91610 IDA at Work Vietnam: Laying the Foundation for Sustainable, Inclusive Growth V ietnam is one of the fastest-growing economies in the world. It is going through a far-reaching transformation from an inward- looking planned economy to one that is globalized and market- based. It has the potential to be one of the great success stories in development Most Recent Country Indicators 1993 2007 Est. GNI per capita (Atlas Method, US$) 170 790 1,010 (2009) Inflation (CPI, annual rate, %) 8.4 12.7 6.5 (2009) External debt (% of GNI) 191 34.3 36.4 (2009) Poverty incidence (% of population with 58 15.9 (2006) 14.5 (2008) consumption below basic needs level) Net primary school enrollment rate (%) 77 (1990) 97 (2006) 98 (2008) Under-five child mortality rate (per 1,000 53 (1990) 25.9 25.5 (2008) live births) Maternal mortality rate (per 100,000 live 200 (1990) 75 75 (2008) births) Population (millions) 70.3 85.2 86.0 (2009) Population growth rate (% per year) 2.0 1.09 1.06 (2009) Source: Vietnam, General Statistics Office and Ministry of Health; World Bank, Develop- ment Data Group. Real income has grown 7.3 percent per year over the last 10 years. When the World Bank reengaged with Vietnam in 1993, income per capita was US$170. In 2008, gross domestic product (GDP) per capita crossed the US$1,000 mark. The poverty rate has fallen from 58 percent in 1993 to 14.5 percent in 2008. Vietnam can reach most of the Millennium Development Goals. Vietnam is a major recipient of resources from An institutional overhaul the International Development Association, although it is not an aid-dependent country. Vietnam’s development strategy involves The World Bank co-chairs with the govern- comprehensive reforms across all policy ment the Consultative Group Forum that over areas, so as to ensure business development, the years has helped mobilize aid in support preserve social inclusion, manage natural of Vietnam’s development and has supported resources and strengthen governance. How- dialogue between Vietnam and Development ever, reforms have not progressed at the Partners on various issues. same pace across all areas. Country Achievements Much has been accomplished in relation to public financial management. Increased Vietnam’s development achievements decentralization, improved transparency, have been remarkable. a growing role of the National Assembly in deciding appropriations and strengthened By the mid-1980s, ravaged by war and a fail- auditing mechanisms are all part of this ing command economy, the country faced process. The gap between budget plans and famine. The government launched a renova- budget execution remains large, however, tion process (Doi Moi) in 1986, with the goal and the management of public investment of adopting market mechanisms wherever projects needs to be strengthened. possible while preserving social inclusion. The introduction of common regulations and An egalitarian redistribution of farmland, models of corporate governance for all enter- coupled with freer trade in agricultural prod- prises, regardless of their ownership, has ucts and better agricultural support services at contributed to a move towards a more level the local level, led to a boom in farm exports playing field. Private participation has been and a dramatic reduction in rural poverty. allowed in most sectors and in state-owned enterprises. State ownership in enterprises Foreign investment grew as the domestic is now being transferred out of ministries entrepreneurial spirit was unleashed. Urban and provinces, so that those in charge of residents moved into paid employment, help- issuing or enforcing regulations do not face ing to reduce the number of rural poor even a conflict of interest. Less progress has been more. accomplished in relation to large state-owned economic groups. Vietnam’s economy expanded rapidly. It avoided the economic collapse that other Progress has been most decisive in relation transition economies went through in the to global integration. Accession to the World early 1990s. It also managed to sustain posi- Trade Organization (WTO) in January 2007 tive growth rates during the East Asian crisis resulted in lower barriers to trade. Most of the late 1990s and the more recent global importantly, it opened service sectors to financial crisis. In spite of the slowdown competition and is resulting in a thorough associated with the latter, Vietnam has now revamping of the legal system. entered the group of lower middle-income countries. 2 Important measures have also been taken to from 3,786 to 1,546 over the past nine years, fight corruption. Vietnam is a country where although not across all sectors. Starting with bribes and unofficial payments put a burden smaller enterprises and insider privatization, on households, even if they tend to be modest the process is now reaching large general by enterprise standards. An effort is underway corporations and state-owned commercial to simplify administrative procedures and banks. Remaining ownership rights by the reduce red tape. Government systems are state are being transferred out of ministries being strengthened in the most vulnerable and provinces to avoid a conflict of interest agencies, including construction, customs, between management and regulation. tax administration and land administration. Senior civil servants are now required to As the private sector expands rapidly, both declare their assets regularly. domestic and foreign-invested firms have con- nected solidly with global markets. Private On the other hand, progress has been slower in firms now contribute nearly 80 percent of financial sector reform. While the stock mar- manufactured products and over 70 percent ket and the insurance sector have developed of non-oil exports. Vietnam is