CURRENCY Currency Unit = Dong (VND) US$1 = 15,040 VND (November 2001) GOVERNMENT FISCAL YEAR: January 1 to December 31 ABBREVIATIONS ADB Asian Development Bank NAPA National Academy of Public Administration AFTA Asean Free Trade Agreement NIC Newly Industrialized Country ASEAN Association of Southeast Asian Nations NERC National Enterprise Reform Committee BOT Built, operate and transfer NSEP National Strategy for Environment Protection CG Consultative Group NGO Non-Governmental Organization CEPT Common Effective Preferential Tariff NTB Non-Tariff Barriers CPIA Country Policy and Institutional NTR Normal Trade Relation Assessment CPRGSP Comprehensive Poverty Reduction and ODA Official Development Assistance Growth Strategy Paper CIEM Center for Institutional and Economic OOG Office of Government Management DFID Department for International PAR Public Administration Reform Development, UK FDI Foreign Direct Investment PER Public Expenditure Review GCOP Government Committee on Organization PIP Public Investment Program and Personnel GSO General Statistics Office PRGF Poverty Reduction and Growth Facility HEPR Hunger Eradication and Poverty PRSC Poverty Reduction Support Credit Reduction HCMC Ho Chi Minh City PTF Poverty Task Force IDA International Development Association QR Quantitative Restriction IDT International Development Target SBV State Bank of Vietnam IL Inclusion List SDS Socioeconomic Development Strategy IMF International Monetary Fund SME Small and Medium Enterprises IT Information Technology SOCB State Owned Commercial Bank JBIC Japan Bank for International SOE State-Owned Enterprise Cooperation JSCB Joint-stock Bank SRV Socialist Republic of Vietnam LNA Legal Needs Assessment TEL Temporary Exclusion List MDG Millennium Development Goal UNCTAD United Nations Conference on Trade and Development MOET Ministry of Education and Technology UNDP United Nation Development Programme MOF Ministry of Finance USBTA United States Bilateral Trade Agreement MOJ Ministry of Justice VAT Value Added Tax MOLISA Ministry of Labor, Invalids and Social VLSS Vietnam Living Standard Survey Affairs MPHS Multi-purpose Household Survey WHO World Health Organization MPI Ministry of Planning and Investment WTO World Trade Organization MOT Ministry of Trade NA National Assembly VIETNAM DEVELOPMENT REPORT 2002 IMPLEMENTING REFORMS FOR FASTER GROWTH AND POVERTY REDUCTION TABLE OF CONTENT EXECUTIVE SUMMARY ............................................................................................ i I. Vietnam’s Development Goals and the Comprehensive Poverty Reduction and Growth Strategy (Chapter 1) .......................................................................................... i II. Navigating the Global Downturn (Chapter 2) ............................................................. v III. Implementing Structural Reforms (Chapter 3) .......................................................... x IV. Building Modern Governance (Chapter 4) ............................................................. xiv V. Improving Public Investment Policy (Chapter 5) .................................................... xvi 1. Vietnam’s Development Goals and Targets ....................................................................1 International Goals to Reduce Poverty ............................................................................ 1 Defining Core National Targets ....................................................................................... 3 Development Goals and Targets for Vietnam 2001-2010 ............................................... 4 2. Navigating the Global Slowdown ..................................................................................21 Deteriorating External Environment .............................................................................. 21 Impact on Vietnam ......................................................................................................... 22 Macroeconomic Performance ........................................................................................ 30 External Financing Requirements .................................................................................. 34 3. Implementing Structural Reforms .................................................................................39 Progress on Implementation .......................................................................................... 39 Better Arrangement for Implementation ........................................................................ 42 Impact on Policy and Institutional Framework .............................................................. 43 Impact on Growth and Poverty Reduction..................................................................... 45 4. Building Modern Governance .......................................................................................53 Recent Government Actions And Plans ........................................................................ 53 Public Administration Reforms ..................................................................................... 55 Legal System Development and Wider Access to Justice ............................................. 62 5. Improving Public Spending ...........................................................................................67 Implementation of Reforms ........................................................................................... 68 The Challenge for Public Investment ............................................................................ 70 Inter-sectoral Allocation ................................................................................................ 72 Regional Allocation of Investment ................................................................................ 76 Implementation and Monitoring .................................................................................... 81 Statistical Appendix Bibliography Boxes Box 1: PAR Master Program 2001-2010: Four Pillars and Seven Program Areas .. xv Box 1.1: The Comprehensive Poverty Reduction and Growth Strategy .................... 1 Box 1.2: Goal One: Eradicate Poverty and Hunger .................................................... 6 Box 1.3: Goal Two: Achieve Better Education for All .............................................. 7 Box 1.4: Goal Three: Reach Gender Equality and Empower Women ....................... 9 Box 1.5: Goal Four: Eradicate Poverty and Preserve the Culture and Diversity of Ethnic Minorities ...................................................................................... 10 Box 1.6: Goal Five: Reduce Child Mortality ............................................................ 12 Box 1.7: Goal Six: Improve Maternal Health ........................................................... 13 Box 1.8: Goal Seven: Combat HIV/AIDS ................................................................ 15 Box 1.9: Goal Eight: Ensure Environmental Sustainability .................................... 16 Box 1.10: Some Cross Cutting Targets for the Environment .................................. 16 Box 1.11: Goal Nine: Provide Essential Infrastructure ............................................ 17 Box 1.12: Goal Ten: Ensure Good Governance for Poverty Reduction ................... 19 Box 2.1: Falling Rice Prices ..................................................................................... 26 Box 2.2: Breakdown of “Other” Export Earnings .................................................... 27 Box 2.3: Estimates of Increased Imports by China following Accession to WTO .. 29 Box 3.1: China’s Mechanism of Policy and Institutional Reform ............................ 43 Box 3.2: Trade and growth ....................................................................................... 48 Box 4.1: Assessment of Progress on PAR ................................................................ 54 Box 4.2: PAR Master Program 2001-2010: Four Pillars and Seven Program Areas 55 Organizational Restructuring .................................................................... 55 Box 4.3: Realizing the Potential of E-Government .................................................. 57 Box 5.1: The Broader Agenda of Public Financial Management Reform ................ 68 Box 5.2: Recurrent Cost Implications of the National Irrigation and Road Prgs ..... 75 Box 5.3: Cost-Benefit Analysis for Large PIP Projects ............................................ 76 Box 5.4:Decision-Making Process for Government Expenditure on Transport ....... 80 Box A3.1: Trade Reform Program............................................................................ 86 Box A3.2: Private Sector Reform Program .............................................................. 86 Box A3.3: SOE Reform Program ............................................................................. 87 Box A3.4: Banking Reform Program ....................................................................... 87 Box A3.5: Public Expenditure Reform Programme ................................................. 88 Box A5.1: The One Million Ton Sugar Program ................................................... 101 Box A5.2: The 1996-2000 Public Investment Program.......................................... 104 Box A5.3: The Investment Approval Process......................................................... 106 Box A5.4 : The Development Support Fund .......................................................... 107 Box A5.5: Decentralization of investment approvals ............................................. 108 Tables Table 1: Vietnam Development Targets 1 .................................................................... iii Table 2: Current Account Balance (US$ billion) ........................................................ ix Table 1.1: Millennium Development Goals (MDGs) for All Developing Countries ... 2 Table 1.2: Indicators for Monitoring Better Education for All Goal ............................ 8 Table 1.3: Mortality Indicators for Disadvantaged Areas. ......................................... 12 Table 1.4: Reproductive Health Targets and Baseline................................................ 14 Table 1.5: Maternal Mortality and Reproductive Health Targets and Indicators for Disadvantaged Areas ................................................................................... 14 Table 1.6: Intermediate Indicators for Electricity ....................................................... 17 Table 2.1: GDP Growth Projection (year on year change in percent) ........................ 22 Table 2.2: Export Performance ................................................................................... 24 Table 2.3: Current Account Balance (US$ billion) .................................................... 34 Table 2.4: Vietnam: Financing Requirements and Sources (US$ billion).................. 35 Table 3.1: Schedule for QR removal, 2001 – 2003 .................................................... 40 Table 3.2: Private SMEs: 1998 – 2000 ....................................................................... 47 Table 4.1: Key PAR Milestones for the Next 12 Months ........................................... 61 Table 5.1: Public Investment: Actual 1996-2000 and Proposed 2001–2005.............. 71 Table 5.2: Sectoral Allocations of Total Budgetary Expenditure - Share of non- Interest Expenditure. .................................................................................... 73 Table A3.1: Tariff Rates for Model Industries ........................................................... 93 Table A3.2: Effects of Tariff Reform on the CPI ....................................................... 94 Table A3.3: Effects of Tariff Reform on Exports and Sectoral Output ...................... 94 Table A3.4: Selected Sectoral Output Results ............................................................ 95 Table A3.5: Effects of Tariff Removal on Nominal Household Income .................... 96 Table A3.6: Effects of Tariff Removal on real Household Consumption .................. 97 Table A3.7: Effects of Unilateral Tariff Removal on Poverty Measures ................... 98 Figures Figure 1: Import Demand Growth in Vietnam’s Trading Partners ............................... v Figure 2: Falling Prices and Surging Volumes of Agricultural Exports in 2001......... vi Figure 4: Vietnam’s Policy and Institutional Performance Relative to Others (1) ...... xii Figure 5: Likely Impact of Trade Reform on Consumption of Ten Income Groups . xiii Figure 6: Changes in Poverty and Divergence in Growth Rates ............................. xviii Figure 2.1: GDP Growth Rates of Selected East Asian Economies in percent .......... 23 Figure 2.2: Import Demand Growth of Vietnam’s Trading Partners.......................... 24 Figure 2.3: Falling Prices and Surging Volumes of Agricultural Exports .................. 25 Figure 2.4: Index of Rice Price relative to Non-food Prices, (1991 = 100) ................ 26 Figure 2.5: Share of Credit Growth to State-Owned Enterprises, in percent. ............ 31 Figure 2.6: Revenue, 1996- 2001, in percent of GDP ................................................ 32 Figure 2.7: Expenditures, 1996-2001, percent of GDP .............................................. 33 Figure 2.8: Servicing External Debt ........................................................................... 37 Figure 3.1: Number of Completed SOE Equitizations ............................................... 41 Figure 3.2: Vietnam: Policy and Institutional Performance (1) ................................... 45 Figure 3.3: Poverty-reduction Implications of Alternative Rates & Patterns of ........ 46 Figure 3.4: GDP per capita Growth Rates in Selected Countries over 30 years ........ 48 Figure 3.5: Likely Impact of Trade Reform on Consumption of Ten Income Groups50 Figure 5.1: Links Between the Five Elements of PFMR and Service Delivery ......... 68 Figure 5.2: Regional Incidence of Poverty, Poverty Reduction and Growth Rates ... 76 Figure 5.3: Divergence in Regional Per Capita GDP Growth .................................... 77 Figure 5.4: Road Spending and per Capita Incomes in Provinces, 1999…………….79 ACKNOWLEDGEMENTS This report was prepared and coordinated by the World Bank with substantive inputs from the Poverty Task Force (PTF) on Chapter 1 and from the Asian Development Bank (ADB) on Chapter 4. Chapters 2, 3 and 5 benefited from discussions in the working groups on state-enterprise, banking, trade and public expenditure reforms as well as the work carried out with their support. The draft report was discussed at a workshop of Vietnamese policymakers and researchers hosted by the Institute of Economics. Substantive and written comments were provided by the following: Dr. Do Hoai Nam, Director of the Institute of Economics and Vice Chairman of the National Center for Social Sciences and Humanities; Dr. Cao Sy Kiem, Vice Chairman of the Economic Commission of the Communist Party; Mr. Nguyen Quoc Huy, Vice Chairman, Office of Government; Mr. Thang Van Phuc, Vice Chairman of GCOP; Prof. Le Dang Doanh, Senior Advisor of CIEM; Ms. Pham Chi Lan, Vice President of VCCI; Dr. Pham Viet Muon, Vice Chairman of NSCERD; Dr. Nguyen Quang Thai, Secretary – General of Economic Association ; Mr. Nguyen Van Phuc, Deputy Director, MPI; Mr. Nguyen Thanh Hung and Ms. Trinh Thanh Hien, Deputy Directors, Ministry of Trade; Dr. Vo Tri Thanh, CIEM; and Dr. Tran Dinh Thien, Institute of Economics. Additional written comments were received from State Budget Department of MOF and the Foreign Economic Department of MPI. The report was drafted by a team led by Kazi M. Matin with overall guidance provided by Homi Kharas and Andrew Steer. Individual chapters were written by the following: Chapter 1 by Carrie Turk and Rob Swinkels based on inputs from the PTF; Chapter 2 by Theo Larsen and Dinh Tuan Viet, with contributions by Nguyen Van Minh, Ton Thang- Long and Elena Ianchovichina; Chapter 3 by James Beard with contribution by Pham Minh Duc; Chapter 4 by Jesper Kamarsgaard, John Samy (ADB) and Clay Wescott (ADB) with contribution by John Bentley; Chapter 5 by Bob Warner with contributions by Edmund Malesky, Le Anh Tu Packard and Anil Deolalikar. The summary was written by Andrew Steer and Kazi Matin. The peer reviewers were: Alan Johnson (DFID), John Samy (ADB) and Daniela Gressani (World Bank). Document preparation and publishing support was provided by the following: Kieu Phuong Hoa, Vu Tran Phuong Anh, Phung Thi Tuyet, and Hoang Thanh Ha. VIETNAM DEVELOPMENT REPORT 2002 IMPLEMENTING REFORMS FOR FASTER GROWTH AND POVERTY REDUCTION SUMMARY 1. Vietnam’s medium-term development prospects are considerably stronger at the end of 2001 than at the beginning. During the past year Vietnam’s Authorities have taken important decisions about the policy context that will guide economic activity in the coming decade, and early actions have begun. 2. Unfortunately, as these “internal drivers” of development have been strengthening, the global context has worsened dramatically. Unexpectedly, therefore, Vietnam’s short term outlook is worse than a year ago. The current world economy poses difficult challenges for Vietnam. But it also provides an opportunity, as Vietnam can, if it acts wisely, grow more rapidly than neighboring countries and position itself as a stable and predictable location of high-return investment, where living standards and the quality of life of all citizens are rising rapidly. To do so, Vietnam will need to implement its policy agenda rigorously, and change its behavior and image as a country where decisions are made in a slow and sometimes insufficiently transparent manner, towards a country with a more modern administrative and governance structure. 3. This report begins (Chapter 1) with an examination of Vietnam’s longer term goals for the improvements in the quality of life. Drawing upon the ongoing activities of the Poverty Working Group, specific monitorable indicators are described and placed in the context of the International Development Goals. This is followed (Chapter 2) with an assessment of the achievements of the past year, the likely impact of the global downturn, and the projected international financing requirements for Vietnam’s development program. The first two chapters thus provide the context as Vietnam embarks upon its ten-year socio-economic strategy. 4. The following three chapters address the three broad sets of instruments that the Government has at its disposal to move the country towards the achievements of its ambitious goals. These are: (i) improvements in the policy and incentive structure (Chapter 3), (ii) public administration and institutional reform (Chapter 4), and (iii) the allocation and management of public expenditure (Chapter 5). In each of these areas the report outlines progress, plans and remaining gaps. I. VIETNAM’S DEVELOPMENT GOALS AND THE COMPREHENSIVE POVERTY REDUCTION AND GROWTH STRATEGY (CHAPTER 1) 5. The past year has seen important progress in Vietnam’s articulation of its development vision for the coming decade. An important component of this has been the establishment of an impressive set of social and economic goals for the 2000-2010 period. These are driven by a genuine concern for poverty reduction and improved quality of life for all citizens. The broad goals are documented in the ten-year socioeconomic strategy (SDS) endorsed by the Ninth Party Congress in April 2001, and in a series of sectoral plans and the draft Five Year Plan for 2001-2005. Vietnam Development Report 2002 6. In order to be useful, targets need to be limited in number, reachable and monitorable -- and the steps to reach them must be understood, prioritized and costed. This exercise is now underway, and will be documented in the Comprehensive Poverty Reduction and Growth Strategy (CPRGS), which is currently being prepared by a Government inter-ministerial team,1 in collaboration with donors, NGOs and other stakeholders, and is expected to be completed in the spring of 2002. The strategy will articulate the structural reforms, public spending and sectoral policies that will be necessary to achieve the agreed goals and targets. Central to this task is the clarification of clear outcome targets, which explain the changes the Government of Vietnam seeks to generate over five and ten-year timeframes, and intermediate indicators, which can be tracked and monitored regularly (annually or biannually) to indicate whether there is sound progress towards achieving the targets. 7. Helping in this process has been a task of the Government-donor-NGO Poverty Task Force (PTF).2 This has involved the production of eight thematic papers, which have been distributed as consultation drafts and will be finalized in January 2002. The process has been informed by the Millennial Development Goals agreed upon by all the countries of the world at the Millennial Summit of the United Nations in 2000. Each of these papers draws on national strategies and the MDGs to propose goals and outcome targets which can guide policy measures and public actions. They also suggest indicators which – taken together – could set the framework for monitoring progress against the CPRGS. The papers cover the following topics: Eradicating Poverty and Hunger; Reducing Vulnerability and Providing Social Protection; Providing Quality Basic Education For All; Promoting Ethnic Minority Development; Improving Health Status and Reducing Inequalities; Ensuring Environmental Sustainability; Enhancing Access to Basic Infrastructure; and, Ensuring Good Governance for Poverty Reduction. 8. Table 1 summarizes the goals and outcome indicators that have been derived from this analytical work. This seeks to capture as far as possible the collective views of the Poverty Task Force. This work is still very much in progress; in some areas there is agreement on broad principles, but more work and discussion is necessary to assess what is realistic and attainable. Once complete, attention will need to turn to establishing the resource requirements associated with reaching these targets and establishing the links between outcome targets for poverty reduction and the resource allocation process. 9. It will also be necessary to establish more regular and accurate tracking systems for the key indicators of progress, with good dissemination of the results. Such 1 This is being prepared by an inter-ministerial committee under the leadership of the Ministry of Planning and Investment (MPI), building on the interim poverty reduction strategy completed earlier. 2 The Government-donor-NGO Poverty Task Force has been working collaboratively on poverty analysis (World Bank et al, 1999) and strategic planning since 1999. While the CPRSG is being drafted, the PTF comprises 16 Government ministries, 6 donors, 4 international NGOs and 4 local NGOs. ii Summary monitoring systems will need to be disaggregated by geographical region, gender and ethnicity in order to reflect Vietnam’s strong emphasis on equitable development and social inclusion. Such monitoring will call for significant improvements in generating and analyzing data. The proposed Multi-Purpose Household Survey to be done every two years by the Government Statistics Organization (GSO) is a very important initiative towards this end. Table 1: Vietnam Development Targets 1 Goals and Targets Indicators Goal 1: Eradicate poverty and hunger Target 1. Between 2000 and 2010, reduce poverty according to international 1. Proportion of population/households below poverty line by 2/5th and according to national poverty line by 3/4th international and national poverty line 2. Poverty gap ratio 3. Share of poorest quintile in national consumption Target 2. Between 2000 and 2010, reduce food poverty according to 4. Proportion of population below international food international food poverty line by 3/4th poverty line Target 3. Address vulnerability by reducing the proportion of households 5. Indicators of risk to natural disaster: loss of life; falling by two quintiles or more to less than 10% between two damage to property, assets and crops; displacement of survey dates people 6. Creation of jobs in the non-agriculture sector 7. Percentage of agriculture households dependent on one activity for 75 percent or more of total income Goal 2: Achieve better education for all Target 4. Provide 100 percent enrolment in primary school (80 percent in 1. Net enrolment rate in primary education junior secondary school) by 2005 and quality basic education for 2. Net enrolment rate in lower secondary education all by 2010, with an emphasis on full day primary education. 3. Pre-school attendance for 3-5 years old 4. Age-specific enrolment rate 5. Percentage of children in full day schooling 6. Completion rate of primary education 7. Literacy rate of 15-24 years old Target 5. Eliminate gender disparities in primary and secondary education 1. Ratio of girls to boys in primary, secondary and tertiary by 2005 and ethnic disparities in primary and secondary education education by 2010 2. Ratio of literate females to males of 15-24 years old 3. Ratio of enrolment rate of ethnic minority children to Kinh children in primary and secondary education by 2010 Goal 3 : Reach gender equality and empower women Target 6. Increase women's participation in political and 1. % of positions in Party Committees business life by increasing the number of women in elected bodies held by women; 30% of deputies in NA who are and the government machinery at all levels (national, provincial, women; % of representatives in elected bodies who district and communes) are women; 80% of ministries, branches, central agencies and authorities that have female heads of department Target 7. Improve women's access to assets by ensuring 2. % of land titles with both names their names (as well as those of their husbands) are On 100% of the land-titling books by 2005 Target 8. Reduce the vulnerability of women to domestic violence 3. Mechanisms to prevent domestic abuse and to help victims to cope (sensitize police stations, courts, build shelters etc) are in place Target 9. Target public investments into areas that reduce the burden on 4. More work needed to identify priority investments women's time (such as drinking water and fuel, etc.) iii Vietnam Development Report 2002 Goal 4 : Eradicate poverty and preserve the culture and diversity of ethnic minorities Target 10. Preserve and develop literacy in ethnic minority languages 1. Literacy level in ethnic minority languages Target 11. Ensure individual and collective land-use rights for all land-use 2. Proportion of ethnic minority households that have types have been allocated to the majority of the ethnic land-use rights for all their land-use types mountainous people. Target 12. Increase the proportion of government personnel of ethnic origin 3. Proportion of government personnel of ethnic origin. closer to its proportion in the national population. Goal 5: Reduce child mortality Target 13 Reduce the IMR to 30%o by 2005 and 25%o by 2010 and more 1. Infant mortality rate rapidly in disadvantaged areas Target 14. Reduce under 5 MR to 39%o in 2005 and 32%o in 2010 2. Under 5 mortality rate Target 15. Reduce under 5 malnutrition to 25% by 2005 and 20% by 2010 3. Prevalence of underweight children (under 5 years old) Goal 6 : Improve maternal health Target 16. Reduce the maternal mortality rate to 80/100000 in 2005 and 1. Maternal mortality rate 70/100000 nationally and with additional targets set for 2. Skilled attendance at delivery disadvantaged areas (to be established) Target 17. Provide universal access to safe and reliable reproductive health 1. Contraceptive prevalence rate care services by 2010 Goal 7: Combat HIV / AIDs Target 18. Slow the increase in the spread of HIV/AIDs by 2005 and halt the 1. HIV prevalence 15-49 years old increase by 2010 Goal 8: Ensure environmental sustainability Target 19. Extending forest cover to 43% by 2010 (from 33% in 1999) 1. Forest cover 2. Percentage of country under protected (“special-use”) forests 3. Representation of species diversity in the protected forests Target 20. Air and water pollution to be within the national standards by 2005 4. Quality of air and water Goal 9: Provide essential infrastructure services to the specially disadvantaged poor Target 21. Provide essential infrastructure service to 75% of poor communes % of poorest communes with : by 2005 and to 100% of specially disadvantaged communes by 1. automobile road access to commune center 2010 Target 22. Improve long term access to safe water from 52% in 2000 to 68% 2. clean drinking water systems (73% by 2010) by 2010 3. grid and off-grid electricity 4. Health center 5. schools 6. markets 7. communications center (Post Office) 8. small-scale irrigation Goal 10 : Ensure good governance for poverty reduction Target 23. Build a democratic, clean, strong, professionalized, modernized, 1. Implement the grassroots democracy decree effective and efficient public administration system. 2. Implement the Legal Needs Assessment (LNA) Action Plan 3. Implement the Public Administration Reform (PAR) Action Plan 4. Implement the Public Expenditure Review (PER) Action Plan 5. Develop and implement an anti-corruption strategy (more work needed to develop specific indicators) (1) These Vietnam Development Targets reflect work in progress. They are compiled from a number of sources including the seds; other national strategic plans; a series of background papers commissioned by the PTF; and discussions held at a meeting in Haiphong. iv Summary 10. This process underway in Vietnam is part of an important trend internationally, as developing countries and donors seek to focus on outcomes rather than on inputs, and as an increasing number hope to gradually move away from a project II. NAVIGATING THE GLOBAL DOWNTURN (CHAPTER 2) 11. Central to achieving virtually all of Vietnam’s development goals will be the maintenance of high overall growth rates. The current global economic downturn thus makes the achievement of Vietnam’s goals much more difficult, and makes it imperative that Vietnam navigates carefully through this period.. The global slowdown, though cyclical, is the worst experienced in two decades. Global economic growth of 1.3 percent in 2001 is only a third of the 3.8 percent growth in 2000 and the lowest in eight years. Prospects for a recovery have been pushed back to late 2002 by the events of September 11 and their aftermath. The growth of world trade volume has fallen from 13 percent in 2000 to around 1 percent in 2001 – the sharpest decline in two decades — and is expected to recover to only 4 percent next year. Growth in the OECD countries in 2001 and 2002 will be the slowest it has been since the early 1980s. 12. Export Growth. As would be expected, there has thus been a sharp falling off in the demand for Vietnam’s exports (see Figure 1). This has been exacerbated by the fact that Vietnam’s key East Asian trading and investment partners have entered recession abruptly. Japan’s growth has fallen from 1.5 percent in 2000 to minus 1 percent in 2001 and, even more striking, the newly industrialized economies of Singapore, Taiwan (China) and Hong Kong, which grew by 8 percent in 2000, will see a contraction of their GDP by 1 percent this year. Figure 1: Import Demand Growth in Vietnam’s Trading Partners % 18 15 12 9 6 3 0 2000 2001/e 2002/f Source: World Bank (2001b); IMF (2001b) & Asia Pacific Consensus Forecast (2001). 13. As a result, overall export earnings growth is expected to be 7 percent in 2001 (to around $15 billion) down from 25 percent growth in 2000. This is due more to price than volume declines. In agriculture, volume increases continue to be impressive by any standard – almost 25 percent this year --, but have been offset almost entirely by price declines (see Figure 2). Manufactured export earnings rose by only 1 percent in 2001, in marked contrast to last year’s 16 percent, due to the collapse in exports of footwear, electronics, and computers. v Vietnam Development Report 2002 Figure 2: Falling Prices and Surging Volumes of Agricultural Exports in 2001 (year-on-year percentage change) -80 -60 -40 -20 0 20 40 60 Total Agriculture Rice Coffee Black pepper Rubber Cashewnut Tea of all kinds Ground nut Price Volume Source: Customs Office and General Statistical Office. 14. Vietnam’s exports will probably be under even greater pressure next year than this. First, with oil prices falling towards the end of this year, the full effect will likely be felt only next year, as oil export earnings decline by as much as 20 percent. Second, the global slowdown which was led by a decline in high-tech business investment is now being followed by sharp declines in consumer confidence in all three major global economies – the US, Japan, and the European Union --, thereby reducing demand for consumer goods next year. This means that more of Vietnam’s exports – garments, footwear, seafood, beverages and other consumer products – will be affected in 2002. Prices of agricultural exports could also fall further. 15. Foreign investment. The supply of world foreign investment is likely to fall by 40 percent this year – the sharpest decline in three decades. East Asia has largely managed to avoid this decline – mainly due to the attractiveness of China. But Vietnam has been prevented from enjoying the increase in investment it had hoped. How Should Vietnam Respond to the current Global Economy? 16. Navigating through the current global slowdown will require skill and decisiveness. While the current global economy creates a major threat to Vietnam’s development objectives, it may also offer an opportunity. Done right, this year and next offer an unusual chance to gain in competitiveness and position Vietnam for the decade ahead. The key question is whether Vietnam can act quickly and seize these opportunities. Four types of actions are recommended for that purpose. 17. First, implement the recently-adopted structural reform agenda more rapidly. Slower world growth calls for an accelerated domestic program to build competitiveness. Faster implementation of reforms over the next 12 months – aimed at reducing costs of exporters and enhancing options for private investors – will have a bigger and more favorable impact for Vietnam, than doing the same actions in the vi Summary subsequent twelve months. This is because many international businesses have terminated their earlier import contracts because of falling demand, especially since the September events and its aftermath. Many of them are also rethinking their location and procurement strategy. This situation presents Vietnam with easier opportunities to break into these markets now than will be the case later, once new contracts and procurement strategies are adopted by these businesses. 18. This will be particularly important in respect of actions to open up the private sector and promote exports. Specific actions to assist the private sector – modifying laws on banks to reduce their constraints on providing credit to private SMEs, modifying the land law to provide easier access to land, removing existing business licensing restrictions in various sub-sectors and facilitating the formation of domestic private business associations – can all be taken now, rather than later. The proposed Party Plenum in February 2002, to discuss private sector policies, is extremely timely and could provide a significant boost to private investment in 2002 and beyond. 19. Second, position Vietnam as a safe and productive place to invest. The current global economic and political uncertainty is forcing foreign investors to rethink their global portfolios. Some countries in the region are less attractive, while others (e.g., China, given its WTO accession) are more attractive. Vietnam needs to work hard to position itself among the latter. A recent survey shows that Vietnam is perceived as the “safest” country in Asia, which is valuable. The challenge will be to match this strong rating on physical security with strong ratings on predictability and transparency of the business climate. 20. The past year has seen some important progress in this respect. Three large energy related investment – the three biggest private foreign investments in Vietnam ever – have finally been signed, indicating that Vietnam is open for large scale investment. And a number of specific policy changes – such as reductions in personal income taxes, movements on interest rate caps, new procedures for the conversion of foreign invested into joint-stock companies – have resulted in a generally improved business sentiment among foreign investors, and a significant number of new investments and expansions of existing operations. 21. Nonetheless, Vietnam has a good distance to travel before it is regarded as a premier investment location. This is not because of any inherent lack of competitiveness because Vietnam can become highly competitive and increasingly it is improving its policy environment. It is because of Vietnam’s reputation for slow decision-making and for insufficient transparency. If Vietnam is to attract the foreign investment target it has set itself for 2001-2005, issues of “governance” will need to be addressed in parallel with the implementation of the structural policy reform agenda. 22. Third, tap the US and Chinese export markets. The United States and China provide good opportunities for expanding exports, despite the global slowdown. The ratification and implementation of the USBTA lowering US tariffs on Vietnamese manufactured exports presents a great opportunity. Though import demand will remain weak in the US in the near-term, Vietnam could generate growth in its exports to that market, if it prepares expeditiously and targets its products carefully. China is expected to grow rapidly next year and over the coming decade, offering opportunities for South East Asian countries including Vietnam. Currently, China’s imports from this region equals vii Vietnam Development Report 2002 that from Japan, but Vietnam’s share of the Chinese market is falling. Recent estimates of the impact of WTO accession on China’s import demand suggest that there will be important opportunities for Vietnam to export certain products. Whether Vietnam is successful in realizing these opportunities will depend on its efforts to penetrate the Chinese market and on the speed of reforms that Vietnam undertakes as part of its own WTO accession process. 23. Fourth, take actions to address depressed rural incomes. The sharp declines in commodity prices have hurt poor farmers badly. Among the poorest 40 percent of the population nearly half are net rice sellers, and others are sellers of other commodities. As Vietnam opens its economy even further, it will become even more vulnerable to fluctuations in world commodity prices. Other countries have adopted risk management (hedging) techniques, which Vietnam now needs to consider. In addition, of course, a more diversified agricultural base can help significantly, as can better market and price information to farmers. The Government is rightly seeking ways to inject resources into these rural areas and a slightly expansionary fiscal stance may be a good near-term option. Considerations of banking sector stability preclude rapid expansion of domestic credit. However, revenue collection this year is rising faster than expected (especially oil revenues), and public expenditures have not kept pace. Thus the budget deficit is expected to be lower than was planned. There is thus an opportunity to increase public spending in 2002, given debt levels that remain serviceable and rates of return on public infrastructure projects and public recurrent that spending remain high. Faster implementation of public projects could also speed up disbursement of ODA. Mechanisms are being put in place to channel funds more quickly and effectively to lower tiers of government. 24. Nevertheless, to implement an expansionary fiscal policy next year, public spending programs that reflect strategic priorities and create employment, have to be prepared now. Also special efforts are needed to ensure that accountability mechanisms apply to the new spending programs and this may be dovetailed into ongoing efforts to improve financial management and accountability. The Near-Term Outlook and External Financing Prospects. 25. Vietnam’s medium term prospects for growth remain good despite the near term uncertainty that shrouds the global economy. This is because internal factors driving growth are more favorable today than in the last three years and because macroeconomic stability continues to be maintained. Macroeconomic performance in 2001 is close to expectations, despite a substantially worse external environment. Growth is lower than originally projected, but Vietnam is still expected to have the second highest growth rate among the larger economies in the region both this year and next. Retail sales and industrial production point to continued growth in real GDP, with economic activity driven by domestic demand, including a pick up in private investment following improved business sentiment. With a slight easing of imports this year and a modest improvement in foreign investment inflows, the external balance remains favorable. The proposed near-term measures will not only help Vietnam to reach a better overall growth rate for 2002, but also to position itself well when the world recovery is in full steam in 2003. viii Summary 26. External financing requirements. Total external financing requirements are expected to rise as Vietnam participates more vigorously in the recovery of the world economy. The fiscal costs of reforms and the growth in imports, the latter arising from higher investment and higher output levels, have to be financed. While higher export earnings growth will be key, capital inflows -- especially foreign direct investment inflows and concessional foreign assistance -- will also need to play an important role if Vietnam is to catch-up with its more prosperous neighbors. This will also help to minimize commercial borrowing, so that Vietnam can continue to maintain its current low and sustainable external debt-servicing burden. Table 2: Current Account Balance (US$ billion) Projected Projected Projected Items 2000 2001 2002 2003 2004 Exports (fob) 14.5 15.3 16.1 18.1 20.5 Imports (fob) 14.0 14.9 16.4 18.9 21.1 Trade Balance 0.5 0.4 -0.3 -0.8 -0.6 Services, investment income & transfers (net) 0.2 0.1 -0.2 -0.2 -0.2 Current account balance 0.5 0.4 -0.6 -1.1 -0.9 (excluding grants) Percent of GDP 1.7 1.2 -1.9 -3.3 -2.7 Memo items: Growth rates: Export value 25.0 7.0 5.0 12.0 13.0 Import value 35.0 6.0 10.0 15.0 11.0 Source: Actual data: Vietnamese authorities, IMF and World Bank. Estimates: IMF and World Bank staff. Note: Figures are rounded. 27. To support the costs of reforms and the import needs, Vietnam will require disbursements -- or gross capital inflows -- of about $2.7 billion next year. Slightly more than half of this inflow should come from concessional financing or ODA, based on higher disbursements from the existing stock of un-disbursed project aid), and the rest from FDI and non-concessional loans. FDI and commercial inflows are estimated to increase to $1.2 billion in 2002 (both equity and loans) given the large projects in the energy sector that were recently approved. These projects are expected to include loan- components of around US $0.4 billion and non-concessional loans, unrelated to FDI, are not expected to exceed US$ 0.2 billion. 28. However, even with rising disbursements of project aid, there will be need for quick disbursing concessional assistance. The World Bank’s Poverty Reduction Support Credit (PRSC) and the IMF’s Poverty Reduction and Growth Facility (PRGF) are expected to disburse a total of around US$ 270 million in 2002, helping to meet the external financing requirement. Disbursement from the UK, Sweden, Denmark and the Netherlands, who have recently approved co-financing of the first PRSC, and from program loans of the Asian Development Bank (ADB) are also expected. ix Vietnam Development Report 2002 III. IMPLEMENTING STRUCTURAL REFORMS (CHAPTER 3) 29. Over the past twelve months good progress has been made in respect of structural reforms. Following the adoption of the Ten-Year Strategy by the Ninth Party Congress in April, Vietnam reached agreement with the IMF and the World Bank on a multiyear program of specific actions concerning banking and state-owned-enterprise (SOE) reform, trade policy, improving the climate for private enterprise, and public expenditure management.3 30. Progress in implementation. Implementation of this agreed program of actions has been good except for SOE reform. Measures in respect of trade reform and private sector development are on track. Indeed, trade reform was implemented faster than expected as quantitative restrictions (QRs) on imports were removed from seven items instead of the two that were scheduled in the original program. Banking reform lagged initially, but now seems to be largely back on track. Restructuring of non-state joint- stock commercial banks (JSBs) has progressed satisfactorily, as several more JSBs have been closed and merged to reduce the total number of JSBs by more than a third of the number in 2000. Restructuring of the four state-owned commercial banks (SOCBs) is also proceeding after a delayed start, and financial audits of the four SOCBs for 2000, using international accounting standards, are expected to be completed by January next year. Detailed restructuring plans with phased and conditional re-capitalization were also approved, making it possible for SOCBs to implement their restructuring plans. 