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p. 1 of 6 BACK | NEXT I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program Update 2007-2010: Viet Nam, Socialist Republic of

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I. Current Development Trends and Issues

A. Overview of Development Outcomes and Issues

1. Viet Nam’s recent socioeconomic development progress has been remarkable. The country’s success in reducing general poverty incidence by almost two thirds in just 11 years is unprecedented. Poverty was cut from 58.1% in 1993, to 23.2% in 20041. During this period, income per capita has grown from $288 to $622, with a modest increase in income disparities.2 Broad-based and vigorous economic growth, greater macroeconomic and political stability, and targeted programs to provide basic public infrastructure and services to vulnerable groups have all helped reduce poverty. While income inequality has only increased marginally, significant pockets of poverty remain. Households whose consumption is just over the poverty line are vulnerable to external shocks (e.g., low agriculture commodity prices and disease outbreaks). They remain at risk of falling back below the poverty line.

2. Poverty reduction has been underpinned by rapid, stable, and inclusive economic growth3, following Viet Nam’s steady transition from central planning to a socialist-oriented market economic system. This transition has involved the liberalization of markets, recognition of private property rights, and a gradual opening up of the economy to external markets for trade and investment. Political stability, prudent macroeconomic management, relatively equitable distribution of the factors of production, and effective and equitable investments in human resource development facilitated a strong response to reforms. Sustained agriculture growth of nearly 4% in the past decade, resulting from reforms and improved incentives, was pivotal in reducing poverty in the early stages of reforms. More recently, rapid growth in private sector investment has generated substantial new jobs in industry and the services.

3. Despite remarkable progress, more needs to be done to eradicate poverty and improve living standards. Rapid economic growth and programs targeting poverty and social equity need to be sustained. This implies a need to:

• accelerate infrastructure development to overcome weaknesses and respond to rapidly growing demand for new infrastructure;
• create a business-friendly environment by removing policy, institutional, and structural bottlenecks to increase private investment;
• improve financial intermediation
• develop human resources to meet the increasing demand for a more skilled and productive workforce.

B. Economic Growths

5. Viet Nam is one of the fastest-growing economies in Asia, recording an average annual growth in gross domestic product (GDP) of about 7.5% over the last decade.4 Growth of 8.1% in 2005 was fuelled by a robust increase in domestic demand and strong export performance. Growth in consumption was underpinned by higher farm incomes (reflecting rising prices for agricultural commodities), increases in the employment share of manufacturing and service sectors, and buoyant inward remittances. Growth has been achieved with relative macroeconomic stability.

6. The fiscal deficit has remained well under 5.0% of GDP in recent years (2.8% in 2005, excluding net lending). Revenues during the last 5 years, on average, have been strong at around 22% of GDP, supported by improvements in tax administration, growing numbers of taxpaying businesses in the formal sector, and higher oil receipts. However, this may overstate the fiscal strength as some expenditure, such as those from the development assistance funds and other infrastructure funds, remain off-budget. Inflation remained high at 8.4% in 2005 (albeit somewhat lower than 9.5% in 2004) resulting mainly from higher prices for food, oil, steel, cement, and fertilizers. This was fed by a 30% increase in the salary of professionals. The inflation figure, however, could understate price pressures because of the Government’s regulation of power and transport prices. Inflationary pressures will thus need to be carefully managed.

7. In the external sector, the current account deficit fell to 3.6% of GDP in 2005, from 5.7% in 2004, with strong growth in private remittances, tourism receipts, and earnings from crude oil exports. External debt is equivalent to about 39.5% of GDP. This low level of mostly highly concessional debt means that Viet Nam faces a low risk of external debt stress. Foreign exchange reserves more than doubled in the past 3 years, to $7.7 billion in 2005.

8. The investment–GDP ratio has been increasing, and was high at 37.6% in 2005.5 The Government anticipates this ratio to reach 40% of GDP during the SEDP period. However, despite recent marginal improvements (Figure 1), capital productivity remains low (as reflected in an incremental capital output ratio of 4.8:1). Hence, this ambitious investment target implies a need for strenuous efforts to strengthen the financial mechanism to help generate domestic resources, improve investment decision making, and increase transparency to manage and prioritize limited resources.


