. There are coordination issues between the Entrepreneurial local governments and pres- Ministry of Home Affairs (MOHA), which is sure from property developers contribute to responsible for defining the administrative extensive peri-urban development. And in boundary of urban areas, and the Ministry of unplanned residential areas on the fringe of Construction, which runs the City consolidated urban cores, urban infrastruc- Classification System (CCS) and is the leading ture networks are mostly provided only after agency of urban planning and management. urban development. As a consequence, three- For example, the merging of the provinces fourths of new urban housing units lack suffi- within Hanoi has led to the absorption of cient services (UN-HABITAT, forthcoming). rural populations in the Hanoi agglomera- tion. Similarly, the indicators for cities Ineffective planning upgraded to Class I reveal deviation from tar- Vietnam has five different kinds of plans that gets related to density, highlighting the govern the system (table 4.5). sprawling growth in peri-urban areas. Socioeconomic development plans are one Between 2009 and 2011, seven cities attained of the most important and are the responsibil- ity of the Ministry of Planning and FIGURE 4.15 After receiving Class I status Investment. They are usually developed every in 2009, Thai Nguyen’s local receipts nearly five years, with the latest being the Ninth doubled Five-Year Plan (2011–15). They set goals and detailed production and investment targets 120 across regions and productive sectors of the 100 economy and combine (often without priori- tizing) sector-plan proposals. They are Vietnamese Dong (millions) 80 TABLE 4.4 Criteria assessment of cities upgraded 60 from Class II to Class I City Year upgraded Population Density (average) 40 Can Tho 2008 1,199,817 856/km² Da Lat 2007 n.a. n.a. 20 30,000/km2 Nha Trang 2007 397,563 (city center) 0 2007 2008 2009 2010 2011 Nam Dinh 2010 352,108 5,290/km² Local receipts Tay Nguyen 2009 279,689 1,474/km² Central transfers Viet Tri 2011 188,564 4,561/km2 Attained class I status in 2009 Vinh 2007 305,609 2,911/km2 Source: Ministry of Finance data and World Bank and Ministry of Source: UN-HABITAT City Profiles. Planning and Investment calculations. Note: Bold indicates that the target was met; n.a. = not applicable. MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 225 TABLE 4.5 Types of master plans and plans in undesirable environmental impacts. The lim- Vietnam ited information shared among authorities Type of master plan/plan Scope and sectors and the uncoordinated develop- Orientation National general policy ment of different sectors need revisions to fol- Regional master plan for low actual development. There is also a lack Multiprovince or multicity economic zones of high-level private-sector involvement in Master Province or city preparing and implementing plans. Zoning Development control in cities In reality, the master plans, by design, can- or towns not be implemented. Their objectives, rarely Detailed area District, ward, industrial zone, linked to a budgeting process, often describe or project an ideal set of conditions that a city would achieve after flawless implementation of the plan. The influence of “external” conditions, prepared with limited economic and financial such as demand and the availability of analysis, without full consideration of pro- resources, is barely considered. This process spective resources. They are therefore lists of leads to a mismatch between demand and projects essentially driven by production tar- supply, as most of the infrastructure identified gets. Potential social and environmental in the master plan may not materialize during impacts are overlooked. At the provincial the implementation. A lack of priories also level, the Departments of Planning and contributes to asymmetric decision making. Investment screen proposals submitted by In fact, the plans seem to serve only as a tool local governments before passing them on to for bargaining among government authorities the Ministry of Planning and Investment. at different levels on resource allocation, Spatial or physical plans are generally mobilizing resources from various external referred to as master plans, construction organizations and encouraging the private plans, or detailed area plans for specific proj- sector’s involvement in the construction and ects. This planning retains the practices of an operation of cities through the changes in the era when the state was in charge of all con- master plans (Huynh 2015). struction projects. Master plans propose spa- Functional planning across various govern- tial arrangements of land uses, building ment departments creates bottlenecks in this footprints, and infrastructure for a province, process. In Vietnam, the socioeconomic devel- city, district, or development site in progres- opment plans, urban master plans, and sector sively greater detail. The plans are prepared infrastructure plans are prepared by different by the Ministry of Construction or subordi- departments at the provincial level. The coor- nate departments of construction at the prov- dination between these departments is lim- ince and city level. Most are prepared by the ited, as with city administrations. Poor National Institute of Urban and Rural coordination in sequencing is exacerbated by Planning, which became the Vietnam Institute a silo approach to plan making, in which of Architecture, Urban, and Rural Planning in planning institutes tend to overlook economic 2008. Its functions are research, physical and social dimensions and, conversely, socio- planning, capacity building, international economic planners tend to overlook the spa- cooperation, and consultancy activities. tial dimensions. The various plans often run Preparation is also a top-down process on different schedules and use inconsistent that determines production outputs by sector data and projections. For example, the period rather than by cross-sector inputs and coordi- of a master plan for a centrally run city is nation. The widely dispersed responsibilities between 20 and 25 years, with a vision for 50 and unclear procedures make it difficult to years (for a township, 10–15 years), but bring sector agendas together, resulting in socioeconomic plans are drafted every five inefficient planning and ineffective implemen- years. The intended sequence of spatial plan- tation producing delays, higher costs, and ning consistent with socioeconomic and 226 VIETNAM 2035 sector plans does not always happen. And with people living above or behind their since land-use plans are developed indepen- stores, and motorcycles as the primary means dent of sectoral plans, there are no true sys- of transport—have historically produced rela- temic spatial considerations that focus on tively good urban mobility (World Bank planning infrastructure investments. 2011). Average commuting times in cities in Vietnam are correspondingly short: 15 min- utes in Da Nang, 18 minutes in Hanoi, and Fragmentation and Lack of Coordination 20 minutes in Ho Chi Minh City.8 The urban in Infrastructure Development and structure and the infrastructure in the two Metropolitan Management largest cities, Hanoi and Ho Chi Minh City, Fragmentation and lack of coordination in are inappropriate for cars as the major means infrastructure development of transportation. One primary reason that transport modes are In the central business district of Hanoi, misaligned not only with supply and demand only 9 percent of the area is devoted to street but also relative to each other is that they are space, and in Ho Chi Minh City less than 8 planned individually and on a largely decen- percent, similar to Bangkok, which is notori- tralized, separated, and fragmented basis. The ous for traffic congestion, and much lower limited capacity of bridges and roads as well than New York’s Midtown Manhattan (32 as the overall condition of transport infra- percent) or Seoul’s Jung District (14 percent) structure increase costs. The loose decentral- (map 4.4). In addition, both New York and ization and lack of coordination in developing Seoul have extensive underground transit net- regional infrastructure, economic corridors, works, which reduce the need for surface and metropolises undermines the efficiency of transportation.9 Their public transportation existing infrastructure. For example, the over- systems are also very good, capable of accom- supply of container-handling capacity at Cai modating considerable numbers of daily Mep–Thi Vai coexists with fully used facili- commuters. ties in Ho Chi Minh City only 80 kilometers An increase of car ownership to 250 pas- away—and therefore part of the same freight senger cars per 1,000 people would provoke corridor. The Cai Mep–Thi Vai port uses less total gridlock in central Hanoi, where the than 30 percent of its capacity because of the density is 400 people per hectare (World continued operation of inner-city river ports Bank 2011). The car-owning population grew in Ho Chi Minh City. at an average annual rate of 15.2 percent dur- Comparing the main ports—such as Ho ing 2008–14. The risk of gridlock is not due Chi Minh City region, Haiphong, and Da to excessive human or built density, but to Nang—with Tanjung Pelapas in Malaysia irrationalities in the road system and the shows that berth lengths are not adapted to absence of efficient public transport. Most the maximum vessel size and storage capac- districts in Paris’s intramuros (central district) ity. Of the 18 dry ports in Vietnam, only one are comparable in human density to Hanoi’s is connected by rail to the national railway or Ho Chi Minh City’s densest districts, network. Haiphong port is missing a direct which have three to four times more surface access road and a railway connection to ease area per inhabitant. The remaining Parisian container movements (refer to annex 4A). districts are two to three times denser in sur- This indicates a lack of sufficiently coordi- face area than Hanoi’s, with car ownership of nated market and connectivity analysis for 330 per 1,000 people but no gridlock. In the freight across modes, creating misalignments Hanoi and Ho Chi Minh City core centers, and inefficiencies. there are not enough medium-scale streets connecting the local network of 4-meter-wide Irrationalities in metropolitan development lanes to the 40-meter-wide roads. The organic features of Vietnam’s cities— A tenfold difference in the width between mixed land-use neighborhoods, shophouses small lanes and wide roads is not ideal. MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 227 MAP 4.4 Hanoi’s street space is ill suited for urban transport HANOI BANGKOK NEW YORK SEOUL Area of primary and secondary roads As % of total area within 9 km2 around the city center 0 1 KM Read Width Hanoi 9.03% 15 m 20 m Bangkok 7.88% 30 m New York 31.90% 45 m Scoul 13.56% 50 m Source: World Bank 2011. Sixty percent of the Parisian streets are less than and in Hong Kong SAR, China, public trans- 12 meters wide. And Parisian boulevards are port systems are extremely efficient. So to like the avenues and streets in Manhattan— address traffic congestion, especially in Hanoi 20 meters wide in most cases and 30 meters and Ho Chi Minh City, Vietnamese policy wide for the rest. Further studies are necessary, makers should take advantage of the organic with a robust methodology on the street relationship between urban compression and patterns of Vietnamese cities, their connectivity, the public transport systems. But the develop- and the percentage of streets in each size cate- ment plans for the center of Hanoi and Ho gory. Such studies could measure the local and Chi Minh City show that it may not be pos- global imbalances at various scales and orient sible due to the conflicting policies. On the investments in street infrastructure. one hand are the tens-of-billions-of-dollar Experience from other countries shows plans to build a large-capacity public trans- that urban compression and large capacity port system based on metro, trams, and transport systems are closely related, espe- express buses (Clement and Charles 2015). cially when urban development is based on On the other hand is the view associated with public transport. Hong Kong SAR, China; policies on restricting density and height in New York; Seoul; Singapore; and Tokyo are the central areas, which could create numer- good examples. Given the very high density ous small congestion points that will ulti- of population and employment in Singapore mately spread out in these big cities. 228 VIETNAM 2035 Lack of Attention to Develop Effective to mobilize private investment, government Rural–Urban Connectivity bonds, and foreign loans have been underex- ploited. There is no effective assessment In recent years, investment in agriculture and mechanism to promote the role of beneficia- rural areas was much lower than their capac- ries, which can locate investments in the most ity, potential, and development demand. promising fields. There are no decentralized While farmers’ ability to accumulate and rein- mechanisms for authorities to foster markets, vest is very limited, the preferential policies serve farmers as customers, or mobilize local for boosting investment in agriculture and people and communities. rural areas were not enough to attract private investment in difficult areas. Besides weak infrastructure, enterprises investing in agricul- Residence Policy Creates Discrimination ture and rural areas have faced many other Despite great changes in residence regulations difficulties, especially in accessing land for to enable freer mobility of people, household production and agribusiness. registration regulations remain a big problem. Public investment in agriculture has been According to the residence law, a person who low, unreasonably allocated and inefficiently wants to apply for permanent registration in managed. The current budget concentrates on centrally managed cities is required to have a irrigation, mostly for rice in the two deltas. legal residence. If he or she wishes to have a Investment has mainly focused on raising sup- permanent registration in rural districts or ply and production rather than protecting provincial towns under a centrally managed production, reducing post-harvest losses, and city, the requirement is at least one year of promoting trade, creating congestion for the temporary residence in that city. And for per- whole agricultural value chain. The railway manent registration in urban districts under a systems cannot facilitate the circulation of centrally managed city, the requirement is at agricultural products. There are no deepwater least two years. This is exactly the key prob- ports for the main agricultural production lem that creates discrimination—or more pre- areas. There are no storm-avoiding port sys- cisely, inequality—in accessing employment tems or maritime logistics. And warehouses opportunities (especially in the public sector and processing facilities are poor. when permanent resident status is a binding Investment has paid attention only to requirement) and other basic services, such as quantity rather than quality and efficiency. education and health care. Even in irrigation, maintaining, preserving, Because of these risks, rural–urban and improving water use efficiency have not migrants mostly participate in the informal been attended to. Irrigation systems reach sector, and lack instruments to protect their only 78 percent of their designed capacity. rights, such as labor contracts, social security, Only 43 percent of the area of new vegetable and education. crops and industrial crops has been irrigated initially. Irrigation for fisheries, salt industry, and industrial plants has been very limited. Institutions and Infrastructure: Electricity supply for rural areas has been reg- Cities to Lead Vietnam’s ularly cut off, causing difficulties for livestock Transformation into a Modern production and intensive aquaculture. This is a general problem for rural infrastructure Industrialized Nation and social services such as health, education, Over the next two decades, policy makers culture, and communication. This under- should focus on enabling cities to reach their mines the competitiveness of rural busi- potential and enhance the pace of national nesses and discourages business investment in economic development. Lessons from the rural areas. urban development experience of countries Investment in agriculture and rural areas such as Japan can be particularly useful given has relied heavily on the state budget; policies similarities in land area and population MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 229 (box 4.5). The lessons are that policies that both to benefit from clustering because they can strengthen urban institutions can promote choose workers and materials from a bigger urban development at scale, and better con- pool and to engage in beneficial competition so nective infrastructure can expand market as to promote development. These cities will be access to foster economic specialization. In aggregators for the hinterland economy and be this way, Vietnam will benefit more from part of GVCs. Towns such as Buon Ma Thuot agglomeration economies across a vibrant in the Central Highlands, famous for its coffee, portfolio of towns and cities. will let firms and farms exploit plant-level scale The system of cities will have complemen- economies by providing roads (for inputs and tary functions. Metropolises such as Ho Chi outputs) and schools and other amenities Minh City will interact with the global econ- (for workers’ families). Service clusters with omy and provide the urban diversity that infrastructure and basic business-supporting encourages learning, innovation, and new prod- services should serve specialized cultivated uct development, connecting people and firms areas in rural districts. But it is difficult to pre- to the world. Regional cities such as Haiphong, dict the mix of metropolises, cities, and towns— Da Nang, and Can Tho will allow producers or the size of these settlements (box 4.6). BOX 4.5 Some advanced regional economies have adopted efficient systems of developing their cities Japan has developed its cities in a highly efficient way, between microprocesses and large-scale structur- by creating a well-integrated and well-connected spa- ing interventions. Also very useful for Vietnam are tial hierarchy of subcenters, linked by the most devel- the lessons from urban development in the Repub- oped subway network in the world. Rather than rely lic of Korea and Taiwan, China—with large-scale on excessive rural-to-urban land conversion and then peri-urban areas surrounding Seoul or Taipei—and suffer from detrimental urban sprawl, Japan based from the development of compact cities based on its urban growth on internal intensification through public transport in Hong Kong SAR, China, and in well-balanced spatial-planning policies and a balance Singapore. BOX 4.6 A portfolio of modern and livable cities Vietnam is still in the incipient stage of urbaniza- ning and City Classification System to meet the demands tion. The path that it follows in the next 20 years of the market and society. In some areas, the state will will determine the spatial development of cities. If have to play a key role in regulation and policy setting. land development continues in the business-as-usual In others, it will facilitate a greater role for the private approach of low-density development, Vietnam will sector, as in land redevelopment, mass transit, solid face increased congestion, illiquid land markets with waste, water supply, sanitation, and, to some extent, increasing housing costs, catching up to mass tran- social services. The other key principle will be to have sit needs in the metropolitan context, stretching out a level playing field for the public and private sectors. public services and externalities like air pollution and The path followed will require strong leadership environmental deterioration. at the central and local levels to promote the vision But if Vietnam chooses a low carbon path, policy of modern and livable cities with efficient and afford- makers will have to switch from a quantity to a quality able public services and a conducive environment for approach. They will have to fine-tune the urban plan- domestic and international businesses. 230 VIETNAM 2035 That depends on how families and businesses • Link cadaster to tax maps documenting “pick” different types of Vietnamese cities as potential revenue, based on different valu- places to live and do business, and how the ation formulas, to promote broader use of state corrects market imperfections. land taxation to generate revenue for local In preparing for the transition to upper- governments. Use this link to develop and middle-income status and a modern industri- disseminate draft regulations for land taxa- alized nation, authorities could enhance the tion required in the law. economic efficiency of their cities. This is crit- • Under the 2013 Land Law, expedite form- ical for higher productivity, greater innova- ing an independent valuation profession, tion, and the development of a vibrant urban and use land information to make the tran- middle class—markers of high-income econo- sition toward parcel-specific valuations. mies with vibrant cities. The focus should be on upgrading institutions and expanding con- Rationalize and make more transparent the nective infrastructure. land-acquisition processes The success of land acquisition for public interest and for economic development has Upgrading Institutions to Support led to its widespread use as an alternative to Urban Development developing land markets. Levels of compensa- Enable land markets tion are largely based on land-price tables At the core of urban policy reform is letting known to be vastly different from market land markets emerge and flourish. Reforming prices, leading to distorted investment deci- land institutions—such as strengthening land sions (including by companies with margin- registration and bringing in market land ally viable or totally ineffective business valuation—is a priority to reduce excessive plans) and a large number of complaints and and fragmented urban land conversion. denunciations (more than 10,000 a year). Increasing the transparency of land pricing by The conditions for public land acquisition establishing mechanisms to regularly publicize have been tightened in the 2013 Land Law. land values obtained in auctions and individ- ual land sales could be a good starting point. • Foreign-invested enterprises can no longer These efforts need to be tied to local govern- benefit from land acquisition. ment fiscal reforms that promote broader use • Investors must demonstrate financial capac- of land and property taxes as an alternative to ity for implementing a project and make a land-conversion fees for revenues. deposit in accord with the investment law. The supply of land for affordable housing • Investors are not eligible for any compen- for low-income households needs to be in sation if the land they received is taken close accordance with land policy. Going for- back due to noncompliance with invest- ward, the priority should be to make infor- ment plans (a 24-month delay). mation available in the public domain to help • Although reference to land-price tables establish common knowledge and inform the can be made, an independent land valua- decisions of investors. tion must be conducted for each land To enable land markets, the following acquisition project. Compensation must issues should be considered: be for land and for other livelihood- relevant activities and possessions (job • Increase the transparency of land pricing training, relocation, and plants and live- by establishing mechanisms to regularly stock) as specified in a resettlement plan publicize land values obtained in auctions that must incorporate input from the and individual land sales (for example, by affected population. cross-checking with buyers to deal with undervaluation) and to check these against The content of urban land-use plans the land price tables. specifies public goods and topics that may be MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 231 subject to externalities. Plans must be pre- access to affordable and adequate housing. pared in a public process, with detailed proce- The Housing Law has reoriented the housing dural instructions written in law (such as policy toward urban areas, particularly self- conducting meetings to discuss district-level built housing and affordable rentals. plans and issuing reports summarizing all responses received and how they have been Update and refine the City Classification addressed). Independent appraisal boards System should be established to provide technical Key recommendations here include: support and verification of plans at all levels. Detailed requirements for publicizing plans • Develop a new set of urban indicators to are also laid out in the law. shape a strategic approach to urbaniza- tion. This project is being undertaken by Create stable revenues from land the Ministry of Construction, which is Revenues from land currently make up a conducting studies focused on criteria to huge share in local government budget reve- be included in a new decree (Government nues. But given that most of these revenues of Vietnam 2015). See box 4.7 for are one-time revenues from transforming Shanghai’s use of urban indicators to guide land-use rights, they are neither stable nor strategic decisions. sustainable. This creates difficulties for local • Collect reliable and open data on urban governments when the real estate market indicators. Data at metropolitan levels are becomes stagnant, as in Da Nang recently.10 scarce. Indicators based on administrative International experience shows that real jurisdictions fail to reflect the changing estate taxes can be a stable source of reve- dynamics in peri-urban areas, where most nues. Vietnam should therefore consider pro- development takes place in cities under mulgating a real estate tax and a property pressure to urbanize rapidly. But cities are tax. Since such taxes are highly progressive, not islands, so their success is related to the they would likely promote better equality. planning and management of the space around them. The activities of cities go Make land available for affordable housing well beyond any local government’s An estimated 11,500 hectares of urban land is administrative boundaries to include peri- needed each year for affordable housing urban areas and the corridors that connect (World Bank 2015b). But the formal supply is them with other centers of activity. failing to keep pace with demand, forcing up • Create a spatial-development framework prices and reducing affordability, partly closely associated with the economic devel- because the existing land administration opment strategy. The government is consid- framework is complex and inefficient. Key ering regional planning as an approach for challenges are in delivering serviced land in a more efficient use of land and resources. mobilizing vacant or underdeveloped land in In 2009, Prime Minister Nguyen Tan Dung cities, tracking and enforcing the requisite approved the Adjustment of the Master 20-percent land contribution (Decree 188), Plan Orientation for Vietnamese Urban using land-value capture tools to extract value System Development up to 2025 with a from new development, and integrating land- Vision toward 2050. The plan identifies use planning and coordination between the key economic zones targeted to accelerate relevant ministries—Construction, Home socioeconomic development. These positive Affairs, Natural Resources, Public Investment, steps should be further developed in combi- and Transportation. nation with a reform of the classification The 2013 Land Law and the 2015 Housing system that establishes economic and social Law recommit the government to ensuring goals. These goals would form the basis for that low-income Vietnamese are not excluded a strategic spatial structure supported at the from the market and to supporting their local planning level (Kim 2014). 232 VIETNAM 2035 BOX 4.7 Shanghai moving away from GDP as a driving indicator of urbanization policy Shanghai has become the first major city or province cities have built successful careers on GDP-based eval- in China to abandon GDP metrics for 2015 as gov- uations, making it difficult to adjust their policy focus. ernment policy shifts toward growth’s quality over More than 70 Chinese smaller cities and coun- quantity. Analysts say an excessive focus on GDP ties and at least two municipal districts in Shanghai contributed to urban sprawl and environmental deg- had previously canceled GDP targets, but the deci- radation as officials encouraged the reclassification sion by Shanghai confirms a shift from the pursuit of of agricultural land to build housing developments. economic growth at all costs toward measures that Growth in GDP has long been a key metric to evalu- address unequal income distribution, problems with ate the performance of local officials, helping to deter- the social welfare system, and environmental cost and mine whether they were promoted. Officials in these in general encourage better quality of life. Source: Financial Times 2015, January 26. http://www.ft.com/intl/cms/s/0/2c822efc-a51d-11e4-bf11-00144feab7de.html?siteedition=uk#axzz3UeGtfHwM. • Generate a mechanism for metropolitan will require a dedicated management entity coordination. A clear framework for at a regional level. Political synchroniza- decentralization needs to be in place for a tion over the long term with provincial and metropolitan or regional approach. This local leaders (who have mandates of five entails delegating decision-making pow- years) will demand significant institutional ers at the regional level as well as creating innovation away from the current status management entities that enable the coor- quo. The influence of the regional entity on dination of policies and budgets between the policies of the various subregional local governments within the region. The localities may be stronger if they are tied to role of provincial government and other resource allocations from the local govern- subregional administrative divisions ment. The legal status of the regional entity would have to be analyzed to avoid dupli- must be clearly designed, as must its man- cation of administrative procedures and date over provinces and local governments. an extra tier of bureaucracy. A culture of Laws should define regional-planning planning at the central level and func- competencies, tax-collection structures, tional silos also needs to be revised. This and resource-allocation responsibilities— requires a shift from command-and-con- and the policies to ensure participation, trol planning systems to articulating a transparency, and accountability. common regional direction, aligned with those of other regions, and establishing Strengthen urban planning practical guidelines that can be imple- There is also a need to strengthen institutions mented at the subregional level. See for integrated urban planning—within and Poland’s experience in box 4.8, where the across sectors (land use and transport for emphasis has shifted from a centralized to example)—based on harnessing scale econo- a local planning approach. To attract mies at the corridor, metropolitan, and investment, transparency and account- regional levels. In countries such as Japan and ability must be firmly established at the Korea, the institutional mandates for land, local level to attract investment. Localities infrastructure, transport, and water resources need to develop capacity to prepare and are vested under one-line ministries. Such enforce detailed plans. arrangement encourages better coordination • Implement regional plans for economic of policies at the national and city levels. This and territorial development. This process integration calls for a “whole of government” MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 233 BOX 4.8 Poland’s spatial planning transition During the years of central planning in Poland, which investor/developer. However, reforms were not lasted until the late 1980s, urban planning was a accompanied by compulsory property taxes, even top-down exercise. It was based on theoretical mod- though private property was restored to its original els and standards, with limited relation to economic owners. In addition, replacing the old spatial plans reality and the possibilities of the state’s budget. within five to nine years with new planning tools was These “good wishes” plans focused on zoning land too radical and perhaps naïve, as spatial planning for housing and industry, as well as roads and other was made mandatory even with low capacity. The infrastructure needs, which were estimated centrally. majority of the municipalities could not perform their The central government also established urban stan- obligations effectively. dards that allocated land for education, recreation, The Land Use Planning and Management Act health, culture, retail, and other functions. Alloca- of 2003 brought a second stage of reform. It was a tions were generous, as land could be purchased (or complex effort to improve planning regulations and expropriated) as through eminent domain at very low instruments to adjust them, step by step, to come costs. The central government and its regional and to terms with a free-market environment. Local local branches were the main stakeholders in the pro- planning became more substantial and linked to an cesses, while urban planners and state-owned con- emerging strategic-planning practice, as well as to tractors (the word developer was not known then) the dynamics of the real estate market. But some simply followed their instructions. The planners’ task measures required further attention. Supplemen- was reduced to observing regulations emanating from tary planning instruments, introduced to accelerate the central government, which resulted in generations the master planning process, ended in many cases of risk-averse technical cadres. through the substitution of local plans. Development The first wave of reforms in the 1990s discontin- inconsistent with local spatial policies was in many ued urban standards, because the state was not able cases approved. Developers became the main players, to fulfill its own ambitious projections, even though sometimes at the cost of public interest. A key lesson land was allocated by master plans at nearly no cost. is that spatial planning should not be a rigid dogma Reforms also focused on altering planning structures and that binding local plans should ensure a spatial from a top-down, arbitrary tool of central authori- order that benefits society as a whole. Furthermore, ties to a function assigned to elected local govern- spatial-planning reforms should be part of a broad ments. These reforms ended the illusion of freely package of state reforms in the transition from a cen- available land donated by an omnipotent state/public trally planned economy to a market economy. Source: Buczek 2013. approach, which would require the central urban master plans, and sector infrastructure government to carefully review and align the plans are prepared by different departments, line ministries’ mandates to international best often run on different schedules, and use practices. inconsistent data and projections for plan- Urban planning departments need to ning. The timing of planning needs to be syn- strengthen their capabilities urgently to inte- chronized, and the number of plans that grate socioeconomic realities when develop- govern territorial space needs to be cut heav- ing physical plans. Master plans and other ily (ideally to two or three). Vietnam also physical plans need to be linked to the budget needs to create a professional cadre of urban process, for if plans cannot be supported by planners who can plan and manage cities. key investments, their credibility will suffer. As Vietnam urbanizes, planning must be In addition, coordination mechanisms can linked to economic strategies at the metro- align provincial and city plans, especially politan level. Key to metropolitan and since socioeconomic development plans, regional planning is assessing the extent to 234 VIETNAM 2035 which spatial strategies emanate from eco- additional layer of planning bureaucracy. nomic strategies. The economic influence of Instead, it should bring together planning cities is not confined to administrative bound- and financial instruments with manage- aries but spreads to a greatly enlarged metro- ment, which can range from simple coordi- politan area encompassing peri-urban areas nation, information exchange, and and rural hinterlands. Connected with func- capacity sharing between local govern- tional corridors to other urban centers and ments to a full merger of authorities. subcenters of activity, they can attain a regional scale. To reap the advantages of Reform residence policy agglomeration, urban centers would need to Policies and institutions need to be changed to become part of an economically and spatially further enable rural–urban migration. The defined system of cities. household registration policy should change The following principles can contribute to enable migrants’ easy access to services in to it: urban areas. In addition, fundamental reno- vations of vocational training and employ- • The economic strategy can be a tool for ment for migrants should equip them with coordinating metropolitan and regional skills to meet the needs of businesses and plans. There is a critical need to leverage urban populations. Infrastructure and basic regional plans by developing associated social services should support migrants, management structures and investment including housing, schooling, health care, incentives for cities in the region to work health insurance, and social insurance. And together. associations should be formed to support and • Investment must focus on successful protect the rights of migrants. agglomeration, concentrating it in clearly defined clusters. The current radial struc- Connective Infrastructure to Better Link ture around Ho Chi Minh City might fail Cities and Neighborhoods to encompass the productivity in growth areas outside the core area, which must be Vietnam’s connectivity challenges are attribut- supported through integrating land-use, able to both the transport of goods across transport, and infrastructure planning to regions and congestion within urban areas. optimize market demand, value chains, Institutional reforms will be essential to population projections, and goals for coordinate investment in cross-province infra- social and economic development. structure and to improve the quality of intra- • Not all cities can thrive on the same indus- metropolitan connectivity. Improvements to try. For example, it would be unrealistic to roads, rail, and seaports will all be necessary to encourage every city in the region to attract lower internal transport costs and connect investment as an information technology Vietnam to other regional markets (box 4.9). (IT) industry center. The region would ben- efit from complementary industries Mainstream integrated transport and logis- financed by investments in spatially effi- tics platforms cient infrastructure. Enabling collaboration The government should push to mainstream within a system of cities requires mecha- integrated planning for transport and logis- nisms for coordinating resource mobiliza- tics across modes, geographies, and public tion, allocation, and service delivery. sector functions. The focus should be on key • Management units must be created consis- road corridors and expressways to tackle tent with the most efficient methods of for- issues in supply chains and reduce the bur- mulating an economic strategy. The spatial den of road transport costs on the economy. development system must not limit man- Integrated planning that is less decentralized— agement options to fixed administra- for example, at the corridor level, metropoli- tive boundaries. Nor should it create an tan area, conurbation, or even regional MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 235 BOX 4.9 Potential for high-speed rail Evidence from the literature suggests that high- distances between cities, differentiated production speed rail (HSR) links were developed to increase centers along the corridor, facilitation of logistics and accessibility and connectivity between core cities people, and interjurisdictional coordination. in the range of 400–600 kilometers (Vickerman Vietnam, given its long coastline (close to 2,000 2012). The direct causality of the HSR and its eco- kilometers), needs to sequence interventions to nomic benefits (given the high costs of investments) improve connectivity from Hanoi and Ho Chi Minh for agglomeration and economic concentration are City from a public investment perspective. In the difficult to establish because the experience has next 10 years, policies should focus on strengthen- been mixed (Cervero and Murakami 2012). China, ing of agglomeration around Ho Chi Minh City and France, Japan, the Republic of Korea, and the Hanoi, with an emphasis on improving the connec- United States have developed HSR from a different tivity of the secondary cities around these large cities, perspective, some focusing on connectivity from a such as Hanoi–Haiphong or Ho Chi Minh City–Can travel passenger demand perspective (Japan, United Tho–Binh Duong. Once these agglomerations are States) and others focusing on facilitating better well established, the focus could shift to connecting access across key economic cities (China, France, Ho Chi Minh City to Central Vietnam and Hanoi to Korea, and the United States). Central Vietnam. This can be done by improving the Promoting HSR requires careful planning and road network, but also by improving the existing rail strategic vision to promote corridor development and network to facilitate logistics. Finally, with economic is often part of a deliberate policy to promote growth benefits and available private long-term financing, it and development, which is often resource-intensive. is possible for HSR to link the major agglomerations Other factors also play an important role like optimal (Hanoi–Ho Chi Minh City). Source: Report team. level—would result in better-integrated solu- and Trade. This strategy would also be sup- tions. Such an approach might have pre- ported by strong fiscal discipline through ade- vented, for example, the oversupply of quate auditing and reporting mechanisms container-handling capacity at Cai Mep–Thi because the gap between fiscal space for trans- Vai coexisting with fully used facilities in port, investment plans, and the actual budget Ho Chi Minh City only 80 km away—and is shrinking. That offers a tremendous oppor- therefore part of the same freight corridor. tunity to improve the ability to leverage public Integrated planning that is less fragmented, resources for private investment and financing with fewer agencies, may not only help to through public-private partnerships for large simplify the planning process but also transport infrastructures. strengthen accountability, since responsibility Integrated planning can help the govern- is more clearly assigned to parties that are ment agencies conceive, design, and imple- best able to manage the planning and associ- ment individual connectivity-enhancing ated execution. The current utilization rate of projects. In addition, a national strategy for the Cai Mep–Thi Vai port is less than 30 per- logistics and transport could provide goals, cent, because its supply–demand balance is approaches, and policy direction to pursue at hindered by the continued operations of the national, provincial, and local levels. The inner-city river ports in Ho Chi Minh City. joint Port Authority of New York and New A national strategy would also increase Jersey in the United States better aligns the collaboration across government agencies, interests and plans of an entire region. The including the Ministries of Transport, Finance, Port Cluster Management Authority No. 5 in Planning and Investment, and Industry the Ho Chi Minh City region, for example, 236 VIETNAM 2035 can be a good first pilot to adopt the U.S. China suffers from severe urban sprawl based experience. on giant infrastructure and isolated buildings, a marked contrast to the much finer grain of Expand metropolitan transport solutions Chinese historical spatial forms. This new Traffic congestion will increase even with stage of development for Chinese cities has increased construction of roads for individual severed the traditional links between family means of transportation. And no super city generations and between neighborhoods. can address traffic congestion without a large- Spatial zoning and large-scale separation of capacity public transport system. The activities have greatly increased mobility and increased use of cars and changes in housing imposed strict separations between economic types require multimodal solutions. The logis- classes and the time for work and for leisure. tics infrastructure of the two largest cities, The diversity among Chinese cities, with Hanoi and Ho Chi Minh City, cannot sustain their different local climates and cultures on a cars as the major means of transportation. Of semicontinent spanning many latitudes, has similar size to such European cities as Paris been reduced to a single uniform category of and Amsterdam, Vietnamese cities can modern city, which consumes massive develop integrated multimodal transport sys- amounts of energy and will be locked into car tems by basing the projects on their successful dependency far into the future. This urbaniza- counterparts in Europe. The fine grain of tion model is not only environmentally Vietnam’s urban fabric and street patterns is unsustainable—it also jeopardizes the future advantageous when businesses and services of China’s transition toward a more mature are rebuilt at walking distances from each society less dependent on low-cost labor. The other and a dense and efficient public trans- goal was more innovation as a research-based port network courses through their periphery. engine of economic growth. As Vietnam enters a crucial phase of China has so far built its intra- and interur- urbanization—shifting from 30 to 50 percent ban networks at a much larger grain than of its land area—policy makers need to plan other countries. The result has been an expo- modes of transportation that will best nential collapse in the total number of possi- enhance urban mobility. The 30–50 percent ble links and paths between urban elements, urbanization process in China has been car- compared with cities and city systems in ried out through a massive transformation of Europe and the United States. This lack of rural land into urban land and the develop- medium- and small-scale street networks has ment of large-scale infrastructure. But this a big impact on managing traffic flows. urbanization has led to massive urban sprawl That rules out the deployment of a variety and a huge dependence on cars. Japan, by of transport choices—walking, cycling, buses contrast, has maintained and—if anything— with short distances between stops, tram- increased its connectivity and diversity while ways, dense subways, regional trains. People limiting rural land conversion. The result: a cannot efficiently time their daily commute. vibrant urban economy and social integration Everyone has only two choices: the large- through myriad microprocesses. scale mass transit system or the urban high- way. The lack of short-range local diversity Lessons from China: Avoid locking in to a and choice creates inefficiency. The whole “large scale” mindset system has peaks that could be better dissi- In China’s early stages of urbanization, the pated by a variety of modal choices in a large massive and accelerated conversion of rural “space of paths,” fitting the distances to land into urban land brought in large amounts travel in a finer grain, and a better-structured of capital, further fueling the process. The city organized around a variety of scales. To resulting economic growth led to large-scale avoid congestion, the large scales are overdi- industrialization and social transformation. mensioned and segregated from the smaller Further, as mentioned previously, at this stage scales, which prevents intermediary and MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 237 small scales connected to the large scale. This There also is much to learn from other reinforces large scales against intermediary Southeast Asian countries whose develop- and small scales and eventually locks cities ment level is not greatly higher, such as into large-scale dependence. Indonesia, the Philippines, and Thailand. But some urban areas in the region still face many problems. For example, to different extents, Japanese Successful Organization Based Bangkok, Jakarta, and Manila have to deal on Fine Grain with extremely difficult issues that reduce In many respects Vietnam’s spontaneous their competitiveness. Hanoi and Ho Chi urban dynamics are closer to Japan’s, whose Minh City certainly do not want to fall into narrow and elongated shape is similar to the similar situation in the future. So, it will Vietnam’s, and its population is roughly the be very difficult for Vietnamese urban areas same. Japan increased its rate of urbaniza- to avoid troubles if the country relies on the tion from 25 percent in 1950 to 65 percent experiences of countries with just a little in 1980, while rising over 30 years of sus- higher level of development. tained growth from poverty after the In contrast, Hong Kong SAR, China; destructiveness of World War II to become Korea; Singapore; and Taiwan, China, are the third-largest world economy, just after success stories, attributable to reasonable pol- the United States and China. Japan devel- icies. This is the destination that Vietnam oped the largest city in the world, Tokyo, wants to emulate. The urban development with 38 million inhabitants, in a highly effi- lessons from Korea and Taiwan, China, with cient way. Myriad microprocesses created a large urban areas around Seoul and Taipei highly complex, well-integrated, and well- and their urban management experience, connected spatial hierarchy of subcenters, especially the urban compression develop- linked by the world’s most developed sub- ment based on public transport in Hong Kong way network. Rather than rely on excessive SAR, China and Singapore, are of great value rural to urban land conversion and then suf- for Vietnam. fer from detrimental urban sprawl, Japan based its urban growth on internal intensifi- Strengthen rural–urban connectivity cation through well-balanced spatial- The rural–urban relationship needs to change planning policies and myriad microprocesses from competitive to complementary to create for larger-scale structuring interventions. synergy. Rural areas can be the supplier and By preserving and reinforcing fine-grain market for urban areas. Peri-urban areas can and local connectivity, Japan has avoided the be greenbelts, providing leisure for residents destruction wrought by the collapse of the of big cities. centuries-old social structure in China. Balanced spatial development between Japanese society supports both social resil- urban and rural areas can ease the excessive ience and vibrant economic activity. By pro- concentration of people, reduce congestion viding an appropriate framework for and social problems in major cities, and pro- investment at the district, city, and national mote agglomeration and scale economies in scales, Japan has produced well-balanced cit- urban centers. When the rural–urban gap is ies with high degrees of connectivity—also at narrowed, migration will be based on peo- the district, city, and national scales. The ple’s preferences rather than pushed by numerous medium-scale projects and invest- poverty. ments, in comparison with the very large- The core of Vietnam’s economic success is scale projects in China, have avoided the rapid growth while keeping inequality in large-scale dependence that China suffers check. But continuing this success requires from—and have instead contributed to the knowing how to integrate rural areas into emergence of livable, low-carbon, and suc- urban engines. Improving rural–urban con- cessful cities. nection is the key to tackling this challenge. 238 VIETNAM 2035 Infrastructure is an important element of residential concentration that overloads infra- rural–urban connection. The development of structure in the short term in large urban a three-tier urban system, as mentioned areas. Removing obstacles to fulfilling proce- above, will facilitate the integration of regions dures, leasing land, registering businesses, and and remote areas. For urban centers in key providing tax-free and fee-free incentives can agricultural areas—such as the Red River encourage professional farmers and house- Delta, Central Highlands, Southeast, and hold businesses to register as enterprises to Mekong River Delta—the state should priori- expand production. Procedures and costs tize investments to create systems of transpor- related to business registration should be tation, warehouses, and vehicles appropriated reduced as much as possible. Enterprises that to agro-ecological zones. It also needs to form hire local labor, sign long-term contracts, or systems of railways, ports, and specialized offer vocational training for employees after road or air transport for the major agricul- recruitment should receive incentives and spe- tural products. In addition, synchronous ser- cial support (such as land and credit). Service vice systems, especially agricultural science enterprise groups that organize agricultural centers, can tie research to training and production, agribusiness, and high-tech pro- extension. cessing enterprises and create added value Industrial service clusters should be devel- from sub-sectors’ byproducts should be given oped at district level, linking specialized pro- priority. In addition, the quality of labor and duction regions with main markets for labor markets should be improved in rural agricultural products. Attracting enterprise areas. Sharing vocational training expenses investment is necessary to connect farmers to with enterprises that employ local labor markets, mobilize local labor, and reduce the would also be helpful. Annex 4A Haiphong City: The Challenges and Promises of a Gateway in Transition Haiphong, Vietnam’s third-largest city and heavy vehicles traveling to and from the most important international gateway to Haiphong port. the northern region, illustrates the challenges Despite being Hanoi’s gateway to the facing Vietnam as it manages its dual transi- world, Haiphong has thus far been developed tion from lower to higher urbanization and as a river port. As a result, the container ter- from limited to wider connectivity. According minals currently serving Haiphong port, to the 2009 population and housing census, including Hoang Dieu, Chua Ve, and Dinh Haiphong has an urban population of Vu, are limited in draft, able to receive vessels 847,000, although the broader province of of up to only 2,000 TEUs (twenty-foot equiv- Haiphong has about 1.9 million people. It is alents) in capacity. This increases the cost of located approximately 105 km from Hanoi transport per landed container and reduces on National Highway 5 (NH5). the efficiency of port operations, which are NH5 is the main artery linking Hanoi with fragmented across multiple small vessels. Haiphong port, a cluster of container, bulk, Unsurprisingly, terminals at Haiphong port and break-bulk terminals along the Cam are nearly full, most with utilization rates of River. A limited-capacity road, it is heavily at least 70 percent. exposed to congestion, particularly because it Recognizing this pressing supply–demand passes through Haiphong’s city center, con- mismatch, the government has embarked on tributing to inner-city congestion and increas- large-scale infrastructure projects. First, an ing emissions. It also undermines safety due international-standard expressway has been to the mix of motorbikes, light vehicles, and under construction over the past six years MANAGING URBANIZATION FOR GREATER ECONOMIC EFFICIENC Y 239 to link Hanoi and Haiphong. This 105 kilo- container-freight stations; consolidation and meter, $2 billion facility will bypass deconsolidation centers; and a privately oper- Haiphong city center and connect Hanoi ated “logistics zone” for handling, staging, directly with Haiphong port. With these storing, and repairing containers. In other features, the Hanoi–Haiphong expressway words, an integrated ecosystem of infrastruc- will become a game changer, providing hin- ture and service provision is developing in terland connectivity for Vietnam’s northern Haiphong thanks to a critical mass of connec- region. tivity improvements. Second, the deep-water port of Lach Haiphong is the only rail-enabled port in Huyen is being developed on Cat Hai Island, Vietnam (connected all the way to Kunming, to the east of Haiphong City. In Phase 1, China) with direct access to the Red River expected to be operational in late 2017, it Delta inland waterway network and to an will have annual handling capacity of 1 mil- international airport (Cat Bi). So further lion TEUs, with a draft of 13 million, able investments in and improvements to rail, air, to handle vessels of up to 6,000 TEUs in and inland waterway infrastructure provision capacity initially and up to 8,000 TEUs or and service delivery could expand the multi- more after further channel dredging. Lach modal connectivity of Haiphong and the Huyen will be directly connected to the broader Hanoi and northern region even fur- mainland via what will become Vietnam’s ther. For example, in January 2015 Cat Bi longest sea bridge, with a total length of Airport launched a $70 million expansion of 15.6 km. The bridge will connect Lach its passenger terminal, which will modernize Huyen with the Dinh Vu industrial park and the airport facilities and bring passenger the Hanoi–Haiphong expressway. By bring- capacity from 800,000 to 4 million travelers a ing large mother vessels for the first time to year. The new terminal is expected to become northern Vietnam, Lach Huyen, like the operational by the end of 2016. Hanoi–Haiphong expressway, promises to With simultaneous improvements to air, be a connectivity game changer for the land, and maritime connectivity, Haiphong northern region. sets an unprecedented example of the success- Lach Huyen can be expected to bring ben- ful development of a major regional gateway. efits to container shipping lines (and their But the sustainability of these investments, customers) by allowing them to deploy which run into billions of dollars, will depend larger ships with lower costs per container on how the facilities are planned and man- unit (World Bank 2013). The calling of aged going forward. Making full use of the mother vessels at Lach Huyen may result in newly available capacity in a way that truly savings of about $74 million a year through enhances connectivity will require multimodal the elimination of feeder vessels now trans- coordination, which is not generally pro- shipping containers to foreign ports. moted under Vietnam’s current institutional Shippers and, by extension, end customers in framework. And if current demand expecta- Vietnam’s export products will ultimately tions materialize, Lach Huyen will by 2022 benefit from having access to more direct find itself at capacity and need to deliver routing choices to more markets at lower Phase 2 of its development plan. Government logistics costs than today. authorities and all relevant stakeholders (ter- Typical of network-based infrastructure minal operators, connecting road operators, and services, initial investments to develop shippers) should undertake integrated plan- network density attract further development. ning for Phase 2, well in advance of the point For Haiphong, the Lach Huyen port and when the capacity is already reached and the Hanoi–Haiphong expressway have demand and supply have again fallen into attracted complementary facilities and ser- mismatch. vices, such as modern international-standard Lessons can be learned from developing warehousing and cargo-handling facilities; Phase 1, which had delays of about two years 240 VIETNAM 2035 due to financing, technical, and implementa- Notes tion constraints (such as delays in land acqui- 1. After controlling for skill level of the labor sition and resettlement compensation). It is force. See Rosenthal and Strange 2003. also necessary to ensure that the quality and 2. See http://www.evn.com.vn/News/Tin-tuc-Hoat standard of all connecting infrastructure— -dong/Dau-tu-Xay-dung/998-so-xa-nong-thon across local roads, expressways, waterways, -tren-ca-nuoc-co-dien201618.aspx. and railways—remain adequate to handle the 3. See http://www.baomoi.com/Nam-2015-Viet expected higher volumes facilitated by Lach -Nam-co-120-6-trieu-thue-bao-di -dong Huyen and the other Haiphong terminals. /c/18268774.epi. Despite its scale, the current development 4. See http://densityatlas.org/casestudies/. drive in Haiphong suffers from the modal 5. See http://khucongnghiep.com.vn/tinhoatdong planning and delivery imbalances that have / tabid/63/articleType/ArticleView/articleId affected much of the past development of /1113/Default.aspx. 6. The planning framework for urban develop- Vietnam’s transport infrastructure. It has ment in Vietnam follows the orientation speci- largely neglected rail (primarily) and inland fied in the General Plan for Urban System in waterway (secondarily) connectivity improve- Vietnam (Decision 445/QD-TTg dated ments. As the only rail-enabled port in the 07/4/2009). country, and as a link between the Chinese 7. This is an estimate by the World Bank; the lack and Vietnamese rail networks, Haiphong and of data in transport and logistics is a serious the northern region have substantial opportu- impediment to policy reform and moderniza- nities for rail intermodal connectivity. The tion of this sector. nature, scale, and implications of this oppor- 8. These data are taken from the substantial tunity should be considered, measured, and household surveys undertaken by ALMEC in integrated into the planning for regional con- 2008 for Da Nang, 2004 for Hanoi, and 2002 for Ho Chi Minh City. nectivity in the future. 