more and more considerably, Vietnam is still in the process an integral part of international production of establishing a modern central bank and and distribution chains. upgrading its capacity to supervise commer- cial banks and monitor international capital Ida’s Contributions flows. The International Development Association Private sector-led growth (IDA), the World Bank’s fund for the world’s poorest countries, has helped Vietnam fight The transition to a competitive market poverty through finance for agriculture, economy is well under way, driving Vietnam’s infrastructure, health programs, and schools, growth and increasing its resilience. among other things. The country has received US$10.9 billion in interest-free credits, grants, Formal private enterprises, whose activities and guarantees from IDA, the second largest were negligible in 1993, now account for provider of aid to Vietnam after Japan. two-thirds of the investments made each year. When faced with increased domestic Still, Vietnam is not aid-dependent. Foreign and international competition and a harder assistance disbursements represented only budget constraint, state-owned enterprises about 17 percent of total public spending have done reasonably well. or 10 percent of total public spending annu- ally during the period from 2004 to 2008. The equitization1 process cut the number of Donors focus their efforts on policy dialogue, state-owned enterprises by more than half, research, and investments in key develop- ment areas. 1. Vietnamese English term that denotes the conversion of a state-owned enterprise in Vietnam into a public limited com- pany or a corporation 3 The Bank’s partnership with pation of 20 donors2 and co-financing by 13 of Vietnam since 1993 has contributed them. These credits have supported reforms to achieving notable results. across 17 policy areas, including trade inte- gration; financial and state owned enterprise Supporting policy reforms reform; infrastructure; social sector issues (health, education, social protection); natu- Policy dialogue arguably has had the biggest ral resource management; and governance. impact of all donor contributions as it under- Specific actions in each area were sequenced pins the reforms, which are transforming the carefully to match implementation capacity entire economic system. and exploit synergies across sectors. Some work has directly affected the govern- Building local capacity ment’s programs and policies. For example, community-driven development programs According to the World Bank’s 2010 Country funded by the World Bank, with a strong Survey, knowledge, capacity-building, and emphasis in participation, resulted in a rede- technical advice are among IDA’s greatest sign of the national target program for the contributions. most disadvantaged communes, which oper- ate mainly in ethnic minority areas. 2. The 20 donors are: Asian Development Bank, Australia, Belgium, Canada, Denmark, the European Commission, Fin- land, France, Germany, Ireland, Japan, Luxemburg, the Neth- Nine poverty reduction support credits have erlands, New Zealand, Norway, Spain, Sweden, Switzerland, now been completed with the active partici- the United Kingdom, and UNDP. Some of the benefits of reforms supported by IDA credits include: • The decision to bring strategic investors into all state-owned commercial banks. • School quality standards that have improved the quality of teaching. • Land user certificates that list the names of both husbands and wives, thereby allowing women to us the certificates as collateral for bank credits. • A state budget plan disclosed to the public for the first time in 2005. • A State Audit reporting directly to the National Assembly and effectively auditing a growing number of state- funded entities. • A Unified Enterprises Law introducing the same set of corporate governance models for all enterprises, regardless of ownership. • Regulation issued in 2008 on charter for first “new model” university with academic, managerial and financial autonomy. • Legal and regulatory reforms that facilitate the move of urban water supply and sanitation companies to operate on a financially sustainable commercial basis. • A pricing and standard contract system to grow the use of grid-connected renewable energy. • The introduction of a market-based mechanism for electricity tariffs in 2009 started the transition to cost reflective pricing with a lifeline rate to protect the poor, ensure transparency and non-discrimination to all investors, and promote supply-side efficiency. • Modernization of the payments system, which has made banking transactions more, secure and timely, and at a lower cost. 4 This has included helping to build the govern- local communities rather than managed from ment’s capacity to undertake research for its Hanoi. Energy projects have opened the door own purposes. For example, while the Bank to private participation in infrastructure. A conducted Vietnam’s first poverty assess- credit to support schools in poor areas has led ment, the second was undertaken jointly to nationwide standards on school quality and with the government. Now the government is the regular auditing of schools against those doing its own, with the Bank’s advice. standards. In education, the Bank has helped build IDA’s impact is felt across sectors. capacity in setting minimum standards for primary education (for example in teacher Transport: There have been remarkable qualification), the quality of teacher training, improvements in rural access over the last textbooks, and primary teacher competency few years. In 1998, little more than half profiles. Through a series of IDA education the rural ethnic minority population of projects, including the Bank’s first develop- Vietnam lived close to an all-weather road, ment policy credit for higher education in the remainder experiencing considerable 2009, the government is expanding these isolation during wet seasons. By 2006, 91 innovations geographically and through percent of the majority Kinh population and higher levels of the education system. 