Vietnam to reach upper-middle-income status in 20 Years (Part I)

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Vietnam to reach upper-middle-income status in 20 Years (Part I)

Based upon a World Bank evaluation, jointly with the government of the country, Vietnam is to reach an upper-middle-income level within 20 years. As Vietnam is of emerging importance for textiles, apparels and textile machinery, we will present to you indepth aspects of its development in the first part. The second and third part to follow will allow you to evaluate the present and future aspects, detecting also new market opportunities in all sectors.  It will also entail a focus on textile relevant factors, and the aspirations of Vietnam in view to political, economic and social perspectives. When this series is completed, you will have the full picture of this upcoming country. TextileFuture has purposely not shortened the comments of the World Bank, because the entire elaborated facts will give you a true picture of what Vietnam has achieved, where it will tak from now, as well as the possible perspective of developments up to 2035

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A new report recommending steps to help lift Vietnam to upper-middle-income status in two decades suggests that Vietnam build a more competitive private sector, support smart urbanization, promote innovation, and take advantage of increasing trade opportunities to enact broad structural reforms, writes the World Bank.

Introduction

The World Bank’s Vietnam 2035 report, prepared jointly by the Government of Vietnam and the World Bank Group, lays out key reforms for themap-vietnam-8886075 lower-middle income country to grow its economy, become more equitable, and put in place modern governance over the next 20 years. Reaching the ambitious goal of upper-middle-income status would require Vietnam to grow at least 7 percent per year, raising the average income level to over USD 7000 – or USD 18000 in purchasing- power parity terms – by 2035, compared with USD 2052 – or USD 5370 in PPP Purchasing Power Parity terms – in 2014.

“In the last 30 years, Vietnam has become one of the world’s great development success stories, rising from the ranks of the poorest countries. On the strength of a nearly 7 % average growth rate and targeted government policies, tens of millions of people have lifted themselves out of extreme poverty,” said World Bank Group President Jim Yong Kim.

Kim said that the Vietnam 2035 report, with inputs from international and Vietnamese experts, reflects Vietnam’s aspirations of becoming a modern, industrialized nation within a generation.

“Improvements in productivity, environmental protection and economic innovation can help Vietnam maintain high levels of growth. It will be critically important to remove barriers that exclude marginalized groups and deliver quality public services to an aging and urbanizing middle-class,” Kim said. “The report recommends that Vietnam build modern and more transparent institutions – those steps will help the country meet its ambitious goals.”

The agreement to work on the joint report was made in Hanoi between Prime Minister Nguyễn Tấn Dũng and Kim in July 2014. The report was produced by a joint team from the Ministry of Planning and Investment, the World Bank Group, and external experts from Vietnam.

“Our country is at a turning point of reform and development. We face significant opportunities, but also big challenges. To reach our goal of a becoming a prosperous, creative, equal and democratic Vietnam, our only choice is to implement the reforms recommended by the Vietnam 2035 report. Without these reforms it will be hard for us to avoid falling into the middle income trap and lagging behind,” said Minister of Planning and Investment Bui Quang Vinh. “We see these reforms as a continuation of the historic Doi Moi reform process, and we believe current and future generations of Vietnamese people have the will, determination, courage, and capacity to successfully implement these changes.”

The report focuses on three areas: improving productivity and private-sector competitiveness; promoting equity and social inclusion; and improving public sector effectiveness.

Improving Productivity and Private-Sector Competitiveness

The report recommends Vietnam to take steps to strengthen the economy and financial sector, with a focus on more effective regulation, protection of property rights and enforcement of competition policies. It suggests that Vietnam consider new policies and investments supporting the growth of industries linked to global supply chains, along with smarter use of major international trade agreements like the Trans- Pacific Partnership. Improvements to the agriculture sector – which employs nearly half the nation’s workforce – as well as stronger environmental protections and better planning for clean energy generation are also recommended.

Promoting Equity and Social Inclusion

The report says that Vietnam can continue fostering social inclusion and equality by providing greater access to opportunities for minorities, people with disabilities and women, and providing services to an aging, urbanizing and middle-class society. Though Vietnam has made impressive progress on the inclusion agenda, ethnic minorities comprise half of the country’s poor despite being only 15 percent of its population.