9. The possible development of surface public Finally, the urban fabric of Haiphong as a transport in Vietnam is also severely limited by city should not be neglected. Although the lack of road space: 2.5 percent in Ho Chi Haiphong as a port city has an economic Minh City (only 14 percent with a gauge impact that goes well beyond its city limits, greater than 12 meters, which allows the pas- the multimodal infrastructure that makes it a sage of large buses); 35 percent usable only by gateway should be planned in the context of two-wheelers; and 7 percent in Hanoi com- the city itself to ensure that urban transport pared with 25 percent in Paris, for example. can coexist with gateway transport. This rep- 10. See http://vietnamnet.vn/vn/kinh-doanh/284910 resents yet another dimension of integrated /giac-mo-da-nang-con-gi-sau-con-sot-dat.html. planning—integration across modes for both freight and passenger transport. 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Taking Stock: An Update on ———. 2015b. East Asia’s Changing Urban Vietnam’s Recent Economic Developments . Landscape: Measuring a Decade of Spatial Washington, DC: World Bank. Growth. Washington, DC: World Bank. 5 Achieving Sustainable and Climate-Resilient Growth Main Messages Strengthening the management of natural assets is critical in transforming several pro- Vietnam is a long narrow country with nearly ductive sectors, including agriculture, fisher- 3,260 kilometers of coastline, two major river ies, forestry, tourism, and food and beverages. deltas, and mountains on its western and Improving water and air quality is also impor- northeastern borders. It depends on natural tant for sustainable economic growth and for resources to a much larger extent than other quality of life. Achieving these goals will middle-income countries in the region. require the country to make more productive The nonagriculture sector has grown at twice and sustainable use of its natural resources the pace of agriculture since 1990, and rural and to be innovative in addressing environ- villagers have migrated to cities and craft vil- mental constraints to growth. Inaction will lages to seek jobs in industry and services. But impose a drag on growth and otherwise strong economic growth since the early 1990s worsen living conditions, as in other countries and the ongoing economic and spatial trans- such as China where air pollution is calcu- formations have brought with them severe lated to contribute to 1.6 million deaths a stresses on the environment. year, roughly 17 percent of all deaths in that The sustainability of Vietnam’s current country (Rohde and Muller 2015). economic growth model is threatened by the Compounding the problem, Vietnam is degradation of land-based assets and air vulnerable to climate change and weather and water pollution. The country’s income variability. Climate change threatens develop- aspirations for the next 20 years will require ment, with more than half the workforce its economy to rapidly industrialize and dependent on natural resources and the urbanize. Achieving the rapid growth needed majority of the population living in coastal to meet these aspirations by conducting busi- areas and low-lying deltas. Models predict ness as usual will further degrade the coun- that the mean temperature increase will be try’s natural assets and lower productivity 0.6–1.2°C by 2040 and 1.1–3.6°C by 2100. growth between now and 2035. And eco- A 2°C warming scenario projects heat nomic growth may be more severely compro- extremes covering nearly 60–70 percent of mised beyond that. 243 244 VIETNAM 2035 the land and a higher frequency of intense The importance of these three action areas storms and associated extreme rainfall. may be seen in the solutions for the major Social costs of environmental and natural environmental challenges that Vietnam faces. resource degradation stem from the inequi- Reversing land degradation will require table distribution of these economic costs. changes in agricultural practices and greater The poor in rural areas are mainly in the investments in preserving ecosystem services. Northern Mountains and Central Highlands These shifts will require coordination within or in some of the coastal provinces, areas vul- government and between the public and pri- nerable to climate change. Unsustainable vate sectors, and developing accessible and resource use often blights fishing communi- user-friendly data and knowledge that can be ties and ethnic minorities, who are reliant on used in decision making. They will also surrounding natural assets for their liveli- require a functioning land market, accelerated hoods and well-being. Similarly, vulnerable restructuring of SOEs engaged in natural children and elderly among the urban poor resources, and incentives to mobilize private are more likely to bear the costs of air and investments. Local governments will require water pollution. incentives to address land degradation and to These environment-related outcomes adopt environmental policies that may result have several underlying causes. Public in short-term costs but guarantee long-term investment decisions are neither well- gains. As interventions are pushed through, coordinated nor generally efficient while oversight must ensure that they do not harm public institutions to enforce environmental vulnerable communities. regulations lack adequate capacity and For reducing air and water pollution, the resources. Market imperfections and pricing government will need to enhance governance distortions undercut private sector invest- by tightening coordination among the numer- ment. Similarly, the state-owned enterprises ous ministries involved (such as agriculture, (SOEs), such as those in forestry, hinder pro- energy, industry, and transport) and remove ductivity gains and generate limited public policies that maintain artificially low tariffs, benefits, while contributing to degradation such as unpriced irrigation water. Equally of the resource base. Poor coordination important will be enforcing standards for among key ministries with overlapping good practice and imposing penalties and mandates in implementing climate change fines for violating regulations. The responsi- action plans—for which financial resources ble public institutions will need support to are limited (World Bank 2015)—also strengthen their capacity to coordinate among complicates matters. themselves and to monitor and enforce com- To achieve sustainable growth, Vietnam pliance. This approach will be especially will have to do the following: important in meeting the growing demand for energy, shaping not only the impact of the • Improve governance through strong insti- country’s energy mix on air and water quality tutions that are better coordinated at but also its footprint from greenhouse gas implementing and enforcing policies, (GHG) emissions. plans, and investments. Adapting to climate change will require • Develop incentives for private and public better governance through coordination investments that are innovative, reduce envi- among multiple agencies and levels of govern- ronmental pollution, and increase income ment on strategic regional plans. Efforts to and nonincome measures of welfare. reduce the exposure of different cities in a • Ensure that information is credible region to climate change will need to be coor- and publicly accessible, informs decision- dinated. It will be similarly important to coor- making, improves monitoring, and dinate among line agencies and levels of enhances accountability. government in watersheds, where the impact ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 245 of changes in surface water availability Shifting Vietnam to a more environmen- will need to be addressed jointly to reduce tally sustainable path for economic growth disproportionate negative impacts down- will have trade-offs. The main one is to bear stream. Public and private investment in upfront the costs of new technologies and enhancing resilience to climate change will be policy measures for sustainable growth. essential for a sustainable growth path These will yield long-term benefits and because of the country’s vulnerability to leave open options for new types of growth, climate-related disasters such as flooding and such as nature-based and cultural tourism. drought, and its exposure to sea-level rise. They will also help retain uncontaminated Another fundamental need is to build the data water resources for fish production. The net and evidence base for taking decisions using cost of sustainable growth is usually monitoring systems like Hydromet. modest. Vietnam is well placed to rethink its growth path and embark on a sustainable, Environmental Sustainability: A inclusive, and resilient growth trajectory to 2035. It has approved several strategies Key to Growth and Development (for example, Climate Change Strategy), Vietnam, a major development success story, signed on to various international treaties, is aspiring to industrialization, greater and launched market-based instruments to modernity, and a higher quality of life. improve resource use (for example, payments As part of this aspiration, the country is aim- for forest environmental services). Further ing for an annual growth rate of 7 percent developing its current approach and adopting per capita. Yet if it pursues these goals fol- additional measures would minimize the lowing business as usual, environmental costs of degradation on growth, augment stresses from income growth, urbanization, resilience to climate change, and meet and industrialization are likely to increase national commitments the government has significantly between now and 2035. made in, for example, its Socio-Economic Without changes in policies and practices, Development Strategy (2011–2020), which growth will place unsustainable pressures on calls for better policies and mechanisms to land, water, and energy resources. Put sim- improve the collective economy, farm-based ply, real growth that takes account of a economy, and craft villages in achieving sus- depleting resource base will be lower than tainable development. measured growth, and so undermine health, Worldwide experience indicates that sus- productivity, and development potential. tainable growth requires policies that deal The environmental quality of water and air with political economy realities, such as is important not only for ecosystem health vested interests and entrenched behaviors. and the quality of life but also for economic It also requires incentives to internalize exter- growth and development. nalities and innovative financing instruments Climate change poses a major threat to to support long-term investments. Sustainable development in Vietnam, where more than growth should thus be based on strategies 50 percent of the workforce and income that do not bind the country to a path with depends on climate-sensitive natural resources. irreversible adverse impacts but that maxi- The majority of the population lives in coastal mize local and immediate benefits without or low-lying deltas. Without considering generating negative externalities. Policies potential changes in temperature, rainfall, and should promote and incentivize smart other climatic variables, old and inefficient decision-making and innovative investments infrastructure and current social development by the public-private sector, and facilitate paths could increase economic vulnerability. financing of the upfront costs for sustainable How Vietnam handles this transition over growth. the next two decades will determine whether 246 VIETNAM 2035 the country can maintain its economic adaptation to climate change. Policy makers growth and move into the higher reaches of will need to direct growth to a sustainable upper-middle-income status—or whether it path that gets mired in an expanding cycle of dirty industries, degraded natural resources, and • Recovers and maintains land resources; polluted land, air, and water. Many coun- • Builds climate resilience into eco- tries have grown at the expense of environ- nomic planning and infrastructure mental quality and natural resource development; and degradation, and they have come to regret it. • Restores and preserves the environmental The “grow now, pay later” strategy is often quality of water, air, and land resources by counterproductive, since the damage is ensuring a continued clean, affordable, either irreversible or costs more to correct. and sustainable energy sector that provides From a natural capital perspective, the real sufficient energy to a growing economy income of these countries did not grow as while minimizing environmental and social fast as traditional measures of national impacts. income suggest. Improving environmental quality is critical Countries such as Germany, Japan, for Vietnam to transform itself in several pro- Morocco, and the Republic of Korea have ductive sectors, including agriculture, fisher- sought to limit the drag of poor environmen- ies, food, beverages, forestry, and tourism. tal performance on growth and to improve It must also minimize the costs that poor the quality of life. These development paths households bear in vulnerable regions include some of the necessary conditions for (Central Highlands, Northern Mountains, sustainable, inclusive, and resilient economic and coastal areas). A Harvard University growth (box 5.1).1 The conditions include the study estimates that each year Vietnam has following: about 4,000 premature deaths related to generating coal-fired power. • Get the prices right. Taking early action to improve the envi- • Institute policies that complement pricing ronment can reduce the risk of investments (or substitute for them when prices are leading to hidden costs—such as those for ineffective or unchangeable). health—and exceeding the country’s eco- • Make needed financing available. logical carrying capacity. In China, for • Manage the transition so that changes do example, environmental degradation cost not disadvantage the poor (Fay et al. 2015; 9 percent of gross national income in 2008. World Bank 2012). In 2014, 60 percent of groundwater sam- ples from 200 Chinese cities showed poor For Vietnam and other countries aiming groundwater quality, while 16 percent for more sustainable development, this means of the samples were extremely poor. three main actions across such key sectors as Contamination in and around industrial energy, industry, urban, water, land, agricul- sites and arable land in China also poses ture, fisheries, and forestry: threats for urban expansion and food safety. Pollution has become a leading 1. Improve governance and strengthen insti- cause of human illness and water stress in tutions to coordinate, monitor, and China. enforce plans, policies, and regulations Vietnam faces environmental concerns for sustainable natural resource and envi- that require dedicated attention from policy ronmental management. makers to address the main challenges to 2. Institute innovative incentives for public- optimizing sustainable use of natural assets private investment that benefit the envi- and improving productivity—land degrada- ronment and the poor by getting prices tion, air and water pollution, and limited right, creating an enabling regulatory ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 247 BOX 5.1 Gains from sustainable, inclusive, and resilient growth A wide range of countries have adopted prac- enhance the competitiveness of industry by reduc- tices to engender green growth. Such policies in ing production costs. Benefits from measures to Germany, for example, have enabled an interna- reduce GHG emissions can also be incorporated tionally competitive environmental goods and in agriculture, by—for example—avoiding exces- services sector to burgeon, focusing on renewable sive and inappropriately timed application of fer- energy. Under the German model of promoting tilizers, notably nitrous oxide. This measure could wind and solar power, the government needed to lower farmers’ production costs and prevent yield- create strong financial incentives for the industry. reducing soil pollution. In Costa Rica, performance-based payments for A sustainable growth path is also important for green practices have amounted to $230 million Vietnam to meet national commitments. Its Socio- since their launch. Funds come from a fuel tax and Economic Development Strategy 2011–20 includes a water tariff. In the Republic of Korea, invest- several environmental targets, including increas- ment in green infrastructure generated—after two ing forest cover to 45 percent. These targets ensure years—a quarter of the investment value through that most urban and rural residents have access to job creation. clean water and sanitation. They guarantee that all Some benefits of a green growth path are new production facilities and businesses apply clean improved management of water, land and soil, technology or are equipped with pollution reduction atmospheric assets, and sustainable fish and tim- or waste disposal devices. They also make certain ber stocks. Economic benefits include the resil- that more than 80 percent of existing businesses ience of assets to natural hazards and exogenous achieve business environmental standards. In 2012, shocks and upgraded adjusted net savings. Social Vietnam also adopted a green growth strategy that benefi ts include improved health, preservation of aims to achieve a low-carbon economy to enrich cultural heritage, and improved and stable gover- natural capital and become the principal direction nance institutions. Quantifying some of these ben- in sustainable economic development. The National efi ts is diffi cult. For Vietnam, a benefi t of such a Environmental Protection Strategy has been in growth path includes reductions in the cost of cli- place since 2004 and commits Vietnam till 2020 mate change adaptation, such as lowering the total to continue to improve living-environment quality. cost of adaptation in aquaculture (estimated at The country will also enhance proactive adaptation $130 million a year over 2010–50). It would also capacity to climate change. It has also committed to reduce the cost of wastewater management, which, controlling and limiting environmental pollution, if unaddressed, could range from $12.4 million to degradation of natural resources, and biodiversity $18.6 million a day in 2030. deterioration. Policies that promote sustainable growth can do Building on several of these national commit- more than improve environmental management. ments, Vietnam has put forth its Nationally Deter- They can lead to a growth path that includes invest- mined Contribution (NDC) to mitigate climate ments with low greenhouse gas (GHG) emissions change. This NDC presents the country’s GHG and notable economic and public health gains. reduction path for 2021–30, which includes reduc- For example, clean transport is associated with ing domestic GHG emissions in 2030 by 8 percent substantial fuel savings and reduced air-quality- versus business as usual. With international support, related complications and deaths from respira- Vietnam commits to reducing emissions by up to tory illnesses. At the household level, funds that 25 percent. The NDC also describes the adaptation would otherwise be spent on filling the tanks of gaps in financing, technology, institutions, policies, cars with gasoline could be used to purchase other and human resources, as well as the priority adapta- goods and services. Improved energy efficiency can tion measures for 2021–30. 248 VIETNAM 2035 environment, and increasing access to change in soil features, vegetation, rainfall long-term financing. patterns, and climatic conditions in some 3. Improve public access to and use of infor- parts (Bao and Laituri 2011). The total mation for decision making, monitoring, erosion-prone area amounts to 13 million and accountability. hectares, or 40 percent of natural areas (Nguyen 2010). Unsustainable agricultural practices Environmental Challenges in loom large in accelerating land degradation Vietnam Today and in the Future as well as other environmental concerns Growth over the past 25 years has imposed (box 5.2). Despite the conversion of an esti- significant environmental costs in Vietnam, mated 700,000 hectares from agricultural such as rapid depletion and degradation of to nonagricultural uses, the total area under natural resources and environmental pollu- agriculture has grown nearly 15 percent tion from urban and industrial wastewater. (from 8.9 million to 10.2 million hectares) While urban water and air pollution are since 2000. Most of this expansion took beginning to pose serious health hazards, place at the expense of upland or mangrove exacerbating the risks is rapidly growing forests. The 1990s’ growth of coffee and energy consumption, which is increasingly aquaculture production also occurred reliant on coal-powered electricity generation. largely at a cost to forests.2 Expansion con- Vietnam also is one of the countries most vul- tinues through increased use of steeply nerable to climate change, with settlements sloped land for cassava production in and economic activity in the Mekong Delta at upland areas and a surge in rubber planta- especially heightened risk. In recent years, tion areas on the back of recent price Vietnam’s increase in GHG emissions has increases. been one of the world’s fastest. Agricultural land is also being cultivated more intensively. While the area under paddy has changed little, the total harvested area Natural Resource Degradation grew by an average of 1.7 percent a year dur- Land degradation and soil erosion ing the 2000s. This reflects a shift toward Land is a relatively scarce resource in double and triple cropping. But expansion of Vietnam, with acute stresses on its quality. the third rice crop in the Mekong Delta has With just 0.11 hectares per capita, one-sixth had severe environmental effects. Disruption of the world average, Vietnam ranks 159th in of natural flooding processes has restricted the world in per capita land resources. the transfer of nutrients and normal cleansing Pressures are exacerbated by the fact that effects, leading farmers to use more fertilizers 9.3 million hectares (representing about and pesticides, often at the cost of soil quality. 28 percent of total land area) are considered In upland areas, the fallow periods of shifting uncultivable, of which 7.5 million hectares cultivation have been shortened to the point have been affected by desertification. About of almost continuous cultivation, degrading 5.1 million hectares are unused land, 2 million the soil. are used although the land is seriously eroded, Since the early 1990s, cultivation of upland and another 2 million are at risk (with rice, maize, soybean, cassava, and forest crops reduced soil fertility or severely degraded has seriously eroded the Northern Mountains land) (Nguyen 2013). Agriculture and for- and the Central Highlands (Siem and Phien estry are especially constrained by soil degra- 1999). In the uplands, expanding coffee culti- dation, which affects the productivity of land vation has deforested and degraded land. and downstream systems. Coffee monoculture contributes to soil ero- Soil erosion is a serious concern, given the sion, especially when the crop is planted on topography (three-quarters of the country is steep slopes. Some 74 percent of coffee covered by hills and mountains) and the planted in Dak Lak Province grows on ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 249 BOX 5.2 Agricultural growth has a growing environmental footprint Agricultural growth in Vietnam has been encour- Despite a range of programs over the years to pro- aged by domestic policy reforms, international trade mote integrated pest management, Vietnam uses pes- agreements, and public investments, especially in ticides heavily. The use of newer, less toxic products agricultural research, irrigation, and other rural has grown, along with the use of less expensive generic infrastructure (see chapter 2 “Enabling Economic (and sometimes inaccurately labeled) products. Some Modernization and Private Sector Development” for of the latter are no longer permitted for use in many details). Growth has also been heavily based on of the Vietnam’s agricultural export markets. Pesti- expanded and intensified agricultural land use and cide use appears to have increased sharply since the an intensive use of material inputs, especially fertiliz- mid-2000s, perhaps because of increased pest pres- ers and pesticides. The downside is a large and exten- sure from more intensive production and the develop- sive environmental footprint: agriculture is a major ment of pesticide resistance. Frequent and late-season cause of deforestation, land degradation, excessive chemical spraying has contributed to growing con- water use, greenhouse gas emissions, biodiver- cerns about pesticide residues in rice, tea, and fruits sity loss, and water and air pollution. Table B5.2.1 and vegetables, although systematic data are not avail- presents the agro-environmental hotspots for seven able on the extent and seriousness of the problem. commodities. On the basis of past violations, Vietnamese products Recent agricultural changes include intensive use entering the European Union are subject to more fre- of fertilizers, pesticides, and water for crops. Anti- quent sampling and testing (EU Food and Veterinary biotics use in aquaculture is also notable. Fertilizer Office 2014). Relatively strong national legislation is application grew rapidly during the 1990s but has in place, yet the capacities to advise on and monitor more or less stabilized since the early 2000s. Still, at agrochemical use is patchy within government and nearly 300 kilograms per hectare, the rate is about among food distribution and trading companies.b twice that in other Southeast Asian countries. Farm- As Vietnam transitions from an agricultural ers rarely have the soil tested and seldom apply fer- economy, the sector’s decline in importance could tilizer with the optimal composition or at the best be gradual (similar to the Philippines and Thailand), time. And poor water management practices see a given the large rural population and the reliance on large proportion of fertilizer run-off into streams agriculture and fisheries for jobs. Greater inequal- or groundwater or emitted as nitrous oxide.a Viet- ity in income will also cause poor rural households nam needs to avoid the serious land degradation and to become more reliant on agriculture and increase water pollution effects of heavy fertilizer use that their use of inorganic inputs or convert land to aug- China has suffered. ment their incomes. TABLE B5.2.1 The downside of agricultural growth is a large and extensive environmental footprint Water/air Water scarcity and Deforestation and Greenhouse Commodity Location Soil degradation pollution salinization loss of biodiversity gas emissions Rice Mekong River Delta Coffee Central Highlands Corn Northern Mountains Cassava Northern Mountains and Central Highlands Pork Red River Delta and Southeast Shrimp Mekong River Delta Catfish Mekong River Delta High Medium Low Nonimpact Source: Khoi et al. 2015. a. The Food and Agriculture Organization of the United States estimates that some 80 percent of the nitrous oxide emissions in Vietnam derive from agriculture. b. Perhaps even more serious have been the health risks to farmers and others drawing water from streams collecting pesticide run-off. One study (Dasgupta et al. 2005) found that among surveyed Mekong Delta rice farmers who were medically tested, 35 percent had signs of poisoning—from organophosphates and carbamates, with 21 percent having symptoms of chronic poisoning. 250 VIETNAM 2035 unsuitable, sloping land (>15 degrees), with schemes were developed 30–40 years ago, production causing soil erosion of more than with high levels of deferred maintenance. 100 tons per hectare a year. Incomplete structures and water losses during operations have many schemes operating at Water only 60–70 percent of capacity. This means The risks of water resource degradation and that irrigated land is not achieving the expected depletion from climate change and increasing yield increases of 35–65 percent during the dry water exploitation—within and outside season and 20 percent during the wet season. Vietnam—raise concerns over water avail- In addition, financial incentives to improve ability in the future. Until recently some 80 water-use efficiency do not exist. Obtaining a percent of total freshwater withdrawals in the license to use water for irrigation is costly. country came from agriculture (figure 5.1). But the irrigation-water tariff ceases once the Since the mid-1970s, some $6 billion (present irrigation system is established. This applies value) has been invested in irrigation, about to more than 100 different types of irrigation 80 percent of the government’s capital invest- systems (at different scales) in Vietnam, ment in the sector. Although irrigation cover- including canals, dykes, and water storage. age is high with most suitable areas equipped, The reengineered Red and Mekong River the irrigation systems were designed primarily Deltas have also altered the natural ecosys- for rice (World Bank 2013a). But irrigation tem’s equilibrium. Changed surface water has helped diversify agricultural production, flows in the Mekong River Delta are causing including in coffee, horticulture, and aquacul- inland movement of saline water. This affects ture (World Bank 2013a). soil fertility and saline balance and poses risks Several factors impede increased water pro- to aquatic and terrestrial habitats. In addi- ductivity. From the design perspective, irriga- tion, countries upstream of the Mekong River tion schemes do not typically have structures have built hydraulic works (dams and reser- for accurate flow measurement and control. voirs), reducing the water flows into Vietnam Low canal density results in high dependency and making them more variable. on field-to-field conveyance. This makes it dif- ficult to deliver water flexibly and reliably. Forests, biodiversity, and ecosystem services Fields are also inadequately equipped for field Forests . Although the surface area of and storm drainage, constraining the timing of Vietnam’s forests has increased from harvesting. Further, most of the irrigation 29 percent of total surface area in 1990 to 45 percent in 2013 (after having fallen from 72 percent in 1909), degradation has contin- FIGURE 5.1 Making water available in the future means addressing today’s water exploitations ued. Over the past 20 years, primary forests have decreased by 79 percent. The area under Water usage by different sectors (share of total water use) mangroves has declined by 70 percent in nearly five decades due to toxic chemicals in Services, the earlier years and shrimp farming practices 2% more recently (MONRE 2005). Only 8 per- cent of land area is covered by resource-rich tropical rainforests, compared with 50 per- Agriculture, Industrial, cent in other Southeast Asian countries 15% 81% (Trương Quang Học 2012). Households, Forests are primarily in the north and the 3% Central Highlands (figure 5.2), which have high levels of poverty. Timber production is concentrated in the Central Highlands (34 per- cent), the North-Central Region (23 percent), Source: General Department of Irrigation 2013. and the South-Central Region (17.4 percent). ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 251 FIGURE 5.2 Vietnam has lost an alarming since the early 1990s, they are facing a grow- percentage of “primary” forest over the past ing welfare gap in comparison with the ethnic 20 years, although its overall forest cover is majority (see chapter 6 “Promoting Equity around 40 percent and Social Inclusion”). These minorities rely on forests to meet their subsistence needs and to generate income. Deforestation and forest degradation are heavy in the northwest and the south. The drivers include mainly illegal logging and conversion to agricultural land for food crops in the deltas.3 They also include perennial Tree cover (%) crops in the Central Highlands and shrimp farms and other forms of aquaculture in the 0–20 21–40 Mekong Delta (UN-REDD 2009). Along the 41–60 coast, mangrove areas declined by 62 percent 61–80 N between 1943 and 1999. More recently, 81–100 0 50 100 200 300 400 shrimp production has destroyed more than Kilometers half the remaining mangrove forest area. The wood industry is a major timber con- sumer and deforestation contributor. Since the late 1980s Vietnam’s state for- Underlying causes are poor commercial estry has moved to sustainable management logging practices and harvesting of timber by and social participation (Dang et al. 2012). rural households. Legal exploitation results in Following the poor outcome of a logging ban logging degradation. Such exploitation occurs in the 1990s and the collapse of centralized when government-licensed and large commer- forest management (MARD 2001), recent cial logging operations harvest plantations for reforms have improved the rights and bene- timber exports and paper production. fits of nonstate actors. Under current regula- Degradation also happens when smaller oper- tions, nonstate actors can become ators act without government permission or production-forest plantation owners with licenses. With the population growing and limited autonomy over the forest they man- becoming wealthier, the demand for land, age (Dang et al. 2012). paper, and timber is expected to compete with SOEs and a number of private small and traditional fuelwood production. This is even medium enterprises are involved in timber more likely if more modern fuels are unavail- production and harvesting, including high- able for rural households. Projected regional value commodities such as rubber. The eco- demand for wood chips and global industrial nomic rents from forests have been declining demand for wood are likely to extend the since the mid-1990s, as the sector’s share in pressure on the forest sector. gross domestic product (GDP) fell from 5 per- Biodiversity. Vietnam is ranked as the 16th cent to 1.4 percent. Even so, forests are most biodiverse country, with 59 “important important for providing employment, income bird areas,” (BirdLife International 2013) for generation, and ecosystem services. While not example. In 2006, it was home to 128 pro- all countries report their forest employment tected areas (now known as “special use for- numbers, Vietnam seemingly has the most ests”). These protected areas include 30 significant full-time employment in the forest national parks, 48 nature reserves, 11 species sector in the East Asia region. But even these or habitat conservation areas, and 39 land- numbers are underestimated; they do not scape protection areas, constituting 7.6 per- reflect subsistence and other informal forest cent of the country’s natural area. They use. Although the Northern Mountains’ eth- shelter important forest ecosystems, and nic minorities have experienced welfare gains endangered, rare, and endemic fauna and 252 VIETNAM 2035 flora and their habitats. But degradation Republic of Egypt, Thailand, and Vietnam, of biodiversity is a growing challenge in only Vietnam shows little progress for trade Vietnam. in tigers and in rhino parts. For elephants, key Vietnam now ranks in the world’s top 15 aspects of compliance and enforcement need countries suffering from declining mammal strengthening (WWF 2012). species, top 20 for declining bird species, and Ecosystem services. In addition to biodi- top 30 for declining plant and amphibian versity and timber, forests provide other envi- species. Over the past few decades Vietnam ronmental and ecosystem services. Vietnam’s has contributed to the loss of regional and contribution to reducing soil erosion and sed- global biodiversity through three channels. imentation and to enhancing soil-protection First, endangered species are illegally traded, ability in watersheds with hydropower dams often for food and medicinal purposes. is widely recognized.6 Second, tropical timber is imported from The government has issued decrees and neighboring countries to support its own made a strong commitment to implementing wood-processing industry. Third, live animals schemes for sharing benefits and paying for and plant products from threatened species ecosystem services (PES). These actions will are consumed (USAID 2013). Conversion of compensate provinces and districts that man- its forests (including mangroves) has negative age lands for downstream benefits. The insti- implications for terrestrial and aquatic species tutional setting for PES relies heavily on for which forests are important habitat. establishing forest protection and develop- Of Vietnam’s aquatic creatures, 236 are ment funds at central and provincial levels. listed as endangered, precious, or rare. And The institutional arrangements for PES at the the number of endangered wildlife species provincial level are in place, and between was 882, including 418 animal and 464 plant 2009 and 2012, the arrangements generated species (Ministry of Science and Technology $85 million, 98 percent of which was from and Vietnamese Academy of Science and hydropower plants and water supply compa- Technology 2007). Nine species classified as nies (Pham et al. 2013). endangered in 1992–1996 were classified extinct in the wild in 2007. The number of Fisheries and aquaculture aquatic species, especially shrimp and fish Marine resources are central for employment, of high economic value, has also declined. subsistence, and revenue generation. Between Beyond losses caused by habitat conver- 2000 and 2010, the sector grew by 13.6 per- sion, Vietnam is also losing biodiversity cent a year in volume and 10.4 percent in owing to illegal trade in animal and plant value. Fisheries production in 2010 was products (USAID 2013). For example, of estimated at 5.2 million tons, including 53 species hunted or collected at Bac Huong 2.5 million tons from capture fisheries and Hoa Nature Reserve, 14 are globally threat- 2.7 million tons from aquaculture. In 2012 ened and 36 are nationally protected (USAID the sector accounted for about 4 percent of 2013). The rising purchasing power of Asian GDP (similar to the garment and textile consumers is expected to increase demand industry) and 8 percent of merchandise for what are considered luxury and status exports. Nearly 8 million people—9 percent products.4 High profits, poor law enforce- of the population—rely on fisheries-related ment, and well-established trafficking net- activities for a major source of their income. works make it difficult to clamp down on While aquatic exports have grown and now illegal activities. exceed $5 billion a year, more than two- Vietnam is a transit and destination coun- thirds of the volume of fish caught or pro- try for traded wildlife. On compliance with duced is consumed domestically. Such and enforcement of CITES (Decisions and consumption is growing rapidly, with an esti- Resolution) for three target species5 (tigers, mated 50 percent of Vietnamese obtaining elephants, and rhinos) in China, the Arab their dietary protein from aquatic products. ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 253 Marine fisheries productivity has been fall- reversed to convert capture fisheries into a ing for a long time, seemingly more steeply in source of green revenue. recent years. More than 100,000 small fishing Unlike coastal fisheries, aquaculture vessels are operating in nearshore areas growth has been phenomenal (figure 5.3). (within six miles of the coastline), and the In 2008, Vietnam accounted for almost vast majority of these have a horsepower 5 percent of global output, more than triple below 49. The quality of marine fisheries has its share from a decade earlier and third glob- also been declining. The share of the catch ally behind China and India. In 2005, shrimp comprising “trash fish” and small fish has were produced in brackish-water aquaculture risen. Trash fish now account for an estimated systems, accounting for 98 percent of produc- 60 percent of the total marine catch, most of tion volume. Fish accounted for 99 percent of which is consumed locally or used in produc- freshwater aquaculture production. In 2009, ing fish sauce or fish feed for aquaculture. southern provinces from Da Nang to Ca Mau Overfishing is especially evident in the accounted for 79 percent of the country’s nearshore areas, which are the fishing grounds total aquaculture area and 80 percent of the for some 85 percent of the country’s fishing total aquaculture output.7 The pond culture fleet and the primary source of livelihood for of brackish-water shrimp dominates in poor or near-poor coastal communities. farmed area (71 percent of the aquaculture Although the exact fisheries stock is area). Freshwater catfish farming accounts for unknown, fishers continue to catch more than 47 percent of aquaculture production by the allowed limits, hurting regeneration and weight.8 restoration. Some fishers adopt destructive The Ministry of Agriculture and Rural practices in prohibited areas and during times Development (MARD) and its provincial of spawning. The de facto, open-access nature departments manage the development of of fisheries in Vietnam, and the scarce data, aquaculture. MARD has six regional centers poor zone enforcement, and inconsistent responsible for food safety and quality con- communication across scales need to be trol, and they regularly conduct inspections FIGURE 5.3 The prominence of aquaculture in Vietnam’s economy requires close coordination, biosecurity investments, and efforts to stem water pollution and water use in fisheries Fisheries production 45,000 3,500 40,000 3,000 Vietnamese D (billions of 1994 D) 35,000 2,500 30,000 Tons (thousands) 25,000 2,000 20,000 1,500 15,000 1,000 10,000 500 5,000 0 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 Capture Aquaculture Aquaculture Capture fisheries Source: Calculations using General Statistics Office of Vietnam data. 254 VIETNAM 2035 for harmful substances. The Vietnam threatens water quality in the Mekong Association of Seafood Exporters and Delta. Vietnamese shrimp farms have pol- Producers and the Vietnam Fisheries Society luted surrounding waters and themselves also promote the industry. been hurt by poor water quality. In intensive No system is in place to certify sources of shrimp production systems, farmers often quality seed and to ensure that adequate bio- use large amounts of chemicals and antibi- security measures are taken at the farm level. otics to keep the overcrowded shrimp Each year diseases affect some 30–70 percent healthy. Effluents from these ponds, which of the total production area, reducing yields also contain large quantities of organic and leading many growers to fail entirely. waste, contaminate surrounding freshwater In shrimp farming, low-quality and infected and coastal waters. Studies indicate that seed or shrimp fry are the main causes of dis- common water pollution indicators—such eases. But intensive farming has required as biochemical oxygen demand, chemical greater use of antibiotics. Similarly, intensive oxygen demand, and total suspended catfish cultivation has led to high frequency of solids—increase over the growing period disease, increasing need for treatments. and with the age of the ponds. Antibiotics and chemicals have affected There have been several recent episodes Vietnam’s reputation in international sea- of large-scale shrimp loss in many provinces food markets. The catfish industry, for of the Mekong Delta due to water pollu- example, has attracted strong criticism based tion. For example, the shrimp loss was on alleged environmental and food safety spreading in more than 500 hectares of Soc issues. And while evidence is mixed on the Trang Province, with 30 percent of prawn use of treatments for diseases, local eutrophi- output lost in February and March 2012. cation impacts are evident (FAO 2014). Also in 2012, almost all shrimp died in 600 Operators can afford the treatment costs; in hectares of the total 6,000 hectare farming shrimp aquaculture, the profits from clearing area in Tra Vinh Province within one month mangroves to expand production are partic- due to disease. In Ca Mau Province, more ularly high. than 20 percent of the total 3,500 hectare Global forecasts to 2030 for fisheries pro- aquaculture farming was diseased. In duction in Vietnam, including aquaculture Phu Tan and Dam Doi districts, the shrimp and capture fisheries, point to an increase died in 50 percent of the farming area stemming largely from growth in aquaculture. (MONRE 2012). Assuming that the country maintains its Urban wastewater. Problems in managing share of global fisheries, it would raise its water quality—especially the polluting effects aquaculture production by some 41 percent of fertilizer and agrochemical runoff—exist in and capture fisheries output by about some rural areas.9 But urban wastewater is 10 percent. Transforming the fragmented and the largest contributor to water pollution in unsustainable fisheries sector to sustainable many parts of the country. This means that production will require close coordination, now and in the future, sanitation and waste- investments in biosecurity, and efforts to stem water collection and treatment will be critical water pollution and water use in fisheries for improving water quality. production. A small share of urban wastewater is treated (10 percent), and an even smaller share (4 percent) of septage (septic tank Environmental Pollution sludge) is safely disposed (figure 5.4). Poor Water pollution sanitation comes at significant social and eco- Agricultural water pollution. Water pollu- nomic costs (box 5.3). Moreover, the sections tion is one of the most serious environmen- of rivers flowing through urban areas are tal issues. The large amount of wastewater heavily polluted, and many have turned into from aquaculture production in the south sewage or dead rivers. ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 255 Changing regulations and standards receiving water bodies. That equals about since the first standard was issued in 1995 70 percent of the country’s total industrial have created uncertainty among local govern- effluent discharges. High pollution levels have ments for designing and implementing waste- severe implications for human health and nat- water projects. Selecting high-cost treatment ural ecosystems. They are also constraining technology—much of it financed with official urban development and the sustainability and development assistance—while overlooking future growth of industry and agriculture. lower-cost technologies has further affected standards. For example, many sewerage sys- FIGURE 5.4 Wastewater treatment needs low-cost solutions, tems have focused on wastewater treatment regulatory certainty, and market incentives facilities alone, while sewage collection has been neglected. Only in Hai Phong are septic Direct sewerage tanks regularly emptied. Fewer than half the (no septic tank) Total Wastewater wastewater hospitals in Vietnam have proper wastewater 5% safely treated treatment systems. Septic tanks collected 10% Low tariffs (which limit public-private with sewerage 55% partnerships and self-financing by water and wastewater utilities) have resulted in the pri- Septage safely Septage disposed/ vate sector being minimally involved in waste- Urban Septic tanks safely treated water. The absence of an effective regulatory population no sewerage collected 4% system for private investments has the same 25 million 22% Septage + outcome. Other on-site wastewater Industrial water pollution. Industrial zones treatment unsafely discharge an estimated 1 million cubic meters 18% disposed of untreated wastewater a day directly into Source: World Bank and Australian Aid 2013. BOX 5.3 Costs of poor sanitation Diarrhea is the sanitation-related disease with the Diarrhea is also the main cause of death from poor most cases, at 7.05 million a year, and significant sanitation and hygiene, accounting for around 4,600 economic costs (table B5.3.1) (World Bank 2008). deaths a year. Malnutrition-related diseases, such as The economic cost of treating patients can be esti- lower respiratory infections, account for an estimated mated using an average cost of $4.50 per case of further 1,500 deaths a year and are attributed to poor waterborne illness, for a total cost of $31.7 million. sanitation. Malaria follows with 600 deaths a year. TABLE B5.3.1 The estimated cost of poor sanitation-related impacts is US$780 million Aspect Cost (US$ million) Impact of poor sanitation 780 Water-related diseases 262 Impact on water sources 287 Land use 119 Other welfare losses 43 Tourism 69 Source: World Bank and the Ministry of Planning and Investment of Vietnam calculations, drawing from different sources. 256 VIETNAM 2035 Among the shortcomings of Vietnam’s Air pollution regulatory system are policies that promote The growth of fossil fuel energy consumption industrial growth without considering by industry and coal-fired power plants in environmental pollution. Another defi- northern Vietnam (discussed in more detail ciency is limited resources—personnel and below) is increasing air pollution. Satellite funding—for environmental monitoring. images show high levels of average fine par- Failings are evident in insuffi cient enforce- ticulate matter (PM2.5) around Hanoi, ment because of corruption and inadequate approaching levels in China and several times resources. Other shortcomings are low higher than safe levels recommended by the penalties for noncompliance and little World Health Organization. Some pockets of public disclosure of industrial pollution very high concentrations in urban and indus- information. trial zones are also shown (figure 5.6). Major The two most heavily polluted water sources of PM2.5 pollution include industrial basins are Nhue-Day River Basin in the fuel combustion, resuspension of road dust, north and Dong Nai River Basin in the coal and biomass emissions (such as rice husks south passing through the country’s most for cooking and heating), and—during har- industrialized provinces. Over the next vest season—residues from burning fields. 15 years urban wastewater is expected to account for the largest share of effluents Cross-border environmental issues (about 60 percent). Industrial wastewater Many of Vietnam’s 2,360 rivers with a length (25–28 percent) and rural wastewater (12– of 10 kilometers or more flow from neighbor- 15 percent) follow (figure 5.5). The Food ing upstream nations, adding an extra trans- and Agriculture Organization of the United national/cross-border layer of complexity to Nations estimates the global cost of treat- managing the associated environmental chal- ing water to range from $1 to $1.5 per lenges. The challenges include polluted trans- cubic meter. This implies costs for Vietnam boundary rivers, transmission of air pollution of $12.4–18.6 million a day by 2030 if across borders, and water pollution from oil treatment measures are only put in place spills, marine litters, transportation of haz- then. In Vietnam’s southern key economic ardous materials, demolition of old ships, and zones, the cost estimate for 2010 was invasive alien marine life species. $867 million. Every year, the coastal waters of Ba Lat River (Nam Dinh Province) receive 37.3 bil- lion m3 wastewater from the Red River, con- FIGURE 5.5 The economic implications of Vietnam’s wastewater cleanup gives pause taining 232,000 tons of BOD, 353,000 tons of COD, 31,000 tons of nitrogen, 7,000 tons 14 of phosphorus, 29 million tons of suspended 12 solids (organic waste), 4,000 tons of heavy meters per day, millions) 10 metals, 210 tons of pesticides, 343 tons of Discharge (cubic 8 chemical fertilizers, and more than 13,000 6 tons of oil. The waste comes not only from 4 manufacturing establishments, agricultural 2 production, and trading and cities in Vietnam, 0 2020 2030 2020 2030 2020 2030 2020 2030 but also from watersheds of other countries. Cau River Nhue-Day Dong Nai Total A series of oil spills in the Gulf of Tonkin Basin River Basin River Basin discharge (Vịnh Bắc Bộ) are also a major source of con- volume cern in preventing and controlling cross- Urban wastewater border environmental pollution. There were Rural wastewater 89 oil spills in the gulf during 1987–1997 and Industrial wastewater another 50 during 1997–2010 (Center for Source: Thang 2015. Global Change Research 2015). ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 257 FIGURE 5.6 Fine particulate matter, driven by industry and coal-fired power plants in the north, is approaching Chinese levels PM2.5 (ug/m3) >75 70–75 65–70 60–65 55–60 50–55 45–50 40–45 35–40 30–35 25–30 20–25 19–20 18–19 17–18 16–17 15–16 14–15 13–14 12–13 11–12 10–11 9–10 Source: World Bank and the Ministry and Planning of Vietnam calculations using available data. Note: PM2.5 = particulate matter that are 2.5 micrometers or less in size; μg/m3 = micrograms per cubic meter of air. The situation calls for Vietnam to 1971 (Nguyen, Renwick, and McGregor strengthen the cooperation with regional 2013), which is more than twice the global countries and international organizations to average rate of about 0.13°C a decade for better manage the transnational environmen- 1956–2005 (Trenberth et al. 2007). tal issues. The Ministry of Natural Resources and Environment (MONRE) projects that the global annual mean temperature will increase Vulnerability to Climate Change by 0.6–1.2°C by 2040 (depending on loca- Vietnam has a high and increasing exposure tion) relative to the average during 1980–99 to gradual-onset impacts associated with ris- and by 1.1–1.9°C to 2.1–3.6°C by 2100 ing sea levels, ocean warming, and growing (MONRE 2012). Under the latter scenario, acidification, alongside sudden-onset impacts heat extremes virtually absent now will cover linked to tropical cyclones and fast-rising heat nearly 60–70 percent of the total land area in extremes (World Bank 2013b). Evidence is summer. Unprecedented heat extremes will increasing that climate change is already affect up to 30–40 percent of the land area in occurring in Vietnam and will intensify over the northern-hemisphere summer. the coming decades (table 5.1). An increase in the frequency of intense Highly unusual and unprecedented heat storms and associated extreme rainfall is pro- extremes 10 are projected to escalate with jected in Vietnam. Changes in observed extreme temperature events, frequently annual rainfall were not significant over exceeding past temperature ranges. 1958–2007, with variations across regions. Trends show a mean temperature increase in Annual rainfall decreased in northern Vietnam of about 0.26°C a decade since Vietnam but increased in southern areas 258 VIETNAM 2035 TABLE 5.1 Vietnam has a high and increasing exposure to gradual-onset impacts of climate change Expected climate changes Vulnerable region Main consequence Vulnerable community Temperature rise of Mountainous regions: Reduced integrity of natural Poor farmers 2.3°C by 2100 Northeast, Northwest, and ecosystems; some agriculture Ethnic minorities, the elderly, North Central Red River Delta subsectors will be affected women, children Sea-level rise of Coastline: Red River Delta, Salinization, loss of land, Coastal population, especially about 3 centimeters Mekong Delta, Central Coast impacts on agriculture, poor farmers and fishermen a decade Islands worsening of extreme weather The elderly, women, children events (storm surges) More marked Coastline: Red River Delta, Impacts on agriculture; greater Coastal population seasonality of Mekong Delta, Central Coast challenges for water resources Residents in mountainous areas, precipitation: wetter Mountainous regions: management (particularly in especially ethnic minorities wet seasons and drier Northeast, Northwest, North dry seasons) The elderly, women, children dry seasons Central and Central Highlands, South Central and Northern Midlands Increase in total Coastline: North Delta, Impacts on agriculture, urban Coastal population, especially rainfall Mekong Delta, Central Coast drainage fishermen The elderly, women, children Extreme weather Central Coast Potentially more economic Farmers, especially in Northern events more common Northern Mountains and impacts (particularly for mountainous and Central or more extreme Midlands vulnerable groups) and loss regions of life The elderly, women, children Source: World Bank 2010. (MONRE 2012). The latest model projec- The maximum wind speed of tropical tions show a substantial and rising increase in cyclones making landfall is projected to both magnitude and frequency of heavy pre- increase by 6 percent for mainland Southeast cipitation events (World Bank 2013b). Asia, though combined with a decrease of MONRE scenarios project total annual rain- 35 percent in the number of land-falling fall increasing from 0.5 percent in the Central cyclones (Murakami et al. 2012). As sea-sur- Highlands and 0.6 percent in the southern face temperatures rise, tropical cyclone- region to above 3 percent in the north-central related rainfall is expected to increase by up and north delta regions by 2040 (MONRE to a third, indicating a higher flood risk in 2012). Seasonal variability is projected to low-lying and coastal regions. increase: the wet season is forecast to see a Projections show that a significant sea- rise in precipitation of 5–14 percent in south- level rise over the coming decades in ern Vietnam. Vietnam will exacerbate the impacts on cur- For Southeast Asia, the maximum number rently affected communities. For instance, of consecutive dry days (a measure for the South Hai Thinh commune in the drought) is also expected to increase, indicat- Red River Delta experienced a 34 percent ing that minimum and maximum precipita- increase in the erosion rate over 1965–95 tion extremes are likely to be amplified. (and a subsequent 12 percent increase over The intensity and maximum wind speed of 1995–2005), attributed to the direct effect tropical cyclones making landfall in Vietnam of sea-level rise (Duc, Nhuan, and Van Ngoi are projected to increase significantly. 2012). By mid-century, the sea level is likely Maximum surface wind speed during tropical to be 28–33 centimeters above 1980–99 lev- cyclones is forecast to rise by 7–18 percent for els (MONRE 2012). Close to the equator, a warming of around 3.5°C above preindus- sea-level rise along the coastline relative to trial levels for the western North Pacific 1986–2005 is forecast to be 10–15 percent Basin. But the center of activity is projected to higher than the global mean by the end of shift north and east (Murakami et al. 2012). the 21st century. ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 259 Natural processes put the delta regions at Mekong River Delta and about 24 percent in risk of land subsidence. Human activities the Red River Delta. In the Mekong River such as drainage and groundwater extraction Delta a 30 centimeter sea-level rise by 2050 greatly exacerbate subsidence, increasing would result in a loss of 193,000 hectares of coastal flooding. In the Mekong Delta, man- rice area due to inundation. Some 294,000 made subsidence is 6 millimeters a year hectares will be lost due to salinity intrusion, (Syvitski et al. 2009). The projected loss of without adaptation in both cases. The lost mangrove forests from sea-level rise and rice area would reduce rice production by human activities—which increase coastal about 2.6 million tons a year, based on cur- erosion—is a deep concern and likely to rent yields. accelerate coastal erosion. Aquaculture. In the Mekong River Delta, Climate change will sharply increase salin- aquaculture is particularly important for ity intrusion in coastal areas. As described in employment and rural income. Higher tem- the Mekong Delta Plan (see figure 5.8 in peratures, greater storm frequencies, increas- “Adaptation to Climate Change”), salinity ing sea levels, and other effects of climate intrusion is already occurring during the dry change are likely to affect fish physiology, season, hurting crop yields appreciably. With ecology, and aquaculture operations. Some an unfixed saline-brackish border, the Delta is fish species, such as catfish, may increase particularly vulnerable to increased salinity more rapidly with higher temperatures. But intrusion associated with sea-level rise. The they may also be more vulnerable to disease. total area affected by such intrusion in the The main effects of climate change on aqua- Mekong River Delta, with concentrations culture are likely from increased flooding and higher than 4 grams per liter, will increase salinity. Moderate and major shrimp produc- from 1,303,000 hectares to 1,723,000 hect- ers may pay more for pumping water to ares if the sea rises by 30 centimeters maintain water and salinity levels. The indus- (World Bank 2010). try is capital intensive and growing rapidly, so adaptation is likely to be autonomous, with Potential impacts on key sectors and regions the costs borne by operators. The total cost of Given the multiple channels for climate adaptation is estimated at $130 million a year change to affect Vietnam, the economic and over 2010–50, or equivalent to 2.4 percent of social impacts are likely to be significant and total costs (figure 5.7). widespread, with some vulnerable groups Fisheries, particularly coral reef fisheries, especially at risk (see table 5.1). are expected to be affected by the impacts of Agriculture. Climate change is expected to sea-level rise, warmer oceans, and ocean affect agriculture in several ways. For acidification. Maximum catch potential in instance, land for rice will be cut steeply. Vietnam’s waters is projected to decrease Much attention has focused on the potential 16 percent (Cheung et al. 2010). Given a 100 impact of changes in temperature on rice centimeter sea-level rise, Vietnam is expected yields. Any assessment of climate change on to lose 8,533 square kilometers of freshwater agriculture must consider changes in land use marsh (a 65 percent loss) (Blankespoor, caused by salinization and flooding. But not Dasgupta, and Laplante 2012). These marsh- all outcomes will be negative. Higher temper- lands support human well-being by: atures and changes in rainfall may permit cul- tivation of some crops in areas where they • Supplying timber, fuelwood, and charcoal; previously were not viable. • Regulating floods, storms, erosion, and Climate change and sea-level rise will saltwater intrusion; affect yields and production of key crops, • Providing biodiversity and habitat for com- such as rice, maize, cassava, sugarcane, and mercial fish species to breed and spawn; and coffee (table 5.2). For rice, the worst yield • Supporting culture for recreational and reductions are about 12 percent in the aesthetic pleasure. 260 VIETNAM 2035 TABLE 5.2 Climate change and sea-level rise will affect yields and production of key crops Agroecological zone/river basin Potential impacts of climate change without adaptation North-West Rice yield declines by 11.1 percent to 28.2 percent; yields of other crops decline by 5.9 percent to 23.5 percent. Generally the Dry scenario results in more yield reduction than the Wet scenario. MONRE scenario has the least yield reduction. North-East Rice yield declines by 4.4 percent to 39.6 percent; yields of other crops decline by 2.7 percent to 38.3 percent. The largest yield reduction can be with either the Dry or Wet scenarios, depending on crops. MONRE scenario has the least yield reduction. Red River Delta Rice yield declines by 7.2 percent to 32.6 percent; yields of other crops decline by 4.1 percent to 32.9 percent. The largest yield reduction can be with either the Dry or Wet scenarios, depending on crops. MONRE scenario has the least yield reduction. North-Central Rice yield declines by 7.2 percent to 32.6 percent; yields of other crops decline by 4.1 percent to 32.9 percent. The largest Coast yield reduction can be with either the Dry or Wet scenarios, depending on crops. MONRE scenario has the least yield reduction. South-Central Rice yield declines by 8.4 percent to 27.0 percent; yields of other crops decline by 4.0 percent to 20.9 percent. Generally Coast the Dry scenario results in more yield reduction than the Wet scenario. MONRE scenario has the least yield reduction. Central Rice yield declines by 11.1 percent to 42.0 percent; yields of other crops decline by 7.5 percent to 45.8 percent. The largest Highlands yield reduction can be with either the Dry or Wet scenarios, depending on crops. MONRE scenario has the least yield reduction. South-East Rice yield increases by 4.3 percent in the dry scenario, remains the same in the wet scenario, and declines by 8.8 in the MONRE scenario. Yields of other crops decline by 3.0 percent to 22.7 percent. The largest yield reduction can be with any of the three scenarios, depending on crops. Mekong River Rice yield declines by 6.3 percent to 12.0 percent; yields of other crops decline by 3.4 percent to 26.5 percent. The largest yield Delta reduction can take place under any of the three scenarios, depending on crops, Source: World Bank 2010. Note: Taking into account differences in projections generated by different global climate models (GCMs), a selection of climate scenarios was based on the ranking of GCMs with sufficient geographical detail by the climate moisture index (CMI) for the IPCC SRES A2 emission scenarios. There were 14 GCMs that met the criteria for consideration. The driest (IPSL-CM4) and wettest (GISS-ER) scenarios were used as the Dry and Wet scenarios. In addition, MONRE’s climate projection for the medium emission scenario was included to represent the middle of the distribution of GCMs in terms of the CMI. FIGURE 5.7 Projected reduction in aquaculture income as a result of impacts of climate change without adaptation a. Reduction in net income from catfish farming b. Reduction in net income from shrimp due to climate change without adaptation farming due to climate change without adaptation 10,000 10,000 8,000 8,000 VND Million per ha VND Million per ha 6,000 6,000 4,000 4,000 2,000 2,000 0 0 2020 2030 2040 2050 2020 2030 2040 2050 Coastal Inland Extensive Semi-intensive Source: World Bank 2010. Note: “Extensive” takes place in large coastal ponds relying on tidal water exchange but stocked from hatcheries with the use of fertilizers to promote the growth of natural organisms to feed the shrimp. “Semi-intensive” uses smaller ponds and higher stocking rates, relying on water pumps and aeration to maintain water quality as well as a variety of formulated feedstuffs. It also includes additional costs of water pumping to maintain water and salinity levels. Cities. Increased tropical cyclone inten- High urban growth rates, combined with sity, sea-level rise, and coastal flooding are inadequate urban housing, lead to expand- projected to affect coastal cities, where ing informal settlements. Ho Chi Minh increasingly large populations and assets City is expected to be particularly exposed. are exposed to climate change risks. A study that quantified its current and ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 261 future citywide flood risks projects that up Greenhouse Gas Emissions to 60 percent of developed area will be From 2000 to 2010, Vietnam had the fast- affected by a 100 centimeter sea-level rise.11 est growth in GHG emissions in the region Without adaptation, the planned urban (figure 5.8). Its total and per capita emis- development for 2025 increases Ho Chi sions almost tripled, while the carbon inten- Minh City’s exposure to sea-level rise by sity of GDP rose by 48 percent. On all three 17 percent. Floods associated with sea-level measures, Vietnam’s growth was one of the rise and storm surges carry great risks in fastest in the world. It ranked much higher informal settlements, where 41 percent of than other countries in the region, including the urban population lived in 2005 Cambodia, China, Indonesia, Malaysia, the (UN-HABITAT 2007). Lack of drainage Philippines, and Thailand. Given the growth and damage to sanitation and water facili- of its economy and the high and increasing ties accompany the health threats in these trends in energy (and carbon) intensity of its settlements. GDP, Vietnam should consider smarter Health. Negative human health impacts energy and transport choices that will help include waterborne and vector-borne dis- bend the GHG emission of this trajectory eases (such as malaria, dengue, and enceph- down to less risky ranges. alitis) and diarrheal illnesses—and are especially pronounced in the less devel- High and rapidly growing energy intensity oped, densely populated, and poorer areas Energy use in Vietnam is rising faster than in (Coker et al. 2011). Flooding compounds any other country in the region, led by oil and the risk and is associated with immediate electric power. With current trends and poli- risks, such as drowning and the disruption cies, the share of coal for power will rise from of sanitation and health services resulting 23 percent in 2013 to nearly 60 percent by from damaged infrastructure (Schatz 2030. The country will remain a net energy 2008). In cities the effects of heat extremes exporter for the next few years. But by 2020, are pronounced. High temperatures could it is expected to be a net importer of coal, result in high human morbidity and mor- largely to fuel the power sector. Between tality, especially among the growing numbers of elderly people. Coastal aquifers provide people living in coastal areas with water resources, and drinking salt- FIGURE 5.8 In only one decade, the three measures of carbon contaminated water can have detrimental dioxide emissions—greenhouse gas emissions, per capita health impacts (Vineis, Chan, and Khan emissions, and carbon intensity of GDP—increased by 50 percent 2011). Potential health problems include 150 hypertension and other conditions linked Carbon intensity of GDP 140 to increased salinity exposure through (index 2000 = 100) 130 bathing, drinking, and cooking. These 120 include miscarriage (Khan et al. 2011), skin 110 disease, acute respiratory infection, and 100 diarrheal disease (Caritas Development 90 Institute 2005). 80 70 Infrastructure. Climate change—especially 00 01 02 03 04 05 06 07 08 09 10 sea-level rise, temperature increase, climatic 20 20 20 20 20 20 20 20 20 20 20 variability, and intensified natural disasters— China Malaysia Thailand will put at risk some of Vietnam’s critical Indonesia Korea, Rep. Lao PDR infrastructure assets, especially transporta- Cambodia OECD EAP average tion networks and power plants and equip- Vietnam ment near the coasts, since these were not designed with climate change factors Source: Calculations based on World Development Indicators. Note: EAP = East Asia and Pacific; OECD = Organisation for Economic Co-operation and in mind. Development. 262 VIETNAM 2035 2000 and 2010, electricity demand grew by complete resource-potential studies for these about 14 percent a year. But per capita elec- three sources, plus small hydro. It must move tricity consumption is still relatively low (one- forward with utility planning and operational third that of China). Electricity demand will capabilities to fully integrate renewables. It is continue to grow at about 10 percent a year important to draw on lessons from develop- over the next decade. Energy policy in the ing utility-scale renewable energy projects to coming years—involving energy efficiency, design attractive feed-in tariffs for wind, bio- renewable energy, and natural gas—will have mass, and solar to provide incentives for pri- to balance both Vietnam’s energy security and vate development and scaling up. containing air pollution and GHG emissions. At 237 kilograms, Vietnam already has the Growth of transport highest energy intensity—the ratio of energy Fossil fuel consumption has been increasing in use in kilograms of oil equivalent per constant transport. Motorcycles have seen the fastest 2005 $1,000 of GDP—in East Asia. This is rise over a decade, dominating growth in vehi- also higher than the world average of 208 kg. cle ownership (figure 5.9). In Hanoi, public Electricity intensity (kilowatt-hour per US$ of transportation provides only about 7 percent GDP in constant 2000 US$) is around 1.5, of passenger trips, and in Ho Chi Minh City nearly twice the world average of 0.8 (World around 5 percent. The largest share of motor- Bank 2013c). Energy intensity has been cycles nationwide is in cities, with 15 percent increasing in large part because of the growth in Ho Chi Minh City and 8.5 percent in of industrial energy use, accounting for about Hanoi in 2010 (MONRE and MOT 2012). one-third of national energy consumption. Vehicles in Ho Chi Minh City accounted for Vietnam’s iron and steel plants use twice one-third of total registered vehicles in the energy per unit of output as the global Vietnam in 2012 (MONRE 2012). average, largely because they use old Judging from international experience, technology. Getting the price right could automobile ownership will increase as improve power-generation technology and incomes rise. But motorization rates (the could cut carbon dioxide emissions over the number of automobiles per 1,000 persons) next 15 years (World Bank 2015). The coun- remain below those in other countries at simi- try also has a conservative plan to increase the lar income levels, reflecting higher acquisition share of electricity produced from wind, bio- costs for automobiles, including import duties mass, and solar between 2010 and 2030. But and other taxes that are likely to fall with to move to a more ambitious path, it must Association of Southeast Asian Nations (ASEAN) integration. FIGURE 5.9 Urban areas have seen a rapid increase in motorcycle Underlying Causes and Priority ownership, 2000–11 Challenges automobiles in Vietnam (thousands) 40,000 Vietnam must tackle the environmental chal- 35,000 Number of motorcycles and lenges stemming from the current growth 30,000 pattern to sustainably achieve upper-middle- 25,000 income status and reduce the inequitable cost 20,000 distribution of environmental degradation. To 15,000 manage this task, it will need to set priorities 10,000 for determining the degree of irreversibility 5,000 (for example, if a large commitment of the 0 2000 2002 2004 2006 2008 2010 resource makes a change in use or nonuse thereafter unlikely), the scale of impact (for Total road vehicles Cars Motorcycles example, the number of people affected), and Source: Ministry of Natural Resources and Environment and Ministry of Transport 2012. whether taking corrective action is viable. ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 263 These criteria (based on evidence and expert information allow water and air pollution to opinion) generate four immediate environ- persist. Those guiding agriculture—which is mental concerns: preserving natural resources, now heavily based on intense land use and especially by reversing land degradation, material inputs—have yet to identify ways to reducing air pollution, decreasing water pollu- enforce pollution regulations. The small pro- tion, and adapting to climate change (discussed duction scale and nonpoint source pollution in more detail in “Growing Sustainably present heavy transaction costs. And the toward 2035: The Road Forward”). highly fragmented production system across Vietnam needs to also preemptively and many small producers and over wide geo- proactively attack the three main underlying graphic areas can be difficult and expensive causes of these four challenges to achieve for monitoring staff to reach. more sustainable growth and to avoid the Effective regulations and monitoring and increasing burden of health costs, resource enforcement systems need to be in place if the degradation, and low productivity. country is to grow in a sustainable manner, especially in sectors that generate negative externalities. These include energy, agricul- Weak Institutional Capacity to ture, and industry. Many techniques from Coordinate, Monitor, and Enforce varied settings worldwide mitigate the envi- Sustainable Practices ronmental effects of agriculture (Liniger and Limited coordination among institutions Critchley 2007). A subset of them is already results in contradictory policies, poor plan- being piloted or applied widely in Vietnam, ning, and ineffective and incoherent invest- though generally not on a scale that will have ments. For example, it is not feasible to much impact. As a result, Vietnam remains expand local fish processing or boat building ineffective in managing increasing threats to in the same locations where fishery conserva- agroindustries, ranging from pests to exces- tion is under way. Institutional fragmentation sive inputs. discussed in chapter 7 “Building Modern As noted, excessive antibiotic use in aqua- Institutions for an Effective State” is a big culture is contaminating freshwater bodies, part of the problem. threatening the national reputation in key Poor coordination among institutions is export markets. The country is one of the notable in the deltas where vulnerability to lowest ranked in complying with European climate change is high. The institutional land- Union (EU) standards and suffers from a high scape in the Mekong Delta is complicated, rejection rate. This is another upshot of the with planning and implementation roles shortfalls in guidance from public institu- unclearly spread across several ministries, tions. Standards for food safety and for sus- agencies, and provinces. This format makes it tainable production are inadequately enforced challenging to plan for and build resiliency. in agriculture, fisheries, and forestry. These The government faces huge challenges in measures will be effective only when carried coordinating the activities and investments of out in conjunction with incentives for sustain- central and local agencies in the water, envi- able investments. ronment, transportation, and agriculture sectors. This creates negative implications for Price Distortions and Minimal Incentives how cities in the delta are buffered against cli- for Engaging the Private Sector mate change. The environmental challenges of air and The impact of price distortions is evident in water pollution underscore the need to aug- the environmental challenges in water and ment institutional capacity to guide, monitor, energy. The lack of irrigation water pricing and enforce sustainable practices. Too few means there are hardly any incentives to cut trained monitors, weak penalties for lack of water use or adopt technologies to that end. compliance, and little publicly accessible Overuse of water for growing coffee and 264 VIETNAM 2035 increased droughts are raising concerns about price covered coal output costs but was still groundwater use in the Central Highlands. below world market prices. This keeps the A coffee tree needs on average 350–400 liters average cost of electricity production from of water per application (Khoi et al. 2015), fossil fuels artificially low, which is why a carried out every 20–25 days during the dry large and increasing share of electricity gen- season (Hagger and Scheep 2012). Many eration comes from coal and gas. 12 Such farmers in the Central Highlands use up to subsidies slow the pace of modifying the 800 liters. energy mix to less-polluting and renewable Low coal and electricity prices, partly sources. responsible for high energy intensity, crimp The subsidization of the energy sector is incentives for investments in energy effi- not all through fiscal transfers. It also ciency. Although Vietnam increased average includes preferential treatment of SOEs, tariffs by 53 percent between 2010 and especially for access to land and to finance 2015, cumulative inflation was 57 percent (see chapter 2). SOEs dominate the energy over the period, taking real electricity prices market and have wasteful practices that down a shade to among the lowest in the make them operationally inefficient. The region (table 5.3). Another impact of low monopoly of SOEs and slow reforms of tariffs is on the capacity of utilities to energy SOEs are also barriers to building a finance investment, operations, and mainte- competitive energy supply market. In 2012, nance or to attract private investment. the total debt of the three main energy cor- Without the latter, Vietnam will find it hard porations was around $15 billion, roughly a to finance the large power infrastructure quarter of the debt owed by all SOEs in the it needs or to move to newer and lower country (UNDP 2014). carbon-intensity fuels, such as natural gas, Systemic changes in incentives and behav- wind, and solar. An estimated $5 billion in ior are needed not only at site level but also at annual investments will be needed to match community, landscape, and national levels. the requirements in the power sector up to Incentives that engage the private sector are 2030, for which private participation will be necessary for ideas to become action. The essential. Low tariffs will also hinder efforts public sector cannot be the sole investor, and to increase regional power trade, especially the private sector should play a greater role in from the large undeveloped hydropower providing environmental services and in man- potential in the Lao People’s Democratic aging natural resources. In sectors such as Republic. agriculture (including fisheries and forestry), Vietnam uses many fossil fuel subsidies. the expanded role of public institutions is Vietnam Electricity Group (EVN) enjoys holding back investments in innovation and domestic coal and gas input prices well stifling competitiveness. The public sector, below world market prices. In 2012, coal usually budget-constrained, should target was sold to electricity producers at about its spending toward areas that leverage pri- 60 percent of the export price and 70 per- vate investments or that are purely public cent of the production cost. In 2013, the goods, such as cleaning contaminated sites. TABLE 5.3 Cumulative inflation surpassed tariffs and percentage increase show that real electricity prices are among the lowest in the region 3/2009 3/2010 3/2011 12/2011 6/2012 12/2012 8/2013 3/2015 Electricity tariffs (VND/kWH) 948.5 1,058 1,242 1,304 1,369 1,467 1,508.85 1,622.01 Electricity tariffs (US cents/kWH) 4.7 5.3 6.2 6.5 6.8 7.0 7.1 7.6 Increase (%) in VND tariffs – 11.5 17.4 5.0 5.0 5.0 5.0 7.0 Source: Electricity Regulatory Authority of Vietnam. Note: kwH = kilowatt hour; VND = Vietnamese dong. ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 265 This approach not only offers incentives and and allow public access to information. The leverages private resources—it also uses gov- information needs are wide ranging. Data ernment funds more efficiently. and information that determine natural resource management and improve resource governance in subsectors must be stronger. Inadequate Information Available information should be accessible Evidence-based decisions and public support in a user-friendly format, downscaled and are integral to managing natural resources sector specific. Coordinating how informa- efficiently. Both require good scientific infor- tion is used should also be enhanced to mation. For example, anecdotal information improve planning, particularly among agen- based on fish-catch surveys suggests that cies working together at the central and sub- Vietnam’s $1.5 billion–2.5 billion13 coastal national levels. fisheries industry is facing serious issues over This would ensure that information is fish stocks, but no credible analysis of the understandable and accessible to the public, stocks and their supporting ecosystems has under access-to-information laws. Integrated been made to allow them to be managed sus- platforms that convert data to user-friendly tainably. Without scientific evidence, policy outputs and inform planning and manage- makers and the general public are unlikely to ment exist in Vietnam, but they need to be make good long-term decisions. Evidence harmonized across sectors and government from the U.S. East Coast cod fishery shows levels. how fisheries can suddenly collapse—and fail to recover—with dire consequences for those Growing Sustainably Toward depending on them. Vietnam’s fishing indus- try could be at similar risk. But without data, 2035: The Road Forward no one can tell. By 2035, Vietnam envisions a solid founda- In Vietnam, data on ambient air pollution, tion for sustainable and efficient growth. This emissions levels, and source structures are will involve a proactive approach to protect- also scarce. Some transportation data exist, ing natural resources and the environment, but few data are available for other sectors. making efficient energy choices, and shielding Understanding is also lacking on how much the country from the worst effects of global some sectors contribute to urban air pollution. climate change. Vietnam under this scenario This information gap must be plugged would meet most, if not all, of its interna- to understand PM2.5 formation and its tional commitments to lower greenhouse gas impact—and to augment the environmental emission, achieve green growth, and maintain and economic effects that have focused on ecological balance. Vietnam’s vision sees total suspended particles and PM10. The achievement of environmental targets that are urgency is underscored by plans for expand- equivalent to the current levels of regional ing coal-fired power generation. Potential air developed industrial countries. pollution must inform decisions today. Global experiences point to how sustain- Policy makers require more knowledge of able growth requires good policies adapted to other countries’ experiences to adopt a more the national political economy and to ambitious renewable energy path before entrenched behavior. Vietnam is well placed 2035. They need resource-potential studies to avoid becoming one of the countries wres- for biomass, wind, solar energy, and addi- tling with irreversible environmental degrada- tional run-of-river hydro. They must also tion and onerous remediation costs. In line draw on lessons in developing utility-scale with the evolving global agenda on sustain- renewable energy projects to design dynamic able development (as articulated in the UN tariff systems that attract the private sector. Agenda 2030 for Sustainable Development, Vietnam will need to adopt current tech- which includes the Sustainable Development nology and systems to generate, validate, Goals) and addressing climate change 266 VIETNAM 2035 BOX 5.4 Sustainable Development Goals related to environmental issues 1. Ensure availability and sustainable management 5. Take urgent action to combat climate change and of water and sanitation for all. its impacts. 2. Ensure access to affordable, reliable, sustainable, 6. Conserve and sustainably use the oceans, and modern energy for all. seas, and marine resources for sustainable 3. Build resilient infrastructure, promote inclusive development. and sustainable industrialization, and foster 7. Protect, restore, and promote sustainable use of innovation. terrestrial ecosystems, sustainably manage forests, 4. Make cities and human settlements inclusive, combat desertification, halt and reverse land safe, resilient, and sustainable. degradation, and halt biodiversity loss. (box 5.4), Vietnam has issued a series of strat- one-fifth and one-fourth of GDP (World Bank egies and action plans (United Nations 2016). This will require mitigating agricul- General Assembly 2015). ture’s role in land degradation and producing Vietnam can transition to a sustainable more from less—transforming the sector. growth path if it translates its various strate- Land management systems need to be gies and action plans into practice—and installed on sloping lands to reduce land deg- addresses the main environmental challenges radation. This requires spatially coordinated by implementing three key action areas: approaches between districts and provinces to improving governance through strong institu- optimize different land uses and employ sys- tions that are well coordinated and effective tems similar to payments for environmental in monitoring and enforcing policies; incen- services (PES). Coordination of technical ser- tivizing private sector investments; and pro- vices is also important for diversifying land viding relevant and robust information that is use on farms and across the landscape. In Ca publically accessible. Mau province local policy makers identified This section presents actions the govern- the environmental and commercial benefits of ment could take in strengthening institutions, diversified land use through the concept of an incentives, and information to address the “organic coast” that maintains less input- four main environmental challenges identified intensive shrimp–mangrove aquaculture. above: preserving natural resources (including Similar approaches could be adopted land), reducing air pollution, reducing water elsewhere. pollution, and adapting to climate change. In addition, improving the sustainability of offshore and nearshore fishing will need dif- ferent approaches. Offshore fishing requires Address Land Degradation while proactive management and restrictions prior Modernizing Agriculture, Aquaculture, to the depletion of fisheries, including through Forestry, and Fisheries strict zoning enforcement, limiting the num- The share of primary agriculture is expected ber of fishing boat permits, and close coordi- to decline by about half a percentage point a nation among governments at all levels. The year, so that by the early 2030s it accounts for adoption of marine spatial planning strategies about 8 percent of GDP (see chapter 2). But could be useful for determining the feasible agroindustry, with food distribution and offshore fishing locations and volumes. This logistics—and other services—could account approach can also be important for conserv- for twice this share, implying that the agro- ing marine ecosystems and coastal areas, pro- food complex will account for between tecting endangered species, and restoring or ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 267 protecting marine fish stocks. Co-management The government is also providing credit—on in fisheries is crucial to the effort to conserve, preferential terms—to farmers who replant manage, and extract fish stocks effectively in coffee bushes while improving soil and water Vietnam (box 5.5). management practices. Vietnam will need to modify agricultural To make agricultural practices more sus- policies—such as those promoting fish pro- tainable, the government will also need to cessing, biofuel production, and irrigation— shift its role to a facilitator of agricultural that contradict environmental protection modernization, as did governments in Brazil, goals. It will also have to enable and encour- Chile, Mexico, and Thailand. The shift age private actors to invest in environmen- should see the government focusing on core tal protection through incentives and public goods and services. This involvement information. Drawing on international should encourage and enable farmers and the experience, Vietnam could promote agro- private sector to make a greater investment in environmental strategies that anticipate agricultural practices. It should also promote and prevent degradation in the first place greater value added rather than a higher vol- (World Bank 2016). In addition, public reve- ume of low-quality products. The shift should nue could co-finance private land manager emphasize coordination to achieve food investments (by subsidizing landowner resto- safety in the supply chain from farm to fork. ration of riparian areas, for instance). Public In Thailand, the government has facilitated revenue could pay producers or communities the application of Code of Conduct and Good for ecosystem stewardship that benefits the Aquaculture Practice—which contains stan- public. Such revenue could also provide finan- dards for food safety and quality, environ- cial incentives (through preferential credit to mental protection, social responsibility, health producers who use sustainable practices, for and welfare of animals, and data collection example). Incentives to internalize positive and traceability. The Vietnam government externalities from landscape restoration (for could propose incentives to get domestic pro- example, payments for water services result- ducers to adopt certification systems of envi- ing from watershed management) and sus- ronmental and biosafety standards. tainable resource management can also Institutions, incentives, and information promote stewardship. In Dak Lak, the gov- would also be key as Vietnam looks to gener- ernment is sharing the cost coffee farmers ate higher and more sustainable income from incur to adopt water- saving technologies. forest production and environmental services. BOX 5.5 Co-management is crucial for sustaining marine fisheries Co-management in marine fisheries means building The application of co-management on a large a partnership between the local stakeholders and the scale will require effective consultation with stake- government to manage natural resources. The co- holders and adequate justification for the change management approach has been strongly supported (including social and economic justifications). The in the Vietnam Law of Fisheries. In addition, the local effective application of co-management will also democracy policies of the government strongly advocate require more enforcement and rising productivity this co-management approach, by robustly empowering (for justifying transaction costs). Globally com- communes in planning, developing, and managing petitive manufacturers such as Peru and Chile have resources. But the approach has not been widely applied adopted co-management. Thailand has also applied and needs to facilitate formalization of fisheries groups the approach. In Chile, it has resulted in resource so they can fully benefit from the arrangement. sustainability as well as benefits for fishermen. 268 VIETNAM 2035 Vietnam will also need to strengthen institu- services and natural capital, and assisting tional capacity at both the central and local local communities, through mechanisms that levels. This will not only strengthen enforce- ensure their participation in forestry-related ment of regulations and ease operating condi- value chains and return to them a fair share of tions for enterprises (through speedier the profits. issuance of permits and land use rights, for Vietnam, among the early adopters of the example). It will also ensure better collection program of PES, has benefitted from its eco- of data and information on forest boundaries, nomic returns, as discussed earlier. Following inventory of species, soil conditions, forest the example of other developing countries, it management practices, and market opportu- can now look to expand the program, while nities. Vietnam will also need to restructure keeping an eye on maintaining positive eco- its timber processing industry to lower pro- nomic returns (box 5.6). Two additional duction costs—for instance, in 2011, the financial resources for ecosystem services paper production costs in Vietnam were from forests are carbon markets and tourism. 10–30 percent higher than in other ASEAN First, Vietnam can generate sizable revenues countries. Consolidating the domestic pro- in the international carbon market from car- cessing industry will be important to have bon sequestration by its forests (CIFOR 2009, fewer wood chip and paper manufacturers 2012). Second, tourism can create revenues operating on greater scale. Other complemen- that can be reinvested to maintain ecosystem tary measures include accelerating SOE equi- services. Vietnam’s mountains and coastal tization in forestry, strengthening spatial landscapes make it an attractive tourism des- planning for locating high-yield plantations, tination, a potential that is far from fully institutionalizing the value of ecosystem tapped. BOX 5.6 Payments for ecosystem services: A market-based approach to environmental management Payments for ecosystem services (PES) are a ment of the private sector as buyers and the matur- market-based approach to environmental manage- ing market for ecosystem services such as carbon, ment, including direct compensation to land man- water, and biodiversity. Although private conserva- agers for maintaining specific ecosystem services, tion groups and companies are important actors in often through conservation and recovery activities. PES programs, public bodies are still the key buyers PES transactions are voluntary and dependent on of ecosystem services (UNEP 2012). the continuation of an identified ecosystem service Government-financed payments for ecosystem (or a form of land use to secure the service) (Wunder services appear to be more common in many coun- 2007). The payments can be made directly in cash, tries. Some of the biggest PES programs—in Mexico, or other forms of compensation, and can be used, Costa Rica, Colombia, and China, have been largely for example, to encourage landowners to plant trees or entirely financed by domestic resources, such as for carbon absorption, restore forests for water puri- tax revenues or water and power user fees (Milder, fication, preserve scenic beauty for cultural values Scherr, and Bracer 2010). The Grain for Green Pro- and aesthetics, or sustain biodiversity for less fertil- gram in China and the Conservation Reserve Pro- izer and pesticide needs. In agriculture, PES is often gram in the United States are two PES programs used for farmers to fallow, or conserve production funded by the government and deployed on a large systems or contribute to ecosystem services. scale to restore more suitable land cover to agricul- Over the past decade, the PES programs have tural land, to minimize environmental degradation expanded rapidly, thanks to the increasing involve- from agriculture. ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 269 Vietnam could also allow modern land the numbers for one year showed that it gen- markets, since they are critical in improving erated internal savings of about 2 million environmental quality. Many industries or euros. One of the major sociopolitical bene- other high-polluting activities are in fast- fits is that the infrastructure has reduced the growing urban areas. The traditional market digital divide between larger and smaller solution to rising urban land values is to dis- municipalities. It also has enabled smaller place lower-valued industrial sites, but not in municipalities to provide services that previ- Vietnam. Finding alternative revenue sources ously were not feasible. In addition, five years for local governments—such as revenue after its inception, many public organizations from property, sales, or income taxes (see are interested in publishing their geodata and chapter 4)—would help remove highly pollut- making it available through the single plat- ing industries from densely populated areas. form (Almiral et al. 2008). The industrial relocation from Dalian, China, In Vietnam, the National Spatial Data shows how transforming land markets can Infrastructure—which will be one of the core benefit the environment. data platforms for sharing, accessing, and SOE equitization needs to be accelerated, managing natural and artificial objects by for economic efficiency and environmental geographic location—will enhance efficiency sustainability. SOEs are inefficient producers in local and central government policy making. (see chapter 2), dominating the energy sector MONRE has been assigned to prepare a (and active in some natural resource sectors, plan to set up a National Committee on such as forestry). Accelerating their restruc- Geographical Names and Spatial Data turing and equitization to bring in private Infrastructure. It should be supported to do so capital and innovation would improve pro- in an expeditious manner. The government ductivity and reduce their environmental could also promote affordable information impacts. To foster competition, equitization and communications technology, including will need to be backed by measures to get publicly accessible spatial data apps to collect prices right and clarify tenure and property and share real-time information on environ- rights. Such complementary actions will build mental and demographic variables. private sector confidence to invest in Vietnam It is also important to build capacity and and also help “pull up” the viable small and coordination among research organizations, medium enterprises that are investing in sus- public agencies, and think tanks to analyze tainable activities. Equitizing SOEs would the resultant data from the above initiatives. also reduce the state’s conflict of interest when This action will ensure that these bodies pri- it acts as producer of resources and enforcer oritize approaches and improve public agen- of environmental standards. cies’ use of data (including data monitoring The government can generate and and enforcement). It will also ensure that make publicly available information on land, approaches are developed for using data to ownership, sector investments, and cli- inform decision making. mate change. It is already pursuing the Generating and disseminating information e-government program, which puts in place a will also be crucial for revising the fisheries mechanism for increasing government pro- sector in a sustainable way. For both offshore ductivity and efficiency and enables services and coastal/nearshore fishing, information on catering to citizens’ needs. Countries in fish stocks is crucial but lacking. For near- Europe have launched spatial data infrastruc- shore fisheries, the tradeoffs with flood pre- ture activities, some national and others sub- vention measures in agriculture need to be national. A European Commission–financed better understood—how physical structures effort to assess the socioeconomic impact of that manage water flows (such as floodgates, spatial data infrastructure around 2007 dams, causeways, and weirs) can disrupt the found that, in Catalonia, the spatial data reproductive environment for fish by imped- infrastructure was financially justified and ing their free passage along the waterways, 270 VIETNAM 2035 which is essential for their survival. Reversing 45,000 gigawatt-hours (GWh) between 2015 this lack of information can improve the man- and 2030. agement of fisheries resources. China has developed comprehensive national and local building codes. The national code covers design, construction, Reduce Air Pollution while Meeting and operation (variations of the urban resi- Growing Demand for Energy and dential code for different climate zones). In Greater Urbanization addition, each province can develop its own The uncertainty over the contribution of dif- more stringent commercial and residential ferent sectors to air pollution underscores the building codes. Some provinces, such as need to promote coordination and planning Beijing and Tianjin, have implemented stan- across institutions and sectors. Vietnam could dards that are roughly 10–15 percent more benefit from cities and urban clusters that efficient than national codes. Compliance develop multipollutant air quality manage- with the energy-efficiency codes for new ment implementation plans. The country buildings are supervised and enforced needs to develop and adopt regulations on through regular inspections of new construc- vehicle emissions standards and on fuel tion and random inspections of completed quality. The government could also initiate projects. Regular inspections for new con- industrial permits to control air emissions struction follow a “loop system” with four from the relevant industrial sectors. For air phases of administrative review and licensing. pollution, adopting the National Action Plan Finished projects that violate the standards on Air Quality Management deserves imme- are considered illegal construction that can- diate attention.14 not be sold or occupied until violations are In the energy sector, it would be valuable to rectified. The government has other noncom- enforce the law on energy efficiency and con- pliance penalties, such as imposing fines, servation and the decree on sanctions for revoking licenses, and requiring that non- violations on energy efficiency. Energy- compliant buildings or their components be efficiency building codes are mandatory for all corrected (Feng et al. 2015). new investments into building projects. An immediate policy measure is to phase Implementation could be bolstered by address- out energy subsidies and increase electricity ing government authorities’ inadequate code tariffs (while maintaining protections for low- monitoring and enforcement. Mandatory income consumers). This will encourage pri- standards, such as those for widely used vate investment to meet future energy demand energy-efficiency equipment, are also impor- and enable energy suppliers to cover their tant. These standards can help reduce energy investment and their operation and mainte- consumption (and energy imports), saving nance spending. Raising energy prices would consumers large amounts of money. also promote incentives for energy-efficiency The government needs to be the regulator investments, particularly in the industrial sec- of operations in the energy sector by setting tor where financial returns are directly related and enforcing environmental standards. to electricity tariffs or other fuel costs. It Vietnam could reduce its air pollution by would also allow electric utilities to meet the improving energy efficiency in the industrial costs of new investment and operational sector. It could benefit from putting in place expenses. The increase in prices may also mandatory performance-based targets com- motivate upgrading and rehabilitating the bined with financial incentives for industry aging coal-fired power plants. This action and provinces. Standards could also be used could substantially contribute to increasing to improve energy efficiency among end users, efficiency, reducing GHG emissions15 and particularly iron and steel plants. Investing in air pollution, and developing incentives their energy-efficiency measures is expected for investments in new power generation. to reduce energy consumption by about Higher energy prices would also facilitate ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 271 competition and the workings of the whole- augmented annual solar photovoltaic elec- sale electricity market. tricity generation from 18 GWh in 2000 to The government needs to promote more around 6.4 terawatt-hours (TWh) in 2010 aggressively wind, solar, and natural gas (Bridle and Beaton 2012). development and regional power trade, espe- The transport sector should coordinate cially hydropower from the Lao PDR. new development with mass transit to create Vietnam’s heavy reliance on generating coal- connected communities, strategic develop- fired power to meet future electricity demand ment corridors, and other efficient transport conflicts with its GHG emissions reduction options. Transitioning to electric vehicles targets. The country needs to continue devel- could reduce transport-related pollution. oping attractive feed-in tariffs for wind, solar, and biomass or other financing mechanisms Reduce Water Pollution from Urban, (such as auctions). These provide incentives Industrial, and Rural Areas for developing nonhydropower and reduce transaction costs associated with renewable Vietnam needs to bolster the capacity of its energy. The government is conducting a com- public institutions to better monitor and prehensive renewable energy mapping project enforce programs and policies that aim to collecting and managing all data on hydro- reduce the environmental impacts of industry. power, biomass, wind, and solar resources. Cleaner production has been used to reduce This information should be a basis for future waste and lower resource consumption in policy decision making. industry while improving its performance. India, for example, provides private inves- Sectors such as textiles, food processing, and tors with a tax incentive to invest in renew- leather estimate an average savings potential able energy. It enables businesses to take—as of 30 percent for water without major invest- a tax deduction—100 percent of the capital ments in infrastructure. Based on government costs of renewable energy projects. The idea is surveys, only 11 percent of industrial facilities that tax deductions linked to the amount of in Vietnam were using cleaner production investment can provide valuable benefits for techniques to reduce their energy, fuel, and producers. In Bulgaria, the government pro- materials consumption in 2010, pointing to vides nontax incentives. It offers a 20 percent much room for improvement. grant and an 80 percent loan-support mecha- The Green Credit Trust Fund promotes nism for new hydropower plants smaller than long-term investments by Vietnam’s small 10 megawatts. This incentive also includes and medium enterprises in production tech- biomass heating, wind power parks under nology that have a positive impact on the 5 megawatts, and solar, biogas, and small environment. This is achieved thanks to a geothermal generators. partial reimbursement of the credit offered by The value of combining tax and nontax the trust fund depending on the environmen- incentives is also recognized in Spain’s energy tal impact resulting from the investment. For sector, one of the world leaders in renewable example, if an investment made using credit energy. Spain has the second-largest capacity from the fund reduces negative environmental for solar thermal electricity, the third-largest impact by 30 percent (such as reducing waste- for small hydroelectric, and the fourth- water), the trust fund will reimburse 15 per- largest for wind power. The sector employs cent of the credit. Similarly, an environmental 200,000 people and includes more than 400 improvement of 50 percent from the original companies. Although Spain has taken back conditions would result in 25 percent of the some of these subsidies because of fiscal credit being reimbursed. costs, the economy has derived major bene- The country also faces an urgent need to fits from the incentives regime, including achieve universal access to sanitation in urban installation of 3.9 GW of renewable energy and rural areas, for environmental and health capacity between 2000 and 2010, which reasons. Municipal wastewater is predicted to 272 VIETNAM 2035 be the largest source of wastewater over the Another focuses on a solid waste collection, coming decades. Sewage treatment levels need segregation, and recycling network. A waste- to be raised substantially from the 10 percent water reclamation and reuse network involves of recent years. installing microfiltration and purification The government has already set a fee on equipment. The Kalundborg eco-industrial effluents with the aim of reducing water pollu- park in Denmark and the Ulsan eco-industrial tion and helping public wastewater utilities park in Korea apply this process. cover investment and operation and mainte- Vietnam will also need to tackle pollution nance expenses. This fee must be enforced and challenges linked to its craft villages. More reviewed to check whether it is high enough to than 2,500 in number and distributed mainly change behavior. in the Red River Delta, they tend to engage in Based on international experience in devel- economic activity that often includes metal oped countries, private sector investment in recycling and leather tanning and involves sustainable technologies often exceeds public plastic and lead, causing serious environmen- investment. Furthermore, government regula- tal pollution. Water pollution is a leading tion of environmental protection standards problem, affecting not only the craft villages requires the private sector to invest in environ- but also downstream villages. The formula- mental protection. Private firms can contrib- tion of appropriate policies and measures for ute to improving sanitation and wastewater an environmentally sustainable operation in treatment by financing environmental craft villages has encountered local customs infrastructure. With properly designed policies and practices. In addition to the broader solu- (including intellectual property rights protec- tions involving enforcement of pollution tion), the private sector can introduce sustain- control–related regulations and investment in able treatment technologies and innovations, wastewater treatment infrastructure, it is nec- mitigating environmental pollution. Acquiring essary to develop a master plan to address the better technologies and management pro- special needs of craft villages. cesses should be a goal of domestic and for- In agriculture, Vietnam needs to remove eign private investment. The government can support policies that work counter to the help ensure that this happens by encouraging environment, such as waiving water-use fees. private sector involvement in a fair, efficient, But it will have to make such changes while and safe regulatory environment. maintaining measures to protect the rural Tax incentives or direct subsidies for envi- poor from their impact. It also needs to ronmental investments further encourage pri- improve public access to information on vate sector involvement. To reduce pollution, water consumption and pollution and to gal- Vietnam should provide incentives for the pri- vanize broad public support for government vate sector to operate within green industrial measures. Publicly accessible information will zones. In recent years, Korea has transformed help identify laggards in adopting improved 12 of its industrial parks to green zones, yield- wastewater treatment. ing economic benefits of some $44 million and reducing GHG emissions by nearly 200,000 Adapt to Climate Change tons a year. Industrial symbiosis within an economic zone is another novel concept that Cities in the Mekong Delta that are vulnera- provides simple but cost-effective solutions to ble to climate change could have considered achieve efficiency and reduce waste through a broad set of adaptation measures. They an exchange of energy, waste, and material could have “worked with nature” by empha- resources between firms. The waste of one sizing coastal resource management, for enterprise becomes the input to another’s pro- example, or by protecting mangrove and nat- duction activities. One example is creating a ural reef ecosystems. They could have cli- company-to-company network through mate-proofed infrastructure by improving a waste-heat-recovery steam generator. storm-drainage systems and water supply ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 273 and treatment plants. And they could have FIGURE 5.10 Developing in each region a single coordinated protected or relocated energy or solid waste multisectoral plan, similar to the Mekong Delta Plan, will facilitate better coordination with the center management facilities. But the region remains highly exposed to sea-level rise, with infor- Socioeconomic mal settlements at particular risk. Greater Sector master plans Spatial plan development plan coordination among national and subna- (other ministries) (Ministry of Construction) (Ministry of Planning and Investment) tional institutions is needed to enhance resil- ience to climate change. Greater coordination should be facilitated Mekong Delta Plan orientation scheme to reviewing existing and new planning by developing a single, coordinated, multisec- toral plan for each of the regions most vulner- able to climate change. These include the Regional master plans Master plan SEDP Deltas, Central Highlands, and Northern Mekong Delta Mekong Delta Mekong Delta Mountains. Similar to the Mekong Delta Plan (see figure 5.10), the single plan should Local master plans (for example, DARD, DoNRE DoC, DPI in province/city) develop a long-term strategic and sustainable and detailed planning vision for each region and include policy rec- Source: Royal HaskoningDHV 2013. ommendations. The plan should also guide Note: DARD = Department of Agriculture and Rural Development; DoC = Department the government in coordinated development of Construction; DPI = Department of Planning and Investment; MoC = Master Plan of Mekong Delta; MPI = Ministry of Planning and Investment; MPI DoNRE = Department of planning and future investments. Natural Resource Environment. In the medium term, Vietnam needs to augment its subnational capacity to conduct fundamental shift in the approach to moving risk and uncertainty analyses (related to water supply from groundwater to surface socioeconomic, investment, and climate mod- water to prevent land subsidence. Such a shift els) and use a decision-support framework to will require investing in water conservation determine suitable investments. Efforts to and measures to reduce reliance on ground- build capacity and mainstream climate risks water extraction; restructuring, rehabilitating, in development policies should enable the and upgrading irrigation systems; construct- provinces to improve integrated spatial plan- ing more multipurpose reservoirs; and devel- ning across sectors. They should also ensure oping watershed management mechanisms. that land and water resources are managed, Measures in agriculture will need to be cli- taking into account the long-term perspective mate smart and market savvy. Augmenting (and potential climate and development the resilience of the agricultural production impacts). The aim is to increase local govern- system could entail promoting agricultural ment participation in defining the plans and land use changes that both mitigate climate- boosting their willingness to engage in related risks and respond to emerging market implementation. signals, funding research and extension to Vietnam can augment the sustainability of develop and diffuse new crop and animal its natural resources through appropriate varieties tolerant to changing conditions, coordination and implementation of sector- achieving water savings in irrigation systems specific adaptation measures that blend by rehabilitating infrastructure and through ecosystem-based and infrastructure-based better management practices and incentives approaches. For water resources, Vietnam (water charges), and increasing the availabil- will need to continue to invest in flood con- ity of timely weather information and sea- trol, fresh water supplies during the dry sonal climate forecasts, with the knowledge season, monitoring of saltwater intrusion, to best use this information. regulation and management of water for Smart measures in aquaculture will need aquaculture, coastal protection, and so on to blend the development or use of climate- at large scale (including regionally). In addi- resilient varieties with investments in dyke tion to these solutions is the need for a upgrading that can help reduce flooding 274 VIETNAM 2035 and salinization. For estuaries where con- human actions. The government could also ditions have not completely compromised enhance opportunities for restoration and the ecosystem, an option is replanting and conservation. protecting mangroves and mud flats to prevent erosion caused by sea-level rise, Measures in Common storms, and floods. Over time, this will restore biodiversity and help with aquacul- The Vietnamese government will also need to ture production. push through with actions important for all Restoring mangrove forests will improve priority environmental issues. It should build the resilience of coastal areas—and biodi- the human capital to engage in sustainable versity. In some regions of Vietnam, pre- management practices by training workers dicted changes in climate will increase the and building a technical cadre of graduates. likelihood of forest fires, and changes in As it invests in improving its education sys- temperature and water availability are likely tem, it should ensure that the curriculum for to stress forest productivity, exposing them graduates interested in environmental fields is to other factors. Managing forests will suffused with the latest ideas and best practice enhance their resilience to these changes. for sustainable growth. Expanding the area under forests with more The government also needs to invest in diverse species can also help adapt these nat- transitioning low-skilled labor from sectors ural systems. such as aquaculture and agriculture to low- Measures to adapt to climate change carbon and sustainable industries (potentially should not be limited to the natural resource in the same sector). The EU’s approach sectors. They will need to extend to health to addressing some of the challenges facing sectors and to industry. Many of the neces- fisheries-dependent communities could be sary investments can be beneficial indepen- noted. Twenty-one EU member states helped dent of climate change, as they entail form local multi-actor partnerships, known as augmenting resilience to unexpected shocks. fisheries local action groups, which could then Vietnam also needs to improve the infor- access the European Fisheries Fund to pro- mation base it uses to inform plans and mote local development. These groups must investments for climate resilience. This create new opportunities for jobs and growth requires mechanisms for monitoring by launching alternative or complementary and collecting additional data—such as activities. A wide range of local promoters— Hydromet and survey data—and for devel- businesses, civil society organizations, local oping a comprehensive, publicly accessible, governments, and fishers themselves— a n d u s e r- f r i e n d l y k n o w l e d g e b a s e . implemented fund-financed projects. They Improving the information base will aimed to revitalize communities heavily reli- improve the government’s ability to reex- ant on dwindling fisheries without increasing amine sectoral policies on agriculture (triple extractive fishery activities. rice cropping, for example), urban develop- The central government should provide ment (including nature and spatial develop- local governments with incentives to imple- ment), and water resource management ment environmental policy by devising alterna- (such as choice of infrastructure or non- tive revenue-raising or budget-funding structural measures to control floods and strategies. Local governments need to raise rev- saline intrusion) to adjust land use to enue and create jobs in order to maintain their changing water regimes (between fresh, development trajectories. But their fear of chas- saline, and brackish waters). This would ing away industry or losing public revenue— enable the government—at multiple levels— from selling or taxing natural resources—may to internalize natural resource conditions impede them from conducting environmental and trends. It could capture the infl uence policies. China provided cash transfers and of climate change, natural processes, and enabled local governments to tax chemical ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 275 inputs, thus allowing local governments to benefits. In the short term, most benefits are adapt national agro-environmental strategies. local. They stem from improvements in Vietnam will benefit from benchmarking accessing energy, managing water and waste, local governments with explicit performance and controlling pollution, most frequently in indicators of sustainable growth. These indi- agriculture and urban sectors. While urgent cators would track performance and offer to prevent locking in irreversible decisions, rewards and promotions to lower officials investments in reducing deforestation and who have fostered environmental programs improving land management generate and improved environmental quality in their medium- to long-term benefits. These benefits jurisdictions. Such benchmarking can create include reduced soil erosion and fewer emis- incentives for behavioral change among local sions-related payments. governments. For example, Brazil transfers Trade-offs in policy measures vary, additional tax revenue to municipalities that depending on the scale and type of economy perform well on environmental indicators. In and how measures are implemented. Short- China, local government officials’ perfor- term gains can be tied to costs from price mance is evaluated on environmental indica- increases, for example, or changes in access tors and economic growth indicators. and short-term setbacks in competitiveness. For many households and smallholder Measures to reduce pollution can include enterprises, natural assets are the only option enforcing certification standards. Firms for generating revenue. To avoid severe eco- can meet lower pollution targets by invest- nomic impacts from conservation policies, it ing in new technology. Other pollution- is important for private investments to gener- reducing measures can include property ate gains to welfare that extend beyond broad rights, changes in access to public resources, economic growth. This can be achieved by and charges for resource use (such as water creating jobs or reducing poverty through fees). Trade-offs between intertemporal shared benefits. The latter could cover mone- benefits and local and global benefits of sus- tary and nonmonetary benefits, such as pref- tainable growth measures should be bal- erential access to skill-upgrading for youth in anced with the urgency required for the forest-dependent households. Similarly, fish- measures. This helps to avoid locking in ing communities should receive safety nets irreversible actions that do not consider the and training until fisheries recover and assis- environment or climate change. Table 5.4 tance in moving workers to other fields. provides a generalized representation for Policy makers could raise resource pricing— developing countries. such as for electricity and water—with knowl- In Vietnam, where natural-input use in edge of the potential impacts on the poor. For industry is heavy, policies for sustainable electricity, government protection programs growth can raise the rate of return as they have limited the large impacts of tariff adjust- improve resource use, reduce waste, and cut ments on the poor. For example, the social inefficiencies and lost output. Sustainable tariff for households consuming up to 50 kWh growth policies can also reallocate time and a month helps insulate poor households from money from polluting practices to beneficial price increases. Similar policies should be used activities such as education. Strengthened when other resource prices are increased. environmental policies can potentially slow capital accumulation and growth in the short term. But if it includes investing in innova- Trade-Offs Associated with Sustainable, tion, the trade-offs are less pronounced. Inclusive, and Resilient Growth Moreover, welfare—not reflected in measures Evidence from other countries—including such as GDP—is improved.16 Investment of Brazil, Costa Rica, Malaysia, and the revenue generation from sustainable agricul- Philippines—shows that measures for sustain- ture, fisheries, and forestry can also help to able growth can offer short- and long-term improve competitiveness. 