9. The structure of the economy is changing markedly, with a steady increase in the share of industry and services, and a steady decline in the share of agriculture (including fishery and forestry) in GDP (Table 1). Agriculture generates only about 21% of the GDP, and its 57% share in total employment will continue to decline. Agriculture labor productivity will need to grow if the real incomes of agriculture workers are to keep pace with national averages. Many agricultural workers will seek higher-paid employment in industry and the services. That many of these jobs will be in urban areas suggests an accelerating rural–urban transition.6 Achieving rapid employment growth, while ameliorating potential adverse social and environmental impacts of rapid urbanization, will be key development challenges over the next 5 years.

10. Rapid industry and service output growth has underpinned economic growth. Industry’s share of economic output has increased steadily, reaching over 40% of GDP in 2005, partly reflecting ongoing market reforms, the gradual reduction in barriers to competition and private sector development, an affordable labor force, and improvements in physical infrastructure. The manufacturing sector has been a major source of growth in output and employment. Manufacturing output rose by 13% in 2005, with diversified growth in production for both domestic and export markets. The share of services has declined marginally, but still accounts for nearly 40% of GDP. Greater diversification in industrial production and services is laying the foundation for sustained growth. This economic transformation is changing the pattern of development, with most new jobs being created by the private sector in existing, and newly emerging, urban areas and along key transport corridors and coastal provinces.


11. The manufacturing sector has been a major source of growth in both output and employment. Manufacturing output rose by 13.0% in 2005 with continuing growth in a wide range of products for both domestic and export markets. While growth rates dropped sharply in 2005 from very high levels, garments and footwear products (mostly locally assembled under subcontracts) still remain the two major items accounting for a major share of manufactured exports. Wood products and electronic goods now account for a rapidly growing share of total manufactured exports.

12. Strong export growth has complemented strong growth in domestic consumption. Exports grew at an average annual rate of about 17% in 2001–2005, following average export growth of 24% per year in 1993–2000. The ratio of exports to GDP increased, from about 55% in 2000, to 61% in 2005. While other Asian economies remain the dominant market for Vietnamese products (about 50%), 23.6% of Viet Nam’s exports went to the European Union in 2004 (12.6% in 1995), and 20.2% to the United States of America7 (3% in 1995). The structure of exports is also becoming more diversified. Major exports include largely unprocessed commodities such as crude oil, rice, marine products, coffee, and other agriculture products, and manufactured products such as garments and footwear. Electronic goods and wood products account for a growing share of exports. While it will be difficult to sustain the very strong export growth rates of the last 15 years, implementation of ASEAN Free Trade Area (AFTA) commitments and related agreements, and expected World Trade Organization (WTO) accession in 2006 will provide new opportunities for export growth.

13. Foreign direct investment (FDI) has played an important role in Viet Nam’s recent economic growth. It has provided capital, technology, know-how, and market access. Neighboring Asian economies are the dominant source of FDI, the top five sources being Singapore; Taipei China; Japan; Republic of Korea; and Hong Kong, China. Growth in industrial output from FDI has exceeded that of the state sector for more than a decade. Growth of the domestic private sector has accelerated since the late 1990s, and is now growing at a consistently higher rate than that of the state sector. The increasing share of the domestic private sector and FDI in industrial output is shown in Figure 2.


14. The Government is increasingly recognizing the pivotal role that the private sector has played in economic development and job creation. Preliminary estimates indicate that the private sector generated almost 90% of the 7.5 million jobs created during the five years to 2005, of which 64% were generated by small enterprises employing fewer than five people. Most of the 1.6 million new jobs Viet Nam needs to create annually in 2006–2010 are expected to be generated by the private sector. The Government and ADB need to focus on facilitating increased private sector investment and developing market institutions needed to promote competitiveness and create jobs.