Bolstering the state’s effectiveness

vietnam_hue_07The report recommends governance improvements to help boost accountability and transparency, and ensure Vietnam has strong institutions to keep pace with the country’s rapid development. The report suggests adopting a more unified government structure that more clearly defines the economic functions of the state, reduces its role in direct production, clarifies boundaries between the private and public sphere, and employs and promotes staff based on merit. Another recommendation calls for Vietnam to strengthen state accountability by ensuring checks and balances between the three branches of government and creating opportunities for citizen feedback on public service delivery.

The basics

The year 2015 marks 70 years since Vietnam’s Declaration of Independence, 40 years since Reunification, and just short of 30 years from the launch of Đổi Mới, which catapulted the nation from the ranks of the world’s poorest to one of its great development success stories. Critical ingredients of success have been visionary leaders, a sense of shared societal purpose, and a focus on the future. Starting in the late 1980s, these elements were fused with the embrace of markets and the global economy, setting the nation on the path to becoming the middle-income country that it is today. Its spectacular growth since then, one of the fastest in the world, has all but eliminated extreme deprivation and lifted tens of millions of people out of poverty.

Looking forward to 2035, which will mark 60 years since its reunification, Vietnam now aspires to modernity, industrialization, and a higher quality of life. These aspirations and the supporting policy and institutional agenda stand on three pillars: balancing economic prosperity with environ- mental sustainability, promoting equity and social inclusion, and bolstering the state’s capacity and accountability.

The rapid growth needed to achieve these aspirations will be sustained only if it stands on faster productivity growth and reflects the costs of environmental degradation. Productivity growth, in turn, will benefit from measures to enhance the competitiveness of domes- tic enterprises, scale up the benefits of urban agglomeration, and nurture a creative and innovation-led economy. Maintaining the record on equity and social inclusion will require lifting marginalized groups and delivering services to an aging and urbanizing middle-class society. To fulfil the country’s aspirations, the institutions of governance will need to become modern, transparent, and fully rooted in the rule of law.

Balancing Economic Prosperity with Environmental Sustainability

The goal posts for Vietnam’s future economic success are set broadly and aspirationally. The 2013 constitution sets the objective of a “prosperousVietnam-Constitution-excerptpeople and strong country,” marking little deviation from its 1992 version. Party and government documents couch the income objectives in similarly aspirational terms, with an annual GDP per capita growth target of 7 % (equal to around 8 %annual growth). Growth rates in this range would produce by 2035 an upper-middle- income country on the cusp of high income, at the level of Malaysia or the Republic of Korea in the mid-2000s. This target is extremely ambitious, far surpassing Vietnam’s past growth and with few global precedents.

The Vietnamese qualities of thrift, discipline, and hard work will have to be deployed in full measure for the country to stay close to its aspirations. The national savings rate needs to re- main high while the investment rate rises slightly. Discipline and hard work can help counter the projected rapid aging of the population. However, more is needed. Productivity and innovation will eventually have to become the main drivers of growth. That will re-quire policies to tackle the stagnation in productivity and long-term investments, especially in urban infrastructure and innovation capabilities.

What explains the stagnation in productivity?

Vietnam Modernising infrastructurePublic investment is not as efficient as it needs to be because of uncoordinated and often incoherent investment decisions of a fragmented state structure. There also is little doubt that most state-owned enter- prises (SOEs) are inefficient producers. Thus, widespread inefficiencies in state in- vestment perpetuate the weak productivity trends across the economy. However, they do not fully explain the decline in productivity growth, reasons for which are especially worrisome. A steady erosion in the productivity growth of the domestic private sector leaves it just as inefficient as the state sector for two reasons.

First, the institutional foundations for an advanced market economy are insufficiently developed, undermining private-property rights and competition in product markets. Second, factor markets are governed by an unclear mix of allocation by markets and by fiat. Commercialized state institutions—whereby the state is directly involved in economic activity through SOEs and indirectly through the influence of vested interests have ensured that land and capital allocations are guided as much by arbitrary administrative decisions as by efficient market signals.

Productivity is also hurt by mal-functioning land markets, and in at least two other ways. First, the urbanization of land is outpacing the urbanization of people, reducing urban population density and suppressing productivity gains from urban agglomeration. Second, obstacles to consolidation of small landholdings in agriculture are depressing small-landholder profits and sector productivity.