276 VIETNAM 2035 TABLE 5.4 Trade-offs should be balanced with the urgency required for the measures Local and immediate benefits LOWER HIGHER (Trade-offs exist between short- and long-term (Policies provide local and or local and global benefits) immediate benefits) Inertia and/or risk of lock-in and irreversibilìty LOWER • Lower-carbon, higher-cost energy supply • Drinking water and sanitation, solid waste (action is less urgent) • Carbon pricing • management • Stricter wastewater regulation • Lower-carbon, lower-cost energy supply • Loss reduction in electricity supply • Energy demand management • Small-scale multipurpose water reservoirs HIGHER • Reduced deforestation • Land use planning (action is urgent) • Coastal zone and natural area protection • Public urban transport • Fisheries catch management • Family planning • Sustainable intensification in agriculture • Large-scale multipurpose water reservoirs Source: World Bank 2012. In summary, policy, financial, and inter- 4. Traffic, as cited in USAID 2013. temporal trade-offs associated with measures 5. The World Wide Fund for Nature (WWF) has for green, inclusive, and resilient growth a scorecard of how well the countries are using depend on how they are implemented. the resources they have available to them to handle CITES compliance. Vietnam can adapt experiences of countries 6. A questionnaire was developed and adminis- that have successfully adopted measures for tered to stakeholders on the importance of such growth. It will need to design green and valued ecosystem components and found that climate-resilient policies that stimulate inno- forest and forest products (especially from pri- vation and are augmented with targeted, mary forests) were seen as important, followed socially complementary policies. In the long by soil and erosion control. term, these measures will pay for themselves. 7. VASEP 2010 and http://pubs.iclarm.net Vietnam has a unique opportunity to take /resource_centre/WF_2776.pdf (viewed May advantage of its natural assets and redirect 2015). its growth path to one that is sustainable, 8. See http://pubs.iclarm.net/resource_centre/WF inclusive, and resilient. Strengthening public _2776.pdf (viewed May 2015). 9. The larger irrigation schemes are managed by institutions, engaging the private sector, intro- state-owned irrigation and drainage manage- ducing needed financial support, and using ment companies (IDMCs), whose operating existing technologies and information can revenues come from a combination of public engender change. In following a sustainable subsidies and water use charges to industry growth path, the country should also consider and municipalities. Since 2008, most farmers accessing public financing sources—such as have been exempt from paying fees for services the Green Climate Fund—to facilitate needed provided by the IDMCs. This measure was investments in the short term. adopted to improve farmer welfare, but has weakened IDMCs’ accountability to local water user organizations. Notes 10. Defined using thresholds based on the historical 1. This term growth is taken as synonymous with variability of the current local climate. Unusual green growth that is inclusive and resilient to heat extremes are defined as three-sigma events. climate change. Unprecedented heat extremes are defined as 2. Nearly half the mangrove forests in the five-sigma events. Mekong Delta were destroyed by shrimp aqua- 11. Excluding the impact of subsidence, due to culture expansion. lack of data; Storch and Downes 2011. 3. General Statistics Office of Vietnam data that 12. The fossil fuel subsidies on electricity and were available up to 2013. petroleum products include price controls, ACHIE VING SUSTAINABLE AND CLIMATERESILIENT GROW TH 277 grants to (electricity) consumers, low-interest Energy Deployment Subsidies: Solar PV in and preferential loans, government loan guar- Germany and Spain. Winnipeg, Canada: Global antees, tax and tariffs credit, and exemptions. Subsidies Initiative. https://www.iisd.org/gsi 13. Estimation using 2013 General Statistics Office / sites/default/files/rens_cba_solar_germany of Vietnam data on fish catch and price. _spain.pdf. 14. The Plan includes a broad range of activities Caritas Development Institute. 2005. Base Line organized under seven focus areas—regulation, Survey of Brackish Water Resources and organizational strengthening, emissions reduc- Environmental Situation in Shyamnagar, tion and prevention, investments and financial Satkhira . Dhaka, Bangladesh: Caritas incentives, international cooperation, monitor- Development Institute. ing and inspection, and dissemination and Center for Global Change Research. 2015. Cross- public awareness. Implementation requires Border Environmental Issues in Southeast Asia coordination among MONRE, Ministry of in the Context of Regional Integration. Home Affairs, Ministry of Transport, Ministry Cheung, William W., V. Lam, J. Sarmiento, of Industry and Technology, Ministry of K. Kearney, R. Watson, D. Zeller, and D. Pauly. Construction, Ministry of Housing, along with 2010. “Large-Scale Redistribution of Maximum provinces and cities. Fisheries Catch Potential in the Global Ocean 15. We could save 15–20 GW by aggressively under Climate Change.” Global Change Biology promoting solar and wind, implementing 16 (1): 24–35. demand-side energy efficiency, and taking CIFOR (Center for International Forestry Research). full advantage of regional trade. Using cur- 2009. 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Looking forward to have managed at any level of development. 2035, Vietnam faces a twin agenda on social It has made impressive gains in health, with inclusion: one unfinished and one emerging. sharp gains in life expectancy, steep reduc- The unfinished inclusion agenda is ensur- tions in infant and maternal mortality, as ing equality of opportunity for all. While well as communicable disease incidence, and Vietnam has made long strides in lifting liv- rapid expansion of health insurance cover- ing standards since Ð ổi M ớ i, some groups age. The vast majority of children are now remain marginalized, and wide gaps in in school, and their results on international opportunity persist between children in poor tests surpass those of many much wealthier and wealthy households. An ethnic minority nations. The country has also put in place child is four times more likely than a Kinh a nascent pension and social safety net sys- child to die before her first birthday, and tem and eased restrictions on the movement more than half the children with severe dis- of people nationally. These accomplishments abilities never attend school. Such exclusion have contributed to remarkable progress as starkly contrasts with the rising fortunes Vietnam has launched itself out of the ranks of those at the top. As malnutrition among of low-income countries. ethnic minority children remained nearly The question for Vietnam today is how unchanged, the number of millionaires in social policy and institutions can play a role Vietnam tripled over the last decade. in achieving the country’s aspirations over The emerging inclusion agenda is sup- the next 20 years. Doing more of the same porting the growing middle class and an will not ensure that Vietnam remains an aging population to manage risks and pur- inclusive society and high-growth economy. sue opportunities. As countries move from It now faces the more complex demands of a 281 282 VIETNAM 2035 lower-middle toward upper-middle and ulti- upper-middle-income economies. Education mately high-income status, social policy must is an important contributor to productivity respond to the needs of a growing, increas- growth. Labor market institutions are a key ingly urban, middle class. By 2035, with more mechanism to balance productivity growth than half the population reaching the global and societal welfare and thus sustain growth. middle class, Vietnamese social policy must Robust pension systems can free household shift its primary focus to helping the middle consumption to play a central role in the new class maximize productivity and manage the growth model. Reforming hộ khẩu (house- risks that could set back social and economic hold registration) policy is critical to realizing progress. the full potential of structural change in Viet- The middle class will have several fea- nam’s economy from low productivity rural tures. First, it will expect government to employment to formal sector urban work. deliver quality services and provide citizens And an adequate social safety net allows with greater voice and choice. Second, it will people to take entrepreneurial risks confi- be subject to new challenges: changing fam- dent that they will not face destitution if their ily structures and rapid aging, a growing business fails. burden of lifestyle diseases, complex labor If the twin agenda is fulfi lled, Vietnam’s markets that require sophisticated labor landscape of social inclusion in 2035 will institutions and regulation, and a higher and look very different. For the unfinished inclu- differently skilled workforce to meet eco- sion agenda, the vision is as follows: nomic needs. Third, with a more open and marketized economy it will face risks such as • Take down the barriers to opportunity unemployment, rising inequality, wage and for ethnic minorities. Targeted initiatives price shocks, and the need for constant skill in education, nutrition, and sanitation can upgrading. These create fiscal risks as govern- close the large gaps in opportunities for ment seeks to expand the coverage and qual- ethnic minority children. An approach of ity of education to higher levels, widen social experimentation and evaluation, building security, and provide affordable universal on new insights from behavioral econom- health coverage—all placing new demands ics, can develop effective interventions on social policies and institutions. in these areas. Policy actions can also be Demographic changes also shape the made more effective through greater voice emerging inclusion agenda. Vietnam is for ethnic minority individuals. one of the fastest aging populations in the • Make people with disabilities full par- world. Around 2035, the old-age dependency ticipants in society. Vietnam has made ratio—the number of people 65 years of age strong commitments to the inclusion of or older for every 100 people aged 15–64— people with disabilities but lags severely in will have risen to 21.8 from 9.6 today, and implementation. Following the example of the working-age population will begin to other countries, it can realize these prom- decline in absolute terms. This sharp shift in ises by regularly monitoring commitments the country’s demographic profile will rever- and by creating opportunities for people berate throughout the economy and generate with disabilities and their families to be new challenges in social services, particularly their own advocates through civil society for health, pensions, and old-age care. organizations. Underpinning both the unfinished agenda • Delink the household registration system and the emerging agenda is the need for from access to public services. At least a new vision of the role of social policy. 5 million Vietnamese lack permanent reg- One key message of this chapter is that the istration in their place of residence and social sectors are very much productive sec- thus have limited access to public services, tors that are central to realizing the goals of including schooling, health care, and such knowledge-based and globally competitive administrative services as registering a PROMOTING EQUITY AND SOCIAL INCLUSION 283 vehicle and applying for a birth certificate. services without imposing fi nancial hard- While the force of the system has waned, it ship will entail both reforming the insur- remains a source of inequality of oppor- ance regime and shifting health care from tunity and an effective tax on migration. its focus on hospitals and toward high- Phased reform of the hộ khẩu system would quality primary care at the center of an place all citizens on an equal footing. integrated system. • Reduce gender gaps. More opportunities • Expand the pension system to cover most are needed for women in public leadership of the population. Given the challenges of roles and could be created by eliminating rapid aging, including those without any gender discrimination in the retirement coverage in the informal sector, will be age and using affirmative action as a short- possible only through a diversified system term measure. Also critical is reducing the and a major reform to make it fi nancially imbalance in the sex ratio at birth (SRB), sustainable, including raising the retire- now one of the world’s highest, with 114 ment age. boys born for every 100 girls. The prefer- ence for sons could be reduced through expanding the pension system, reforming The Situation of Social Inclusion the population policy, and campaigning to in Vietnam highlight the value of daughters. Overall Situation For the emerging inclusion agenda, the Vietnam faces many challenges for social vision is as follows: inclusion. The country now faces the com- plex demands of a transition to a modern • Establish effective representation of work- industrialized economy. Moreover, it faces ers through independent unions. Vietnam a changing domestic and external environ- needs to move toward an industrial rela- ment: rapid demographic change, a labor tions system suited to a mature market market exposed to increased global compe- economy, where the interests of workers, tition, new health challenges from noncom- employers, and the state are more properly municable diseases, and shifting societal represented in a true bargaining process, expectations. Ethnic minorities, people with following the recent commitments in disabilities, and migrant workers are disad- a Trans-Pacific Partnership (TPP) side vantaged and face barriers to sharing in the agreement. In addition, labor market reg- country’s overall success. Access to basic ulations can better balance the protection social services has increased dramatically, of workers with the flexibility needed to but service quality is still wanting. Although promote a vibrant formal sector. Vietnam has managed to avoid an explo- • Ensure that nearly all children complete sion of extreme inequality, growing inequi- upper secondary school with job-relevant ties are increasingly a concern. Meanwhile, skills. One policy priority will be ending the growing dangers of climate change and the exam-based allocation of upper sec- environmental pollution disproportionately ondary school places and replacing it with impact vulnerable groups, undermining the universal secondary-school attendance. nation’s poverty reduction achievements. Another is to continuously improve the quality and relevance of what students Social Development Trends learn, to help them develop the noncogni- tive and complex problem-solving skills Looking forward to 2035, it is expected they need for a competitive labor market. that economic growth will continue to lift • Achieve universal health coverage and people out of poverty, and economic oppor- reorient the health delivery system. tunities, particularly in the private sector, Ensuring access to good quality health will expand, and migration to urban areas 284 VIETNAM 2035 will continue. High returns to education in 1993, while today such extreme poverty has urban areas will provide one pathway to a been all but eliminated. better life for millions of Vietnamese. Nev- Unlike many other countries, Vietnam has ertheless, there are many reasons for con- achieved rapid growth without large increases cern about the country’s social development. in inequality in outcomes (figure 6.2). But a Domestic violence remains prevalent across single measure like the Gini is an imperfect the country, and illicit behavior is common. summary of broader distributional changes Traditional social values are weaker than in the country, primarily the gap between in the past, and social tethers to one’s com- those at the bottom and those in the middle munity are fraying. Social trust that was the of the distribution, and that between the most important factor for community soli- middle and the top. The fi rst gap is largely darity and social cohesion is now declining. congruent with the divide between ethnic Poverty has plummeted in Vietnam over the minorities and the Kinh majority. Ethnic past two decades, whichever of four pov- minorities, who make up some 15 percent erty measurements are used (figure 6.1). of the population, have historically been the Revisions to methodology and poverty lines poorest Vietnamese. Although they have (dashed lines) make it difficult to compare made relative gains in welfare, as the large trends across years. Apparent upward bumps majority of Kinh have moved above the pov- in poverty reflect points where the General erty line, the remaining poor increasingly Statistics Office–World Bank and the Min- comprise ethnic minorities. On the second istry of Labour, Invalids, and Social Affairs gap, the few data suggest that the number of (MOLISA) poverty lines were increased to wealthy in Vietnam has increased sharply in reflect rising living standards and an evolv- the last decade—by one estimate, the number ing understanding of what constitutes “basic of U.S. dollar millionaires tripled between needs” in Vietnam. More than half of Viet- 2004 and 2014 and now exceeds 10,000— namese lived on less than $1.90 a day in but that increase is typical of other countries experiencing similar GDP per capita growth FIGURE 6.1 Poverty has plummeted in Vietnam in the past two during the period. decades Vietnam’s record on poverty reduction is matched by similar accomplishments across 80 a range of social indicators (table 6.1). These gains stem from the mix of Vietnam’s over- all economic growth and the government’s 60 record of effective service delivery. Poverty rate (%) FIGURE 6.2 Vietnam has managed to contain the 40 rise in inequality even as its economy grew rapidly 45 40 20 35 Gini coefficient 30 25 20 0 1993 1996 1999 2002 2005 2008 2011 2014 15 10 $3.10/day $1.90/day 5 General Statistics Office– Ministry of Labour, Invalids, 0 World Bank poverty line and Social Affairs poverty line 92 94 96 98 00 02 04 06 08 10 12 14 19 19 19 19 20 20 20 20 20 20 20 20 Source: Analysis of Vietnam Living Standards Surveys and Vietnam Household Living Standards Surveys, various years. Source: Analysis of income data from Vietnam Living Standards Note: Dotted lines indicate periods when substantial changes were made to poverty lines Survey and Vietnam Household Living Standards Survey, various and/or methodology. years. PROMOTING EQUITY AND SOCIAL INCLUSION 285 TABLE 6.1 Vietnam has experience dramatic improvements in a range of social indicators 1993 Circa 2012 Education Percentage of 15–24-year-olds who have not completed primary school 24 6 Primary enrollment rate (net) Female 87 93 Male 86 92 Lower secondary enrollment rate (net) Female 29 83 Male 31 80 Upper secondary enrollment rate (net) Female 6 64 Male 8 56 Health Infant mortality (per 1,000 live births) 33 19 Under-5 mortality (per 1,000 live births) 45 24 Incidence of stunting (low height for age), Under-5 61 23 Incidence of underweight (low weight for age), Under-5 37 12 Life expectancy at birth (years) 71 76 Access to household infrastructure Percentage using electricity as main source of lighting 48 98 Percentage with access to an improved water source 67 95 Rural 60 94 Urban 91 98 Percentage with access to clean water 70 Rural 17 61 Urban 60 90 Percentage with access to sanitation facilities 43 75 Rural 36 67 Urban 68 93 Ownership of assets Percentage of households with assets TV 22 92 Fan 31 88 Refrigerator 4 49 Car 0 1 Motorbike 11 80 Sources: Vietnam Living Standards Survey 2003, Multiple Indicator Cluster Survey 2011, and Vietnam Household Living Standards Survey 2012. Subjective measures show that Vietnam- Social policy will shift from quantity to ese are pleased with public amenities influ- quality. While issues of access and coverage enced by government policy (figure 6.3). The will remain, quality will be the leitmotif. In greatest standouts are schools and affordable education, this includes a higher performing housing, where Vietnam ranks sixth and education system that raises learning outcomes third among 143 surveyed countries. Air and for all students and provides the relevant and water quality are less satisfactory. increasingly complex skills needed by the economy for progression up the value chain. In health, it refers especially to high-quality Policy Issues services for the poor. In the labor market, the Vietnam’s vision for social inclusion in 2035, quality of institutions involved in wage bar- across the twin agendas, reflects expected gaining, dispute resolution, and employment changes across six thematic areas: protection will become increasingly important. 286 VIETNAM 2035 FIGURE 6.3 Vietnamese citizens express high rates of satisfaction labor markets and private provision of social with public amenities services). In other areas, the state may need to retreat to functions more typical of a mature Schools 89% (Rank #6) market economy (for example, reorienting hộ khẩu to a simple population registration Affordable housing 81% (Rank #3) function, and allowing independent worker representation in industrial relations). State– Water quality 76% (Rank #48) private sector relations will also become more complex: the state will continue to play a key Air quality 76% (Rank #69) fi nancing role but provision should migrate more to the private sector. This will require Health care 73% (Rank #31) the state to recalibrate its functions across the social sectors between provider, financier, Roads 68% (Rank #26) and regulator. Public transportation 65% (Rank #50) A more diverse range of stakeholders will balance their interests and build social 0 20 40 60 80 100 consensus as the country deepens sectoral Satisfaction rate (%) reforms. The successes in Vietnam’s first wave of reforms in social sectors have produced a Source: Analysis of Gallup World Poll 2014. Note: Vietnam’s ranking in the survey is noted in parenthesis. new set of vested interests, which are often central to further reforms but may also resist them. The challenges of social sector reform require careful balancing of the interests of In social protection, the capacity of the system well-connected and vocal “insiders” and those to collect revenue efficiently and provide bet- of dispersed and less influential “outsiders.” ter client services will demand institutional Social policies will be reoriented to rapidly reform. In each of these domains, better qual- changing demographics. The dramatic falling ity will require enhanced mechanisms for fertility, increased longevity, greater mobility accountability of service providers to the pub- of people, urbanization, and rapidly shift- lic and to the state. ing burden of disease from communicable to Social service delivery and labor markets noncommunicable diseases are all reshaping will demand greater efficiency. The chal- the demographic landscape. Aging will accel- lenges of meeting growing societal expecta- erate, the working-age population will start tions while maintaining fiscal discipline will to shrink, as will the size of cohorts of chil- become more acute and may require more dren entering school, and demand for new public resources. The bigger challenge is to types of health services will escalate. New derive better outcomes through efficiency pressures will arise: old age fi nancial protec- gains—thus the need for robust systems to tion and long-term care, higher-productivity monitor human development outcomes rela- workers as the demographic dividend fades, tive to the costs of service provision. and new approaches to urban management to The state’s role in the social sectors will ensure livable and harmonious cities. change. As the economy, labor market, and Finally, as Vietnam seeks to achieve its social services evolve, the state will need vision for social policy in 2035, it will need to diversify its functions. In some policy to keep social spending sustainable. This is areas, it will need to do more (for example, one of the defi ning challenges of fiscal and strengthening the social safety net and finan- macroeconomic management in middle- cial support in old age). In others it will need income countries. Global experience sug- to shift its role more to setting and enforcing gests that the social sectors will account for the “rules of the game” and letting market a growing share of public spending. Nearly forces play a stronger role (for instance, in all countries that have transitioned from PROMOTING EQUITY AND SOCIAL INCLUSION 287 low to upper-middle income devote a grow- Ethnic Minorities ing share of public spending to social sec- Situation tors. In the initial phases, spending growth The Constitution strongly commits to equal- is often focused on education as the system ity for ethnic minorities. Article 5 proclaims expands coverage to a growing youth cohort. all ethnicities to be equal, prohibits discrimi- But as countries grow and age, spending on nation by ethnicity, asserts the right of ethnic health and social security almost invariably minorities to use their own languages, and increases as a share of total public spending. commits the state to implementing a policy of comprehensive development for ethnic The Unfinished Agenda: minorities. Other parts of the Constitution Marginalized Groups and specifically prioritize ethnic minorities in pol- Equality of Opportunity icies for health care and education. Members of Vietnam’s 52 ethnic minori- Equity is a deeply held value of the Viet- ties have made substantial gains in welfare namese people. In the nation’s Declaration over time but remain much more likely to of Independence, Ho Chi Minh said, “All be poor than members of the Kinh and Hoa the peoples on earth are equal from birth.” ethnic majority (figure 6.4).1 Using the GSO– The Preamble to the Constitution sets the WB poverty line, in 2014 the poverty rate had goal of “a prosperous people and a strong, fallen to 6.3 percent among the Kinh and Hoa democratic, equitable and civilized country,” while standing at 57.8 percent among ethnic and Article 50 stipulates “the State shall cre- minorities. Poverty rates for minority groups ate equal opportunities for citizens to enjoy range from 38 percent among the San Diu to social welfare.” Surveys of Vietnamese citi- 93 percent among the Hmong (figure 6.5). zens find widespread concern with inequality. Vietnam’s move away from collectivism and toward a market economy has created FIGURE 6.4 Vietnam’s 52 ethnic minorities are incentives that allow talented, entrepreneurial, much more likely to be poor than the Kinh–Hoa and hard-working individuals to flourish but ethnic majority also inevitably lead to some inequality in out- comes. Inequality of outcomes can be under- 100 stood as the result of interaction between 90 opportunities, effort, and luck. Opportuni- 80 Headcount poverty rate (%) ties are individual circumstances at birth 70 outside our control that influence outcomes. 57.8% 60 Examples include gender, ethnic group, place 50 of birth, and the income or education levels of 40 parents. Effort refers to action on the part 30 of an individual. Luck also plays a part. 20 13.5% While inequality of outcomes is expected 10 in a market economy, inequality of oppor- 6.3% 0 tunity is inherently unfair and incompatible 93 96 99 02 05 08 11 14 with Vietnamese ideals. Equality of oppor- 19 19 19 20 20 20 20 20 tunity prevails when the outcomes are inde- Ethnic minorities pendent of circumstances at birth—a “level All Vietnamese playing field.” Profound inequality of oppor- Ethnic majority tunity remains in Vietnam, particularly for Source: Calculations based on the Vietnam Household Living three marginalized groups—ethnic minori- Standards Survey. ties, people with disabilities, and urban Note: General Statistics Office–World Bank poverty line. Dotted lines represent periods when substantial changes were made to survey migrants—which collectively include one in or poverty methodologies. The poverty rates before 2010 are not four Vietnamese. comparable to the rates of 2010 and later. 288 VIETNAM 2035 FIGURE 6.5 Poverty rates vary by ethnic group, 2009 FIGURE 6.6 The historically poor in Vietnam are much more likely to be poor today Kinh Tay Hoa Thai 5 Muong Kinh 2009 Mean Wealth Index of ethnic group Khmer Hoa Cham Nung 4 San Diu Tay Hmong Kho Me Nung Dao EMuon DeCh San g ay MnonCogH o ai Th Gia Rai Gia Rai Raglai Dao Ede 3 Ba Na Ba Na Hre San Chay Xu Dang Bru−H Mon Van Kg ieu Cham Kho mu Co Ho 2 Xo-Dang San Diu Hre Ra Glai 1 Mnong 1 2 3 4 5 0 10 20 30 40 50 60 70 80 90 100 1999 Mean Wealth Index of ethnic group Poverty rate (%) Source: Calculations based on the Population and Housing Censuses Northern Mountains and South Central Vietnam of 1999 and 2009. Mekong Delta Note: By ethnic group with at least 0.5 percent of the national population in 2009. Central Highlands Source: Calculations based on the Vietnam Household Living Standards Survey. Notes: Poverty rates using the General Statistics Office–World Bank poverty line. Only the largest groups in Vietnam are represented, in order of decreasing size from top to bottom. barriers, which may prevent ethnic minori- Colors indicate primary geographic region of each group. Estimates are based on poverty mapping methods using the 2009 Population and Housing Census. ties from better integrating into society. Lan- guage constraints create difficulty for ethnic minorities in accessing public services and The gaps between the majority and ethnic information. Ethnic minority women are minorities reflect historical and global pat- reluctant to use free services. There may also terns. Around the world, ethnic minorities be cultural barriers to economic advance- and indigenous peoples often remain the poor- ment, such as social pressure against excess est of the poor.2 Among the different groups economic accumulation and cultural percep- in Vietnam, the historically poor are much tions of social obligations (VASS 2009 and more likely to be poor today (figure 6.6). That World Bank 2009b). More recent qualita- all groups fall above the 45-degree line on tive work has emphasized the commonalities the figure indicates that all groups have seen between Kinh–Hoa and ethnic minority atti- increases in their average wealth over this tudes (World Bank 2012c). period. But their ranking has not changed sub- The importance of language as a bar- stantially. The Hmong, for example, remain rier may be fading, with a rapid rise in self- among the poorest groups and the Tay remain reported literacy among ethnic minorities. In among the wealthier ethnic minorities. 2009, 94 percent of those aged 10–14 were The persistence of ethnic minority pov- reported as literate, compared with 74 per- erty is the product of factors across a broad cent of those 30–34. This matches trends set of domains: social exclusion, culture, and in schooling: in 2012, 89 percent of ethnic language; geographic isolation and low mobil- minority individuals aged 15–20 had com- ity; limited access to high-quality land; low pleted primary school, compared with just 45 education levels; and poor health and nutri- percent in 1989. Due to the successful push tion, often reflecting limited access to services.3 to expand primary education, language will The fi rst set of factors consists of social likely be much less of a barrier for ethnic exclusion as well as cultural and language minorities in the future. PROMOTING EQUITY AND SOCIAL INCLUSION 289 Attitudes toward and treatment of the eth- A second set of factors is geographic iso- nic minorities are related barriers. Studies in lation, limited market access, and discon- many countries have shown that unconscious nection from economic growth centers, or implicit biases, usually favoring one’s own particularly for those living in the Northern group, are pervasive among all human beings. Mountains.4 One study found that location Thus even Kinh who do not see themselves accounts for 21 percent of the overall differ- as prejudiced may have unconscious biases ence in consumption levels between minor- that affect the way they treat ethnic minori- ity and majority households. But geography ties. Qualitative work has found that many by itself has only limited explanatory power, Kinh hold negative stereotypes toward ethnic as ethnic minority groups in the Mekong minorities and view them as “backward.” For Delta and Central Highlands regions—which example, one survey by the Institute of Ethnic are less isolated and more economically Minority Affairs found that the staff of banks connected—still have high poverty rates, in Dak Lak believed that Ede were not credit- while the Kinh in the Northern Mountains worthy for loans (World Bank 2009b). have much lower poverty (map 6.1). MAP 6.1 Geography alone does not explain poverty in Vietnam a. Poverty rates for Kinh and Hoa b. Poverty rates for ethnic minorities Northern Northern Mountain Mountain Red Red River Delta River Delta Central Coast Central Coast Central Central Highlands Highlands South East South East Mekong Mekong River River Delta Delta Source: World Bank 2012c. Estimates are based on the Population and Housing Census 2009 and the Vietnam Household Living Standards Survey 2010. 290 VIETNAM 2035 Geographic movement allows people to annual cropland, perennial cropland, and for- integrate with a country’s broader economic estry land), but their cropland is largely unir- success. Ethnic groups with higher migra- rigated and of low quality, unlike Kinh-Hoa tion rates are economically more successful land. Historically, land among many commu- (figure 6.7). Geographic movement allows nities has been held communally, and even people to integrate in a country’s broader eco- following the transition to a market-based nomic success, but ethnic minorities migrate at land system in 1993, some ethnic households half the rate of Kinh-Hoa (Coxhead, Nguyen, have not been willing to sell. Much forest and Linh 2015). This may stem from limited land—the bulk of land held by many eth- information—particularly for those in moun- nic minorities—has not been formally allo- tainous and remote areas—higher costs due to cated, rendering it hard for households to use distance, potential discrimination by employ- land as collateral or sell their land-use rights ers, thin migrant networks (as few ethnic (VASS 2009). Finally, agricultural extension minorities are already in cities), less education, services for ethnic minorities in mountainous and limited language ability. But these factors areas are often inappropriate, having been are in flux. It is likely that by 2035 migration designed for lowland cultivation (Jamieson, will continue rising among ethnic minorities, Le, and Rambo 1998; Oxfam and Action increasingly offering a pathway out of poverty. Aid 2008; World Bank 2009b). All these fac- A third set of factors relates to limited tors help keep ethnic minority households access to good quality land. Surveys con- dependent on low-value staple crops. sistently show that ethnic minorities hold A fourth set of factors is related to educa- more land than Kinh and Hoa (in aggregate, tion. Ethnic minority children are still less likely to be enrolled in school, particularly at upper secondary level, and education attain- FIGURE 6.7 Individual ethnic groups with higher ment is low among ethnic minority adults edu- migration rates are economically more successful cated when ethnic minority enrollment rates were much lower. In 1989, just 20 percent of 6 ethnic minority 6-year-olds were enrolled in school and only a bare majority were enrolled Hoa at age 10—the peak age for attendance. Few Mean Wealth Index of ethnic group 5 attended lower secondary, and only a very Hoa Kinh tiny share enrolled in upper secondary. By 2012 nearly all ethnic minority children 4 ages 7–9 were enrolled in primary school, a Tay Nung Kho Me large majority attended lower secondary, and Muong roughly one-third enrolled in upper second- Thai Kinh Dao ary. But they lagged the Kinh’s near-universal 3 Tay primary completion rate (figure 6.8). Muong Nung Although some ethnic minorities start late, Thai HMong Dao enrollment rates through primary school and Kho Me the first years of lower secondary through age 2 HMong 13 are not far below those of the Kinh. But 0 2 4 6 from age 14 (the last year of lower secondary) Share of ethnic group living in another a steep fall-off in ethnic minority enrollment province 5 years previously (%) begins, and relatively few children from ethnic 1999 2009 minorities make the jump to upper secondary. Source: Calculations based on the Population and Housing Censuses Enrolled ethnic minority children perform 1999 and 2009. worse than majority children, scoring lower Note: By ethnic group with at least 0.5 percent of the national population in 2009. Blue dots correspond to 1999, and green dots on mathematics and reading tests than Kinh correspond to 2009. children (figure 6.9a). The disparities are very PROMOTING EQUITY AND SOCIAL INCLUSION 291 large before children start primary school. Ethnic minorities have seen little improve- Language appears to be an important factor ment in the under-5 malnutrition rates and in the poorer performance (Glewwe, Chen, worsening infant mortality rates. Malnutri- and Katare 2012). Despite their lower start- tion rates in 2014 were twice as high among ing point, ethnic minority students show ethnic minorities as among the Kinh and substantial learning gains—particularly in Hoa (figure 6.10a). Infant mortality rates are Vietnamese language (figure 6.9b). low for the country’s income level but are A fi nal set of factors consists of nutrition four times as high among ethnic minorities and health. Poor nutrition in the fi rst years (figure 6.10b). of life can have strong effects on learning and on later-life outcomes. The most important Three policy directions measure of malnutrition is the proportion of Vietnam has pursued many programs and under-5 children who are stunted.5 Stunting policies to promote ethnic minority develop- generally reflects malnutrition as a conse- ment. These programs can be categorized by quence of chronic illness or failure to receive their form of targeting: by location, by house- adequate nutrition over a long period. hold economic status, and by ethnic minority FIGURE 6.8 Ethnic minority children lag the (Nguyen and Baulch 2007). Many programs Kinh’s near-universal primary completion rate targeted at poor locations and to poor house- holds disproportionately target ethnic minor- 100 ity households de facto because of their high 90 Primary school completion 80 poverty rates and location in poorer areas. 70 Many of the area-based programs focus on 60 rural infrastructure, which research in Viet- rate (%) 50 40 nam and worldwide has shown to be effective 30 20 at reducing poverty in remote areas, where 10 many ethnic minorities live. The analysis thus 0 far suggests several areas of focus for a long- 1989 1999 2009 2012 term agenda to boost the economic prospects Kinh and Hoa Ethnic minorities of ethnic minorities. Source: Calculations based on the Vietnam Household Living Standards Survey 2012 and the Population and Housing Censuses Policy should be driven by the insight that, 1989, 1999, and 2009. over the long term, migration will likely be a Note: The lines represent those ages 15–20 years completing primary school in 1989, 1999, and 2009 for the Kinh and the Hoa pathway to economic integration for many versus the ethnic minorities as a whole. ethnic minorities. Vietnamese language FIGURE 6.9 Ethnic minority children score lower on tests than Kinh but show large gains with time in school a. Mathematics b. Vietnamese language 575 575 550 550 525 525 Score, 2014 Score, 2014 500 500 475 475 450 450 425 425 400 400 Test 1 Test 2 Test 1 Test 2 Kinh Ethnic minority Source: Rolleston 2014. Note: Scores represent successive tests in grade 5. Young Lives, a longitudinal study, was conducted in Ethiopia, India, Peru, and Vietnam. 292 VIETNAM 2035 FIGURE 6.10 Large gaps in child health and nutrition by ethnicity persist a. Malnutrition rates b. Infant mortality 40 50 Share of children under age five who are stunted (%) 44 35 35 40 31 Deaths per 1,000 live births 30 30 27 25 22 20 20 20 16 10 10 15 10 0 2010 2011 2012 2013 2014 2002 2004 2006 2008 2010 2012 Ethnic majority Ethnic minorities Source: Calculations based on the National Institute of Nutrition Surveys and the Multiple Indicator Cluster Survey 2006, 2011, and 2014 reports. Note: For the nutrition figures the ethnic majority group includes only the Kinh, while in the infant mortality figures it includes both the Kinh and Hoa. FIGURE 6.11 Ethnic minority children face inequality of FIGURE 6.12 Triangle of unequal opportunity opportunity, 2010–14 for ethnic minority children Poor education Infant mortality rate (per 1,000 live births) Rate of stunting (% of children under age five) Poor sanitation Malnutrition Improved sanitation (%) The prospect of migration points to a need to focus on providing equality of opportunity for Rate of enrollment in upper secondary school (%) the next generation ethnic minority children. Three interrelated circumstances generate 0 20 40 60 80 100 a triangle of inequality of opportunity for eth- Ethnic minority Ethnic majority nic minority children: poor education, malnu- trition, and low access to sanitation (figures Source: Calculations based on the Vietnam Household Living Standards Survey 2014 and 6.11 and 6.12). The higher poverty of ethnic the Multiple Indicator Cluster Survey 2011 and 2014. minorities can be attributed largely to low educational attainment. The modest levels ability among ethnic minorities, previously of ethnic minority enrollment at tertiary and an obstacle to migration, is improving among upper secondary levels are a consequence of the younger generation, and over time ethnic many factors, including childhood malnutri- minorities will develop migrant networks tion, which is in turn driven by a set of causes that will ease the path of future migrants. including poor sanitation. Completing the PROMOTING EQUITY AND SOCIAL INCLUSION 293 cycle, children who grow up in poor house- subsidies. Affordable and accessible toilets holds are much more likely to drop out of provided through local private suppliers school early, be malnourished, and lack ade- can move more people from open defeca- quate sanitation. In these three areas, policy tion and unimproved sanitation to improved interventions could close the opportunity gap. sanitation. Community mobilization and Improving education access for ethnic behavioral-change communications can sup- minority children is the first policy priority to port a new social norm within communities. boost equality of opportunity. Ethnic minor- In developing education, sanitation, and ity children do learn in school, but they start nutrition programs for ethnic minority school less prepared to learn and drop out ear- children—and programs to address ethnic lier. Few go on to upper secondary school and minority poverty more generally—the gov- a very few attend university. These issues could ernment could benefit from experimenting, be addressed by expanding current govern- monitoring, and evaluating, since in many ment initiatives. High-quality early childhood cases the evidence on “what works” is thin. education programs can boost preparation, Pilot approaches could be carefully evaluated particularly for ethnic minority children. Plac- before programs are expanded to scale. And ing teaching assistants who know the local lan- for all three points of the triangle, initiatives guage in the first few years of primary school could draw on promising new insights from can ease the transition for children who do not behavioral economics. Choices about send- learn Vietnamese at home. And financially ing children to school, feeding infants, and supporting ethnic minority children can raise constructing latrines are determined by a attendance rates in upper secondary school. variety of factors other than cost–benefit cal- Improving nutrition is a second priority. culations. Interventions in all three areas that Early childhood nutrition has substantial seek to “nudge” behavior can be effective and effects on early cognitive development and cost-efficient. readiness to learn in school. Despite existing Policies and programs also need to tackle programs, high rates of malnutrition persist prejudice and help ethnic minority voices be among ethnic minority children. Two of the heard. Although the legal framework is ade- most important factors in undernutrition are quate in recognizing equality of status between inadequate knowledge about the benefits of ethnic minorities and Kinh, prejudice against exclusive breastfeeding, complementary feed- minorities is still common (World Bank ing practices, and micronutrients, and the 2009a). Education can be the basic platform, lack of time women have for childcare and focusing on appreciating and respecting the for themselves during pregnancy. diversity of Vietnamese ethnicity and culture. The third policy priority is sanitation. Conspicuously lacking is a strong ethnic A major driver of malnutrition is lack of minority presence in the Committee for Eth- improved sanitation facilities. In Vietnam, nic Minority Affairs. Local authorities, even stunting rates are high precisely among the in mainly ethnic minority areas, are typically ethnic minority communities that are most Kinh. Vietnam can benefit from having eth- likely to lack improved sanitation facili- nic minority civil society organizations take ties (Quattri and Smets 2014). Poor access part in developing and implementing policy. to sanitation is also one factor behind the high levels of infant mortality among ethnic People with Disabilities minorities. A national sanitation program can achieve universal usage of improved Like ethnic minorities, people with disabili- sanitation. Policies, targets, and incentives ties lack full opportunity. Vietnam has a under such a future program should be substantial population of people with disabil- aligned to promote community-wide behav- ities, in part a legacy of confl ict. They face ior change, including targeted support for obstacles in accessing transport, education, the poor, such as low-interest household health care, social assistance, infrastructure, financing and/or targeted output-based culture and sports, and information and 294 VIETNAM 2035 communications (NCCD 2010). In Vietnam, sometimes segregated in residential institu- disability is highly correlated with poverty tions and special schools. But global policy (Mont and Nguyen 2011). has recently shifted toward including them People with disabilities merit particular in society, making them subjects of the law consideration in a vision of social inclusion with clearly defined rights rather than objects for several reasons. First, the number of peo- of charity. This approach recognizes that dis- ple with disability is likely to increase rapidly ability is the result not of impairment but of as the old-age population expands. Second, the interaction between a person and his or as Vietnam reaches upper-middle income, it her environment. For example, a person in a will face rising expectations on the part of wheelchair might have difficulties fi nding a people with disability and their families for job not because of her condition but because greater inclusion. Third, given its rising level of such barriers as staircases in the workplace. of resources, it should realize its commitment A child with disability might have difficulties to inclusion for people with disabilities. going to school due to the attitudes of teach- The government has made a number of ers and school officials who cannot adapt commitments to advancing the rights of to students with particular needs. Closely people with disabilities. Foremost among related is the understanding that there is tre- these are the Law on Persons with Disabili- mendous diversity in the set of situations that ties, passed in 2010, and the United Nations people with disability face, depending both (UN) Convention on the Rights of Persons on the domain and severity of their disability with Disabilities, which Vietnam ratified in and the environment in which they live. 2015. Protection of people with disabilities is also enshrined in the Vietnamese Consti- Disability-related issues tution. Vietnam’s Law on Persons with Dis- The above commitments and guarantees as abilities and the Convention are based on implemented are too wide for full treatment similar principles. The Convention’s purpose here. The discussion focuses on four issues: is “to promote, protect and ensure the full incidence, attitudes to people with disabili- and equal enjoyment of all human rights and ties, access to education, and jobs. fundamental freedoms by all persons with The incidence of disability among those disabilities, and to promote respect for their age 5 and older is substantial and rising, with inherent dignity.” The Law on Persons with estimates ranging from 7.8 percent (analysis of Disabilities guarantees the following rights to 2009 census) to 15.3 percent (2006 VHLSS) people with disabilities: (VHLSS 2006). Separate administrative rec- ognition of persons with disability is made by • Participate on an equal basis in social commune-level examination councils, with a activities. much more thorough assessment than is pos- • Live independently and integrate into the sible in the census or VHLSS. The census data community. are used for most of the analysis in this report • Enjoy exemption from or reduction of cer- because they are the most recent nationally tain contributions to social activities. representative data on disability and allow • Be provided with health care, functional fine-grained analysis, though the census dis- rehabilitation, education, vocational train- ability classification has limitations. ing, employment, legal assistance, access Disability rates are low for children and to public facilities, means of transport, young adults but rise rapidly after age 40, and information technology, and cultural, particularly after age 65. Two-thirds of those sports, tourist, and other services suitable at age 80 report having some form of disability to their forms and degrees of disability. (figure 6.13). The combination of age-specific- disability patterns and the aging of Vietnam’s Many people with disabilities around the population means that this fraction will rise world have been hidden from society and over the coming decades, to 12 million people PROMOTING EQUITY AND SOCIAL INCLUSION 295 FIGURE 6.13 Disability rises quickly after age 65, FIGURE 6.14 Wealthier countries are more likely to report being a with two-thirds of those age 80 reporting some good place to live for people with intellectual disabilities, 2014 form of disability 100 100 90 DEU Percentage of population SWE NLD CHE NZL CANAUT NOR BEL LUX with any disability 80 80 UZB ECU URY CHL FIN MLT GBR IRL DN AUS K USA ARE SGP BGD CRI MUS ESP FRA SVN 60 70 MLI LKA COL SVK PRI J PN ZAF MEX PRT BFA GRC NER NIC SLV BRA TUR KAZ ESCYP TCZE KEN BHR 40 60 SLE ZWE BOL BTN PER AZE BWA ROU HUN ISR ITA Percent TJK VNM GEO PRY H RV SAU SRB BGR PAN UGA SEN BLZ M K D L T U I ND G T M VEN POL ETH TCD NPL KGZ GHA 20 50 MWI GIN BEN SSD ZMB H ND AGO JAM TUN B IH LBN LVA BLR KWT TGO MRT NAM RUS KOR LBR RWA SDN UKR THA TZA MNG 0 40 AFG CMR CIV PAK MDA ARM ALB MNE IRN DOM IRQ 0 20 40 60 80 100 HTI MAR IDN PSE Age (years) 30 COD EGY JOR BDI KHM YEM MDG 20 COG PHL GA B Source: Calculations based on the Population and Housing Census 2009. 10 1,000 2,000 5,000 10,000 20,000 50,000 100,000 GDP per capita (PPP 2011 US$) (12.3 percent of the over-6 population) by Source: Gallup World Poll 2014. 2035 under one scenario.6 The projected surge in the older population will also mean a larger population of people with disability. Limited research suggests that attitudes FIGURE 6.15 Most children with severe disabilities in Vietnam toward people with disabilities in Vietnam never attend school, 2009 have generated exclusion but may be becoming more conducive to greater inclusion. A detailed 100 qualitative survey in Thai Binh, Quang Nam, 90 80 Da Nang, and Dong Nai found that attitudes 70 toward people with disability were generally 60 Percent negative and that people with disability were 50 often excluded from local activities (Le, Khuat, 40 30 and Nguyen 2008). It documented discrimi- 20 nation in schools and at work, among other 10 places.7 In a more recent survey, 93 percent 0 responded affirmatively when asked if they 5–9 10–14 15–19 20–24 25–29 would like to make friends with a person with Age (years) disability (Kham 2014). But this survey also Never attended school showed evidence of the attitudes in the ear- Currently attending school lier study: just 43 percent said that they would Source: Calculations based on the Population and Housing Census 2009. work alongside a person with disabilities. “Is the city or area where you live a good place or not a good place to live for people with intellectual disabilities?” Affirmative Children with disabilities who do not replies to that Gallup World Poll question, attend school are very likely to face real bar- when plotted against gross domestic prod- riers to being part of society at later ages. uct (GDP) per capita, show that people in Whether children with disabilities attend wealthier countries are more likely to report school indicates the degree to which people that where they live is a good place for people with disabilities are integrated into society. with disabilities (figure 6.14). Vietnam ranks Most children with severe disabilities in above other countries at its income level but Vietnam never attend school (figure 6.15). substantially below wealthier countries. More than 53 percent of children age 10–14 296 VIETNAM 2035 with severe vision disability and nearly They sometimes face obstacles, including dis- three-quarters of those 10–14 with hear- crimination by employers and inaccessible ing (73 percent), walking (72 percent), and work environments. Employment rates vary cognition (74 percent) disabilities have never widely across subgroups of people with dis- attended school. abilities (figure 6.16). Employment rates for Including children with disabilities in people with and without disability increase regular classrooms is fundamental for through the late 40s and then decline. human rights and for equity. Worldwide, education is provided to children with Policy directions disabilities through three different models: On paper, policy toward people with disabil- special schools, integrated schools (with ity in Vietnam is highly inclusive, but actual separate classrooms for children with dis- implementation falls short (UNFPA 2012) abilities), and inclusive schools (with all whether in education, vocational training, children in the same classroom). Inclusive employment, health care, social assistance, schools are better for learning, help foster cultural and sport activities, or transport attitudes of greater inclusion, and are less and public accessibility. The broad agenda costly than special schools (WHO 2011). for disability policy is thus to fulfill the com- The government has recently begun to pay mitments across all the areas that the country more attention to providing teacher train- has already made in its laws, the Constitu- ing and moved toward an inclusive school tion, and the UN Convention. approach. Looking to 2035, creating a mechanism to Employment offers people with disabilities regularly monitor implementation (a commit- the opportunity to fully participate in society ment under the Convention) can be a practi- and to develop their talents and capabilities. cal step. The National Coordinating Council on Disability (NCCD) study, last conducted in 2010, should be updated once every year or two, including a regular, comparable FIGURE 6.16 Employment rates vary widely across disabilities assessment of attitudes toward people with disabilities. Better monitoring can help the 100 Council and other advocates maintain long- term focus. 