Countries and Regions

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p. 2 of 7 BACK | NEXT Executive Summary I. Development Agenda II. Asian Development Bank Development Experience III. Asian Development Bank Strategy IV. Operational Approach V. Three-Year Assistance Program VI. Performance Monitoring and Evaluation

Country Strategy and Program 2002-2004: Socialist Republic of Viet Nam

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I. Development Agenda

A. Key Features of Viet Nam

1. The Socialist Republic of Viet Nam occupies the eastern part of the Indochina Peninsula. The long coastline, high mountains and broad plains, together with deforestation, have made Viet Nam vulnerable to flooding associated with typhoons and torrential rains. The general topographic dichotomy of highland and lowland regions has a corresponding ethno-linguistic distinction: the lowlands generally have been occupied by the majority Kinh, while the uplands are home to diverse ethnic groups that differ culturally and linguistically from the Kinh. With its long coastline, Viet Nam is rich in marine resources, though the fish stock has been overexploited. Forestry resources, once significant, are being depleted. Mineral wealth is diverse and includes anthracite coal, phosphate, iron ore, lead, zinc, and bauxite. Oil deposits were discovered off Viet Nam's southern coast in the 1980s.

2. The population of Viet Nam according to the 2000 census was estimated at 77.7 million. The majority (76 percent) live in rural areas. Average annual population growth during 1996-2000 was estimated at 1.64 percent, down from 1.72 percent during 1991-1995. In recent decades, there have been resettlement programs for ethnic minorities in the highlands, and voluntary migration from the lowlands to the uplands. In addition, there has been a steady increase in migration from rural to urban areas.

3. Despite its low per capita gross domestic product (GDP), Viet Nam has achieved notable success in improving social indicators over the past decade, including infant and child mortality (reduced by 17 percent), maternal mortality (reduced by 50 percent), primary school enrollment (above 90 percent for both boys and girls), and adult literacy (83 percent). About two fifths of the population are poor, with lower education and health levels than the nonpoor.

4. Doi moi (renovation), adopted in 1986, launched Viet Nam's transition from a centrally planned economic system to a multisector socialist-oriented market economy. As with other developing countries, the economy is also in structural transformation. Agriculture's share in GDP is declining, but the sector still accounts for the largest share of employment. The primary agricultural areas are the Red River and the Mekong River deltas. Rice is the principal crop but agricultural diversification is taking place. Viet Nam has gone from being a rice importer to becoming the second largest rice exporter in the world. Coffee and tea cultivation have expanded rapidly in the Central Highlands. The expansion of the industry and services sectors has been concentrated in urban areas. Light manufacturing industries, including textiles and footwear, are expanding but significant untapped potential remains. The services sector is diverse, ranging from self-employment in micro-enterprises such as street food vending, small-scale trade, and transport to tourism and the slowly emerging financial and business services.

B. Current Political, Macroeconomic, and Social Trends

5. Political Trends. The Congress of the Communist Party of Viet Nam (CPV), held on 19-22 April 2001, elected a 150-member central committee with a five-year term. A new General Secretary of the CPV and a 15-member political bureau were subsequently elected. The 10-year Socioeconomic Development Strategy 2001-2010 (SEDS), approved by the Ninth Congress of the CPV in April 2001, confirmed the commitment to continuing reform and recognized the need for an evolving multisector economy that includes the private sector. It also envisaged that the state would continue to play a leading role in strategic activities. Viet Nam's collective decision-making style tends to promote slow and deliberate change, without sharp policy swings.