31. The implementation of SOE reform has slipped substantially and, unless corrected over the next two months, there is real risk of not meeting the twelve-month program targets by May 2002. The number of SOEs that were equitized in this calendar year was lower than in each of the previous two years (Figure 3). The establishment of the redesigned social safety net fund and the revised decree to improve the equitization process are four months behind schedule and are currently expected to be completed by mid-December 2001. 3 The IMF’s board approved the Poverty Reduction and Growth Facility (PRGF) in April 2001 and the World Bank’s board approved the Poverty Reduction Support Credit (PRSC) in June 2001 in support of Government’s reforms. Annex 3.1 describes the reform actions envisaged under each component of the PRSC program as well as the non-bank financial sector reforms supported by the ADB. x Summary Figure 3: Number of Completed Major and Minor Equitizations 250 200 150 100 50 0 1998 1999 2000 M8-2001 Less than 51% of shares sold 51-65% of shares sold More than 65% of shares sold Number of completed equitizations Source: National Steering Committee for Enterprise Reform and Development. 32. This slippage is attributed in part to the fact that managers were waiting for the results of the August 2001 Party Plenum meeting on SOE reform. But now that the Plenum has endorsed the SOE reform program, proposed timetable of specific actions on SOE reform has been published, and strengthened implementation arrangements are being put in place, the Government is making concerted efforts, including monthly review and monitoring of progress, to correct the slippages. 33. Implementing arrangements. The Government has established a high-level committee to oversee the implementation of the planned reforms. It is headed by a Deputy Prime Minister, and is supported by a working group in the Office of Government and a secretariat headed by the State Bank of Vietnam. Designation of specific members of the working group and the secretariat as well as recruitment of full-time staff is now urgent. Also, as the reform agenda is being developed and expanded, there will be a need for a more permanent agency or body, with full time staff and adequate powers, that will be responsible for coordinating implementation of reforms as well as for assessing impact of reforms on an ongoing basis. The Expected Impacts of the Planned Reforms. 34. The medium term impact of the recently-adopted program of structural policy reforms will be favorable, notwithstanding redundancies in the SOE sector. Four aspects of impact are examined in this report: (i) the impact on the overall policy and incentive regime in Vietnam, in comparison with other countries; (ii) the impact of a continuously improving investment climate on employment creation by private small and medium enterprises (SMEs); (iii) the impact of trade reforms on growth and poverty-reduction using a general equilibrium simulation model; and (iv) the impact on short-term unemployment through redundancy of SOE workers, and the required mitigation programs. 35. Vietnam’s Policy Environment in Comparison with Other Countries Vietnam has improved its policy and institutional environment considerably in recent years and now compares favorably with the average for low-income countries. This is presented in Figure 4, which is based upon an assessment across countries made each xi Vietnam Development Report 2002 year by the World Bank. When compared to the average for the top one-fifth of low- income countries and the top one-fifth of all developing countries, Vietnam does well in respect of macroeconomic management and policies for social inclusion, but lags considerably in the areas of structural policies and public sector management. Vietnam also lags China in these two areas. However, successful implementation of structural reforms and public expenditure reforms, as well as implementation of the emerging specific actions in governance (see below) will bring Vietnam close to the better performing developing countries. Figure 4: Vietnam’s Policy and Institutional Performance Relative to Others (1) Progress has been made … and Vietnam is above the average for during 1999-2001... low income countries in some areas... Inflation and Macro. Inflation and Macro. Imbal. Imbal. 6.0 6.0 Equity Policy Fiscal Policy Equity Policy Fiscal Policy 4.0 4.0 Social Policy 2.0 Ext. Debt Mgt. Social Policy 2.0 Ext. Debt Mgt. 0.0 0.0 Bank. Sect. Effic. & Res. Bank. Sect. Effic. & Factor & Prod. Market Mob. Factor & Prod. Market Res. Mob. Pub. Sect. Mgt. Com. Environ. For PSD Pub. Sect. Mgt. Com. Environ. For PSD Trade & Forex Policy Trade & Forex Policy Vietnam, 2001 Vietnam, 1999 Average for low income countries, 2001 Vietnam 2001 ... but not as good as the top quintile of low …nor as good as the top quintile of all income countries... developing countries. Inflation and Macro. Imbal. Inflation and Macro. Imbal. 6.0 Equity Policy Fiscal Policy Equity Policy 5.0 Fiscal Policy 4.0 3.0 Social Policy Ext. Debt Mgt. Social Policy 2.0 Ext. Debt Mgt. 1.0 0.0 Bank. Sect. Effic. & Res. Bank. Sect. Effic. & Res. Factor & Prod. Market Factor & Prod. Market Mob. Mob. Pub. Sect. Mgt. Com. Environ. For PSD Pub. Sect. Mgt. Com. Environ. For PSD Trade & Forex Policy Trade & Forex Policy Top quintile of low income countries, 2001 Vietnam, 2001 Top quintile of borrowers, 2001 Vietnam, 2001 (1) This is based on the World Bank’s annual internal assessment of the quality of each country’s policy and institutional framework. This assessment is conducted for 20 characteristics: four relating to economic management, six to structural policies, five to policies for social inclusion and five to public sector management. These graphs are based on the assessment of 10 of those characteristics. The further out a characteristic is from the centre of the graph the better the quality of the score for that characteristic. 36. Medium-term employment impact of domestic private sector. Improvements in the policy environment for the domestic private sector in Vietnam over the last two years appear to be leading to impressive results. Since the Enterprise Law became effective in January 2000 an average of 1200 new small and medium enterprises (SMEs) have registered each month. A recent World Bank/CIEM/MOLISA survey finds that 70 xii Summary percent of these new registrations are start-ups and are adding genuinely to domestic investment. Evidence over a two-year period also suggests that private SME employment has grown at around 30 percent a year and private SME manufacturing employment, at 35 percent a year. The strongest employment growth was found in SMEs with more than 100 workers, which is a recent and very encouraging development. Based on these and other research findings on supply response, there is little doubt that if the Government systematically seeks to improve the climate for domestic private investment, and manages to change attitudes towards private enterprise at the local government level, employment generation can be huge. Based on the performance of China in this area over the past decade, it is probable that employment in the domestic SME sector could rise from one to 10 million over the coming decade -- thus reaching 20 percent of the labor force. This spectacular growth may not only be possible with strong effort, but is almost certainly necessary if the Government’s targets of employment growth and industrialization are to be met. 37. Medium-term growth and poverty impact of trade reforms. The recently- adopted trade reforms, when implemented, will increase employment, incomes and consumption of all income groups over the medium term4, even though some households will suffer from short-term unemployment as labor is reallocated across sub-sectors. Simulation of the medium-term impact of a more ambitious trade reform program than the one recently-adopted (i.e. reducing all tariffs to 5 percent) using 1997/98 VLSS data, confirms that all income groups are expected to gain in the medium term. Figure 5: Likely Impact of Trade Reform on Consumption of Ten Income Groups Real consumption percentage change Urban 5 (wealthiest) Rural 5 (wealthiest) Urban 4 Rural 4 Urban 3 Rural 3 Urban 2 Rural 2 Urban 1 (poorest) Rural 1 (poorest) 0 1 2 3 4 5 6 7 8 9 Source: Annex 3.3. 4 Once the case studies are completed it will be possible to ascertain the nature and extent of impediments to the movement of goods, labor and capital and thus their likely impact on regional distribution of these gains. xiii Vietnam Development Report 2002 38. Household expenditures of all ten income groups – five urban quintiles and five rural quintiles – not only rise but also get relatively evenly distributed across the groups as shown in Figure 55 and the incidence of poverty falls in both rural and urban areas. This outcome requires that the considerable reallocation of output that is needed across sectors is completed. All agricultural sectors will expand as import-protection is reduced, with ‘Other crops’ and ‘Livestock’ showing the biggest gains. Export oriented sectors such as ‘food processing’ and ‘garments and textiles’ and ‘footwear’ show expansions in output too though greater competition in third-country markets could reduce this impact. On average, the increases in labor for expanding sectors compensate for the contractions in the highly protected, import competing sectors. 39. Short-term unemployment impact and mitigation. The reform agenda will result in moderate transitional unemployment as redundant workers find new jobs in the expanding sectors6. It is likely that redundancy will be unavoidable in some import competing sectors, such as paper, cement, chemicals, steel, electrical goods and machinery and equipment as protection is reduced. Similarly, as SOEs are equitized or sold and new owners focus more on profits, there will be labor-shedding in over-staffed sub-sectors like transportation, oil and gas, construction, steel, coal and minerals as well as machinery of all types.7 40. The Government has redesigned the social safety net fund that will be used to mitigate the adverse impact of job losses on SOE workers. This fund will provide a more generous compensation package than is available under the current labor code in order to encourage voluntary separation as well as to protect workers in a period of intense reform actions in over three years. The newly designed package will ensure the same level of financial assistance to all redundant workers irrespective of the reform actions causing the redundancy (i.e., equitization, divestiture, liquidation, restructuring, reduced protection, and so on). Also to encourage younger workers to move to the private sector, and to avoid penalizing redundant female workers, the compensation package will have a substantial lump-sum component. IV. BUILDING MODERN GOVERNANCE (CHAPTER 4) 41. The Government recognizes that building modern governance structures is fundamental to Vietnam’s transition to a successful market economy. It is impossible to implement reforms and allocate public resources effectively in a sustained way without a strong and well-performing public administration. Neither can a multi-sector economy grow rapidly and in a sustained manner without a strong commitment to the rule-of-law and to a independent court system. 42. Public administration reform master-program. The Government approved a master program for public administration reform (PAR) this year, covering the four related areas of (i) organizational restructuring; (ii) human resource reforms; (iii) institutional improvement; and (iv) public financial management. Seven national 5 There are ten income groups in the CGE model used – five rural income quintiles and five urban income quintiles. 6 See Annex 3.3. 7 See Belser and Rama (2000) for a rigorous estimate of the redundancy arising from shifts in ownership. xiv Summary programs have been established to carry that process forward, each under the leadership of a specific government agency (see Box 1).8 Two of these programs -- institutional improvement and public finance reform – are linked closely to the ongoing work being done by the Ministry of Justice (i.e. legal needs assessment and strategy) and by the Ministry of Finance (i.e. public expenditure management reform) and they are both discussed below. Box 1: PAR Master Program 2001-2010: Four Pillars and Seven Program Areas Organizational Restructuring. 1. Redefinition of roles, functions, and organizational structures of the agencies in the public administration system (Lead Agency: GCOP and the Office of the Government) 2. Modernization of the public administration system (Lead agency: Office of the Government) Human Resource Reforms 3. Downsizing (Lead agency: GCOP) 4. Human Resource Development: building and improving quality of public servants (Lead agency: GCOP and the National Academy of Public Administration (NAPA) 5. Salary Reforms (Lead agency: GCOP) Public Financial Reforms 6. Reform of financial management mechanisms in the public sector (Lead agency: Ministry of Finance) Institutional Development. 7. Improve the process of law-making and of developing and issuing legal documents (Lead agency: Ministry of Justice). 43. Implementation of the PAR master progam is now the major challenge. It will require strong leadership and close consultation with stakeholders. A good deal of analytical and diagnostic work will have to be done, building on the earlier review, before specific reform measures in some areas can be adopted. This should begin with a stock- taking of work done in the four sub-reports on public administration to identify areas where further analysis is necessary to formulate specific measures. In a few areas agreed actions can be implemented right away. 44. The PAR master program provides an excellent overall framework that should enable improved mobilization and use of donor resources in supporting implementation of PAR. All existing PAR projects that are being supported by donors are being reviewed to ensure their consistency and coherence with the PAR Master Program. This should overcome existing fragmentation and improve the targeting of assistance. Further technical assistance can now be provided for various components if the seven national programs. 45. Developing legal systems. Vietnam needs a well-functioning legal system to underpin the ongoing transition to a market-economy, and thus a strategy to develop such a system in a deliberate manner has been initiated. A legal needs assessment and a draft strategy for developing such a legal system has just been completed and the process for discussion and consensus-building on a program of reform actions is underway. 9 8 The first workshop on this master-plan was held in Halong Bay in September and was attended by relevant government agencies and donors. 9 Five teams of Vietnamese and external experts have worked intensively for the last six months, under a inter-ministerial committee led by the Ministry of Justice, to finalize this assessment and a draft strategy. xv Vietnam Development Report 2002 46. This draft strategy proposes significant improvements in the legal system. First, it defines the rule-of-law for citizens who can do anything, which is not specifically prohibited by law, and for state agencies/ministries that can do only that which is specifically permitted by the law. Second, it proposes greater independence of courts and improvements in the status of judges. Third, it recommends increased transparency by requiring publication of legal documents, administrative procedures and court decisions in the Official Gazette. Fourth, it seeks to strengthen law-making by improving the skills of deputies of the National Assembly and by reorienting legal education and training for all lawyers towards interactive problem-solving methods. 47. The legal needs assessment and draft strategy for comprehensive development of Vietnam's legal system will be submitted to a conference of Vietnamese state legal agencies and donors in early March 2002 and thereafter the Final Report will be submitted to the Government for approval of the strategy, the action plan, and the framework for international donor cooperation and coordination. The plan is for the Government to finalize the overall report together with the strategy and the action plan for the development of Vietnam’s legal system to be discussed at the mid-term CG meeting in 2002. V. IMPROVING PUBLIC INVESTMENT POLICY (CHAPTER 5) 48. Public spending management reform has come a long way since the approval of the Budget law in 1997, but a lot more remain to be done. The formulation of the five- year total investment plan and the subsequent detailing of the public investment program (PIP), provides an opportunity to improve budgetary processes that would ensure high quality public investments and better linkage between sectoral allocations and development targets. 49. More comprehensive public financial management reforms. This is also a propitious time because the Government has expressed a desire to move to a more comprehensive reform process in public finance. After nearly two years of diagnostics and consensus-building, Vietnam adopted a program of specific reform measures on public spending and budget management, earlier this year.10 The Ministry of Finance has now proposed other areas for diagnostics and consensus-building in order to develop and implement a more comprehensive public financial management reform program, covering not only public spending, but also public debt, public asset and revenue management. 50. Progress in implementation of public spending reform. Vietnam has been implementing in a timely manner, the recently-adopted program that seeks to increase public access to budgetary information, enhance comprehensiveness of budget accounts and improve the processes of budget formulation and execution. Regulations to authorize publication of more detailed budgetary data early next year, with breakdowns similar to those provided in the public expenditure review, have been approved. Actions have been taken to develop an information base on all receipts and expenditures of the “off-budget” accounts and consolidate them. In addition, the Ministry of Finance has decided to replicate the HCM City pilot block-grant approach to decentralization as well as to initiate a pilot medium-term sector expenditure program. A new budget management 10 This is also supported by the World Bank’s PRSC (see Annex 3.1 for details). xvi Summary information system linked to the proposed budget reforms is also being developed to generate timely, reliable and consistent information on budget execution and for this purpose the Treasury has already been designated as the agency responsible for consolidation and maintenence of all public accounts.11 51. Ensuring appropriate sectoral allocations. There are at least four changes in the institutional arrangements and budgetary processes that can promote more appropriate sectoral allocations and help Vietnam achieve its development goals and targets and they are as follows: The public investment process should allocate public resources to deliver goods and services that are unlikely to be adequately provided by business-oriented SOEs and the private sector. Thus investments of business-oriented SOEs should no longer be eligible for budgetary and concessionary credit (or state credit) resources, which is consistent with the principles of the Government’s SOE reform program. This would increase the availability of resources for more pressing public investments in infrastructure and human development. The budgetary process of making public investment allocations to specific sectors needs to be better linked with the process of setting sectoral goals and targets by ministries. For this purpose ministries and provinces must cost the proposed public interventions to achieve their sectoral targets so that questions of affordability are fully addressed at the time of setting them. This will be particularly true of the goals and targets emerging from the process of preparing the CPRGS. The process of determining sectoral allocations of public investment ought to be explicitly integrated with the formulation of the recurrent expenditure because if sectoral investments are not complemented by sufficient recurrent spending, a good deal of this investment would not be utilized efficiently. The public investment planning, approval and budgeting processes – at both central and provincial levels -- need to take explicit account of available resources for financing recurrent expenditures for the investment, especially operations and maintenance (O&M) expenditures. Careful cost-benefit analysis of the large investment projects in different sectors should be an integral part of the central project selection process to ensure that resources are used for the best available public investment project. 52. Medium-term sector expenditure program. The Government has decided to pilot multiyear or medium-term sectoral expenditure programs in order to link total sector spending more closely to goals and targets as well as to integrated investment and recurrent spending. This is because the appropriateness of sectoral allocations can be best judged in the context of total sectoral spending (i.e. recurrent and investment), because they together determine the delivery of public goods and services. Thus five year 11 The Ministry of Finance is using its detailed matrix of actions with a timeline, not only to organize its own work but also to coordinate donor support xvii Vietnam Development Report 2002 sector investment plans should be integrated with five year recurrent expenditure programs and this should be redone every year.12 53. Promoting better regional allocations. While all seven regions have benefited from growth and poverty-reduction, the extent of poverty reduction and the rate of growth have both been much lower in Mekong Delta, Northern uplands, North central coast, and Central highlands. Three of these four regions (excluding Mekong) are also the poorest, accounting for two-thirds of all poor provinces (i.e. defined as having a higher poverty incidence than the national average). There is also evidence of continuing divergence in per capita GDP growth rates across provinces (over the last five years for which data is available) as shown in Figure 6. Figure 6: Changes in Poverty and Divergence in Growth Rates Poverty Reduction and Growth Rate Relative Mean Deviation of GDP Per Capita Growth of All Provinces Mekong Delta 0.54 Central Highlands 0.53 South Central Coast 0.52 Northern Uplands 0.51 North Central Coast 0.5 0.49 Red River Delta 0.48 North Southeast 0.47 0.46 0 20 40 60 80 100 0.45 % 0.44 Poverty Reduction Growth rate 1995 1996 1997 1998 1999 2000 Source: World Bank, 1999. 54. While ascertaining the relative importance of factors explaining these divergence in per capita GDP growth rates is difficult, differences in labor and capital endowments as well as in productivity performance across provinces clearly played a role. Differences in physical infrastructure, social services and governance institutions also contributed. Nevertheless, poorer provinces must make greater efforts themselves to create a better climate for private domestic and foreign investment and to allocate public funds to redress the severest physical and social infrastructure deficits in their provinces. The center can only ensure that the national investment framework is favorable, the barriers to movement of goods, capital and labor across provinces are minimal and that intergovernmental fiscal arrangements provide sufficient support to the poorer provinces. 55. On the latter, three changes to the existing institutional arrangements are recommended. First, allocation of cash-transfers to poor provinces should move to a formula-based system, wherein transfers, through a simple formula, will be positively related to population and cost disabilities and negatively related to per capita GDP, some other indicator of welfare and maybe remoteness. Second, the provinces should be given 12 MPI and MOF has taken the initiative to estimate the recurrent cost for some sectors during the five-year plan exercise. xviii Summary greater autonomy for the use of their total available resources and this should be accompanied by greater accountability for the use of those resources. Third, the process for determining the size of total transfers should include the central ministries as well as the provinces that are taxed for the transfers. Only five provinces are currently taxed for these transfers; thus a very high a level of total transfers could discourage the high- performing provinces from promoting vigorously their reform agenda. xix 1. Vietnam’s Development Goals and Targets 1. VIETNAM’S DEVELOPMENT GOALS AND TARGETS 1.1. Vietnam has articulated its development vision for the coming decade in the Socio-Economic Development Strategy (SDS), which expresses a strong commitment to growth, poverty reduction and social equity (ADB, UNDP and the World Bank, 2000). The specific actions, needed to translate this vision into reality, are described in the draft five year plan for 2001-2005 and in a number of sectoral strategies and plans. 1.2. The Comprehensive Poverty Reduction and Growth Strategy (CPRGS), which is being drafted by a inter-ministerial committee under the leadership of the Ministry of Planning and Investment (MPI), will look across these strategies and identify the priority areas for action in promoting growth, social equity and poverty reduction over the medium term (Box 1.1). Central to this task is the identification of clear outcome targets which explain the changes the Government of Vietnam seeks to generate over five and ten-year timeframes and intermediate indicators which can be tracked and monitored regularly (annually or biannually) to assess progress towards the targets. This chapter summarizes the work which has been carried out in defining such core development goals and targets for Vietnam. Box 1.1: The Comprehensive Poverty Reduction and Growth Strategy Reflecting its strong political commitment to equitable growth, poverty reduction and social development the Government of Vietnam is currently preparing a Comprehensive Poverty Reduction and Growth Strategy (CPRGS). This builds on the interim Poverty Reduction Strategy Paper (IPRSP), prepared last year, which introduced a package of structural reforms which were intended to accelerate economic growth and poverty reduction (Chapter 2). It also makes use of previous quantitative and participatory poverty assessments conducted jointly by Government, donors and NGOs through the Poverty Task Force. A Government team from 16 central agencies (50 people) are drafting the strategy in consultation with sub-national levels of Government. The drafting team anticipates that the CPRGS will cover five main areas: General assessment of the poverty situation; Creating an environment for growth, economic stability, and poverty reduction; Sectoral policies and measures to create opportunities, reduce vulnerability and provide support to the poor; Resource mobilization and allocation for poverty reduction strategy; Poverty monitoring and evaluation strategy. The schedule for the final six months of the drafting period includes an active consultation process which will include village- level discussions on the draft document. In addition, a considerable amount of analytical work is taking place both inside and outside Government in order to fill gaps in knowledge. The work during 2001 on defining goals, outcome targets and intermediate indicators was commissioned to contribute to the final section of this outline and involved eight thematic papers (halving poverty; reducing vulnerability; ensuring better education for all; improving health status and reducing inequalities; developing rural infrastructure; ensuring environmental sustainability; reducing poverty for ethnic minorities). It also draws on the second Plan of Action for the Advancement of Women 2001-2005. The draft papers and the goals, targets and indicators they propose have been discussed and debated with a wide range of stakeholders. INTERNATIONAL GOALS TO REDUCE POVERTY 1.3. While Vietnam has been defining its national development strategies, international commitment to achieving important poverty and social outcomes has intensified across the globe. This effort has been expressed in the International Development Targets (IDTs) and the Millennium Development Goals (MDGs). The latter is a set of goals embodied in the Millennium Declaration which has been adopted by 180 countries, including Vietnam (UN Country Team, 2001). 1 Vietnam Development Report 2002 1.4. The current formulation of the MDGs defines 7 outcome goals and 11 long term targets (mostly setting 2015 as a deadline for achievement). They will be monitored through 31 intermediate indicators on a regular basis (see Table 1.1). There is a further global partnership goal, which demands actions by developed countries to open up greater market access for developing country exports and to provide development assistance to support progress towards the MDGs. Table 1.1: Millennium Development Goals (MDGs) for All Developing Countries Goals and Targets Indicators Goal 1: Eradicate poverty and hunger Target 1: Halve, between 1990 and 2015, the proportion of 1. Proportion of population below $1 per day people whose income is less than one dollar a day 2. Poverty gap ratio 3. Share of poorest quintile in national consumption Target 2: Halve, between 1990 and 2015, the proportion of 1. Prevalence of underweight children (under-five years of age) people who suffer from hunger 2. Proportion of population below minimum level of dietary energy consumption Goal 2: Achieve universal primary education Target 3: Ensure that, by 2015, children everywhere, boys and 1. Net enrolment ratio in primary education girls alike, will be able to complete a full course of 2. Proportion of pupils starting grade 1 who reach grade 5 primary schooling 3. Literacy rate of 15-24 year olds Goal 3: Reach gender equality and empower women Target 4: Eliminate gender disparity in primary and secondary 1. Ratio of girls to boys in primary, secondary and tertiary education education preferably by 2005 and to all levels of 2. Ratio of literate females to males of 15-24 year olds education no later than 2015 3. Share of women in wage employment in the non-agricultural sector 4. Proportion of seats held by women in national and sub-national government, including parliament Goal 4: Reduce child mortality Target 5: Reduce by two-thirds, between 1990 and 2015, the 1. Under-five mortality rate under-five mortality rate 2. Infant mortality rate 3. Proportion of 1 year old children immunized against measles Goal 5: Improve maternal health Target 6: Reduce by three-quarters, between 1990 and 2015, 1. Maternal mortality ratio the maternal mortality ratio 2. Proportion of births attended by skilled health personnel Goal 6: Combat HIV/AIDS, malaria and other diseases 1. HIV prevalence among 15-24 year old pregnant women Target 7: Have halted by 2015, and begun to reverse, the 2. Contraceptive Prevalence Rate spread of HIV/AIDS 3. Number of Children orphaned by HIV/AIDS 1. Prevalence and death rates associated with malaria Target 8: Have halted by 2015, and begun to reverse, the 2. Proportion of the population in malaria risk areas using effective incidence of malaria and other major diseases prevention and treatment measures 3. Prevalence and death rates associated with tuberculosis 4. Proportion of TB cases detected and cured under DOTS (Directly Observed Treatment Short Course) Goal 7: Ensure environmental sustainability Target 9: Integrate the principles of sustainable development 1. Proportion of land area covered by forest into country policies and programmes and reverse 2. Land area protected to maintain biodiversity the loss of environmental resources 3. GDP per unit of energy use (as proxy for energy efficiency) 4. Carbon dioxide emissions (per capita) Target 10: Halve, between 1990 and 2015, the proportion of 1. Proportion of population with sustainable access to improved water people without sustainable access to safe drinking sources water Target 11: By 2020, to have achieved a significant 1. Proportion of people with access to basic sanitation improvement in the lives of at least 100 million slum 2. Proportion of people with access to secure tenure dwellers. [Urban/rural disaggregation of several of the above indicators will be relevant for monitoring improvement in the lives of slum dwellers] 2 1. Vietnam’s Development Goals and Targets 1.5. This chapter sets out the progress that has been made so far in specifying Vietnam specific development goals and targets and it reflects the collective view of the Poverty Task Force13 (PTF) and represents work-in-progress. These goals and targets are taken from a variety of sources, most notably: SDS and sectoral strategies, Eight papers commissioned by the PTF, and Discussions between Government agencies and ministries, the international community and civil society organizations at a workshop in Haiphong in September 2001. 1.6. Ten areas have been identified as the heart of the CPRGS with seven of these corresponding closely to the MDGs. In each area PTF proposes a goal that establishes the development vision and outcome targets which explain the changes that Vietnam seeks to generate over both five and ten-year timeframes. There are also intermediate indicators but much of the detail on indicators and monitoring mechanisms as well as the issues of data availability are not in this chapter, but they are available in the background papers. DEFINING CORE NATIONAL TARGETS 1.7. The reports and discussions in the PTF have generated 10 goals and 23 outcome targets and these are presented here as draft Vietnam Development Goals and Targets. There is not yet a full consensus on all of these goals and targets and this work is still in progress. In some areas there is agreement that a goal is needed, but more work and discussion is necessary to assess what would be realistic and attainable targets. This will happen over the coming months as the CPRGS is finalized. Once complete, attention will need to turn to establishing the resource requirements associated with reaching these targets and establishing links between outcome targets for poverty reduction and the public resource allocation process. This process of selecting and defining core national goals and targets generated a number of questions which can be summarized into three main areas. 1.8. Linking international commitments and national challenges. Although the MDGs do express the direction in which Vietnam should go, they are not all appropriate in terms of the targets. The poverty goal is an example of this. In 2001, Vietnam has already halved poverty from the high 1990 levels. By 2010, which marks the end of Vietnam’s own strategic planning timeframe, the Government would like to have made further progress in attacking poverty. The target, which the Government will set for the 2001-2010 period, will be both more ambitious than and more exacting; they will relate to specific regions or population subgroups. Similarly, the emphasis in the area of health and education will be more on the quality of service. 1.9. Distinguishing inputs and outcomes. The process of defining core national targets and goals has raised important questions of what is included and what is left out: Is good governance an input or an outcome, which warrants being a separate goal? Good 13 The Government-donor-NGO Poverty Task Force has been working collaboratively on poverty analysis (World Bank et al, 1999) and strategic planning since 1999. While the CPRSG is being drafted, the PTF comprises 16 Government ministries, 6 donors, 4 international NGOs and 4 local NGOs. 3 Vietnam Development Report 2002 governance is fundamental for poverty reduction and so is an input. But having a strong, transparent, participatory government is also a goal in its own right (Chapter 4 and World Bank et al, 2000). Similarly, infrastructure is not really an outcome, but it is so important to achieving some of the other goals that provision of essential rural infrastructure constitutes a national goal with a national program. In this chapter we consider both governance and infrastructure as goals in their own right. Targets to reduce vulnerability and improve social protection are considered in this chapter, but are spread across the other goals. Whether or not a separate goal for reducing vulnerability is necessary is still being discussed. 1.10. Variations at sub-national levels and between population subgroups. While national level monitoring is adequate for the MDGs, outcomes will have to be tracked at sub-national levels if priorities of social equity and inclusion are to be reflected. The poorest areas also lag behind in health (especially mortality) outcomes and education outcomes (especially at post-primary levels). Some national strategies – such as health – identify separate targets for lowland and upland areas and the emphasis here needs to be on aiming for greater equity in outcomes over the long term. Progress in this respect is immeasurable unless data is available disaggregated by different sub-groups of the population. It strongly proposed that all goals and targets be broken down by sex, ethnicity, region and consumption quintile. 1.11. Analysis of recent trends in data shows that – despite Government action – poverty and social outcomes are improving less for ethnic minority groups than for the majority population. The Government of Vietnam has set out its serious commitment to narrowing ethnic and gender gaps in performance in its interim PRSP (Government of Vietnam, 2001) and would like strategic goals, particularly in areas where needs are basic and universal, to apply equally to ethnic minorities and the majority population, regardless of sex. For this reason, the needs of special groups are generally discussed here within the scope of sectoral goals. Ensuring that this mainstreaming does result in greater equity of outcomes, however, will be a major challenge for Government and has implications for policy measures and public actions (World Bank et al 2000; UNDP, 2001a). This is particularly true in sectors such as education where the absolute target will require much more rapid progress for minority groups because the baseline is much lower. There are areas, however, where goals and targets have been proposed, which refer directly to the specific needs of particular groups – such as ethnic minorities or women. These are separated out from the universal goals and are discussed below. DEVELOPMENT GOALS AND TARGETS FOR VIETNAM 2001-2010 Goal One: Eradicate Poverty and Hunger14 1.12. The Government of Vietnam has put poverty reduction at the heart of its development strategy. Although accurate estimates of poverty before the early 1990s are not available, many believe that in 1990 approximately 70 percent of the population was living in poverty. By 1998, data shows that the incidence of poverty had been halved to 37 percent (World Bank, 1999). Food poverty reduced from 25 percent to 15 percent over the 1993-1998 period. Simulations based on data from 1993 and 1998 suggest that by 14 Draws on the background papers, Eradicating Poverty and Hunger by the World Bank, (2001a) and Reducing Vulnerability and Providing Social Protection by the World Bank, (2001b). 4 1. Vietnam’s Development Goals and Targets 2001 32 percent of the population are living under the poverty line and 13 percent are under the food poverty line. MOLISA surveys, which are used for identifying poor households and targeting them in their Hunger Eradication and Poverty Reduction (HEPR) program uses a different methodology and a lower poverty line. MOLISA estimates that 17 percent of the population was poor at the beginning of 2001. 1.13. The Government of Vietnam sets targets for poverty reduction in relation to the MOLISA poverty baseline assessment. These involve: By 2005: eliminating chronic hunger and reducing poverty from 17 percent to 10 percent based on the MOLISA definition; By 2010: to reduce the incidence of poverty to below 5 percent. 1.14. These targets are not expressed in the Government’s strategic documents in figures which are compatible with international figures, but achieving the targeted reduction in the number of households in poverty will imply that the incidence of poverty as measured by an international line will have to fall from 32 percent to 15 percent by 2010. 1.15. Vietnam has already met the international MDGs for poverty and hunger reduction. Meeting the national poverty reduction targets will require economic growth that is both rapid and that distributes benefits more evenly than in the past. Mapping poverty by province as is possible by combining the VLSS data and the Census data demonstrates that the poverty headcount varies from a low of 4 percent of the population in Ho Chi Minh City to a high of 78 percent in Lai Chau (Baulch and Minot 2001). Chapter 3 discusses the structural reforms and some policy measures which will be necessary to achieve a more even spread of benefits. Chapter 5 looks at the implications of these regional patterns and needs for resource allocation processes and decision- making. 1.16. There is an explicit recognition in national strategies that gains in poverty reduction should be sustainable and that non-poor households should be prevented from falling back into poverty and hunger. The national target which specifies that poverty reduction should be robust and sustainable and that households should not fall back into poverty could be strengthened and elaborated. Many recent quantitative and qualitative studies have emphasized the high levels of vulnerability which even non-poor households face to individual, household and community-level shocks. The proximity of non-poor households to the poverty line means that just one episode of ill health for an economically active member of a near-poor household is sufficient to push households into poverty, or even hunger (World Bank et al 1999; World Bank 2001b). 1.17. This is the case in many countries and there is a considerable amount of new work on measuring vulnerability to suffering declines in consumption and falling into poverty. It is suggested here that Vietnam adopt a more specific target for addressing vulnerability which can supplement the other targets included in the poverty goal. The policy measures needed to address vulnerability overlap to some extent with those needed to address poverty, but emphasize the imperative of fostering for the kind of economic growth which builds the assets of poor households. Measures could be taken to strengthen the existing safety net and make it more efficient and better targeted. But work recently conducted suggested that addressing vulnerability to material poverty will 5 Vietnam Development Report 2002 require a broad range of measures in addition to the narrow focus of providing social assistance to defined vulnerable groups (World Bank 2001b). These measures would address the abilities of poor and near-poor households to manage risk and could include improving access to facilities for cash savings; improved disaster mitigation and response mechanisms; agricultural extension which provides a basis for diversification of farm incomes; improving access to affordable health care; relaxing restrictions associated with being a migrant with temporary residential status; and, investigating the potential for public works programs in providing more stable sources of incomes. 1.18. A poverty reduction goal and outcome targets that reflect the national strategic direction and that over-achieve the MDG by some way are proposed in Box 1.2. Box 1.2: Goal One: Eradicate Poverty and Hunger Target 1: Reduce by 40 percent the proportion of people living below the international poverty line between 2001 and 2010 Target 2: Reduce by 75 percent the number of people living under the international food poverty line by 2010 Target 3: Address vulnerability by reducing the proportion of households falling by two quintiles or more to less than 10 percent between two survey dates Source: World Bank (2001a); World Bank( 2001b); and Report of the PTF Haiphong Workshop (2001). 1.19. Proposed indicators for poverty reduction and hunger eradication reflect those set out in the MDGs, which capture important equity dimensions of poverty reduction. Here we also propose some indicators which could be used to gauge the progress being made in stabilizing volatile patterns of consumption and addressing vulnerability. These indicators include (among many others): The proportion of population/households below the international and national poverty lines; The poverty gap ratio (which measures the depth of poverty); Share of the poorest quintile in national consumption; The proportion of the population below the international food poverty line; Indicators of risk to natural disaster: loss of life; damage to property, assets and crops; displacement of people; Creation of jobs in the non-agricultural sector; Percentage of agricultural households dependent on one activity for 75 percent or more of total income. 