90 Creating space for civil society organiza- 80 tions for people with disabilities could foster 70 implementation. In other countries, people with disabilities and their families advocate 60 through their own organizations. These cam- Percent 50 paigns have guided governments on policy implementation and ensured follow-through 40 on commitments. 30 20 Migrants 10 Migrants are essential in Vietnam’s eco- 0 nomic transformation. The movement of 15 25 35 45 55 65 people out of areas with less opportunity Age (years) to places with greater possibilities for more economically productive lives is an impor- Any disability Walking disability Seeing disability No disability tant driver of economic growth, generating Hearing disability Cognition disability “agglomeration effects” from greater pro- Source: Calculations based on the Population and Housing Census 2009. duction density. PROMOTING EQUITY AND SOCIAL INCLUSION 297 An increasing number of Vietnamese are interruption (against one year under the pre- migrants. According to the 2009 census, 4.3 vious law). A separate law requires at least percent of the population over age five (3.4 three years of residence to apply for residence million people) lived in a different province in Hanoi. from five years earlier, up from 2.5 percent in Recent studies have found that obtain- 1989 and 2.9 percent in 1999. An additional ing temporary residence status is generally 2.2 percent of the population, accounting for not difficult, but there are high hurdles to 1.7 million people, moved across districts obtaining permanent residence, particularly within a province. In urban areas, 7.7 percent in Hanoi and Ho Chi Minh City (Giang of the population consisted of interprovincial 2014). Some people have lived in Ho Chi migrants, with 12.5 percent of urban house- Minh City as temporary residents for many holds having at least one migrant. years but been unable to obtain permanent status, obstacles to which include inability to provide the required paperwork, as well as Hộ khẩu policy and impacts cost. Numerous respondents in one qualita- H ộ kh ẩ u (household registration system) tive study reported that substantial informal restricts access to services for some urban payments were required—most commonly in migrants, reducing equality of opportunity Hanoi and Ho Chi Minh City—in the range and slowing structural transformation. It was of 3 million–10 million Vietnamese dong introduced in 1957 explicitly to restrain the (around $150–500). Some with “connec- movement of migrants into cities.8 The essen- tions” reported not paying anything. tial component is a household registration More than 5 million people lack perma- booklet (sổ hộ khẩu) that records details of nent registration status where they live. The all household members. Originally, the sys- 2015 Household Registration and Service tem was tied to the ration system, and before Access Survey, conducted only in Hanoi, Ho 1986 a combination of government employ- Chi Minh City, Binh Duong, Da Nang, and ment policies and the link to rations tightly Dak Nong, found large fractions of the popu- controlled migration. lation without permanent registration, par- The 2007 Law on Residence eased h ộ ticularly in Ho Chi Minh City (36 percent) kh ẩ u restrictions. The law lessened the and Binh Duong (72 percent) (figure 6.17) requirements for temporary residents apply- (World Bank 2016). In major urban centers, ing for permanent registration in centrally the Vietnamese without permanent registra- administered cities and removed geographic tion face difficulties accessing services for restrictions for registration of births, the health, utilities, schooling, and social protec- requirement of employment for the regis- tion, as well as challenges in employment and tration, and the requirement that a letter of social networks.9 release be obtained from the migrant’s origi- Evidence also points to some poor chil- nal commune or district. But local authorities dren not attending school for lack of reg- differ in interpreting and enforcing the law. istration. Net school enrollment rates are And h ộ kh ẩu remains important through lower at every level for children without its link to access to public services and as a permanent registration (figure 6.18). Enroll- requirement for many administrative proce- ment rates are very low for children without dures (Marx and Fleischer 2010). permanent registration at the upper second- But in 2014 h ộ kh ẩ u restrictions were ary level. They are also particularly low for strengthened through further amendments children without permanent registration who to the Law on Residence. Among other mea- have been at their current location for less sures, applicants for permanent residence in than six months. Multivariate analysis shows four cities—Ho Chi Minh City, Hai Phong, that the gap persists even when controlling Da Nang, and Can Tho—must now have for socioeconomic status. Urban schools, lived there for at least two years without often overcrowded, give priority to residents 298 VIETNAM 2035 FIGURE 6.17 Percentage of population without (Institute of Sociology 2015). Unregistered permanent registration in four major urban children and those with temporary residence centers are sometimes required to pay higher fees to attend public schools, must pay to attend pri- 80 vate schools, or do not attend school at all (Oxfam and ActionAid 2012). Share of population without permanent 70 Access to health care, pensions, and 60 household registration (%) support for poor households also present 50 challenges for those without permanent reg- istration. Those without permanent registra- 40 tion are less likely to seek professional care 30 when ill and less likely to have health insur- ance (Haughton 2010). Without permanent 20 registration, children under 6 struggle to 10 get health insurance. Those without local hộ khẩu are also ineligible to receive social 0 pensions for the elderly or support for poor g ity i ng g households (Institute of Sociology 2015). no on on hC Na Ha kN Du Those without permanent registration face in Da Da nh iM Bi Ch difficulties with such administrative proce- Ho dures as registering vehicles, obtaining birth Source: World Bank 2016 Notes: Number of people per city: Bin Duong, 1.4 million; Ho Chi and marriage licenses, and applying for Minh City, 2.9 million; Hanoi, 1.3 million; Da Nang, 120,000; Dak bank loans or business licenses (Institute of Nong, 40,000. Sociology 2015). Finally, unregistered workers receive lower wages than comparable registered workers. Controlling for other characteristics, unregis- tered workers have wages 8–9 percent lower. Differences in unobserved characteristics FIGURE 6.18 Net school enrollment rate by school level and could explain the gap, as could legal vulner- hộ khẩu status ability, which increases employer power in wage negotiations with unregistered workers. 100 While the registration system seems to 90 have less force than it used to, it remains a 80 source of inequality of opportunity, increas- Net enrollment rate (%) 70 ing the cost of migration to major cities. How 60 much it discourages migration is unclear, 50 40 however: the presence of large numbers of 30 people in Hanoi and Ho Chi Minh City with- 20 out permanent registration shows that many 10 migrants continue to arrive, despite the costs. 0 Why does hộ khẩu persist when its origi- Nursery, Primary Lower Higher nal purpose no longer applies? Some fear Kindergarten Secondary Secondary that loosening hộ khẩu will increase the flow Permanent Long term temporary Short term temporary of migrants to the main urban centers and Source: Household Registration Survey 2015. aggravate urban crowding. In a 2010 news Note: “Long-term temporary” migrants are those without permanent registration status story concerning possible changes to the who have been living in their current location for more than six months. “Short-term temporary” migrants are those without permanent registration status who have been rules in Hanoi, the Minister of Justice was living in their current location for six months or less. quoted as saying, “To reduce migration is PROMOTING EQUITY AND SOCIAL INCLUSION 299 necessary to reduce the population growth temporary and permanent residents would of the capital, to limit traffic congestion, cease to exist. and to reduce the grubbiness of the capi- 3. A third long-term option is to replace hộ tal” (VTC News 2010). Municipal officials khẩu with a national identification card worry that providing full service access to in a unified national database. The data- migrants will attract more migrants and put base could include place of residence and more pressure on already constrained urban allow individuals to change their listed res- infrastructure. The Ministry of Public Secu- idence at will. Local service access could rity, which administers h ộ kh ẩ u, opposes be determined on the basis of residence as relaxing the system because it sees it as an specified in the national database. instrument of security and control. The sys- tem also employs Ministry of Public Security Gender Equality and Fertility officers and provides opportunities for infor- mal payments (Institute of Sociology 2015). Vietnam has achieved impressive outcomes on gender equality. Gender differences in Three policy directions school enrollment and attainment are mini- The broad objective of policy reform should mal, and the gender wage gap is modest. loosen the link between service access and But women remain outliers in private- and registration status: public-sector leadership positions, and the SRB has increased precipitously. 1. One option is to reduce the barriers to First, there are sharp gender differences obtaining permanent registration. Many in business and in government and political countries require local registration to spheres, where the leadership is overwhelm- access services, and proof of residence, ingly male. In the last decade and a half, the such as a property title or lease, to obtain share of women in the National Assembly local residence. What distinguishes Viet- has been declining. Few chairs of National nam’s hộ khộu from the typical system is Assembly committees are female. A large that permanent registration is only pos- share of the civil service is comprised of sible after residence of 2–3 years, and both women, but their representation in leader- the payment and document requirements ship positions is low. There is a target that for permanent registration are substantial. all ministries should have at least one female The problems the system creates for service vice minister, but the system for that is yet access would be reduced if these require- to be developed. Women’s representation also ments were lessened. A package of reforms remains low in key bodies of the Communist along these lines could include eliminating Party: the Politburo, the Central Committee, the residence period requirement for per- and the Secretariat. As of 2015, women con- manent registration or lowering it to six stituted only 18.3 percent of Party leadership months, reducing the document require- in communes, 14.2 percent in districts, and ments for permanent registration, and 11.3 percent in provinces. strictly regulating payments for perma- Measures to boost women’s leadership nent registration and cracking down on could focus on equalizing retirement ages in informal payments. These changes could the labor code, using affi rmative action as a be made as part of a renewed effort of short-term measure to ensure that qualified broader administrative reform. women are fast tracked to management posi- 2. A second option is to eliminate the differ- tions, adopting a long-term program to identify ences in service access based on registra- potential women leaders early in their public tion. If temporary registration were treated career, and addressing gender stereotypes that as equivalent to permanent registration for limit women’s career choices. This demands a services access, the gap in access between long-term approach to update the education 300 VIETNAM 2035 system and curricula and to promote healthier growth as far back as 1961. A policy decision views of masculinity and gender roles in the in 1989 (largely reiterated in 1993) stipulated media, and perhaps social media. one or two children per family, born three to A second concern is the SRB, which surged five years apart, and recommended the age of after 1999 (figure 6.19). Sex-selective abor- marriage. Although the program was rooted tion is a form of gender discrimination and in a principal of volunteerism, coercive ele- a threat to gender equity over the long term. ments were sometimes apparent locally. Vietnam’s level of the SRB, measured as the Changing demand for children is another number of male births per 100 female births, factor. As in other fast-developing coun- was in the normal range of 105–106 in 1979 tries, a typical couple now wants fewer and 1989. With the spread of ultrasound children. With declines in child mortality, a technology that allows parents to identify large number of children is no longer neces- the sex of the child, the SRB has risen rap- sary to ensure that some children survive to idly, reaching nearly 114 in 2013, placing it care for their parents. Additionally, as eco- with India and China among countries with nomic opportunities have improved overall, the highest SRB. This imbalance will result the value of parents’ time—particularly for in a large number of surplus men starting in women—has increased, making the child approximately 20 years, which may result in care commitment required for a large family an increased level of antisocial behavior, vio- less attractive. Finally, with rising incomes, lence, and human trafficking. families are investing more in each child (for Apart from the introduction of ultrasound higher “quality” children in economic terms). technology, the high SRB is due to the tradi- This increases the cost of each child and fur- tional high value of Vietnamese families for ther discourages large families. sons, partly because sons traditionally have The upshot has been a dramatic decline the main responsibility for taking care of par- in the total fertility rate, which reached the ents in old age and worshipping their ances- replacement rate (2.1) in 2005 (see figure 6.19). tors. Population policy is also likely to be a The rate appears to have increased slightly contributing factor. in recent years, however, possibly due to The “one- or two-child policy” has its ori- changes in 2011 in the messaging of the gov- gins in policies targeting reduced population ernment’s family planning campaign, which families may have perceived as loosening the two-child limit. FIGURE 6.19 Vietnam runs close to India and China as having the world’s highest sex ratio at birth The government is considering issuing a new population law, further loosening 6 116 or even abandoning the two-child policy. Sex ratio at birth (males per 100 females) Although the impact is highly uncertain, Total fertility rate (births per woman) 5 114 the slight increase in the total fertility rate in 2012–14, possibly refl ecting a perceived 4 112 policy shift, suggests that full elimina- 3 110 tion may well increase fertility. The change would likely be modest, since the broader 2 108 economic dynamics of fertility are more important determining factors than the 1 106 two-child policy. Removing the two-child policy will prob- 0 104 ably reduce the SRB somewhat. Given the 1975 1980 1985 1990 1995 2000 2005 2010 2015 option to have a larger number of children, Total fertility rate Sex ratio at birth couples with strong preferences for a male Source: Compilation from General Statistics Office of Vietnam estimates from Population child may be less likely to abort a first or and Housing Censuses and annual Population Change and Family Planning Surveys. second child. Easing of the two-child policy, PROMOTING EQUITY AND SOCIAL INCLUSION 301 however, will most likely not reverse the Its focus of social policy will have shifted sex ratio trend completely. Government dramatically. laws to prohibit sex identification of fetuses But what is the middle class? It has mul- (to reduce sex-selective abortion) have not tiple definitions, each with its own strengths. proven effective. Very large majorities of One group of measure uses relative defini- women in the later stages of pregnancy know tions, for example, the middle three quintiles the sex of their fetuses. The imbalance in the of the income distribution within a country SRB will probably only change markedly as or people earning 75–125 percent of median parent preferences evolve. income (Birdsall, Carroll, and Stefano 2000; Government policy may be able to speed Easterly 2001). A second set uses absolute this evolution through various measures. One terms, such as an income of $2–$13 a day approach is public campaigns to emphasize for a developing world middle class and the value of daughters. A second approach— an income of $10–$100 a day for a global relevant to the discussion on pensions later middle class (see for example, Banerjee and in this chapter—is to ensure that the gov- Duflo 2008; Ravallion 2009; Kharas 2010). ernment provides sufficient old-age support A third type combines relative and absolute to lessen the concern of parents about hav- measures, including people consuming $10 ing a male offspring to support them in their or more a day but also falling below the 90th later years. percentile of the income distribution. Other It is important to note that besides the indicators of the middle class are sociologi- marginalized groups considered above, there cal, such as education, occupation, or life- are many other disadvantaged individuals style. Each approach has its utility, some for who should be considered under social inclu- domestic analysis over time and some for sion policies, although they are not given sep- cross-country comparisons. arate treatment in this report. These include The middle class is a driver of economic child workers, people reintegrated after growth, social stability, and broader devel- rehabilitation, and the victims of trafficking. opment.10 Cross-country analysis points to Other populations of marginalized or vulner- a variety of channels through which a larger able groups include the victims of disasters middle class affects development. Middle- and climate change (and the elderly, who are class households tend to accumulate more considered in the next section). human capital and have higher financial savings—both critical inputs to sustained economic growth. Middle classes are also The Emerging Agenda: stronger markets for consumer durables Middle-Class Inclusion in a and thus a source of domestic consumption growth. Finally, worldwide they have pressed Market Economy for greater accountability and quality in pub- The second element of Vietnam’s social lic service delivery, which in turn can improve inclusion vision for 2035 is the emerging efficiency and socioeconomic outcomes. agenda of supporting the growing middle By a simple projection, in 2035 more than class to maximize their productivity, man- half of Vietnamese people will be members of age risks, and pursue opportunities in a the “global middle class” ($15 or more per day market economy. As countries move from consumption in 2011 PPP terms) (figure 6.20). lower- to upper-middle and ultimately high These gains are shifting expectations and income, social policy must respond to a generating new challenges. For example, growing, increasingly urban, middle class, most people will aspire to wage jobs. They whose needs are very different from those will also expect the state to provide a mini- of the mass of rural poor who characterized mum standard of services, fi nancial protec- Vietnam in the past. By 2035, Vietnam will tion, and decent work, with affordable health be overwhelmingly a middle-class society. care, old-age protection, and basic working 302 VIETNAM 2035 FIGURE 6.20 By 2035, more than half the Vietnamese will have entered the global middle class 100 80 Share of total population (%) 60 40 20 0 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Global middle class (>$15.00 PPP/day) Emerging consumer ($5.51–15.00 PPP/day) Near poor ($3.10–5.50 PPP/day) Global poor (<$3.10 PPP/day) Source: Calculations based on the Vietnam Household Living Standards Survey 2014. Note: Figures reflect the projected distribution of per capita consumption. Projections assume 4 percent annual growth in per capita consumption. protections. Globally, the rise of the middle Vietnam’s education system and key chal- class has also meant greater demand for voice, lenges in promoting a system better suited to such as independent worker representation in the needs of an upper-middle-income coun- the workplace, citizen oversight of public ser- try. The following section discusses Vietnam’s vices, and broader civic participation. Middle social protection system: fi rst, looking at its classes also tend to place a strong weight on pension system and the challenges of balanc- avoiding high-income inequality. ing coverage expansion, fi nancial protection The growing middle class also faces new in old age, and fiscal sustainability in a rap- risks. Health risks from urban and seden- idly aging society; and second, discussing the tary living will increase, and new health risks challenges of building an effective, equitable, such as dementia will develop as people live and sustainable safety net. The final section longer. The risks of losing formal sector jobs reviews the challenges facing the health sec- may increase in the face of global competi- tor as it seeks to ensure universal coverage of tion and increased economic volatility, and health care at affordable levels, and reorient risks of workplace conflict may worsen as the the health delivery system to the lifestyle dis- rapid increase in wages tapers. eases that dominate among the growing, and What are the key public policy challenges increasingly urban and aging, middle class. in meeting these rising expectations? The fi rst section looks at challenges in the labor The Labor Market market and balancing the interests of work- ers and employers in ways that share the fruits The jobs landscape has shifted over the last of growth, sustain competitiveness, and pro- 25 years. While jobs were once entirely in family mote social harmony. The next focuses on farming, collectives, and state-owned enterprises PROMOTING EQUITY AND SOCIAL INCLUSION 303 (SOEs), more than half of jobs are now in man- reducing movement of workers across geog- ufacturing and services, household enterprises raphy, sectors, and types of work. outside agriculture, and private domestic and Vietnam’s labor market policies may be foreign-owned firms. In 1989 nearly three- an emerging constraint to private sector quarters (71 percent) of employed Vietnamese wage job growth. In the most recent data worked primarily in agriculture, fishing, or for- from 2009, although just 1 percent of fi rms estry, and private employment was almost non- identified labor regulations as the chief con- existent. Today agriculture, fishing, and forestry straint to firm growth, an additional 28 per- account for 46 percent of jobs, and one in 10 cent identified them as a minor or moderate Vietnamese workers—about 5 million—holds a constraint (World Bank 2014a). Since that wage job with a private firm.11 time, employment protection legislation has The expansion of private sector wage jobs become significantly more restrictive. Viet- is fundamental to improving living standards. nam faces the danger that overly strict regu- Family farms, household enterprises, SOEs, lations could weigh on wage and job growth. and the government will continue to be a source Regulations often benefit insiders—workers of livelihoods for many workers. But only pri- who hold wage jobs—while smothering the vate sector wage jobs promise the potential for creation of new jobs that would generate the rapid productivity gains needed to lift large opportunity for outsiders. As the ranks of numbers of Vietnamese workers into the ranks wage workers increase, insiders will become of the global middle class. an increasingly powerful voice in favor of Private sector job growth is determined maintaining policies that are to their advan- by many factors. The primary driver is the tage. This could make it difficult to change business environment for private companies. overly strict policies in the future. For private companies to flourish, they need a government that sets clear and fair “rules Structure of the game” that allow markets to function Despite the rapid changes that have taken and allocate land, labor, and finance. Among place in the last quarter-century, nearly half the many other factors that can influence job of Vietnamese workers still work primarily in growth are the education of the labor force, family farming, including fishing and forestry infrastructure, and government corruption. (figure 6.21). That share has dropped steadily Labor regulations and institutions can also since the start of the new millennium, at 1.6 be an important determinant of private sec- percent a year, as workers from that sector tor wage growth. Labor market policies have move into nonfarm household enterprise the potential to help people grasp economic and wage work. Household enterprises have opportunities in a risky world but need to generated a large boost in living standards be well calibrated to help households and for millions of Vietnamese but are limited in society manage the risks. Labor market poli- their potential for productivity growth. The cies can mitigate the effects of earnings and future growth of Vietnam’s middle class will employment losses, provide voice to work- depend principally on the growth of wage ers, and facilitate the movement of labor and jobs, which is heavily influenced by labor human capital to where they are most effi- regulations and institutions. ciently deployed. Conversely, inappropriate policies may increase individual and societal Regulations and institutions labor market risks. At the individual level, Labor market regulations cover three sub- risks of job loss or sustained informality may jects: the minimum wage, employment pro- increase, while at a societal level they may tection legislation, and industrial relations. result in slow formalization of employment, The minimum wage is intended to guar- mismatches between earnings and produc- antee basic living standards for workers. The tivity growth, or labor unrest. Poor policies 2012 Labor Code states, “The minimum may also inhibit structural transformation by wage is the lowest payment for an employee 304 VIETNAM 2035 FIGURE 6.21 Even with rapid change over the last 25 years, family farming still employs the largest share of Vietnamese workers Total employment 52.6 million, 100% Family farming Wage work Nonfarm household 22.5 million, 18.7 million, enterprise 11 million, 43% 36% 21% Without contract With contract 7.4 million, 11.3 million, 14% 22% State-owned Foreign Domestic Government enterprise private sector private sector 4 million, 1.4 million, 2 million, 3.9 million, 7.6% 2.6% 3.8% 7.5% Source: Calculations based on the Labor Force Survey 2014. Note: In this breakdown, family–farm or nonfarm–household–enterprise wage workers are classified under “wage worker.” Nearly all such workers are without a contract. who performs the simplest job in normal The theoretical impact of changes in the working conditions and must ensure the minimum wage on employment is uncertain. employee’s minimum living needs and his/ Absent strict enforcement, if the minimum her family.” Minimum wage legislation has wage exceeds worker productivity, employers direct implications for the 22 percent of Viet- may hire workers informally without a con- namese workers who hold “formal” wage tract to evade minimum wage restrictions. jobs—those with the job contract required Economic theory shows that in a perfectly by the Labor Code. The minimum wage also competitive labor market with both a formal forms the basis to calculate wage scales for sector covered by minimum wage laws and government staff/public-sector workers; wage an uncovered informal sector, the effect of an scales for the payment of social insurance, increase in the minimum wage will be to shift unemployment insurance, and health insur- employment from the formal to the infor- ance for workers of SOEs (and often private mal sector. In the real world, labor markets fi rms in practice); allowances for redundant are not perfectly competitive—large firms workers due to restructuring of SOEs; and in particular can exert market power—and pensions, allowances for veterans, and some thus the impact of the minimum wage is less social transfers. Currently, the minimum clear cut. Theories of efficiency wages sug- wage for each district is set by the national gest that paying workers more induces higher government at one of four levels. A separate effort, makes them more productive, and/ and lower minimum wage—known as the or reduces worker turnover. In the presence reference wage or basic wage—still applies to of either market power or efficiency wages, government workers. changes in the minimum wage at low levels PROMOTING EQUITY AND SOCIAL INCLUSION 305 can have little, no, or even positive effects on FIGURE 6.22 The nongovernment minimum employment. wage in Vietnam is high relative to the median wage, compared with other countries Nonetheless economic theory unambigu- ously predicts that an overly high minimum wage, if enforced, will reduce formal employ- Philippines Cambodia ment. Increases in the minimum wage can Thailand also increase wages higher up the wage Indonesia scale—and possibly reduce employment— Turkey if some workers are paid multiples of the Chile minimum wage. Given that Vietnam has France attracted foreign direct investment (FDI) in Slovenia part because of its low wages, there is a risk New Zealand that very high minimum wages will discour- Vietnam, nongovernment age further FDI and the jobs it creates. Israel Portugal Outside the government sector, Vietnam’s Australia minimum wages have risen rapidly in recent Hungary years, outstripping productivity growth in Lithuania the state, nonstate domestic, and FDI sec- Belgium tors (figure 6.22). The government’s stated Poland ambition is to raise minimum wages to allow Romania households to reach the minimum monthly Mongolia living standard by 2018.12 This would imply Latvia further large increases. Ireland The Netherlands Vietnam’s private sector minimum wage is United Kingdom now somewhat high relative to other coun- Slovak Republic tries. A key benchmark of minimum wages Greece is the relationship to median wages. For Viet- Canada nam, the picture differs sharply between the Korea, Rep. government and private sectors (figure 6.23). Luxembourg Vietnam’s reference wage is low by global Spain and regional standards at about 30 percent of Japan median wage, while the private sector mini- Estonia United States mum wage is high, with the average ratio of Mexico minimum to median wage about 58 percent. Czech Republic Vietnam’s minimum wage increases may Vietnam, government have depressed formal employment growth Lao PDR somewhat. Minimum wage changes in 2006– 0 25 50 75 100 10 were associated with slower private sector Percent employment growth in the domestic private Source: World Bank 2014a, and World Bank and Ministry of Planning sector. Increases in the minimum wage in and Investment of Vietnam calculations based on the Labor Force 2001–2012 raised average wages and mod- Survey 2013. Note: Full-time workers; 2008 for Lao PDR; 2009 for Cambodia, erately lowered firm employment in private Mongolia, and Thailand; and 2010 for China, Indonesia, and the firms and SOEs (Del Carpio et al. 2013; Philippines; average minimum wages for China and Vietnam. The nongovernment sector includes state-owned enterprises and Hansen, Rand, and Torm 2015a). The sharp domestic and foreign-owned private firms. increases in the minimum wage in 2011–13 substantially boosted wages at the low end of Torm 2015b). Overall, 8 percent of full-time the distribution but only in SOEs and foreign- workers are paid less than the minimum wage. invested private firms. This suggests that the The second type of labor market regulation— minimum wage is not fully enforced in the employment protection legislation— domestic private sector (Hansen, Rand, and establishes terms for hiring and dismissing 306 VIETNAM 2035 FIGURE 6.23 Vietnam—following labor code times of reduced demand, it may discourage changes in 2012—is more restrictive in hiring and fi rms from hiring workers in the fi rst place. dismissing workers than France and China This reduces both overall formal sector employment and productivity. Turkey The Organisation for Economic Co- Mexico operation and Development (OECD) calcu- Spain lates an employment protection legislation Indonesia index that compares some of the most criti- Greece cal employment protection legislation com- Vietnam (2014) ponents and the costs they put on employers. France The index shows that changes to the Vietnam China Labor Code in 2012 made Vietnam more Norway restrictive than France (figure 6.23). Italy The most dramatic impacts from the 2012 Iceland reform were on fi xed-term contract regula- Germany tions, reflecting new regulations to outsource Philippines contracts (limited to a maximum cumulative Poland duration of 12 months) and labor leasing Vietnam (2010) enterprises. These reforms moved Vietnam Cambodia from having moderately stringent restrictions Lao PDR on temporary forms of employment to being Thailand very restrictive. Finland Evidence from other countries shows that Netherlands restrictive employment protection legislation Sweden is often associated with lower formal sector Hungary employment, especially of young workers, Denmark women, new entrants to the labor market, and Korea, Rep. unskilled workers (OECD 2004; Heckman Mongolia and Pages 2004; Perry et al. 2007; Packard, Japan Koettl, and Montenegro 2012; World Bank Malaysia 2014a). These groups tend to be among the United Kingdom first to be laid off when labor costs rise or to be Canada blocked from entry altogether. More restric- Singapore tive employment protection legislation raises United States the share of self-employment and decreases dependent employment in low- and middle- 0 1 2 3 4 income countries (Betcherman, Luinstra, and Least Index Most Ogawa 2001; Haltiwanger, Scarpetta, and restrictive restrictive Vodopivec 2003). Source: Calculations based on the World Bank (2014a) and the An important complement to more flexible Organisation for Economic Co-operation and Development Indicators of Employment Protection for 2010. employment protection legislation is active Note: The index has three components: protections of permanent and passive labor market interventions. Both workers against individual dismissal, additional requirements for collective dismissal, and regulations and restrictions on temporary remain underdeveloped in Vietnam. Pro- forms of employment. The value ranges from zero (least restrictive) tecting workers in flexible labor markets to six (most restrictive). requires both active labor market programs workers by employers. The intent is to pro- like training and job search assistance, vide some level of job security. Because overly and passive benefits such as severance pay restrictive employment protection legisla- and unemployment insurance. With China tion makes it harder to dismiss unproductive and Thailand, Vietnam is one of only three employees and to reduce employment during developing countries in East Asia and Pacific PROMOTING EQUITY AND SOCIAL INCLUSION 307 (EAP) with a national unemployment insur- services to workers. This last function is at ance system, but coverage remains modest times subsidiary to other duties of union at under 20 percent of the workforce. At the representatives. same time, unemployment benefits in Viet- The roles for employers’ associations like nam are relatively generous. At 60 percent of the Vietnam Chamber of Commerce and average monthly earnings in the six months Industry and the Vietnam Cooperative Alli- before unemployment, the replacement rate ance are similarly complex. In line with (the portion of income replaced by benefits) their original mandate, these associations is higher than in China or Thailand, and are often more experienced in promoting relatively high globally for middle-income the policies of the state and the Communist countries. Party and in fostering trade activities than Active labor market programs are lim- in engaging in industrial relations. In addi- ited in low- and middle-income countries tion, state-designated employers’ associations in the EAP region. But even there Vietnam fail to represent the interest of all relevant is somewhat of an outlier as it has very few employers, including foreign investors (Ly such programs. Those that it does have, as Khanh 2015). Finally, the capacity of the for public employment or to support employ- government to monitor the enforcement of ment changes for laborers in rural areas, labor legislation and to negotiate and imple- often have low coverage and funding. ment collective agreements remains limited Vietnam’s industrial relations system— (Clarke, Lee, and Chi 2007).14 the third segment—exhibits the legacy of a A symptom of these weaknesses is the high planned economy and faces growing chal- number of “wildcat” strikes. While Viet- lenges to adapt to its central function in a nam’s Labor Code explicitly regulates strikes, market economy. A basic shortcoming is the official procedures are so cumbersome and lack of clearly demarcated functions among the role of labor unions is so unclear that labor unions (where membership is high), apparently no strike has ever taken place that employers, and the state. This limits the force was strictly in accordance with the Labor of industrial relations as an economic and Code. Instead, strikes have been “wildcat”— social mediator, and places undue pressure spontaneous work stoppages bypassing offi- on regulatory measures.13 cial procedures (Schweisshelm 2014; Tran Many observers have highlighted pro- 2012). Such strikes have increased notably found weaknesses in Vietnam’s industrial since the mid-2000s, though with consider- relations system (Chi and van den Broek able volatility from year to year and with the 2013; van Gramberg, Teicher, and Nguyen bulk of strikes in the foreign-invested sector, 2013; Schweisshelm 2014, for example). indicative of the underdeveloped nature of All labor unions fall under the umbrella other mechanisms to resolve labor disputes. of the Vietnam General Confederation of The capacity of mediators and arbitrators Labour (VGCL), which operates under the appears particularly weak (figure 6.24). leadership of the Communist Party of Viet- The 2012 legislative reforms attempted to nam. The Confederation and its affiliated address some of the weaknesses, with formal unions fulfill different roles that can result procedures to settle industrial relations dis- in conflicts of interest. First, enterprise-level putes, a more active role in facilitating col- unions have traditionally been close to man- lective bargaining for the government, and a agement. Second, unions act as a transmis- tripartite National Wage Council. Yet they did sion belt between the Communist Party not resolve fundamental issues over the roles and working people and are supposed to of labor unions and employers’ associations. represent the people in government deci- Well-functioning institutions for collective bar- sion making. Third, unions are tasked with gaining and dispute resolution are still missing. representing workers’ interests in relation Minimum wages adjustments and more to firm management and providing welfare stringent employment policy legislation have 308 VIETNAM 2035 FIGUR E 6.24 The high frequency of wildcat strikes is a symptom of a wage floor approach that emphasizes pro- a weak industrial relations system ductivity and competitiveness as the drivers of minimum wage adjustments should be con- 1000 sidered while the market economy matures. Wildcat strikes (number) 800 Factors such as price growth and relative earnings could remain factors but productiv- 600 ity would become a more crucial factor in 400 minimum wage determination. Other policy instruments are more effective—possibly in 200 combination with the minimum wage—to 0 assure that people who work are able to live above the poverty line. To achieve this shift 98 99 00 01 02 03 04 08 09 10 Au 11 st) 05 06 07 95 96 97 19 19 20 20 20 20 20 gu 20 20 20 to 20 20 20 20 19 19 19 in approach, in the short run, Vietnam’s pri- p vate sector would benefit from moderating (u 12 the rate of minimum wage adjustments. In the 20 State enterprises Foreign-invested enterprises medium term, existing plans to anchor mini- Domestic private enterprises mum wage adjustments to real productivity Source: Tran 2012. growth should be put into place. A number of Note: “Wildcat” strikes are spontaneous work stoppages bypassing official procedures factors are taken into account in setting mini- (Schweisshelm 2014). mum wages in other countries (table 6.2). Vietnam could also benefit from stream- been used to address insufficient power of lining its employment policy legislation workers to negotiate adequate wages and regulations to promote greater labor market assure decent work conditions. This has cre- flexibility. It should consider loosening regu- ated one-size-fits-all regulatory parameters lation of labor leasing enterprises and of tem- that fail to respond to the varying interests porary and outsourcing contracts. It could of workers and employers and are not neces- look more closely at the interaction between sarily appropriate for all sectors, locations, or employer-provided severance and unemploy- types of work. ment insurance—generally more efficient in pooling risks related to job loss. Their poten- Policy directions tial substitutability is apparently already rec- Whether Vietnam can realize the further ognized in Vietnam’s labor code. transformation of its labor market will To ensure that increased flexibility in depend on its policies—whether the country the regulated labor market is accompanied addresses weaknesses that are already appar- by adequate security for workers, Vietnam ent before moving from farms to factories should gradually expand coverage of unem- and firms. One concept is “flexicurity,” strik- ployment insurance and active labor market ing a balance between flexible labor regula- programs. This can enhance labor market tion that maximizes productivity growth and efficiency and worker welfare (World Bank creative destruction and the needs of workers 2012b). But Vietnam needs to keep close for decent employment that is fairly compen- track of the fiscal impacts. It should also sated. Put another way, Vietnam should aim monitor the labor tax wedge and explore to protect workers rather than jobs as it deep- options of financing unemployment insur- ens its structural transformation. ance, active labor market programs, and The minimum wage will be most effective other initiatives out of general tax revenue. if it is determined primarily with reference The government might approach its indus- to productivity and competitiveness factors. trial relations challenges over three stages. In To date, Vietnam has taken a “living wage” the short term, it should continue strength- approach to minimum wage setting, with a ening efforts (such as the VGCL’s attempts primary focus on the cost of living. Shifting to to form enterprise unions independent PROMOTING EQUITY AND SOCIAL INCLUSION 309 TABLE 6.2 Countries have different criteria in setting minimum wages Economy Approach Key criteria Australia Wage floor Productivity, business competitiveness, relative standards of living, workforce participation rate. Korea, Rep. Wage floor Cost of living, economic growth rate, average wage level, labor productivity, unemployment rate, consumer price index, and income distribution. No fixed weight for factors and relevance of each determined within wage council debate and varies in time. Taiwan, China Wage floor Conditions of national economic development, price index, national income and average individual income, labor productivity of different industries and employment situation, workers’ wages in different industries, survey and statistical figures on household income and expenditures. United States Wage floor Manufacturing productivity, affordability to employers, cost of living, wage levels. United Kingdom Wage floor Pay differentials, inflation, business costs, competitiveness, employment, economic conditions. France Living wage Overall wages and income CPI economic conditions, needs of workers and families. Hong Kong SAR, Wage floor General economic conditions, latest economic performance and forecasts, labor market China conditions, labor demand and supply, wage level and distribution, wage differentials and employment characteristics, competitiveness, productivity growth, labor costs, operating characteristics of enterprises, entrepreneurship, business sentiment and solvency, relative economic freedom and competitiveness, standards of living, changes in employment and earnings and inflation. Source: Hong Kong SAR, China, Provisional Minimum Wage Commission 2010. from management) to increase the capacity should be to develop collective bargaining of unions and employers’ federations through where the interests of workers, employers, awareness campaigns, and training in collec- and the state are more properly represented tive bargaining, among others. in a true bargaining process. In the medium term, Vietnam should con- Vietnam has already made strong commit- sider more specific measures. The VGCL and ments along those lines in the United States– its affiliated unions could bar company exec- Vietnam Plan for the Enhancement of Trade utives and managers from key union positions and Labor Relations, a side agreement to the (like being head of an enterprise union). This TPP. The main provision is as follows: would follow the example of other coun- tries where company managers cannot hold Viet Nam shall ensure that its laws and reg- top union positions or even union member- ulations permit workers, without distinc- ship. Vietnam should continue simplify- tion, employed by an enterprise to form a ing regulations to resolve industrial relation grassroots labour union (to chuc cua nguoi disputes. It could also consider institutional lao dong) of their own choosing without reforms that allow the creation of fi rm-level prior authorization.… A grassroots labour works councils or labor-management coun- union registered with the competent govern- cils, as in many European countries and the ment body shall have the right autono- Republic of Korea. And, it should look to mously to elect its representatives, adopt its develop labor mediation and arbitration sys- constitution and rules, organize its adminis- tems that provide channels beyond the court tration, including managing its finances and assets, bargain collectively, and organize system to resolve labor disputes when work- and lead strikes and other collective actions. place institutions are unable to resolve mat- ters amicably. In the long term, Vietnam should consider Further, Vietnam agreed that within five fundamental institutional reforms to create years grassroots unions may form organiza- an industrial relations system suited to the tions “across enterprises and at the levels needs of a mature market economy. One goal above the enterprise, including the sectoral and 310 VIETNAM 2035 regional levels.” If fully implemented, these Advances in education are also critical to measures will address many of the weaknesses Vietnam’s overall economic success. High- in the current industrial relations system. income countries have workforces with high levels of advanced skills gained through edu- cation. These skills are essential to growth Education (Acemoglu and Autor 2012). The many Education is the most critical component specific skills combine in complementary of equality of opportunity. In Vietnam’s ways with technology, and the educational increasingly market-oriented economy, the foundations of the workforce allow indi- prospects for success in life are far greater for viduals to change and adapt more quickly as those with a high-quality education. Despite changes in technology and the demands of great gains over time in educational attain- work accelerate. These basic facts underlie ment among Vietnamese of all income levels, the massive rising global demand for educa- large gaps remain in the education experience tion (Garcia de León, Heckmann, and Gon- of children by socioeconomic status. A child zalez 2012). from a wealthy family in Hanoi or Ho Chi Vietnam is rightly proud of its achieve- Minh City will typically receive high-quality ments in expanding education coverage, with instruction through upper secondary school, quality and equity, over the past 20 years. supplemented by private tutoring, and com- This is an excellent start toward creating plete a university degree, either in Vietnam the adaptable, skilled workforce it needs or abroad. In contrast, a child from a poor to become and stay a high-income country. rural family is unlikely to advance past lower But it is not enough. Too many students fail secondary (figure 6.25). to graduate high school, and too few continue FIGURE 6.25 A large gap in upper secondary school attendance remains between the poorest and richest 20 percent 18 17 16 Age (years) at start of school year 15 14 13 12 11 10 9 8 7 6 5 100 75 50 25 0 25 50 75 100 Poorest 20% Richest 20% Share of children attending school (%) Vocational Tertiary Upper secondary Lower secondary Primary Preschool Source: Calculations based on the Population and Housing Census 1989 and the Vietnam Household Living Standards Survey 2012. PROMOTING EQUITY AND SOCIAL INCLUSION 311 to tertiary education. Those who continue do The current education system not, as a rule, receive a high-quality education Over the past 25 years, Vietnam has that is relevant for a modern labor market. expanded education access, achieving univer- In short, the Vietnamese education system sal primary education and increasing enroll- is inclusive, high quality, and largely equita- ments in lower secondary, upper secondary, ble through lower secondary education. But and tertiary education (figure 6.26). it then becomes exclusive, mid-quality, and Challenges remain after basic education. inequitable. It provides students with excel- The poorer a student’s family, the less likely lent foundations for success, but fails to build she or he is to finish high school or continue on them. to tertiary education. Dropping out dispro- Public policy for education should pro- portionately affects students from poorer mote universal high school completion. The families, and after age 14 the poor start to excellent foundations of public basic edu- rapidly disappear from the education system. cation in Vietnam should channel students In the last year of junior secondary school, into a dynamic tertiary system. This sys- when students are 14 years old, there are 67 tem should offer students a wide range of students from the bottom income quintile choices—increasingly presented by private for every 100 enrolled students from the top providers—that respond to their demands quintile. By age 16, just two years later, 24 and aspirations. (This section focuses more on of the poor students are no longer in school, the basic education system and makes recom- dropping the share to 43 poor students per mendations for policy directions; chapter 3 100 rich students. These ratios continue to on innovation considers the tertiary education worsen for high school graduation and ter- system more closely.) tiary enrollment. FIGURE 6.26 Over the past 25 years, Vietnam has greatly expanded access to education 18 17 16 15 Age at start of school year 14 13 12 11 10 9 8 7 6 100 90 80 70 60 50 40 30 20 10 0 10 20 30 40 50 60 70 80 90 100 1989 Share of children attending school (%) 2012 Primary Upper secondary Tertiary Lower secondary Source: Calculations based on the Population and Housing Census 1989 and the Vietnam Household Living Standards Survey 2012. 312 VIETNAM 2035 Vietnamese basic education policy has system. Second, in a “normal” distribution overemphasized the continued development about 50 percent of students are below aver- of students seen as having more traditional age by definition. This has led to a failure to academic ability and underemphasized those sufficiently develop the potential of a large seen as having less. A key bottleneck is at share of students, and a tolerance for drop- the end of lower secondary school due to ping out and short educational careers. the exam-based system to allocate places in Demand-side issues affect children con- academic high schools. Policy puts the onus tinuing school beyond junior secondary. on the student to demonstrate sufficient aca- Affordability for less well-off households is a demic talent to merit a place in upper second- challenge, along with the opportunity cost of ary education. This policy prevents marginal having young adults in school rather than at students from entering upper secondary work. Poor families may also have concerns school. The policy also appears to have a about the relevance and usefulness for job strong indirect effect on students’ decisions success of schooling at the senior secondary to drop out and parents’ support and influ- and tertiary levels. ence on these decisions. Vietnamese schools are extremely good Research confirms that the exam-based at achieving basic learning outcomes. Stu- system of progression makes the path for dents in the Young Lives study documented ambitious students of moderate academic tal- learning gains and other characteristics from ent and achievement more arduous. Parents birth through age 15 for compatible cohorts sometimes discourage further schooling of of children in four countries (Ethiopia, India, students who are having difficulty achiev- Peru, and Vietnam). Children in all four ing top or even average grades (Duc and Tam countries show similar levels of cognitive 2013). Social attitudes and policy orientation development at age 5, but by age 8, after only choose to cast academic upper secondary three years in school, wide gaps emerge in school as a precious good not to be “wasted” their performance on standardized tests. At on the less talented. Two problems stand out. young ages, even the poorest students in Viet- First, it is unclear that the traditional defini- nam outperform the average students in the tion of academic talent and aptitude is either other three countries, and the gaps widen the optimal or measured accurately by the exam longer students are in school. In the Programme for International Stu- FIGURE 6.27 Vietnam excels in international tests, scoring above dent Assessment (PISA) study, even though many rich countries Vietnam had the lowest GDP per capita, the 600 performance of its students in all three areas exceeded that of many OECD countries. SGP KOR HKG Vietnam’s mean score in mathematics, for 550 JPN MAC example, was above that of Austria and just Mean PISA math score CHE Vietnam POL EST NLD DEU AUT CAN below that of Germany. Vietnam’s measured AUS 500 E SVN DNK scores were boosted somewhat, however, LVA CZ PRT USA HRV ISR SWE because about one-fourth of Vietnamese 450 SRB ROU TUR GRC students are no longer in school by age 15 BGR THA K AZ MYS CHL ARE and lower-performing students are more 400 ALB MNE MEX URY CRI likely to have dropped out (figure 6.27). TUN IDN JOR COL BRA ARG QAT Three main elements have contributed PER to Vietnam’s learning results. The Ministry 350 of Education defined and widely dissemi- 1,000 2,000 5,000 10,000 20,000 40,000 100,000 nated clear learning goals for all students to GDP per capita (US $) all schools and school subsystems. Strong Source: Calculations based on the Organisation for Economic Co-operation and attention ensured the basic conditions for Development 2014a results and World Bank 2012d. performance through, for example, the PROMOTING EQUITY AND SOCIAL INCLUSION 313 Fundamental School Quality Level (FSQL) as the student progresses through the educa- audit system introduced in 2003 and used to tion system, with 32 percent of students in compare primary school performance. The primary schools receiving paid supplemen- system maintained basic standards for qual- tary education, 46 percent in lower secondary ity, such as low absenteeism. schools, and 63 percent in upper secondary Regardless of a young person’s socioeco- schools (Dang 2013). Some 27 percent of nomic status, investment in early childhood households pay for tutoring—15 percent in education can improve educational out- the poorest income quintile and 30 percent in comes throughout a student’s school career. wealthier quintiles (Dang 2013). Kinh fami- Early childhood education programs can lies on average spend 80 percent more on pri- benefit disadvantaged children by prepar- vate tutoring than ethnic minority families. ing them for primary school. In Vietnam, The gap between rich and poor household there are crèches for children between spending on tutoring may be correlated with three months and three years old and kin- lower scores on entrance exams for disadvan- dergartens for children between three and taged students. six years old. Early childhood education Most students attend supplementary institutions are either public (the majority), education classes arranged by the students’ semi-public, or private. Preschools all fol- schools, although urban areas have educa- low the same government regulations tion centers. Six percent of students attend regarding organizational structures, curric- private tutoring classes not organized by ulum, class size, and teacher qualifications. their schools. The gap in supplementary edu- The objective of Vietnam’s early childhood cation attendance between urban and rural education institutions is to help children students ranges from 4 percent in preschool prepare for school by developing their phys- to 23 percent in primary school (Dang ical, emotional, and intellectual abilities 2013). Vietnamese students spent an average (UNESCO IBE 2011). of 89 hours in tutoring in 2006, with urban The government is committed to improv- students spending twice as much time as ing access to and the quality of early child- rural students. This disparity in attendance hood education programs to ensure that between rural and urban students may students can enroll in full-day, full-year pre- worsen educational outcomes for poor, rural schools. The government approved univer- students. sal early childhood education for 5-year-old children (Decision 239) to raise enrollment Policy directions in early childhood education institutions to Vietnam is in strong position but will need 95 percent, raise attendance to 90 percent, to respond to new conditions. Its trends in and reduce malnutrition to below 10 percent education coverage place it along the same by 2015. The program also aims to increase trajectory as Korea. Both countries are above school readiness by expanding coverage to the global trend line for attainment. But for disadvantaged children and to improve Vietnam to develop educationally as Korea the quality of early childhood education did will require new ways of thinking about institutions by constructing infrastructure, education policy. The trends affecting Viet- providing teaching and learning materials, nam’s education policies for the next two promoting teacher training, and providing decades will be: lunches to disadvantaged students. The cur- riculum was changed from being teacher- to • The substitution of technology for human child-led to improve learning outcomes. labor for routine tasks and for the increas- While access to basic education is nearly ing cognitive and skill demands of remu- universal in Vietnam, supplemental tutor- nerative work. ing is pervasive and a source of inequality of • The global tendency toward higher lev- opportunity. Spending on tutoring increases els of education in the workforce and the 314 VIETNAM 2035 FIGURE 6.28 Vietnam can follow the Republic of Korea’s path in it with universal secondary school attendance high school completion rates is a priority. This matches global experience of universal high school completion as coun- 100 tries grow richer (figure 6.28). It will also 2010 mean that upper secondary schools will have Percentage of people ages 25–34 years with a high school degree 80 cohorts with a greater range of abilities. 