6. Macroeconomic Trends. Viet Nam's economic performance over the past decade has generally been strong. During 1992-1997, GDP grew at an average annual rate of 8.8 percent. The high growth period was followed by two years of economic slowdown during 1998-1999 when the average annual GDP growth rate fell by half to 4.6 percent. A rebound started in 2000, but the deepening global economic slowdown has dampened prospects for a full recovery in the short term. The industry and services sectors were the main drivers of growth until 1998 and bore the brunt of the economic slowdown in 1998-1999. The strong recovery in industrial growth in 2000 has since moderated, reflecting slackening domestic demand and more modest growth in exports. Sizable foreign direct investment (FDI) inflows in the first half of the 1990s boosted investment growth. They peaked even before the regional crisis, and further decelerated markedly during the economic slowdown. This is in part due to investors' perceptions that the cost of doing business in Viet Nam is high. However, prudent macroeconomic management has (i) kept inflation in check; (ii) maintained fiscal deficits within manageable limits, although the quality of fiscal adjustment needs improvement;¹ (iii) brought high current account deficits down; and (iv) set external debt accumulation on a more sustainable path. In recent months, the nominal exchange rate has been allowed to depreciate at a faster rate, but the real effective exchange rate has appreciated as a result of stronger depreciation in partner countries. Viet Nam remains vulnerable to external shocks because the relatively concentrated export base with dependence on crude oil and agricultural commodity exports, leaves it exposed to volatility in world commodity prices. Also, the regional concentration of its sources of FDI makes it dependent on the growth outlook of its regional partners.

7. Social Trends. Migration to urban areas has been accompanied by higher unemployment rates. Characteristics of longer established market economies, such as fluctuating unemployment and labor disputes, are becoming more common in Viet Nam, since life-time employment in state-owned enterprises (SOEs) is no longer guaranteed and layoffs are more common. According to the latest figures released by the Ministry of Labor, Invalids and Social Affairs (MOLISA), the urban unemployment rate now stands at 6.3 percent compared to 6.5 percent in 2000. The recently released National Labor Plan calls for bringing down the urban unemployment rate further to 5.6 percent and reducing rural underemployment.

C. Current Development

1. Poverty Situation²

8. Viet Nam's record in reducing poverty during the 1990s was impressive. The proportion of the population below the total poverty line dropped from 58.1 percent in 1992-1993 to 37.4 percent in 1998, while the proportion below the food poverty declined from 25 percent to 15 percent over the same period. Although significant, the gains in poverty reduction are fragile, since a significant proportion of the population who were just below the poverty line in 1993 had barely crossed it by 1998. These near-poor remain vulnerable to shocks that could push them back below the poverty line. Poverty is now more concentrated in rural areas, where around 94 percent of Viet Nam's poor live. Although poverty has declined in both rural and urban areas, the incidence of rural poverty (45 percent) is significantly higher than urban poverty (15 percent). Further, the depth of poverty,³ as measured by the poverty gap index, is much worse in rural areas than in urban areas, and rural-urban gaps as measured by growth in real consumption expenditures have widened. Urban poverty, which is underestimated in official figures that do not include unregistered migrants, has come to be associated with unemployment and low productive activities in the informal services sector. Poverty has declined in all seven regions of Viet Nam but at different rates. The regions with the highest poverty incidence are the Northern Uplands (59 percent), Central Highlands (52 percent), and North Central Coast (48 percent). The lowest incidence of poverty is in the Southeast and Red River Delta regions. Inequality has increased marginally in Viet Nam with the Gini coefficient rising from 0.33 percent in 1993 to 0.35 percent in 1998.

9. There are a number of other attributes, besides place of residence, differentiating the poor from the nonpoor. First, the poor have low levels of human capital as measured by educational attainment, with almost half the poor living in households where the head has primary education or less. Second, the poor have weaker health status than the nonpoor, as indicated by higher rates of infant mortality, child malnutrition, and maternal mortality among the poorer quintiles. Third, the occupational status of the household head is an important differentiating attribute: nearly 80 percent of the heads of poor households are engaged in agriculture as their primary occupation. Fourth, poor households are larger and have higher dependency ratios than nonpoor households.

2. Pro-Poor Growth

10. Viet Nam's rapid growth during 1992-1997 translated strongly into poverty reduction. However, the sources of this growth had differing impacts on poverty. The largest contribution to growth came from manufacturing, wholesale and retail trade, and agriculture, in that order. Manufacturing growth was to a large extent generated by relatively capital-intensive industries that provided fewer opportunities to the poor. Also, the employment opportunities accompanying rapid expansion of foreign investment and exports were captured by the better educated nonpoor. The services sector, led by wholesale and retail trade, accounted for over half the incremental employment generated during 1992-1997. While jobs in the formal services sector were captured by the better off, the informal services sector absorbed a significant proportion of labor from agriculture. Agriculture lagged behind the other sectors in terms of contribution to real GDP growth but its impact on poverty reduction has been greater. Reform of land-use rights in the late 1980s significantly improved the incentive framework for small farmers and led to a rapid expansion in agricultural production and incomes. The potential for growth from those early reforms in the agriculture sector has now largely been exploited.