1.20. These should be monitored, every two years, by indicators which can be derived from the modified Multi-purpose Household Survey (MPHS). This MPHS, which GSO will carry out every two years for the next ten years, will have a core questionnaire which will produce reliable estimates of poverty and hunger. It will also have rotating, “special topic” modules which will provide information on agriculture and household businesses, access to and utilization of health and education services, environmental information, access to infrastructure and interactions with institutions and governance. Even with the additional modules there will be limitations in what can be learned from the MPHS. It will still be necessary to supplement the quantitative data with participatory, qualitative surveys to cover topics which elude household-level quantification. Many of the non- 6 1. Vietnam’s Development Goals and Targets material dimensions of poverty (such as insecurity, social exclusion and voicelessness) will need to be captured in this way. Issues relating to poverty and voicelessness within the household can also be assessed in this way. Goal Two: Achieve Better Education for All15 1.21. By signing the Millennium Declaration, the Government of Vietnam has committed itself to achieving universal completion of primary education by 2015. With net enrolment in primary education standing at 91 percent in 1998 – a very positive outlier by low-income country standards – the Government of Vietnam has shown what can be achieved by prioritizing social sector investments. It is recognized, however, that the high enrolment rates for both girls and boys mask significant challenges in addressing disparities (socio-economic and geographic) in access, coverage and participation in education. The successes in enrolment also sit beside deficiencies in quality: only two- thirds of those enrolled in primary school actually complete. And when they do complete, the primary school curriculum provides less than half the number of tuition hours a child completing primary school in Sri Lanka would have had and only 40 percent of the number of hours a child in Thailand would have enjoyed. 1.22. The proposed national goals and targets for the education sector reflecting the challenges ahead in completing universal primary education and ensuring that the quality of teaching and learning outcomes is improved are as follows (Box 1.3). These are being proposed in consultation with the Ministry of Education and Technology (MOET) as they revise and finalize their national education strategy for 2001-2010. Box 1.3: Goal Two: Achieve Better Education for All Target 1: provide 100 percent enrolment in primary school (80 percent in junior secondary school) by 2005 and quality basic education for all by 2010, with an emphasis on full day primary education; Target 2: Eliminate gender disparities in primary and secondary education by 2005 and ethnic disparities in primary and secondary education by 2010. Source: DFID (2001) and Report of the PTF Haiphong Workshop (2001). 1.23. These goal and targets imply the need for a strategic focus within the education sector on important shortcomings. To achieve these targets 1.6 million primary school- aged children -- currently out of primary school (1 million of them from the lowest two expenditure quintiles) -- will have to be included in mainstream education. It requires that those children least likely to be at school – those in the lowest quintiles, those in the central highlands, northern uplands, central coast and Mekong Delta regions, and ethnic minority children will have to be particularly targeted. The Ministry of Education and Training is currently estimating the costs involved in moving towards full-day primary schooling. It is important that this does not lead to an increase in the private costs of education, which are already high for poor households. 1.24. Raising and equalizing the quality of learning outcomes across regions and population subgroups will demand a full range of measures. Among other measures currently under consideration by MOET are extension of the instructional time to full-day education; reforming the curricula and teaching methods; upgrading facilities; 15 Background paper: Providing Quality Basic Education for All by DFID (2001). 7 Vietnam Development Report 2002 strengthening education management; professional development for teachers; establishing education and training facilities of international standard; and, expanding the use of information technology. Over the last few years, Vietnam has been building the capacity to assess and monitor student learning achievements. Data which is soon to be analyzed may help in identifying which actions are paramount in addressing quality deficiencies. Table 1.2: Indicators for Monitoring Better Education for All Goal 2000 By 2005 By 2010 (or most recent) (%) (%) (%) Target 1: Provide Quality Basic Education for All Primary school net enrolment rate 91 97 99 Lower secondary school net enrolment rate 62 82 90 Pre-school attendance rate (% aged 5 children attending 81 90 98 pre-school) Age-specific enrolment rate 91 100 Full day schooling at primary school All cities, urban & nationwide wealthy areas Completion of first 5 years of primary school 68 99 Learning achievement (youth literacy rate) 91 (estimates vary) 100 Target 2: Eliminate Ethnic and Gender Disparities Ratio of girls to boys in primary and secondary education 93 100 (99 using NER) Ratio of literate females to males (15-24 year olds) 101 100 Ratio of ethnic minority children to Kinh children in primary 95 100 and secondary education (76 using NER) Source: DFID (2001). 1.25. A number of indicators have been identified which will allow regular monitoring of progress in achieving targets (Table 1.2). There are several sources of data available to measure these intermediate indicators and outcome targets. The core part of the new MPHS, which will be done every two years, contains ten questions on the education status of household members. In addition, once every six years, this will be supplemented by an education module which will provide a much greater breadth and depth of information which can be linked to socioeconomic status and other household characteristics. Government administration systems provide regular (annual) data within a well-established, well-understood framework for data collection and analysis. Vietnam’s population census provides a good source of infrequent data on a limited range of indicators. Periodic surveys provide assessments of specific issues within the education sector. Each of these data sources have strengths and weaknesses. Taken in combination, however, they can be used to build a comprehensive picture of patterns within the education sector. 8 1. Vietnam’s Development Goals and Targets Goal Three: Reach gender equality and empower women16 1.26. Vietnam performs well relative to countries of comparable income levels on many indicators of gender equality. The Government of Vietnam’s IPRSP does not draw out specific targets for gender equity, though it does indicate where gender concerns are pressing and emphasizes the participation of women in particular activities. This sort of mainstreaming may be an appropriate approach to take in sectoral strategies – such as education and health - where targets already stress equality of access and outcomes across different groups of the population. 1.27. A rigorous review of recent analytical work on the situation of women suggests that this approach may leave gaps in policymaking which could hold back attempts to promote gender equality and empowerment of women. The MDGs present the elimination of gender disparities in education as an outcome target for achieving gender equity. In the national goals presented in this chapter, gender equity in sectoral outcomes is discussed as part of the relevant sector. In this section we present targets which are not adequately covered when reading across the sectors (Box 1.4). These, with the exception of the fourth target, extrapolate from the draft National Plan of Action for the Advancement of Women 2001-2005 (POA2) and the Draft 10-year Strategy for the Advancement of Women 2001-2010). The fourth target responds to findings in recent participatory poverty assessments (World Bank, 1999) and quantitative analysis of the VLSS which clearly demonstrate the imbalance between men’s and women’s workloads, which has consequences for women’s health and their participation in community and social life. Box 1.4: Goal Three: Reach Gender Equality and Empower Women Target 1: Increase women’s participation in political and business life by increasing the number of women in elected bodies and the government machinery at all levels (national, provincial, district and commune) so that by 2006, 15 percent of the position in the Party Committees are women; 30 percent of deputies in the National Assembly are women; 20 percent of the representatives in elected bodies are women; Target 2: Improve women’s access to assets by ensuring that by 2005 100 percent of Land Use Certificates include women’s names as well as their husbands by implementing Decree 70/ND-CP; Target 3: Improve women’s physical security by attacking domestic and gender-based violence; Target 4: Target public investments into areas that reduce the burden on women’s time. Source: NCFAW (2000), World Bank et al (1999), Decree No 70/ND-CP Detailed Regulations on Implementing the Marriage and Family Law and Report of the PTF Haiphong Workshop (2001). 1.28. Setting quantitative indicators for the reduction in gender-based and domestic violence is extremely hard. The actions to tackle violence against women outlined in draft POA2 revolve around bringing greater clarity to the legal framework. Indeed, they are part of a goal to improve the gender sensitivity of the legal framework rather than part of a goal against violence. International experience suggests that these actions will need to be supplemented by a more comprehensive package of measures which involve generating attitudinal changes as well as adjusting legal instruments. If these measures are successful, one might reasonably expect an increase in number of reported incidents of gender-based violence as the problem is addressed in a more open manner before the 16 The section draws on the National Plan of Action for the Advancement of Women 2001-2005 by NCFAW and discussions at the Haiphong workshop, 2001. 9 Vietnam Development Report 2002 incidence starts to decline. There is, as yet, no reported baseline for the incidence of domestic or gender-based violence in Vietnam – nor are there any good proxy indicators which are readily available or collected. This should be addressed as part of a monitoring system which seeks to measure progress in gender equity. 1.29. The MPHS will permit regular monitoring of hours worked inside and outside the house, broken down by sex. Experience from around the world suggests that targeted investments can play a valuable role in equalizing workloads between the sexes. These investments might include the provision of clean water close to residential areas; the provision of rural energy; and, the provision of kindergartens and crèches. Attitudinal change which allows traditional working roles to be redefined and re-evaluated is also of fundamental importance. Goal Four: Eradicate poverty and preserve the culture and diversity of ethnic minorities17 1.30. Over 13 percent or about 10 million people in Vietnam belong to an ethnic minority group. Analysis using various criteria has shown that while progress has been made, reduction in poverty for these minority groups has been much slower than the national average.18 Poverty in ethnic minority areas is also deeper, i.e. further below the poverty line than is true for the nation’s poor as a whole. Although this is an issue of high concern for the Government, which has resulted into various special development programs for ethnic minorities, no specific quantitative target for poverty reduction among ethnic minorities has been established. 1.31. Clearly, to achieve the national poverty reduction targets, special attention will have to be paid to eradicating poverty among the ethnic minority groups. This warrants a number of special targets and indicators for the main ethnic minority groups to be embedded in the sectoral targets. Such targets should refer to closing the gap between ethnic minorities and the rest of the population for each of the sectors. Baseline values for the appropriate indicators will have to be set. 1.32. However, some areas cannot be fully addressed within any one sector and deserve special attention. This leads to the following three additional targets (Box 1.5). Box 1.5: Goal Four: Eradicate Poverty and Preserve the Culture and Diversity of Ethnic Minorities Target 1: Preserve and develop literacy in ethnic minority languages; Target 2: Ensure individual and collective land-use rights for all land-use types have been allocated to the majority of the ethnic mountainous people; Target 3: Increase the proportion of government personnel of ethnic origin closer to its proportion in the national population. Source: UNDP (2001a) and Report of the PTF Haiphong Workshop (2001) 17 Background paper: Poverty Reduction amongst Ethnic Minorities in the Mountainous Areas of Vietnam – Reaching Targets by UNDP (2001a) 18 It should be noted that a substantial diversity in development progress exists among these ethnic groups. The Central Highland minorities lag behind most substantially with a level of expenditure that has remained stagnant since 1993. Of its inhabitants, 91 percent live below the poverty line. Of the northern upland minorities, about 73 percent are poor. Separate targets may be warranted for several groups. 10 1. Vietnam’s Development Goals and Targets 1.33. These targets have been agreed upon by the PTF, but need to be quantified and made more specific by the government in order to make them operational. The rationale for including these targets is briefly presented below. 1.34. Educational achievements of ethnic minorities in the past ten years have lagged behind national ones (see for example the analysis by Baulch et al, 2001). Given that many of the ethnic minorities are not fluent in Vietnamese, preserving and developing literacy in the local language may be an important vehicle for improving education performance of ethnic minorities and for preserving their culture. The right to mother tongue instruction is mentioned in the 1992 Constitution. 1.35. Enhanced living standards of ethnic minorities require a more intensive, diverse and sustainable use of uplands. A key constraint here is land allocation. A recent review points towards the need to speed up land allocation and improve land titling measures for all categories of land that are in line with ethnic community traditions, practices and systems (UNDP, 2001b). This should be easy to monitor through updates in land registration records and the MPHS surveys. 1.36. Ethnic minority members rarely participate actively in local governance processes for various reasons, and few are employed as government staff. As a consequence, they have little influence over government decisions that affect their lives. To improve this, a further increase in the proportion of government personnel of ethnic origin is required. 1.37. Recent experience has suggested that interventions for reducing poverty among the majority households may not be effective for all minority groups. This implies that far more input from ethnic minority households, and more decentralization in anti- poverty programs is needed than has occurred up to now (see targets on governance). The government is now committed to developing local ethnic minority plans as mentioned in the I-PRSP. Goal Five: Reduce Child Mortality19 1.38. Infant mortality has declined at a remarkable rate – more than 20 percent per decade. This gives Vietnam an impressively low starting point (by international comparisons) for infant and child mortality. If Vietnam followed a pattern more typical of Asia, it would have an infant mortality rate approximately double its current level, given current per capita income levels. In 1990 the infant mortality rate (IMR) stood at 44 per 1000 live births and the under five mortality rate (U5MR) was 58 per 1000 live births. Given these low starting points, achieving the MDG – which calls for a two-thirds reduction in the infant and child mortality rates between 1990 and 2015 – is unrealistic. 1.39. National targets for reductions in mortality rates are less ambitious than the MDGs. They specify that the IMR will fall to 25 per 1000 live births and the U5MR to 32 per 1000 live births, representing a decline of 44 percent in both rates over the 1990- 2010 period. They are also more realistic, however, than the MDGs and achievable if there is a stronger focus than hitherto on regions where mortality figures are highest. Projections demonstrate that both rates will have to reduce more rapidly over the coming decade if national goals are to be achieved (ADB 2001a). There is a positive relationship between infant mortality and poverty: infants have a lower chance of survival in poor 19 Background Paper: Improving Health Status and Reducing Inequalities by ADB and WHO (2001) 11 Vietnam Development Report 2002 provinces. These regional disparities in mortality rates suggests that there is scope for setting more ambitious targets, in line with the MDGs, for these areas. 1.40. In addition to the two targets for mortality rates, it is proposed that the child malnutrition indicator – often included as an indicator under poverty targets – be identified as an important strategic target for the next decade within the health sector. Unlike many other health outcome indicators where Vietnam outperforms expectations for its per capita income levels, child malnutrition levels remain one of the highest in the region: in 2000, one third of children under the age of five were underweight. Estimates based on observed relationships between poverty and child malnutrition suggest that expected reductions in poverty will – in the absence of other measures – have only a minor impact on child malnutrition. The Government of Vietnam’s own national goals for reducing malnutrition, which imply a reduction of child malnutrition levels of 60 percent between 1990 and 2010, are more ambitious than the MDGs, which call for a halving of malnutrition between 1990 and 2015. Projections suggest that these ambitious rates will be achievable if the rapid rates of decline over the 1990’s continue. 1.41. Given the rapid progress in reducing infant and child mortality to date and the more modest achievements in reducing child malnutrition, revised goals and targets for child health are proposed (Box 1.6). Box 1.6: Goal Five: Reduce Child Mortality Target 1: Reduce the infant mortality rate to 30 per 1000 live births by 2005 and 25 by 2010 and at a more rapid rate in disadvantaged regions (see below) Target 2: Reduce the under-5 mortality rate to 39 per 1000 live births by 2005 and 32 by 2010 Target 3: Reduce under five malnutrition to 25 percent by 2005 and 20% by 2010 Source: ADB and WHO (2001) and Report of the PTF Haiphong Workshop (2001) 1.42. Because reaching goals will depend crucially on making rapid progress in the most disadvantaged areas – and this is especially so for the mortality outcomes, where gains in some of the best-performing regions are likely to be minimal – it is also suggested that separate targets be established for the central highlands and the northern mountains (Table 1.3). Table 1.3: Mortality Indicators for Disadvantaged Areas. Indicator Targets Latest Value 1990 2005 2010 2015 IMR Northern Uplands 62 31 30 21 44.0 (1998) Central Highlands 72 40 36 28 64.4 (1998) Malnutrition Percent of underweight children (0-59months) Northern Uplands -- 35 30 25 41 (1997) Central Highlands -- 35 30 25 42 (1997) Source: ADB and WHO (2001). 12 1. Vietnam’s Development Goals and Targets Goal Six: Improve maternal health20 1.43. The MDGs call for a reduction in the maternal mortality ratio to one quarter of its 1990 level by 2015. This goal is reflected in national targets which seek to lower the maternal mortality ratio to 70 deaths per 100,000 live births by 2010 (from 200 in 1990). Maternal mortality is difficult to measure accurately and questions have been raised about the reliability of the data in Vietnam. Official data shows that declines in maternal mortality over the 1990s have been rapid and, if replicated over the next decade, are sufficient to attain these goals. As with infant and child mortality, Vietnam’s performance in reducing maternal mortality has been remarkable by international standards. Regional differences in maternal mortality within Vietnam, however, highlight the central highlands, other central provinces, and the northern uplands as areas which warrant special attention. 1.44. Analysis by the Ministry of Health shows that 53 percent of maternal mortality is preventable and an additional 35 percent of maternal mortality could be averted through timely intervention. 70 percent of maternal mortality is believed to be caused by obstetric complications and unsafe abortions. Vietnam has the highest abortion rate in the world with the Ministry of Health estimating a total abortion rate per woman of 2.5. This high rate poses a significant health risks to women, with one third of women reporting a health problem following a pregnancy termination (World Bank et al 2001). Measures are needed to provide better access to other means of contraception. 1.45. An earlier set of international targets – the International Development Targets (IDTs) calls for universal access to safe and reliable reproductive health services by 2015. Though no longer specified in the MDGs as a separate target, Vietnam has set national targets for reproductive health and it is appropriate to include them with the goal for improving maternal health (Box 1.7). Indicators for access to reproductive health services mirror the regional patterns in maternal mortality. Box 1.7: Goal Six: Improve Maternal Health Target 1: Reduce the maternal mortality rate to 80 per 100,000 live births by 2005 and 70 by 2010 with particular attention to disadvantaged areas; Target 2: Provide universal access to safe and reliable reproductive health care services by 2010. Source: ADB and WHO ( 2001) and Report of the PTF Haiphong Workshop (2001). The following national quantitative targets have been proposed for measuring progress in improving maternal health (Table 1.4). 20 Background Paper: Improving Health Status and Reducing Inequalities by ADB and WHO (2001) 13 Vietnam Development Report 2002 Table 1.4: Reproductive Health Targets and Baseline Indicator Target Latest Value Source of 1990 2005 2010 2015 Verification Maternal Mortality 200 80 70 50 100 (2000) Special Survey (NHS) Contraceptive 39 65 70 75 61 (2000) Household Surveys Prevalence (DHS) Skilled Attendance at 70 80 90 100 77 (1996) Household Surveys delivery (DHS) Source: ADB and WHO (2001). 1.46. As with the mortality goal, meeting outcome targets will require that attention be concentrated on the worst-performing parts of the country and sub-national targets have been proposed (Table 1.4). Table 1.5: Maternal Mortality and Reproductive Health Targets and Indicators for Disadvantaged Areas Indicator Targets Latest Value 1990 2005 2010 2015 Maternal Mortality Northern Uplands -- 130 100 80 -- Central Highlands -- 130 100 80 -- Attendance at Delivery Northern Uplands -- 75 90 100 58 (1996) Central Highlands -- 80 90 100 64 (1996) Source: ADB and WHO (2001). Goal Seven: Combat HIV/AIDs and communicable diseases21 1.47. HIV/AIDS has spread to all 61 provinces since 1990 when the first case was detected in Vietnam. Between 1990 and 2000 the number of reported HIV/AIDS cases rose at 7 percent per annum. WHO estimates that the prevalence of HIV/AIDS is around 0.29 percent among adults. At the early stages of the epidemic the disease was confined mainly to injecting drug users. However, it has now spread to other population groups including sex workers, patients with tuberculosis and the general population. 1.48. Making future projections for the prevalence of HIV/AIDS is methodologically problematic. The spread of HIV/AIDS from vulnerable groups to the general population suggests that the past trend of increasing prevalence is likely to continue for the next few years. The Government has articulated its HIV/AIDS strategy for the next five years and the goal proposed here captures the direction outlined in the strategy (Box 1.8). Recent work suggests that this goal requires a number of serious institutional, practical and attitudinal challenges (United Nations 2001). 21 Background Paper: Improving Health Status and Reducing Inequalities by ADB and WHO (2001) 14 1. Vietnam’s Development Goals and Targets Box 1.8: Goal Seven: Combat HIV/AIDS Target 1: slow the increase in the spread of HIV/AIDs by 2005 and halt the increase by 2010. Source: ADB and WHO (2001) and Report of the PTF Haiphong Workshop (2001). 1.49. Despite considerable progress in reducing the incidence of and mortality from major communicable diseases, significant burdens of disease (especially TB and malaria) persist among poorer households. There is not yet a consensus of views on whether there should be a separate outcome target for reducing the prevalence of these diseases but it is likely that either a target or intermediate indicators for progress in reducing the incidence of both TB and malaria will be included. 1.50. The Ministry of Health has also set targets for reducing malaria morbidity and mortality rates. About 15 million people live in malaria endemic areas, mostly in the central highlands and the southern provinces. Malarial morbidity rates are 50 percent higher (at 6.6 per 1000 of the population) in malaria endemic areas than for the nation as a whole. Mortality rates in endemic areas are 150 percent the national average. The Ministry of Health hopes to reduce the endemic areas by 40 percent, to reduce the morbidity rate in endemic areas to less than 5 per 1000 of the population (3.5 per 1000 for the nation as a whole) and the mortality rate to less than 0.4 per 100,000 of the population (from 0.5 per 100,000 now). 1.51. Vietnam’s National Tuberculosis Control Program is recognized as one of the most successful in the world. Strenuous efforts since 1986 to detect and treat TB have covered 99 percent of the Vietnamese population. Reported cases of TB have increased dramatically largely because of improved detection. The Government of Vietnam hopes to reduce the prevalence incidence to 70 percent of its 2000 level by 2010 (MOH, 2000). Goal Eight: Ensure Environmental Sustainability22 1.52. In recent years, Vietnam has witnessed a significant degradation of its natural resources. The country’s biodiversity is threatened, forest cover has dwindled, near-shore fish stocks have declined sharply, groundwater quality and quantity have decreased substantially, pesticide and fertilizer use is growing fast and urban air pollution is on the rise (UNDP 2001c). The government recognizes that the main challenge of the next decade will be to improve livelihoods while simultaneously protecting the environment. The poor benefit most of such an improved environment. This is because they depend more on natural resources, they are less able to protect themselves from environmental pollution, and they suffer more from natural disasters than others. The two poorest regions of the country, the northern uplands and the central highlands, are both areas with a high proportion of ethnic minorities and forest cover. Studies in Vietnam have shown that those who depend most upon forest resources are ethnic minorities. 1.53. The MDG for the environment relates to two issues: implementing a national strategy for sustainable development, and reversing the loss of environmental resources. 1.54. Vietnam has partially achieved the first part by completing the National Strategy for Environmental Protection (NSEP) for 2001-2010. This strategy identifies the need to protect, conserve and sustainably use natural and biodiversity resources, and to control 22 Background Paper: Ensuring Environmental Sustainability by UNDP (2001c) 15 Vietnam Development Report 2002 pollution and improve environmental quality in urban, rural and industrial areas. The big challenge now is implementation. 1.55. Reversing the loss of environmental resources is obviously a difficult part of the MDG, given that the loss of environmental resources has been precipitous in Vietnam. To monitor progress towards environmental sustainability, two specific targets are identified: (1) increasing forest cover, and (2) improving water and air quality by reducing pollution (Box 1.9). (Access to safe water, a third area of attention in the MDG environmental goal, is presented under the rural infrastructure section.) Box 1.9: Goal Eight: Ensure Environmental Sustainability Target 1: Extend forest cover to 43 percent by 2010 (from 33 percent in 1999); Target 2: Bring air and water pollution to be within the national standards by 2005 Source: UNDP (2001c) and Report of the PTF Haiphong Workshop (2001). 1.56. Plans for strengthening the monitoring of the forest cover target are presently under discussion. Some draft indicators have been proposed (UNDP, 2001c). Monitoring of forest cover could probably be improved by focusing more on quality than quantity, by better coordination of data collection among the different agencies, and by establishing clear links to the Partnership Support Program for the 5 Million Hectare Reforestation Program, potentially leading to an improved enforcement of forestry policies. 1.57. The second specific target focuses on reducing pollution in order to improve the quality of water and air. The Government is in the process of finalizing national standards for air and water quality, and also working towards strengthening the environmental monitoring network. 1.58. For the Government to be able to reach its environmental goal, the draft National Strategy for Environmental Protection (NSEP) 2001-2010 needs to be implemented. This requires concerted efforts to strengthen capacity in government agencies at the central and local level, creating opportunities for community participation and enforcing laws by expanding the choice of regulatory instruments and incentives. A number of institutional arrangements have been proposed that should encourage further mainstreaming of environmental issues in the different ministries. The draft NSEP 2001-2010 recognizes this and even sets a number of relevant cross-cutting targets. We present a few here for illustrative purposes (Box 1.10). Box 1.10: Some Cross Cutting Targets for the Environment The cross-cutting targets for the environment include: environmental agencies established in ministries by economic regions and industrial zones by 2002, environmental action plans prepared by each sector and each region to develop one by 2002, environmental education introduced into the school and tertiary education systems by 2002, 100 percent increase in teachers trained on environmental issues by 2005, 80 percent of population covered by environmental awareness programs, mass organizations incorporating environmental themes into their programs by 2005. Source: Draft National Strategy for Environmental Protection 2001-2010. 16 1. Vietnam’s Development Goals and Targets 1.59. Economic costs of implementing the 10 year environmental strategy have not been estimated and therefore very little is known in terms of the increased public and private spending required to achieve these goals and targets. Goal Nine: Provide Essential Infrastructure to the Specially Disadvantaged Poor23 1.60. The Government of Vietnam attaches great importance to the role that investments in infrastructure can play in reducing poverty. Infrastructure forms the core of key targeted programs to address poverty – notably the Hunger Eradication and Poverty Reduction program (HEPR) and the national Program for Socioeconomic Development in Communes in Especially Difficult Circumstances (“Program 135”). The SDS 2001-2010 similarly emphasizes the role of pro-poor infrastructure development. Infrastructure is usually regarded more as an input than an outcome in its own right. Investment in schools is a means to achieving better education outcomes. Investment in rural transport is a tool for opening up remote areas to markets and social services and so is a means for achieving poverty reduction and better social outcomes. But given the importance of infrastructure in Government’s own strategic plans and given the level of resources allocated to infrastructure (See Chapter 5), it is appropriate that the expected impact of infrastructure development be specified and formulated into a national goal with explicit targets (Box 1.11). Box 1.11: Goal Nine: Provide Essential Infrastructure Target 1: Provide essential infrastructure services to 75 percent of poor communes by 2005 and to 100 percent of poor communes by 2010; Target 2: Improve long term access to safe water from 52 percent in 2000 to 68 percent by 2010. Source: JBIC, 2001; UNDP, 2001c and Report of the PTF Haiphong Workshop (2001). 1.61. “Essential infrastructure” in the goal and target refers to the eight components included in Program 135: basic road access, schools, health centers, clean drinking water systems, electrification, markets, post and irrigation. Identifying the proportion of communes with access to these facilities and services will form the foundation of regular monitoring and serve as intermediate indicators. It should not be particularly challenging gathering this information through administrative reporting systems. Table 1.6: Intermediate Indicators for Electricity Targets Monitoring Indicators Accessibility - Grid extension to 1266 communes, and off-grid - Number of communes with electricity supply electrification for 200 communes Reliability - Generation/provision losses - Installation of modern efficient facilities - Amount and source of invested capital - Effective investment capital mobilization - Environment damage Financial sustainability - Electricity fees - Economically efficient and targeted subsidies - Financial status of power producers/suppliers Governance - Number of licenses to new entities (including private - Structural reform for market-based, accountable power sector) supply - Set up of regulatory agencies Source: JBIC (2001). 23 Background Paper: Enhancing Access to Basic Infrastructure by JBIC, 2001 17 Vietnam Development Report 2002 1.62. More challenging, however, is to assess the impact of these investments on poverty in poor areas. It has been suggested that monitoring information should provide an assessment of four key dimensions of infrastructure provision. The four areas include: accessibility; reliability; financial sustainability; and, governance (especially enhancing transparency and accountability in the provision of infrastructure and infrastructure services). Taking these four areas together would give a more balanced view of whether the infrastructure being provided is likely to contribute to poverty reduction on a sustainable basis. Suggested intermediate indicators broken down across these dimensions for four24 of the seven infrastructure subsectors have been identified and the indicators for electrification are included here as an example of what is possible in other subsectors (Table 1.5). 1.63. A second target for providing clean water incorporates targets included in the MDG formulation under the environment goal. Though included here, this target also gives information on the environment, such as the quality of water in lakes and rivers. It also relates to the health and should be linked to sanitation improvement efforts. In 2000, 52 percent of the population had access to safe water. The Government’s goal is to reach a coverage of 60 percent by 2005 and 100 percent by 2020. Analysis shows that a 68 percent coverage in 2010 is probably a more realistic target (UNDP, 2001b). This would still require doubling the rate of improved access to safe water. 1.64. Gauging the impact of infrastructure on changes in welfare of poor individuals or poor communities will require data from a range of sources. The new MPHS will provide some data on access to infrastructure and changes in poverty outcomes. But this will have to be combined in analysis with data from the various sectors to assess the extent to which broader social outcomes are being generated. In addition, some kind of mechanism to include citizen feedback on the quality and relevance of infrastructure and infrastructure services could be very valuable. 1.65. Though still needing further detailed work, the estimated resource requirements identified in the background paper indicate substantial capital and operations and maintenance costs will be necessary to attain the targets. It will be important that the process of preparing the PIP (see Chapter 5) allocates resources in line with the strategic targets it has identified. Affordability is likely to arise as an issue and prioritization should be guided by consultation with the local beneficiaries at the commune levels, so as to meet local needs and increase the awareness for operation and maintenance responsibilities. Strengthening the implementation of the grassroots democracy decree would facilitate this process. Goal Ten: Ensure Good Governance for Poverty Reduction25 1.66. In the absence of institutional structures which enforce good governance, the goals and targets described earlier in this chapter will be largely unachievable. The range of policy measures and public actions required to deliver these outcomes will demand that Government is more transparent, accountable, predictable and participatory than in the past. National strategies recognize that there are certain areas where progress in improving governance is urgently needed if targets are to be achieved and it is 24 Electricity, transport, waterworks and communications 25 Background Paper: Ensuring Good Governance for Poverty Reduction by ADB (2001) 18 1. Vietnam’s Development Goals and Targets appropriate that these should be expressed as key indicators of success over the next decade (Box 1.12). Box 1.12: Goal Ten: Ensure Good Governance for Poverty Reduction Target 1: Build a democratic, clean, strong, professionalized, modernized, effective and efficient public administration system. Source: ADB 2001; Master Programme on Public Administration Reform 2001-2010 and PTF (2001). 1.67. The most pressing measures which are need to reach this goal are discussed in detail in Chapter 4. They cover: implementing the Grassroots Democracy Decree; implementing the Legal Needs Assessment (LNA) Action Plan; implementing the Public Administration Reform Master Program; implementing the Public Expenditure Review (PER) Action Plan; and, developing and implementing an anti-corruption strategy. 1.68. The Government of Vietnam has just taken the important step of ratifying the Master Program for Public Administration Reform 2001-2010. The PAR Master Program is broad-ranging enough to take in several of these areas and will pave the way for concerted action in addressing the legal framework and implementing the PER as well. As such, enthusiastic implementation of the PAR Master Program should make a significant contribution towards improving transparency, accountability and predictability within Government. 1.69. One area which is not well captured by the PAR Master Program is the implementation of the Grassroots Democracy Decree and the need to make Government more participatory. If the Government machinery over the next ten years is to deliver widespread improvements in welfare for poor households, it is essential that processes are in place and working for people to participate more in decision-making. The Grassroots Democracy Decree provides a framework for increasing transparency, accountability and participation at local levels of Government, but it has not yet been widely implemented. Recent studies (Prohl et al, 2001, World Bank, 1999) suggest that there is strong demand by poor people to interact more meaningfully with Government institutions, particularly at the local level. 1.70. Greater participation by poor households will require that more information on a broad range of issues of importance to poor people is more widely available – to poor people and to civil society organizations which work to support them or represent them. Some measurement of information flows and dissemination could be extremely useful in indicating progress towards greater participation. Citizen feedback should be actively sought on public actions and services. In many countries, mechanisms such as scorecards and rankings by households of the quality of public services have provided a powerful tool in reorienting public services to be more useful and relevant to those who use them. These could be used in Vietnam to provide monitoring information on many of the sectors included in the core Vietnam Development Goals and Targets set out in this chapter while also giving poor people more influence in the content and nature of public actions. 19 2. Navigating the Global Slowdown 2. NAVIGATING THE GLOBAL SLOWDOWN 2.1. The deteriorating external environment poses a threat to Vietnam’s goal of faster growth and poverty-reduction in the near-term. This is mitigated in part by a stable macroeconomic situation and an improving investment climate underpinned by recent reforms. Nevertheless, navigating through the current global slowdown will be a challenge. If done right, next year offers an opportunity to gain in competitiveness and position Vietnam to participate strongly in the recovery. 2.2. The downturn in world economic activity that began in 2001, has worsened after the horrific September attacks on the United States and the heightened uncertainty about next year. World economic growth in 2001 is a third of its rate last year (i.e. 1.3 percent compared to 3.8 percent), which is lower than at the time of the East Asian crisis. Growth in world trade volume has decelerated from 13 percent to around 1 percent, the lowest in two decades. 2.3. As a result, Vietnam’s growth projections have been revised downward too. Growth in 2001 is expected to be slower than in 2000. There will be a rebound in 2002 but it will still be lower than was projected before. This is largely because external demand is falling and export earnings growth will be significantly lower in both these years. Nevertheless, Vietnam is still expected to have the second highest growth rate among the larger economies in the region. This slowdown in growth will take a toll in terms of poverty reduction and other development targets. DETERIORATING EXTERNAL ENVIRONMENT 2.4. Developed countries economic growth. The external environment has deteriorated as the economies of the United States, Europe and Japan have slowed sharply and this slowdown is expected to continue in 2002. The US economy (representing 30 percent of world GDP) is expected to grow at 1.1 percent this year, down from 4 percent last year. The precipitous decline in business and consumer confidence will not only push the US economy into negative growth for the last two quarters of 2001, it will also restrain growth in 2002 to around 1.0 percent. This is expected to have substantial knock-on effects on Europe, slowing their growth to 1.5 percent from 3.5 percent last year. Japan (representing around 15 percent of world GDP) is in recession this year, falling from a growth rate of 1.5 percent last year, its growth will remain flat next year. 2.5. East Asia’s growth prospects. East Asian exports and economic growth are under pressure as the prospect for a recovery in world trade has been pushed back after the September attacks. Growth in the newly industrialized countries (NICs) of East Asia -- such as Singapore, Taiwan and Hong Kong -- was around 8 percent in 2000, but will decline to less than 1 percent in 2002. And the "East Asian 5" (the five countries that 21 Vietnam Development Report 2002 were in serious crisis in the 1997-99 period) will see their healthy growth of 7 percent in 2000 fall to 2.3 percent in 2001, recovering only mildly to 3.5 percent in 2002.26 External climate has deteriorated further and global recovery has been pushed back 2000 2001 2002 World 3.8 1.3 1.6 High Income Countries 3.7 0.9 1.0 United States 4.1 1.1 1.0 Japan 1.5 -0.8 0.1 Euro Area 3.5 1.5 1.3 Developing countries 5.5 2.9 3.7 East Asia 5 7.0 2.3 3.5 Indonesia 4.8 3.6 3.7 Korea 8.8 2.5 3.6 Malaysia 8.3 1.0 3.5 Philippines 4.0 2.1 3.1 Thailand 4.4 1.2 2.8 Singapore 9.9 -2.3 1.7 China 8.0 7.2 6.5 Vietnam 5.5 4.8 5.5 Table 2.1: GDP Growth Projection (year on year change in percent) Source: World Bank (2001a). 