60 Serious consideration should also be given to a medium- to long-term transformation of 1980 2015 40 the two separate subsystems (academic and technical/vocational upper secondary school) 20 into a single system offering two tracks to a high school diploma. One track would be pur- 0 sued by those who expect to continue to ter- 0 500 1,000 5,000 10,000 50,000 100,000 tiary education. The other would be for those GDP per capita (2005 PPP US$) who may not or who seek only limited formal Korea, Rep. Vietnam education beyond high school. The potential for housing both systems in common second- Source: Calculations based on Barro and Lee 2010 and World Development Indicators. ary school buildings should be explored. Funding is too limited to expand both long-term persistence of returns to higher the academic and technical and vocational levels of education. education training systems to full national • The transition of Vietnam from a rural, coverage. This model would be especially lower-income, agricultural society to an advantageous for rural, isolated communi- urban, modern, middle-class economy. ties, which could see efficiency and social gains from a single high school for all high As Vietnam moves toward 2035, basic school-aged youth. Modulating course diffi- education policy will need to focus on mak- culty and content could be done as well or ing all high school graduates ready for better in a single school. The policy would college—preparing them to succeed in edu- have the added effect of ending what is widely cation beyond high school. This workforce viewed as lower-value education and/or a dis- will allow Vietnam to raise productivity amid tant second option for those without the tal- increasing global competition and rapidly ent to pursue academic secondary education. changing knowledge and technology. The T he second avenue — inquir y-based overall policy goal is to build on Vietnam’s learning—entails continuously improving the current advantages to produce a globally quality and relevance of what students learn. competent, adaptable, and high-quality work- The Vietnamese school system excels at accom- force, through two avenues: universalizing plishing straightforward tasks. But it needs high school completion and adopting greater to develop behavioral and complex problem- elements of inquiry-based learning. solving skills demanded by the modern world Too many students leave before receiving of work. These include broader generic skills a high school diploma. Initial gains in equity such as communication, teamwork, problem- of learning outcomes are dissipated when solving, and self-regulation, allied to a rigor- students from poorer families leave school ous approach to content, enabling students to with no diploma and few options for tertiary become skilled and flexible learners. study. These problems are more prevalent Some of the groundwork for pedagogi- among the country’s ethnic minority students cal change has been put in place. The Viet- and families. Universal high school comple- nam Escuela Nueva Program provides tion will reverse this trend. more than 1,500 schools nationwide with Ending the exam-based allocation of much pedagogical autonomy to encour- upper secondary school places and replacing age student-centered pedagogy and locally PROMOTING EQUITY AND SOCIAL INCLUSION 315 initiated professional development for teach- them money they cannot afford. The respon- ers. Building on this experience, the National sibility to manage and mitigate these risks Assembly has approved a fundamental reform will be a key challenge for policy makers. For of education to revise the curriculum and text- these reasons, health system performance is books in all subjects for grades 1–12, aiming likely to be an increasingly important factor to replace rote learning with competency- in broader perceptions of government efficacy. based education. The major policy challenge facing Viet- To be successful, this sweeping change nam’s health system over the next 20 years will require a clear idea of the attributes of will be to achieve universal health coverage— the ideal graduate, continuous development that is, to ensure that everyone has access to of content that develops acquisition of factual good quality services without suffering finan- knowledge along with the broader generic cial hardship. Vietnam’s 1992 Constitution skills, creation of an expanded national also highlights this objective. Two big policy learning assessment system of high techni- challenges will have to be met: in service deliv- cal quality that is carefully aligned with the ery, transitioning to a health system centered revised curriculum, and strong education on primary care; in health fi nancing, besides research capacity and the ability to move resolving efficiency and equity challenges, from research to policy. stabilizing high total health expenditure and Implementation of the revised curricu- cutting out-of-pocket (OOP) spending. An lum will require efforts to ensure that teach- important question on the latter is how the ers understand its goals. This is a large task, current pace of insurance enrollment can be partly reconceptualizing what it means to accelerated, since by some estimates it may teach and to learn. It requires that teach- not be rapid enough to achieve 100 percent ers understand and teach in a way that pro- coverage by 2035. Other challenges are to motes the relatively complex goals in the involve the private sector more in the delivery competency-based curriculum. Continuous of health care, and the state more in financing professional development, mentoring by mas- of aged and long-term care (ALTC). ter teachers, experimentation, and analyses Vietnam can build on many past successes are standard in the high-income OECD coun- as it looks toward 2035. For many years, it tries that are Vietnam’s educational peers. has enjoyed health outcomes better than Vietnam now needs the same type of system. what its income level would suggest. But past accomplishments do not guarantee continued success. For example, many countries that Health Care have done well on maternal and child health As Vietnam moves to middle-class status by have struggled to make progress on address- 2035, average citizens will increasingly aspire ing noncommunicable diseases (NCDs). to a long and healthy life, to enjoy time with Robust economic growth does not auto- their family, and to take part in the country’s matically translate into improved health out- growing affluence. Any perceived shortcom- comes. In fact, the global evidence suggests ings in the health system—quality, cost, or that higher income does not have a major role responsiveness—are likely to spark public in “producing” better health, which relies debate. There may also be growing impa- instead on the wider application of health- tience with gaps between the health care improving knowledge and technology, espe- afforded by the rich and what is available to cially in personal behavior and medical care. the rest of the population. High expectations reflect the substantial Strengthening service delivery: Moving risks that individuals face when they encoun- from hospitals to primary care ter the health system—the risk that if they In recent years, Vietnam has been very suc- get sick they will not be able to get the care cessful at improving health outcomes for they need, and the risk that falling ill will cost the majority of the population, and basic 316 VIETNAM 2035 indicators such as life expectancy are gener- responsible for treating illness, but not detect- ally better than in other countries at simi- ing or preventing it. And for many patients, lar levels of development (figure 6.29). It is the first point of contact to seek health advice one of 10 high-performing countries on the is the private pharmacy chain, not connected health-related Millennium Development to the public service delivery or health insur- Goals. Nationally, infant, child, and mater- ance system at all. nal mortality all declined by roughly half Hospitals overadmit, overtest, and overpre- over 2000–12, but in mountainous, rural scribe, having received the autonomy and incen- areas child and maternal mortality rates are tives to raise revenue from nonpublic sources three to four times higher than on the rural under the policy of “socialization,” including plains and in urban areas. Child malnutrition patient charges. Hospital-accountability safe- is still high in areas with a concentration of guards are largely absent, however. A lack of ethnic minorities. system-wide capital planning is resulting in Yet for most of the population the major large inefficiencies due to overinvestment. health challenge will be to address NCDs In recent years, inpatient stays have been and injuries. Smoking rates, especially growing nearly twice as fast as outpatient among men, are high. Emerging issues such visits, and Vietnam’s rate of hospital admis- as obesity loom. sions and average length of stay are higher Today’s service delivery shortcomings are than the regional average. Inpatient spending grounded in two interrelated problems: hos- is more than three times higher than outpa- pitals are doing too much and “grassroots” tient spending. And in most hospitals well primary care (at district level and below) over half of patients either came directly or is doing too little. Vietnam has a hospital- without any referral from a lower-level facil- centric system in which referrals and self- ity. At least one-fifth of inpatient admissions referrals to overcrowded facilities at the are “ambulatory care sensitive”—they could central and provincial levels are largely a have been handled in an outpatient setting. result of low public confidence in the quality The need to shift service delivery to the of a fragmented primary care health system grassroots is not only good for health, but that is ill-prepared to address the challenge of will also be pro-poor. While the poorest 20 NCDs. There is a split between the preventive percent account for about one-third of com- health system that primarily implements ver- mune visits, the richest 20 percent are respon- tical programs and a curative system largely sible for nearly half the visits to central level hospitals (figure 6.30). Thus any attempt to FIGURE 6.29 Vietnam needs to sustain its progress in raising life expectancy of its citizens FIGURE 6.30 The poor use grassroots health care, while the rich use higher level hospitals 90 85 50 Life expectancy at birth (years) 80 45 Share of patients (%) 75 40 Vietnam 35 70 30 65 25 60 20 55 15 50 10 5 45 0 40 Poorest 20 quintile Richest 20 quintile 100 1,000 10,000 100,000 Commune/ward clinics Provincial hospitals GDP per capita ($, 2011 PPP) District hospitals Central hospitals Source: World Development Indicators. Source: Analysis of Vietnam Household Living Standards Survey 2012. PROMOTING EQUITY AND SOCIAL INCLUSION 317 address inequality of opportunity in access to These include more advanced procedures to health care services should begin at the grass- address heart disease, neonatal intensive care roots level. units for low-birth-weight infants, and screen- Strengthening service delivery for primary ing programs to ensure early diagnosis and care is arguably the most important task treatment of certain cancers (for example, facing health policy makers over the next breast and cervical). These interventions will 20 years. For reasons of both quality and be more costly on a population-wide scale than cost, a strong primary care function based on primary care services and are less likely to be a continuous doctor–patient relationship is pro-poor in the near term. Thus, while some central to a modern, efficient health system. pilots and centers of excellence may be valuable The evidence supporting this approach is for learning purposes, scaling up can arguably abundant (Starfield, Shi, and Macinko 2005, wait until greater progress is made on public for example). International evidence shows health and primary care agendas. that a disease profile dominated by NCDs What steps are required for Vietnam to requires more complex case management and strengthen primary care over the next two coordination of care, and primary care level decades, with the long-term aim of the popu- plays a critical role in the process. A large lation trusting their primary care providers? majority (up to 80 percent) of NCD patients In the short term, it should build consen- need lower-level care because their conditions sus on the importance of primary care, and can be controlled with self-management. set the broad parameters of organizational Only about 5 percent of patients with NCDs design and fi nancing. It should also experi- require complex case management delivered ment and pilot, possibly with a focus on by specialized or hospital-based care. key diseases such as hypertension and dia- Global experience also suggests that coun- betes. Over the medium to long term it will tries seeking to make significant progress be important to revamp human resources to address NCDs must rely more on public policies and programs, resource allocation health and primary care than on hospital including provider payment, “gate-keeping” services. A few key interventions have been modalities (from the primary health care responsible for much of the significant lon- level), and coordination of care between pri- gevity gains achieved by advanced health mary and secondary levels, irrespective of the systems over the past 50 years (this period is model of primary care delivery (solo or group instructive because it corresponds with a rise practices, and so on). in life expectancy from the low 70s to over It also needs to launch new graduate and 80 years of age, which is also the task now post-graduate training programs and retrain facing Vietnam). First, there has been a large existing cadres. Vietnam has the second decline in smoking, with the most important lowest nurse-to-doctor ratio among more policy in this regard being sharp increases in than 25 countries in Asia, suggesting a bias tobacco taxes. It is hard to envision Vietnam toward physician-based health care. A basic remaining a high performer without stronger road map to strengthen primary care involves anti-tobacco measures to help reduce smok- many steps (figure 6.31). ing. Second, drugs to help treat risk factors Thailand has been successful in shifting for cardiovascular disease, such as hyperten- the focus of service delivery from tertiary sion and diabetes, most commonly managed level hospital-based care toward grassroots- and prescribed through primary care, have based primary care. A key objective of the had a major impact. These two areas should Universal Coverage Scheme (UCS), launched be prioritized, due to their relatively lower in 2001, was to strengthen the health system cost as well as high impact. by placing a greater emphasis on primary More complex services that have had a signif- care. Service delivery reform efforts through icant health impact elsewhere will also warrant the UCS emphasized the development of scaling up, albeit over a longer-term horizon. family medicine, and primary care units at 318 VIETNAM 2035 FIGURE 6.31 Creating a basic road map to strengthen primary care entails many steps All populatiuon covered by modernized PHC 100 National legislation providers updated to reflect the Financing model modernized health operational Continous stream of system structure and 80 new professionals features Gatekeeping in force enter practice Coordination of care happening Continous learning First graduates from Retraining programs 60 retraining program, from lessons and closed down Percent needed adjustments enter practice of policies Continuing education PHC professionals system operational association launched 40 Graduate and post- graduate training Training programs New PHC financing programs manage the launch modalities ready to attrition of worldforce Stock taking of PHC be applied 20 financing pilots Special incentives PHC profession’s prestige improved Development of for population to Population trusts PHC practice guidelines enroll starts 0 0 2 4 6 8 10 12 14 16 18 20 Years from initiation of reform Postgraduate training program Re–training program Source: World Bank and Development Research Center of the State Council, China 2013. Note: PHC = primary health care. the district level were strengthened. One The hospital agenda is also critical. of the main pillars of the approach was the A key challenge is to exert greater influence use of strategic purchasing by the National over hospital accountability and effi ciency Health Security Office (NHSO). The NHSO through a more active strategic purchas- required all contracted hospitals to set up a ing agency (Vietnam Social Security [VSS] primary care unit for designated popula- or another body). This will require a shift tion catchment sizes and areas, and to form from simply paying the bills submitted by district-level provider networks that would providers to using information to ensure deliver primary care services and arrange that patient care and cost-effectiveness patient referrals to secondary and tertiary- are emphasized over hospital revenue care services. This helped to shift the focus maximization. For their part, patients need of care from specialists working in hospitals recourse to grievance-redress mechanisms. to family practitioners with stronger links Finally, there is a public health agenda to the community. There have been chal- related to urbanization. Most urban popu- lenges in implementation, however, including lations have better access to care and health a shortage of doctors to staff primary care outcomes than their rural counterparts, but units despite a policy of mandatory rural with wider variation, and the urban poor face service for all health professional graduates. health risks the rural poor do not, including This constraint was addressed by rotating those related to air quality, road traffic safety, hospital doctors to work in clinics, as well as water, sanitation, and solid waste manage- training a cadre of nurses and health workers ment, in addition to infectious diseases such to serve as the backbone of service delivery at as dengue and tuberculosis. Governments— the primary care level. especially municipal ones—need to manage PROMOTING EQUITY AND SOCIAL INCLUSION 319 and reduce these risks. More broadly, multi- from about two-thirds to one-half. Over sectoral advocacy for “health in all policies” the same period, insurance enrollment has should become a common undertaking of the increased sharply, from less than 15 percent Ministry of Health and others. in 2000 to about 70 percent today, reflecting the government’s incremental expansion that Financing health: Improving efficiency has targeted key vulnerable groups including and equity the poor, children, and ethnic minorities. The major policy challenge facing Vietnam’s Vietnam now spends a larger share of health system over the next 20 years will be its income on health than almost any other to achieve universal health coverage—that is, country in developing Asia (figure 6.32a), to ensure that everyone has access to good yet households can be driven into poverty quality services without suffering fi nancial by unpredictable medical bills or discour- hardship. Health system performance has aged from seeking necessary care at all due to relevance for the broader economy. There high costs (figure 6.32b)—one of the pitfalls is now very strong evidence that conditions of high private OOP spending. The future during early childhood—and especially child is likely to see growing pressure to absorb it nutrition—have a strong impact on a wide into the public purse. range of economic and social indicators later Aging will impose additional cost pres- in life, including schooling, learning, employ- sures on the health system, accounting for up ment, and productivity. Ultimately, this to one-third of the growth of health spend- also has implications for economic growth. ing. Other factors, such as expanded insur- Increasingly the health of older adults will ance coverage and technology adoption, are also matter for economic performance, as likely to be more important. Because demo- Vietnam’s aging population will pose new graphic change cannot be avoided while the challenges to maintaining a healthy and pro- other two drivers are amenable to policy ductive workforce and mitigating the impact intervention, rapidly rising health expendi- of a rising dependency ratio. tures are not inevitable, but the risk should Since 2000, the government health bud- be managed carefully. get has increased from 1.5 to 2.5 percent of The health fi nancing agenda for Vietnam GDP, and the share of total health expendi- over the next 20 years will be to stabilize the tures paid out of pocket (OOP) has declined share of GDP spent on health near its current FIGURE 6.32 Out-of-pocket health expenses push many Vietnamese into poverty a. Total health spending as a share of GDP, 2013 b. Share of household-impoverishing 12 out-of-pocket expenses, 2013 3.0 10 2.5 8 2.0 Percent Percent 6 1.5 4 1.0 2 0.5 0 0 Sin alay a Ph gap ia m m re dia n I a Ca etna a ilip ore Th i a Vi a sia Ca am a J a p. ail s La s In o PD r do R In DR C d ilip d La ma Th pine ne M ndi Vi h i n in di si pa s ys an e Ph an ne ne Ch bo Ko bo aR n oP pi ala n ail et do ya m M M Private Public Source: World Development Indicators. Source: Vietnam Household Living Standards Survey 2012 and Rannan-Eliya et al. 2013. 320 VIETNAM 2035 level while reducing reliance on OOP expendi- are beneficiaries of premium subsidies paid by tures (figure 6.33). This will require crowding government. But many poor and vulnerable OOP through some combination of govern- are not insured, because MOLISA’s targeting ment spending and insurance contributions. approach is not perfect and the poverty line is Some insights into what can be achieved low, excluding many poor households (as mea- can be gleaned by looking back at the per- sured by comprehensive household surveys). formance of countries that had similar indi- An additional coverage challenge is that there cators in the 1990s to Vietnam today. Over are migrant workers who may be registered in almost 20 years, the average increase in total their home district but do not have effective health expenditure among this group was a access where they live and work. modest 0.7 percent of GDP (table 6.3).15 For The current approach to expanding insur- Vietnam, maintaining total health expendi- ance coverage may not be adequate to achieve tures near 6 percent of GDP in 2035 would 100 percent coverage by 2035. Vietnam is represent an above average achievement. On relying on individual or household contribu- OOP spending, the average change among tions alongside the gradual transition to a the comparator group (which, like Viet- larger formal workforce. But this is a slow nam today, started with an OOP share near process, and some Ministry of Health pro- 50 percent) was a decrease of 9 percentage jections have self-paying enrollees increasing points.16 An ambitious target for Vietnam by about 2 percentage points a year through would be a 20 percentage point decrease, to 2020, which would not give full coverage in just under 30 percent. Ideally most remaining 20 years given today’s low starting point. OOP expenses in 2035 will be for less cost- Over the long term, how should new effective services and concentrated among the enrollees be funded? One option would be better-off. to offer premium subsidies to the uninsured, A key agenda item as Vietnam seeks to as it already attempts to do for some groups reduce its reliance on OOP spending will be to such as the poor and near-poor. A potentially expand insurance coverage to the roughly 30 much quicker route to a higher coverage percent of the population currently uninsured alternative would be to allocate general tax (figure 6.34). Many of these households include revenue to cover the uninsured (table 6.4). nonpoor informal sector workers, as the bet- Expanded insurance coverage is a pri- ter off are covered through their formal sec- ority with longer-term impact, and more tor contributions while a fraction of the poor immediate inefficiencies should arguably be addressed fi rst. These span a wide range of issues, from provider payment to phar- FIGURE 6.33 Reliance on out-of-pocket health maceuticals to accountability. Delaying the expenditures declines as countries develop and move toward universal health care efficiency agenda may come at a price, as it will grow more pressing over time as the 80 population ages and pressures from a new Out of pocket spending as a share middle class grow. There is a potential trad- of total health expenditure (%) 70 60 eoff here between equity and sustainability. Vietnam Prioritizing the expansion of coverage to the 50 40 30 percent uninsured at an accelerated pace China Korea Rep. 30 would bring the whole population into the 20 same program and enhance equity, but at Japan some cost in view of current ineffi ciencies. 10 0 But aiming to reduce excess spending before 1,000 10,000 100,000 increasing coverage would be a more sus- GNI per capita (2013) tainable approach while postponing attain- Source: World Development Indicators. ment of a more equitable system. A middle Note: GNI = gross national income. road is also possible. PROMOTING EQUITY AND SOCIAL INCLUSION 321 TABLE 6.3 Comparator countries averaged a 0.7 percent increase in total health expenditure, with out-of-pocket expenses decreasing 9 percent, 1990–2015 Average 20-year per formance (1990s–present) Potential 2035 target for a Indicator Vietnam today of countries similar to Vietnam today high-per forming Vietnam +6.0 years Life expectancy at birth 73.0 years +4.1 years (to reach 79.0 years) Out-of-pocket spending as a −20% 49% −9.0% share of total health expenditure (to reach 29%) Total health expenditure as a 0.0% 6.0% +0.7% share of GDP (to remain at 6.0%) Source: Information compiled from various sources. Note: The similar indicators of the comparator countries are from the 1990s. FIGURE 6.34 The current approach to expanding be part of the solution (see the next subsec- insurance coverage is unlikely to achieve 100 tion). Lastly, overconsumption of drugs is percent coverage by 2035 also a problem, and steps to enforce ratio- Insurance coverage, by decile, 2012 nal prescription patterns and address self- 100 medication would help. 90 An additional area is to reform provider 80 payments, including a shift toward a more 70 strategic purchasing agency instead of a rela- 60 tively passive payer of services. A transition Percent 50 from input-based fi nancing from the Minis- 40 30 try of Health toward output-based payment 20 by VSS is planned in the near term, and an 10 initial move away from open-ended fee-for- 0 service payment has begun as piloting of 1 2 3 4 5 6 7 8 9 10 case-based payments is underway. But the Decile provider payment environment remains frag- Uninsured Insured mented and there is work to be done before Source: Analysis of Vietnam Household Living Standards Survey incentives to oversupply are brought under 2012. control. In some cases, VSS has provided the wrong incentives—for example, by reimburs- Perhaps the most important near-term ing pharmaceutical costs that vary widely area for efficiency gains is to rationalize the for the same drug from one hospital to the pharmaceutical system. In the past, hospi- next for no transparent reason. There is also tals have purchased drugs at widely varying presently an unequal treatment of provinces prices, and the high costs are passed on to (and insured population groups) due to VSS the government or the population. Central- allocation formulas. Enhancing the capac- ized procurement and better use of state ity of VSS (or an alternative purchaser) will purchasing power to negotiate prices under be a critical part of strengthening provider a framework contract with pharmaceutical payment. companies would help reduce costs. Vietnam A further move to reduce reliance on OOP has started to implement reforms in this area, and to improve efficiency entails strengthen- but sustained effort will be required. There ing the accountability of health care provid- may be some tension with industrial policy ers, in two broad approaches. The fi rst is to priorities aimed at supporting domestic pro- rely on stronger stewardship by the Ministry duction. But from a health system perspec- of Health and VSS, with a clear delegation of tive, lower prices are an obvious objective. responsibilities (for instance, a well-defi ned Contracting private pharmacies can also benefit package), coherent payment system, 322 VIETNAM 2035 TABLE 6.4 Alternative routes to 100 percent insurance coverage Financing Countr y Advantages Disadvantages Approach mechanism examples (for Vietnam) (for Vietnam) “Slower route” Insurance Vietnam More gradual approach means lower Leaves many—including many contributions Philippines short-term fiscal burden of the poor—without insurance Allows time to address existing coverage for longer inefficiencies before expanding coverage “Faster route” General tax Thailand Achieves 100 percent insurance coverage Larger short-term fiscal burden revenue Mexico sooner, including of the poor Allows less time to address existing inefficiencies before expanding coverage Source: World Bank and Ministry of Planning and Investment of Vietnam compilation. strong information requirements by which require an ability to negotiate complex con- providers report on their health care activi- tracts with drug companies. Ensuring quality ties, and enforcement mechanisms. The sec- of care and efficiency of provision by hospi- ond is to empower the population to hold tals and other providers across the country providers accountable, which may be par- will require significant analytical capacity to ticularly important to discourage providers undertake operational research using large from extracting informal OOP from patients. datasets. In brief, health reform will require Recent survey evidence indicates that 22 per- strong state capacity to implement complex cent of respondents in Vietnam reported policies and programs if it is to achieve the paying a bribe at a health facility within intended goals, even as the role of the private the previous 12 months, placing Vietnam in sector becomes more prominent. the bottom half of the nearly 100 countries under study. Public and private roles A final priority to improve efficiency is to Around the world, governments are trying strengthen capital planning for infrastructure to achieve the right balance between public and equipment. The health financing agenda and private participation in all aspects of described here has obvious links with the health system reform. These experiences will service delivery reforms presented earlier. In be directly relevant to Vietnam as it charts a particular, a stronger primary care system path toward 2035. will promote efficiency. But it is also true Global pat terns indicate that pub- that better primary care will help aid fi nan- lic financing must play the dominant role cial protection by keeping patients away from in paying for health care. In the majority expensive (and frequently unnecessary) hos- of high-income countries, public spend- pital care. Likewise, improving the efficiency ing accounts for at least 75 percent of total of health expenditures will be essential to health expenditures. Many middle-income respond to the demand for more and better countries are headed in the same direction. quality services. This pattern has a strong economic ratio- Stepping back from all the potential nale: people do not know when they might reforms already discussed, it is clear that in fall sick and how much it will cost if they do, the future Vietnam will be managing a more and once ill they are not in a good position complex health system. An integrated pri- to judge where to seek care, what treatment mary care system requires strong information is required, or in some cases even whether flows. Engaging the private sector will require the doctor can be trusted. A reliance on pri- a robust regulatory function. Emerging pub- vate financing for health also tends to result lic health challenges, whether homegrown or in significant inequalities between rich and from abroad, will require robust responses. poor. These considerations will pose limits Keeping a lid on pharmaceutical costs will to how far a policy of “social mobilization” PROMOTING EQUITY AND SOCIAL INCLUSION 323 can go. As elsewhere, a predominant gov- interventions such as cardiology and oncol- ernment role in health financing can also be ogy, for which there is demand from the expected in Vietnam. better-off population (and who may other- Public funds do not need to flow exclu- wise seek treatment abroad). Private insur- sively to public providers, and thus a greater ance, perhaps largely employer-based, may public–private mix is possible in service deliv- evolve further to help fi nance this care. Non- ery, where private health care providers play a medical aspects of health care provision, central role in many advanced health systems, such as hoteling amenities, may become a especially at primary care level (table 6.5). common feature of these packages. Impor- In Vietnam, VSS has started to contract some tantly, this will allow the government to private hospitals. In the years ahead, these focus its limited resources on a more cost- relationships could be broadened and deep- effective universal basic package for every- ened, including by extending the approach to one else. As Vietnam grows more affluent, the outpatient setting. it should be presumed that eventually these There is no clear evidence from interna- services will also be funded by government tional experience that either public or private for the broader population. provision is “better”—what matters most is The private sector may have a compara- strong accountability, which requires clear tive advantage in procuring and distributing delegation of tasks, adequate financing of pharmaceutical products. In many countries, service provision, collection and analysis government has curtailed its role in the direct information about what providers are doing, procurement of drugs, including supply chain and enforcement of rules. Regulatory and management, and instead contracts with supervisory authorities must play a key role private pharmacies to provide medicines to in the oversight of public and private provid- the population. This may be a particularly ers. (Vietnam’s early experience with public– important step in Vietnam given the large private purchasing arrangements for capital inefficiencies in pharmaceutical procurement. equipment at hospitals reveals some of the A broader development strategy to pro- pitfalls of engaging the private sector without mote the private sector and job creation suitable accountability. Indeed, by obscur- can sometimes come in conflict with health ing the line between public and private, they system objectives. For example, enacting could be discouraging the emergence of a measures to promote the domestic pharma- robust private sector.) ceutical industry at a cost of higher drug An additional role for the private sector prices that are ultimately funded by the pub- is delivery of health care services that can- lic purse will not be beneficial to the health not be afforded by government for the whole sector. Similarly, an administratively com- population. This may include high-cost plex health system may generate employment TABLE 6.5 International experience indicates that strong accountability matters most in delivering health care—not public or private provision Public/private sphere Advanced systems (OECD countries) Vietnam today Out-of-pocket spending share: 14% Out-of-pocket spending share: 49% Health financing Private health insurance share: 6% Private health insurance share: <2% Private provision is more common in more than two Primary care provision Mostly public provision thirds of countries Public provision is most common. In a few countries, Mostly public provision, but Hospital care provision private not-for-profit is common. Private for-profit with public–private purchasing hospitals are relatively rare arrangements in some hospitals Sources: World Development Indicators; Paris, Devaux, and Wei 2010. Note: OECD = Organisation for Economic Co-operation and Development. 324 VIETNAM 2035 opportunities, but not in a productive way. ALTC policy is the “continuum of care,” in Health policy makers should seek to avoid which the large majority of older people in these pitfalls. need of care receive it in the home (through As Vietnam charts a path toward a stron- some form of outreach services, often coordi- ger health system by 2035, a central chal- nated by social affairs-type agencies and/or lenge will be the difficult political economy community-based organizations), those with of health reform. From tobacco lobbies to somewhat higher needs access community- pharmaceutical companies to medical work- based care, and only a small portion require ers themselves, there are vested interests residential care. in the sector that can be expected to resist The continuum of care in ALTC as people certain reforms. Doctors in particular are move from modest to more intensive care typically a well-educated and well-connected needs also creates new demands for coordina- elite, many of whom prefer the prestige of tion, both within the state sector and between using advanced equipment at a big-city hos- the state and nonstate sectors. Within the pital rather than taking blood pressure and state sector, there is typically an institutional writing prescriptions in a remote rural post. transition from welfare-type ministries (like But Vietnam has made impressive strides in MOLISA in Vietnam) managing ALTC at the past decade or more, providing an impor- lower levels of care to health ministries as tant foundation for further progress to come. older people require more intensive medical intervention and eventually facility-based or Aged and long-term care: An emerging need institutional care. The boundaries between Formal ALTC systems in the developing aged care and long-term care services are EAP remain nascent, but Vietnam, like other often blurred, and it requires close cross- rapidly aging countries, will need to grapple agency cooperation to ensure that services with what is the appropriate and sustainable are coordinated well across the continuum of role of the state in an area that has tradition- care. In addition, the likelihood of a substan- ally been the domain of families, communi- tial role for nonstate providers in the ALTC ties, and the health system.17 Vietnam shows sector will place new demands on the state great demand for ALTC of different forms, for standard setting, human resource devel- from low-level social support to self-care opment in the caring industry, and regulation activities of daily living—with which almost of quality and market rules. half of people 70 and over in Vietnam report The state cannot assume the full financing having difficulties (HelpAge International burden of ALTC. There will be a need to pri- 2015). And about two-thirds of adults expect oritize people and services for public support, government to be their primary source of but along what lines? For example, should support in old age (Jackson and Peter 2015). priority for state financing for example be Proactive policy choices in the ALTC domain on the basis of level of frailty and disability, are therefore important, but require careful and/or focused primarily on the poorest? thought with respect to their interaction with Should public fi nancing come entirely from informal care systems and existing formal general revenue or is there a potential role health and welfare systems. for dedicated long-term care insurance (and ALTC systems should be built around how might that be afforded given the already home- and community-based care (“aging high share of social contributions in Viet- in place”)—as borne out globally—while a nam)? Should public financing be focused segment of older people receive residential primarily on the supply side of the ALTC care. More humane and fiscally sustain- system or is there a role for financing on the able, aging in place is also consistent with demand side and letting elderly people and the expressed preferences of older people their families choose the type of care most in the EAP region, in order to sustain fam- suited to their situation? At this early stage ily and social networks. One framework for in developing ALTC in Vietnam, the answers PROMOTING EQUITY AND SOCIAL INCLUSION 325 are unknown, but it is important to have the FIGURE 6.35 The old-age dependency ratio will questions expressed. increase rapidly Still, Vietnam needs to develop ALTC policy directions, ideally combined with well- 50 Older people as a share of working-age population (%) evaluated pilots to test the culturally appropri- ate delivery models and better understand the 40 market segments. As part of piloting, a criti- cal challenge is to develop sustainable financ- ing models, for the state and for citizens. 30 Social Protection 20 Vietnam’s social protection system is in a transitional phase as it moves from being 10 primarily reliant on informal, traditional sources of support toward a greater and more coherent role for the state. As countries 0 transition from low to upper-middle income, 1975 1995 2015 2035 2055 2075 their social protection systems typically grow in terms of GDP and public spend- Source: United Nations 2015. ing share. While social protection spending tends to rise over time and as countries get by all people in a middle-class market richer, falling rates of absolute poverty also society, as opposed to the current system drive a reorientation of social protection that serves largely those at the top and spending toward higher (and wider coverage) bottom of the distribution in a fragmented spending on social insurance, and a stron- manner? And what financing strategies ger link between social assistance and active can make this a reality? labor programs. 2. How will Vietnam assure adequate finan- Part of this social protection reform cial protection for its growing old-age agenda is driven by the fact that Vietnam population in a fiscally sustainable way? is at a demographic turning point, facing a slowdown in the growth of the labor force What is the desirable and sustainable and a sharp expansion of the old-age popu- social contract, with respect to social protec- lation. The old-age dependency ratio—the tion, between the Vietnamese state and its ratio of older dependents to the working-age citizens and how will it differ from today? population—has been roughly constant for The period until 2035 will see a fundamen- decades in Vietnam but will climb from 9.6 tal rebalancing of the relative roles of citizens to 21.7 between 2015 and 2035 and continue and the state in social protection, driven by to rise in the following decades. In other demographics in a low-fertility, aging soci- words, Vietnam will soon have many more ety. It is also likely to be driven by changing old-age people to support for every person of social attitudes, increased wealth combined working age (figure 6.35). Expanding social with greater income volatility, urbanization, insurance coverage is both vital and chal- and greater mobility of people, all of which lenging in light of the society’s rapid aging. change the expectations of citizens, especially Looking ahead to 2035, for Vietnam two among the younger generations. For exam- strategic questions emerge for the social pro- ple, more than 60 percent of the Vietnamese tection system: people expect the state to be their primary source of support in old age, an expectation 1. How will Vietnam create a social protec- that the country is not in a position to meet tion system geared toward the risks faced (figure 6.36). 326 VIETNAM 2035 FIGURE 6.36 The Vietnamese people expect the state to be their and piecemeal safety net; does a very par- primary source of support in old age tial job on prevention due to low coverage of social insurance; and has an unclear 70 60 strategy on promotional policies, where 50 the system is also underfunded and frag- Percent 40 mented, and in a transitional state between 30 area-based antipoverty approaches and 20 10 household-focused interventions. Articula- 0 tion between the three functions of social protection is weak, so that social protection . a na re ia a sia s d m ep ne in in an ys po na hi ne h Ch aR pi ala ail programs do not operate as an integrated ,C RC et ga do ilip re Th Vi M an Sin SA In Ko Ph iw and coherent system. For Vietnam, reform ng Ta Ko is needed in all three areas to achieve the ng Ho Retirees themselves kind of system that will be expected by its Government citizens. Grown children or other family members The dramatic demographic changes that Source: Jackson and Peter 2015. the country will soon encounter, with emerg- ing fiscal risks, suggest that an immediate pri- ority will be developing a strategy to achieve How do the tax and transfer system figure adequate and sustainable old-age protection. in the government’s redistribution policies? And how do such policies interact with eco- Status and issues: The pension system nomic growth? In many countries, social Against pension systems elsewhere in the protection addresses inequality, and tax/ EAP region and globally, Vietnam’s sys- transfer systems are the primary vehicle for tem stands out on several aspects. First, redistributive public policies. In Vietnam, contributory coverage is low, though on the explicit and implicit subsidies accruing the global relationship between share of to public and formal private sector workers working-age population participating in through pensions more than offset the tar- contributory pension schemes and GDP geted distribution through social assistance. per capita, Vietnam is around where one Achieving sensible redistribution through might expect given its high labor market social protection can foster social stability, informality (according to the World Bank address inequality, and help sustain economic Pension Database). At the end of 2013, growth. social insurance covered about 10.9 mil- Looking ahead to 2035, the institutional lion people in the compulsory scheme and set-up, policy mix, coverage, fi nancing, and 176,000 people in the voluntary scheme. delivery platforms of the social protection This is just 20 percent of the total work- system in Vietnam are likely be funda- force, with coverage heavily concentrated mentally transformed. With respect to the among the top 40 percent of the distribu- policy mix, a well-functioning social pro- tion (figure 6.37). tection system in an upper-middle-income Second, in terms of public spending on country should perform three functions pensions, Vietnam is slightly below the global effectively— protection (of the poor and average for its share of population 60 years vulnerable), prevention/mitigation of risk and older (figure 6.38), and the risk is that for the whole population, and promotional it will move quickly to the right in the figure policies to sustain productive movement due to rapid aging, just as it faces fi nancing out of poverty and into more efficient labor constraints on increased spending. markets. At present, Vietnam does a frag- Third, on “generosity” within the con- mented and incomplete job on protection tributory pension system, Vietnam is an due to an underdeveloped, underfunded, outlier within the EAP region and globally, PROMOTING EQUITY AND SOCIAL INCLUSION 327 and continues to have high replacement FIGURE 6.37 Pension coverage should increase as Vietnam moves rates, a product of high accrual rates in its to upper-middle-income status, 2013 pension system. This situation will improve 100 Share of working age population covered (%) somewhat as a result of the 2014 reforms, which reduced annual accrual rates18 — though the adjustments only become fully 80 Japan effective from 2022—and still fall short of making the system sustainable. A com- 60 plicating factor is that Vietnamese work- Korea, Rep. ers have typically contributed against a 40 minimum base salary, so people combine China high replacement rates with low abso- 20 Vietnam lute value of pensions. The 2014 reforms aim to broaden the compensation base on 0 0 1,000 2,500 5,000 10,000 25,000 50,000 which contributions are levied, but achiev- GDP per capita (2011 PPP US$) ing the desired outcome will require sig- nifi cant improvements in social insurance Source: World Bank 2014b. administration. Vietnam has a high social contribution rate for pensions (table 6.6). In the region, heavy public subsidies that match worker the only country with a higher contribution contributions. rate is China, and more competitive parts of Even with the 2014 reforms, the current China have lower rates (for example, coastal pension system is not sustainable. Prior to prefectures of Guangdong). Some of its neigh- the reform, the pension fund was projected bors’ lower contribution rates are helped by to enter into deficit from 2021 and to have FIGURE 6.38 Vietnam currently has low pension spending, but this is expected to rise quickly in coming years 20 Public pension spending as share of GDP (%) 18 16 y = 0.4362x – 1.0813 14 R2 = 0.6867 12 10 Philippines Japan 8 6 4 Mongolia China 2 Timor-Leste Hong Kong SAR, China Thailand 0 Lao PDR Vietnam Korean, Rep. –2 0 5 10 15 20 25 30 35 Cambodia, Indonesia Share of population 60 years as older Source: World Bank 2014b and United Nations 2015. 328 VIETNAM 2035 TABLE 6.6 Vietnam has a high social contribution rate for pensions FIGURE 6.39 Vietnam has a large “missing Countr y Employee Employer Total middle” of old-age support China 8.0 20.0 28.0 High Korea, Rep. 4.5 4.5 9.0 Indonesia 2.0 3.7 5.7 protection Level of Philippines 3.3 7.1 10.4 Malaysia 11.5 11.0 22.5 Not covered Thailand 3.0 3.0 6.0 by any scheme Brazil 7.65 20.0 27.65 Mexico 1.7 6.9 8.6 Floor level Vietnam 8.0 14.0 22.0 Low Source: World Bank 2014b. Low High Note: For China, this is the maximum rate. Many prefectures have lower rates. Individual/household income Social pension Compulsory insurance Voluntary insurance under depleted all reserves by 2034. Another way government regulation of putting this is that the contribution rate Source: Galian 2014. required to keep the fund in balance would have had to rise to almost 30 percent of sal- ary by 2035, and to 80 percent of salary by Status and issues: Safety net programs 2080. This would clearly not be sustain- Household- and individual-based cash trans- able from a competitiveness perspective and fer programs have expanded sharply over the would imply major subsidies from the bud- past 15 years. The social assistance system is get. The 2014 reforms help but do not go far no longer a simple last-resort income support or fast enough. system for people who cannot work and do Vietnam also has a social pension, tightly not have family support. In particular, it has targeted for those age 60–79 and pension- evolved from reliance mainly on area-based tested from age 80. As of the end of 2013, development and antipoverty programs there were 95,635 people aged 60–79 (or (emphasizing in-kind and programs targeting about 1.3 percent of people aged 60–79) and the poorest communes) to the current mix 1,410,064 people aged 80 and over (account- of area- and household-targeted antipoverty ing for about 79 percent of the cohort) and social assistance programs, including job receiving the social pension (Long 2014; training. MOLISA 2014). The benefit level is also mod- Coverage has steadily expanded, both est, at under 10 percent of per capita income. through new programs and relaxed eligibil- Overall, well over half of people 60 ity criteria for existing programs, including and over have neither a formal sector pen- social pensions and disability income sup- sion nor a social pension, and half of those port. And since the mid-2000s, targeted with some pension have a very low ben- social assistance policies (including cash efit. Combined, these benefits cover under transfers) have been introduced for house- 20 percent of the population 60 years and holds to offset potential losses as health and over, which is modest by the standards of education services were socialized, energy neighbors such as China and Thailand. The prices liberalized, and economic crises hit. current system exhibits a common problem Yet Vietnam’s spending on social assis- of developing country pension systems of a tance remains low relative to countries at large “missing middle” between the rela- similar incomes, and well below that of tively small and better-off formal sector upper-middle-income countries. Social assis- covered by the existing VSS system and an tance spending (excluding social pensions and even smaller (and concentrated among the health insurance subsidies) stayed at around very old) group covered by social pensions 0.69 percent of GDP over 2008–13, or just (figure 6.39). over half the EAP regional average and below PROMOTING EQUITY AND SOCIAL INCLUSION 329 half the global average among lower-middle- FIGURE 6.40 Social assistance coverage and generosity vary income countries (about 1.5 percent). across provinces but were in line with or slightly above East Asia Pacific neighbors On coverage and generosity, social assis- tance in Vietnam was in the mid-range to 100 cover the bottom quintile in the late 2000s, Share of population 80 at just over 50 percent including social covered (%) 60 pensions (fi gure 6.40). This is well below some neighbors but mid-range among 40 Association of Southeast Asian Nations. 20 But coverage and generosity vary hugely 0 across provinces, with some covering only 8 8 8 09 9 9 8 08 07 00 00 00 00 00 00 20 20 20 a few percent of households, and others a ,2 ,2 ,2 ,2 i, 2 ,2 ia, a, , lia es m sia nd te Fij di s na n es go a y ne third or more. Average benefit levels were bo pi ala ail -L et on do ilip m Th or Vi M M Ca In in line or slightly above those of EAP neigh- Tim Ph bors, at about 26 percent of pretransfer Source: Galian 2014. levels in 2008. Thus in the past 15 years, the social assis- tance system has become broader and some- nationwide and selected social assistance what more protective, but also more complex benefits in four provinces.) and fragmented, and changes have been Service delivery is also disconnected. introduced in an ad hoc manner. For exam- There is no local, institutional structure that ple, at least five government decisions provide effectively links beneficiaries of cash transfers cash transfers for school-related expenses, to supply-side health, education, and poverty excluding provincial programs. reduction services, for example, through vil- Delivery systems are much below the qual- lage/commune social collaborators who can ity expected from a country at Vietnam’s provide support through case management development level. For example, Vietnam and counseling services. While there is strong has a well-established mechanism to iden- local monitoring, oversight at the provincial tify the poor but with methodological and or central level is weak and mechanisms for governance-related deficits. Commune bottom-up information management are authorities conduct a poverty census every underdeveloped due to the absence of an five years, updated annually. But implementa- integrated management information sys- tion is uneven, standard rules and procedures tem. Beneficiary-level information is not yet are not strictly followed locally, and quality readily available beyond the commune. This control of data is not rigorous, though prepa- restricts the ability of higher levels of govern- rations for the 2015 census suggest that this ment to monitor program performance and should improve in the current round. Nor is improve local accountability. there a valid national or provincial household In short, Vietnam is transitioning from database for all assistance programs, causing area-based antipoverty interventions toward government agencies to duplicate beneficiary household-focused cash transfers, and both lists for each program. Mechanisms for ben- types coexist. But the shift is piecemeal: it efit payments, and monitoring and oversight lacks clear vision of future priorities and of social assistance, are also inadequate. instruments of support, duplicates social assis- Payments are typically handled by districts tance transfers and support and area-based and commune officials through visits to ben- programs, and induces policy incoherence eficiaries, and some education benefit pay- across agencies and levels of government.19 ments are handled by schools, which are just not equipped to do this. (One recent promis- Policy directions: General ing reform was to assign VN Post as a pay- The social protection sector in Vietnam lacks ment provider for social insurance benefits a well-defi ned and evidence-based strategy 330 VIETNAM 2035 that sets goals and targets. While Resolution (for example, on accrual rates) or at all in is on Social Policies for 2012–20 (June 2012) some cases (for instance, retirement ages) sug- sets out a wide-ranging social protection and gests that the pension fund will struggle to basic social services agenda, it has broad cov- sustain balance, and will squeeze fiscal space erage and lacks the kind of specific vision for to finance the coverage expansion agenda. social protection that one might typically see Even with 2014’s social insurance reforms, in a national social protection strategy, and the formal pension scheme remains unsus- importantly does not have a costed action tainable and will need further adjustment, plan.20 The resolution provides general guid- without which the pension system will most ance, but acts more to identify aspirations likely reach a crisis during the 2020s. The than as a concrete set of challenges, tradeoffs, central question is whether further reforms fi nancing constraints, and sustainable ways are politically possible. forward in social protection. On the safety net, Resolution 15 pro- More specifically, Vietnam has set a target vides some general directions, with a spe- of 50 percent coverage of pensions by 2020, cifi c target for 2.5 million benefi ciaries of but the strategy to realize it remains unclear. regular social allowances by 2020 (of which The target is unlikely to be reached under the 30 percent are to be elderly). This is broadly current policy and financing approach. Essen- the same target group size as currently tially, Vietnam is “losing the race” between receives benefits. Where the document is less pension coverage expansion and rapid aging, clear is on the relative balance between poor on several fronts. households, meritorious people (who may or First, Vietnam’s recent modest perfor- may not be poor), and other household char- mance in expansion of contributory scheme acteristics (with or without children, disabil- participation suggests that a target closer to ities, and so on). 