80 percent of the ethnic minority population resident in rural areas were living within 2 Several investment credits aim to revamp kilometers (km) of an all-weather road. IDA business processes for more efficient use of has financed the rehabilitation of 1,000 km of public resources (e.g., in higher education Highway One—the country’s main transporta- institutions) and increased transparency tion artery—with another 350 km under way. (e.g., in agencies more vulnerable to cor- It has also provided funds to improve 600 ruption, including customs, tax and land km of another 18 national highways and to administration). perform preventive maintenance of 1,100 km of the national highway network. IDA has also Providing good-practice models helped build more than 7,000 km of district- level roads. As a result, 6-to-8 million people Investment credits and technical assistance— have better access to the transport system, for example, on river basin management or speeding up their ability to reach markets, infrastructure—have provided demonstration schools and health centers. In addition, IDA effects, influencing government approaches has financed the rehabilitation or dredging of at the technical and policy levels. 1,100 km of inland waterways in the Mekong Delta and a further 540 km is being improved IDA expertise on phasing, sequencing, and in the Red River Delta. working across sectors has strengthened the effectiveness of development aid. For Electricity: As a result of the government’s example, in the context of the broader infra- rural electrification program, about 95 per- structure development undertaken at the cent of rural households now have electric- national and provincial level, the government ity (2009) compared with just over 50 percent has embraced projects that are driven by 10 years ago. IDA helped design this overall 5 effort and has supported the implementation system through a series of investment and through several projects. The first brought policy operations. The IDA contribution to electricity to around 2.7 million people in Vietnam’s education sector stands at US$788 poor rural areas and the second now under million. Although small in terms of Vietnam’s implementation will help connect or improve spending on education (about 2 percent), it the supply for another 5.6 million. Already, makes a more significant contribution towards this has transformed thousands of rural non-salary cost of education programs and communities, enabling small businesses to development. grow and improving the services of schools and health facilities. IDA is also supporting Health: IDA is contributing to improvements substantial expansion and rehabilitation to in the quality of essential health care ser- the high and medium voltage networks to vices for more than 20 million people through support industrial development and to ensure three regional health support projects. These that consumers get electricity in sufficient projects also support the implementation of quantity and of acceptable quality for their the new health insurance law at local levels, needs. IDA is supporting wide-ranging reforms in particular targeting the poor and near to the power sector, to promote efficiency, poor. IDA supports the implementation of the and attract sufficient investment to ensure National Strategy on HIV/AIDS Prevention in supply security and quality of service for 32 provinces, as well as the development economic growth. of a National Monitoring and Evaluation Framework. IDA’s contributions have included Education: The primary education net enroll- financing of regional blood transfusion centers ment rate has increased from 81 percent in to ensure a safe blood supply to the country 1999 to 98 percent in 2008, and the primary and reinvigorated popular participation in education completion rate from 72 to 87 voluntary blood donations, support for the percent over the same period. While the national programs for malaria, tuberculosis government continues to promote equity and and acute respiratory infections; essential quality of education, especially primary edu- drugs for healthcare centers; construction cation, significant gaps remain, most notably and upgrade of 15 health and family planning between majority Kinh and minority ethnic centers, 137 obstetric and operating rooms in groups. IDA has facilitated improvements district hospitals, and 2,500 communal health in the provision of primary school services centers; and training for about 22,000 health in the poorest districts: after four years of workers in the country’s poorest provinces. implementation, the rate of schools meet- Under-five child mortality has dropped from ing minimum service standards increased at 53 per 1,000 births in 1990 to 25 in 2009, a rate nearly double the national average. while the maternal mortality rate has fallen IDA is also contributing towards reducing the from 200 per 100,000 births in 1990 to 75 in learning gaps for the disadvantaged popula- 2009. tion groups by extending full day schooling. As Vietnam’s economic development will Agriculture and rural development: be highly dependent on skills development, Nearly a million loans have been provided IDA is helping to strengthen the governance under IDA-supported rural finance projects, and relevance of Vietnam’s higher education enabling the upgrading of farm production 6 and the expansion of micro- and small rural improved flood control, access to community