3. Private Sector⁴

11. The domestic private sector, largely made up of very small productive units, is the main source of employment in Viet Nam-nearly 25 percent of the labor force, or up to 86 percent if private agriculture is included. Its performance during the 1990s was mixed. Since registration requirements were eased in 1999, household enterprises have proliferated and the number of formal private enterprises has nearly doubled. However, the expectation that the private nonfarm sector would have a major impact on the overall employment situation has yet to be realized. This is in part because the private sector is concentrated in a few industries, and SOEs still dominate industrial production. The foreign-invested sector, which accounts for over half of exports and 10 percent of GDP, employs less than 1 percent of the workforce. Obstacles to private sector development include contradictory and unevenly enforced legislation, cumbersome and arbitrary administrative and taxation systems, and difficult access to land, credit, business information, and markets. The ability of the banking system to meet the credit needs of the domestic private sector is limited due to the burden of nonperforming loans owed by SOEs. In addition, private enterprises have difficulty in providing collateral for obtaining medium- and long-term loans. In spite of considerable infrastructure needs, private participation in its provision is limited partly due to low tariff levels, incomplete regulations, "bundling" of utilities (specifically power generation, transmission, and distribution), and an uncertain government attitude. The Government has embarked on a program to strengthen and deepen banking reforms, which may take time to complete. The nonbank financial sector, which is currently underdeveloped, could potentially provide more diversified sources of financing to private enterprises.

4. Social Development

12. Viet Nam's impressive growth during the 1990's has by and large benefited all groups, although some groups, such as ethnic minorities and to some extent women, have benefited less than others, despite government action. Viet Nam's rankings in terms of the Human Development Index (HDI)-101 out of 162-and gender-based HDI-89 out of 146-are ahead of its ranking (120) in terms of GDP per capita.⁵ Most education and health indicators have improved over the last decade and compare favorably with other countries at a similar level of per capita income. The following paragraphs discuss these areas in more detail.

13. Education. Viet Nam's high literacy rate has contributed to pro-poor growth, consistent with cross-country evidence of strong synergies between growth and human development. Increases in primary school enrollment to 95 percent in 2000 were accompanied by relatively equal access across income quintiles. However, secondary education enrollment rates, averaging 57 percent nationwide, are still significantly lower for the poor, in part due to problems of access and affordability. Further improvements can be expected as pupils from the lower levels containing large number of students from poorer families eventually move through the system, provided that policies to improve access of the poor are extended to higher grades of education. School enrollment rates for ethnic minorities are rising overall, but remain low for some groups, particularly minorities living in the Central Highlands and Northern Uplands.

14. Health. Health and nutrition have improved steadily, especially for higher income quintiles. As a result, child and maternal mortality and malnutrition, while lower overall, are now more concentrated in poorer households. Episodes of ill health are a significant reason for falling into poverty, due to loss of income during sickness and sale of assets to pay for health care and fees. Government spending and health insurance account for only a small proportion of total outlays on health, and tend to favor the urban nonpoor. Further, there is considerable scope for improving the quality of health services in rural areas. Increasing access of the poor to affordable health services of adequate quality and controlling the spread of HIV/AIDS are the emerging challenges.

15. Social Protection. Poverty fell significantly between 1993 and 1998 but antipoverty and social safety net programs⁶ had a negligible bearing on the outcome.⁷ Low spending, low coverage, and poor targeting of public safety nets have impaired effectiveness in helping the poor escape poverty and reduce their vulnerability to shocks. The Social Insurance Fund, an employment-related program for social insurance payments to formal sector workers, accounts for the largest payments and the most beneficiaries. Per capita transfers are the largest for the urban poor. In rural areas, transfers appear to rise with standards of living-in general, the poor receive less in absolute amounts than the nonpoor.