30 percent is more likely realistic by 2020, and even that will need continued improve- Policy directions: Expanding pension ments in program administration by VSS. coverage The bigger question is whether the existing A first step in social insurance coverage combination of a purely contributory model expansion is achieving higher participation for the formal pension scheme and a low rates in the formal private sector. In Viet- coverage social pension approach will ever nam, even higher inclusion of formal sector be sufficient to achieve widespread coverage workers has proved challenging, with only beyond the formal sector. Global experience two-thirds of formal private sector employees suggests this is unlikely and that Vietnam participating in social insurance (as against risks stagnating its pension coverage expan- around 90 percent of FDI and 93 percent sion at about 30 percent of the labor force for state-owned sectors) (Vietnam Social in the contributory scheme and a further 20 Security 2013). The “low hanging fruit” of percent of elderly in social pensions of some coverage expansion is thus achieving fuller form. This is a common middle-income coverage of formal sector workers. But this country challenge. cannot happen without major improvements A second goal of the government is to in social security administration, and the achieve sustainability in its existing formal current rate of pension contributions creates sector pension system. The goal is linked to incentives to evade. The feasibility of targets the fi rst goal of coverage expansion in that will also be affected by the demand side with controlling deficits in the existing pension sys- respect to migrants, who may generally pre- tem is essential to creating the fiscal space for fer to trade off higher salaries for less social general revenue to fund old-age support. The insurance coverage. recent social insurance reforms are a move A bigger challenge is extending coverage to in the right direction, but the slow pace of the informal sector. International experience phase-in, alongside failure to move far enough offers a range of approaches, all of which PROMOTING EQUITY AND SOCIAL INCLUSION 331 suggest that it would be very challenging to basic pension of around 220,000 Vietnamese achieve wide pension coverage of informal dong equivalent (about US$10). The scheme sector workers through a purely contributory thus blends incentives to contribute during approach. This has also been the case with the working life with a modest basic pension the expansion of health insurance in Viet- after retirement.22 nam. Three main options, which need not be Pension reform faces tradeoffs between mutually exclusive, are expanding social pen- adequacy, coverage, and sustainability and sions, matching defined contribution (MDC) a potential tradeoff between the system’s schemes, and adopting a hybrid of MDC and sustainability and the labor market impacts the basic pension. of high social insurance contribution rates Expanding social pensions is the easiest and other factors like low retirement ages. way to expand coverage and has achieved To date, Vietnam has sought adequacy of high coverage in a number of countries, pensions among a limited group of pub- including Thailand. 21 But it involves trad- lic servants and formal sector workers, but eoffs between coverage, degree of fi nancial achieved this at the expense of low coverage protection to the elderly, and fiscal costs. and poor sustainability. The commitment to While Vietnam already has a universal social expand coverage and to improve the social pension, the current threshold of 80 years insurance system’s sustainability under the old is very high, and contrasts with a typical 2014 Law indicate a welcomed rebalancing threshold in countries with social pensions of of the historical tradeoffs. closer to 65 years old. A key consideration is The coverage expansion targets that fiscal affordability. Projections suggest that Vietnam has set are ambitious. Few develop- a pension-tested elderly social pension at the ing countries have achieved such a scale-up level of the poverty line for people 65+ years without publicly fi nanced incentives to par- of age would cost about 0.7 percent of GDP ticipate for the informal sector. Public sub- for the remainder of the decade, rising over sidies will almost certainly be necessary to 2020–2035 as the number of elderly rises induce informal sector workers to join con- sharply (Long 2014). tributory schemes voluntarily (as has been MDC schemes are usually voluntary, seen with health insurance contributions for relying on incentives rather than a mandate the near poor), and mandating their partici- (see Hinz et al. 2013). Most countries using pation will most likely not work. Innovation MDCs sustain the subsidy for the entire con- will be needed to achieve substantial cover- tribution period of the worker. Given subsidy- age expansion. matching costs, MDC pensions are subject If Vietnam is serious about coverage to the same questions on whether to make expansion of its pension system, it will also the program universal for informal workers require deeper parametric reforms of the or targeted in some way. MDC schemes are existing pension system. It cannot afford more administratively demanding than social both its formal sector pension and the new pensions, but have achieved some notable subsidies that will most likely be needed successes in expanding coverage, particularly to expand coverage to informal work- in Korea, where coverage more than doubled ers without further reforms of the exist- between 1995 and 1999. ing system. These reforms include gradual China has rolled out an innovative hybrid increases in offi cial retirement age (which of the MDC scheme and the basic pension. has not kept pace with increased longev- The hybrid is voluntary and is not part of ity), increasing penalties for early retire- the formal sector pension schemes. Each ment, more disciplined implementation of contributor has an individual account, with pension indexation on the basis of prices, a public subsidy partially matching a small further reduction in the annual accrual rate yearly contribution. After 15 years of contri- while broadening the base for collections butions, the worker is entitled to a monthly to full compensation, reduction in special 332 VIETNAM 2035 categories of privileged pensioner, and bet- deprivations captured by monetary and ter provisioning for fi nancing. nonmonetary indicators, allowing poverty Achievements in reforming the pen- to be determined by comparing the house- sion policy will be hard to implement hold score on composite indicators with an unless Vietnam modernizes its social insur- income threshold. In addition, households ance administration—as recognized in the with specific nonmonetary deprivations Vietnam Social Services Modernization (for example, a child of school-going age Strategy 2016–20. Higher public subsidies, not enrolled in school, inadequate hous- as Vietnam’s health insurance reform dem- ing) can be identified. The general approach onstrated, do not suffice. Vietnams’ social was recently endorsed by the government. services standards must also improve. Recent The most appropriate approach would be to progress in the social services, with moves use this information to provide customized to reform its business processes, consolidate and comprehensive packages of support. A its information technology systems, and sequenced approach would be desirable, ini- improve its client orientation, need sustained tially emphasizing simplicity in design and investment and high-level political support. implementation. The fi nal dimension in the overall policy mix is to hugely expand the Policy directions: Reforming the social active labor market component of the social safety net protection system in order to ease movement The overall policy mix of social services of people between rural and urban areas, needs reform, along several dimensions. and to match workers to jobs. Underserved groups loom large for protec- The second set of reforms touches on over- tion against risks and vulnerabilities in old hauling delivery systems for social assistance age, consistent with the demographic profile. programs to realize greater efficiency and But investing early in young children’s nutri- welfare impact, along two tracks. Track one tion and early childhood development is also requires improving systems to identify benefi- important. Today, no programs target house- ciaries, better targeting through the poverty holds with children age 0–3 years. census, and systematic enrollment procedures Addressing the widening disparity between for social assistance programs and beneficiary regions and groups through a more coherent management, benefit payments (improving policy for poor areas and for poor people is current cash payments by using third-party another dimension. Area- and household- agents for greater transparency and account- based protective and promotional policies ability, eventually moving to electronic pay- should be designed as a coherent package of ments), community mobilization and social support that addresses multiple vulnerabili- work networks, feedback/grievance redress, ties. Programs targeted to poor areas should monitoring and evaluation, and management continue. But the design of these area-based information systems. programs must shift from a simple infusion Track two entails consolidating deliv- of productive assets or local infrastructure ery systems across programs: information development to community-driven income consolidation through digitized household generation. and individual information in the national Another need is a more coherent approach benefi ciary database; and process consoli- to household-based transfers, with a more dation, that is, relying on the same systems comprehensive package of support. Consoli- to deliver different programs, including a dated policies could have common objectives national beneficiary database, manage- and could target similar groups. Multiple ment information system, third-part y education subsidies are an example. payment agency (or electronic payments Strengthening multidimensionality is a in the long run), collaborator network in further dimension, based on the growing the short term, and social workers in the recognition of the need to address multiple long term. PROMOTING EQUITY AND SOCIAL INCLUSION 333 An overarching question in the third and richer areas may object to greater cross- final set of reforms is the appropriate role of subsidization of poorer areas. Third is the the state and citizens/families in providing relative lack of voice among safety net ben- social protection support of different forms. eficiaries, which may mean a steady state of What is the emerging social contract in Viet- social safety net spending that is less than nam and how is it likely to evolve over the desirable, and results in an overall social coming two decades? The assumption of protection system where public subsidies the family as the permanent primary source are less progressive than desirable. A related of support is increasingly open to question, question is the optimal degree of targeting with about two-thirds of adults expecting that promotes efficiency and maximizes government to be their primary source of poverty reduction while not being so narrow support in old age (Jackson and Peter 2015). that popular and political support for social Among nonfamily providers, the government safety nets programs is undermined. Finally, will remain paramount in the short and long there will be a need to overcome entrenched terms—even if nonstate providers are gradu- attitudes that social protection spending is ally expected to play more of a role—staying a drag on growth. In fact, empirical studies the primary fi nancer and provider for both from the International Monetary Fund fi nd social insurance and social safety nets to that redistribution—when sensibly done— 2035 and beyond. accounts for around 0.5 percent additional In areas where the government collabo- GDP growth a year (Ostry, Berg, and Tsan- rates with the for-profit and the not-for-profit garides 2014). Higher social protection private sector and civil society organiza- spending has also been found in developing tions, the regulatory and contracting frame- countries to be associated with higher aver- work needs to focus on their participation age growth in the 1990s and 2000s (Zaman to ensure basic service standards, fiduciary and Tiwari 2012). compliance, and performance monitoring. Finally, a big challenge in realizing the Social protection is an area where collabo- social protection reform agenda, especially in ration with social partners such as unions, social insurance, will be how to finance what citizen groups, and employer associations is will almost inevitably be expanding public vital, more so when difficult social insurance spending. This will require fresh thinking reforms are needed. on the right financing mix that balances sus- The national level of social support will tainability, system coverage, and labor com- need a stronger coordinating mechanism petitiveness, among others. Overall, general across agencies to develop a more coherent revenue financing of social protection will strategy for reforms, linking social insurance be more important, both within tradition- and social assistance, which currently oper- ally contributory programs like pensions ate in silos. A fundamental reappraisal of the (just as for health insurance) and in some- roles (policies, financing, and implementa- what higher spending on social safety nets. tion) of national and subnational govern- This will require wider reform of Vietnam’s ments is needed, including implications for tax structure, as there is no scope for further fiscal equalization. increases in social insurance taxes without The political economy risks of social risking compromising the country’s long- protection reform in Vietnam must not be term competitiveness. forgotten. First, insiders in the civil service and formal sector are a vocal and influen- tial group. Those who stand to gain are Notes disbursed, lack influence, and are not well 1. The Kinh and Hoa, having comparable pov- organized. Second, if the social insur- erty levels and social indicators, are often ance system shifts more to general revenue grouped together. The Kinh are the larg- and aims for greater spatial equalization, est ethnic minority group, accounting for 334 VIETNAM 2035 approximately 75 percent of the Vietnamese Malaysia, and the Philippines were in the very population. low double digits in recent years. (World Bank 2. For example, in the United States, poverty staff calculations based on the Labor Force rates are 26 percent among Native Americans Survey 2013, and World Bank 2012a. and 28 percent among African Americans, 14. This includes MOLISA, particularly the local compared with 11 percent among whites. Departments of Labor, Invalids, and Social See Hall and Patrinos (2012) for analysis of Affairs. poverty of ethnic minorities and indigenous 15. But the average increase in total health expen- peoples around the world. diture among this group varied widely. Several 3. The causes of poverty of ethnic minorities in countries saw total expenditures rise by more Vietnam has been the subject of a large number than 2.5 percent of GDP, while others wit- of studies, for example, ADB (2003), DFID and nessed a decline. UNDP (2003), Oxfam and ActionAid (2009), 16. The top performer was Thailand with a decline and World Bank (2009b, 2012c). Studies car- of 30 percentage points (its OOP share is now rying out statistical decompositions of major- below 15 percent), but several countries expe- ity–minority differences in consumption or rienced an increase over the same period. earnings include Van de Walle and Gunewar- 17. See World Bank (2015) regional aging study. dena (2000), Baulch, Pham, and Reilly (2008), 18. In the late 2000s, the average annual accrual Baulch et al. (2010), and Dang (2012). rates in defi ned benefit pension schemes were 4. Ethnic minorities are concentrated princi- 1.7 percent for the world, 1.8 percent for the pally in the Northern Mountains and Central EAP region, but only 1 percent in China and Highlands, with a smaller concentration in Korea, against 2.25 percent for men and 2.75 the Mekong Delta. percent for women in Vietnam, post-2014 5. Stunting means the height-for-age is more reforms (World Bank Pensions database). than two standard deviations below the 19. For the GIZ, see Giang et al. 2011. median for a reference population. 20. The 2010 draft national social protection 6. These projections assume that age-specific- strategy was never formally endorsed. disability rates remain constant over time. 21. For a global review, see Holzmann, Robalino, This is an approximation. Because disability and Takayama 2009; Palacios and Sluchyn- among the current old-age population includes skyy 2006. war-related injuries, rates of disability among 22. 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Productivity growth the quality of institutions that provide secu- has fallen sharply and the economy remains rity, regulate economic activity, enforce the dependent on small-scale production and rule of law, and enable the public to take part foreign-invested firms for exports and jobs. in governmental decision making. But there Corruption is deteriorating and the rule of is no single path to achieving modern institu- law is weak, with a critical gap between the tions, and every country must devise solu- laws and their implementation. This aspect tions to institutional problems suited to its has to be addressed to underpin the “level specific historical, political, and cultural playing field” that is essential for the market conditions. to work and for efficiency within government. Evidence from many countries indicates A strong rule of law also constrains domina- that state effectiveness, or the capacity of tion of the economy and society by the state government to set objectives and attain them, and its officials. is closely associated with economic growth Vietnamese institutions suffer from two in the long run. The development of state fundamental problems: constraints on auton- capacity rests on three supporting pillars: a omous private sector activity and weak coherent, disciplined, and meritocratic capacity and accountability. Achieving a bureaucracy; adherence to market rationality clear boundary between private business and in policy making; and mechanisms to ensure state officials will be crucial to creating an broad public participation in setting goals environment conducive to long-term invest- and making decisions. ment in capital and to technology-intensive Vietnam’s existing institutional structure industries. Commercialization of state agen- has facilitated three decades of growth and cies has created powerful incentives for pub- development, but signs of needed change lic officials to exploit their authority over 339 340 VIETNAM 2035 market regulation, law enforcement, and the to oversight, and even this function is con- allocation of property rights to lock in bene- strained by intersecting relationships with fits for themselves and their networks. The the executive and party organizations. government suffers from vertical and hori- Looking toward 2035, a modern, prosper- zontal fragmentation, with responsibility for ous Vietnam will rest on three pillars—a state policy making and implementation divided that sets, enforces, and abides by law, a full- among numerous agencies at the central and fledged market economy, and an evolved provincial level. Fragmentation results in democratic society where the rule of law gridlock and creates opportunities for indi- governs all social interactions. Accordingly, vidual agencies to bargain for policies that institutional modernization entails a compre- serve their particular interests, often leading hensive reform of the state as well as the rela- to decisions that are suboptimal from the tionships between the state and the market perspective of society as a whole. Government and the state and the society. The state can effectiveness is also undermined by nepotism become more effective through a coherent and corruption in the state human resource and disciplined government; market rational- management system. ity applied to economic policy making; and These problems are evident in applications accountability through greater public involve- of the law. Vietnam has made progress in ment in decision making and strong account- establishing the legal and regulatory founda- ability mechanisms. tions of a market economy and has taken The government will need to be more steps to strengthen property rights. But major rationally organized, with greater coherence issues remain, particularly on allocating and among state institutions and a lean public enforcing land-use rights. The dependence of administration based on meritocracy. The local governments on revenue from land sales decentralization of authority will be improved has prompted them to capitalize on their through clearer functional assignments with power to expropriate land and control prices. corresponding adjustments in the intergov- Land disputes are the dominant source of ernmental financial framework. These complaints against government, and most changes will increase accountability and over- consist of disagreements over amounts of come present inefficiencies in coordination compensation for expropriated land. Bias in and the use of public resources. The center of the design and implementation of economic government should be strengthened to regulations, often in favor of state-owned or improve policy coordination and oversight of state-connected firms, is a product of close policy execution by public agencies. There relationships between authorities and busi- will be an efficient allocation of powers nesses, and reflects limited capacity within among central agencies to have greater effec- state agencies to formulate regulations that tiveness and accountability. Public adminis- are consistent with sound economic tration practices will be reformed to ensure principles. that merit drives the deployment of human The weak accountability also means that resources by the state. The National Assembly the state is inefficient. Vietnam has high will be a professional body, democratically rates of citizen participation in nonstate elected, consisting of full-time deputies, fully organizations, but the ability of citizens to representing the people and supported by participate in governmental affairs is expert staff. The judiciary will be similarly bounded. Lack of transparency reduces gov- strengthened to function as a body that is ernment accountability and discourages par- independent in carrying out justice, and with ticipation. While the confidence and enough capacity to settle increasingly com- professionalism of the National Assembly plex disputes. are on the rise, the influence of the executive State–market relations will have a clearer branch on the legislature is still predomi- division between the public and private nant. The role of local councils is restricted spheres. It will be necessary to build a state BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 341 that promotes long-term development and a shape behavior, the extent to which they dynamic and competitive market economy prompt or discourage growth-enhancing or that actively participates in the global value other socially desirable activity is critical to chains with a strong private sector as the whether a country achieves better economic growth engine. This will occur through adop- or social outcomes. tion of conflict-of-interest provisions and as a Institutions that encourage socially con- function of political leadership that will be structive behavior—such as healthy competi- sensitive to the particular challenges Vietnam tion among firms or cooperation among has in separating the two spheres. The state individuals and groups—help promote eco- will continue to disengage from its role as a nomic growth and other desirable outcomes. participant in the economy through state- Dysfunctional institutions—such as those that owned enterprises (SOEs) and closely linked reward corruption, collusion, nondisclosure private companies. It will focus on providing of public information, or other forms of a level playing field for the economy, with counter-productive behavior—discourage more secure and transparent property rights, productivity-enhancing investment from particularly around land issues. A more capa- investors and citizens and create opportuni- ble, trained, meritocratic judiciary will be ties for rent seeking. Poorly formed institu- developed to enforce rules to keep the play- tions often result in one group exploiting ing field level. another. Recent scholarship has documented State–society relations should provide for a the close relationship between institutions stronger voice of citizens and the public. The such as property rights enforcement and the role of social organizations representing the rule of law and economic performance. people as important partners of the state Predictable and just rules of the game reduce needs to be strengthened. The state will need uncertainty and thus encourage individuals to provide a comprehensive legal framework and businesses to invest for the long term and space for the citizens to exercise funda- rather than seek quick returns. mental rights, including the right to informa- The relationship is strong between institu- tion, the right to associations, the right to tional quality and the level of development. hold demonstrations, and other basic demo- Political and economic institutions vary cratic rights. The state will also adopt legisla- considerably. Prosperous countries have tion requiring public bodies to be transparent developed institutions that provide security, and provide mechanisms for citizens to inter- enforce the rule of law (including for con- act with the state. tracts), protect property rights, control Taken together, a state can only function corruption, and foster broad participation in effectively when it focuses on facilitating, reg- the economy and the society. Data from the ulating, and nurturing a safe and healthy Worldwide Governance Indicators (WGI) environment for development, but does not project, which collects annual information on direct the market and society. six dimensions of governance, reveal a strong relationship between the quality of gover- nance over the long period and prosperity as The Role of Institutions measured by gross domestic product (GDP) Institutions, defined broadly as the rules of per capita (figure 7.1).2 This is especially so the game for interaction in society, play a fun- among countries with limited natural resource damental role in any country’s economic endowments such as Japan, the Republic of growth and overall development perfor- Korea, and Singapore, which have developed mance. 1 Institutions embody formal and successfully thanks to enabling institutions. In informal rules devised by people that con- broad terms, institutions that promote open- strain or condition human activity and hence ness and inclusiveness of a country’s economy provide incentives that influence human and society are integral to prosperity. 3 behavior. Since institutions influence or even Outliers tend to be countries with large 342 VIETNAM 2035 FIGURE 7.1 There is a long-term correlation between good and obligations of citizenship. Universities governance and prosperity, 1996–2013 will train more of the skilled professionals that Vietnam needs to run a modern bureau- 5.5 cracy, well-developed legal and judicial insti- 5.0 tutions, and an active civil society. Log of GDP per capita (PPP) Singapore 4.5 Taiwan, China While the relationship between govern- Russian Federation Korea, Rep. ment and growth is not linear, one consis- 4.0 China tently important element is government 3.5 Vietnam Poland effectiveness, defined as the capability of the 3.0 state to formulate and implement policy and 2.5 law. The WGI government effectiveness indi- cator is most closely associated with the rate 2.0 of growth among developing countries—at 0 1 2 3 4 5 least those that are not dependent on oil for Weak Strong Average of WGI export revenues (Pincus 2015). This indica- Sources: World Development Indicators; International Monetary Fund 2015 (for Taiwan, tor, which measures the quality of the bureau- China only); Worldwide Governance Indicators database. cracy and specific public sector outcomes Note: “Log of GDP per capita (PPP)” is the average of GDP per capita in PPP from 1996 to 2013. The original unit of GDP per capita is current international dollars, transformed into relating to service delivery and infrastructure a log scale. “Average of WGI” is the average of the six Worldwide Governance Indicators development, captures the capacity of govern- good governance indicators in 1996–2003. The scale of the scores has been transformed from −2.5 (weak)/+2.5 (strong) into 0 (weak)/5 (strong). PPP = purchasing power parity. ment to set clear objectives and meet them. The idea of state effectiveness recalls Max Weber’s classic formulation of an effective natural resource endowments that achieve bureaucracy: fixed jurisdictions (to prevent relatively high middle incomes even without overlapping authority); hierarchical organiza- deeper institutional reform. The regularity of tion; meticulous record keeping; meritocracy; this relationship suggests that a prosperous full-time employment; and rule-based author- Vietnam in 2035 will possess modern institu- ity. These features are echoed elsewhere, from tions that meet the needs of a middle-class Confucian political philosophy to modern society for security, equity, fairness, and pub- public administration theory (box 7.1). lic participation. State effectiveness entails not only the abil- The close relationship between open, inclu- ity to make rules and formulate plans but sive institutions and economic prosperity also the capacity to realize plans and achieve should also not be taken to imply a direct line concrete outcomes over the long term. A des- of causality from institutional reform to potic state could impose its will on the popu- higher rates of economic growth. While there lation; but, if its policies do not make are good reasons to believe that improve- economic sense or fail to mobilize public sup- ments to institutional quality are good for port, it is unlikely that they will generate pos- growth, causality may also run in the opposite itive outcomes for more than a limited period direction—that is, from prosperity to institu- of time. Scrapping fiscal rules and ignoring tional development. In 2035 a majority of market signals, or consistently overriding the Vietnamese people will have joined the ranks aspirations of the people, are likely to reduce of the middle class and thus possess enough the effectiveness of the state. Peter Evans cap- resources and autonomy from government to tures multidimensional state effectiveness in demand better public services, less arbitrary his “hybridity” model (Evans 2005). regulation, and greater public participation According to him, the development of state and supervision in decision making and the capacity requires a balance between three implementation of policies and laws. A larger separate—and at times contradictory— proportion of the population will have components: the above-mentioned Weberian attended university or undergone other forms bureaucratic capacity based on hierarchy, of tertiary education, and will therefore most unified jurisdiction, meritocracy, and rule- likely have a greater awareness of the rights based authority; the use of market signals to BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 343 BOX 7.1 State effectiveness and development: Confluence of Eastern and Western thought Economists who have studied in the Western tra- (Nolan 2004). The ideal monarch was expected to dition look to Adam Smith for the first definitive govern virtuously and to give equal emphasis to statement of the role of the state in economic devel- administration and moral guidance. opment. For Smith, the proper realm of state action The characteristics of modern bureaucracy was limited to defense, justice, the rule of law, the described by Max Weber would not be unfamiliar establishment of public institutions, and the provi- to Chinese or Vietnamese officials under the ancien sion of public goods (Smith 1904). While often cited régime: fixed jurisdictions, hierarchical organiza- as an advocate for a limited state, Smith made it clear tion, meticulous record keeping, meritocracy, full- that state action included public education, control of time employment (no moonlighting), and rule-based monopolies, and other forms of business regulations. authority in which all citizens are subject to the same He understood the importance of an effective state to treatment (Weber 1946). Like the philosopher– economic prosperity (Viner 1927). officials of ancient China, Weber had in mind an Vietnamese economists have recourse to an older ideal type of a properly functioning state, a model tradition, which is similar in many ways to the ideal that governments in the real world may aspire to but state described by Smith. Confucian political phi- rarely achieve. Rules are often unclear and designed losophy is based on the creation and maintenance to serve special interests; appointments are made on of a meritocratic bureaucracy, legal protection for the basis of patronage rather than merit; hierarchical property rights and contracts, military defense, and structures are undermined by politics and clientelism; public works, with water control the most impor- and overlapping responsibilities create confusion tant among the latter. The aim of government was and lead to power struggles. The philosopher–kings to protect the general welfare of the people through of the Confucian ideal were challenged in practice mechanisms like stabilizing food prices, redistrib- by regional aristocrats and warlords in China, the uting rice to the poor, and providing famine relief Republic of Korea, and Vietnam. Source: Pincus 2015. allocate resources and fiscal discipline to Institutional reform does not occur in a match policies with financial capacity; and vacuum, but is rather shaped by the interests popular participation to ensure that policies of influential groups in society. In their influ- and programs are aligned with the needs and ential work Why Nations Fail, Acemoglu and aspirations of citizens. Robinson stress that the development of The three components, together, strengthen “inclusive institutions”—those that serve the state capacity while narrowing the space for mass of the population rather than a small policies to benefit officials at the expense of elite—is not an automatic process (Acemoglu the public good. The crucial point that Evans and Robinson 2012). The origins of inclusive makes—and one directly relevant to institutions lie in political settlements in Vietnam’s program of developing modern which elites agree to share power rather than institutions—is that all three legs of this pub- lose it. These settlements arise out of shifting lic administration tripod are necessary to political coalitions and a healthy dose of good achieve satisfactory levels of state effective- luck. For present-day middle-income coun- ness. This is directly related to Vietnam’s tries like Vietnam, the main lesson from these institutional modernization agenda. historical analyses is that the development of Reforming state structures but rejecting mar- well-functioning modern institutions is not an ket discipline, or assigning a larger role to the inevitable consequence of economic growth. market mechanism while insulating govern- Much depends on the alignment and relative ment decision making from the community, bargaining power of interest groups within is unlikely to generate positive outcomes. and outside government, the assessment of 344 VIETNAM 2035 these groups of how institutional change is The 2013 Constitution reaffirmed that mar- likely to affect them, and their willingness to kets allocate resources and reemphasized that accept compromise to manage risk and national sovereignty rests with the people. achieve their political aims. The state’s domi- It also established the legal foundations nation (including in nominally independent for democratic society, holding the state businesses and organizations) and the relative accountable to its citizens and making it weakness of civil society organizations have subject to the law. threatened to push institutional reform off the Over the past three decades, Vietnam’s agenda. Modernizing the country’s institu- government has demonstrated the capacity to tions, even in the context of rapid economic formulate effective policies and achieve objec- growth, will require greater tolerance for tives. The country’s record of sustained eco- market-driven activity and deeper involve- nomic growth and poverty reduction with ment of citizens in the process of making poli- narrow disparities in income and access to cies and laws that have widespread effects for services are exemplary, particularly when the population. compared with countries of similar income. Government agencies can mobilize the state to achieve specific targets like rural electrifica- Diagnosing Vietnam’s tion and immunization. Maternal mortality Institutional Challenges and under-5 mortality rates have been reduced by two-thirds since 2002. Demonstrable Achievements Vietnam’s success is also a result of the Vietnam’s institutional framework has been reform of the state toward greater adher- gradually reformed and has facilitated rapid ence to the rule of law, although efforts to social and economic development over 30 reform the organization and operation of years. The country has transitioned from cen- the state (such as legislative, administrative, tral planning to market forces as the primary and judicial reforms) have not always kept means of resource allocation. Accomplishing pace with the requirements of economic this without a major economic crisis helped reforms. The 1992 Constitution brought empower Vietnam’s ascent in just 25 years about changes in the organization and oper- from one of the poorest countries in the world ation of the center of government. 4 to lower middle income. Specific achieve- Administrative reforms started in 1994 ments have been presented in the previous have changed procedures to reduce cumber- chapters—achievements all the more remark- some interactions of citizens and businesses able given that Vietnam endured nearly half a with government. In 2001 a Comprehensive century of war and destruction before peace Administrative Reform Program was issued was secured in the 1980s. for the first time while legislative and judi- Vietnam’s success is largely owing to cial reform strategies were launched in reforms that allowed market forces to enter 2005. The 2013 Constitution continues the production, distribution, and trade. Before process of legislative, executive, and judi- Ðổi Mới (economic reforms instituted by the cial reforms, establishes the principle of a Party Congress in 1986), the private business socialist state governed by rule of law and sector was targeted for “re-education.” The of the people, by the people, and for the private sector, as the 10th Party Congress people, which also responds to the needs of confirmed in 2006, has become “one of the developing a market economy, accelerating sources of momentum of the economy” along- industrialization, modernization, and inter- side the state. In the 1990s Vietnam liberal- national integration. While the legal frame- ized trade, and in 2007 it joined the World work still pays inadequate attention to the Trade Organization. There are now roughly a direct democratic rights of the people, there half million registered private firms and are laws regulating most of the important thousands of foreign-invested enterprises. economic, political, cultural, and social BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 345 activities and the organization of the public to rely heavily on small-scale agriculture sector. 5 The policy- and law-making pro- production and foreign-invested firms in cess has been gradually improved toward manufacturing. Large private domestic firms, greater use of evidence and employing more 30 years after introducing Ðổi Mới, are few democratic norms, including consultations in number, with very few in manufacturing. with beneficiary groups and greater use of The economy is dominated by state-owned, impact assessments.6 state-controlled, and state-connected firms.7 Moreover, few large manufacturing firms can manage technologically and manageri- Major Challenges ally complex processes, realize economies of State effectiveness scale, control costs and quality, and compete Vietnam’s capacity to sustain this rapid in domestic and foreign markets. This development is in question. The economic reflects the weaknesses of the country’s gains of the state–market reforms are not institutions. yielding structural changes tied to sustained Vietnam consistently ranks in the bottom growth—particularly for a lower-middle- third in global indicators of corruption— income country. GDP growth has fallen and lacks progress in addressing the prob- steadily since the late-1990s, with labor pro- lem (figure 7.2). Most firms (51–70 percent) ductivity and total factor productivity reported having to pay bribes to access gov- growth also trending downward. Indeed, ernment services between 1996 and 2014, total factor productivity growth came to a and fi rms stating that informal payments standstill after 2000, with higher capital were normal practice saw an uptick investment and faster rates of increase in the (Vietnam Province Competitiveness Index labor force generating slower rates of eco- 2006–2014). Of citizens and civil servants, nomic growth. Economic growth continues over four-fifths rated corruption as FIGURE 7.2 Corruption is a continuing challenge a. Control of corruption scores, 1998–2013 b. Irregular payments and bribes by firms, 2014 Worldwide Governance Indicators score 1.0 1.0 Global Competitiveness Index score 0.9 0.5 0.8 0.7 0 0.6 0.5 –0.5 0.4 0.3 –1.0 0.2 0.1 –1.5 0 1998 2003 2008 2013 ai a P U Cs EA ICs re sia ala ep. do a ian P ysia de nd Ta g n ,C e P am s Vi land IC Th hin In hin an or Sin atio EA LMI Fe ola Ko ne M PH R EA tn iw ap C a, r e China Korea, Rep. M Poland Russian Federation ss Taiwan, China Thailand Ru Vietnam Sources: a. Worldwide Governance Indicators; b. World Economic Forum 2015. Note: Panel a. 2.5 = best, −2.5 = worst. Indicators for each country are a blend of up to 24 perception- and experience-based indicators. Panel b. 0 = best, 1 = worst. The data are based on an opinion survey of business executives. Group averages are based on the countries with data (18 EAP countries); EAP = East Asia and Pacific; HICs = high-income countries; LMICs = lower-middle-income countries; UMICs = upper-middle-income countries. 346 VIETNAM 2035 a serious issue (World Bank 2013b); Vietnam faces a core challenge in develop- 92 percent identified corruption as a prob- ing the rule of law. A strong rule-of-law state lem in the public sector (Transparency means that broadly accepted laws constrain International 2013). the behavior of all actors—including those Corruption is a serious economic problem with political power. Fair and open rules even if Vietnam has sustained high rates of accepted and adhered to by all are intrinsic to growth in the early stages of development. functioning markets, and systematic enforce- As in other East Asian economies, Vietnam’s ment of the law promotes fairness and social corruption has coexisted with high rates of cohesion. Through its 2013 Constitution and investment and strong export performance. market-focused laws such as the Law on This paradox has led observers to argue that Enterprises, Vietnam has established a legisla- corruption facilitates growth by providing a tive basis for a rule-based state, but implemen- path around the slow-moving bureaucracy. tation is weak. Less than 10 percent of firms Surveys indicate tolerance of corruption in surveyed over the past nine years believe that Vietnamese society, suggesting that corrup- central laws will be consistently applied in the tion is not a major impediment but part of provinces (Vietnam Province Competitiveness doing business. This does not mean that cor- Index 2006–2014). Based on global gover- ruption is costless. It has negative long-term nance indicators, Vietnam lags its neighbors effects on market efficiency and investment. and peers on the rule of law (figure 7.3a). As the middle class grows in Vietnam, corrup- Perception-based surveys of business execu- tion will increasingly affect political stability; tives suggest that important elements in the perceptions of inequality and unfairness in the rule of law have been weakening over the past use of public power can lead to social tensions five years, while long-term trends show no that undermine the state’s legitimacy. signs of improvement (figure 7.3b). FIGURE 7.3 Rule of law continues to be weak a. Rule-of-law scores, 1998–2013 b. Quality of rule of law, opinion of firms, 2006–14 1.5 1.0 Worldwide Governance Indicators score Global Competitiveness Index score 0.9 1.0 0.8 0.5 0.7 0.6 0 0.5 0.4 –0.5 0.3 –1.0 0.2 0.1 –1.5 0 08 13 06 08 10 12 14 98 03 20 20 20 20 20 20 19 20 20 China Korea, Rep. Property rights protection Poland Russian Federation Judicial independence Thailand Taiwan, China Efficiency of legal framework in Vietnam settling disputes Efficiency of legal framework in challenging government actions and regulations Sources: a. Worldwide Governance Indicators; b. World Economic Forum 2015. Note: Panel a. −1.5 = worst, 1.5 = best. Indicators for each country are a blend of up to 24 perception- and experience-based indicators. Panel b. 0 = worst, 1 = best. The data are based on an opinion survey of business executives. BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 347 Vietnam has two basic challenges in insti- decision making remains shielded from public tuting the rule of law: state domination over scrutiny. And in the past decade, the space the private sector and fragmented state of civil society organizations—social and institutions with weak capacity. These two professional—has narrowed. factors are interrelated. The absence of inde- pendent economic interests has reduced exter- Commercialization of the State nal pressure for institutional reform, while The prospect for building modern institutions commercial interests within the state are left in Vietnam depends on the degree of distinc- to pursue policies that deliver economic ben- tion in terms of benefits among private enter- efits to them but often at the expense of the prises, SOEs, and state officials. As in all government’s capacity to act as an impartial countries, influential groups have accumu- regulator and supplier of public goods and lated political and economic power that they services. seek to preserve by influencing government Weaknesses in the operations of govern- decisions. But in Vietnam economic success ment have emerged as important checks on stemming from state relations appears to be investment and growth. Regulations are unusually high. Citizens consistently report unclear or contradictory. State agencies that connections to the state are necessary to have conflicting mandates because they succeed in business and that vested interests’ often serve as regulators but also have their power is on the rise (figure 7.4). own commercial interests. The judiciary is The interconnectedness between the state politicized and law enforcement is selective. sector and entrepreneurial business class Endemic corruption pervades the public was born out of economic reforms. The sector. Communist Party, in the four-decade strug- Moving forward, the quality of institu- gle for independence, was highly effective at tions will be increasingly important. For the mobilizing the state. With victory in 1975 Vietnamese economy to transition from the Party mobilized capacity to build a cen- small farms and workshops to large, capital- tralized, planned economy. But the system and technology-intensive manufacturing, teetered on the brink of collapse in a few public institutions must create a stable, low- years. State companies, local authorities, risk economic environment. and other state agencies began working Building a more effective state requires around the planned economy to acquire balance—to set clear boundaries between inputs, pay workers, and provide essential business and government officials, to institute goods to their communities. bureaucratic coherence while maximizing Ðổi Mới grew out of these off-plan (fence- capacity, to apply market rationality to eco- breaking) activities. Markets for food, con- nomic policy making, and to ensure public sumer goods, construction materials, and participation in policies and programs. These financial instruments such as gold, money, four conditions present challenges in Vietnam. credit, and foreign exchange replaced the Connections to the state are integral to planned-economy instruments. But because success in business. Government institutions the control of resources was vested in the are fragmented vertically—local authorities state, the reform represented less a shift from either resist or go against directives from the the state to markets than a marketization of center—and horizontally—assigned and the state. Millions of household microenter- assumed mandates and power splinter agen- prises grew in the space created by the cies at every level of government. Market reforms, but they operated at the fringe of the rationality does not guide public policy, with economy. SOEs (including equitized firms regulations favoring state-owned or state- that retained a close relationship with the connected enterprises and property rights state), politically connected private firms, and unevenly enforced. Although the stature of foreign-invested enterprises continued to legislative bodies is increasing, government dominate the economy (Pincus 2015). 348 VIETNAM 2035 FIGURE 7.4 Where private business interest ends and government begins is still being negotiated in Vietnam a. Special interest groups are becoming b. State connections are key to business more influential Totally disagree Contracts, land, and other 1% economic resources mostly fall in the hands of enterprises Disagree that have strong connections 9% to local authorities I do not know 21% Neither agree Preferential treatment to large nor disagree companies (both state-owned Totally agree 19% and nonstate) is an obstacle to 6% their business operations Agree 44% Ease in getting state contracts, a privilege to state-owned economic groups 0 25 50 75 100 Share of firms agreeing (%) Top-performing province Median province Bottom-performing province Sources: a. World Bank 2013b; b. Provincial Competitive Index 2013. Note: Data based on a survey of firms. The confluence of commercial interests Connections to the state raise the risks for and state power produces rents that reinforce private firms. They discourage large invest- and perpetuate the system. Rents were clear ments in land, plants, skills, equipment, and cut in the early days of reforms. Agile entre- technologies. State commercialization has preneurs in the government or with govern- effectively crowded out large, genuinely pri- ment connections secured subsidized goods vate firms. and other privileges. Subsequent legislation The direct involvement of the state in the has done little to demarcate the public– economy declined in the 2000s. Next- private boundaries and stem these advan- generation reforms allowed private enter- tages. Relations with state agencies provide prises to emerge, diminishing the state’s government contracts, access to land and direct, formal, and dominant role in the credit, and access to state-controlled markets. economy. By the end of 2014, 3,166 SOEs Insiders use their market position and politi- accounted for 20 percent of total capital cal access to sustain the rents. And the assets, marking a decline from 66 percent in transition—expected to reduce rent-seeking 2001. Their share in total employment fell opportunities—offered further opportunities from 55 to 11 percent in the same period to manipulate the social and political envi- (GSO Enterprise Surveys 2001–2014). But ronment. In the words of one scholar, “What this reduction came through equitization, occurred was the development of a business merely shifting the connection to public offi- class within the state” (London 2009). cials (Gainsborough 2009). BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 349 The state remains a producer of many competition—and violated the rights of goods and services without a strong public pilots under the country’s labor code. goods rationale. It mostly closed small SOEs, SOEs are not subject to the same market then equitized large-scale SOEs in the mid- discipline as private firms. Annualized SOE 2000s. But the global financial crisis halted growth rates in 2005–12 were 50 percent any momentum to reduce the level of state higher than those of the private sector. ownership. Although the pace accelerated in The global financial crisis did not affect 2013–14, firms with 50 percent or more state SOE performance but stalled private sector ownership have remained essentially the same growth after 2009. In this same period, the (CIEM and World Bank 2015). The state has SOE turnover- to-asset and output-to-asset tried to promote efficiency as well as upward ratios lagged those of the private and the and downward production links in SOEs by foreign-invested sectors. While making direct creating “general corporations” and “state comparisons is complicated by sector-specific economic groups.” Where there are monopo- factors, these figures suggest that SOEs were lies or a lack of public goods justification, able to access financing to sustain operations state economic groups play an outsized role. based on nonmarket criteria. SOEs have priv- Critical sectors such as telecommunications, ileged access to finance. They receive a dispro- banking, and insurance are dominated by portionate share of financing from the state SOEs, even though the private sector could banks, favorable terms to restructure, implicit provide much needed competition for them. (such as Vinashin’s unguaranteed loans) and The legal framework does not provide explicit government guarantees, and outright explicit advantages to SOEs. The Law on capital injections (CIEM and World Bank Enterprises, amended in 2005, called for equi- 2015). Special terms like interest-free loans tizing SOEs and stipulated that their opera- cover sensitive expenditures or social insur- tions must be carried out under the same rules ance payments. These benefits are not codi- as private businesses. Subsequent prime min- fied but are provided ad hoc. SOE compliance isterial decisions and government decrees with financial and nonfinancial transparency require greater transparency and a clear sepa- regulations also compares poorly with the ration of the state’s ownership and regulatory private sector (World Bank 2013a). functions. State shares in more than 1,000 Preferential access to information aids rent equitized entities have been transferred to the seeking and provides other advantages. State Capital Investment Corporation, sepa- Insider information on opportunities and rating ownership rights from the ministries upcoming policy changes allows connected and regulatory agencies. businesses to preempt or outmaneuver their SOEs nonetheless enjoy preferential competitors. Low transparency in government treatment by the state—including access to reinforces this. The nexus between connec- credit, soft budget constraints, and direct tions and sensitive information comes through administrative interventions. The share of clearly in the PCI. In one province over half total bank credits to SOEs is 30 percent the surveyed firms said that relationships were above the share of private firms. 8 The important to access provincial documents reg- National Assembly’s Economic Commission ulating commercial matters (figure 7.5). reported in 2013 that SOEs face a soft State commercialization and rent-seeking budget constraint and documented the behavior undermine state capacity. The Ministry of Finance covering loan defaults blurred state–market line imposes static ineffi- in 2010–14, including those of Vinashin and ciencies on the economy since high-cost Song Da Corporation. In early 2015 the producers are rewarded at the expense of con- Ministry of Transport banned Vietnam sumers and efficient firms. Efficient firms also Airlines’ pilots from moving to private avia- avoid investing because of regulatory risks and tion companies, a decision that insulated elite capture, deepening the inefficiencies. Vietnam Airlines management from wage Public officials have powerful incentives to 350 VIETNAM 2035 FIGURE 7.5 Transparency and preferential access The political power of local authorities to information are major hindrances to economic complicates policing the public–private efficiency boundary. The system bears a striking resem- blance to the fragmented authoritarianism Budget documents framework developed by Lieberthal and have enough Oksenberg to describe policy making in details for use in China (Lieberthal and Oksenberg 1988). business activities Budgetary and regulatory decentralization have empowered provincial leaders to the Budget documents are published extent that they wield considerable influence right after over the decisions of the central government. being approved Reforms in the 1980s increased provincial Relationship representation in the Party’s Central important Committee from 101 to 176 members for access to between 1976 and 1996. Provincial party provincial leaders now make up the largest single vot- documents ing bloc of the Central Committee. Local 0 25 50 75 100 power brokers have repeatedly demonstrated Share of firms agreeing (%) their capacity to block central directives, Top performer such as when SOEs and local governments Median performer halted an attempt by Hanoi to rationalize Bottom performer the port system in Ho Chi Minh City (Overview of this report).10 Their capacity to Source: Provincial Competitive Index 2013. Note: Data based on a survey of 8,093 firms. veto or delay decisions affords bargaining power to extract resources from the center, to obtain other privileges, or to simply block exploit their regulatory powers to lock in central directives against their interests. They long-term benefits for themselves, their fami- also have forced through decisions regardless lies, and their networks. This abuse of public of economic logic. They compelled the authority undermines the legitimacy of state national airline to serve small provincial cap- institutions. itals justifying building of airports. Local leaders have strong local roots and loyalties. Vietnam’s fragmented government structure As of November 2011 only eight provincial Vietnam’s horizontal and vertical fragmenta- secretaries and about 10 percent of senior tion of power creates overlapping mandates, provincial officials served in areas in which conflicting rules and decisions, and bargain- they did not have extensive local ties (Pincus ing in the bureaucracy. The Office of the et al. 2012). Government, the Ministry of Finance, and the Vietnam is one of the most fiscally decen- Ministry of Planning are the most powerful tralized countries in the region, with provinces entities. 