2.6. This is because of the severe downturn in their exports led mainly by a steep fall in hi-tech exports. However, the declining external demand for hi-tech goods is expected to spread to consumer and services exports. Consumer confidence is falling in Europe following the US decline, leading to sharp declines in consumer spending in all three major economic areas. Thus developing countries like Vietnam that are more dependent on the exports of consumer goods, including agricultural items, will face a further fall in both export demand as well as in prices of agricultural commodities. IMPACT ON VIETNAM 2.7. Vietnam had weathered the East Asian crisis quite well as is shown in Figure 2.1. It maintained macro-economic stability and prepared for reform and performed much better than the East Asian crisis countries. China of course did much better maintaining the highest growth rate in the region. 26 The above assessment of the state of the world economy in general and the East Asian region in particular is subject to considerable uncertainty, as events continue to unfold. Even the direct effects of the attack on the US economy in 2001 are hard to gauge with any precision. This is truer of 2002, since that impact is likely to depend also on the scope and duration of the military response undertaken by the US and its allies. 22 2. Navigating the Global Slowdown Navigating the East Asian crisis and the global slowdown % 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000/e 2001/f 2002/f East Asian Crisis-5 Vietnam China Figure 2.1: GDP Growth Rates of Selected East Asian Economies in percent Source: World Bank SIMA Database, 2001 & World Bank (2001c). 2.8. Vietnam’s vulnerability to the deteriorating external environment comes not from its current dependence on the US economy but rather from the adverse impact of the US slowdown on other countries. Korea, Taiwan (China), Singapore, and Malaysia – which are experiencing sharp economic declines this year because of their high export dependence on the US market -- are important sources of foreign investment to Vietnam and destinations for its exports. Japan and Europe are also important for both investment and exports. Thus the demand for Vietnamese non-oil exports will slow down, and the supply of foreign investment to Vietnam will be lower than was projected earlier. 2.9. Vietnam faces a very large decline in external demand for its exports with the growth rate in export-weighted import demand from trading partners falling from 16 percent in 2000 to 0.5 percent in 2001 and is projected to be only 4.5 percent in 2002. 2.10. Falling export earnings growth. As a result total export earnings growth will not exceed 7 percent in 2001, compared to the 25 percent achieved last year. Falling world prices of oil and of agricultural commodities have cut export earnings from these products, which comprise nearly 40 percent of total exports. Vegetable and fruits and seafood exports grew at double digit rates. Manufactured export earnings rose by only 1 percent, because of a collapse in the volume of footwear, electronic and computer exports, compared to its growth of 16 percent last year. 23 Vietnam Development Report 2002 Falling demand for Vietnamese exports % 18 15 12 9 6 3 0 2000 2001/e 2002/f Figure 2.2: Import Demand Growth of Vietnam’s Trading Partners Source: World Bank (2001b); IMF (2001b) & Asia Pacific Consensus Forecast(2001). Note: Import demand growth of different regions are weighted by the relevant market-share of Vietnam’s non- oil exports. Export earnings grow more slowly Export US$ billion Share % Change in percent 2000 2000 2000 2001/e Total export earnings 14.4 100.0 25.2 7.0 Crude oil 3.5 24.2 67.5 -3.0 Non-oil 10.9 75.8 16.1 10.2 Of which : Agriculture 1.9 13.4 -9.8 -2.5 Seafood 1.5 10.2 55.5 21.0 Mining products 0.1 0.7 2.7 13.8 Garment 1.9 13.1 8.3 8.0 Footwear 1.5 10.1 5.2 2.0 Electronics & computers 0.8 5.4 33.8 -20.0 Handicraft & art 0.2 1.6 40.8 -5.0 Other 3.1 21.1 30.4 27.0 Table 2.2: Export Performance Source: Actual data: General Statistical Office; Projections: World Bank staff. 2.11. Non-oil exports grew by 10 percent, mainly because unclassified “other” exports grew by 27 percent. Both manufactures and primary goods are among the “other” exports. With furniture, toys, hides and skins, prepared foodstuff, plastic and rubber articles as well as simple machinery being among the rapidly growing export items in this category. 24 2. Navigating the Global Slowdown 2.12. Export volumes rose but prices fell. Increasing export volumes in the face of falling demand is a daunting task, but Vietnam did just that. Given its small share in most export markets and the dominance of supply constraints in determining exports, there are opportunities for increasing volume, if actions are taken to remove domestic constraints. In fact export volumes of crude-oil, all agricultural and seafood exports increased in 2001 despite falling external demand. Impact of weak commodity prices offset by surging volumes -80 -60 -40 -20 0 20 40 60 Total Agriculture Rice Coffee Black pepper Rubber Cashewnut Tea of all kinds Ground nut Price Volume Figure 2.3: Falling Prices and Surging Volumes of Agricultural Exports (9 months of 2001, year-on-year percentage change) Source: Customs Office and General Statistical Office. 2.13. Oil export volume rose by around 7 percent, which helped to mitigate the adverse impact of a 10 percent decline in world prices (i.e. from US$ 28.2 per barrel to US$ 25 per barrel). Export volumes for all crops (except tea) also grew, coffee and pepper grew by more than 40 percent and rice and cashew, by around 20 percent (see Figure 2.4). There is some evidence to suggest that ad hoc incentives may have helped enterprises reduce their fob-export prices to levels below what was evident in world markets. 2.14. Non-oil commodity prices fell sharply after the September attack and reinforced the trend of weakening agricultural prices over the last few years. Rice prices have fallen by over 40 percent since 1998, and robusta coffee (which in 2000 accounted for 99 percent of Vietnam’s coffee production) today trades at only a third of its 1998-price. Commodity prices are not expected to recover in 2002, because supply will remain strong while demand will stay depressed or even weaken due to the global slowdown. 25 Vietnam Development Report 2002 Box 2.1: Falling Rice Prices Between 1993 and 1998 rice prices increased at a faster rate than non-food prices, benefiting farmers that were net sellers of rice. This rise in the relative price of rice contributed to significant injections of resources into rural areas and thus to the poverty reduction that took place over that period. Since 1999, the relative price of rise has been falling and net sellers of rice have been losing. Since net buyers of rice comprise 58 percent of the households in the poorest income quintile, the price fall has clearly benefited them. Urban consumers have also gained. However, the rural economy has lost because of reduced inflow of resources. From 1999 to 2001, receipts from rice exports are estimated to have been reduced by US$ 220 million due to this price deterioration. The actual loss to rural areas was greater since urban consumers also paid lower prices. Figure 2.4: Index of Rice Price relative to Non-food Prices, (1991 = 100) 120 110 100 90 80 70 60 1991 1992 1993 1994 1995 1996 1997 1998 1999 20008M-01 Price of rice relative to non-food prices In the two poorest income quintiles, households market 28 and 34 percent of their paddy production respectively; this share is much higher in the top three quintiles. This implies that a price support or a stocking scheme will favor the wealthier farmers disproportionately more than the poor ones and remove farmers’ incentive to diversify. If the government’s concern is the poorest farmers that are net sellers, a more targeted program of income or employment support would be preferable. Given the current prices, even full compensation of the poorest farmers that are net sellers, such a scheme would not exceed VND 630 billion, or US$ 40 million, in 2001. Source: VLSS 1998 and staff estimates. 26 Box 2.2: Breakdown of “Other” Export Earnings In 2000, the “Other” in the export statistics of Customs accounted for US$ 3 billion or around 20 percent of total exports. The category has also been growing rapidly in both 2000 and 2001 and comprises products with great potential. Much more of the product groups like furniture, mattresses, toys, hides and skins, prepared foodstuff and plastic and rubber articles could be exported with additional efforts. The recent breakdown of ‘Other’ suggests at least 10 product groups each exceeding $100 million and adding up to US$2.2 billion. Value in US$ Growth in % million “Other” exports 2000 2000 2001 Total 3,002 30.4 28.0 Machinery & mechanical appliances 567 96.4 22.7 Furniture, bedding, mattresses, toys, games 300 64.5 14.0 Mineral products (excl. crude oil) 294 37.9 -19.6 Hides and skins 203 59.2 5.5 Prepared foodstuffs 176 12.6 58.0 Plastics and rubber articles 151 34.6 8.9 Chemical articles 131 7.2 16.5 Meat, diary and other animal products 128 19.7 104.7 Base metals and articles thereof 124 11.3 24.4 Wood and wood products 115 -7.8 -11.0 Other goods, n.e.s 812 7.3 57.8 Source: General Department of Customs. 2.15. Near term Export prospects. Though it is difficult to forecast export earnings growth in 2002, a year of great uncertainty in the world economy, there are factors that augur well for Vietnam’s export prospects. The ratification of the USBTA and its implementation by end of this year means that Vietnam will have “normal access” for the first time to the large US market.27 Despite a weakening US economy, Vietnam could generate growth in its exports to this market, especially if a lower-priced niche market in manufactures can be developed.28 However, it is unlikely that export earnings growth will exceed 5 percent in 2002 since oil-export earnings are likely to fall by nearly 20 percent due to weaker oil prices. Thereafter, export growth could recover to around 12 percent a year. 2.16. Foreign Direct Investment. Given falling availability of foreign investment and rising risk premiums, Vietnam’s potential for getting larger foreign investment inflows in the near term, especially in 2002, is limited. Foreign investment flows between all countries has declined by as much as 40 percent this year, the largest fall in three 27 The tariffs that Vietnamese exporters face in the US market will on average be reduced from around 35 to about 5 percent once the BTA becomes effective. 28 Vietnam could also adapt new measures to reduce the cost of exporters and the competitiveness of exports. Furthermore, there are promising opportunities for Vietnamese exports to China as well, even though its potential for raising export growth is limited and China’s WTO accession will increase competition in third-country markets. 27 Vietnam Development Report 2002 decades.29 This is accounted for mainly by a large decline in FDI flows between developed countries, but flows to developing countries have fallen too. Though, total foreign capital inflows (comprising of loans, bonds and equity) to East Asia has actually risen in 2001, equity flows show a slowdown. Recession in Singapore, Taiwan (China) and Japan, as well as a slowdown in Hong Kong, Korea and Malaysia, will also reduce flows of foreign investment from the region. 2.17. Even so, Vietnam could get a larger share of the falling investment flows in the short and medium term, if it can position itself as a safe place to invest during these difficult times.30 Vietnam can benefit from its similarities to China. But this opportunity can only be tapped if Vietnam undertakes new initiatives to make its climate for foreign investment better and genuinely more attractive than in the past. In 2002 Vietnam is assured of significant foreign investment inflows from the three newly approved foreign investment projects in the energy sector31. The US trade agreement has already generated renewed foreign investment interest in the more labor intensive sectors of the economy. If investors can be persuaded that Vietnam is accelerating the implementation of its reform program, foreign investment flows could increase substantially in 2003 onwards. 2.18. China’s WTO Accession and Vietnam’s exports. China’s accession to the WTO presents new opportunities for higher growth of exports but also new challenges for Vietnam’s manufactured exports to third country markets. China will become a much bigger market for its trading partners, including Vietnam. The greatest benefits will go to the regional exporters like Japan, Taiwan (China), and other NICs. South East Asian countries will also benefit but not as much. The estimated increases in import volumes from Indonesia and South East Asian countries are only around 3 and 14 percent, respectively.32 Although the aggregate increase in China’s imports from South East Asia is unlikely to be large, certain industries and countries will gain more than others. The new proposal to create a free-trade area between China and the ASEAN, when implemented, will also improve ASEAN countries access to new market opportunities in China. Vietnam, for instance, will have to accelerate its reforms towards WTO accession and make concerted efforts to take advantage of this large and expanding market and the opportunities it offers in products like meat, various crops like rubber, tea and coffee, vegetables and fruits, textiles and plastic products. (see Box 2.3 on China’s import demand for these products). 2.19. Chinese competition in third countries. China’s accession to WTO also poses a threat to Vietnam and other developing countries, as competition in third-country markets intensifies. WTO accession will lead to the abolition of quotas on Chinese textiles and garment exports starting in 200533, to a reduction in China’s own protection, and to a surge in exports from China. Garment exports are estimated to increase more than three- 29 UNCTAD (2001). 30 In a recent survey conducted by Political Economic Risk Consultancy Ltd., regional tourism executives rated Vietnam as the safest place in Asia. 31 These projects are expected to result in FDI of US$ 2.6 billion during the period 2001-2003. 32 Ianchovichina and Martin (2001). 33 China will be subject to additional textile safeguard quotas until 2008, but these will be applicable for only one year at a time, unlike the existing quotas which were put in place for an indefinite period of time. 28 fold34 which will most likely squeeze the garment industry in many South East Asian countries and reduce their garment exports by as much as a third. 2.20. Estimates suggest that Vietnam’s apparel sector, which accounts for 14 percent of all exports, is perhaps the only sector that might suffer noticeable negative consequences from China’s accession to the WTO. Since Vietnam is not yet a member of the WTO, its apparel exports will most likely continue to face restrictions in industrialized markets. This means that the squeeze on this industry could be significant over the next 5-10 years and there is an urgent need to focus on improving efficiency of the apparel and garment industry in Vietnam. Box 2.3: Estimates of Increased Imports by China following Accession to WTO With its accession to the WTO, China will increase its imports of a range of products as described below. This will be of considerable interest to many South East Asian countries including Vietnam. This is based on estimates made by a recent World Bank study by Ianchovichina and Martin (2001) about the likely increases in imports of various products. Meat products: The estimated increase in the volume of China’s imported meat is about US$540 million. Countries in South East Asia are expected to capture about 16 percent of this increase or US$62 million. Vietnam, which currently exports some types of meat products to China, will likely have an opportunity to sell more meat products to China. Crops: The volume of China’s imports of selected crops is expected to expand by about US$314 million. South East Asia may capture about 18 percent of this increase or US$46 million. Vietnam currently exports about US$300 million worth of vegetables, rubber, cashew, coffee, and other crops to China, and is well-positioned to increase its market share in these products. Textiles: Abolition of quotas on Chinese textiles and apparel exports starting in 2005, and therefore to a dramatic rise (158 percent) in Chinese apparel production after 2005. This expansion will stimulate input demand for imported textiles, by an estimated 114 percent. While most of the imports will be sourced from countries in North East Asia, a significant portion of imports (US$930 million) will come from South East Asia. About one third of this increase in import volumes will be captured by Indonesia, while the remaining two thirds will be supplied by other South East Asian countries, including Vietnam. The small share of Vietnam in China’s total textile imports in 1997 and the recent rapid growth of Vietnam’s textile exports to China presents an opportunity for Vietnam. Wood and paper products: China will increase its imports of wood and paper products and while Indonesia will remain a major supplier of wood and paper products to China, some of the demand (US$105 million) will be met by other South East Asian countries. Vietnam’s exports of wood and paper products to China is only around $5 million, suggesting scope for further expansion. Petrochemical products including plastics: China’s demand for imported petrochemical products will rise too. While North East Asia will satisfy most of this demand, South East Asian nations will also expand sales of these products to China. Vietnam, which currently exports plastic products to China will have an opportunity to expand its market share. Electronics and other manufactured products: The volume of China’s imports of electronics and other manufactures will increase by an estimated US$ 52 billion following accession. South East Asia will supply approximately US$1.4 billion of this increase. Vietnam’s exports of electronics and other manufactured products to China is only $10 million, but it can in future become part of the international production sharing arrangements in electronics production and trade. 2.21. Faster implementation of reforms. Slower world growth calls for an accelerated domestic reform program to build competitiveness. More rapid implementation of some parts of the recently-adopted reform program, in particular actions over the next 6-12 months aimed at reducing costs of exporters and enhancing options for private investors, will have a bigger favorable impact now than taking the same actions in the subsequent 12 months. This is because most businesses in the US, Japan, the Euro-zone, as well as in the NICs of East Asia, have terminated their earlier import contracts especially since the September events and its aftermath. Many of those importers are also rethinking their 34 Ianchovichina and Martin, 2001. 29 Vietnam Development Report 2002 sourcing and procurement strategies. This situation presents Vietnam, a relative newcomer to manufactured exports, with easier opportunities to break into these markets and production chains. Once the new contracts are signed and revised procurement strategies are adopted by these businesses by the end of 2002 and early 2003, penetration will be more difficult. 2.22. Specific actions that could assist the private sector include modifying laws on banks to reduce constraints on credit to private SMEs, modifying the land law to provide easier access to and valuation of land, removing existing business licensing restrictions in various sub-sectors, and facilitating the formation of domestic private business associations –these actions could all be implemented now rather than later. MACROECONOMIC PERFORMANCE 2.23. Growth prospects. Vietnam’s medium term prospects for growth remain good despite the near term uncertainty that shrouds the global economy. This is because internal factors driving growth are more favorable today than in the last three years. Continued implementation of reforms are expected to sustain the recent improvements in business and consumer confidence. Macroeconomic stability is also maintained: inflation remains low, domestic credit growth is slowing and the exchange rate more flexible. 2.24. Macroeconomic performance in 2001 has been close to expectations, despite a substantially worse external environment. Growth is lower than originally projected and owing to falling food prices, inflation remains well below 5 percent. Available key indicators, such as retail sales and industrial production, point to continued growth in real GDP, with economic activity driven by domestic demand, including a pick up in private investment following improved business sentiment. With a slight easing of imports this year and a modest improvement in foreign investment inflows, the external balance remains favorable. 2.25. Most of the credit expansion in the last two years has come from the SOCBs. In view of their already high levels of non-performing loans, and generally weak expertise in credit risk assessment such rapid credit expansion will further weaken asset quality of these banks. Also, given the stretched liquidity position of the banks and the slowing growth of dong deposits over the past six months, sustainable financing of this credit growth may be questionable. 30 Less new credit to SOEs 100 90 80 70 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 9M 2001 Share of Credit Growth to SOEs Figure 2.5: Share of Credit Growth to State-Owned Enterprises, in percent. Source: International Monetary Fund. 2.26. Credit policy has been restrained, as envisaged, thereby reversing the trend of the last two years. A breakdown of credit growth shows that a declining share has been allocated to state-owned enterprises (SOEs) (see Figure 2.5). In 2000 and 2001, a substantial part of the credit allocation to non-state sectors reflects the Government’s decision to ask SOCBs to extend loans for rural development purposes. 2.27. Overall fiscal position. The overall fiscal deficit in 2001 is expected to be lower than budgeted because of higher-than-planned revenue. The deficit is only estimated to stand at 2.6 percent of GDP compared to a budgeted 4.1 percent, thereby reducing the expansionary impact of fiscal policy on the economy. 2.28. Falling oil price putting pressure on revenue. Maintaining the present level of revenue over the medium term calls for concerted efforts to raise non-oil revenue. Unfortunately VAT revenue as a share of GDP has not improved, reflecting mainly weaknesses in design and collection procedures. Over the medium term, this tax will prove crucial to assure stronger public finances. Reform of the VAT system becomes imperative as the relative importance of revenue from external trade taxes declines in line with tariff reductions under international trade agreements. The modernization of tax administration at the central level, an overall upgrade of tax officers technical knowledge, the rationalization of collection procedures, the introduction of more tax-payer friendly procedures, and increased reliance on voluntary compliance will also be needed. It is noteworthy that non-state sources of revenue are becoming more important. Non-oil SOEs now account for less than 25 percent of total revenue compared to close to 50 percent in the early 1990’s. Revenue from corporate income and national resource taxes are expected to remain unchanged at last year’s level. 31 Vietnam Development Report 2002 Total revenue is improving – mainly driven by strong oil revenue % of GDP 25 20 Total revenue 15 Non-oil revenue 10 VAT revenue 5 0 1996 1997 1998 1999 2000 2001 Figure 2.6: Revenue, 1996- 2001, in percent of GDP Source: Ministry of Finance. Bank staff estimate. 2.29. Expenditures. Capital expenditures have increased in 2001 mainly due to additional capital spending to rehabilitate infrastructure damaged by floods. Higher capital spending also came from extra spending by provinces financed by higher-than- planned revenue collection. Wage spending has risen faster than total current expenditures, thereby squeezing non-wage recurrent expenditures. This squeeze is likely to exacerbate further the existing inadequacy in operations and maintenance (O & M) expenditures which reduces the utilization effectiveness of the public capital stock (see Chapter 5). 2.30. Slightly expansionary fiscal stance. In view of the poor financial health and vulnerability of the banking system, an expansionary fiscal stance is the only option for stimulating demand. There is room for small increases in budgetary spending in 2002, without endangering the sustainability of public finances. This will permit Vietnam to make progress on the structural reform agenda, even as external demand falls off. 32 Increasing capital expenditures and squeezed non-wage current expenditures 25 11 10 20 9 8 7 15 6 5 10 4 3 5 2 1 0 0 1996 1997 1998 1999 2000 2001 Capital expenditure excl. on-lending Current expenditure Wage Expenditure Non-wage expenditure Figure 2.7: Expenditures, 1996-2001, percent of GDP Source: Ministry of Finance, Bank staff estimate. 2.31. More flexible exchange rate. The foreign exchange surrender requirement was relaxed from 50 to 40 percent, and in the first three quarters of 2001 and the exchange rate depreciated by 3.5 percent against the dollar. Lower international interest rates on dollars, provided room for SBV to cut interest rates on both dollar and dong deposits and lending, while still maintaining the interest spread in favor of the dong. This helped inhibit households’ demand for dollar deposits. However, the corporate sector continues to prefer dollars over dong, putting downward pressure on the currency, as the interest margin in favor of dong is not large enough to offset expectations of further dong depreciations in the near term. The dong was also allowed to weaken in response to depreciations in currencies of regional competitors. 2.32. More flexible interest rates. The interest rate ceiling on foreign loans has been abolished even though cap on dong loans remain. This gives Vietnamese enterprises and foreign lenders the liberty to freely negotiate and fix interest rates and fees on overseas loans. The banks that operate in Vietnam have also been granted discretion to set the interest rate on foreign currency lending based on international market rates and the domestic demand and supply situation. For lending in Vietnamese dong, banks have for some time been allowed to offer interest rates up to a new ceiling rate, defined as the base rate plus 0.3 percent for short-term loans, and plus 0.5 percent for medium- and long- term loans. This means that banks can price their loans at any rate below the SBV base rate for their prime customers and apply higher rates for non-prime customers, subject to 33 Vietnam Development Report 2002 that ceiling. This rationalization of interest rates is important in paving the way for increased lending to private SMEs, which may not have sufficient credit history or collateral to secure loans at administratively set low interest rates. EXTERNAL FINANCING REQUIREMENTS 2.33. Total external financing requirements are expected to rise as Vietnam participates more vigorously in the recovery of the world economy. Both the costs of reforms and the growth in imports -- arising from higher investment and higher output levels -- have to be financed. Higher export earnings growth will be key. But given Vietnam’s current stage of development, capital inflows – mainly foreign direct investment and concessional assistance – should play an important role in Vietnam’s efforts to catch-up with its more prosperous neighbors. 2.34. Import growth. Imports are expected to grow rapidly over the medium term, due to trade reform and growth in investment, especially domestic private investment. In 2002, higher imports will mainly result from the large foreign investment flows into oil and gas and electricity-generation projects approved earlier this year. These investments will require a great deal of imported capital and inputs. Beyond this, imports will be driven by trade reform and higher investment and output. Imports are thus projected to grow at an average annual rate of 12 percent over the coming 3 years, higher than the projected growth in nominal GDP. Current account deficit to grow as imports gain momentum Projected Projected Projected Items 2000 2001 2002 2003 2004 Exports (fob) 14.5 15.3 16.1 18.1 20.5 Imports (fob) 14.0 14.9 16.4 18.9 21.1 Trade Balance 0.5 0.4 -0.3 -0.8 -0.6 Services, investment income & transfers (net) 0.2 0.1 -0.2 -0.2 -0.2 Current account balance 0.5 0.4 -0.6 -1.1 -0.9 (excluding grants) Percent of GDP 1.7 1.2 -1.9 -3.3 -2.7 Memo items: Growth rates: Export value 25.0 7.0 5.0 12.0 13.0 Import value 35.0 6.0 10.0 15.0 11.0 Table 2.3: Current Account Balance (US$ billion) Source: Actual data: Vietnamese authorities, IMF and World Bank. Estimates: IMF and World Bank staff. Note: Figures are rounded. 2.35. External Balance. The current account deficit will rise to accommodate higher imports. The current account balance is projected to move from a slight surplus to a cumulative deficit of US$ 2.7 billion over the next three years ranging between 2 and 3 percent of GDP over this period. 34 2.36. To support the costs of both the reform and the public investment program, Vietnam will need disbursements or gross capital inflows of about $2.7 billion next year, given the net outflows on the short-term capital account. Around half of this inflow will come from concessional financing or ODA and the rest from FDI and non-concessional loans. External financing requirements will rise 2001 2002 2003 2004 Financing Requirements 1.4 2.4 3.0 3.0 Current account deficit -0.4 0.6 1.1 0.9 Medium and long-term amortization 1.3 1.3 1.3 1.4 Reserve requirements 0.5 0.4 0.6 0.6 Financing Sources 1.4 2.3 2.7 2.5 Official grants 0.1 0.1 0.1 0.1 Medium & long-term borrowing 1.5 2.0 2.5 2.4 - ODA loans 1.1 1.4 1.4 1.5 of which: IDA 0.2 0.4 0.3 0.3 - Others (including FDI loans) 0.3 0.6 1.1 0.9 Direct foreign investment 0.6 0.8 0.7 0.7 Short-term capital (net) -0.8 -0.8 -0.6 -0.7 Additional financing needs 0.0 0.1 0.3 0.5 Table 2.4: Vietnam: Financing Requirements and Sources (US$ billion) Source: Actual data: Vietnamese authorities, World Bank and IMF. Estimates and projections: IMF and World Bank staff. Note: Figures are rounded, includes errors and omissions. It includes the disbursements under existing PRSC but excludes IDA assistance under subsequent PRSCs, bilateral co-financing under PRSC-I which is soon to be signed as well as the ADB program loan. 2.37. The rising external financing requirements can be met without creating debt servicing problems because disbursement of concessional assistance from bilateral and multilateral donors from already committed funds and quick-disbursing assistance will meet a large part of this requirement. Under this scenario, debt servicing will remain sustainable in the medium-term. In fact, even if the export earnings growth rate were reduced further, Vietnam’s projected debt service remains sustainable. This assessment requires improved implementation of public investment projects, especially those supported by foreign assistance. 2.38. Quick-disbursing concessional assistance. Even with rising disbursements of project aid, there will be need for quick-disbursing concessional assistance. The World Bank’s Poverty Reduction Support Credit (PRSC) and the IMF’s Poverty Reduction and Growth Facility (PRGF) are expected to disburse a total of around US$ 270 million in 2002. The UK, Denmark, the Netherlands, and Sweden have recently approved co- financing of the first PRSC whose first and second tranches are likely to be disbursed in 2002. A new financial sector adjustment loan of US $95 million from the ADB is 35 Vietnam Development Report 2002 expected to disburse in part as well. Thus, most of the financing gap is expected to be filled in 2002. 2.39. FDI and commercial inflows. FDI and commercial inflows are estimated to increase to $1.2 billion in 2002 (both equity and loans) given the large projects in the energy sector that were recently approved. These projects are expected to include loan- components of around US $0.4 billion. Non-concessional loans, unrelated to FDI, are not expected to exceed US$ 0.2 billion. 2.40. Downside risks to the outlook. Vietnam’s economy is vulnerable to the global slowdown due to its openness, with exports accounting for one half of GDP. In a scenario where global growth is lower than is projected now, Vietnam would have weaker exports and FDI, and lower GDP growth. Slower world growth in 2002 and a later recovery, could cause oil prices to fall below US$ 21 per barrel (current projection for 2002), and result in a further weakening of commodity prices. If the price of crude oil were to fall to US$ 16 per barrel, Vietnam’s total exports would barely grow in 2002. This could cause GDP growth to be lower than the 5.5 percent currently projected for 2002. 2.41. Additional external financing requirements. Imports may need to be sustained to maintain GDP growth momentum. Not all of the adjustment to falling exports will be done through policies. Some of it will need to be financed. A deeper global slump would likely also lessen the commitment of new FDI projects. International institutions would then be willing to provide additional financing. 2.42. External debt servicing. Vietnam is current in all its debt service obligations, and the projected debt service burden is sustainable. Debt service stands at around 11 percent of exports of goods and services and 7 percent of GDP in 2001 and is expected to fall in the medium-term. This decline in the debt service burden is based on the projected export and GDP growth rates discussed above as well as on the assumption that there will be no major increases in commercial borrowing. Sensitivity analysis suggests that even a significant drop in the projected export earnings growth rate will not create a problem with the servicing of external debt. 2.43. Vietnam’s external debt as a share of GDP and its external debt service as a share of exports of goods and services compares very favorably with other developing countries (see Figure 2.8). Vietnam’s debt stock is not excessive relative to other developing countries and its debt-service is lower still. 2.44. Current Stock of Debt. Vietnam’s stock of outstanding external debt stands at US$12 billion in 2000, and is expected to reach an estimated US$12.9 billion by the end of 2001. Thus total external debt is equivalent to about 43 percent of GDP and 89 percent of exports of goods and services. About four-fifth of this debt is from multilateral and bilateral sources and thus on concessional terms. In 2001, multilateral debt stands at around $2.9 billion and bilateral debt at around US$7.1 billion. Most of the remaining debt consist of these loans that accompany foreign investment flows into Vietnam. 36 Low external debt and easy debt service Debt Services as Share of Total Exports of Total Debt as Share of GDP in 1999 G d and Services in Mauritania 1999 Zambia Zambia Burundi Sudan Indonesia Mozambique Rwanda Lao PDR Mauritania Burundi Pakistan Malawi Kenya Cote d'Ivoire Cote d'Ivoire Madagascar Zimbabwe Indonesia Cameroon Togo Uganda Cameroon Thailand Gambia, The Mozambique Gabon Ghana Nigeria Gabon Tanzania Madagascar Ghana Ethiopia Central Senegal Zimbabwe Burkina Faso Ethiopia Tanzania Thailand India Vietnam Philippines Senegal Central African Rep. Chad Malawi Cambodia Chad Rwanda Bangladesh Philippines Vietnam Uganda China Gambia, The Kenya Nepal Vietnam Malaysia Sri Lanka Togo Sri Lanka Burkina Lao PDR Pakistan Sudan Nepal Nigeria Bangladesh Malaysia India Cambodia China 0.0 50.0 100.0 150.0 200.0 250.0 300.0 0.0 10.0 20.0 30.0 40.0 50.0 % % Figure 2.8: Servicing External Debt Source: World Bank 2001. 2.45. The Government has formulated an action plan on debt monitoring and debt management. The authorities also have issued supporting decrees and regulations on external debt, defining the roles of different agencies in external debt management, and the UNDP is managing a technical assistance project to support the government with debt management. 37 3. Implementing Structural Reforms 3. IMPLEMENTING STRUCTURAL REFORMS 3.1. Vietnam’s major challenge is the timely implementation of the Government’s recently adopted multi-year program of structural reform actions. This chapter examines the progress so far in implementing that structural reform program and the likely impact on Vietnam’s policy and institutional framework as well as on employment, growth and poverty-reduction.35 This involves an examination of the medium-term impact of private sector liberalization on employment and of trade reforms on different income groups, especially on the poorest. The short-term impact of these reforms on employment is also assessed. PROGRESS ON IMPLEMENTATION 3.2. Vietnam has embarked on a major round of multiyear reforms in April of 2001, as part of the ‘doi moi’ which began in the late 1980s. Following the adoption of the ten- year Socio-economic Development Strategy by the Ninth Party Congress in April this year, Vietnam reached agreement with the IMF and the World Bank on a multiyear program of specific actions concerning trade policy, improvement of the climate for private enterprise, banking and state-owned-enterprise (SOE) reform, and public expenditure management.36 This agenda complements the reforms in corporate governance and the non-bank financial sector supported by the Asian Development Bank. 3.3. Implementation of the program of reform actions supported by IMF and the World Bank has been good, except for the SOE reform component that has slipped substantially. The programs in respect of private sector development and trade are progressing satisfactorily and banking reform, which lagged in the early months, is also back on schedule. 3.4. Trade reform is moving faster than planned. In fact, progress in liberalizing the import regime has been faster than was envisaged. To further open Vietnam’s market, the Government committed to remove QRs multilaterally and reduce tariffs on ASEAN imports by 2003 (see Table 3.1). Instead of removing QRs from two items (clinker and paper) this year as committed, the Government removed QRs from seven items. Under the AFTA program of tariff reduction, the government announced changes in tariff lines and reduction in tariffs effective from January 2001. More than 700 items were transferred from the Temporary Exclusion List (TEL) to the Inclusion List (IL).37 On the export side, quotas on rice were eliminated and the share of garment export quotas to be 35 Growth in household income of the poor is highly correlated with improvements in various indicators of welfare. High growth and more efficient provision of public services will contribute to the achievement of Vietnam’s development goals and targets. 36 The IMF’s Board approved the Poverty Reduction and Growth Facility (PRGF) in April 2001 and the World Bank’s Board approved the Poverty Reduction Support Credit (PRSC) in June 2001. Annex 3.1 describes the reform actions envisaged under each component of the Government’s program, supported by the PRSC, as well as the non-bank financial sector reform supported by ADB. 37 The remaining 1,200 items in the TEL are expected to be moved to the IL by 2003. Currently, 65 percent of the 4,986 items in the IL list have a tariff rate of 0-5 percent and the rest to a tariff rate of 5-20 percent. 39 Vietnam Development Report 2002 auctioned was raised to 25 percent, in line with the commitment. These measures are expected to increase private participation in the export of rice and garments. Speeding up Trade Liberalization Item or group Original date Actual or revised date 1. Paper Dec. 31, 2001 Removed May 1. 2001 2. Clinker Dec. 31, 2001 Removed May 1. 2001 3. Construction white glass Dec. 31, 2002 Removed Dec. 31, 2001 4. Remaining steel products Dec. 31, 2002 Removed Dec. 31, 2001 5. Vegetable oil January 1, 2003 Removed Dec. 31, 2001 6. Alcohol Not schedule for removal Removed May 1, 2001 7. Granite and ceramic tiles Dec. 31, 2002 Removed May 1, 2001 8. Cement Dec. 31, 2002 No change Motorcycles (new) and cars Not schedule for removal Dec. 31, 2002 Passenger vans 10-16 seats Not schedule for removal Removed May 1, 2001 Up to 9seats Not schedule for removal December 31, 2002 Table 3.1: Schedule for QR removal, 2001 – 2003 Source: Prime Minister Decision 46/2001/QD/ttg on the management of import and export of goods in the period 2001-2005. 3.5. Private sector reform is progressing well. The implementation of the Enterprise Law in January 2000 has been followed by other actions in 2001 all seeking to improve the climate for private investment. Access to land and credit has been facilitated by decentralizing allocation of land, aligning compensation with the true value of land and creating the appropriate infrastructure for mortgaging land. The establishment of a National Register Agency for Secured Transaction under the Ministry of Justice – to conduct, record and register all transactions and to maintain a database – has now made it possible to implement mortgages for the first time.38 The Government has already identified 70 additional sub-sectors where business licensing restrictions need to be removed or modified and the process has been initiated. 3.6. More than 26,000 private SMEs have registered since January 2000, compared to 6000 SMEs registered in the two years before 2000. These firms had a total registered capital equivalent to US$2 billion, or 6 percent of GDP. Nearly 70 percent of the newly registered SMEs are new entities, implying significant new investment; the remaining 30 percent have transformed themselves from informal household enterprises to formal SMEs which suggest that confidence in the formal system has improved. 3.7. Banking system reform is back on schedule. The Government has adopted a comprehensive banking reform program focused on the restructuring of banks and on improvements in the regulatory and supervisory framework (see Annex 3.1 for details on measures). In the short-term, the reforms will ensure the stability of the banking system, 38 The Hanoi office of the agency will function from December 2001 and the HCM City office from March 2002. 40 3. Implementing Structural Reforms and in the medium-to-long term it will promote better mobilization of domestic resources, improved allocation of those resources to commercially viable activities, and expanded banking services for all of Vietnam. 3.8. The restructuring of non-state joint-stock banks (JSBs) has picked up momentum after a delayed start. Since January 2001 six more JSBs have been closed and the total number of JSBs has been reduced by nearly two-fifths relative to the number in 2000 through cumulative merger and closures. Several JSBs are also being rehabilitated with private shareholders providing additional capital. 3.9. Until November 2001, Vietnam was behind in completing the initial steps in the restructuring of SOCBs. The recent adoption of detailed restructuring plans for Incombank (ICB), Vietnam Bank for Agriculture and Rural Development (VBARD), and the Bank for Investment and Development (BIDV) permits actual restructuring to begin. These plans, are critical because they incorporate agreed annual milestones that have to be met in order for banks to receive the recapitalization funds in stages (see Annex 3.1). The State Bank of Vietnam has also issued the decision that would govern the phased and conditional recapitalization of the SOCBs. Independent financial audits by international auditors using International Accounting Standards are expected to be completed early next year. 3.10. SOE reform has been much slower than planned. The implementation of equitization has slowed dramatically this year and the establishment of the re-designed social safety-nets and the removal of caps on shareholdings in equitized SOEs are both behind schedule. This slippage is in part due to the fact that managers were waiting for the results of the August Party Plenum on SOE reform. Now that the Plenum has endorsed the reform program, implementation of the program is expected to be reinvigorated. Nevertheless, unless this slippage is corrected in the next two months, there is real risk that the twelve month target of the SOE reform program will not be met in May 2002. Slowdown in Equitization 250 200 150 100 50 0 1998 1999 2000 M8-2001 Less than 51% of shares sold 51-65% of shares sold More than 65% of shares sold Number of completed equitizations Figure 3.1: Number of Completed SOE Equitizations Source: National Steering Committee for Enterprise Reform and Development. 41 Vietnam Development Report 2002 3.11. The number of completed SOE equitizations increased every year since 1998, totalling more than 700 equitized SOEs. As of September 2001, only 120 SOEs had completed major and minor equitizations, with 78 of these SOEs selling more than 65 percent of shares to non-state shareholders (see Figure 3.1). BETTER ARRANGEMENT FOR IMPLEMENTATION 3.12. Vietnam faces the daunting task of implementing several components of its multiyear reform program in a consistent, coherent, coordinated and timely manner. Timely implementation of some components of structural reforms is already proving difficult. Over the medium-term, Reform programs in public administration and in legal system development will also be added to the ongoing structural reform agenda, making implementation more complex than it is at present. Thus for the medium-term, better arrangements for implementation will have to be established. 