103435 OVERVIEW Vietnam 2035 OVERVIEW Vietnam 2035 Toward Prosperity, Creativity, Equity, and Democracy The World Bank Ministry of Planning and Investment of Vietnam This booklet contains the overview, as well as a list of contents for Vietnam 2035: Toward Prosperity, Creativity, Equity, and Democracy, doi: 10.1596/978-1-4648-0824-1. The PDF of the final, full-length book, once published, will be available at https://openknowledge.worldbank.org/ and print copies can be ordered at http://Amazon.com. Please use the final version of the book for citation, reproduction, and adaptation purposes. © 2016 International Bank for Reconstruction and Development / The World Bank and the Ministry of Planning and Investment of Vietnam 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank and the Ministry of Planning of Vietnam (MPI), with external contributions. 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Cover design: Ministry of Planning and Investment and Bill Pragluski of Critical Stages Cover photographs: The image of the Vietnamese bronze drum (Ngoc Lu) is © by Doremon 360; it is licensed under the Creative Commons license, version 3.0. The three photos at the base are © the Ministry of Planning and Investment of Vietnam, used with permission. “The State shall guarantee and promote the People’s right to mastery; to recognize, respect, protect, and guarantee human rights and citizens’ rights; and to pursue the goal of a prosper- ous people and a strong, democratic, equitable, and civilized country, in which all people enjoy an abundant, free, and happy life and are given conditions for their comprehensive development.” —Article 3 of the 2013 Constitution of the Socialist Republic of Vietnam Contents Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Preface and Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxi Overview Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 A Record of Strong and Equitable Growth, with Emerging Concerns. . . . . .  2 Opportunities and Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7 Aspirations for 2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13 Pillar 1  Economic Prosperity with Environmental Sustainability Vietnam’s Long-Term Growth in a Global Perspective. . . . . . . . . . . . . . . .  17 —­ Trends in Productivity Growth­ A Cause for Concern. . . . . . . . . . . . . . . .  19  A Reform Agenda to Reignite Productivity Growth. . . . . . . . . . . . . . . . . .  22 Pillar 2  Equity and Social Inclusion The Unfinished Agenda: Ensuring Equality of Opportunity . . . . . . . . . . . .  44 The Emerging Agenda for the Rising Middle Class and the Aging  Population . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Pillar 3  A Capable and Accountable State Why Institutional Quality Matters for Growth and Development . . . . . . .  61 How Vietnam Performs on Institutional Quality . . . . . . . . . . . . . . . . . . . .  62 Institutional Constraints to Vietnam’s Development. . . . . . . . . . . . . . . . . .  64 The Way Forward for the State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  70 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  80 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  82 VIETNAM 2035 vii Contents of the Full Report Overview Chapter 1  Review of Thirty Years of Reforms—and Aspirations for 2035 Chapter 2  Enabling Economic Modernization and Private Sector Development Chapter 3  Moving toward an innovation-led economy Chapter 4  Managing urbanization for greater economic efficiency Chapter 5  Achieving sustainable and climate-resilient growth Chapter 6  Promoting equity and social inclusion Chapter 7  Building modern institutions for an effective state VIETNAM 2035 ix Foreword After 30 years of economic reforms be a modern and industrialized nation since the launch of Đổi Mới in 1986, moving toward becoming a prosper- Vietnam has recorded significant and ous, creative, equitable, and demo- historic achievements. From a poor, cratic society. war-ravaged, centrally planned econ- Motivated by these aspirations, in omy, which was closed off from much July 2014, the Government of Vietnam of the outside world, Vietnam has be- and the World Bank Group jointly ini- come a middle-income country with tiated the Vietnam 2035 report. a dynamic market economy that is The report recognizes six key trans- deeply integrated into the global econ- formations that will help Vietnam omy. Vietnam’s economic