15. Recent initiatives to further improve the investment climate include: (i) approval of the Unified Enterprise Law (UEL), aimed at strengthening business rights, improving corporate governance, and ensuring a level playing field for domestic (state-owned enterprises [SOEs] vis-à-vis private sector) and foreign businesses, and the Common Investment Law (CIL), opening most sectors to private domestic and foreign investors; gradual equitization (i.e., partial privatization) of SOEs, and; building the foundations for financial and capital market development. To sustain progress, the Government has recognized the need to further reduce business costs by improving physical infrastructure, financial intermediation, governance, and public administration, and promoting competition. It also needs to ensure that growth will be socially equitable and environmentally sustainable.

16. Competition from neighboring countries is increasing with the implementation of AFTA and related agreements. Competitive pressures will further increase as Viet Nam joins WTO. Further improvements in the policy environment and continued efforts to address structural weaknesses (e.g., in market institutions, SOEs, and the banking sector), more efficient public service delivery, improvements in vocational and general education, development of public infrastructure and utilities, and sustained macroeconomic stability are all needed to enhance Viet Nam’s international competitiveness and to take full advantage of regional and global cooperation and integration. This CSP aims to support such improvements.

C. Poverty

17. Viet Nam has made good progress in achieving the Millennium Development Goals (MDGs) and the Viet Nam Development Goals (VDGs).9 Viet Nam has already achieved its poverty targets, halving income poverty and largely eradicating extreme poverty and hunger. Good progress has also been made in achieving other social goals such as universal primary education, gender equality, child mortality and maternal health, and access to safe drinking water. Progress is being made in combating HIV/AIDS and other communicable diseases, and in including environment sustainability in national policies and programs. Despite these achievements, increased efforts will be required to ensure that key MDGs related to child mortality, drinking water, the environment, and HIV/AIDS are met and to improve the quality of key services such as education (Appendix 1, Table A1.1).


18. Although economic growth has benefited most of society, some groups have benefited less than others. Poverty incidence (in 2004) was much higher in rural areas (26.4%) than urban areas (13.7%). Food poverty has been largely eliminated in urban households (3.3%), but 8.1% of rural households remain food-poor. Some 69.3% of ethnic minority households lived below the poverty line in 2002, compared with 23.1% of the Kinh and Chinese households. Ethnic minority children are less educated because of poor infrastructure and accessibility, language and cultural barriers, problems in attracting good teachers to remote areas, and curriculum relevance.

19. The poor have lower social indicators, including lower school enrollment (partly because of difficulty in access and affordability) and health care. Low-income households typically have lower levels of human capital because of greater difficulties in accessing and using health and education services. Key challenges in reaching the poor include:

• mobilizing and allocating more resources
• improving the targeting of resources
• enhancing efficiency by making social services more demand-driven
• improving monitoring systems to make sure that benefits reach the poor

D. Political Environment

21. Viet Nam is a stable single-party state but with significant decision-making authority delegated to the subnational levels. Local authorities can:

• decide on investment, budget, education, public health care, and service delivery;
• approve investment projects valued below D5 billion;
• decide on sources of revenues and expenditure items
• issue construction licenses, business registration certificates, certificates of land-use rights, among others

• strengthen governance to ensure that public resources are used more efficiently and effectively
• reduce misuse of public resources
• control corruption

E. Governance and Institutional Capacity

25. The Government recognizes the urgent need to improve governance and control corruption. The SEDP notes Government concerns that Transparency International’s corruption perceptions index ranks Viet Nam 102nd among 144 countries. The Government aims to improve governance via a broad range of measures, including:

• public administration and civil service reforms
• regulatory reform and simplification
• encouragement to CSOs and mass media to play an active role
• legislative reforms to directly eradicate corruption through public disclosure and transparency in areas such as procurement, civil works, state-owned enterprises (SOEs) equitization, management of land, and corporate and financial governance

F. Gender Assessment

29. Viet Nam leads the Asia and the Pacific region in key aspects of gender equality19. Viet Nam performs well in delivering education and health services equitably to both men and women. There is little difference between genders in school enrollment rates. Adult literacy is high for everyone, and the gender gap in literacy rates has been declining. Viet Nam has one of the highest economic participation rates in the world, with 85% men and 83% women economically active. With 27% female members in the NA, Viet Nam has one of the highest proportions of women in parliament in Asia and the Pacific region.