16. Gender.⁸ Indicators of literacy, school enrollment, labor force, and political participation of women are higher in Viet Nam than in other countries in the Asian region. Female-headed households, however, show lower mean household expenditures than male-headed households. Women who are significantly involved in agricultural activities tend to have limited access to extension services, less control over land, and less access to credit. They are also less involved in the management of small and medium-scale enterprises (SMEs) outside the informal sector activities of trade and handicraft production. Women's illiteracy rates are somewhat higher than men's, and there is a gender gap in secondary education enrollment (particularly at the upper secondary level) and in vocational training. Other areas where gender gaps are evident include the number of hours worked and the type of activities engaged in. Representation in political bodies and voice in public life is still lower than that of men at all levels.

5. Governance

17. Viet Nam has made considerable efforts to adapt its laws, institutions, and financial management mechanisms to the changing needs of a socialist-oriented market economy. A first wave of Public Administration Reform (PAR) reduced the number of ministries and government-subordinated agencies, increased civil service salaries, aimed to improve service delivery, and strengthened decentralization. An anticorruption ordinance was approved in 1998. The state budget was made public in 1999. Governance reforms affecting the poor have included establishing administrative courts and one-stop shops for service delivery; promoting local participation through the 1998 Grassroots Democracy Decree; and opening legal aid centers. Reorientation in government systems and machinery, however, has been partial. Systems designed to function in a centrally planned economy must now deal with the challenges of international integration, the need to facilitate private sector development, and new aspirations of the public for greater participation, transparency, and Government accountability. One related area of concern is corruption, which has thrived because of ambiguous laws and regulations, complex administrative procedures, civil service salaries which remain low despite recent increases, and inadequate control mechanisms. The Government has proposed a systemic approach to reducing corruption, centered on legal, administrative, and civil service reforms, and on strengthening the system for airing and resolving public grievances

6. Cross-Cutting Concerns

a. Environment

18. Natural resource degradation has accelerated over the past decades. The forest cover of Viet Nam declined by about 30 percent between 1945 and 1990 but has increased in recent years.⁹ Forest cover loss and degradation were driven by demand for agricultural land to meet food security needs of an increasing population, and by heavy forest exploitation, largely from state forest enterprises. Regulated and unregulated migration and rapid economic growth has exacerbated this degradation process. The coastal areas are also severely affected by population pressures, and marine resource stocks have declined significantly due to habitat loss and over-fishing. Further, with a growing urban population, safe disposal of solid, industrial, and hazardous waste is an emerging issue. The Government has taken positive steps to reverse environmental degradation, including (i) a regreening of barren hills program and a 5 million hectares program, to increase forest cover and strengthen forest management practices; (ii) expansion in the number of protected areas; (iii) enactment in 1998 of a water resources law; and (iv) establishment of pollution control boards in some of the industrial zones. More recently, the National Environmental Agency finalized a national strategy for environmental protection. The strategy has been designed as an integral component of the overall SEDS.

b. Regional Cooperation

19. Viet Nam is an active member of Association of Southeast Asian Nations (ASEAN), ASEAN Free Trade Area, and Asia-Pacific Economic Cooperation, and has supported from the start subregional cooperation in the Greater Mekong Subregion (GMS). Cross-border road transport projects have been the most tangible sign of Viet Nam's GMS integration, including the Phnom Penh-Ho Chi Minh City highway in the south, and the East-West Economic Corridor in the Central Region. Integration has also been manifested in "soft infrastructure" represented by cross-border agreements to facilitate the flow of goods and people, and through participation in regional approaches to economic monitoring, health, education, and environmental management. Social and environmental issues, such as transmission of HIV/AIDS by mobile populations, are also being addressed in a subregional context.

D. Development Priorities and Outlook

1. Objectives and Priorities

20. The Government's vision and development goals are contained in the SEDS 2001-2010, and the draft Comprehensive Poverty Reduction and Growth Strategy (CPRGS), scheduled for approval by mid-2002. The Government is committed to pursuing the International Development Goals (IDGs). In some areas (poverty reduction and primary education enrollment), Viet Nam has already exceeded IDG levels, while in others the IDGs need to be adapted to local conditions and government policies. The Government and its development partners¹⁰ are in the process of revising and adapting the IDGs to Viet Nam's specific opportunities and constraints (Table 1). While the list of goals and targets is under discussion and is likely to be further refined, it has been taken as a basis for development of the Poverty Partnership Agreement between the Government and ADB, to be signed in early 2002.