3.13. No single government organization or agency is currently responsible for monitoring implementation of all reforms nor for ensuring consistency and coherence of the actions that are being implemented under individual reform components.39 For example, it is possible that under SOE-reform, restructuring of state-enterprises in certain sub-sectors are proceeding slowly or not at all, even though under the trade reform program, tariffs on competing ASEAN imports are expected to fall next year. Even within the same SOE reform component, where different ministries or agencies are responsible for different actions, delay in establishing the social safety-net for workers because of one ministry can prevent enterprise managers from implementing SOE restructuring. These situations -- which are likely to multiply as additional reform areas are adopted -- call for a single agency with adequate powers to coordinate and cajole ministries and agencies to move in step with others in the implementation of various reform components. 3.14. Even for a single reform component like SOE reform, several ministries/agencies are involved in its implementation. Not only are four ministries and agencies involved – Ministry of Finance, Ministry of Planning and Investment, Ministry of Labor, Invalids and Social affairs and the Office of Government – but actions in respect of specific SOEs like equitization, liquidation, sale and restructuring, can only be taken by owners like different provincial peoples’ committees, line ministries, and General Corporations. They in turn have to persuade enterprise managers to take actions. Similarly for trade reform, four Government agencies -- Ministry of Trade, Ministry of Finance, the Office of Government and the Customs Office – have to coordinate implementation. 3.15. Transition economies have often found it useful to establish a single agency or organization for reform because implementation of reforms is such a large share of Government’s business. The experience of China with such arrangements is worth emulating (see Box 3.1). While each ministry was adequately equipped to implement the 39 This problem was faced during the preparation of the multiyear program of structural reforms too. In November 1998, the Government established a high-level Steering Committee for Cooperation with International Financial Institution (also called SAC / ESAF committee) led by the first Deputy Prime Minister and comprising of all involved ministries and agencies. 42 3. Implementing Structural Reforms actions that it was responsible for, China deemed it necessary to establish a Reform Commission with full time staff and appropriate powers not only to implement reforms across many areas in a coordinated manner, but also to initiate research on new reforms and to assess the impact of reforms or pilots on an ongoing basis. Box 3.1: China’s Mechanism of Policy and Institutional Reform The National Committee for Economic Institutions Reform was established at the beginning of the reform and openness process to manage the reform process. In 1998, this committee was upgraded to a more senior institutional set-up. Its specific tasks are carried out by the Office of the Economic Institutions Reform (OEIR) directly under the Government. OEIR is to study, formulate, and manage implementation of reform and openness policies. This ministerial body has one chairman, four deputy chairmen, 23 departmental cadres, and 85 staff covering the following six functions: (1) Researching on the policy agenda of economic reform and openness and providing recommendations to the Government for making decisions; (2) Monitoring and managing implementation of the reform agenda, according to the Prime Minister’s authorization, and timely provide recommendations for resolving problems arisen during the implementation; (3) Conducting surveys to review implementation of economic reform and openness policies in order to formulate long-term strategies for the future; (4) Reviewing policies on special economic zones to provide recommendations to the Government; (5) Studying and exchanging views with international partners to learn from external experiences on economic management, comparing Chinese institutions with institutions in other countries; (6) Studying other specialized and important issues assigned by the Government and the Prime Minister. OEIR has six Departments with the key following functions: (1) General Research Department: organizing overall reform studies related to global issues; comparing different reform scenarios; combining economic strategy with technology and education strategies; harmonizing imbalance between rural and urban developments; (2) Macro Institutions Department: institutional issues of investment regime, economic planning, fiscal and monetary policies, foreign exchange regime, income distribution, employment policy, and policy coordination; (3) Market Institutions Department: researching and recommending on ownership regime, Government governance and conducting surveys and studies on commodity, factors, and real estate markets; (4) Openness Policy and Special Economic Zones Department: policies and strategies applied to special economic zones and their positive spillover to the rest of the economy; (5) Department of International Institutions: in charge of comparing domestic institutional mechanism with international experiences; exchanging views and cooperating with the international community. (6) Administrative Department: administration, filing, personnel, etc; Source: “Organizational Structure of the Chinese Government”, 1998 3.16. Vietnam has already decided to establish a high-level inter-ministerial committee headed by the Deputy Prime Minister to coordinate implementation of the recently- adopted structural reform program supported by the IMF and the World Bank. This committee is to be supported by a working group led by the Office of Government and comprising of representatives of several ministries and agencies and a secretariat led by the State Bank of Vietnam. It is essential that this committee and its supporting working group and the secretariat begin to function immediately. This requires the designation of specific individuals to be members of the working group and the secretariat, who will become the focal points for following the implementation of each of the five components. The appointment of full time staff members also has to be expedited. IMPACT ON POLICY AND INSTITUTIONAL FRAMEWORK 3.17. Fifty years of development experience shows that faster growth and poverty reduction requires sound policies and institutions. Key elements of such a sound policy 43 Vietnam Development Report 2002 and institutional framework include prudent macroeconomic management, greater competition through openness to trade and investment, efficient financial intermediation clearly defined property rights, social inclusion, well-distributed human assets and effective governance. How good is Vietnam’s policy environment today relative to its recent past and how does it compare with other developing countries? How will implementation of the current three-year reform program improve the environment? 3.18. Country Policy and Institutional Assessment (CPIA). The World Bank’s system for assessing borrowers’ performance, the CPIA, is used annually to examine whether the country’s policy and institutional framework is improving sufficiently to make better use of concessional development assistance. The CPIA covers four broad policy areas -- macroeconomic management, structural policies, policies for social inclusion and public sector management and institutions -- and uses twenty specific characteristics for assessing these areas. 3.19. Vietnam has improved its policy and institutional environment considerably since 1999, and successful implementation of the three-year reform program will move Vietnam closer to the top quintile of low income countries. Vietnam today compares very favorably with the top quintile of these two groups in respect of macroeconomic management and policies for social inclusion, but relatively unfavorably in respect of structural policies and public sector management (Figure 3.2). 3.20. Implementation of the recently adopted three year program of reforms will lead to noticeable improvement in the banking sector, the competitive environment for private sector as well as the factor and product markets. The assessment of trade policy will improve very little because the planned reforms will not reduce Vietnam’s multilateral tariffs. In the area of public sector management and institutions, improvements will be mainly in the quality of budgetary and financial management, the efficiency of revenue mobilization and in transparency of information. Not many actions to change public administration or legal enforcement are likely next year as a good deal of diagnostic work and consensus building on specific actions remain to be done. But there will clearly be improvements given the reform process that has begun (see Chapter 4 Building Modern Governance). 44 3. Implementing Structural Reforms Figure 3.2: Vietnam: Policy and Institutional Performance (1) Progress has been made … and Vietnam is above the average for during 1999-2001... low income countries in some areas... Inflation and Macro. Inflation and Macro. Imbal. Imbal. 6.0 6.0 Equity Policy Fiscal Policy Equity Policy Fiscal Policy 4.0 4.0 Social Policy 2.0 Ext. Debt Mgt. Social Policy 2.0 Ext. Debt Mgt. 0.0 0.0 Bank. Sect. Effic. & Res. Bank. Sect. Effic. & Factor & Prod. Market Mob. Factor & Prod. Market Res. Mob. Pub. Sect. Mgt. Com. Environ. For PSD Pub. Sect. Mgt. Com. Environ. For PSD Trade & Forex Policy Trade & Forex Policy Vietnam, 2001 Vietnam, 1999 Average for low income countries, 2001 Vietnam 2001 ... but not as good as the top quintile of low …nor as good as the top quintile of all income countries... developing countries. Inflation and Macro. Imbal. Inflation and Macro. Imbal. 6.0 Equity Policy Fiscal Policy Equity Policy 5.0 Fiscal Policy 4.0 3.0 Social Policy Ext. Debt Mgt. Social Policy 2.0 Ext. Debt Mgt. 1.0 0.0 Bank. Sect. Effic. & Res. Bank. Sect. Effic. & Res. Factor & Prod. Market Factor & Prod. Market Mob. Mob. Pub. Sect. Mgt. Com. Environ. For PSD Pub. Sect. Mgt. Com. Environ. For PSD Trade & Forex Policy Trade & Forex Policy Top quintile of low income countries, 2001 Vietnam, 2001 Top quintile of borrowers, 2001 Vietnam, 2001 (1) This is based on the World Bank’s annual internal assessment of the quality of each country’s policy and institutional framework. This assessment is conducted for 20 characteristics: four relating to economic management, six to structural policies, five to policies for social inclusion and five to public sector management. These graphs are based on the assessment of 10 of those characteristics. The further out a characteristic is from the centre of the graph the better the quality of the score for that characteristic. IMPACT ON GROWTH AND POVERTY REDUCTION 3.21. Rapid growth over the next decade will be critical to the achievement of Vietnam’s development objectives. High growth, such as that envisaged under the Government’s ten-year SDS will permit rapid reductions in poverty - more than could be achieved with the growth rates achieved in 2000 and 2001. Figure 3.3 shows that average growth rate of 7.5 percent a year will reduce poverty by 50 percent by 2008 while current growth rates will only reduce poverty by 40 percent by 2010. Assuming that average growth is likely to be somewhere between 5 and 7.5 percent, Vietnam will achieve a reduction of between 40 and 55 percent in the incidence of poverty by 2010 (see Figure 3.3), provided regional distribution of that growth is similar to the 1990s; with a more even distribution, higher reductions in poverty are possible. 45 Vietnam Development Report 2002 Higher growth required to reach poverty target 35 30 Current level of growth 25 Head count ratio High, SDS growth 20 Target =16% 15 10 High, uniform growth 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Figure 3.3: Poverty-reduction Implications of Alternative Rates & Patterns of Growth 3.22. At any rate, rapid reductions in poverty are expected to be accompanied by significant improvements in most social and other welfare indicators. This is the experience of both Vietnam and other developing countries. 3.23. Ongoing assessment of the impact of recent reforms and proposed reforms helps to fine-tune the implementation of reforms and the adoption of complementary or mitigating measures in a timely manner. For example, assessment of the likely adverse impact of SOE reform on employment in Vietnam permits policymakers and donors to learn that the estimated social costs of redundancy and the fiscal cost of a social safety net are not too high. Similarly, if an improved investment climate is expected to generate higher private employment or if trade reform and private sector deregulation increases exports and employment and thereby offsets the employment declines in the contracting sectors, such an assessment will be useful for sustaining and implementing trade reform. 3.24. This section examines the likely impact on employment, growth and poverty reduction, using different sources of analysis. The actual impact of recent liberalization on private firms in 2000 and 2001 is used to assess the likely medium-term impact of continued opening-up of the private sector on future employment-creation and household income. Information from the VLSS and the trade regime is used to simulate the likely impact of liberalizing trade on exports, household consumption, and poverty reduction. 3.25. Improving the investment environment through reforms of state enterprises and banks, and enhancing competition through reforms of trade and private sector are expected to raise both the quantity and quality of investment necessary for growth and poverty reduction. Private small and medium sized enterprises (SMEs) will have to contribute a much larger share of investment.40 Labor-intensive export-led growth will also be needed. 40 ADB, UNDP, and World Bank (2000). 46 3. Implementing Structural Reforms Impact on private sector reforms on employment 3.26. Recent reforms have generated a large response in terms of new private enterprise registrations. Though Hanoi and Ho Chi Minh City have had the largest number of registrations, this growth has been distributed across the country. The initial numbers of enterprises in the North and Center of the country were small, but they have been growing at a faster pace than in the South where the initial numbers were much larger. The Mekong Delta has experienced the lowest growth in private enterprise registrations and in private employment. Table 3.2: Private SMEs: 1998 – 2000 Province Number in Cumulative Private Private 2000 Registration employment manufacturing growth (%) growth (%) employment growth (%) The North 11717 78 86 107 The Center 6046 54 130 194 The South 37357 41 44 55 Total 55120 49 61 71 Note: These figures are cumulative and do not take account of enterprise closures and so actual number of enterprises currently operating Is likely to be lower. Source: Ministry of Planning and Investment, General Statistical Office. 3.27. Growth in total private SME employment averaged 30 percent a year (Table 3.2), with faster growth in employment of the SME manufacturing sector. In fact, the strongest employment growth is found in enterprises with more than 100 workers,41 which is a good sign. 3.28. Potential employment impact. Continued growth of private enterprises of this nature could rapidly increase the significance of private SMEs as a source of employment in Vietnam. The formal private sector currently accounts for a little over 2 percent of the labor force or around 800,000 workers. A continuation of 30 percent annual growth rate in formal private sector employment would see this sector expand to over 11 million people by 2010. Impact of trade reforms on growth and poverty 3.29. Vietnam has already seen large payoffs to increased openness in the 1990s. Vietnamese consumers and producers have enhanced access to a wider range of products. Exports have increased by an average of around 23 percent between 1990 and 2000 leading to an expansion in sectors that employ large numbers of people — garments and textiles, footwear, food processing and agricultural products. Combined with a stable 41 The vast majority of new firms that were created since 1998 were less than 100 workers in size — 4887 versus the 685 new firms whose size were greater than 100 workers. 47 Vietnam Development Report 2002 macroeconomic environment and other reforms to improve the investment climate, it generated exceptional growth and poverty-reduction. On average, open economies grew over three times as fast as more closed ones over this period (see Box 3.2). Box 3.2: Trade and growth Dollar and Kraay (2001) examine the links between trade policy and economic growth by defining globalizing developing countries in two ways — the top one third of developing countries in terms of growth in trade as a share of GDP, and the top one third of countries with the largest absolute declines in average tariff rates. These two definitions give rise to different lists of countries, although nine countries appear on both — Argentina, Bangladesh, Brazil, China, Colombia, India, Nicaragua, Thailand, and Uruguay. They find that: - Per capita growth rates increased in globalizing countries more than they did in non-globalizing countries - Openness lead to declining inequality between countries and declining poverty within countries. Increased Openness Pay-off in terms of Growth in 1980s and 1990s Average real GDP per capita growth (%) 6 Rich countries Globalizers Non-globalizers 5 4 3 2 1 0 1960s 1970s 1980s 1990s Figure 3.4: GDP per Capita Growth Rates in Selected Countries Over 30 Years They also test whether the effects of openness on growth are true in general and not just for the selected sample of globalizing countries. To do this they examine within country rather than cross–country differences in trade and growth. This approach attempts to address many of the criticisms of earlier empirical studies of this nature. Their analysis shows that there is a strong positive relationship between trade volumes (a proxy for more open trade policy) and growth. Further, they find that this result is robust when tested against other competing influences on growth — such as the level of foreign investment, institutional quality, level of government consumption, level of inflation, and political stability. 3.30. The planned trade reforms imply a gradual approach to import reforms. QRs will be removed and access to imports will be enhanced, but average tariffs and dispersion in tariff protection will come down later. Preferential tariffs vis-à-vis ASEAN will fall significantly over the next three years, especially in manufacturing. The average Common Effective Preferential Tariff (CEPT) will fall from 14 percent in 2000 to 8.5 percent in 2003 and 4 percent in 2006. 3.31. Nevertheless, there will be increased opportunities for exports both to the region, including China, as well as to the new US market. Given the pattern of production existing in ASEAN partner countries, sectors like agriculture, processed agricultural products, light manufacturing, and equipment and machinery sectors would be expected to expand the following implementation of the CEPT. Vietnam currently exports a moderate amount of products to ASEAN countries (around 20 percent of total exports), suggesting that the gains may be relatively moderate. The gains to exporters will be 48 3. Implementing Structural Reforms enhanced if there is rapid progress in liberalizing trade in products currently on the Sensitive Lists (Fukase and Martin 2000). On the other hand, the US–Vietnam Bilateral Trade Agreement (USBTA) will help secure access to the large American market in early 2002. 3.32. Trade reforms will directly benefit the poor. Aside from being good for growth generally, trade reform of the kind planned in Vietnam will have direct benefits for the poor. One reason is the expansion in economic activities that directly benefit poorer households.42 Reducing protection lowers costs and encourages producers to expand output. Labor intensive and export intensive sectors tend to expand the most. As they expand, they hire labor, especially unskilled labor, commonly supplied by poorer households. Poor rural households particularly benefit from the expansion in agriculture and processed agricultural products. The beneficial effects on agriculture of lowering protection on imports is reinforced by other Government reforms such as the liberalization of rice exports and also recent changes in the control of fertilizer importation. 3.33. Medium-term growth and poverty impact of trade reforms. The recently- adopted trade reforms, when implemented, will increase employment, incomes and consumption of all income groups over the medium term,43 even though some households will suffer from short-term unemployment as labor is reallocated across sub-sectors. Simulation of the medium-term impact of a more ambitious trade reform program than the one recently-adopted (i.e. reducing all tariffs to 5 percent) using 1997/98 VLSS data, confirms that all income groups are expected to gain in the medium term. 3.34. Household expenditures of all ten income groups – five urban and five rural quintiles – not only rise but also get relatively evenly distributed across the groups as shown in Figure 3 and the incidence of poverty falls in both rural and urban areas.44 3.35. This outcome requires considerable reallocation of output across sectors. All agricultural sectors will expand as import-protection is reduced, with ‘Other crops’ and ‘Livestock’ showing the biggest gains. Export oriented sectors such as ‘food processing’ and ‘garments and textiles’ and ‘footwear’ show large expansions in output. On average, the increases in labor for expanding sectors compensate for the contractions in the highly protected, import competing sectors. 42 See Annex 3.2, Impact of Trade Reforms: Results from a CGE model for Vietnam, which this section draws upon. 43 There are two caveats to this simulation result. First, without finishing the case studies it is difficult to ascertain the nature and extent of impediments to the movement of goods, labor and capital and thus their likely impact on regional distribution of gains. Second, there is insufficient information on regional concentration of the contracting sub-sectors. 44 There are ten income groups in the CGE model used – five rural income quintiles and five urban income quintiles. 49 Vietnam Development Report 2002 All income groups set to gain from trade liberalization Real consumption per cent change Urban 5 (wealthiest) Rural 5 (wealthiest) Urban 4 Rural 4 Urban 3 Real consumption per Rural 3 cent change Urban 2 Rural 2 Urban 1 (poorest) Rural 1 (poorest) 0 2 4 6 8 10 Figure 3.5: Likely Impact of Trade Reform on Consumption of Ten Income Groups Source: Economy-wide simulation (see Annex 3.1). 3.36. Short-term Impact on redundancy and its mitigation. There are likely to be transitional costs as resources are reallocated across sectors. Trade reform will move resources away from protected sectors toward less protected, more efficient sectors. Workers in contracting sectors will be displaced but there will be increased opportunities in expanding sectors. The net effect will be an overall expansion in employment opportunities. However, in practical terms, not all of the displaced workers may find work in growing sectors straight away. They may not have the right educational or skill requirements or they may not be in the right geographic location to take immediate advantage of opportunities that are created in other sectors. Policies that support retraining and job search will help displaced workers find new employment and mitigate the transitional costs associated with reform 3.37. Safety nets will help mitigate the cost of adjustment. Trade and SOE reforms are likely to involve reductions in state enterprise employment as some enterprises close and others shed labor in order to improve their efficiency and profitability. It is estimated that the reforms could result in 400,000 job separation.45 The government has put in place a safety net for displaced workers to mitigate the impact that these reductions in employment will have on the poverty rate. This safety net is in the form of the Assistance Fund for SOE Rearrangement and Equitization. The Fund will finance compensation and retraining packages for redundant workers. The compensation package will include up to 45 Belser and Rama (2000). 50 3. Implementing Structural Reforms 2 months of basic salary per year of service and a lump sum payment in the range of VND 5 to 10 million, including costs for re-training. The severance package has been designed to reduce possible gender biases and biases against younger workers. 51 4. Building Modern Governance 4. BUILDING MODERN GOVERNANCE 4.1. Building modern governance includes creating sound policies (chapter 3) and allocating public resources efficiently (chapter 5), but it is more than that. Governance covers all institutions of the state which exercise authority over economic, social and cultural affairs, both national and sub-national, including executive, legislative, judicial and administrative agencies. Good governance requires state institutions that are accountable, transparent, participatory and predictable. 4.2. Since the introduction of doi moi in the late 1980s, Vietnam has made considerable efforts to adapt its institutions to the changing needs of a socialist-oriented market economy. A host of laws and regulations have been enacted to increase the role of markets and to encourage greater participation by the private sector. Market institutions and civil society now play an increasingly important role in Vietnam. Despite progress to date, the task of re-defining the role of the state and reorientating Government institutions has only been partially accomplished. Thus, the implementation of further reforms, to build modern governance structures, will be critical for policy formulation and coordination, for implementation, for executing public projects, including those supported by ODA, and for delivery of key public services. 4.3. This chapter will first examine the progress made so far in respect of the key changes and reforms that are underway in public administration, legal system development and anti-corruption, indicate the next steps in the implementation and support from the donor community. RECENT GOVERNMENT ACTIONS AND PLANS 4.4. The Government has been taking various actions to improve governance structures in Vietnam including improvements in public administration, in local participation and in reducing corruption. The 1992 Constitution sets out the framework for “…a market economy regulated by the state” where, the distinct roles of the National Assembly, Government, Supreme People’s Court, and Supreme People’s Prosecutor’s Office are set out clearly. A first wave of Public Administration Reform (PAR) which started in 1995, reduced the number of Ministries, increased civil service salaries, and initiated reform of service delivery and steps for decentralization. In addition, the Government took its first steps to regularize personnel management, including recruitment, performance evaluation, promotion, recognition, disciplinary action, training and retraining. 4.5. Governance reforms directly affecting the poor have included the Grassroots Democracy Decree that offers a legal framework for increasing community participation at the local level and establishes programs for disseminating legal information and providing legal aid. It also creates an enabling environment for civil society by strengthening partnerships with other organizations working for the people's benefit and eventually putting in place a legal and policy framework for associations and domestic NGOs. Grassroots participation has since improved in a significant number of communes but this needs to be extended progressively to cover all communes. 53 Vietnam Development Report 2002 4.6. The Government has also taken important steps in the fight against corruption, which was a major theme of the Sixth Party Plenum in October 1998. A number of ordinances and decrees have been passed addressing corruption, such as the Ordinance against Corruption and related implementing regulations. In 1998, the Prime Minister established a "hot-line" to receive business complaints and several ministries now have units for tackling grievances and corruption. The Party launched an anti-corruption campaign in May 2000. In August 2000, new members were asked to declare their property and assets before taking up high-ranking party posts in an attempt to ensure a corruption free leadership. Promulgation of the Civil Code in 1998 provided the public with avenues to get redress and to obtain mediation in disputes with government administrators. However, the actual level of success achieved in fighting corruption is unclear from the available information. 4.7. The Government and the Party have given a number of strong signals in 2001 in support of governance reforms. There has been good progress this year in developing reform programs in public administration including legal system development and public financial management (see Chapter 5). The amendment of the 1992 Constitution to realign the political and economic regime is on the agenda of the November National Assembly, which is to be followed by a new Law on Government Organizations. Box 4.1: Assessment of Progress on PAR Administrative reform has been slow and irresolute, and results meagre. The State apparatus has been organizationally cumbersome, with overlapping functions, numerous intermediaries and harassing administrative procedures; with not a few cases of disharmonious actions between higher and lower levels, and central and local authorities, hindering socio-economic development and reducing development opportunities. Certain individuals, due to personal or local interests, have been reluctant to step up administrative reforms and reform of the State organization and apparatus. Not a small number of public officials and employees have been substandard both in ethics and integrity, and in job qualifications, professional capacities and vocational skills. Source: Central Committee’s Political Report to 9th Congress of CPV, 2001 4.8. The Government has approved a new PAR Master Program46 that took several years to formulate and which was approved recently. It envisages the reform of the entire public administration system by 2010, in line with the development of a socialist-oriented market-driven economy. In addition, the Government has completed a Legal Needs Assessment (LNA) to support legal reforms in line with last year’s CG recommendation. 46 The Prime Minister approved the Master Program for 2001-2010 in September 2001, by decision No. 136/2001/QD-TTg. The Master Program is built around four pillars, namely: organizational restructuring; human resource reforms; institutional development and public financial management reform. The work of the Master Plan will be carried out mainly through seven national programs. For each program a lead agency (LA) has been identified, as follows: (i) Improvement of quality of legal documents. LA: Ministry of Justice; (ii) Roles, functions, organizational structures of the Government, ministries, ministerial level agencies, agencies of Government and local government. LA: GCOP; (iii) Down-sizing. LA: GCOP; (iv) Personnel management and development. LA: GCOP; (v) Salary reform: LA: GCOP; (vi) Modernization of the public administration system. LA: Office of the Government; and (vii) Public Finance Management. LA: Ministry of Finance. 4. Building Modern Governance The LNA was initiated by the Ministry of Justice (MOJ), with the support of a number of donors, and has developed a draft strategy for the development of Vietnam's legal system consistent with the PAR Master Program.47 PUBLIC ADMINISTRATION REFORMS 4.9. The PAR Master Program recognizes that substantive and enduring change will require major reforms in human resources and organizational structure. Vietnam needs an adequately remunerated and sufficiently skilled public service that is performance- oriented and accountable. It must also be given a clear mission and clearly defined goals. 4.10. Accordingly, the Master Program is built around four pillars, namely: organizational restructuring, human resource reforms, institutional development and public financial management reform. The work of the Master Program will be carried out mainly through the seven national programs shown in Box 4.2. Box 4.2: PAR Master Program 2001-2010: Four Pillars and Seven Program Areas Organizational Restructuring 4. Redefinition of roles, functions, and organizational structures of the agencies in the public administration system (Lead Agency: GCOP and the Office of the Government) 5. Modernization of the public administration system (Lead agency: Office of the Government) Human Resource Reforms 6. Downsizing (Lead agency: GCOP) 4. Human Resource Development: building and improving quality of public servants (Lead agency: GCOP and the National Academy of Public Administration (NAPA) 5. Salary Reforms (Lead agency: GCOP) Public Financial Reforms 6. Reform of financial management mechanisms in the public sector (Lead agency: Ministry of Finance) Institutional Development. 7. Improve the process of law-making and of developing and issuing legal documents (Lead agency: Ministry of Justice). 4.11. Organizational Restructuring. The PAR Master Program gives high priority to restructuring so as to define state management functions in a market oriented economy to overcome an unsynchronised, overlapping and inconsistent system of administrative institutions and to simplify cumbersome administrative structures and procedures. Diagnostic reviews are being carried out on the mission, structure, and functions of ministries and agencies, with a view to identify and eliminate duplication and fragmentation, contract out public service delivery where appropriate, and strengthen program formulation, human capacity and financial management. Business processes are to be modernized, and performance monitoring put in place to strengthen each 47 The LNA is overseen by an Inter-Agency Steering Committee (IASC) composed of senior officials of Vietnam’s key state legal agencies-- Supreme People’s Court (SPC), Supreme People’s Procuracy, Office of the National Assembly, Office of the Government, MOJ, the Internal Affairs Commission of the Party and the Ministry of Planning and Investment. Five teams of national experts from all key State legal agencies assisted by international experts are doing the LNA work 55 Vietnam Development Report 2002 institution’s ability to execute a well-defined mission. Administrative management is being decentralized between the central and local levels, and between the different levels of local authorities, with new key regulations issued by 2005 to put that into operation. Institutions under the People's Committee at provincial and district levels will also be rationalized to perform more clearly defined functions and tasks as stipulated in the amended law on organization of People's Councils and People's Committees. 4.12. The broadly expressed language of the PAR Master Program needs to be broken down into specific reform measures with an indication of how they will be resourced. Short and medium-term priorities should be clearly indicated, as should the method of delivery. The PAR Master Program recognizes that there are enormous risks and challenges to be overcome, including weaknesses of the existing administrative machinery, old habits from the centralized bureaucratic systems; and a lack of knowledge and experience of the new market environment. Sustainable reform programs require clear targets and continuous effort to provide credibility to the change process. Incremental and continuous improvements, coupled with strong political will, will determine the success of these reforms. 4.13. The Halong Bay Workshop held in September 2001, organized jointly by the Government and donors, enabled a more detailed discussion of the PAR implementation issues across each of the seven national programs. Among the agreements reached was an agreement to formulate annual and five-year PAR plans for ministries and provinces, to establish a PAR Facility and Funding framework for developing and implementing the PAR Master Program, and to submit both for approval by December 2001. 4.14. One promising component of the ongoing reforms, which is being directed by the Office of the Government, is the proposed development of an e-government initiative for applying information technology in operations of state management agencies as well as in public service delivery agencies, and putting into operation an integrated computerized network from the Government to the district level. For example, a small subproject has already been launched under the heading "Vietnam's tale of two cities", where Hanoi (MPI) and Ho Chi Minh City (DPI) each launched Web sites for business service agencies in 2000. The two websites are designed to serve as the first point of contact for potential investors, especially foreign investors. 4. Building Modern Governance Box 4.3: Realizing the Potential of E-Government E-government is the use of information and communications technologies (ICT) to enhance the efficiency, transparency, and accountability of government. These tools, particularly the Internet, are increasingly used in developing and developed countries alike to provide public services that for years were delivered only in person or by mail (if at all). These innovative technologies can: meet citizens’ demands more efficiently, saving time and money for both service providers and their clients, cut through red tape and associated opportunities for corruption, discrimination and harassment, and enhance access to public information and services, leading to greater transparency and equity. Developing country governments are fast adopting these new technologies, adapting them to their particular needs and constraints. One area that has witnessed remarkable changes in recent years is government procurement. The Chilean and Mexican governments, for example, have implemented new Internet-based systems for public procurement. In Chile (www.com- praschile.cl), for example, all companies that wish to be considered for a public contract register themselves according to their business activity (for example, construction, IT consulting, office furniture, etc.). When a public agency needs to purchase goods or services, it files a request in the new electronic system. An e-mail message soliciting bids is then sent automatically to all companies registered in the relevant business area. And once a decision is made, all information concerning the companies, their bids, and the results of the decision making process are posted electronically. E-government solutions like this can generate cost savings for government and reduce opportunities for corruption, leading to increased public confidence in government. Source: “Reforming Public Institutions and Strengthening Governance” A World Bank Strategy, November 2000. 4.15. Downsizing (rightsizing). Given the redefined role of the government that will be required to manage a market economy, the size of the public service will need to be adjusted. Although new regulatory and other functions may require some additional staff, it is expected that there will be a need for overall reductions in the size of the public service. Higher salaries for public service will not be affordable unless the size of the service is smaller. And appropriately skilled staff will be difficult to recruit unless salaries are competitive and adequately linked to performance. 4.16. The first phase of downsizing the public administration in Vietnam is led by resolution no. 16/2000/NQ-CP on reduction of payroll in administrative agencies and public-service units adopted by the Vietnamese Government on October 18, 2000. The resolution sets the target for reducing the year 2000 payroll by about 15 percent in the State administrative agencies and the indirect payroll in the public-service units by end 2002. The implementation of the downsizing program until end 2002 is to be based on this resolution. 4.17. In preparation for this, a comprehensive database of government employees at all levels - central, provincial and communal; state, party and mass organizations; elected and appointed; and so on – is being assembled by GCOP, with assistance from SIDA. This includes information on grades, cash salaries, non-cash benefits, and individual characteristics of the employees (such as age, gender and years of service). A database of this sort is key for establishment control which is a pre-requisite to downsizing efforts. 4.18. Each Ministry and agency have by now submitted their downsizing proposals to the Prime Minister. Proposals for severance payments include a one-time allowance of approximately US$1,000 (VND15 million). Until the end of 2002, the Government estimates the severance pay package will be paid to 45,000 civil servants and the approximate costs for this exercise will be US$45 million. The cost for downsizing during the period 2003-2005 is currently estimated to be US$100 million. But this should 57 Vietnam Development Report 2002 be subjected to more rigorous analysis using the experience with redundancies under the SOE program. In addition to that, the costs for retraining people that will be moved to new job positions will have to be added. Both the World Bank and ADB are able to finance such restructuring cost if desired by the Government. However, given the uneven success of similar programs in other countries, the Government should proceed cautiously in this area, and in particular, ensure that it is the less effective civil servants that are to receive severance and that appropriate transitional mechanisms are put in place, while subjecting severance payments to rigorous cost-benefit analysis before going ahead on a large scale. 4.19. Human Resource Development and Salary Reform. The PAR program recognizes the need to improve the quality of civil servants through a modernized human resource management system, in order to strengthen policymaking, implementation of policies and projects as well as delivery of public services. The present system of cadre/civil servant training is to be re-organized, and division and delegation of training and management will be carried out among training institutions, including the National Academy of Political Sciences, the National Institute of Public Administration, public administration schools of ministries, provinces and cities. Training quality is to be improved through better identification of training needs, by improving the quality of trainers in training institutions, developing training materials of high standards, and introducing modern training methods. 4.20. The PAR Master Program also recognizes the need for salary reform as part of such a modernized system. The salary system for cadres and civil servants is to be fundamentally reformed by 2005 through fully monetizing salaries and adjusting salary scales. In addition, allowances for skill and a form of performance based salary system is to be introduced. A proposal for salary reforms will be discussed at a Party Plenum in October 2002 and a final reform proposal is expected to be adopted by the National Assembly in November of the same year. This would require intensive work over the next 8-10 months to develop a comprehensive reform proposal. 4.21. Regarding salary reform, a common reference point for the public sector is the salary paid by private employers for similar jobs. The problem when applying this approach to countries like Vietnam is that comparable jobs are mainly or exclusively found in formal sector enterprises. Jobs of this sort might be the relevant alternative for public sector workers at the professional or managerial levels. However, tracer studies of separated public sector workers suggest that the relevant alternative is self-employment, or casual work in informal activities, including agriculture. An alternative to the above mentioned approach is to compare the earnings of public sector workers to those of similar workers in the private sector, regardless of whether they are employed in the formal or the informal sector of the economy. The two ways of comparing public and private sector earnings have been examined in the context of Vietnam by looking at earnings in SOEs. Comparing wages by the first approach resulted in the conclusion that SOE workers in Vietnam are severely underpaid, but when one looks at the second approach, SOE workers’ total earnings would fall by more than 20 percent when leaving 4. Building Modern Governance the public sector. This research underlines the importance of selecting the right approach when designing salary reforms for the public sector.48 4.22. Combating Corruption. An analysis of the manifestation and causes of corruption shows that it is the result of ambiguous laws and regulations, complex administrative procedures, a lack of adherence to the rule of law, insufficient remuneration levels in the civil service, and inadequate control mechanisms. A successful solution to this problem must therefore address its root causes, and not simply prosecute its manifestations. 