9 They formulate policies, often accounting for more than half of government deploying interministerial task forces to spending. Its unusual budget process nests achieve consensus. In theory the Communist provincial budgets in the central budget. This Party oversees cohesive planning. In practice process complicates tracking expenditures, the power splinters across agencies and compresses budget review time, and counter- between the center and the provinces. The vails coherence in planning and execution— absence of a clear hierarchy and distribution making it difficult for central institutions to of authority creates incentives for agencies to set policy and to monitor and enforce delivery resist decisions perceived to be against their standards.11 Indeed, the center’s interest in interests. The result is gridlock and decisions maintaining local authorities’ support pre- contrary to the society’s point of view. vents ministries from acting consistently. BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 351 Fewer than 10 percent of firms surveyed for two specific features of Vietnam’s system the PCI over the past nine years believe that have slowed progress in developing a merito- the central laws would be consistently applied cratic system. First, despite the enactment of in the provinces. reforms mandating open recruitment for Fragmented authority contributes to exces- technical positions in 2008, recruitment and sive capital investment in the provinces. promotion are still conducted based on Virtually every coastal province has its own patronage relationships or seniority rather deep seaport and nearly all provinces have an than merit. Second, human resource manage- airport with arrangements for at least a few ment is itself fragmented, with responsibility flights a week by the national airline, often assigned to three entities within the govern- operating at a loss. Similarly, about 260 ment plus the Central Committee Secretariat industrials parks are spread across nearly all and Organization Commission of the Party of the country’s 63 provinces, with plans to (Phuc 2015). build 239 more by 2020. Yet the average The state personnel system is undermined occupancy rate of the existing parks is well by corruption. Nothing destroys bureaucratic below half. The investments were financed by capacity more quickly than distributing jobs the central government to impose greater dis- based on connection and side payments rather cipline on local capital investment decisions, than merit. While the problem is difficult to with little success. measure, perceptions are that corruption Fragmentation also occurs horizontally. plays a major role in public sector human State actors often reinterpret, ignore, or even resource practices. For instance, 60 percent of run against overall state policy objectives. the population consistently report that bribes Horizontal fragmentation delays issuing and are paid for government jobs (figure 7.6a). implementing regulations. The central gov- Personal connections are also perceived by ernment issued about half of 2014’s required the public and by firms as the main factor of regulations but only 20 percent of them were success, followed by material incentives issued on time.12 ( figure 7.6b). Recent discussions in the Overlapping mandates and redundancies Vietnamese press about the rise of the in the government are by far the most compli- appointment of children of senior party offi- cating factors. Multiple agencies can claim cials to high posts in local and national gov- the authority to make or influence decisions, ernment (con ông cháu cha) have highlighted giving rise to interagency bargaining that concerns over widespread nepotism in public slows down decision making and often leads sector recruitment at all levels. to poor outcomes. Market rationality in regulation and Unmeritocratic administration enforcement The public administration system is not meri- The state has made progress in building the tocratic. A basic element of state effectiveness system of rules regulating the modern mar- is the extent to which the functions of gov- ket economy, but the lack of consistency, ernment are carried out by capable public objectivity, and fairness in enforcement is a servants who demonstrate high standards of significant problem. Vietnam’s business envi- ethical behavior, who are motivated, and ronment, in such measures as the Ease of who are assigned discrete tasks within a clear Doing Business indicators and the yearly PCI chain of command. International experience surveys, has improved in the past decade. The indicates that developing a meritocratic sys- legal infrastructure of the market economy is tem takes a long time and responds to par- now largely in place, having enacted laws on ticular political imperatives.13 While issues of land, enterprise, investment, bankruptcy, low pay, and skill shortages in fields like intellectual property, civil and penal proceed- information technology and policy analysis ings, commercial arbitration, and real prop- are a challenge in most developing countries, erty trading as well as civil and penal codes.14 352 VIETNAM 2035 FIGURE 7.6 Corruption in public administration is a widespread concern a. Citizen perceptions: Do you b. Factors influencing promotion in the agree that there are no bribes state sector, share of citizens, for state employment? firms, and public officials in agreement 60 Good capacity, experience, 55 and performance Share of respondents agree (%) 50 45 Being formally trained 40 Being the descendant of or 35 having a relationship high-ranking officials 30 Using material benefits 25 or other benefits 20 15 Not upsetting anyone 10 0 20 40 60 80 100 11 12 13 14 20 20 20 20 Percent Citizens Firms Public officials Sources: a. Centre for Community Support and Development Studies, Centre for Research and Training of the Viet Nam Fatherland Front, and United Nations Development Programme 2015; b. World Bank and Government Inspectorate of Vietnam 2016. This has simplified administrative procedures quality of the property records differs widely and shortened waiting times to register a busi- across the 63 provinces. The 2013 Land Law ness or secure an electricity connection. But articulates a clear framework for the disposi- the regulatory system lacks coherence and the tion of real property, such as leases, enforcement of regulatory rules is neither exchanges, and mortgages. Use-right terms, impartial nor fair. The governance of land including for agriculture, have been extended markets presents the most serious problems. to encourage investment. And, market mech- Land’s legal framework consists of 21 laws, anisms such as auctions must set prices when and hundreds of instructions, resolutions, cir- the government confers long-term use rights. culars, and decisions. Vietnam lags other Government action affects the holders of Southeast Asian countries in the time required use rights. Land remains one of the challeng- to pay taxes, to register property, or to get a ing issues in the state–citizen relationship. Of construction permit. The transfer of land-use the 700,000 registered complaints between rights and the conversion of use rights are 2009 and 2011, 70 percent were land issues. allowed but difficult to execute—except when Nearly three-quarters of these dealt with a state actor has interests and intervenes. compensation, land acquisition, and dis- Vietnam has introduced important reforms agreements over resettlement terms to strengthen property rights. A major effort (Government Inspectorate of Vietnam 2012; is underway to provide land-use certificates. MONRE 2012). Though weak, Vietnam’s And the provinces have developed property property-rights protection is on par with the registration systems to protect the rights of average of other East Asian lower-middle- those holding the rights to land use. income countries (figure 7.7). Systematically registering use rights and com- Developing land provides a major stream piling and integrating technical and norma- of revenue in provinces and in local commu- tive documents (such as land-use plans and nities but also causes most disputes. Land physical parameters) in the Ministry of transactions, as a result of the 2003 decentral- Natural Resources and Environment have ization, now account for 20–30 percent improved property cadasters. However, the of local revenue.15 Property taxes in many BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 353 developed countries serve as an important FIGURE 7.7 A comparative assessment shows relatively weak source of local revenue and encourage protection of property rights in Vietnam broader provision of public goods. In 1.0 Vietnam, the local governments raise revenue by selling land. This provides incentives for 0.9 Global Competitiveness Index score local governments to use—if not abuse—key 0.8 powers in land administration, including: 0.7 0.6 • Expropriating land for vaguely defined 0.5 public purposes, including industrial and residential development. Between 2001 0.4 and 2010, 1 million hectares of agricul- 0.3 tural land were converted to industrial or 0.2 urban residential use (World Bank 2011). 0.1 • Using provincial land-price tables to expro- 0 priate land—typically 30–60 percent M ep. EA am EA ICS S do a re a ia Sin tion an ore Th ina PU S Vi d de d IC in Ko si EA MIC below the market price—and thus creating ys an Fe n R ne M PH n Ch h Ta gap a ala ra a, et ,C ail l PL ian Po elite capture of rents or a dual-priced sys- In iw tem (MONRE 2012). The 2013 Land Law ss Ru bars this practice and requires auctions but uptake has been slow. Source: World Economic Forum 2015. Note: 0 = worst, 1 = best. Data based on an opinion survey of business executives. • Affecting land and land-use values through Group averages are based on the countries with data (18 EAP countries). EAP = East Asia planning, conversion, and granting the and Pacific; HICs = high-income countries; LMICs = lower-middle-income countries; UMICs = upper-middle-income countries. spatial use of land plots. Persistent bias in treating businesses and economic principles constrains regulatory individuals extends beyond land markets to agencies, with new rules quickly withdrawn other forms of regulation. Although equal when heavy costs are imposed on firms or treatment of all market participants is guar- consumers. These costs can be predicted. anteed under the Constitution and the Regulators need a firmer grasp of microeco- Enterprise Law, these basic principles are nomics and a willingness to involve indepen- violated in sectoral legislation. Laws construe dent experts in the consultation process. entry barriers and restrict the business model. These problems are even more serious The Law on Investment also introduces spe- given the increasingly complex commercial cific conditions on some 267 sectors. Matters disputes and the limited capacity of the judi- are made worse by implementing agencies’ cial system. Vietnam’s formal legal framework inconsistent legal interpretations and by has developed quickly to meet the needs of an exceptions and special provisions granted to open, mixed economy. But the justice system, targeted sectors and entities. Regulatory unable to handle increasingly sophisticated inconsistency allows the authorities to favor and complex commercial cases, contributes to state-owned and state-connected enterprises. poor enforcement. Demands for adjudication These complex and profuse regulations and for conflict resolution are increasing rap- hinder market rationality from entering eco- idly. Between 2006 and 2013 civil cases dou- nomic governance. bled and economic cases spiked by 750 Government agencies do not have the ana- percent.16 In contrast, resources have remained lytical capacity to incorporate sound eco- constant, with only a modest increase in the nomic principles in new regulations. total number of courts and judges over the Evidence-based regulatory impact assess- past 10 years. Training for judges and for ments are lacking (Institute of Legal Science other officials to apply the updated legal 2014, 113–14). Limited understanding of framework has been insufficient. 354 VIETNAM 2035 Accountability of the State to Citizens Acting as facilitator and enabler, civil soci- An element that is indispensable in an effec- ety organizations can become the “space tive state is the capacity to ensure state–citizen where we act for common good” (Putnam relationships, in which people widely partici- 1993; World Economic Forum 2013). pate in the decision-making process and hold Despite a large number of formal civic government accountable for the truthfulness organizations, in practice citizens’ exercise of and results of its performance. A modern state their rights, particularly their participation in serves its citizens’ needs. Requiring reliable the affairs of state, is constrained. The gov- feedback provides knowledge of the needs. ernment has few formal channels to consult Assessing performance helps meet the needs. with civil society organizations on policy and And adjusting activities produces more effec- planning. And it rarely consults in a substan- tive outcomes. This requires opening formal tive way. Civil society organizations are not channels to the government and opening citi- seen as active or successful in influencing zens’ space to organize effectively, to partici- public policies and in holding the state and pate in decision making, and to hold the state private sector accountable. Yet the correla- accountable. tion between stakeholder policy consultation Vietnam has high levels of formal civic and effective implementation is strong. This participation. Tens of thousands of social could be the case in Vietnam.18 organizations operate throughout the coun- Limited transparency hinders the ability try, and more than a third of the population of citizens to hold government accountable. is a member of one or more group.17 Citizen Vietnam’s governance practices, like many organizations support government social countries with a legacy of state-dominated programs, provide services when the gov- development, have not encouraged open- ernment is unable or unwilling to do so, ness and public discussion of state activi- advocate for specific constituencies, and ties. The low uptake of current legislation monitor the authorities’ actions. New non- requiring public disclosure, particularly in mass organizations, a notable trend, the land and SOE sectors, is a cause for increased more than 40 percent from 2008 concern (see World Bank 2014, 2015a). to 2014 (figure 7.8). They span credit, This profoundly affects the accountability sports, culture, business, and elderly groups. of the state to its citizens and the develop- ment of a democratic society. It also under- mines the market efficiencies. Incoherent FIGURE 7.8 Membership of mass organizations and other voluntary groups is growing land use imposes costs on most market par- ticipants because unpredictable changes 1.4 increase the risk of doing business. It also favors insiders (figure 7.9). 1.2 Number of voluntary groups The National Assembly’s role has been 1.0 strengthened, but there is room for improve- per household 0.8 ment for it to fully exercise its legislative and oversight functions to the government. 0.6 Though now debating and reviewing legisla- 0.4 tion more substantively, it is not empowered to formulate policy or to supervise the govern- 0.2 ment. Major limitations are its irrational struc- 0 ture, the undemocratic election with bias to a weighing structure of representativeness, and 08 10 12 14 20 20 20 20 the high turnover between sessions (first-term Mass organizations Non-mass organizations deputies now have 70 percent of the seats). Full-time deputies increased 4–5 percentage Source: Markussen 2015. points in the last three sessions. Two-thirds are BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 355 FIGURE 7.9 Vietnam has low levels of transparency a. General population’s opinion: Availability of b. Firms’ opinion: Transparency of official information upon request government policy making 1.0 1.0 0.9 0.9 Global Competitiveness Index score World Justice Project score 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0 0 ala . ian P ysia LM m UM Cs HI s M , Rep re sia Ko one a ga on ai e Cs ng P Cs de nd Vi land 06 07 08 09 10 11 12 13 14 IC d in Th por di EA na I HI Sin rati In Ch Fe ola 20 20 20 20 20 20 20 20 20 et a Singapore Malaysia China lu xc Pe Indonesia Thailand Vietnam ss Ru EA Sources: a. World Justice Project 2014; b. World Economic Forum 2015. Note: Panel a, 0 = worst, 1 = best. The data are based on a general population poll and legal professionals carried out the assessment. Group averages are based on the countries with data (15 EAP countries). Panel b, 0 = worst, 1 = best. Data based on an opinion survey of business executives. EAP = East Asia and Pacific; HICs = high-income countries; LMICs = lower-middle-income countries; UMICs = upper-middle-income countries. part-time and are drawn from the executive at the state much as they had before the reforms, the national or provincial level or from bud- with additional meetings and budget- getary institutions. This creates bias toward information requirements. accepting whatever the executive proposes. Vietnam lacks a key element of a well-func- Compared internationally, Vietnam scores tioning judiciary—judicial independence from poorly on the effectiveness of its legislature the executive. A well-functioning court system (figure 7.11a) in limiting government powers. has to be independent from the executive and The People’s Councils lack the indepen- from political and commercial interest groups. dence to provide oversight of the People’s It is only then that it can be considered an Committees in the provinces. An array of objective arbitrator. Judicial appointments are intersecting relationships and reporting subject to political and administrative pres- requirements constrain the Councils. This sures, and the hierarchical system contributes involves the central government, the Local to this dependence. Many executive opera- People’s Committee, the Vietnam Fatherland tions do not fall under judicial supervision, Front, the Council’s own party organization, but the courts are beholden to the executive to and the Standing Committee of the National administer the courts. There are no important Assembly. The Councils’ supervisory function instances of the court’s ruling against major is limited to compliance with national policies state policies, and only rare cases of judg- and laws. It does not touch on the perfor- ments against public officials. The indepen- mance of local governments in implementing dence of Vietnam’s judiciary ranks below that policies and programs. Local public meetings, of its regional peers (figure 7.10). mandated under various “grassroots democ- Individuals and firms are reluctant to use racy” decrees since 1998, have not changed the court system. An average of 60 percent of government structures. Citizens interact with firms were willing to use provincial courts in 356 VIETNAM 2035 FIGURE 7.10 Comparative ratings show relatively low judicial Toward Modern Institutions for independence in Vietnam an Effective State 1.0 General Orientation 0.9 Global Competitiveness Index score While the end point of what constitutes 0.8 strong institutions is clear, the path to 0.7 achieving a set of well-functioning institu- 0.6 tions is not. Institutions vary from place to 0.5 place since every country and region has its 0.4 own history, culture, and patterns of eco- 0.3 nomic, social, and political change. Vietnam 0.2 is no different. The specific characteristics 0.1 and configurations of its modern institutions 0 will unfold over time. Reproducing the tra- jectory followed by other rapidly growing sia p. Sin tion e a ia Th na EA am EA ICs EA Cs s Fe land Vi d IC in iw por ys Re an I hi middle-income countries is not a given. ne M M PH Ch n ala ra ,C et a ail PL PU a, do ian Po g de re M an In Vietnam will have to devise solutions—not Ko Ta follow an international blueprint—to its ss Ru institutional problems that respond to Source: World Economic Forum 2015. national and local priorities. Another impor- Note: 0 = lowest, 1 = highest. Data based on an opinion survey of business executives. EAP = East Asia and Pacific; HICs = high-income countries; LMICs = lower-middle-income tant issue when switching from the current countries; UMICs = upper-middle-income countries. institutions to modern institutions is the restructuring of economic and political the event of a dispute, but only 22 percent had interests. Political institutions should be actually done so (PCI 2013). Individuals are reformed to enable well-functioning socio- even less likely to use the courts (Anderson, economic institutions. Garrido, and Phung 2009). While the overall As Vietnam becomes more prosperous, citi- number of cases is increasing, there is likely zens and businesses will increasingly demand further unmet demand for adjudication. The that the state facilitates growth, delivers ser- formal judicial system, costly and time con- vices, and provides opportunities. Middle-class suming, should not be the only means of dis- growth will increase the demand for higher- pute resolution. Alternative dispute resolution value goods and services and supply skilled mechanisms, including mediation, are needed. professionals and workers to domestic firms, But confidence in the judicial system as a last to the government, and to civil society. resort is critical to the functioning of the other Incomes will rise. So too will the expectations means of dispute resolution. Lack of confi- for goods and services, including public sector dence in the courts is damaging to Vietnam. services like health care, education, and public Improving state effectiveness will require administration. Failure to meet these expecta- strong legislative and judicial institutions to tions can result in frustration and social ten- hold government accountable. Vietnam’s legis- sions. Albert Hirschman famously described a lature and judiciary are less effective in impos- “tunnel effect,” in which some groups in soci- ing limits on the actions of the state than ety do not feel that they are making progress corresponding institutions in neighboring (“moving through the tunnel”), leading to feel- Southeast Asian countries (World Justice Project ings of disappointment and disaffection. The 2014). And they score far below the average of inclusiveness of growth—and the performance lower-middle-income countries (figure 7.11). of the state in providing services, justice, and a Government officials, in the absence of a strong fair environment for individuals and busi- and independent legislature and judiciary, will nesses—maintains political stability and social not confront meaningful curbs on arbitrary and cohesion. Tolerance of poor performance and self-interested decision making. lack of probity will only decline. BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 357 FIGURE 7.11 Vietnam’s legislature and judiciary do not constitute strong checks on the executive a. Legislature’s effectiveness in limiting b. Judiciary’s effectiveness in limiting government powers government powers 1.0 1.0 0.9 0.9 0.8 0.8 World Justice Project score World Justice Project score 0.7 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0 0 lay . Fe Pola ia a, a ala . Ko on a Fe Pola ia ga ion ai e LM m a, a Ko on a ga ion UM Cs Th pore LM m HI s Cs Cs UMICs s Cs Cs M Rep ng P ng P M Rep de nd Vi land Sin rat d et d IC IC In Chin re esi Th por In Chin re esi s ys di EA di EA na na de n Vi ilan I HI HI HI Sin rat et a a d d lu lu ian ian xc xc Pe Pe ss ss Ru Ru EA EA Source: World Justice Project 2014. Note: Panel a, 0 = worst, 1 = best. The data are based on a general population poll and legal professionals carried out the assessment. Group averages are based on the countries with data available (15 EAP countries). Panel b, 0 = lowest, 1 = highest. The data are based on a general population poll and legal professionals carried out the assessment. EAP = East Asia and Pacific; HICs = high-income countries; LMIC = lower-middle-income countries; UMICs = upper-middle-income countries. The 2013 Constitution confirms that sov- in the decision-making process with more ereignty rests with the people and establishes effective accountability mechanisms. the market as the driving force behind eco- Government fragmentation should be reduced nomic development. Building strong and both horizontally and vertically; public and competent government agencies will be the private boundaries should be clearly defined; first challenge. And adhering to market prin- and regulatory and economic roles of the gov- ciples in economic policy and encouraging ernment should be separated. The authority robust political and social institutions will be of the legislature, executive, and judiciary the second. Together they can gather the peo- needs to be clearly defined to ensure that each ple’s energy and creativity to design the branch operates in accordance with its func- instruments, implement the plans, and moni- tions and with sufficient autonomy. Economic tor the performance of government policies management must be based on market prin- and programs. ciples. The state needs to guarantee the pro- Institutional modernization will require tection of property rights, including clearer continuous reform of the state structure and definition and limitation of cases where these of the relationships between the state and the rights may be overridden. Nongovernmental market, and between the state and the society. organizations, including social and profes- The state can improve its effectiveness by sional organizations, should play a more instituting a highly disciplined and coherent active role in overseeing the operation of the government, applying market principles in all government and can collaborate more economic decisions, and enhancing accountability robustly with state entities in their operations by enlarging space for people’s participation and in the delivery of public goods. 358 VIETNAM 2035 Modernizing institutions in Vietnam will only what is allowed by law. And human require building a rule-of-law state that dem- rights can be circumscribed only in com- onstrates universal values. While there is pelling cases for public interest, as stipu- broad debate about the elements constituting lated by law. the rule of law, four general principles are 3. An effective separation of powers will commonly recognized as characterizing a sys- provide for checks and balances within tem of rule of law: accountability of govern- the state. The executive, legislative, and ment actors and private actors under the law; judicial branches shall have the capacity transparency, predictability, fairness, and and authority to carry out their duties equal application to all; a process for prepara- while providing for accountability and tion of laws that is accessible, fair, and effi- overall effectiveness of the state. cient; and enforcement that is timely and 4. Rule of law will be enforced in every carried out by sufficiently competent, well- interaction of the state with society and resourced, ethical, and independent represen- the market. All actions, including those of tatives who reflect the makeup of the the state or its representatives, will be sub- communities they serve (World Justice Project ject to review by independent, unbiased 2014). Achieving these general principles in courts that are sufficiently empowered to Vietnam requires addressing a set of specific carry out this function and enjoy the con- issues with the present operations of the state. fidence of Vietnam’s citizens and others Changes in the way the state approaches its who have relations with Vietnam. In par- operations will provide a framework for full ticular, individual property rights are to be application of the rule of law, and condition ensured. the development of specific institutions to 5. Individual accountability of officials will achieve the vision for 2035 laid out below. In be defined and upheld. Individual account- the context of Vietnam, the following eight ability of public servants is to be clearly requirements are crucial to the development of determined, with a corresponding reward a rule of law state with a vision toward 2035: or sanction for individual performance; there shall be progressively higher levels of 1. Full implementation of the principle of accountability for higher-level officials. people’s sovereignty in the state’s organi- 6. The legal system will be fair, transparent, zations and operations will be ensured. practical, uniform, stable, accessible, The state must be truly of the people, by effective, efficient, and predictable. Laws the people, and for the people, serving the will be a means to help the state govern needs of the people and public interest and a tool for citizens to control the exer- and being held accountable for this. The cise of state power. enforcement of state power is for the pub- 7. The roles of central and subnational gov- lic interest, within the legal framework. ernments will be clearly determined by The state will be clean, strong, and effec- law, focusing on advancing the autonomy tively prevent and control corruption as and accountability of local governments well as manifestations of state capture. and gradually implementing the principle This will guarantee the legitimacy of the of local self-government, especially at state. grassroots levels. 2. State power must be clearly delineated by 8. International agreements will be fully law. All functions, powers, and roles of observed. The state will actively partici- the state and its agencies must be gov- pate in global governance mechanisms to erned by law, and any arbitrary actions by contribute to common world development state agencies or officials are precluded. and protect national interests. Vietnam Implementing the principle that citizens will be a reliable friend and partner and a can do everything not prohibited by law, responsible member of the international the state agencies and their officials can do community. BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 359 Building a Rationally Organized State horizontal fragmentation (figure 7.12). The with a Meritocratic Bureaucracy main functions include strategic planning, coordinating and monitoring performance, Tackling fragmentation and ensuring accountability. The building Reducing public sector fragmentation is inte- blocks of a coherent national bureaucracy are gral to modernization. Eliminating overlap- rationalization of the personnel system, ping jurisdictions will reduce vertical and improved management information systems, horizontal fragmentation and decrease the and public finance reforms. These compo- scope to bargain and foot-drag in the bureau- nents link concrete objectives to the resources cracy. A guiding principle should be to see needed to achieve them and the performance that responsibility and authority for public of responsible administrators. Results-based sector functions are assigned to a single management methods and robust information agency. Delegation of tasks between and systems can deliver substantial improvements among levels of government will continue, to evidence-based policy formulation and but through specified mechanisms and on the implementation. A more effective center of basis of objective performance targets. government function does not mean a reversal A more coherent approach will address of decentralization. It should yield greater outstanding issues in Vietnam’s decentraliza- clarity on the roles and tasks assigned to sub- tion policies. Clearer functional assignments national government agencies and their rela- should lead to four corresponding adjust- tionship to the execution of national policies. ments in the intergovernmental financial Clear responsibilities increase accountability framework. First, the nested budgeting sys- while preserving the authority of decentral- tem should be reformed to achieve closer ized decision makers to be responsive to the links between financing and functional citizen’s needs. Hiring based on competencies, responsibilities. To raise accountability for competitive compensation, and rigorous per- performance, these links should be made formance evaluation increases accountability transparent to citizens and businesses in a and reduces scope for corruption, while care- given locality and to the central government ful economic assessment of policy impact nar- and the oversight agencies, such as the rows the scope for self-interested behavior Supreme Audit. Second, a closer match and improves the quality of regulation. between functions and finances should then The ability of the government to manage inform capital investment plans, providing its resources efficiently and effectively is inte- greater discipline in sectors where subnational gral to the state’s overall effectiveness. governments spend and making more explicit responsibility for the recurrent costs that FIGURE 7.12 A strengthened center will serve Vietnam well in ensue when assets are built. Third, increased streamlining resources and operations financial management accountability at the subnational levels should be combined with Center of government policy incentives to increase own-source rev- enues at the local level. In addition to provid- 1. Managing 2. Coordinating 3. Monitoring 4. Managing the 5. Communicating and improving politics of ing greater authority with greater clarity in strategically policy performance policies results and accountability responsibilities for services, building a stron- ger direct link between subnational taxes and Producing a government outputs helps strengthen account- Planning the government's Chairing interministerial Monitoring progress in the Leading the political coherent ability. Finally, the capacity of the central key priorities committees for priorities and negotiations with narrative of the government's to ensure the design and intervening to other actors to government to monitor performance of sub- coherent, implementation enable ensure the actions and achievements national governments and to coordinate actionable, and measurable of programs in cross-cutting performance and unblock approval of the government's and being among them would need to be enhanced. goals issues obstacles plan accountable to the public A strengthened center of government will ̦ ̦ ̦ ̦ serve Vietnam well in addressing vertical and Source: Adapted from Duong and Cuo ng 2015. 360 VIETNAM 2035 Vietnam has a comprehensive legal frame- regulatory functions should be kept separate work and a record of implementing essential from ownership and management to promote public financial management functions: fiscal competition and accountability. Fifth, SOEs controls and commitment limits, a budgeting should be encouraged to list on international process and a corresponding set of institu- stock markets that set high compliance tions, and basic transparency measures. standards. Achieving stronger links between government spending and clearly defined results will be a Meritocracy in public administration challenge. Financial systems that provide Vietnam will need to strengthen meritoc- timely and reliable financial information will racy and ensure optimal integrity in public be essential. A comprehensive Government administration through a rigorous position- Financial Management Information Platform based system, salary reform, and organiza- is needed to achieve proper integration of tional reform. The Government’s Public related databases for revenues, expenditures, Administration Reform (PAR) Master Program assets, and liabilities—as is the develop- up to 2020 sets out a vision of a capable public ment of analytical tools for consolidated sector that supports the market economy, citi- statements. zens’ rights, and access to quality services. The Managing state assets well is of particular PAR Master Program is structured around six importance—including SOEs and government interlinked reform areas: institutions, public shares in equitized firms. First, the state, act- finance, administrative procedures, organiza- ing on behalf of the people, must responsibly tion of government, government systems— deploy its assets to serve public purposes, including e-governance—and human from maximizing financial benefit and man- resources—including performance manage- aging associated risks to analyzing the public ment and accountability. The program con- goods rationale behind continued state own- nects public sector functions to the positions ership (and resulting influence over manage- needed, civil service recruitment, promotion, ment) in any particular enterprise. Different compensation, and performance evaluation. countries have adopted varying institutional Key features include open recruitment for forms including decentralized control through civil service positions, separation of political line agencies, centralization in one govern- and administrative spheres, modernization of ment agency, and various special-purpose compensation, improved talent management, entities (to contract out asset management). and a robust performance appraisal system What is important is ensuring that basic pol- (box 7.2). icy objectives are agreed, executed, and An institutional approach will be needed widely communicated. The rationale for state to counter the vested interests in the current enterprises needs to be clearly articulated as a system and ingrain the principle of meritoc- guide to investment and divestiture of state racy into the public service. There will be assets.19 Second, financial oversight must be resistance to change because the control of rigorous to manage risk and ensure proper recruitment, selection, and promotion often use of resources managed by SOEs. This holds the key to redistributing power and requires detailed financial information, rents controlled by the state. And that very including adoption and enforcement of inter- power, constituting a rent in its own right, national financial reporting standards. Third, triggers informal payments and patronage appointment of board members (insofar as (and feeding into the ethos that factors other the state can control this) should be competi- than merit drive human resource decisions). tive, according to transparent criteria includ- While overcoming this resistance will neces- ing technical competence and independence. sarily take a long time, the many public ser- Boards should review corporate strategy, vants moving toward retirement present monitor implementation, review audits, and Vietnam with an opportunity to revitalize the take action to redress issues. Fourth, civil service (table 7.1). BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 361 BOX 7.2 Other countries’ experience in managing talent in the civil service Talent management concerns recruiting, selecting, and 1970s. MITI recruited top graduates from the training, developing, and retaining public employees. most prestigious universities. Applicants had to pass A good example of a deliberate strategy is the Ministry difficult civil service entrance exams. In Southeast of International Trade and Industry (MITI) in Japan, Asia, Thailand, Singapore, and Malaysia have crafted running Japanese industrial policy well in the 1960s more general frameworks to manage talent. Singapore Malaysia Thailand Talent Open recruitment (new graduates Open recruitment (new graduates Open recruitment (new graduates) recruitment and midcareer entrants) and midcareer entrants) Preservice bonded scholarships Preservice bonded Green harvesting Preservice bonded scholarships Scouting/headhunting scholarships Public Service Scouting/headhunting Executive Development Program Recruitment for administrative and diplomatic service Talent Allocated training hours Allocated training hours Allocated training hours development Roadmaps for special schemes Administrative and High-potential performance system (management associates, diplomatic scheme, scheme administrative service, and high high-performing- New-wave-leadership potential schemes) officer scheme development Talent Competitive salaries pegged to Base pay coupled with types of Fast-stream track retention market pay structure allowances Performance-based bonus payouts Performance-based system Performance-based promotions Performance-based promotions High-pay structure for Higher pay (about 1 percent higher for administrative officers Incremental fixed-pay structure high-potential officers) Opportunities for postgraduate Perks in health care and pension studies schemes TABLE 7.1 A demographic snapshot of the civil from bribery, patronage, and other types service of rent seeking. Percent • A separation of political and administrative Age 2005 2012 spheres to reset the business climate—for Younger than 30 years 23.8 18.0 instance, arm’s-length relations between Between 30 and 50 years 65.6 60.0 the government and the Communist Party. Older than 50 years 10.6 22.0 • An internal code of conduct to recruit, Source: Phuc 2015. select, and promote (as embedded in the 2008 Civil Service Law) that is vested in an New systems and responsibilities need to be agency reporting to the highest political lev- established to begin changing the incentives in els and that the National Assembly can hold the public service. These should include: accountable through audits and queries. • Supplementing stronger central policy and • A legal framework to promote profes- monitoring capacity with more devolved sional criteria and to safeguard the recruit- personnel management, relying on a ment, selection, and promotion processes running-cost system in which managers 362 VIETNAM 2035 choose their own staff mix to deliver pro- National Assembly will realize in full its right grams in a hard budget constraint and to of legislative initiative. Deputies will be held ensure due process. accountable to their constituents through reg- • A sequenced hiring process to foster scru- ular elections and through public forums held tiny and fairness—with clear job descrip- at the constituency level. tions and required knowledge and skills; a By 2035 the judiciary will be autonomous standard system to advertise and apply; from the executive and will implement its procedures to evaluate, select, appoint, and responsibilities in a professional and responsi- promote candidates; and required notifica- ble manner. The selection and promotion of tion of results to all candidates. judges and other personnel will be conducted by a judicial oversight body composed of Accountability within government members primarily drawn from the judiciary Independence of the legislature and judiciary itself and independent of the executive. will give rise to greater accountability and per- Selection of judges will be carried out on the formance. Much of Vietnam’s progress in the basis of national examinations, drawing on a past 30 years was based on informal consensus- pool of experienced legal practitioners. Court building within decision-making structures. By administration—clerical staffing, maintaining 2035 consensus building will be formalized in courthouses, financial management, and case state institutions. Stronger checks and balances tracking and management—will continue to will increase the accountability of state agen- be performed by the executive. But the judi- cies and their officials, primarily in the execu- ciary will be empowered to take action against tive. The scope for self-interested behavior staff if administrative underperformance hin- among government officials will be reduced ders the judicial process. At the same time, a and a clearer separation will be achieved long-term, large-scale program to train judges between government and business. on ethics, case management, and substantive By 2035 the National Assembly will realize law (particularly relating to sophisticated mar- its constitutional role as the supreme repre- ket transactions) will build professionalism sentative of the people, exercising legislative within the judiciary. Rigorous laws and and oversight functions. Internal ruling party enforcement mechanisms to ensure ethical mechanisms help to fill this gap at present. As conduct and counter conflict of interest among the country modernizes, the National judges will be put in place. These measures Assembly will provide an independent check will provide for a judiciary that is capable of on executive power. It will be composed of carrying out key functions in the society and full-time deputies who, with the support of in the economy: protection of human and civil technical experts, take responsibility to draft, rights, resolution of commercial and other dis- debate, and enact laws while preparing bud- putes, and provision of a check on the powers gets and monitoring the government’s perfor- of the executive and legislature. In successfully mance. National Assembly oversight, as the carrying out these functions, the judiciary can representative chamber of the people, will be expected to encourage greater confidence encompass all the operations of government. of the citizens and the firms in its capacity to As a step toward that goal, consideration arbitrate fairly among interests. should be given to increasing the number of Collective responsibility mechanisms need full-time deputies (that is, not having regular to change to ones of individual responsibility, employment in executive bodies) in the particularly in the case of leadership posi- National Assembly to over half in the next tions. A key constraint in public administra- sessions. Analytical and technical capacity tion is the lack of mechanisms to hold will be developed in the National Assembly’s individuals accountable, and the lack of clar- specialized thematic committees. It will draw ity in handling individual and collective on research and analysis conducted by schol- responsibilities, as well as political and legal ars and other independent experts. The accountability. Rigorous mechanisms should BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 363 be put in place to sanction policy makers who property rights and transforming the role of commit mistakes and cause severe damage to the state in the economy from a producer to a society. It is necessary to reform policy- regulator and facilitator. making processes to avoid getting views of Addressing commercialization of the public individuals and agencies on matters outside of sector must be made a priority if Vietnam is to their sphere of responsibility. It is also very modernize its government institutions. important to strengthen administrative disci- Agencies that are directly or indirectly involved pline in the public service sector. in economic regulation should not be permit- Vietnam should seek to keep pace with its ted to engage in business of any kind. This middle-income peers in using information avoids the appearance and reality of conflicts and communications technology (ICT) to of interest. More difficult to observe, and enhance the effectiveness of the state through therefore to control, is the exercise of state relatively low-cost mechanisms to monitor power for state-connected companies and indi- compliance. Information generated through viduals that do not have an overt relationship automation can be harnessed to improve the with the state. Powerful conglomerates have evidence base to plan and set policy. ICT emerged in recent years that have benefitted tools can make possible more efficient com- from state connections. Because of their depen- munication and transactions between govern- dence on the government, they do not repre- ment agencies, businesses, and citizens. The sent genuinely private businesses that have an efficiency and probity of transactions involv- interest in impartial regulation and the distri- ing government agencies can be improved bution of state benefits based on fair and trans- through e-filing of key documents such as tax parent criteria. Creating the space for a declarations. Digital identification systems genuinely independent private sector to flour- enable government services to track recipients ish will require political commitment at the more accurately and efficiently, leading to highest levels of government and reduced state better coverage and less leakage. ICT is also control over business and professional organi- used extensively to reflect feedback from the zations, including the Vietnam Chamber of people on activities performed by the state— Commerce and Industry. Allowing these orga- for example, the level of service satisfaction. nizations to operate as authentic representa- User-feedback mechanisms help improve the tives of independent business interests would public’s confidence in the ability of the state give voice to the domestic private sector and to serve the people and businesses. enable these groups to play a more proactive role in monitoring government policy. Political leadership will need to better Applying Market Rationality to enforce the boundary between the public and Economic Policy Making the private sector. Over the long term, Vietnam aspires to be a fully fledged market accountability mechanisms and greater trans- economy and to be recognized as such by parency can be expected to create an environ- international partners. The legal framework ment that lessens the opportunities for, and for a market economy has been put in place impact of, the use of public power for private incrementally, from amendments to the Law gain. In the short term greater discipline is on Enterprise in 1999, 2005, and 2014 to needed in policing that boundary to ensure enshrining the principle of equal treatment of that rents are not captured solely for private all sectors of the economy in the 2013 benefit. Formal mechanisms to identify and Constitution. By 2035 Vietnam aspires to enforce conflict-of-interest provisions for having a level playing field among economic public officials are an important step in actors and a clear separation between the strengthening this boundary. government’s regulatory and commercial By 2035 the state’s main role in the econ- activities. This will involve changes in two omy will be to facilitate the development and major respects: providing for the security of smooth functioning of markets and to 364 VIETNAM 2035 provide public goods. The state’s portfolio of property, rights held over the property, and SOEs will be substantially reduced, and will any restrictions on use—should be made focus on enterprises in markets deemed to be available to the public. Land-use planning natural monopolies or involved in the provi- should be fully open to public consultation sion of public goods such as energy, health and changes in land-use regimes should be and educational institutions, and manage- carried out in a planned fashion with a lead ment of transportation infrastructure. The time for public review, rather than ad hoc. state will progressively divest its holdings in Oversight mechanisms should be strength- enterprises in which it can demonstrate no ened. Finally, rules on government acquisition public interest. Commercial SOEs will be run of land should be strengthened to ensure that on a fully commercial basis, meaning that citizens can only be dispossessed of their land they will be subject to the same market disci- to serve a demonstrated public need. pline as private sector entities, with no Compensation rates should be related to mar- privileges—regulatory exemptions, subsidies, ket prices. Looking ahead to 2035, additional or preferential treatment in state contracting. strengthening of the legal framework for SOEs not involved with public goods provi- property rights may include provision of full, sion will be allowed to fail. The state will seek fee-simple ownership rights. In addition, com- to manage its ownership stake though profes- mercial investments should be acquired to sional fund-management structures. This will obtain land through voluntary transactions provide careful monitoring of fiscal perfor- rather than involving the state. mance and risks to raise the effectiveness in The state will have an active policy of pro- the use of state assets. moting the innovation and skills needed for A successful market is built on security of the Vietnam of tomorrow. The state will act property rights, especially to land. Clarity in to match demand for different skills in defining property rights and impartial and Vietnam’s changing economy with the provi- rigorous enforcement reduce investment risks sion of tertiary and vocational training. It will and promote longer time horizons and there- maintain a National Skills Council to track fore the potential for more capital- and the changing skill demands and to enact pro- technology-intensive ventures. Ensuring the grams or to contract with the private sector to broad distribution of property rights, includ- meet demand. Greater autonomy for tertiary ing to disadvantaged segments of the popula- education institutions and stronger links tion, promotes social inclusion and reduces between universities and the private sector economic exploitation. Confidence in prop- would help achieve a better match between erty markets increases the number and density the demand and supply of skills. The state of transactions, resulting in more accurate will also finance and facilitate private invest- pricing and lower costs. One of the most ment in research and development activities important roles of the state is thus to enforce to promote innovation in the economy. the rules of the game, with regard to the array of ownership rights, including possession, Enhancing State Accountability to the use, and disposition. People Reforms to protect the security of property rights should focus on transparency in assign- There is a conceptual link between corruption ing and converting land-use rights. Reducing and the combination of monopoly power and rent-seeking opportunities linked to the con- discretionary authority without accountabil- version of land-use rights from agricultural to ity.20 Following this simple formulation, con- commercial and residential use will be a chal- trolling corruption should consider reducing lenge. Publication of information on land monopoly over power and instances where transactions, including auctions, should be there is bureaucratic discretion without suffi- mandatory. Information from property cient accountability. Strengthening checks cadasters—including the description of each and balances among the branches of the state BUILDING MODERN INSTITUTIONS FOR AN EFFEC TIVE STATE 365 and between the national and subnational for sharp improvements to help develop inde- governments as mentioned above will help pendent civil society organizations. It is likely reduce monopoly power and increase to be adopted in the near future. accountability. Improving transparency, pro- Stronger support for the participation of tecting the right to information by the people, citizens’ organizations in decision making is can be expected to result in strengthened needed. The Law on Promulgation of Legal accountability of state institutions to the Normative Documents provides a starting people. point for participation and access to informa- Establishing a right to information is essen- tion. Yet the mechanisms to realize the law’s tial to create more space and opportunity for objectives are not in place. In addition to the public to participate meaningfully in the information, specific procedures to channel affairs of state. Two major reforms likely to input from citizens’ organizations into be adopted soon in Vietnam will contribute decision making and feedback on government to democratic society’s development. First, performance are needed. Consultative mecha- Vietnam is on the threshold of passing a Right nisms and public access to deliberative meet- to Access to Information Law. This will pro- ings of governments at all levels should be vide a powerful tool to open state institutions enhanced. Social, cultural, and professional to greater participation and public account- societies can contribute in important ways to ability. It is a well-established principle in the review of draft legislation, the impact of economics that restricting access to informa- regulations, policy formulation and imple- tion imposes costs on society, as information mentation, and the delivery of public asymmetries give rise to market distortions. services. Analogously, unequal access to information Building modern institutions is a long- has negative social and political consequences, term, complex endeavor, but there are steps such as reducing levels of trust and raising the in the short to medium term that Vietnam costs of cooperation. Corruption also thrives can undertake to move toward the aspira- when information is costly or difficult to tional vision outlined above. Having a clear obtain. A basic principle is that information vision for what Vietnam wants to look like in should be publicly available unless there is a 2035 is important as a reference point for a compelling rationale for nondisclosure, such program of reforms. But a vision is not a plan as national security or privacy concerns. of action, nor is it necessarily a clear guide to Improvements to the enabling environ- the steps to be taken since institutional ment for citizens’ organizations are also under improvement almost never occurs in a linear consideration. A stronger legal framework is sequence toward desired results. Political needed to allow citizens to form organiza- realities, the interplay of interests among tions that enrich the life of the community or stakeholders, external factors, and the com- that address the interests and concerns of plexity of institutional change mean that suc- their members. Limits on the ability of people cess rarely lies simply in charting a straight to form voluntary organizations increases the path toward an end goal of a substantially burden on government since state agencies different institutional framework. Identifying move to fill the gap left by their absence. For the steps that should be undertaken now to example, local businesses can form voluntary reach the goals for 2035 needs to build on groups to keep their neighborhoods clean, analysis of present weaknesses, prioritization manage public spaces, and so forth. of what changes are important in terms of Professional organizations can work to working toward the desired end goal, as well uphold standards of service and inform the as sensitivity to what is likely to work given government of inconsistencies in regulations the present balance of interests. or enforcement. Religious groups can help Consideration of these factors combined increase access to education and health ser- with the preceding analysis and vision-setting vices. The draft Law on Associations provides point to three types of steps that Vietnam can 366 VIETNAM 2035 consider in the short to medium term to move 1987, to June 30, 2015), is 8 times more than toward developing modern institutions: the number of laws and ordinances issued in 41 years before the Ð ổi M ới . Specifically, 1. Reforms to improve the effectiveness of between September 2, 1945, and December 30, 1986, Vietnam enacted 63 laws and ordi- key state structures nances, while the number is 524 between 2. Changes in incentives (reward and sanc- January 1, 1987, and June 30, 2015. tion mechanisms) to improve the account- 6. That is evident in the laws on legal document ability, discipline, and behavioral culture promulgation issued in 2008 and 2015. of different actors in the state–society rela- 7. Through direct relationships with SOEs and tionship, above all leaders and public ser- government officials. vants therein 8. A recent joint study by the Central Institute for 3. Mechanisms to manage the shifting rela- Economic Management and the World Bank tionship between the state and the private (CIEM and World Bank 2015). sector and the associated rents to ensure 9. Dunleavy and Rhodes (1990) define the core broader goals of continued legitimacy of executive in this functional way: “all those organizations and structures which primarily the state and the promotion of productivity- serve to pull together and integrate central gov- enhancing behavior ernment policies, or act as final arbiters within the executive of conflicts between different ele- ments of the government machine.” Notes 10. See Nguyen and Pincus 2011. 1. There is widespread consensus around the 11. For a full discussion, see World Bank 2015b. importance of institutions to achieving sus- 12. Ministry of Justice, Monitoring Report on Law tained growth. See, for instance, North 1990, Implementation of 2014, numbered 64/ Acemoglu and Robinson 2012, and Fukuyama BC-BTP, dated March 18, 2015. 2011. 13. For instance, the introduction of meritocracy 2. The six dimensions of governance are voice and in Scandinavia emerged as the absolute kings accountability; political stability and absence of had an incentive to establish a bureaucracy violence; government effectiveness; regulatory that would be rule-based, capable, and inde- quality; rule of law; and control of corruption. pendent from anything but the absolute mon- See http://info.worldbank.org/governance/wgi arch, and that could control the nobility and /index.aspx#home for more information. the landed gentry. In the Republic of Korea, 3. Institutional economists have developed cate- the legitimacy of the state depended on a capa- gories of countries as either “open access ble and neutral public service when the meri- orders” or “limited access orders,” with the tocracy gained a foothold in the 1980s. former corresponding to states where mean- 14. For example, while the Company Law of 1990 ingful participation in the economy and society requires that a person, to start a business, go is broad-based. Acemoglu and Robinson through multiple steps and months to complete (2012) identify countries’ political and eco- the procedures, the Enterprise Law of 2014 nomic institutions as either inclusive or exclu- stipulates that an individual application for sive, and stress the interaction of both types of starting up a business has to be processed institutions as well as political power. They within 3 days. argue that inclusiveness of both political and 15. In 2010, 87 percent of revenue associated with economic institutions is a necessary condition land came from use-right allocations (World for sustained prosperity. Bank 2014). 4. The number of government agencies was 16. In 2006 the court system at all levels received reduced from 70 before the Ðổi Mới to 30 cur- and handled 63,079 civil cases, 64,058 family rently (including 22 ministerial-level agencies and marriage cases, and 1,979 economic cases. and 8 government agencies). In 2013 the numbers increased to 94,963, 5. The number of laws and ordinances passed by 145,797, and 14,767, respectively. the National Assembly, the National 17. See Markussen 2015. Assembly’s Standing Committee promulgated 18. For the global evidence see for example, the clas- in the 29 years of Ðổi Mới (from January 1, sic study by Schmitter and Lehmbruch (1979). 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