21. The Government's poverty reduction targets are to significantly reduce poverty between 2001 and 2010 from 32 percent to 19 percent according to the international poverty line, and from 17 percent to under 5 percent according to the national poverty line.¹¹ The SEDS 2001-2010 envisages that these goals will be achieved through rapid economic growth and employment generation, accompanied by social progress, equity, environmental protection, and accelerated administrative reform to build a clean and strong state apparatus.¹²

22. Sustained economic growth, averaging at least 7.0 percent annually, is targeted to take place in a climate of macroeconomic stability, guaranteed by strengthened fiscal management, anti-inflationary monetary policy, and promotion of manufactured exports. Key elements of the Government's growth strategy are (i) structural reforms to enhance domestic and external competitiveness, with emphasis on reforms in the banking and SOE sectors, and in the framework for private sector development; (ii) higher productivity in agriculture and industry, with stronger linkages between the two sectors; and (iii) reliance on key economic zones to play the growth engine role, while investing more in regions that face difficult conditions.

23. Employment creation, with the target of creating 7.5 million new jobs by 2005, is emphasized in the National Labor Plan. According to official sources, the current rate of employment creation is 1.5 million jobs per year. The National Labor Plan also calls for bringing down the urban unemployment rate and increasing working time in rural areas.

24. Social progress and equity will be promoted through (i) greater equity and efficiency in access to health care, particularly for the poor and residents of remote areas, with the ultimate goal of universal heath care insurance; (ii) consolidation of the gains in illiteracy elimination and education, with the objective of achieving universal lower secondary education and improving quality through upgraded curricula, methodologies, and teachers; (iii) further reduction in the population growth rate, with the target of stabilizing the population at 88 million?89 million by 2010; and (iv) improved targeting and efficiency of programs aimed at poverty reduction or social protection. The thrust in the environmental area is on improving access to clean water for urban and rural areas, and restoring forest cover.

25. Development of a clean and strong state apparatus, that curbs corruption and bureaucratism, is to be pursued through the PAR master plan that addresses, inter alia, issues such as redefining the role of government at all levels, with emphasis on decentralizing powers within the administrative system, civil service reform, and public finance management. An ongoing assessment of legal needs, jointly undertaken by the relevant agencies and supported by external aid agencies including ADB, is developing an action plan for legal reform.

2. Public Finance and Investment

26. The Government expects to raise the average investment rate from 25.4 percent in 1991-2000 to at least 30 percent during 2001-2010 (Table 2). The projected share of FDI appears realistic considering current trends. As a consequence, the share of the domestic private sector is projected to increase significantly, and official development assistance (ODA) will continue to be needed. To finance overall investment levels, the Government expects that gross domestic saving will rise from around 19 percent of GDP (average over 1996-1998) to more than 23 percent. Budget revenue as a share of GDP is expected to remain at current levels of around 20 percent, and much of the increase will have to come from private savings, requiring policy reforms to create a conducive environment for savers.

3. Role of External Assistance

27. Since resumption of operations by most external agencies in 1993, the level of annual ODA commitments and disbursements has increased steadily. The cumulative level of commitments during 1993-2000 reached $17.5 billion. Annual commitments increased from $2 billion in 1993-1995 to $2.25 billion in 1999-2000, and disbursements grew from $625 million to $1.5 billion annually during the same period. Disbursements in 1999-2000 were equivalent to 5.2 percent of GDP, 23.8 percent of total investment, and 60.4 percent of the Government's capital budget in those years. The largest shares of ODA disbursements were accounted for by infrastructure (energy and transport), followed by human development (health and education), and rural development, in that order. Three external aid sources, Japan, World Bank, and ADB accounted for approximately 57 percent of commitments and 52 percent of disbursements during 1995-2000. (Details of the operations of external aid agencies and of ADB's approach to aid coordination are provided in Table 5 and paras. 70-71 of the main text and in Appendix 8.)