growth has achieve its goals for 2035: (1) to en- not only been rapid, but also stable able economic modernization with a and inclusive, translating into strong competitive private sector firmly in welfare gains for the vast majority of the lead; (2) to improve the country’s the population. This is an impressive technological and innovative capac- record of success—one that the Viet- ity; (3) to reshape urban policies and namese people take justifiable pride in, investments for more dynamic cities while appreciating the support of the and urban centers; (4) to chart an en- international community. vironmentally sustainable development But 30 years of success from reforms path with increasing adaptation and raises expectations for the future. The resilience to changing climate patterns; country’s ambitions are aptly captured (5) to promote equality and inclusion in the Vietnamese constitution, which among marginalized groups for the sets the goal of “a prosperous people development of a harmonious mid- and a strong, democratic, equitable, dle-class society; and (6) to establish a and civilized country.” There is a firm modern rule of law state and a demo- aspiration that by 2035, Vietnam will cratic society. VIETNAM 2035 xi xii VIETNAM 2035 FOREWORD Vietnam 2035 structures these report, Vietnam 2035: Toward Pros- transformations and the reform agenda perity, Creativity, Equity, and Democ- around three key pillars: balancing racy. We hope that the Government economic prosperity with environmen- of Vietnam, the World Bank Group, tal sustainability; promoting equity and other development partners will and social inclusion; and enhancing continue the effective collaboration in the capacity and accountability of the incorporating the report’s relevant rec- state. ommendations in the Socio-Economic We are delighted by the close part- Development Plan 2016–20 and the nership between the experts of Viet- Socio-Economic Development Strategy nam and the World Bank Group, and 2021–30, as well as in the oversight other international scholars that has and evaluation of the implementation characterized the preparation of the process. Nguyễn Tấ n Dũng Jim Yong Kim Prime Minister President The Socialist Republic of Vietnam The World Bank Group Preface and Acknowledgments The report, Vietnam 2035: Toward Thanh Sơ n (Vice Minister of Foreign Prosperity, Creativity, Equity, and Affairs), Trươ ng Chí Trung (Vice Min- Democracy, is a joint initiative of ister of Finance), Nguyễn Toàn Thắ ng the Government of Vietnam and the (Deputy Governor), and Prof. Bùi Tất World Bank formally forged between Thắ ng (President, Development Strat- Prime Minister Nguyễn Tấ n Dũng and egy Institute). President Jim Yong Kim in July 2014. The Ministry of Planning and In- The report was written by a Viet- vestment was assigned by the Gov- namese–World Bank team under the ernment of Vietnam to coordinate the supervision and guidance of Deputy line ministries, agencies, and research Prime Minister Vũ Đức Đam; Minister institutes, and to collaborate with the of Planning and Investment Bùi Quang World Bank in the preparation of the Vinh; Axel van Trotsenburg, World report. A joint Vietnam–World Bank Bank Vice President for East Asia coordination team was established, and Pacific; Victoria Kwakwa, Coun- which was led by Dr. Cao Viết Sinh try Director for Vietnam; and Sudhir (Former Vice Minister of Planning and Shetty, World Bank Chief Economist Investment), Victoria Kwakwa (Coun- for East Asia and Pacific. Gratitude for try Director), and Sandeep Mahajan insightful advice is extended to mem- (Lead Economist). bers of the Steering Committee for the The Government of Australia, the Vietnam 2035 Report: Prof. Nguyễn Korea International Cooperation Xuân Th ắ ng (President, Vietnam Agency (KOICA), and the UK De- Academy of Social Sciences), Nguyễn partment of International Develop- Vă n Tùng (Vice Chairman of the Of- ment (DFID) provided financial sup- fice of Government), Nguyễn Ngọ c port for the report, which is gratefully Bảo (Vice Chairman, Economic Com- acknowledged. mission of the Central Committee of The report benefited from invalu- the Communist Party of Vietnam), Bùi able comments from World Bank peer VIETNAM 2035 xiii xiv VIETNAM 2035 PREFACE AND ACKNOWLEDGMENTS reviewers Ted Chu (Chief Economist), velopment that included Jonathan Mario Marcel (former Senior Direc- Aspin, Joe Caponio, and Mike Crum- tor), Martin