enterprises. Millions of poor people have services such as health centers and schools, benefited from improved basic infrastructure and access to micro credit loans for housing and social services financed by IDA in remote improvements, water and sanitation connec- areas of the central and northern highlands. tions and income generating activities. An IDA-supported program is providing land use rights certificates to both spouses in some A Virtuous Circle 1.5 million households. Over 50,000 small- holder farmers will be supported through Infrastructure services are proving to be affordable and sustainable. The expansion of services was enhanced access to markets with the provi- coordinated with budgetary and financial reforms. sion of technology services, farmer organiza- Rapid growth and economic diversification, in turn, tion, and linkages to agribusinesses. IDA is have increased demand for services while allowing also enhancing the livelihoods of hundreds service providers to increase the scale of their of thousands of rural households by support- operations and lower their costs. ing the establishment of more than 44,000 hectares of smallholder forest production and the modernization of irrigation for over Partnerships 130,000 hectares of agricultural land. An IDA-supported project demonstrated suitable Vietnam currently receives over US$5 billion models for community-based disaster risk a year from more than 30 bilateral and multi- management, leading to a national policy lateral donor institutions. The World Bank has change. been able to mobilize additional resources for Vietnam through co-financing or parallel Urban development: The urban population financing arrangements for various invest- is growing at 3.4 percent per year and is ment and development policy operations. expected to double by 2020 and reach 50 per- cent by 2030. Sustainable urban development It co-chairs consultative group meetings and will therefore remain a central opportunity the Vietnam Business Forum with the govern- and challenge in Vietnam for many years to ment, leads the policy dialogue, especially in come. IDA assistance has supported the provi- relation to poverty reduction support credit sion of integrated environmental sanitation operations, and increasingly fosters multi- services for 2.7 million people in many donor credits and initiatives. This includes cities, including financing the country’s first the public financial management moderniza- waste water treatment plants and introducing tion, education for all, International Health user fees for these services, and is continu- Partnership Plus, and forestry partnerships— ing to finance the provision of clean water all good examples of multi-donor support for and sanitation to over 4 million people in government programs.3 Vietnam has made several cities and towns, including Ho Chi Minh City, Da Nang, and Nha Trang as well as 3. The donors involved in public financial management are: Australia, Canada, Denmark, the European Commission, Neth- over a dozen smaller provinces. Projects are erlands and the UK. Education initiatives involve Australia, also under way to improve livelihoods of an Belgium, Canada, the European Commission, New Zealand, additional 3 million urban citizens by provid- Norway, Spain, Switzerland, and the United Kingdom. Forestry is supported by the Netherlands, Finland, the European Com- ing access to basic infrastructure services, mission and GEF. 7 good progress on aid harmonization, where shifts the focus from the size of the stimulus the six-bank initiative4 has been a highlighted package to the quality of its financing. example for working in partnership to enhance aid effectiveness. Some IDA development policy credits were increased in 2009 to help finance some of Challenges Ahead these measures, in particular the Eighth Pov- erty Reduction Support Operation (increased The global crisis has led to a noticeable to US$350 million equivalent and processed slowdown in Vietnam’s economic growth. using the IDA Fast-Track Facility) and the Program 135 Phase 2 Support Operation for The impact was severe in the first quarter Communes Facing Extreme Hardship in Ethnic of 2009, when GDP increased by 3.1 percent Minority and Mountainous Areas (increased to compared to the same period in 2008. This US$100 million equivalent). In 2010, the first is more than four percentage points below Power Sector Development Policy Operation potential, given that the average for first (US$200 million from the International Bank quarter growth over the last few years has for Reconstruction and Development and been 7.2 percent. However, growth bounced US$115 million from IDA) was approved. back in the second quarter, when it reached 4.5 percent. A range of indicators, from elec- Apart from the stresses caused by the global tricity consumption to retail sales, suggest economic situation, new challenges emerge that economic performance will continue to as Vietnam’s economy becomes more sophis- improve during the remainder of the year. ticated. Exports declined, but are holding relatively better than in other countries. Meanwhile, The next few years will be critical a timely stimulus package has effectively supported domestic demand and is leading to Vietnam is likely to complete its transition rapid growth in construction. to a market economy and will have laid the institutional foundations of a middle-income Sustaining economic growth during the global country. Whether those institutional founda- economic crisis will require stronger reliance tions will be strong enough to keep growth on domestic demand. sustainable and inclusive as the global econ- omy continues to reel from the ongoing crisis, The stimulus measures adopted by the gov- will depend on policy decisions made during ernment in 2009 included tax cuts and defer- the next few years. This makes it all the more rals, social transfers and additional public important for donors to sustain a high level of expenditures, especially in relation to infra- assistance in support of the country’s move to structure investments. The first phase of an middle-income country status. interest rate subsidy scheme allowed a rapid refinancing of enterprise debt contracted at Mobilizing resources for infrastructure high interest rates during the stabilization requires stronger frameworks for private phase of 2008. The success of these measures participation, including the organization of a market for electricity. 