30. Viet Nam has a strong policy and legal framework to promote gender equality. Vietnamese women have legal rights that women in many developing countries are still fighting for, including affirmative policies for political participation, inheritance rights, generous maternity benefits, and the right to make reproductive decisions. However, traditional beliefs sometimes limit enforcement of these rights. On average, women work longer hours and are paid less than men; women have limited access to resources such as land, property, and formal credit and job training; and women are inadequately represented in decision-making positions, particularly at the local level. Domestic violence, prostitution, and human trafficking remain concerns. Women from ethnic minorities are particularly disadvantaged: at least one in four is illiterate, and they have much higher infant and maternal mortality rates. The new law on gender equality is expected to address these issues and correct the gender imbalances among ethnic minority groups.

G. Private Sector

31. A striking feature of Viet Nam’s rapid growth is the rise of the private sector, dominated by small and medium-sized enterprises (SMEs). About 165,000 enterprises have been registered under the 1999 Enterprise Law since its enactment in 2000. Most registered enterprises (nearly 90%) are estimated to be SMEs, with registered capital of less than D10 billion ($625,000), and fewer than 300 employees. The SEDP envisages that by 2010, a total of at least 500,000 enterprises will be registered under the UEL (Figure 4).

32. This growth has helped increase the private sector share of total GDP, employment, and industrial output. The private sector now generates over 60% of GDP and employs 90% of the total workforce.22 Rapid private sector development has been a key element of Viet Nam’s propoor socioeconomic development. The domestic private sector generates more employment and output per unit of investment than either the state sector or foreign investors.


33. Sustained growth in private sector investment and employment will be essential to continue with rapid, pro-poor economic growth. The World Bank surveyed some 9,632 Vietnamese enterprises in 2005 as part of the investment climate survey, using a questionnaire designed to allow international benchmarking of key indicators. Findings about the key constraints facing Vietnamese business and comparisons with other firms in East Asia and therest of the world are summarized in Table 4. Access to finance and land, and infrastructure bottlenecks are more significant constraints in Viet Nam than in other countries.


34. The private sector has the potential to play a more prominent role in financing Viet Nam’s large infrastructure development needs. Private sector investment in infrastructure (e.g., via build-operate-transfer [BOT] projects) has been constrained by ambiguity in Government policies, and the limited capacity of local authorities to develop public–private partnership opportunities.25 Conflicting regulations both allow and prohibit private sector participation. Low tariffs, incomplete regulations, and “bundling” of sector utilities reduce the potential for private sector participation. These barriers are expected to be reduced over the next 5 years, providing opportunities for national and provincial demonstration projects. There is scope to gradually increase private contractors’ participation in public procurement. Further efforts are also needed to reform SOEs to make them more efficient, and to increase opportunities for private sector investment. The UEL is a step toward developing a level playing field for all enterprises, private and public, as well as domestic and foreign enterprises. All SOEs are also required to be incorporated under the UEL by 2010.

H. Environment

35. Rapid economic growth, a growing population, and rapid urbanization put pressures on environmental quality. A more open economy has increased economic incentives to exploit forest and other natural resources. Water quality has declined in many areas. Air pollution in cities and industrial areas causes increasing respiratory problems. Greenhouse gas emissions are rising and energy sector emissions have now surpassed emissions from agriculture. Competition is increasing for scarce resources such as land, water, and forests, from competing users and for urban development. Government concern about these realities is reflected in the SEDP.

36. A large proportion of the population remains vulnerable to natural disasters, including typhoons, flooding, drought, and communicable diseases such as avian influenza. The SEDP, in recognition of the link between vulnerability to natural disasters and persistent poverty, gives priority to economic and social infrastructure investment in disaster-stricken regions.Vulnerability will be reduced and social welfare networks built by (among others) preventing and mitigating natural disasters. The goal is to halve the number of people re-impoverished by natural disasters or other risks. Embedded in the Government’s disaster risk management strategy27 is the concept of including measures to prevent and minimize the effects of natural calamities as a regular part of development programs and projects.