Rama (Chief Economist), plar. Production and publication of and Ana Revenga (Senior Director), as the English version was managed by well as reviewers who provided com- Susan Graham and Patricia Kata- ments on the concept note and decision yama of the World Bank’s Publishing draft. We extend special thanks for the and Knowledge Division, External insights and recommendations on the Communications. overview and chapters of the report The Vietnam 2035 report has seven from an advisory panel that comprised chapters and an Overview written by David Dollar (Brookings Institution), individual chapter teams, whose mem- Ravi Kanbur (Cornell University), bers are listed below in alphabetical Homi Kharas (Brookings Institu- order of their surnames. tion), Prof. Danny Leipziger (Growth Dialogue and George Washington Overview University), Vikram Nehru (Carnegie Endowment for International Peace), Lead authors: Dr. Cao Viet Sinh (for- Mari Pangestu (Columbia University), mer Vice Minister of Planning and Graham Teskey (Abt JTA), and Mme Investment), Gabriel Demombynes Tôn N ữ Th ị Ninh (Former Chair- (Senior Economist), Victoria Kwakwa woman, Committee for External Af- (Country Director), Sandeep Mahajan fairs, National Assembly of Vietnam). (Lead Economist), and Sudhir Shetty The report benefited from the syn- (Chief Economist). ergies between international expertise Core team: Prof. Hoang The Lien and local in-depth knowledge through (Former Vice Minister of Justice), Dr. effective team collaboration and valu- Nguyen Quang Thai (Secretary Gen- able contributions of international and eral, Vietnam Association of Econo- local consultants. The preparation pro- mists), Nguyen Van Vinh (Vice Pres- cess was broad-based and consultative, ident, Development Strategy Institute with active engagement of Vietnam’s (DSI)), Pham Chi Lan (Former mem- government ministries and agencies, ber of Prime Minister’s Economic academic research institutions, and in- Advisory Board), Dr. Vo Tri Thanh ternational experts in numerous work- (Vice President, Central Institute for shops and focus group discussions. Economic Management (CIEM)), Public engagement in the preparation and Doan Hong Quang (Senior of the report was facilitated through Economist). an online website, on-line discussions, The Overview builds on back- live chats, as well as a national essay ground papers and notes prepared by: competition in Vietnam. Manu Bhaskaran (Centennial Asia The English version of the report Advisors), Claus Brand (Consultant), was edited by Bruce Ross-Larson Sebastian Eckardt (Senior Economist), and a team at Communications De- and ImpactECON, LLC. PREFACE AND ACKNOWLEDGMENTS VIETNAM 2035 xv Vietnam: 30 Years of Reform and sultant), Reyes Aterido (Consultant), Aspirations Ruth Banomyong (Consultant), David Dollar (Brookings Institutions), Dang Lead authors: Prof. Bui Tat Thang Hung Vo (Consultant), Dr. Dang Kim (President, Institute for Development Son (former Director of the Institute of Strategy), Nguyen Van Vinh (Vice Policy and Strategy for Agriculture and President, DSI), and Dr. Vo Tri Thanh Rural Development (IPSARD)), Mary (Vice President, CIEM). Hallward-Driemeier (Senior Principal The chapter builds on background Specialist), Stacey Frederick (Consul- papers and notes prepared by: Dr. tant), Gian Thanh Cong (Consultant), Nguyen Duc Thanh (Director, Viet- James Hanson (Consultant), Claire nam Institute for Economic and Policy Honore Hollweg (Economist), Victor Research), Dr. Nguyen Quang Thai Kümmritz (Consultant), Dr. Le Dang (Secretary General, Vietnam Associ- Doanh (Former President, CIEM), ation of Economists), and Prof. Tran Miles McKenna (Consultant), Martin Dinh Thien (Director, Vietnam Insti- Molinuevo (Consultant), Ben Shep- tute of Economics). ard (Consultant), Dr. Nguyen Do Anh Capable research assistance was Tuan, (Director, IPSARD), Dr. Nguyen provided by: Dang Huyen Linh, Vu Dinh Cung (President, CIEM), Dr. Thu Trang, Nguyen Dang Hung, Nguyen Thi Tue Anh (Vice President, Nguyen Thi Huong Giang, and CIEM), Timothy Sturgeon (Massa- Nguyen Thi My Hanh (DSI). chusetts Institute of Technology), Prof. Tran Van Tho (Waseda University, Economic Modernization and Private Japan), Vu Kim Hanh (Director, Cen- Sector Development ter for Business Research and Support), Deborah Winkler (Consultant), Chun- Lead authors: Mona Haddad (Practice lin Zhang (Lead Private Sector Devel- Manager), Sandeep