4. The six banks are WB, ADB, JBIC, KfW, AFD, and KEXIM. 8 In health, as Vietnam moves through socio- including by developing policies that more economic and demographic transition, the directly address the needs of poor people, to attention will shift beyond essential preven- complement poverty reduction policies that tive health programs towards tackling health focus on poor regions. system issues of affordable health insurance, efficiency and quality improvements of both Rapid growth and poor compliance with basic and more sophisticated health services environmental laws have created major as well as preparing to tackle increased bur- environmental problems in Vietnam, in areas den of non-communicable disease. such as water and air pollution, depletion of natural resources, and loss of biodiversity. Enhancing Vietnam’s competitiveness and Understanding is growing about what will be avoiding being caught in middle-income coun- the major and negative impacts of climate try trap will require continuous upgrading of change on people and the environment. skills and educational attainment of human There is an urgent need for more balanced capital and developing science and innova- attention to environmental issues in Vietnam. tion base for high value added industries and services. A more sophisticated economy requires bet- ter feedback mechanisms from the people on Poverty in Vietnam still has a strong regional the quality of public policies, and this means dimension. However, industrialization, inte- increased transparency and accountability. gration in the world economy, urbanization, and other economic and societal shifts will Reforms of banking and state-owned enter- bring new poverty and vulnerability risks for prises will need to focus on competition households. Vietnam will need to gradually and moving quickly towards best practice strengthen social protection systems to better standards of transparency and good gover- respond to both chronic poverty and shocks, nance; this has become more pressing with Vulnerability to Climate Change Vietnam is widely considered one of the highest priority countries in the world for urgent action on climate change, due to its vulnerability to sea level rise and extreme weather events, with the bulk of its population and economic activity in two low-lying deltas. The government understands the seriousness of these threats to the country’s future and development. A National Target Program on Adaptation to Climate Change was approved in 2008, and many sectoral plans or strategies are focused on climate change. Virtually all donors and non-governmental organizations (NGOs) in Vietnam are moving forward with efforts to counter or adapt to climate change. In this context, IDA’s role will be pivotal in mobilizing financial resources to Vietnam for both mitigation and adaptation over the next decade. A number of ideas for stand-alone projects or climate change components are being developed. These include enhanced adaptation investments in water resources management, natural disaster risk mitigation, reduction of urban vulnerability to climate change, and in management of coastal resources. On mitigation, the Bank is pursuing important agendas such as supporting the legal and regulatory framework and capacity building for energy efficiency and renewable energy, financing of new renewable energy, and introduction of time of use electricity tariffs. 9 Vietnam’s accession to the WTO and in light While several quantitative MDGs have been of the recent global financial crisis. met or are likely to be met, additional resources are critical to ensuring that there Massive urbanization and land conversion and is strong quality in these achievements. a still weak legal system will amplify oppor- tunities for corruption. Tax revenue alone will not be enough and massive borrowing in international markets Continued economic growth will depend very could raise the public debt burden beyond much on the Government’s ability to tackle prudent levels. Aid on concessionary terms these issues over the coming years. has an important role to play until Vietnam’s infrastructure catches up with that of its The need for stronger IDA support neighbors and competitors. Supporting good policy choices, especially for Resources are still needed to keep growth governance, and strengthening government inclusive. For most of the period after Doi systems are important priorities in the short Moi, reducing poverty was mainly an economic to medium term. But the cost of implement- issue. Now, poverty efforts are increasingly ing these will be high. focused on ethnic minority groups. Recapitalizing state-owned commercial banks Sustained transfers of funds are needed to and divesting and reforming large state- ensure that the living standards of these owned enterprises will lead to redundancies groups do not fall further behind those of the and require effective social safety net. Fund- majority. ing infrastructure development is another costly priority. Last updated September 2010. http://www.worldbank.org/ida 10