4.23. In addition to the laws to fight corruption that have already been enacted, the PAR Master Program calls for effective measures to curb acts which violate democracy and freedom and which indulge in arbitrariness, red tape, corruption, harassment for bribes and trouble-making to people. It calls for strengthening administrative discipline and individual responsibility and accountability, to discipline equally and severely those cadres and civil servants who commit violations, and to abolish those procedures which are cumbersome, which can be easily abused for corruption. Strengthened procedures for budgeting, accounting and audit, as proposed under the Public Expenditure Review Report, will also help to curb corruption. 4.24. Vietnam has been offered support from the donor community to do a diagnostic study on the state of corruption in Vietnam. The aim of the analysis is to measure the economic and social costs of corruption, the quality of public service delivery, and to identify public sector vulnerabilities. This sort of analysis focuses on institutions rather than on individuals, identifies reform priorities, and establishes benchmarks for measuring the effectiveness of future reforms. Similar diagnostics have been undertaken in more than 20 countries. The decision of the Vietnamese authorities for the conduct of such a study is awaited. Implementing the PAR Master Program 4.25. More work is needed to flesh out the detail of the specific reform actions to be taken in each area. This should involve close consultation with stakeholders, to ensure that implementation is done in a practical and sensitive way that suits Viet Nam's context. For example, there is a risk that initiatives for decentralization, which are intrinsically desirable, will be sponsored by different parts of the central Government without first adequately addressing the overall local government framework and also overcoming the existing capability constraints. More work is needed to set out an integrated framework for decentralizing administrative functions to the provincial level as well as providing capacity-building measures. 4.26. Implementing PAR will require not only a clear vision, political commitment and strong leadership but it will also require the involvement of stakeholders, and the allocation of adequate resources to implement the reforms. Bodies which are responsible for assisting in reform development, implementation and coordination, such as the Government Committee of Organization and Personnel (GCOP), the Office of the Government (OOG), the Ministry of Finance (MOF), The Ministry of Planning and Investment (MPI), the Ministry of Justice (MOJ) and the National Institute of Public and 48 See Rama and Bales, 2001 59 Vietnam Development Report 2002 Administration (NIPA), must provide strong support for the work of the PAR Steering Committee and for the coordination of the work across line agencies. 4.27. Key issues for implementation. There are a number of issues that would need to be addressed to ensure a smoother and more effective implementation of the PAR. Major changes in public administration are cross-sectoral and multi-disciplinary. The ultimate authority for such major changes lie at the highest levels of Government and continued political will and commitment will be key;49 Specific reform measures under each PAR national program will have to be developed through further diagnostic work and consensus building, before they can be put into operation. In terms of diagnostic work and reaching consensus on a set of specific policy measures and actions, we are at the reform stage in administrative reforms where we were two years ago on the economic reforms even if one component i.e. the public finance is quite advanced (see Chapter 5); For greater clarity and for more effective implementation of PAR all decrees on administration reform should be accompanied by detailed guidelines, which give clear and comprehensive explanations on the concept, objective and modus operandi for implementation. This should be reinforced with a training plan as an integral part of implementing changes cited in the decrees; Without arrangement for sufficient resources, implementation of the PAR will proceed very slowly. Steering Committees would have to be fully supported by dedicated and fully resourced units of full time qualified staff. There is, thus, a real need to commit the needed resources for PAR implementation for all relevant agencies as soon as possible; Civil society will need to play a more active role in the implementation process so that the Government can take account of their views and reforms are designed to take account of the situation at the community level. These reforms have to produce tangible benefits for all; Appropriate performance measures need to be put in place so that the progress in implementing the PAR can be monitored closely. In some cases, surveys of the impact may be necessary to ensure proper implementation of particular PAR reform initiative; The lack of clarity about the future role of the State in the economy, the likelihood of institutional resistance to change, the sheer scale of the intended reforms and the absence of a single agency to coordinate all reforms increases the risks of weak and slow implementation and they need to be addressed as early as possible. 49 Empirical studies have also shown that significant reform changes require both strong support from the leadership, and ownership, from implementing ministries and agencies. Reform initiatives need to be planned and driven by suitably resourced task forces. A good example of this in Vietnam is the Task Force on Enterprise Law, which has been successful in removing the unnecessary impediments and creating a more conducive climate for business registration. 4. Building Modern Governance Table 4.1: Key PAR Milestones for the Next 12 Months Key Activity Expected Outcome Key Players Formulate 7 national PAR action Clear implementation plans for PAR Master Government Steering programs and submit for approval to the Program in place Committee for PAR Prime Minister Lead central agencies for PAR PAR donors Dissemination and Awareness of the Raise awareness and understanding raised Government Steering Master Program, including conduct of the PAR Master Program at all levels of Committee for PAR Dissemination Conference for PAR government, national and provincial Master Program for Government agencies; and dissemination of Program to all agencies Formulate annual and five year PAR PAR plans of ministries and provinces Government Steering plans for ministries and provinces and consistent with and give effect to the PAR Committee for PAR submit for approval Master Program PAR Steering Committees of ministries and provinces Establish a PAR Facility and Funding ODA resources strategically targeted to GCOP/ Government Steering framework for the PAR Master Program support the implementation of the PAR Committee for PAR Master Program UNDP with donors involved in supporting implementation of the PAR Master Program Finalize draft amendments to Law on New law in place that enables the GCOP, OOG Organization of the Government to Government to carry out restructuring of submit to the Parliament organizations Implement Program on downsizing Payroll reduced by 15% GCOP according to resolution 16/2000/NQ-CP All Ministries and Government Personnel management in service entities agencies transformed towards result-orientation and product-based pay. Compensation policy for retrenched staff established Revise Operational regulations for Clear procedural framework in place OOG, Ministries and provinces Governmental Agencies Set up PAR Steering Committees in all Steering Committees set up in all agencies GCOP Government agencies Propose reform for salary structure Proposal developed and put in place and GCOP salary adjustment proceeds MOF/Molisa Develop plan to mobilize domestic and Plan in place that supports PAR priorities GCOP in coordination with international resources for implementing MPI, MOF, OOG the Master Program Submit proposal for new organizational Structure in pace that gives effect to GCOP structure of the Government to XI Government priorities OOG Tenure of the National Assembly PAR Steering Committee 4.28. Next steps. While the PAR Master Program now gives a clearer sense of the scope of the reforms, it will take some time before its implementation can begin. Its implementation first requires refinement of the seven national programs will be completed. The above table presents the key milestones for the next 12 months drawn from the plan recently approved by the PAR Steering Committee. 4.29. More specific initiatives may also be needed in particular areas. These might include expanding and improving published budget information; strengthening the 61 Vietnam Development Report 2002 systematization of laws; and reinforcing the nation-wide implementation of the one-stop initiative. 4.30. The milestones outlined above need further consideration once the formulation of the seven action programs for the PAR Master Program is completed and more in-depth analyses has been done in areas emphasized in the action programs. 4.31. Donor Support. The Halong Bay Workshop held in September 2001 recognized that the implementation of the PAR Master Program would require considerable long- term assistance from donors and possibly the use of new funding mechanisms. The Government, and in particular the Prime Minister as Chairman of the PAR Steering Committee, should be made fully aware of the magnitude of the financing requirements for the effective implementation of the PAR Master Program. 4.32. The PAR master program provides an excellent overall framework that should enable improved mobilization and use of donor resources in supporting implementation of PAR. All existing PAR projects that are being supported by donors are being reviewed to ensure their consistency and coherence with the PAR Master Program. This should overcome existing fragmentation and improve the targeting of assistance. Further technical assistance can now be provided for various components of the seven national programs. 4.33. The reforms that are to be made to the Public Sector under the PAR Master Program and the LNA must be treated by all development partners as closely linked to achieving the more general outcomes that are being sought by the Government in socio- economic development and in supporting poverty alleviation. This is captured by the tenth goal of the Vietnam Development Goals: Ensure Good Governance for Poverty Reduction (see box 1.12 in Chapter 1). LEGAL SYSTEM DEVELOPMENT AND WIDER ACCESS TO JUSTICE 4.34. Vietnam has been engaged in the momentous task of constructing a new legal system virtually to support the transition from a centrally planned to a market economy. The 1992 Constitution mandated a rule of law socialist state. International experience indicates that achieving these goals requires a legal system which clearly defines and effectively enforces legal rights, creates a "level playing field" for citizens and enterprises and is easily accessible to the poor. The international donor community has applauded these efforts and supported many of them. Most Vietnamese and international experts agree that, while enormous progress has been made, much remains to be done. 4.35. Last year’s CG recommended a Legal Needs Assessment (LNA) be undertaken. The Ministry of Justice (MOJ) initiated a comprehensive LNA aimed at developing a comprehensive strategy and subsequently an action plan for the development of Viet Nam's legal system. 50 50 The LNA is overseen by an Inter-Agency Steering Committee (IASC) composed of senior officials of Vietnam’s key state legal agencies -- Supreme People’s Court (SPC), Supreme People’s Procuracy, Office of the National Assembly, Office of the Government, MOJ, the Internal Affairs Commission of the Party and the Ministry of Planning and Investment. Five teams of national experts from all key State legal agencies assisted by international experts are doing the LNA work. 4. Building Modern Governance 4.36. The LNA examined four broad subject areas to formulate a draft comprehensive strategy: (1) Legal principle and framework for development of the economy and the civil society; (2) Institutions for law-making and for enforcing laws; (3) Legal education and professional training; and (4) transparency in terms of collection and dissemination of legal information. Key Proposals from the LNA and draft strategy 4.37. The reports and draft strategy produced by the teams of international and Vietnamese experts 51 are impressive in terms of their scope and willingness to confront frankly and squarely the major issues facing Vietnam's legal system development. The following proposals emerged from this assessment: Reaffirm Vietnam's commitment to building a rule of law state and, for the first time, defining the rule of law to provide that citizens can do anything which is not specifically prohibited by the law while state agencies and officials can do only that which is specifically permitted by the law. Assert the importance of independent courts and recommend concrete actions to improve the status and independence of judges. Subject all administrative decisions and punishments to review by the courts and provide that all citizen disputes and complaints regarding administrative agencies can be submitted to the courts. Shift the nature of court trials to adversarial instead of inquisitorial proceedings and otherwise significantly bolster the role of independent lawyers in resolving disputes. Recommend concrete steps to increase transparency, including requiring legal normative documents and administrative procedures of general application to be published in the Official Gazette (or its local equivalent) before they can be enforced and calling for the publication of court decisions. Improve significantly law making, by greatly increasing the number of full time deputies of the National Assembly (NA), improving the law making skills of NA members and staff, developing and publishing a legislative drafting manual, and revising the Law on Promulgation of Legal Documents at the central level to expand citizen participation in law making and enacting a Law on Promulgation of Legal Documents at the local level. Restructure legal education and training by shifting from a lecture method of imparting standard material to a method of students using interactive, problem solving methods, materials and techniques so that students acquire not only academic knowledge of subject matter areas but also the skills of legal analysis and problem solving. 51 One of the most important outcomes of the LNA has been the very frank, intensive and active interchange among Vietnamese Legal Experts from all of the key state legal agencies about the major issues facing Vietnam's legal development, including sensitive issues such as the independence of the courts and the proper role and organization of the procuracy. 63 Vietnam Development Report 2002 Complete electronic databases for all of Vietnam's laws, regulations and treaties and making them available to the public through the Internet thereby supporting e-government in the legal field. Adopt a concrete program of law making to support the 10 year Socio-Economic Development Strategy adopted by the 9th Party Congress with special focus on simplifying and improving the business climate and facilitating international economic integration, substantially improving the legal basis for the rule of law in the socialist state. 4.38. It will be important for the current level of intensive and frank discussions of sensitive issues to be maintained. The LNA reports already recognize the importance of independent courts. Further discussion needs to take place regarding the proper role of the procuracy which is now responsible for "supervising" the courts as well as criminal prosecution. It must be determined whether this is fully compatible with the principle of independent courts and giving independent lawyers equal status in court trials of criminal cases. In addition, the current power of the procuracy to appeal civil and economic court decisions, as well as criminal court decisions, may inject a note of significant uncertainty into civil and economic cases and thus needs to be discussed further. 4.39. Future steps. In November 2001, a workshop will be held among relevant Vietnamese state legal agencies and donors to consider the draft Overall Report. Following the conference, further work will be carried out to finalize the draft reports in light of comments at the November Workshop. Revised drafts will also be circulated to concerned stakeholders for their review and input. The draft reports will be finalized in the light of stakeholder comments and submitted to a conference of Vietnamese state legal agencies and donors now planned for early March 2002. Thereafter, the Final Overall Report will be submitted to the Government for approval of the strategy for comprehensive development of Vietnam's legal system to 2010, the action plan, and the framework for international donor cooperation and coordination. The plan is for the Government to finalize the overall report together with the strategy and the action plan for the development of Vietnam’s legal system to be discussed at the mid-term CG meeting in 2002. Links with Institutional Development under PAR 4.40. The PAR Master Plan has institutional development as one of its pillars. Such institutional development will be necessary for a well-functioning market-oriented economy and public administration system. The objective of such development are: To enhance the system of legal institutions, especially economic institutions and those related to the organization and operation of the administrative system. To improve of the law-making process. To develop new administrative procedures based on transparency and simplicity 4.41. In the efforts for ensuring transparent law enforcement by public institutions, the Government of Vietnam aims to implement the grassroots democracy decree and improve the dissemination of decisions and policies of the Government. In addition, in striving to reform the administrative procedures the Government plans to introduce standard formats nation-wide for all papers required for dossiers submitted by people and businesses and 4. Building Modern Governance one-stop shops will be setup all over the country by public institutions delivering services to people and businesses. 4.42. The current outline for this program of institutional development envisages seven sub-projects: Assessing of the prevailing system for developing and issuing legal documents. Developing a program for the development and issuance of legal documents. Defining the jurisdiction for the issuance of legal documents. Developing procedures for the development and issuance of legal documents. Strengthening the capacity of agencies and civil servants directly involved in the legal documents drafting process. Developing a mechanism to ensure public consultation in the lawmaking process. Strengthening the dissemination of legal documents. 4.43. Detailed work for many of these sub projects have already been done in the LNA by two teams addressing the law making process and examining legislative institutions. Proper coordination is ensured because the legal agency for the PAR Program is the Ministry of Justice, which is also coordinating the LNA, and a number of key MOJ officials involved in this area for PAR also are key leaders and members of the relevant LNA Teams. 4.44. Programs dealing with law making are complicated and sensitive in that they are concerned with one of the most political of activities. It is therefore of utmost importance that this program receives broad-based support from senior-government and Party officials. Fortunately, it appears that this is currently the case given the high level Government support accorded to both the PAR and the LNA.52 4.45. In addition to this, there are other new initiatives approved in other legal areas. For example, the PAR Master Program calls for increasing the authorities of inspection institutions in administratively addressing on-site acts of law violation and to clearly define responsibilities of inspection institutions and Administrative Courts in addressing complaints lodged against public institutions, cadres and civil servants. It also calls for specialized programs, regular seminars on public administration reform in mass media facilities, setting up of telephone hot line to receive requests, suggestions, complaints of people on operation of administrative agencies, especially in some critical areas such as land and housing, construction, business registration, customs, import/export and so forth. 52 A 1997 multi-country study on donor assistance to legislatures in developing countries recommends taking a holistic approach to reforms in this area. It stresses the importance of looking at involved institutions as a whole, including the roles of legislators and staff, and the legislature’s relationship with other branches of government and the public (USAID, 1997). 65 5. Improving Public Spending 5. IMPROVING PUBLIC SPENDING 5.1. Vietnam must manage its public spending more efficiently and effectively to promote faster growth and poverty-reduction and to achieve its development targets. The formulation of the next five-year total investment plan, as well as the subsequent detailing of the public investment program, offers a unique opportunity for dialogue on improving the public investment processes. This chapter examines the progress that Vietnam has made in reforming public spending management,53 and articulates an unfinished agenda of reforms in public investment processes in order to promote more appropriate use of resources for public investment, improved sectoral and regional allocation of such investment and better implementation of public projects. 5.2. The public spending reform agenda – both recurrent and investment -- is a part of the broader agenda of the Government’s Public Financial Management Reform (PFMR) program. The Ministry of Finance has defined five different but related elements of this program: public expenditure or budget management, revenue management, debt management, asset management and state-owned enterprises’ financial management (see Box 5.1 for the inter-relationships). Each of these elements are in different stages of the reform process, with public expenditure management being relatively more advanced in terms of the diagnostics that have been undertaken by the Government and a reform agenda that has been developed and adopted. 5.3. This is good news because successful reform of the public spending processes will strengthen the way in which inputs such as revenue, borrowing, and the use of public assets are harnessed to deliver public services by ministries, provinces, districts and communes. Better public spending management, including public investment, will be critical to service delivery and the achievement of Vietnam’s development goals and targets, described in Chapter 1. This is also important for donors who finance public programs and seek assurance that there is effective budget management, to ensure that public funds are used efficiently and for the purposes for which they are intended. 53 The four pieces of recent analysis of public spending policy and management include: the joint IMF- World Bank report Towards Fiscal Transparency (1998), the joint Government-donor report Managing Public Resources Better (2000) and the World Bank and Asian Development Bank reports Country Financial Accountability Assessment (2001), and Diagnostic Study Accounting and Auditing (2000). 67 Vietnam Development Report 2002 Box 5.1 – The Broader Agenda of Public Financial Management Reform The Ministry of Finance’s Public Financial Management Reform (PFMR) is one of the four pillars of the PAR (see chapter 4) and comprises of the following five elements: budget management, covering implementation of public expenditure reforms and the establishment of a Budget Management Information System (BMIS); revenue management, including the strengthening of systems and processes for VAT, the strengthening of corporate income tax processing and the development of self-assessment for personal income tax; debt management, including strengthened systems for the recording of domestic and external short and long-term debt, including contingent liabilities, the establishment of a risk assessment framework and a debt management strategy; asset management, including the establishment of systems for better tracking the value of the Government’s assets within each functional asset category, assessing how well these match identified asset requirements, and planning future liabilities; and state-owned enterprise management, including the establishment of a tracking system for SOEs performance, improved corporate governance and accountability arrangements and the development of an SOE strategy. Figure 5.1: Links Between the Five Elements of PFMR and Service Delivery Revenue Budget Management National Agency - Financial management Service Outputs - Performance Management - - Multi Year Expenditure Revenue Management Programming Budget Cycle Sub-National Agency Borrowings Service Outputs Debt Management Assets State-Owned Enterprise Service Outputs Asset Management SOE Management IMPLEMENTATION OF REFORMS 5.4. Vietnam has made good progress in respect of public expenditure or budgetary management, since the approval of the Budget Law in 1997. This is particularly evident in respect of fiscal transparency, decentralization and budget formulation and execution. In April 2001, the Government adopted a set of specific reform action, that it has been implementing quite diligently so far. In addition, the Ministry of Finance has developed a work-program, which includes reform measures as well as additional diagnostic and 5. Improving Public Spending analytical work, aimed at formulating a more comprehensive reform agenda for public spending.54 5.5. Fiscal transparency has increased in recent years, as manifested in the publication of the annual budget (final accounts and budget estimates) starting in 1999, the issuance of regulations for the posting of commune budgets on notice boards, and the publication of various pieces of analyses on public spending. A rising share of public spending has been decentralized to lower-tier administrations in recent years. Improvements in decentralization include the modified cash transfer systems for provinces and the initiation of the pilot block grant budgeting in Ho Chi Minh City in 2000, in preference to the existing norms-based allocations to provinces. This has permitted greater autonomy to the pilot provinces and encouraged appropriate reallocations where needed. A new classification system and cash limits were also made part of the budget formulation and execution system. 5.6. Implementation of the recently-adopted set of measures is on track and the twelve month targets, to which the Government has committed, are expected to be met. In 2001, Vietnam took a number actions to enhance fiscal transparency, increase decentralization, and improve budget formulation and execution. To expand the public’s access to budgetary data, existing regulations were modified. The revised regulations permit annual publication of more disaggregated budgetary data (both central and provincial) that is similar in coverage of sectors to what was put out in the public expenditure report.55 It also provides sanctions for communes that do not put up their budgets on notice boards as is officially mandated. 5.7. To strengthen budget execution, the MOF has designated the treasury as the main body charged with integrating treasury and accounting as well as with consolidating budget data. A project integrating budget reform with a budget management information system is being developed to ensure that the treasury can discharge its new responsibilities. An inventory of all off-budget accounts, including their receipts and expenses has also been initiated. 5.8. Actions to implement other reforms have also been taken. Decisions were made in 2001 to pilot the multi-year expenditure programming (also called a medium-term sector expenditure program), starting with sectors like education and transport, and to work towards the development of a rudimentary performance-based budgeting system. On inter-governmental fiscal relations, the Government is moving away from ‘norm’ for recurrent spending by provinces to allocating a block-grant that could be used by provinces with fewer restrictions. The roll out of the block grant system to other provinces is expected in the coming year. The developing draft revised Budget Law incorporates many of these changes. 54 For details on the program of specific actions that are supported by the World Bank’s PRSC (see Annex 3.1). 55 For the work-program that has been developed by the Government see the “Matrix of Actions” World Bank (2000). 69 Vietnam Development Report 2002 THE CHALLENGE FOR PUBLIC INVESTMENT 5.9. Ensuring high quality public investment will be a bigger challenge in this decade than in the last. In the previous decade, it was not too difficult to identify high return public investments. The nation’s severe physical and social infrastructure deficit — resulting from long periods of war and its aftermath — left clear pointers to where high returns might lie. But as the worst of that deficit is addressed, more complex and difficult choices will now have to be made in order to achieve Vietnam’s development goals and targets. 5.10. During the 1996-2000 period, most of the “public” investment had high return and impact. Rehabilitation and construction of basic infrastructure was very successful. In the transport sector, projects satisfied an obvious need to rehabilitate and upgrade unusable trunk roads, waterways and ports. Similarly there were projects to restore irrigation and flood control systems as well as schools, clinics and hospitals. All of these truly public investments provided high returns even though the processes for allocation and for project selection were not very sound and efficient. 5.11. The same was not true of many commercial investments that were made by business-oriented SOEs but funded with “public” resources, especially in the manufacturing and agro-processing sector (see Annex 5.1). The process of technical evaluation of public investments, including commercial investments was weak and the motivations for such investments, complex. The motives included supplying the domestic market from local production regardless of cost, the use of commercial investments for regional development goals, the need for rapid industrialization and so on. But the market proved to be a hard task master and the projects lack of economic viability became obvious quite quickly. There was a need for protection from imports, restrictions on domestic competition, direct and indirect budgetary subsidies, directed lending by commercial banks, and explicit and implicit Government guarantees for foreign borrowings in order to sustain these projects. For example, investments in sugar, cement and steel were often not profitable without such protection and subsidy (see Annex 5.1). In turn, this subsidy and the import protection, encouraged provinces to invest more in those sub-sectors despite their poor economic viability. 5.12. The Public Investment Program (PIP) process introduced in 1996, as part of the process for developing the five-year investment plan for the economy, is not yet fully institutionalized as a device for screening public projects and guiding public investment allocations (see Annex 5.2). What exists are complex process of formulating national, sectoral, regional and provincial strategies as well as five-year and annual investment plans, that is not conducive to strategic and outcome-oriented programming of public investment. In particular, the existing processes are not very efficient in promoting appropriate inter-sectoral allocations, better regional allocations and expeditions implementation of public projects, including those funded by ODA, because they do not: generate systematic data on public investments especially those made by SOEs; ensure close linkage between sectoral allocations and the priority development goals and targets; 5. Improving Public Spending subject all large investment projects to a careful and systematic cost-benefit analysis; delineate clearly which investments by SOEs are eligible for public resources and which are not, which is needed for the transition to a market economy; integrate formally, the formulation of a five-year PIP with a five-year recurrent expenditure plan for each sector to make effective use of the new public capital stock; 5.13. This is rendered difficult by the absence of systematic data, as individual components of the public investment program can not be evaluated nor consolidated across sectors or regions.56 Table 5.1 shows the total public investment that is estimated from information on the sources of financing because SOE investment data is not available systematically. The table shows that public investment for the next five-years will be higher than the previous period if the proposed plan is finanlized, but it is not clear how much of these resources will go to businesses-oriented SOEs for financing their commercial investments. Sources of funding for public investment 1996–2000 2001–2005a Share of GDP Share of GDP % % Public investment b 17.5 17.7-18.2 Of which: Government Budget 7.3 6.5–6.7 State credit 4.5 5.0–5.1 SOE resources 5.7 6.2–6.4 Table 5.1: Public Investment: Actual 1996-2000 and Proposed 2001–2005 aIndicative shares in 2001-05 five year plan. bInvestment funded by the government budget, state credits and SOE own resources have been deemed as public investment. ODA is included in government budget and state credits. Source: Vietnam Statistical Yearbook 2000 and Ministry of Planning and Investment. 5.14. With a worsening external environment and limited potential for revenue growth, achieving the plan’s targets for growth and poverty reduction will require considerable emphasis on directing public investments to priority areas with the highest social and economic returns. It will also require greater attention to adequate financing of operation and maintenance costs that will be required to translate these new investments into a sustainable flow of goods and services in the priority areas. 56 The five year total investment plan estimates that meeting Vietnam’s ambitious targets over the next five years will require total investment amounting to some $60 billion, around 31-32 percent of GDP. 71 Vietnam Development Report 2002 INTER-SECTORAL ALLOCATION 5.15. One question arising from the experiences with the 1996-2000 PIP, is how to improve the allocation of public investment across sectors. While theory may provide some broad principles to address this problem, experience in developed as well as developing countries shows that it is not all that tractable to technocratic solutions. In any case, such principles are applicable more to total public spending (both investment and recurrent), where it is reasonable to compare returns based on the delivery of goods and services in a specific sectors. Nevertheless, for Vietnam some guidance for public investment can be derived from considerations of the evolving role of the state in transition, from the priority sectoral goals discussed in Chapter 1, from comparisons of total spending in other countries and from imbalances between investment and recurrent spending. 5.16. Commercial investments. Vietnam’s transition to a market economy suggest that purely commercial investments by business oriented SOEs should be excluded from the PIP. The Government’s SOE reform program has classified SOEs into two categories: public-service enterprises, mainly utilities, and business-oriented enterprises involved in commercial activities. This classification enables a distinction between enterprises that provide public goods and services where government financial support may be warranted, and those that should become reliant on financing provided on commercial terms from the banking system or from the capital market. As access to budgetary funds, subsidized credit and guarantees on borrowing is terminated, and as ‘hard budget’ constraints come into force, investments by business-oriented SOEs should not be eligible for public resources.57 5.17. The evolution towards a market economy also makes it possible to substitute private funding for public funding in some areas permitting greater sectoral allocations where private funding is not available. This makes it imperative that policies to promote private participation in relevant sectors are assessed in the process of making public investment allocations. Obvious examples in place or under development in Vietnam is the creation of an enabling environment for private provision of infrastructure like energy services or of private health and education services at both secondary and tertiary levels. Given the limited potential for revenue growth, this is to be encouraged wherever possible. 5.18. Linkages with development targets. Sectoral allocation of public investment has to meet delivery goals for specific public services in the relevant sectors and those ought to be linked to Vietnam’s outcome targets in those sectors. Thus the outcome targets should be an integral part of the public investment allocation process. This could be done by the sector ministries that not only set those outcome targets but also propose public investment projects. However, there are two weaknesses in this process that need to be addressed if this is to be done well. First, the sector ministries do not cost the public interventions that are needed to achieve those targets. This is in part because the budgetary process does not require sector ministries to link expenditures to output and then outputs to outcome targets. There is no performance-based budgeting, even in a 57 Including resources coming from the Government budget, “off budget funds” like Development-Support- Fund (see Annex 5.2), on-lent ODA, and public-service SOE’s own resources. 5. Improving Public Spending limited sense, though there are some rudimentary efforts in some ministries. Second, the sector ministries have limited access in practice to actual expenditures and outcomes in their sectors, particularly where service delivery is the responsibility of provincial administrations and allocation is the responsibility of MOF. 5.19. Many of the sectoral outcome targets will have implications for raising recurrent expenditure more than investment and others will have implications for raising both investment and recurrent spending, with one raised more than the other. Process for sectoral allocations needs to focus on total spending and the balance between investment and recurrent spending. 5.20. Total sectoral spending. If meeting sectoral outcome targets require delivery of key public services, it is more meaningful to examine the structure of total spending — recurrent as well as investment — when evaluating appropriateness of sectoral allocations. Both types of spending are essential for efficient delivery of goods and services. This sectoral structure can also be related to those in other developing countries. Within Vietnam, there is considerable tension in the allocation of resources between building economic and social infrastructure, and the funding of the delivery of services that such infrastructure supports. Vietnam has similar sectoral spending pattern as the average of developing countries Average of developing Sector Vietnam, 1998 countries, 1990 % % Agriculture, forestry & fishery 7.0 6.0 Transportation & communication 11.1 7.6 Industry 3.2 2.1 Education and training 17.5 17.2 Health 8.3 8.3 Social subsidies, welfare 12.0 8.1 Other 41.4 48.7 Table 5.2: Sectoral allocations of total budgetary expenditure - Share of non-interest expenditure. Source: Government of Vietnam, World Bank and other donors (2000) and Campos & Pradhan, 1996. 5.21. Comparisons with spending in other developing countries tend to suggest that Vietnam’s sectoral allocation of total budgetary spending in agriculture, education, health and transport broadly conforms with the average for developing countries (Table 5.2). 5.22. However, this comparison tells little about the balance between recurrent and investment spending in each sector. This balance is important for determining the effectiveness of these allocations in delivering services efficiently to meet the priority goals in each sector. In Vietnam the PER shows too little recurrent spending relative to investment spending in several areas. In agriculture, the budget allocation to fund O&M costs of irrigation systems that is not covered by water user fees, is only sufficient to ensure that a mere two thirds of the paddy-land covered by some form of irrigation 73 Vietnam Development Report 2002 system, is actually irrigated. In the transport sector, it is estimated that current O&M expenditure on roads is sufficient to cover only two-thirds of the required annual maintenance of national roads and just one-third for inland waterways. In education, increased budgetary funding of mechanisms to protect the poor from bearing a disproportionate burden of funding school running costs would be necessary if the government’s targets for universal basic education are to be met. 5.23. Vietnam’s budgetary process suffers from insufficient integration of investment and recurrent budgets. The situation is exacerbated by the requirement that is imposed by the National Assembly that recurrent expenditures should grow no faster than investment spending, and by the requirement that provinces can devote revenues in excess of budget targets only to investment and not to recurrent spending. This makes it difficult to address the backlog of recurrent spending needs, and also makes it hard to address the recurrent spending implications of new investment. In some sectors, current and capital expenditures may be substitutes — past under-funding of road maintenance, for example, has resulted in widespread deterioration that now requires costly investment. 5.24. The current system of allocations for recurrent spending tends to reinforce the problem. The example of recurrent budgeting for the transport sector is a case in point. While the Ministry of Transport (MOT) plays an important role in the development of transport strategies and plans, its role in deciding the overall budgetary allocation to transport is quite limited. MOF determines the overall level of recurrent spending on transport. A range of norms are used in deciding the volume of the national transport recurrent budget at both the central and provincial levels. For example, a norm of VND 10 million per kilometer of existing national roads is notionally allocated to the central component of the transport budget for maintenance. 5.25. Similarly, while MOF determines an amount for the recurrent transport budget of each province, the annual budget allocation only contains an aggregate recurrent budget. Provinces are thus free to make their own spending decisions across sectors, including the amount they wish to allocate to transport (subject to a specified minimum spending on education and science and technology). Although, in principle, provinces are required to inform the MOF about how they allocate the aggregate recurrent budget across sectors, this is an ex post formality. Provinces do not inform the MOT of transport budgets and expenditures, so the Ministry has little information on which to assess implementation of provincial transport expenditures. 5.26. Recurrent cost implications of PIP. In addition, the five-year public investment planning process does not require that account be taken of the recurrent cost implications of the proposed five-year public investment program. Future recurrent budgets can fund maintenance and operations inputs of proposed investments. This year, for the first time, work is underway in MPI to assess the recurrent cost implications of the proposed PIP, and the ministry is keen to build requirements for recurrent cost analysis into project proposals (Box 5.2 reports on current work on this subject). 