The sustainability of Vietnam’s long- term growth is further threatened by environmental stresses. Growth in the past 25 years has imposed significant environmental costs. Rapid depletion of natural resources is a particular concern. Environmental pollution from urban and industrial wastewater leaves waterways toxic, while urban water and air pollution are beginning to pose serious health hazards, especially near Hanoi and Ho Chi Minh City, and particularly for children.  Vietnam is also one of the countries most vulnerable to climate change, with settlements and economic activity in the Mekong Delta at especially heightened risk. Exacerbating the risks is rapidly growing energy consumption, increasingly reliant on coal-powered electricity generation. In recent years Vietnam’s increase in greenhouse gas emissions has been one of the world’s fastest.

The reform agenda to unleash strong and sustainable economic growth will have four essential elements:

1.Create an enabling environment for domestic enterprises: The immediate emphasis needs to be on ensuring more competitive and productive domestic enterprises. Restructuring and equitizing SOEs will remain important, but will not be enough fixing the nascent and weak domestic private sector commands even greater policy attention. This will involve strengthening the institutional foundations of the market economy, with emphasis on protecting property rights and enforcing competition policies. A stable, well regulated, and inclusive financial sector and transparent and functioning land markets will also be crucial. A more capable and confident domestic private sector will deepen linkages with foreign firms, enabling the transfer of technology and knowhow that are critical for higher productivity growth. More rewarding participation in global value chains will also come from a stronger services sector and more extensive transport and network connectivity across the country and with trading partners.  Finally, a more market driven, and commercial approach will be necessary to modernize agriculture. Commitments under major international trade agreements (the Trans-Pacific Partnership in particular) offer a real opportunity to carry out many demanding and politically sensitive reforms.

2. Spur learning and innovation: Sustaining high growth over an ex- tended period will depend on an aggressive agenda to spur learning and innovation. Neither enterprises nor knowledge and research institutions are currently motivated to focus adequately on this agenda. A national innovation system can improve the situation. On the demand side, it will encourage firms to seek out the best available knowledge and strengthen the technical and financial support to facilitate their learning. On the supply side, such    a system will help build the skills of the workforce beyond its cur- rent proficiency in basic education, while raising the quality and relevance of research and advanced training in universities and government research institutes.

3. Reshape urban policies and investments: For Vietnam to succeed in its growth and economic modernization ambitions, its cities need to do vietnam_hochiminh_14more to nurture private enterprise and innovation, support the growth of industrial clusters integrated with global value chains, and attract and agglomerate talent. Playing this role credibly will involve reshaping policies and investments to amplify economic density in and around    large metropolitan areas such as Ho Chi Minh City, Hanoi, Hai Phong, and Da Nang, as well as a network of dynamic secondary cities; reduce the distance to markets to enable specialization; and equalize access to services between migrants and urban residents. Fulfilling this agenda will require functioning land markets, coordinated urban planning, and improved connective infrastructure.

4. Sustain the environment: There are three core elements of the reform agenda to sustain the environment: protect the quality of natural resources (air, land, and water); build climate resilience into economic planning, sectoral policies, and infrastructure investments; and find ways to tap more clean energy sources, including through regional power trade. Such a sustainable, inclusive, and resilient growth path calls for strong policies and institutions to coordinate actions and in- vestments, smart investments (with private participation) that internalize environmental and climate costs, and more accessible data and in- formation for decision making and monitoring progress.

Promoting Equity and Social Inclusion

Vietnam’s emphasis on equity and social inclusion has always been strong. It is one of the few countries to achieve high growth with equity. Its record rests on a foundation established by equitable land distribution in the late 1980s, effective delivery of basic services such as health and education, and public-policy  choices that equalized fiscal transfers across provinces with different levels of development. Vietnam wants to maintain that record. Its central socioeconomic philosophy—a market economy with socialist orientation—captures the balance in its preferences for equity and market-led growth.

Past performance and societal preferences notwithstanding, sustaining the positive equity trends is not something that Vietnam can take for granted, especially as the forces of urbanization, globalization, and the rising skill intensity of production take firmer root. Looking toward 2035, Vietnam needs to pursue a dual agenda for equity and social inclusion.

The unfinished inclusion agenda is ensuring equality of opportunity. While Vietnam has taken long strides in lifting living standards since Đổi Mới is the name given to the economic reforms initiated in Vietnam in 1986, with the goal of creating a “socialist-oriented market economy), significant groups remain marginalized, and the gaps in opportunity for children are wide between poor and wealthy households. An ethnic minority child is four times more likely, rather than a Kinh (an Asian ethnic group originating from present-day northern Vietnam) child to die before her first birth- day. More than half the children with severe disabilities never attend school.