4. ADB's Assessment of the Development Agenda

28. The Government's development agenda is balanced, comprising not only a growth strategy, but also policies for social development to reach out to disadvantaged groups, and actions for improved effectiveness of public institutions. The strategy is consistent with Viet Nam's poverty profile in that it emphasizes creation of employment opportunities in the rural farm and nonfarm sectors, supported by equitable access to infrastructure and to human capital services, including secondary education and affordable health care. However, prioritizing and costing the various sector programs and embedding them in a consistent overall framework remains a challenging task.

29. Poverty Reduction Targets. The targets are ambitious but achievable, provided that appropriate policies are pursued. Reducing poverty incidence from 32 percent to 19 percent according to the international poverty line (or from 17 percent to under 5 percent according to the national poverty line) is contingent upon achieving annual GDP growth of at least 7.5 percent during 2001-2005 and maintaining it at 7.0 percent thereafter. Growth in agriculture, which is more equalizing, would tend to reduce poverty more than identical growth in industry and services. However, following the sector growth pattern over the 1990s, industry and services are likely to grow faster (at 10.0 percent and 7.0 percent per year, respectively) than agriculture (projected to grow at 3.5-4.0 percent per year) over the next decade. The contribution of faster industrial and services growth to poverty reduction can be quite high if the pattern of growth in these sectors is more labor intensive. Achieving the poverty reduction target will also depend on growth being more equally shared among regions than has been the case in the past. Fiscally, this will require a more equitable system of collecting revenues and allocating expenditures among provinces of different income levels. Administratively, it will require improved coordination among ministries, between central and local governments, and among local governments, to ensure that the needed infrastructure and services are planned and delivered in an integrated way.

30. Sustainable Economic Growth. The target annual growth rate of 7.5 percent in 2001-2005 is higher than the average growth rate during 1998-2000 (5.1 percent). There are serious concerns about whether such high grow rates will be achievable, particularly in the coming few years, given the deterioration in the external environment that has taken place since the targets were set. In this climate, sustaining high growth will be critically dependent on raising the level of private investment, which is projected to increase during 2001-2010 (para. 26). More attention will be needed to improve the investment environment including a strengthened legal and regulatory framework supportive of the private sector, and a resilient and diversified financial system that can meet the private sector's needs for medium- and long-term funds. Private sector development will also depend on affordable and reliable infrastructure, including power supply. Government forecasts indicate that to meet the country's infrastructure needs, investment in the order of 12 percent of GDP is required in the coming years. The Government's investment in infrastructure is unlikely to exceed 3 percent of GDP, while ODA can be expected to provide approximately 2 percent of GDP. This means that the private sector will have to fill the gap in this area as well. Removing obstacles to a more productive and diversified agriculture sector will also be essential for growth and poverty reduction. The Government's emphasis on raising the quality and productivity of labor through relevant education and training is appropriate provided that the needs of a changing labor market and the role that the private sector can play in delivering vocational training are given due consideration.

31. Inclusive Social Development. Issues of social inclusion are adequately addressed in the Government's goals and strategies. The Government has identified reduction in gender gaps in education, increased access to assets, and participation in political and business life as priority areas. In addition, it has recognized the need to preserve the culture and diversity of ethnic minorities. In this connection, the Government should carefully review the impact of past policies and programs for the development of ethnic minorities and remote areas. More generally, the Government needs to undertake a thorough and systematic ex-post evaluation of targeted programs, to increase their efficiency and sustainable impact.

32. Improving Governance. In the area of governance, the Government has formulated a comprehensive vision of the changes needed, covering PAR with an emphasis on civil service reform, public financial management, a strengthened judicial and legal system, and a more participatory approach to development through greater decentralization and implementation of the Grassroots Democracy Decree. The Government has been forthright in recognizing the problem of corruption and the actions needed to combat it. However, the Government will have to clearly identify priorities for action in the short, medium, and long term from among the wide array of governance objectives referred to in the PAR. Also, the Government will have to pay as much attention to the functioning of the state machinery and to the implementation of legal and administrative reforms, as it has devoted to introducing new legislation and regulations.

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