5. Improving Public Spending Box 5.2: Recurrent Cost Implications of the National Irrigation and Road Programs The proposed pubic investment program for the 2001-2005 period includes a range of irrigation and road and bridge building projects. Some are ongoing rehabilitation projects initiated in the 1996-2000 plan period, and others have just started or are proposed to start. These projects create public capital stock that will require maintenance as well as inputs for their operations (i.e. wages and materials) that are to be financed through the recurrent budgets of all levels of government. MPI has attempted to make estimates of these O&M costs for the proposed PIP in irrigation and roads using a range of assumptions about the required frequency of different types of maintenance and using established cost norms. In irrigation, for example, PIP proposed some 15 Category A (very large central projects), and around 115 Category B projects for possible inclusion in the 2001-05 PIP. Some are continuation of projects initiated during an earlier plan period, but together these projects will irrigate over 2.5 million hectares, at an investment cost of around $1.9 billion. MPI is using norms developed by the World Bank to estimate annual O&M costs resulting from these projects. Preliminary estimates, based on varying assumptions about the proportion of hectarage suggest that costs could range between $71 million and $117 million per year. In the road sector, similarly, there are ten large (category A) projects (projects include national highways and rural roads) that are expected to be funded during the coming five years, costing around $1.9 billion. Using standard Vietnamese norms for routine maintenance and medium repairs for the type of roads involved, annual recurrent costs to maintain these roads are estimated at around $11 million per year. These costs range from 0.3 to 1.6 percent of the total investment cost of each project. 5.27. Efficient integration of recurrent and capital spending is a priority for Vietnam. This can be done through a shift to a medium term sector expenditure planning and budgeting system wherein each sector will have to make an integrated medium term sector expenditure program. In the near term sector ministries and agencies could develop five-year recurrent spending plans in parallel with their five-year investment plans. The Government has already approved a ‘pilot’ medium-term sector program to be developed in the education sector. Associated with this would be a requirement that all project proposals (above certain spending threshold) submitted to relevant approval authorities should contain an estimate of recurrent spending needs likely to be generated by the project. A second step would be to rescind the current limitations on the level and growth of recurrent spending. At the same time, donors should be encouraged to consider the scope for financing recurrent costs, and to work with the Government to develop modalities for sectoral rather then project lending. 5.28. Investment appraisal. Once sectoral allocations are firmed up large projects should be subject to careful cost benefit analysis. MPI has identified deficiencies in project design, appraisal and analysis procedures as an important cause of poor investment choices, and has been working on a manual laying out procedures for evaluating project proposals. The problem is not so much one of insufficient attention paid to project approval — in fact the project approval process for large (category A) projects is top-heavy, repetitive and involves inputs from a wide range of agencies. The problem lies more in the absence of clear requirements for evaluation methodologies, and limited capacity to assess the economic and social dimensions of projects. Use of cost- benefit analysis will help in introducing a more systematic and objective approach to appraising projects. However, international experience suggests that most project failures do not result from weaknesses in formal methodologies: rather, unrealistic forecasts of key parameters tend to be a more common cause of poor project selection. 75 Vietnam Development Report 2002 5.29. This problem is exacerbated in Vietnam by the limitations of statistical systems and institutional constraints on information flows. Ministries and agencies that should be in a position to provide professional advice are often caught with conflicting incentives, since they are often the proponents of project proposals. In other cases, sector ministries are not sufficiently involved in assessment or development of projects that are within their area of technical competence. Nor are they adequately involved in final stages of allocating budgets to provinces to be able to ensure that resources flow to higher priority projects. Box 5.3: Cost-Benefit Analysis for Large PIP Projects Detailed cost-benefit analysis can be productively applied to larger scale projects that involve significant commitments of budgetary resources, or creation of contingent liabilities for the state. An equal priority would be to improve the quality of information that flows into planning activities at all levels. This requires resolute efforts to improve the collection and dissemination of economic statistics. Within each sector, project proposals should be based on a list of projects ranked in order of priority, with the priority determined in accordance with well-articulated national and sectoral plan objectives, and on the basis of relevant technical criteria. The technical criteria could include cost-benefit analysis and cost-effectiveness analysis, and implementation schedules. All category A projects should be fully evaluated, while smaller projects could be subject to simpler methodologies, but also ranked in order of preference. This will require more effective integration of the project approval system with consideration of the total and sectoral investment program and resource availability. One option would be to make the preparation of the PIP the vehicle for the introduction of new projects into the investment portfolio. REGIONAL ALLOCATION OF INVESTMENT 5.30. While all seven regions have benefited from poverty-reduction (see Figure 5.1), both the rate of growth and the extent of poverty reduction has been lower in Northern Uplands, Central Highlands, South Central Coast and Mekong Delta. Indicators of social development and infrastructure access are also poorer in these regions. The first three regions are also the poorest, accounting for two-thirds of all poor provinces in the country ( defined as having a higher poverty-incidence than the national average). Poverty is unevenly distributed – growth and poverty reduction go hand in hand %70 Mekong Delta 60 Northern Uplands 50 Central Highlands 40 South Central Coast 30 North Central Coast 20 Red River Delta 10 North Southeast 0 % Northern Central North Mekong South Red River North 0 20 40 60 80 100 UplandsHighlandsCentral Delta Central Delta Southeast Coast Coast Poverty Reduction Growth rate Figure 5.2: Regional Incidence of Poverty, Poverty Reduction and Growth Rates Source: World Bank, 1999. 5. Improving Public Spending 5.31. More recent evidence also confirm that per capita GDP growth rates of provinces continue to diverge over time, increasing provincial disparities. Different measures of dispersion in per capita growth rates across provinces show increases between 1995 and 2000 (the period for which provincial GDP data is available). While inferences about long-term divergence from a six-year-data sample are difficult, there is reason to focus on the factors that may cause long-term divergence across provinces and regions in Vietnam. Rising regional inequality R el at i ve M ean D evi at i o n T hei l Ind ex 0.54 0.25 0.53 0.52 0.2 0.51 0.5 0.15 0.49 0.48 0.1 0.47 0.46 0.05 0.45 0.44 0 1995 1996 1997 1998 1999 2000 1995 1996 1997 1998 1999 2000 Figure 5.3: Divergence in Regional Per Capita GDP Growth Source: World Bank, 1999. 5.32. While determining the factors that explain why one region or province does well and another does not, is difficult without a long-period time-series data on provincial GDP, differences in labor and capital endowments as well as in productivity performance are likely to explain a large part of the divergence in GDP per capita growth rates across provinces. Thus promoting higher investment and improving human capital in poorer regions and provinces will be important. This investment will no doubt include public investment in infrastructure and in social sectors and thus adequate funding for such spending. But given the transition to a market economy, poorer provinces must make greater efforts themselves to create a better climate for private investment and to allocate public funds to redress the severest physical and social infrastructure deficits. 5.33. Differences in physical infrastructure, social services and governance institutions also contribute to this divergence per capita GDP growth rates, it is difficult to find evidence of a one-to-one relationship.58 Recent analysis using the 1993 and 1998 living standards survey in Vietnam indicate that the empirical relationship between one type of 58 Fuente and Vives identify education and infrastructure as important determinants of regional disparities in Spain, though these factors help to account for only two-thirds of the divergence. Faini et all find that labor market imperfections account for most of the differences in regional growth in Italy. Rao et al identify a skewed banking system allocation and public expenditure allocation in favor of richer provinces to account for a good deal of the divergence. 77 Vietnam Development Report 2002 public-provided infrastructure (i.e. roads) and poverty-reduction is ambiguous. One study (Van de Walle 2001) shows that there is no relationships between roads (e.g. extent of accessibility though roads in Vietnamese communes) and poverty-incidence at the commune level. Another report suggests that the benefits of roads to households — whether in increasing their consumption expenditure per capita, helping them break out of poverty, improving their children’s enrolment in schools, or increasing their utilization of health services — are more significant in the poorer provinces than in the richer provinces (Deolalikar, 2001). While provinces should have autonomy to allocate their available resources across sectors, there should not be any mandating of sectoral allocations for roads, in the absence of firmer evidence (see Box 5.4 for the current decision-making process for road expenditures). 5.34. Processes influencing regional allocation of public spending. Historically, there were three processes that influenced Vietnam’s distribution of “public” investment and spending across provinces and regions. The first is the process of decentralizing Government budgetary spending (both investment and recurrent) wherein 40 percent of such spending is made by provinces, with the share rising to two-thirds in the case of health and education spending. The second is the process of allocating cash-transfers to provinces for their investment and the third is the process of allocating public resources for commercial investments by business-oriented SOEs. Given Vietnam’s transition to a market economy, the third process will be less relevant in future as all business-oriented SOEs determine their own investment plans without using public resources; such investments will have to be wooed by the provinces in the same way as private investment. 5.35. Actual Regional allocation of 1996-2000 PIP. In the absence of information on true “public” investment (i.e. excluding investments by business-oriented SOEs), it is difficult to infer the actual regional allocation of public investment in the past five years. But if all SOE investment is included in “public” investment – as was the case with PIP expenditures of 1996-2000 period – 50 percent of such investment occurred in the Red River Delta and the South East region, which account for a fifth of the poor in the country. On the other hand, the Northern uplands and the Mekong Delta, where slightly less than half the country’s poor live, received only 25 percent of total public investment (including SOE investment). 5.36. In recent years there is evidence to suggest that there is greater equalization of Government spending in respect of social spending and certain elements of infrastructure spending, like road spending, are better distributed across provinces. Figure 5.3 shows, for example that per-capita expenditures on roads in 1999 were more evenly distributed across provinces than was per capita GDP (Deolalikar, 2001). 5. Improving Public Spending More even distribution of road expenditures L o r e n z c u r v e s o f p r o v in c ia l p e r c a p it a p u b lic s p e n d in g o n r o a d s a n d p e r c a p it a G D P , 1 9 9 9 100 P e r fe c t e q u a lity 90 P e r c a p ita r o a d s p e n d in g Cumulative % of public spending/GDP 80 P e r c a p ita G D P 70 60 50 40 30 20 10 0 0 11 22 33 44 56 67 78 89 100 C u m u la tiv e % o f p r o v in c e s , r a n k e d b y r o a d s p e n d in g p e r c a p ita o r p .c . G D P Figure 5.4: Road Spending and per Capita Incomes in Provinces, 1999 Source: Deolalikar, 2001. 5.37. Public spending in poorer provinces. Though budgetary spending is considerably decentralized, the extent of discretionary spending by local authorities remain limited. On average more than 40 percent of “total” budgetary spending (recurrent and investment) is spent by the local authorities. While transport and agriculture are close to this average, education and health exceed this average by 30 and 20 percentage points respectively. But per capita local public spending by middle and low income provinces is only around four-fifth and two-fifth of per capita spending by high-income provinces. Also, this amount is spent mostly on salaries – since there is no autonomy of provinces to change employment or wage-rates --leaving little room for discretionary spending. 5.38. Cash-transfers to provinces. Increasing local spending by poorer provinces will require higher cash-transfers and more revenue-raising powers for local authorities. The latter is not yet on the agenda of the Government, though studies on other countries’ experiences are being undertaken. Cash transfers have so far been an important source of enhancing equity in total public spending across provinces (see World Bank 2000a), but these transfers are not “formulae-based” as is the case in many other countries. If the objective of such transfers is to offset revenue and cost disabilities, then total transfers available for distribution should be allocated on the basis of a simple formula (with the right weights reflecting Vietnam’s own social welfare preferences) in which transfers will be positively related to population and cost disabilities and negatively related to per capita GDP, some chosen indicators of development, including maybe remoteness. Once the formula is established, it should be unchanged for a certain period to ensure stability in the transfers. 5.39. While increasing transfers to allow poor provinces to offset their cost disabilities is always helpful, there are limits to the size of total transfers that maybe feasible and desirable. All evidence from other countries suggest that such transfers should not be too high, because taxing other provinces to generate higher transfers have serious 79 Vietnam Development Report 2002 disincentive effects on those provinces, and in turn have adverse effects on adjacent poor provinces too. There is thus need for ensuring that the taxed provinces have a say in the Box 5.4: Decision-Making Process for Government Expenditure on Transport The transport sector is similar to other sectors of the Vietnamese economy in terms of how its expenditure decisions are made. The recurrent transport budget is ultimately the responsibility MOF, while the capital budget is under the purview of the MPI. The Ministry of Transport typically plays a secondary role in deciding the overall budgetary allocation to the transport sector, with MOF and MPI playing the main roles. Norms are widely used in deciding on the volume of the recurrent transport budget. For instance, a norm of VND/km 10 million of existing national roads and VND/km 7 million of provincial and district roads is notionally allocated to the central component of the transport budget for maintenance (although there is no requirement that this amount actually be spent by the MOT on maintenance).1 The capital budget allocation process is somewhat different. MOT is responsible for preparing its own sector strategy, called the Socioeconomic Development Strategy. Based on this, the Ministry develops its five-year as well as annual investment plan, which it forwards to MPI. Meanwhile, each Department of Transport (DOT) in the provinces prepares its own transport plan and submits to the MPI. Once approved, the central portion of the capital budget for transport is transferred to MOT, while the local portions are transferred to the DOTs of the individual provinces. The flexibility of provinces to alter the sectoral allocation of their budget is limited to the recurrent budget – not the capital budget; investment funds are allocated by projects. The provinces are free to spend additional amounts on transport out of their own revenues. The richer provinces typically do spend on investment in the transport sector out of their own revenues. Though MOF determines an amount for the recurrent transport budget of each province, the annual budget allocation document contains only an aggregate recurrent budget and provinces are free to make their own recurrent spending allocation decision across sectors, including the amount they wish to allocate to transport. Districts receive most of their support from the provinces, although they, too, may have their own revenue sources. Provinces have almost complete discretion in the resources they pass on to district transport services. While some provinces split their allocations evenly, other provinces may spend two-thirds of their allocation on nationally-determined staff salaries, which leaves little room for discretion. Since communes are expected to be basically self-sufficient, they are virtually excluded from the integrated state budget. Districts have discretion to pass on a certain portion of their budget to communes, but there are no rules governing this process. Source: Deolalikar (2001). process of determining the total size of transfers and their contribution to that transfer, together with the poorer provinces. 5.40. This is not an issue of equalizing investment funding across localities, but one of pursuing the efficient and equitable provision of public services across the nation. Solutions need to take account of the strong incentives that drive local administrations to focus more on projects than on service delivery, and the possibility that these incentives may be exacerbated by the preferences of donors who may fund a considerable share of public spending in certain localities. 5.41. Greater autonomy and accountability of provinces. Since the benefits from many classes of public investment — for example, rural electrification or village, commune and district roads are largely localized, the issue is largely one of improving the framework for decentralized decision making. 5.42. The government is developing a more decentralized process of decision making with respect to public investment. One step has been to devolve powers to approve 5. Improving Public Spending investment projects. This has helped to expedite decision making, and to locate it closer to the likely beneficiaries. But the process has been encountering some difficulties. This is partly because local capacity to identify and appraise projects is often weak and the system creates incentives for provinces to opt for small projects or to underestimate capital requirements to quickly get projects underway. It is also because the autonomy over approvals is not matched by comparable requirements for accountability and responsibility for outcomes— given continued central involvement in planning and resource allocation, it is easy for provincial authorities to argue for central intervention to bail out bad investments (Annex 5.2). Greater autonomy to allocate available public resources maybe the best option for correcting gross deficiencies in physical and social infrastructure in the provinces. 5.43. Other Policies to promote regional balance. Impediments to the movements in goods, labor and capital across provinces and regions have been important in several countries and regions of the world. Even if economic activity was concentrated (e.g. in agriculture and manufacturing) due to historical and geographical reasons, migration of labor to provinces with higher employment and higher wages help to narrow wage-rates across provinces over time. There were restrictions on the movement of labor in Vietnam wherein migrants were not allowed access to services in their new place of residence when such migration was not authorized, but there is some evidence to suggest that such restrictions have become less binding in recent years. Recent surveys of textile and garment mills show that a large proportion of their labor force are recent migrants, indicating the ability of migrants to get jobs in the formal sector (Thang 2001). It is therefore necessary to focus on removing remaining barriers to movement of goods, capital and labor across provinces. 5.44. Ultimately each province has to take responsibility for their own performance in respect of faster growth and poverty-reduction. The center can create an overall favorable climate for private investment and establish the intergovernmental fiscal arrangements that provide provinces with adequate access to resources and sufficient autonomy and accountability in public spending. But the provinces and their governments have to take the main responsibility of promoting private investment more vigorously (e.g. implement the enterprise law, facilitate foreign investments and so on) and ensuring that public spending allocations are supportive of that objective. IMPLEMENTATION AND MONITORING 5.45. Implementation. The overall impact of public investment is determined not only by how well projects are selected, but also by how effectively they are implemented. The quality of implementation in Vietnam is currently affected by limitations in systems for budget execution and control, the complexity of government procurement procedures, under-resourcing and inexperience of agencies charged with project management, onerous but not very effective accountability requirements, and under-development of the local construction and consulting industry. At the same time, with ODA financing an increasing share of development expenditure, implementation is also being affected by the cumbersome system of approving ODA financed investment projects and the administrative challenges of dealing with a multiplicity of donor systems. 81 Vietnam Development Report 2002 5.46. Some of these factors are currently being addressed. The Government plans to introduce a comprehensive and integrated financial management information system that should help improve budget execution. Recent procedural and regulatory changes introduced with Decree CP17/2001 concerning the management and use of ODA will help to speed up preparation of ODA financed projects, which often could involve delays of up to 2 years. These changes need to be complemented by actions to address other aspects of the implementation challenge. 5.47. Monitoring. The quality of the overall public investment program can also be improved with effective feedback mechanisms to learn from past experience. Current monitoring and evaluation systems for the public investment program are very limited, and focus largely on inputs and outputs rather than outcomes. Even within this more limited scope, there does not seem to be any system in place to report, on a regular and continuing basis, progress in project implementation. The MPI and sector ministries, receive very little information on projects and use of funds by provinces, and have little capacity therefore to assess implementation performance and consistency of provincial expenditures with agreed national priorities. Ex-post evaluation of projects is rarely undertaken except when required as a result of donor financing. Over the longer term, an active program of performance evaluation should be put in place, to help guide investment programming and to increase accountability. This will require improved reporting systems, providing agencies with a mandate to commission independent project and program reviews, and an institutional mechanism for reporting to the Government and the evaluation of results. Annexes ANNEX 2.1 - IMPACT OF WTO ACCESSION ON CHINA’S IMPORTS 1. The impact of China’s WTO accession on imports and exports is assessed by conducting two experiments – a baseline simulation in which China does not enter the WTO, and a companion scenario under which China enters the WTO.59 In the baseline scenario, there is no change in agricultural protection in all regions.60 Protection of the services sectors also remains unchanged.61 Uruguay Round tariff cuts for manufactures are implemented in all economies other than China and Taiwan. The MFA quotas are eliminated in all economies other than China and Taiwan. Quota growth rates on textiles and apparel in China are determined by China’s bilateral agreements with the US and the EU. In the accession scenario, in addition to the liberalization in other economies, China liberalizes its manufacturing sectors, and quotas on textiles and clothing are eliminated in the United State and the European Union. 2. The analysis of the impact of China’s WTO accession in Ianchovichina and Martin (2001) is conducted using a global applied general equilibrium model (Ianchovichina et al., 2000; Ianchovichina, 2001). It provides an explicit treatment of duty exemptions for inputs used in the production of exports. Duty exemptions are a special feature of China’s trade regime. They reduce the cost of imported inputs and bias exports towards assembly type operations. Ianchovichina et al. (2000) show that failure to take into account duty exemptions on imports will seriously misstate the impact of China’s WTO accession on the country’s structure of production and trade. 3. The framework depicts 22 industries in 19 regions each endowed with 5 primary factor inputs – skilled labor, unskilled labor, capital, land and natural resources. The production factors in each region are fully employed, immobile across regions, and in fixed supply. The returns to these factor inputs accrue to the households in the region in which they are employed. Skilled and unskilled labor, and capital are used by all firms, land is used only by firms in the agricultural sectors, while the natural resource input is used as an input only in the natural resource sector. Capital, skilled and unskilled labor are perfectly mobile across sectors. Land and the natural resource input are factors specific to the farming sectors and the natural resource industry. All factors except land are homogenous. 59 These projections were generated by combining historical and forecast data from World Bank sources. Martin et al. (2000) and Anderson et al.( 2000) provide further discussion of the baseline. 60 Agricultural protection is left unchanged due to the considerable uncertainty about both the initial level of agricultural protection in China, and the effects of the next WTO agreement on important commodities like wheat, corn and rice. 61 This is due to lack of border protection data in services. China has committed to open its services sector substantially. Therefore, the estimated impact of China’s WTO accession in Ianchovichina and Martin (2001) reflects reforms as part of WTO accession on merchandise trade and omits the positive effects of services liberalization on other sectors and the economy as a whole. 83 Vietnam Development Report 2002 4. Each industry has an export-oriented sub-sector producing exclusively for export markets and a domestic-oriented sub-sector supplying exclusively the domestic markets.62 Firms in the export-oriented and domestic-oriented sub-sectors operate in perfectly competitive markets and use the same constant-returns-to-scale technology. Demand for intermediate inputs are represented using the Armington assumption as a composite of imported and domestic goods which are imperfect substitutes.63 The model assumes that all imported intermediates used by the export-oriented sub-sector are exempt from duties.64 Product differentiation between imports and domestic goods, and imports by region of origin allows for two-way trade in each product category, depending on the ease of substitution between products from different regions. 5. The model has a representation of consumer demands via a constant difference of elasticities (CDE) functional form. At the macroeconomic level, each region’s final demand is governed by a representative regional household which allocates regional income across private consumption, government expenditure and savings according to a Cobb-Douglas utility function. Global savings must equal global investment, which is allocated across regions in order to equate expected rates of return. The composite world price of exports is chosen as the numeraire. 6. The model is solved in order to determine the endogenous changes in output and trade flows as a result of the proposed trade policy changes. All of the restrictions imposed by economic theory are maintained: changes in consumer demand add up to changes in total spending; each region’s total exports equal total imports of these goods by other regions, less shipping costs; each region’s income is determined by spending on its output and tax revenues. 7. The model is applied to a modified, aggregated version of Version 4 Global Trade Analysis Project (GTAP) data base (McDougall et al., 1998). It combines detailed bilateral trade, transportation and protection data accounting for inter-regional linkages among economies and input-output data bases accounting for inter-sectoral linkages within countries. The data characterize intermediate demands, bilateral trade and taxes in 1995. The benchmark data on China’s intermediate and factor input usage by export- oriented and domestic-oriented sub-sector is constructed based on the share of exports in total output of this sector and the adjustment associated with the elimination of the import tax on inputs used for the production of exports.65 In the resulting database, the share of imported intermediate inputs in total intermediate inputs is higher for the export-oriented sub-sector than for the domestic-oriented sub-sector reflecting the incentive of export firms to use imported materials. 62 Production for domestic markets and production for export markets is completely decoupled. The choice to fully separate domestic and export production is necessary to simplify the representation of the trade regime in the model. It is also a fairly accurate depiction of the trade regimes in China where the rules of the export processing system and the local-content requirements have in effect created a dual market structure with segmented local (domestic) and export (international) markets being to a large extent segmented. 63 This estimate is based on information from China’s Customs and input-output information from GTAP database, version 4 (McDougall, 1998). 64 In 2000, the vast majority of China’s exports were produced with duty except imports . 65 The degree of adjustment is determined by the theory in the model, the price differentials, and the elasticity of substitution between domestic and imported inputs. Annexes 8. All parameters in the model are taken from version 4 GTAP database (Hertel, 1997; McDougall et al., 1998). These include the Allen partial elasticities of substitution that describe the substitutability between domestic and imported intermediates, the substitutability between imported intermediates from different sources, and the substitutability between primary factors. Furthermore, the Allen partial elasticities of substitution in the domestic-oriented sub-sectors are the same as the corresponding export-oriented sub-sectors of the economy.66 9. The protection data consists of import tariffs, which are averages of MFN applied tariff rates obtained at the tariff line level and aggregated up to the GTAP concordance using trade-weights. In the case of agricultural products, where non-tariff barriers have played a very important role, the distortions, particularly in the grains, livestock, and dairy product areas for the OECD countries, were characterized using work by Tsigas (1998). For non-OECD countries, indirect estimates of protection (including non-tariff barriers) were derived using OECD data and protection information from the GTAP version 3 data base. 66 This assumption ensures that in the absence of duty exemptions the solution to the model coincides with the solution to the standard GTAP. 85 Vietnam Development Report 2002 ANNEX 3.1 - GOVERNMENT’S REFORM PROGRAM The Government’s multiyear reform program in trade policy, private sector deployment, SOE reform, banking sector and public expenditure management is being supported by the World Bank’s PRSC and the IMF’s PRGF. The details on reform measures are shown in boxes A3.1, A3.2, A3.2, A3.4 and A3.5. The reform program in the non-bank financial sector is being supported by the ADB and shown in Box A3.6. Box A3.1: Trade Reform Program The Government will, over the next three years, implement the following measures under its trade liberalization program: QRs will be removed multilaterally from clinker and paper by early 2002 and from cement, remaining types of steel, construction glass, vegetable oil, ceramic and granite tiles, motorcycles an cars by early 2003; the share of garment-export quotas to be auctioned will be raised each year from 20 percent in 2000; rice exports will be further liberalized to allow exporters to buy and export rice more freely; and tariffs will be reduced to 20 percent on AFTA-imports for most of the tariff lines by early 2003. The following actions are to be taken in the first year of the program: Removing QRs vis-à-vis all countries, from all tariff lines for clinker and paper, replacing them with tariffs where necessary and appropriate. Increasing the share of government export quotas to be auctioned to 25 percent. Box A3.2: Private Sector Reform Program The Government plans to continue liberalizing the climate for private investment and hence to take the following steps over the next three years. remaining business license restrictions on entry in industries, trades and services will either be eliminated or modified; where modified, they will become conditions that all businesses have to satisfy after they begin operation; registration of private SMEs in the provinces will be monitored and the comparative ease with which they can expand in different provinces assessed; a new decree will be issued to establish various credit and guarantee mechanisms as well as support institutions for SMEs; the Government will facilitate the formation of Vietnamese business associations consisting only of private sector firms, so that they can share information and establish support services for members. This is also part of the Miyazawa program for private sector development (JBIC 2000); the private sector’s access to land and credit will be improved by allocating land more transparently and by removing restrictions on allocation of agricultural land for industrial purposes. In addition, secured transactions’ registration offices will be established in the first year of the program. There will also be a “national data system” on secured transactions which will permit registration of mortgages of land-use rights and of buildings; the dual pricing system will be gradually dismantled and the revised foreign investment law fully implemented. With the following actions to be taken in the first year of the program: Removing or modifying business licenses of at least 50 trades, industries and services, so that entry in those sub-sectors is eased. Annexes Box A3.3: SOE Reform Program The Government’s program includes general measures that will create greater transparency, accountability and financial discipline, enterprise-specific measures that will permit varying degrees of non-state ownership, as well as social-safety-net measures that will mitigate the social costs of reform. The general measures include: imposing stricter financial discipline. Banking reform will restrain credit growth to SOEs, and quarterly monitoring of 200 highly indebted SOEs, covering nearly 30 percent of SOE debt, is expected to encourage all SOEs to reform; increasing transparency of SOE information and accountability. Recording and reporting of systematic data on SOE performance will be improved by requiring SOEs to provide timely financial and audit reports, by improving management information systems in MOF; enhancing effectiveness of process of equitization. The process of equitization will be streamlined and improved to attract capital strong investors with good management expertise, including by removal of caps on shareholding in equitized enterprises, and more equitized SOEs will be encouraged to list on the stock market. All enterprise-specific measures, applicable to around 2225 SOEs, will cover 41 percent of SOEs, 53 percent of SOE employment and 50 percent of SOE debt over the next three years. For the first year the program calls for the following actions: complete major equitizations (i.e., selling more than 65 percent of shares to non-State shareholders and having no dominant or special State shares), sell or liquidate at least 200 SOEs; complete minor equitizations (i.e., sales of shares with the State having dominant or special shares) of at least 200 SOEs; adopt detailed restructuring plans for Seaprodex, Vinatex and Vinacafe General Corporations (GCs), including a timetable of specific actions to be taken to improve corporate governance and competitiveness of key SOEs in these GCs; modify the design of the fund established to finance the social safety net for state-owned enterprise workers, put the fund as modified into operation with dedicated staff in adequate numbers and complete a review and written report on the disbursement performance of the fund; complete diagnostic audits for 30 large SOEs and agree on plan of action; strengthen and extend management information system for SOE performance data; issue revised decree on equitization to remove caps on shareholding and increase transparency of sales. Box A3.4: Banking Reform Program The Government’s reform program for the banking sector under the PRSC consists of the following elements: phasing out policy and non-commercial directed lending by SOCBs, except for a few cases in the transition where explicit MOF guarantees are provided; phasing re-capitalization of each SOCB over a three year period, conditional on SOCB’s satisfactory annual performance in respect of key actions and key operational targets established in their individual restructuring plans; resolving Non-Performing Loans. NPLs as of December 2000 will be resolved by the SOCBs through their own asset management companies (AMCs) and loan workout units (LWUs); conducting annual independent IAS audits by international auditors starting in 2001; Raising the share of credit to the private sector through SOCB restructuring. The following actions should be taken in the first year of the program: adopting restructuring plans for the four large SOCBs; closing nine JSBs, and ensuring the rest comply with existing regulations; bringing criteria for loan classification by banks in line with international practice, and initiating implementation of revised criteria for classification of NPLs as well as for their provisioning; completing IAS audits for fiscal year 2000 of the four large SOCBs by international auditors. 87 Vietnam Development Report 2002 Box A3.5: Public Expenditure Reform Programme The Government’s public expenditure reform program consists of the following elements: improve public transparency further by publishing more budgetary data, including sectoral breakdown of 75 percent of total spending by early 2002, and ensure that commune budgets are posted outside commune offices; designate the treasury in MOF as the main department responsible for maintaining comprehensive public accounts (including aid-expenditures) and implement a fully integrated public financial management system, including uniform accounting system in the treasury; consolidate the budget and expenditure information by including the outturn on various “off-budget” Government accounts including their funding sources; revise “norms” for recurrent budget allocations and for cash transfers to poorer provinces to ensure greater equity for poorer provinces, especially in social spending; integrate recurrent and capital spending in budget formulation and execution processes to ensure better balance; adopt medium term sector expenditure programs in each sector, starting with basic education, with the following step being taken in the first year of the program: improving reliability of the national budgetary information by designating the State Treasury as the agency responsible for a comprehensive management information system for Government expenditures; improve transparency by publishing sectoral breakdowns of at least 75 percent of total Government spending in line with the PER; initiate steps to develop a medium-term sector expenditure program in one sector. Box A3.6: Proposed & Ongoing Reforms of the Non-Bank Financial Sector In Vietnam, the non-bank financial sector mainly comprises leasing, insurance sectors and the capital market and are smaller in size relative to the banking sector. However, the potential for growth of the non-bank financial sector is significant. The Government’s policy reform agenda for promoting the efficiency and growth of the non-bank financial sector is supported by the Asian Development Bank (ADB) and they include the following measures: Leasing Industry streamlining procedures for lease approval, custom clearance and investment license; operationalizing National Registry Agency for Secured Transactions for registration of leasing contracts; allowing leasing companies to conduct both financial and operating leases; developing simplified procedures for repossession and lessor protection in case of lessee’s defaults; rationalizing tax laws to facilitate leasing; and improving public awareness of leasing activities. Insurance Industry separating the supervisory and ownership roles of the Insurance Supervisory Division to avoid conflict of interest and regulatory bias; developing procedures and capacity for supervision to safeguard the market; and setting up of a training institute under a public – private partnership scheme to produce actuary, loss assessors and to train insurance practitioners including agents. Capital Market Development increasing the supply of securities by linking equitization to initial public offering (IPOs), streamlining the listing criteria and procedures and setting up a market mechanism and procedure for pricing IPOs; improving the governance structure by separating Stock Trading Center (STC) from State Securities Commission and turn STC into a self-regulatory organization; establishing an automated clearing, settlement system and depository system in accordance with the international best practice; adopting corporate governance standards to protect minority shareholders and enhancing investors’ confidence; establishing institutional investors to ward off speculation and enhance market stability; gradually relaxing the price cap to 10% to allow immediate discounting of relevant information and determination of stock prices in the market; and educating the public on the benefits and risks of investing in the capital market. Source: ADB Annexes Annex 3.2 GOVERNMENT’S ACTION PLAN FOR IMPLEMENTATION OF THE RESOLUTIONS OF THE 3RD PLENUM OF THE 9TH CONGRESS OF THE PARTY’S CENTRAL COMMITTEE (issued as an attachment to Prime Minster’s Decision 183/2001/QD-TTg, dated November 20, 2001) Leading agency Coordinating Deadline for Form of legal agency submission to the document Actions Prime Minister I Policies and regulations to be issued 1 Criteria for classification of state-owned enterprises, state general corporations, NSCERD MPI Nov. 2001 PM’s Directive sectors and industries, in which the state should own 100% of chartered capital, dominant share, or no share. 2 Revision and complement in the model of the charter for the operation of state MPI NSCERD Apr. 2002 Decree general corporations (Decree 39/CP) 3 Transformation of the state general corporations into the model of parent-son MPI NSCERD Feb. 2002 Decree companies. 