|Project Rationale and Linkage to Country/Regional Strategy
Losing competitiveness. Cross-country assessments show Viet Nam is losing competitiveness relative to others. Viet Nam's ranking of 70th out of 148th countries in the 2013-2014 World Economic Forum Global Competitiveness Index is one notch down from 2006-2007. During this period Indonesia and Cambodia have gained 19 and 23 places, respectively. Viet Nam's institutions sub-index is ranked second-lowest among the Association of Southeast Asian Nations (ASEAN) countries, only above newly covered Myanmar. It's ranking in the Doing Business survey has fallen from 90th position in 2011 to 99th in 2014. Diagnostic studies suggest key constraints to increased competitiveness include unclear regulatory environments, weak enforcement of regulations, and an unequal playing field where state-owned enterprises (SOE) have preferential access to land, credit and public sector contracts.
More vigorous competition needed to sustain growth. Viet Nam is an extremely open economy in terms of trade and investment, but has been unable to impose market discipline on large SOE, resulting in bouts of rapid credit growth, asset bubbles, and inflation. The shift from central planning to market allocation, while retaining government control over productive assets within the state sector, has led to progressive commercialization of the state itself. Weak administrative capacity and unclear regulatory environment pose obstacles to more vigorous market competition needed to sustain rapid growth. GDP growth has fallen from an average rate of 7.3% during 2000-07 to 5.8% during 2008-2012, and down to around 5.4% in 2013.
Weakening competitiveness is slowing job creation. During 2001-2010, employment growth averaged 2.3%. The domestic private sector, consisting mainly of small-medium sized enterprises (SMEs), played a major role and now contributes about 50% to GDP, 86% of the total workforce, and about 90% of new job creation. However, as GDP growth slowed, business closures and layoffs have taken their toll on the labor market. Monetary policy was eased but credit growth is being constrained by uncertainty in the level of bad loans in the banking system. Rapid growth in lending occurred in an environment of shortcomings in risk management at banks and weaknesses in the regulatory and supervisory framework. The banking sector has significant exposure to unprofitable and overstretched SOEs, raising questions about capital adequacy. The private sector's ability to generate output and employment opportunity is being impeded by an inefficient state sector that absorbs significant resources, capital and land.
Government has prioritized reforms to boost competitiveness. The Government's development priorities are set out in its Socio-Economic Development Strategy (2011-2020), and the accompanying Socio-Economic Development Plan (2011-2015). The SEDS sets out the country's goals over ten year period, and the SEDP lays out more specific policy actions and programs to achieve those goals. The SEDS includes a long-term growth strategy that gives attention to structural reforms. Improved market institutions and administrative reforms for a more competitive and equitable business environment are identified as strategic priorities in the SEDS.
Focus of reforms. The Government further announced it would focus structural reforms in three areas: SOEs, the banking sector, and public investment management. On SOEs, the government has prioritized the restructuring of large SOEs, strengthening corporate governance including information disclosure, and improving the regulatory environment for SOEs. On the banking sector, the government has committed to restructuring weak banks, prioritized policies for dealing with systemic risks including non-performing loans, and improving banking supervision. On public investment management, it has committed to improving public investment planning, cutting capital spending, and enhancing the efficiency of projects. See appendix * for diagrammatic presentation of structural reforms in these areas.
To help steer competitiveness-reform efforts, the Prime Minister established in May 2012 a National Council on Sustainable Development and Competitiveness Capacity Enhancement. It is chaired by a Deputy Prime Minister, and has government wide membership to advise the Prime Minister on priority actions to enhance national competitiveness.
Lessons from earlier policy-based loans. ADB has participated in joint development partner programmatic budget support in Viet Nam since 2003. A joint development partner evaluation suggested future program budget support should be more focused on a few important cross-cutting issues, strengthen analytical underpinning of selected policy actions, and improve monitoring and communication of program impact. ADB's own evaluation is in line with this assessment. These assessments also take into consideration the falling number of donors as Viet Nam graduates from concessional ODA financing. Consequently, the design of the EMCC is more narrowly focused than previous joint development partner programmatic budget support programs, and has dedicated TA funds for analytical and advisory support, as well as increased outreach to communicate results of the program.
Benefits of joint donor programmatic approach and ADB value-added. EMCC is aligned to the economic efficiency' pillar of the ADB's Country Partnership Strategy (CPS) 2011-2015. The EMCC framework provides a common platform for development partners to engage in policy dialogue with the government. It enables better alignment of donor programs to government priorities and, as a result, leverages more resources for the country. Coordination is improved and transaction costs are reduced. ADB can also leverage support for its own policy-based loans in the financial and corporate sectors, while extending a broader reach to other related policy reforms. ADB is in a unique position to feed lessons from experience of piloting SOE restructuring into the program design.