37. The Amended Law on Environment Protection, approved by the NA in late 2005, became effective in July 2006. The law is more specific about what types of projects must be subject to environmental impact assessments, and clarifies procedures and timing for such assessments. The revised law:

• requires polluters to clean up pollution and compensate those affected
• introduces a license system for waste producers
• regulates generators of “hazardous waste”

• environmental issues
• land-use planning
• integrated water management
• issuing Law on Environment Protection implementing regulations

I. Regional Cooperation

39. The SEDP recognizes the importance of regional cooperation and integration in attaining the MDGs and VDGs. Districts in the border provinces are among the poorest areas in the country, so their development is significantly influenced by cross-border links with Cambodia, the PRC, the Lao People’s Democratic Republic (Lao PDR), and Thailand. At the same time, Viet Nam has an important role in the GMS. It is strategically located, with large coastal areas and several deepwater ports and road links. Apart from Thailand, Viet Nam is the only GMS country that is part of the north–south, east–west, and southern economic corridors, providing a rapidly growing market and serving as a vital gateway for the subregion.

40. Viet Nam is a major proponent of the transformation of the GMS transport corridors into full-fledged economic corridors. Viet Nam has actively participated in GMS tourism, which is expanding rapidly.29 Of the 26 ADB-assisted loan projects for the GMS 30 approved by the end of June 2006, Viet Nam participated in 5, with a combined amount of $572 million (for which ADB extended $154 million in loans). In addition, Viet Nam was a recipient of all 4 multi-country ADB loans for the GMS, and has been involved in 98 of the 119 regional TA projects, for which ADB has provided about $56 million.

41. Viet Nam has tremendous potential to benefit from greater regional cooperation and integration, by fostering balanced socioeconomic development and better resource management. During 1992–2004, Viet Nam’s combined exports to other countries in the Mekong region—Cambodia, PRC, Lao PDR, Myanmar, and Thailand—grew by over 26% per year on average, and its share of total exports expanded from 6.5% to 8.8%. Viet Nam’s real GDP during the same period grew by 7.6% on average, and its openness ratio (total trade to GDP) more than doubled from 50% to almost 130%, indicating the growing trade integration of the country with the region and the world. The GMS Program has been ADB's primary vehicle to support regional cooperation and integration in Viet Nam. ADB is also helping Viet Nam foster broader regional links and enhance its capacity. In addition to physical connections, other important drivers of economic development has been:

• regional transfers of capital and technology
• coordination on the financial sector
• containing regional public bads such as avian influenza
• access to regional markets

J. Consultation with Country Stakeholders

42. Wider consultations are especially important because Viet Nam is at the forefront of efforts to harmonize and improve the effectiveness of development assistance. To localize The Paris Declaration,31 the Government and development partners adopted the Hanoi Core Statement in July 2005, to make aid more effective in achieving the VDGs. Core elements of the statement include the following:

• ownership: Government ownership and leadership of development efforts are reflected in SEDP priorities and strategies
• alignment: development partners commit themselves to align their development assistance with Viet Nam’s strategies and to use strengthened country systems to manage and implement development activities, and to avoid using project management units (PMUs) created outside the existing structure of the project implementing ministry
• harmonization: development partners will work to implement common, simplified procedures for planning, implementation, and reporting to the Government on their activities
• results: the Government and development partners will jointly use resultsoriented performance assessments to maximize aid effectiveness
• accountability: the Government and development partners are accountable for development results

• vulnerable groups, including ethnic-minority and disabled-people’s groups, migrants, the landless, and trafficked women
• the balance between economic growth and social equity
• consistent cooperation with CSOs in CSP implementation by building in tripartite collaboration between CSOs, ADB, and the Government, and through new partnership modalities that go beyond working with CSOs as contractors and/or knowledge partners
• avian influenza control
• management of social adjustment during the post-WTO accession to mitigate the negative social and economic impact on the poor

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