Such exclusion stands in stark contrast to the fortunes of those at the top: Over the last decade, the number of millionaires in Vietnam has tripled while malnutrition rates among ethnic minority children have hardly budged. Rectifying such inequities will require renewed efforts. Four elements of the equality of opportunity agenda for 2035 are key:

  1.  Reduce the barriers to opportunity for ethnic minorities Targeted initiatives in education, nutrition, and sanitation can close the large gap in opportunities for ethnic minority children. An approach of experimentation and evaluation, building on new insights from behavioural economics, could develop effective interventions in these areas. Policy actions would also become more effective through greater voice for ethnic minorities. Make people with disabilities full participants in society. Vietnam has made strong commitments to the inclusion of peopledich-vu-lam-ho-khau-ha-noi-gia-re-2015 with disabilities but lags severely in implementation. Following the example of other countries, it can realize these promises by regularly monitoring commitments and by creating opportunities for people with disabilities and their families to be their own advocates through social organizations.
  2. Delink the household registration system from access to public services: At least 5 million Vietnamese lack permanent registration in their place of residence and thus have limited access to public services, including schooling, health care, and such administrative services as registering a vehicle and applying for a birth certificate. While the force of the system has waned, it remains a source of inequality of opportunity and an effective tax on migration. Phased reform of the hộ khẩu (nominally a household and residence registration) system would place all citizens on an equal footing.
  3. Reduce gender gaps: More opportunities for women in public leader- ship roles could be created by eliminating gender discrimination in the retirement age and using affirmative action as a short-term measure. Also critical is reducing the imbalance in the sex ratio at birth, now one of the world’s highest, with 114 boys born for every 100 girls. The preference for sons would be reduced through expanding the pension system, re- forming the population policy, and campaigning to highlight the value of daughters.
  4. Two social megatrends will shape the emerging inclusion agenda un- folding in Vietnam: The first is the rise of the middle class, which will be increasingly urban and employed in the formal sector. By 2035 more than half of the Vietnamese people will be part of the global middle class (up from just over 10 % today), with needs distinct from those of the mass of rural poor that characterized Vietnam in the past. The second is an extreme demographic shift, with the size of the elderly population climbing dramatically, making Vietnam one of the most rapidly  aging  countries in the world—and the working-age share of the population shrinking. Around 2035 the old-age dependency ratio—the number of people 65 years of age or older for every 100 people aged 15– 64—will have risen to al- most 22 (from under 10 today), while the working-age population will begin to decline in absolute terms. Four elements of the middle-class and aging population agenda are key:

Expand the pension system to cover a majority of the population: Given the challenges rapid aging, expanding coverage to those in the in- formal sector will be possible only through a diversified system and a major reform to make it financially sustainable, including raising the retirement age.

Ensure that nearly all children complete upper-secondary school with job-relevant skills. One policy priority will be ending the exam-based al- location of upper-secondary-school places and replacing it with universal secondary-school attendance. Another is to continuously improve the quality and relevance of what students learn, to help them develop the non-cognitive and complex problem-solving skills they need for a competitive labour market.

vietnam_rice_25Establish effective representation of workers through independent unions: Vietnam needs to move to- ward an industrial relations system suited to a mature market economy, where the interests of workers, employers, and the state are more properly represented in a true bargaining process, following the recent commitments in a Trans-Pacific Partnership side agreement. In addition, labour market regulations could better balance the protection of workers with the flexibility to promote a vibrant formal sector.

Achieve universal health coverage with a rebalanced delivery system: Ensuring access to good quality health services without imposing financial hardship will entail both reforming the insurance regime and shifting health care from its current focus on hospitals toward high quality primary care at the centre of an integrated system.

Bolstering the State’s capacity and accountability

Political and institutional reforms need to keep pace with Vietnam’s development. Evidence from a large number of countries indicates that state effectiveness, or the capacity of government to set objectives and attain them, is closely associated with better development outcomes. State effective- ness rests on three supporting pillars: a well-organized government with a disciplined, meritocratic bureaucracy; an adherence to market rationality in economic policy making; and mechanisms to ensure checks and balances in the government and broad public participation. All three legs of the state effectiveness tripod are necessary for satisfactory results. Reforming state structures but rejecting market discipline, or assigning a larger role to the market mechanism while insulating government decision making from the community, are unlikely to generate positive outcomes.