4 Establishment of business group MPI NSCERD May 2002 Plan 5 Revision and complement of the Decree 50/CP and 38/CP regarding the MPI NCRD Jan. 2002 Decree establishment, re-organization, liquidation, and bankruptcy of the state-owned enterprises 6 Revision and complement of the Decree 56/CP regarding the state-owned MPI NSCERD and MOF Jan. 2002 Decree enterprises operating in public utilities industries 7 Revision and complement of the Decree 103/1999/ND-CP regarding the transfer, MPI NSCERD Dec. 2001 Decree sale, business contracting, and lease of state-owned enterprises 8 A new decree to replace Decree 44/1998/ND-CP regarding state-owned enterprise MOF NSCERD Feb. 2002 Decree equitization 9 Mechanism for debt management and settlement for SOEs MOF SBV and NSCERD Nov.2001 Decree 89 Vietnam Development Report 2002 10 Establishment of AMC of state-owned enterprises MOF SBV and NSCERD March 2002 PM’s Decision 11 Criteria for evaluating the performance and the monitoring mechanism for public MOF NSCERD and MPI March 2001 PM’s Decision utilities, business-oriented SOEs and the general corporations 12 Policy for redundant workers due to restructuring of SOEs MOLISA Related agencies Dec. 2001 Decree and line ministries 13 Regime for managing labor, wages, and income in SOEs (Revision and complement MOLISA NSCERD, GCOP, Jan. 2002 Decree of the Decree 28/CP and Decree 03/2001/ND-CP) MOF 14 Revision and complement of the Decision 83/1998/QD-TTg regarding mechanism of MOLISA NSCERD, GCPO, Jan. 2002 PM’s Decision the salary and allowance for members of the Board of Directors Control Board of the MOF state general corporations 15 Mechanism for responsibility, material and spiritual incentives for directors in state- MOLISA NSCERD, GCOP, Jan. 2002 PM’s Decision owned enterprises MOF 16 Revision and complement of the Decree 52/1999/ND-CP and Decree 12/2000/ND- Ministry of Related agencies Jun. 2002 Decree CP regarding the regulation on management of investment and construction Construction and line ministries 17 Criteria and regulation on the recruitment of managers in SOEs GCOP NSCERC Dec. 2002 PM’s Decision 18 Regulation on training and employing managers in enterprises GCOP NSCERC Dec. 2001 PM’s Decision 19 Decentralization in appointment and supervision of managers in state general GCOP NSCERC Dec. 2001 PM’s Decision corporations 20 Revision and complement of the Anti-Corruption Ordinance State Inspection NSCERC and MOF March 2002 Revised ordinance 21 Revision and complement of the Bankruptcy Law MPI MOJ and MOF March 2002 Revised Law 22 Revision and complement of the State-Owned Enterprise Law MPI Related agencies Dec. 2002 Revised Law and line ministries 23 Accounting Law MOF GSO Nov. 2001 Law Annexes 24 Law on state capital utilization in business investment MOF Related agencies De. 2003 Law and line ministries 25 Ordinance on State Auditing State Auditor MOF Sept. 2003 Ordinance 26 Law on Competition Promotion and Monopoly Restriction MOF Drafting Committee Dec. 2002 Law II Implementation 1 Organizing NSCERD GCOP NSCERD Nov. 2001 PM’s Decision 2 National Conference on SOE reform and development NSCERD OOG Dec. 2001 Conf. papers 3 Instruction given to local governments, ministries, agencies, state general NSCERD Related agencies Dec. 2001 to May corporations to classify, restructure state-owned enterprises under their respective and line ministries 2002 administration. Special instruction should be given to the restructuring of SOEs under the Ministry of Defense, Ministry of Public Security, and those in mountainous and remote areas. 4 Instruction given to the restructuring of SOEs that belong to Party’s organizations NSCERD Party’s Fin. & Admin. 5 years Commission and it subordinates at provinces & cities 5 Instruction given to the restructuring of SOEs that belong to social and political Steering Committee Social and political 5 years organizations for Enterprise organizations Reform 6 Instruction given to the transforming SOE into a limited liability company with one NSCERD MPI Nov. 2001 to Jun. single owner. 2002 7 Evaluation and approval of plan for classification and restructuring of SOEs during NSCERD MPI, MOF, MOLISA Jan. 2002 to Dec. Decree 2001-2005 submitted by local governments, ministries, industries, and state general 2002 corporations 8 Restructuring of the state general corporations NSCERD Related agencies 2002 to 2005 PM’s Decision and line ministries 91 Vietnam Development Report 2002 ANNEX 3.3 - IMPACT OF TRADE REFORMS: RESULTS FROM CGE MODEL FOR VIETNAM 1. As part of its on-going monitoring of the social impacts of the Government’s reform program, the World Bank has commissioned a study on the effects of Vietnam’s proposed trade reform on the income distribution and poverty in Vietnam. A key component of the study is an assessment of the likely impacts of the reform program using an economy wide model of Vietnam. This work is currently proceeding and the results of the project are expected to be available by January 2002. However, some preliminary results from the modeling are available and confirm the contemporary relevance of the model findings of Pham (2000), discussed in the body of Chapter 3. 2. This Annex provides some broad details of model construction and presents the results of a simulation that reduces all tariffs to no more than 5 percent. This simulation represents an extreme case of liberalization — approaching complete liberalization — and goes much further than Vietnam is intending to go in its reform program over the short to medium term. Further research under the project will examine the effects of Vietnam’s actual trade reform program. Model construction 3. The distributional effects of trade reform are examined using an economy-wide model of Vietnam’s economy. Economy-wide models (sometimes called Applied or Computable General Equilibrium models) are ideally suited to examining policy issues of this type. This is because they account for the direct and indirect linkages between industries, hence these models are able to account for the direct and indirect effects of tariffs. Because they track the flow of income and expenditure, economy-wide models can also be used to examine the effect of tariff changes on the distribution of income and expenditure amongst households of different income levels. 4. Construction of the model involved merging two main sources of official information: Vietnam’s input-output (IO) table and the VLSS. It is important to note at the outset that these two sources of data are not fully compatible. The picture of the broad structure of the economy that each data source gives is quite different, so when merging them many careful choices must be made. While the IO table has some internal balancing requirements (that arise from national accounting concepts), this is not so for the VLSS. Close examination shows, for example, that in the VLSS most households spend in excess of their income and that many rural households claim to have negative income. Further, the VLSS does not use a standard commodity or industry classification, certainly not the same one used by the I-O table. 5. In merging the two, precedence is given to the IO table in cases where they conflict. Thus the economic structure of our model is the same as the IO table. The household structure, however, is taken from the VLSS. 6. The model identifies 33 separate industry sectors, including 8 sectors in agriculture (paddy rice, sugar cane, coffee, other crops and agriculture services), forestry and fishing. Industries utilise primary factors (land, labor and capital) plus intermediate inputs to produce products for sale to domestic consumers, foreign consumers (exports) and to other producers (for use in their production process). Domestic production competes with imported products which are assumed to be imperfect substitutes for the domestic product. Annexes 7. Our model also identifies 10 household groups: income quintiles distinguished by rural and urban locations. Thus, rural 1 is the lowest quintile (poorest) rural household, urban 1 is the lowest quintile urban household, and so on. This breakdown allows identification of the distributional consequences of policy changes. Households are assumed to supply four types of labor: farm, non-farm agricultural, unskilled and skilled labor. 8. Tariff simulation. Table 1 summaries the initial tariff rates for the model industries. These are import weighted rates and were derived from the latest raw tariff schedule provided by the General Department of Taxation (Ministry of Finance). For this simulation, we look at the short term effects of Vietnam unilaterally reducing these tariff rates to 5 percent. Table A3.1: Tariff Rates for Model Industries Industry Tariff rate (percent) Rice 15.4 Sugar cane 10.0 Coffee 18.0 Crops 11.0 Livestock 1.32 Agricultural services na Forestry 0.4 Fishing 28.4 Crude Oil 0.0 Mining 2.2 Tobacco, alcohol 45.1 Sugar 9.6 Food processing 16.4 Garments and textiles 31.2 Paper 13.6 Cement 26.4 Fertiliser 0.4 Chemicals 5.6 Petroleum products 12.4 Steel and steel products 3.8 Vehicles 48.6 Equipment and machinery 5.0 Electrical goods 8.0 Other manufacturing 10.5 All industries 14.3 Source: Estimates based on GDT data. 9. Effects on industry. Removing tariffs lowers import prices which leads to lower costs within the economy. This can be seen in table A3.2 which reports changes (relative to the case where tariffs are not removed) in the consumer price index, both in aggregate, and for each of the household groups in our model. The CPI effect varies for different households groups as they each have different expenditure patterns. 93 Vietnam Development Report 2002 10. The aggregate CPI can be interpreted as the effect of the tariff removal on the real exchange rate (a measure of Vietnam’s competitiveness). It shows that removing tariffs would result in a real depreciation (an increase in competitiveness) of 2.9 percent. Table A3.2: Effects of Tariff Reform on the CPI Household group Consumer price index per cent change Rural 1 (poorest) -3.7 Urban 1 (poorest) -2.3 Rural 2 -3.3 Urban 2 -2.8 Rural 3 -3.1 Urban 3 -2.7 Rural 4 -3.0 Urban 4 -2.8 Rural 5 (wealthiest) -2.6 Urban 5 (wealthiest) -2.6 Economy-wide -2.9 Source: Economy-wide model simulation. 11. Increased competitiveness leads to increased exports and consequently increased output in the economy (table A3.3). Aggregate exports are projected to increase by 6.4 per cent. The greatest change in sectoral output is for agriculture (3.7 percent) followed by services (1.5 percent) and manufacturing (0.4 percent). Real GDP increases by 2.1 percent. Table A3.3: Effects of Tariff Reform on Exports and Sectoral Output Variable Percentage change Exports 6.4 Agricultural output 3.7 Manufacturing output 0.4 Services output 1.5 Real GDP 2.1 Source: Economy-wide model simulation. 12. Exports. Agricultural sectors account for approximately 40 percent of the expansion in exports with the remainder coming from manufacturing sectors. The ‘Other crops’ and ‘Fishing’ sectors are the biggest contributors to the expansion in agricultural exports. In Annexes the manufactured sector, ‘textiles and garments’, ‘food processing’ and ‘other manufactured’ provide the majority of increased exports. 13. Output. Table 4 presents results for changes in output for selected model industry sectors. All agricultural sectors expand with ‘Other crops’ and ‘Livestock’ showing the biggest gains. Export oriented sectors such as ‘food processing’ and ‘garments and textiles’ show big expansions in output and compensate for contractions in protected, import competing sectors such as paper, cement, fertiliser, chemicals, steel, equipment and electrical goods manufacture. Trade (which incorporates transportation and wholesale and retail distribution activities) experiences a rapid expansion in output reflecting the overall expansion in activity in the economy. Table A3.4: Selected Sectoral Output Results Variable Percentage change Rice 1.7 Sugar cane 2.1 Coffee 2.3 Other Crops 4.8 Livestock 6.4 Food processing 1.0 Garments and textiles 5.1 Paper -1.7 Cement -1.7 Fertiliser -1.7 Chemicals -0.2 Steel and steel products -4.3 Equipment and machinery -4.2 Electrical goods -5.0 Trade 4.3 Source: Economy-wide model simulation. 14. Employment. Service sectors provide a large amount of new jobs. Overall, aggregate employment is expanded by around 4.7 percent following the tariff reform. Over half of this expansion occurs in the services sector (reflecting the labor intensive nature of these sectors). Trade accounted for nearly 20 percent of the overall expansion in employment. Agriculture accounts for around 35 percent of the increase in employment (spread across the range of agricultural sectors), with the remainder occurring in manu- facturing. Mirroring their expansion in output and exports, food processing and textiles and garments provide a large share of the jobs in manufacturing. 15. Effects on households. Households benefit from this increased economic activity through an increase in demand for their labour (the model also captures changes in returns to capital and agricultural land, but given the labour intensity of the Vietnamese 95 Vietnam Development Report 2002 economy, the effects on labour demand are dominant). This means that household nominal income increases. The increase in nominal income is different for each household group as households supply different proportions of the four types of labour recognised in the model: farm labour, non farm rural labour, unskilled labour and skilled labour. Table A3.5 shows the increase in nominal income for each household group. 16. All households have an increase in income, but the wealthier households generally have a greater proportional increase. This is a result of them having a greater share of skilled labour in their total income sources. Table A3.5: Effects of Tariff Removal on Nominal Household Income Household group Nominal household income per cent change Rural 1 (poorest) 2.6 Urban 1 (poorest) 7.4 Rural 2 3.8 Urban 2 8.8 Rural 3 4.4 Urban 3 8.5 Rural 4 10.7 Urban 4 10.3 Rural 5 (wealthiest) 4.5 Urban 5 (wealthiest) 10.7 Source: Economy-wide model simulation. 17. The increase in income, along with the decline in prices (combined with an assumption that savings remains unchanged) allows real consumption for each household group to increase. Table A3.6 presents the real consumption increase for each household group. 18. All household groups have an increase in real consumption, and the increases are generally more evenly distributed than the increases in nominal income. This is due to the different effects of tariff removal on each household’s CPI (the relationship between nominal consumption and real consumption depends on the household specific CPI) and to the different initial savings patterns of different households (the relationship between income and consumption depends on savings). 19. All households are able to increase their command over commodities as a result of tariff removal. No household groups lose. The fact that the lowest quintile households experience a real consumption increase implies that both the headcount and depth of poverty has decreased. Annexes Table A3.6: Effects of Tariff Removal on Real Household Consumption Household group Real consumption per cent change Rural 1 (poorest) 5.6 Urban 1 (poorest) 7.3 Rural 2 6.0 Urban 2 7.8 Rural 3 6.0 Urban 3 7.4 Rural 4 6.5 Urban 4 7.9 Rural 5 (wealthiest) 5.5 Urban 5 (wealthiest) 7.6 Source: Economy-wide model simulation. 20. Effects on poverty. Applying the economy-wide model results to the individual household level data from the VLSS, we can calculate the effects of the tariff removal on various poverty measures. They are summarized in table A3.7. 21. The results show that the incidence of poverty (both total poverty and food poverty) declines in both rural and urban areas (note that the change in urban food poverty is small, and is not picked up in the table due to rounding). The greatest percentage point decline is for the rural areas. 22. The depth of poverty (as measured by the poverty gap index) also declines for both rural and urban areas, with the greatest percentage point decline for rural areas. 97 Vietnam Development Report 2002 Table A3.7: Effects of Unilateral Tariff Removal on Poverty Measures Before After percent percent Total poverty incidence Rural 45 40 Urban 9 7 All Vietnam 37 33 Food poverty incidence Rural 18 16 Urban 2 2 All Vietnam 15 13 Poverty gap index Rural 12 10 Urban 2 1 All Vietnam 10 8 Source: Economy-wide model simulation, VLSS. 23. Conclusion. It is well established finding in trade policy analysis that protection provided to import competing industries has the indirect effect of taxing export industries. There are a number of mechanisms by which this can take place, the most important being the effect that tariffs have on the cost structure of the economy. As export industries are often agriculture based, protection provided to manufacturing industries amounts to a tax on agriculture. Further, because a large proportion of the poor work in agriculture, import protection has the effect of reducing their opportunities. 24. These general findings about protection taxing exporters are very much evident in the model results discussed above. These results indicate that on the basis of available data, and using an economy-wide framework, unilateral tariff reductions would be expected to benefit all households, and that such reductions would reduce both the incidence and depth of poverty. 25. There are some important qualifications to these results, however. First, as noted above, the data is far from ideal. But more importantly, the modeling framework makes a number of assumptions about the adjustment of the economy to changes in tariffs. In particular, it assumes a well functioning and flexible labour market, where labour is free to move to its area of highest return. In reality, such mobility is not assured. Further work is underway to examine the implications of various institutional and policy impediments to adjustment. 26. The above analysis captures the effects of unilateral reform that goes much beyond the reforms that Vietnam has planned for the next three to five years. This means that the magnitude of changes in real GDP, employment etc will be smaller than those arising Annexes from the Government’s planned reform program. However, there are reasons to believe that the direction of the sectoral effects will be similar to those discussed above. 27. One reason for this is that tariffs on products from ASEAN countries will be reduced to less than 20 percent by 2003 and less than 5 percent by 2006. These scheduled reductions will see the average tariff on goods from ASEAN countries (eligible for the CEPT rate) fall from 14 percent in 2000 to 8.5 percent in 2003 and 4 percent in 2006. Since imports from ASEAN countries account only around 30 percent of imports (with a smaller proportion satisfying Rules of Origin requirements and eligible for the CEPT rate), the effects of CEPT implementation are likely to more moderate in magnitude than those discussed (which assumed a reduction on tariffs for all imports). The gain in output and exports for agriculture and other sectors arising from lower costs will therefore be lower than in the analysis above. The extent to which the lower tariffs on ASEAN imports will affect local costs will depend on the degree to which ASEAN products are substitutable with products currently available to Vietnamese consumers. 28. The removal of quantitative restrictions on imports such as cement, steel, motor vehicles, etc — sectors that tended to contract in the above analysis — will reduce incentives for production and resource use. These sectors tend also to receive high rates of effective assistance from tariffs so that the above modeling analysis should reflect the effect of reductions on protection for these sectors. 29. A final reason to expect broadly similar sectoral results is that enhanced market access arising from AFTA liberalization and bilateral agreements such as the US–VN BTA will also assist labour intensive, export oriented sectors — the sectors that tended to benefit in the above analysis. The textile and garment sector in particular will benefit from enhanced market access. 99 Vietnam Development Report 2002 ANNEX 5.1 EXAMINING INVESTMENT IN THE SUGAR, STEEL, AND CEMENT INDUSTRIES 1. The cement, steel and sugar sectors provide examples of poor commercial investment programs that have imposed significant costs to the economy and have deprived activities with higher social returns access to scarce investment resources. 2. In the sugar sector, approaches to investment planning and management have led to a situation where Vietnam’s potential to be a relatively efficient and competitive producer of sugar has not been realized. Over $1 billion has been invested in the sector since the implementation of the One Million Ton Sugar Program in 1995. Although certain areas of the country appear to be very suitable for growing sugar and could support a competitive sugar industry, the sector has been unable to deliver economic or financial viability (box A5.1). 3. The poor performance of the sugar industry is largely an issue of inappropriate size, and also of location. There are significant economies of scale in milling, and the average mill size in Vietnam is way below that in the leading cane producers, leading to an increase of around 50 percent in milling costs. The proliferation of small scale mills, and their location in areas less well suited to growing sugar cane reflects some important problems in the investment planning and approval process. First, the objectives of the program militated against efficiency. The program specified that mills of over 2000 tons a day should be built for concentrated raw material areas, and for other areas mills with capacities of between 1000–1500 tons a day would be built. However, to strive for large, technologically advanced and efficient mills in large, concentrated cane areas and small, technologically less advanced mills (that is, less efficient) in small, non–concentrated areas, implies that efficiency and competition are likely to be compromised. Second, the cost benefit analyses underlying the program evaluated investments at inflated domestic prices, rather than world prices, thus ignoring a critical element of competitiveness and efficiency. Third, the Government is vulnerable to various lobbying pressures (especially from People’s Committees in the provinces) and important technical and economic criteria, such as mill size, may not receive the importance they should when investments are approved and funded. Indeed, as the million ton program proceeded, in many cases People’s Committees went ahead with the development of raw material areas before preparing and submitting a detailed feasibility study, so that raw materials would be ready for the mill when its construction was completed. In instances when a proposed mill was not first approved by MARD, especially in the late 90s when over capacity was becoming apparent, provinces exerted considerable political pressures to proceed, even knowing that such mills might be not be viable. The construction of small mills also seems to have been encouraged by decentralization of investment approval for smaller projects to ministries and Annexes provinces. To quickly get a project started, many provinces opted for a smaller project, or underestimated capital requirements to ensure they secured some of the new industrial activity backed by the Government program. Once started these projects were difficult to stop despite their sub–optimal size. This helps explain why so many small mills were built and why eventual capital expenditure for a mill was typically much higher than first planned. Box A5.1: The One Million Ton Sugar Program Implementation of the One Millon Ton Sugar Program began in 1995, following a study by the then Ministry of Agriculture and Food Production. Since then thirty-two new sugar mills have been built, bringing the total number of mills to 44. Sugarcane crushing capacity has expanded from around 10,000 tonnes a day to 78,000. The area sown to sugarcane has expanded from around 150,000 hectares to 350,000. At the same time the production of handicraft sugar has continued to absorb cane from around 100 000 hectares. Total sugarcane production has increased from around 10 million tonnes for the 1994–95 season to 17.8 million tonnes in 1999–2000. Sugar production has increased from around 100,000 tonnes to its high in 1999–2000 of around 750,000, while handicraft sugar has been maintained its output of about 250,000 tonnes. Sugar cane growing now provides employment for around one million people, and some 17,000 are employed in the milling sector. Over US$750 million has been spent on milling capacity and more (perhaps as much as US$350 million) has been spent on infrastructure and capital in sugar growing regions. Some $470 million of the investment came from external sources, including foreign direct investment and foreign borrowing. Of the 44 mills, 15 are run by centrally owned SOEs, 23 by provincial SOEs, 3 are owned by joint ventures with foreign investors and 3 are fully foreign owned. The six foreign invested mills are relatively large, crushing over 350,000 tonnes per year, while nine of the domestically owned mills are of medium size, crushing between 150,000 and 350,000 tonnes per year. The rest are small. The several thousand handicraft mills crush between 3 000 and 10 000 tonnes per year. Vietnam appears to have the natural resources required to grow cane reasonably efficiently. It has adequate relatively flat land, rainfall is generally good (1400 mm to 2000 mm a year), temperatures are reasonable, sunshine levels are adequate in the South but limit potential cane yields in the North, and supplementary irrigation is available in some areas. However, the industry has performed poorly, despite being protected from imports by bans and quantitative restrictions. In the five years to 1999, domestic prices averaged 56 percent over import parity prices. But in 2000, market saturation and smuggling reduced prices to around import parity. At this price, no mills cover all their capital costs, while all small mills can only cover at best 60 to 75 percent of cash costs. The government has responded to the financial difficulty of the mills with a range of measures, including: provision of free working capital (amounting to some $15 million in 1999-2000, and an estimated $30 million in 2000-01); Government guaranteed interest free loans to finance stockholding of 100 000 tonnes of sugar in 2000-01; reductions in VAT payable — by 50 percent in 2000, and by an amount equal to each mills losses in 1999; and directed lending into arrears by commercial banks. In all, subsidies to the mills (accruing mainly to the small mills), in terms of direct subsidies and unpaid interest, amount to around $82 million in 2000. Source: CIE 2001. 4. One of the problems has been that investment appraisal has not taken into account the effect that protection against imports has in driving a wedge between what may be financially profitable, and what generates returns to the nation as a whole. Projects appear 101 Vietnam Development Report 2002 to have been evaluated on the expectation that protection would be used to guarantee market share to local producers, regardless of their competitiveness. 5. The steel sector provides an example of this, where investment choices were based on an expectation of continued high levels of protection, in the context of an objective of increasing capacity to achieve a production target of 2 million tons by 2000. While domestic prices were high (relative to world prices), existing plants using outdated technology were supported and new investments in this old technology were encouraged. In 1998, 8 new plants using this technology were brought online despite the fact that they were unlikely to survive even domestic competition due to their low quality and high costs. This new capacity was not needed and protection for these enterprises from domestic competition imposed further costs by limiting ability of firms to capture a greater market share. 6. Similar problems have been encountered in the cement sector, where over- optimistic plan projections of demand coupled with import management and pricing controls that often destabilized and distorted domestic prices have led to sub-optimal investment decisions. Attempts to protect some existing producers from domestic competition have also delayed new investments that would have allowed achievement of economies of scale by other local enterprises. Annexes ANNEX 5.2 - THE PUBLIC INVESTMENT PROGRAMMING PROCESS 7. The level and structure of public investment in Vietnam emerges from a comprehensive and inter-related process of formulating national, sectoral, regional and provincial strategies and plans. The resulting documents lay out guidelines and targets for the overall socio-economic development of the country. Reflecting a complex process of consensus building, these documents are designed to influence decision-making by all actors in the economy. 8. Overall guidance to investment programming is provided by a long-term socio- economic strategy prepared each decade, which sets out broad development objectives and goals, and policy directions for achieving them (chart A5.1). (Last year’s Vietnam Development Report presented an assessment of the strategy for 2001-10 that was recently approved by the Ninth Congress of the Communist Party of Vietnam.). The resulting document is developed in parallel with a set of sectoral provincial and regional master plans and strategies that are informed by the overall framework and directions that it lays down. The strategy provides a context for formulation of a five-year plan, which sets out macroeconomic, sectoral and social development goals, as well as desired production and service delivery targets to be aimed for over the period. It also nominates projects that may be implemented over the plan period, as well as investment funding goals. 9. An innovation introduced during the preparation of the 1996-2000 plan was a Public Investment Program document, which specified expected uses of three main sources of funding of investment by state agencies (central and local ministries and departments and SOEs). The sources of funding are: budgetary resources, including ODA, to be allocated on a non-reimbursable basis state credits, including on-lent ODA, which are provided on concessionary terms own resources of SOEs, including retained profit and depreciation, unused land and housing mobilized to develop enterprise business, capital contributed to joint ventures or business cooperation with international and local partners. 103 Vietnam Development Report 2002 Box A5.2: The 1996-2000 Public Investment Program The 1996-2000 PIP was the first of its kind in Vietnam. It was produced as a product of the processes involved in developing the five-year plan, and was based on the development objectives approved by the eighth Party Congress. The PIP document discussed the projected level and sectoral allocation of total investment over the period, and laid out the expected level and distribution of PIP resources. As the table shows, a significant proportion of planned PIP investment was primarily in commercial activities in industry, and general agriculture. A big emphasis was placed on large-scale capital intensive projects in cement, steel, chemicals, and fertilizer production. However, the bulk of financing for these investments was to be from state credit and SOE own resources, rather than the state budget. A predominant share of the planned use of budgetary resources was in transport and irrigation. The public expenditure review completed in 2000 characterised the achievements of 1996-2000 PIP as follows: It provided a broad overview of the government’s medium–term intentions regarding public investment, particularly in large projects It provided a basis for international dialogue on important aspects of Vietnam’s development strategy It began to develop a logical approach to public sector investment programming: – by setting overall investment targets in relation to likely resource availability; – by making a broad estimate of the capital requirements to achieve growth targets; and – at least in principle, by relating investment projects to sectoral strategies. It clarified the appropriate use of different modes of state funding: non-reimbursable funding (sate investment), reimbursable state credits and SOE own resources. Planned sectoral allocation of 1996-2000 PIP Sector share of PIP resources Share of sector PIP State State SOE State State SOE Total investment credit resources investment credit resources % % % % % % % Agriculture, forestry and fishery 25.2 21.1 27.3 27.3 35.5 34.8 29.7 Industry, construction 28.0 2.0 35.1 58.0 2.8 40.4 56.8 Transport and communication 20.0 34.0 13.0 7.6 68.7 20.9 10.4 Telecommunication 5.8 0.9 14.8 2.4 6.5 82.0 11.5 Health 2.7 6.7 0.0 0.0 100.0 0.0 0.0 Education and training 3.1 7.5 0.0 0.0 100.0 0.0 0.0 Culture and sport 2.0 5.0 0.0 0.0 100.0 0.0 0.0 Urban infrastructure, water supply 6.1 11.1 5.2 0.0 72.8 27.2 0.0 Science, technology and the environment 1.2 3.0 0.0 0.0 100.0 0.0 0.0 Other sectors 5.9 7.7 4.6 4.6 53.6 25.0 21.4 Total 100.0 100.0 100.0 100.0 40.5 32.1 27.4 10. The PIP document set out the projected level of each of these sources, in the context of a broader macroeconomic framework derived from the five-year plan, and presented an indicative allocation of this funding across sectors (box A5.2). The Annexes document also listed some of the major projects that were expected to receive PIP funding. Most larger central and provincial projects were included, but the list did not specify all of the projects that might receive funding. 11. Neither the five-year plan nor the PIP serves as a screening device to accept or reject projects, nor do they allocate resources. 12. The approval function is carried out on a project by project basis, by the Prime Minister, Ministries, Provincial People’s committees and other authorized agencies and officials. Approvals are guided (but not necessarily constrained) by the five year plan (box A5.3). Large projects, and projects with national security, strategic or safety implications remain subject to Prime Ministerial approval, under a process organized by the Ministry of Planning and Investment. Certain projects of national importance must be approved by the National Assembly. The nature of the approval process depends on the source of financing of the proposed investment. For investments using PIP resources or borrowing guaranteed by the state, extensive appraisal in terms of consistency with relevant sectoral plans, technical and financial specifications and investment efficiency is required. For investments using non-guaranteed credit, the appraisal is the responsibility of the lending organizations. And for investments using other resources, approval is limited to business registration and construction licensing arrangements. 13. The allocation of resources occurs in the context of the formulation of annual plans, which guide allocation of the capital budget and of state credits delivered through the Development Support Fund (DSF) (box A5.4). Every year, the government prepares a national investment plan that sets out the state’s investment intentions. This plan sets targets for aggregate investments, broken down by sectors and regions. It also contains expenditure and financing details of central and provincial projects. 14. The Ministry of Planning and Investment, in consultation with the Ministry of Finance assesses aggregate demand and supply for budgetary and state credit resources and determine the annual envelope for the capital budget and for state credit. These resources are then allocated to ministries, provinces and enterprises through the avenue of the capital budget and the lending operations of the DSF, which is now the channel for state credit (see box A5.4). 15. While the budgetary resource envelopes for sectoral ministries take some account of the basis of the accumulated requirements of individual projects, and their consistency with national plans and objectives, historical allocations and the total availability of resources tend to play a strong role in allocation of their capital budget. For provinces, allocations tend to be determined according to criteria based on the level of development of each province, the number of centrally managed projects being implemented in the province, and counterpart funding required for ODA projects. To safeguard against having too many projects and spreading resources too thinly, there is a requirement that the smallest projects (Category C projects) of provinces be completed within two years, and that 70 percent of each medium size project (from Category B) be completed within two years. 105 Vietnam Development Report 2002 Box A5.3: The Investment Approval Process All public, and most private, investment projects require government approval. (For private projects, the purpose is to ensure consistency with the government’s sectoral policies and development plans, and also as a means of investment incentive to determine and privilege eligibility). Projects are approved at the level of government where they originate, unless they need funding from a higher level or are above certain size thresholds. Decree 52/1999/ND-CP of July 8, 1999, as amended by Decree 12/2000 of May 5 2000, specifies which persons and agencies have authority to approve and allocate funding to projects. Category A projects must be approved by the Prime Minister, while authority to approve projects falling into categories B and C has been delegated to Ministries and Chairmen of People’s Committees. (Managing Boards of State Corporations may also approve investments in category C projects: for Corporations created with approval of the Prime Minister, the Boards may also approve category B projects. Authority to approve Category C projects has also been granted to Commanders in the Military and officials of comparable rank in the Department of Defence.) Category A includes all larger projects (with thresholds ranging from VND 200 billion (around $13 million) for social projects to VND 600 billion (around $40 million) for industrial and infrastructure projects), and projects with strategic or safety implications. Category C covers projects below limits ranging from VND 7 billion to 30 billion (around $0.5 to 2 million), depending on the sector concerned. Category B covers all other projects. Projects in category A face more stringent appraisal processes than other projects — generally requiring approval of both pre-feasibility and feasibility reports. Category B projects generally only require approval at the feasibility stage, as must larger category C projects. Category C projects of less than VND 1 billion where there is a pre-approved model design only require an investment report. 16. The capital budget is developed independently of the recurrent budget, in a top- down process managed by the Ministry of Planning and Investment and guided by resource estimates provided by the Ministry of Finance. While the resource envelopes for sector ministries are determined taking into account the basis of accumulated requirements of individual projects, they are also strongly influenced by historical allocations and the total availability of resources. Provincial allocations tend to be determined according to criteria linked to characteristics of each province, the number of centrally managed projects being implemented in the province, and counterpart funding required for ODA projects. Ministries and provinces then determine the allocation across approved projects according to their own prioritization. 17. The Development Support Fund allocates resources mobilized from a range of sources, including the Social Insurance Fund, the Post Office Savings system, ODA on- lending, government bonds and foreign loans. The annual state credit plan presents targets for resource mobilization from different sources, and allocations across project lending, investment guarantees and post-investment interest rate support. It also specifies new category A projects to receive credits. Apart from these mandated lendings, the Fund must make its own decision on the disposition of funds across eligible projects, based on a range of commercial and policy criteria. Fund credits are in principle available to non- state enterprises as well as SOEs. Annexes Box A5.4 : The Development Support Fund The Development Support Fund was established in 2000 following promulgation of Decree 43/1999/ND–CP of 29 June 1999 on the State’s Development Investment Credits. It was established as a quasi–independent entity to manage the State credit system of subsidised loans for investment, post-investment interest rate support and investment credit guarantees. The mobilisation of resources for the Fund is specified in an annual decision of the Prime Minister on the investment credit plan. In 2001, total state credit of VND25 trillion ($1.6 billion) was to be mobilised from the Social Insurance Fund, Post Office savings, state owned commercial banks (SOCBs) other instruments mobilised by the Ministry of Finance are the SOCBs, loan repayments and ODA on-lending. The decision specifies the broad allocation of credit across the three classes of credit support as well as a broad sectoral allocation. It also nominates category A projects to receive investment credits. In principle, both private and public enterprises are eligible to access the resources of the fund, which determines the allocation of resources other than those specified by the Prime Minister, according to a range of commercial and policy criteria. Before the creation of the fund, state credits were allocated through the SOCBs and the General Department for Investment and Development in the Ministry of Finance. EVALUATION OF THE PROCESS 18. The experience over the last decade has exposed some drawbacks with this process. The Government has identified some of these difficulties in recent evaluations of the Public Investment Program initiative introduced in the 1996 -2000 plan period. They include the following. The strategic framework that guides development and selection of the public investment program (as expressed in ten-year socio-economic development strategies and five-year plans) does not provide a sufficiently clear basis for assigning priorities and for allocating resources among competing claims. Together with the limited emphasis on economic efficiency in project appraisal processes (and the absence of a clear and uniformly enforced methodology for project appraisal), this allows investments that have limited basis in Vietnam’s comparative advantage to proceed. The planning process and investment approval system in which public investment programming is embedded does not take sufficient account of resource availability, especially with regard to development of smaller projects under provincial control. Resources become thinly spread over too many projects, resulting in lengthy delays in implementation. The institutional and procedural separation of the development of sectoral strategies and the resource allocation process in the capital budget makes it difficult to ensure that priority programs are adequately funded. The decentralization of Vietnam’s fiscal and investment approval systems means that it is hard to ensure that national objectives are properly served by public investment (see box A5.5). Managing SOE investment during the transition to a market economy is an enduring challenge. The lack of central control combined with limited hard 107 Vietnam Development Report 2002 budget constraints, limited commercially based lending and lack of clarity with respect to guarantees underpinned some poor investment decisions There is an issue of balance between recurrent and capital spending in key sectors. Recurrent cost implications of projects are not taken explicitly into account in the PIP process, and there is no effective linkage between capital and recurrent budgeting processes to ensure that recurrent spending needs of new and existing projects are adequately catered for. There is little in the way of ex-post evaluation of the impact of investment projects The capacity of staff involved in project design and appraisal is still limited, especially at provincial and lower levels of government. Box A5.5: Decentralization of investment approvals While providing in principle, for better targeting on local needs (and reducing delays), the decentralization of investment approval powers to provincial authorities creates challenges for quality control and coordination. The system of vertical as well as horizontal responsibility influencing the operations of provincial departments might be expected to allow for central guidance with respect to investment decisions and allocation of resources. (For example, MPI provides direction to local Departments of Planning and Investment, and local sectoral departments take responsibility for provincial level activities in areas corresponding to national sectoral ministry responsibilities). In practice, however, provinces have a high degree of autonomy. But because there is in principle central oversight of planning and decision making, this autonomy is not matched by clear requirements for accountability and responsibility for outcomes. Because central government has been involved in guiding local investment plans and project approvals, it is easy for provincial authorities to argue for central intervention to bail out bad projects, rather than to face the consequences that a high degree of autonomy would be expected to require. Examples of negative consequences of the current decentralization include: Local capacity to identify and appraise projects is variable, and funds are often used for projects of limited productive impact. Inefficient proliferation of activities in certain sectors arises because the impact on supply of other projects is not taken into account (examples of excess capacity have arisen in cement, steel, and sugar). Projects of inappropriate scale are undertaken, as provinces may opt for a small project, or underestimate capital requirements to quickly get a project underway to secure some of the industrial activity and project financing that is backed by the Government program. 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