World Bank - Vietnam 2035 Towards Prosperity, Creativity, Equity and Democracy, March 2016

In conjunction with the government, the World Bank has recently concluded a study on the policies Vietnam will need to follow if it is to achieve its objectives of developing into a modern, industrialised nation in the period to 2035. A draft of its conclusions was posted to the World Bank’s website at the end of February.

As a suggestion for what defines a “modern, industrialised nation”, the World Bank proposes a per capita GDP of $18,000 (roughly equivalent to Malaysia in 2010), a majority of the population living in urban areas, industry and services comprising at least 90% of GDP and 70% of employment, a private sector share of GDP of at least 80% and a score of at least 70 on the UN’s Human Development Index.

To meet the first target, per capita GDP would need to grow by at least 6% a year, more than the 5.5% achieved between 1990 and 2014 and well above the 3.8% average for all middle income economies over the same period.

Urbanisation would need to rise by 2% per annum and industry would need to grow at twice the pace of agriculture. History suggests these are achievable but, with the public sector stuck at around 1/3 of GDP since the Doi Moi reforms, the World Bank sees a need for “a departure from the past” if the private sector’s participation in the economy is to meet the targeted level. It also sees challenges in the areas of environmental sustainability, social inclusion and state institutions.

A link to the World Bank’s press release on the Vietnam 2035 report follows. This also provides an indirect link to the full report, which is currently still in draft form. The final report is expected to become available in May 2016.

http://www.worldbank.org/en/news/press-release/2016/02/23/new-report-lays-out-path-for-vietnam-to-reach-upper-middle-income-status-in-20-years

Three Development Pillars

The World Bank advocates three “pillars” on which to build Vietnam’s longer-term economic and social development:

• balancing economic prosperity with environmental sustainability
• promoting equity and social inclusion
• bolstering the state’s capacity and accountability

(i) Balancing Economic Prosperity with Environmental Sustainability

A key near term challenge is Vietnam’s stagnating productivity. Since the 1990’s, the World Bank believes growth in output per worker has declined from a 5% to 7% range to a 3% to 5% range. It believes that labour productivity has actually declined in mining, public utilities, construction, and finance – all sectors in which SOEs have kept a dominant role. It believes that the productivity of private enterprises “gives even more cause for concern” – with asset productivity, which was ahead of China’s in the early 2000’s, now standing at less than half China’s level, on average.

In particular, the World Bank sees three key distortions in the economy at work:

(a) the commercialization of state institutions, with the effect that those with connections dominate and determine business viability
(b) unevenness between the liberalization of product markets, which have integrated well with the global economy, and factor markets – reflected in the inefficient allocation of land and capital owing to the “influence of arbitrary administrative decisions and connections”
(c) weaknesses in the institutions responsible for protecting private property rights and ensuring free and fair competition

In terms of reform, the World Bank advocates the following:

Near term

• enforcing competition policies, ensuring the security of property rights, restructuring the SOE sector and leveling the playing field for all enterprises, public and private, domestic and foreign
• financial sector reform: improvements in regulatory supervision, NPL resolution, capital strengthening, connected lending; deepening capital markets and contractual savings institutions such as insurance
• developing land markets: removing constraints on the market for primary and secondary land use rights

Medium term

• modernizing and commercialising agriculture: improving labour productivity, value addition and supply-chain organization, and reducing central-planning
• leveraging external trade opportunities: regulatory reforms in services (eg reductions in foreign ownership restrictions in finance, telecoms, infrastructure), reducing the import content of manufactured exports by deepening the participation of domestic suppliers (especially the private sector), improving connectivity (trade facilitation, transport corridors, labour market flexibility)
• strengthening institutions for macroeconomic management, monetary policy and budgetary spending

Long term

• fostering learning and innovation: investments in education and training, support for dynamic firms to provide demand for innovation, reforms in R&D and in connecting research to the private sector
• using urbanization to power the drive to modernity and industrialization: developing private sector firm clusters to integrate into global value chains, reducing the fragmentation in urban expansion and better connecting it to infrastructure
• dealing with environmental challenges: deteriorating natural resources (land degradation, over fishing, use of fertilisers and pesticides), addressing and deteriorating water and air quality, addressing Vietnam’s vulnerability to climate change, reducing the intensity of energy consumption and increasing the use of renewables

(ii). Equity and Social Inclusion

Although Vietnam has channeled substantial resources to fund pro-equity spending and has avoided much of the spike in inequality experienced in some other fast-growing countries, signs of growing inequality are emerging.

Looking forward, Vietnam faces a dual agenda: one unfinished, for equality of opportunity, and one emerging, for a rising middle class and ageing population.

Equality of Opportunity

• ethnic minorities: Vietnam’s 52 ethnic minorities suffer from higher rates of infant mortality and stunting and lower quality of sanitation and education. The World Bank advocates action to address weaknesses in these areas
• people with disabilities: their number will likely increase significantly as the population ages. On paper, Vietnam’s policies are highly inclusive but there are shortcomings in implementation
• urban migrants and the ho khau system: more than 5 million Vietnamese do not have permanent registration and so face difficulties in access to services such as health, schooling, social protection, and utilities, as well as challenges in employment and social connections. The link between service access and permanent registration needs to be weakened further
• gender equity: Vietnam’s performance is generally good, but there is scope for improvement in female participation in business and government leadership roles and in reducing gender discrimination at birth (Vietnam’s 114:100 male to female sex ratio at birth is on a par with China’s and India’s)