The relationship between state effectiveness and development outcomes is evident in Vietnam. Many early achievements emerged from the country’s state capacity, which was un- usually strong for its level of income. Today, the productivity stagnation and the weak environment for private- sector development are attributable to gaps in state effectiveness. Vietnam’s unique history has produced state institutions that are commercialized and fragmented and face insufficient scrutiny by citizens.

State commercialization in Vietnam refers to the continued strong engagement of the state in economic activity directly through SOEs State Owned Enterprises, particularly through large state economic groups, and indirectly through very close links with an exclusive segment of the domestic private sector. Vietnam is not alone in having influential vested interests, but the degree to which relationships to the state are integral to economic success appears to be unusually high. State fragmentation refers to the lack of clear hierarchy and assignment of roles and responsibilities both within the central government and be- tween the centre and the provinces, and the inertia and inefficiencies this generates in formulating and implementing policy. Horizontal and vertical fragmentation of power has resulted in overlapping mandates with conflicting rules and decisions. The result is often gridlock or decisions that are suboptimal from society’s point of view. The absence of merit-based management of public servants exacerbates the adverse effects of commercialization and frag- mentation of the Vietnamese state on the quality of public administration.

Vietnam’s legal framework provides some space for citizens to participate in governance. “Government of the people, by the people, and for the people” and “People know, people discuss, people do, and people monitor” are well known affirmations in the constitution. In practice, there is a gap between these statements and the actual space available for citizens to influence decisions. Citizen participation in social organizations not sponsored by the government is growing rapidly, but this does not mean a corresponding improvement in the quality of their participation. Election processes and mechanisms for engaging citizen organizations are not robust enough to provide true citizen representation, and Vietnam lacks a system of effective checks and balances between the three branches of government. Access to information, which is key to citizens exercising their voice to hold the state accountable, is still lacking.

The result is a government that often finds it difficult to articulate coherent economic policies, that is open to extensive bargaining among state institutions and between the state and private sectors, and that is shielded from public scrutiny of policy decisions and public reaction to the consequences of economic policy.

Modernization of Vietnamese institutions will involve an overhaul of the state and its relationships to the market and society. Efforts to enhance state capacity and accountability will need to move concurrently on a three-point agenda:

1.   Develop a more rationally organized government structure with a meritocratic bureaucracy. The government needs more rational organization, and greater coherence on roles and responsibilities among state institutions. This will involve decentralization embodying clearer functional assignments for the different levels of government, with corresponding adjustments in the intergovernmental financial framework that clarify and improve accountability and overcome inefficiencies in coordination and use of public resources. The centre of government could be strengthened to improve policy coordination and oversight of execution of policies by public agencies. A clearer allocation of powers and responsibilities is needed among central bodies to have greater effectiveness and accountability. Public administration practices need to be reformed to ensure that merit drives the deployment of human resources by the state.

2.   Apply market rationality to economic policy making. State-market relations will have to be characterized by a clearer division between the public and private spheres. Specifically, government agencies involved in economic regulation should not engage in business of any kind, to avoid the appearance and reality of conflicts of interest. The state’s role in the economy needs to be transformed from a producer to an effective regulator and facilitator, focusing on providing a level playing field in the economy with enforcement of free and fair competition and more secure and transparent property rights, particularly around land issues. This will require the state to not only significantly reduce its SOE portfolio and strengthen corporate governance of the remaining SOEs but also to stop giving preferential treatment to SOEs and closely linked private companies. In addition, there needs to be an independent and more capable, trained, and meritocratic judiciary to enforce rules and provide the level playing field. Creating   the space for a genuinely independent private sector will require reduced state control over business and professional organizations, including the Vietnam Chamber of Commerce and Industry. Allowing these organizations to operate as authentic representatives of independent business interests would give voice to the domestic private sector and enable these groups to do more in monitoring government policy.

3.   Strengthen state accountability. The state can be organized in a way that provides for genuine checks and balances among the executive, legislature, and judiciary. The National Assembly could be transformed into a professional body (consisting of full-time deputies and supported by expert staff), with oversight of all the state’s operations. The judiciary needs to be similarly strengthened, with emphasis on its independence from the executive and enhanced transparency in its functioning. A large and diverse set of citizen organizations could be allowed to participate in decision making and hold the state accountable. The state could provide a legal framework to promote the right of citizens to associate. It could also adopt legislation requiring public bodies to be trans- parent and provide mechanisms for citizens to interact effectively with the state by enhancing citizen access to accurate and timely information and by providing greater media independence.

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