The Emerging Agenda for the Rising Middle Class and Ageing Population

By 2035, more than half of Vietnam’s population will be members of the “global middle class” ($15/day consumption in 2011 PPP), with new expectations and challenges:

• education: above lower-secondary levels, Vietnam’s education is “inequitable and mediocre”. The World Bank advocates ending exam-based access to secondary education and opening it to all, whilst improving the quality and relevance of what students learn
• effective labour market institutions: Vietnam should seek to strike a balance between flexible labour regulation that maximizes productivity and “creative destruction”, and formal employment that is equitably compensated. Ideas include proposals to improve industrial relations (independent unions, worker councils and labour-management councils), linking the minimum wage more to productivity and competitiveness, streamlining regulations in employment protection whilst expanding unemployment insurance etc.
• pensions and social safety net: Vietnam is at a demographic turning point – the old-age dependency ratio is expected to rise from 9.6 to 21.7 between 2015 and 2015, and to rise thereafter. Coverage of the current working age population is around 20%. Vietnam intends to raise this to 50% by 2020 “but lacks a viable strategy to achieve this goal.” Policies are required to incentivize informal-sector workers to participate in contributory schemes, to raise retirement ages and remove incentives for early retirement, and to raise pension spending from the 2% to 3% of GDP of the last decade toward 6% to 8%. Reforms  will also be needed in the provision of the social safety net (simplification, better systems for beneficiary identification etc.)
• health system: steps are needed to re-orientate provision from hospitals to primary level facilities, expanding coverage to the 30% that are currently uninsured, and to improve spending efficiency

(iii) A Capable and Accountable State

In Worldwide Governance Indicators, Vietnam does reasonably well on “government effectiveness” and “political stability”.   It does particularly poorly on “voice and accountability” and on “regulatory quality”, which measures perceptions of its ability to implement policies designed at private sector development. On “rule of law” and “control of corruption” it does worse than the average of upper-middle income countries but performs in line with the average of lower-middle income countries.The World Bank sees room for improvement in 3 core areas:

• Commercialisation of State Institutions
  This refers to the emergence of an entrepreneurial business class within, or closely connected to, the state and also to the activities of SOEs in most areas of the economy, including many where the private sector could do a better job. SoEs have consistently been inefficient users of land and capital, often have dominant positions in their sectors and are often supported by subsidies, preferential tax treatment, privileged access to land, finance and government procurement contracts—thus crowding out the development of a genuine private commercial class.
• Excessive Fragmentation of the State
  Horizontal and vertical fragmentation of power has resulted in overlapping mandates, conflicting rules and decisions, and space for interagency bargaining in the bureaucracy. Cohesion in planning is in theory provided by the Communist Party but, in practice, power is fragmented across many agencies and between the centre and the provinces (Vietnam is one of the most fiscally decentralized countries in East Asia, with sub-national governments accounting for more than half of public expenditures and 70% of public investments.) The number of provincial governments (63), is large for a country with a population of 90 million. Almost all of Vietnam’s coastal provinces have their own deep-sea ports, and there are about 260 industrial parks (in most of the 63 provinces)—with combined occupancy running at less than 50 per cent.
• Few Checks and Balances in GovernmentThere are two key areas of constraint on the accountability that can contribute to the state’s effectiveness—weaknesses in the institutions of state and the limited voice and participation of citizens.

The National Assembly is less of a rubber stamp for the executive’s proposals than it used to be, but its role in formulating policy and supervising government is weak. Part-time membership, high rates of turnover between sessions (70% of deputies are new to the current convocation) and conflicts of interest arising from the participation of the leaders of SOEs, are constraints on its professionalization. The People’s councils at the local level suffer from multiple reporting lines to other organisations and their effectiveness is limited. The impartiality of the judiciary is heavily undermined by its dependence on the executive and it has failed to keep up with the development of the market economy.

Vietnam has thousands of citizen organisations and more than a third of the population participate at least in one or another. However, they have limited influence on decision making. Access to information is lacking and there are limits on the independence of the media. A culture of more open public debate on the state’s performance is required.

The World Bank has identified 3 core areas for reform:

• building a rationally organized state with a meritocratic bureaucracy: strengthening the role of the centre in co-ordinating policy across different agencies, reforming centre-local relations and adjusting the fiscal framework to align it better to functional responsibilities, making the civil service more meritocratic and re-organising it to more closely reflect current conditions.
• applying market rationality to economic policy making: enhancing the security of property rights, (incl. publishing information on land transactions, increasing public consultation in land planning), enforcing competition (strengthening the Vietnam Competition Authority, aligning the legal framework with consumer protection), transforming the role of the state in the economy (reducing the number of SOEs, adopting a commercial approach to their budgets, accounting and dividends, strengthening SOE corporate governance, leveling the playing field with private firms.)
• strengthening state accountability: enhancing checks and balances between the executive, legislature and judiciary, enhancing the ability of citizens to hold the state accountable (eg. enabling citizen organisations to participate in decision making, enhancing access to accurate information, providing greater independence for the media.)

Conclusions

Vietnam is at a turning point on its development path. There are tremendous opportunities on offer, as well as major challenges and difficulties. To achieve the 2035 vision, the only viable choice is for the country to carry out a bold program of reforms that is consistent with the three pillars. Without this, Vietnam will find it very hard to avoid the “middle-income trap” and will fall well short of its significant potential.

Current and future generations of Vietnamese people have the strong will, the spirit, and the capacity to implement the reform agenda successfully and to move toward a prosperous, creative, equitable, and democratic Vietnam.