Mahajan (Lead opment Specialist), and Ezequiel Zylbe- Economist), Pham Chi Lan (Former berg (University of Oxford). member of Prime Minister’s Economic Capable research assistance was Advisory Board), and Pham Thi Thu provided by: Gian Thanh Cong Hang (Secretary General, VCCI). (Consultant). Core team: Doan Hong Quang The chapter team is grateful for use- (Senior Economist), Claire Honore ful comments and advice from: Prof. Hollweg (Economist), Steven Jaffee Danny Leipziger (Growth Dialogue (Lead Rural Development Specialist), and George Washington University), Nguyen Van Lan (Senior Operations Catherine Martin (Principal Strategy Officer), and Daria Taglioni (Senior Officer), and Daniel Street (Operations Trade Economist). Officer). The chapter builds on background papers and notes prepared by: Alwaleed Fareed Alabatani (Lead Financial Sec- tor Specialist), Guillermo Arenas (Con- xvi VIETNAM 2035 PREFACE AND ACKNOWLEDGMENTS Science, Technology, and Innovation Advisor), Judy Baker (Lead Econo- mist), Abhas Jha (Practice Manager), Lead authors: Dr. Banh Tien Long (former Vice Minister of Education Danny Leipziger (Growth Dialogue and Training), Michael Crawford and George Washington University), (Lead Education Specialist), Dr. Le Paul Vallely (Senior Transport Special- Dinh Tien, (former Vice Minister of ist), and Anna Wellenstein (Practice Science and Technology), and William Manager). Maloney (Chief Economist). The chapter builds on background Sustainable Development papers and notes prepared by: Nich- olas Bloom, Raissa Ebnerb, Kerenssa Lead authors: Diji Chandrasekharan Kayc, Renata Lemosd, Raffaella Behr (Senior Natural Resources Econ- Sadune, Daniela Scurf, and John Van omist) and Prof. Truong Quang Hoc Reeneng (World Management Survey), (former Director of the Center for Re- Hyunho Kim (Chonnam National search Resources and Environment, University), Joonghae Suh (Korea De- Vietnam National University). velopment Institute), and Deok Soon Core team: Anjali Acharya (Senior Yim (Science and Technology Policy Environmental Specialist), Prof. Bui Institute). Quang Tuan (Director, Vietnam In- The team thanks the Government stitute for Regional Sustainable Devel- of Australia for funding the survey of opment), Todd Johnson (Lead Energy managers in Vietnam. Specialist), and Prof. Nguyen Trung Thang (Vice Director, Institute of Urbanization Strategy and Policy on Natural Re- sources and the Environment). Lead authors: Dr. Huynh The Du The chapter builds on background (Fulbright School of Public Policy), papers and notes prepared by: Tijen Somik Lall (Lead Urban Economist), Arin (Senior Environmental Econ- Dr. Nguyen Do Anh Tuan (Director, omist), Christophe Crepin (Sector IPSARD), and Madhu Raghunath Leader), Richard Damania (Lead (Senior Urban Specialist). Economist), Franz Gerner (Lead En- The chapter builds on background ergy Specialist), Sarath Guttikunda papers and notes prepared by: Luis Blancas (Senior Transport Specialist), (Consultant), Steven Jaffee (Lead David Bulman (Consultant), Dr. Dang Rural Development Specialist), Iain Kim Khoi (IPSARD), Edward Leman Menzies (Senior Water and Sanita- (Consultant), Dr. Nguyen Anh Phong tion Specialist), Tae Yong Jung (Yon- (IPSARD), and Pablo Vaggione (Con- sei University), Sung Jin Kang (Koera sultant). Truong Thi Thu Trang, Dep- University), Joo Young Kwak (Yonsei uty Head of Faculty - IPSARD) University), and Dang Kim Khoi, Kim The chapter team is grateful for Van Chinh, Nguyen Thi Cam Nhung, useful comments and advice from: Nguyen Van Lam, and Pham Kim Zoubida Allaoua (Senior Regional Dung (all IPSARD). PREFACE AND ACKNOWLEDGMENTS VIETNAM 2035 xvii Capable research assistance was athan Pincus (Rajawali Foundation, provided by Nguyen Phuong Nga Indonesia), and Charles Undeland (Consultant). (Senior Governance Specialist). The chapter team is grateful for use- Core team: Soren Davidsen (Senior ful comments and advice from: Carter Public Sector Specialist), Dr. Nguyen Brandon (Lead Economist), Christo- Van Cuong (Deputy Director, Insti- phe Crepin (Sector Leader), Richard tute of Legal Science), and Tran Thi Damania (Lead Economist), Doug- Lan Huong (Senior Public Sector las J. Graham (Senior Environmental Specialist). Specialist), and Iain Shuker (Practice The chapter builds on background Manager). papers and notes prepared by: Maridel Alcaide (Consultant), Dr. Bui Nguyen Khanh, Deputy Director, Institute Social Inclusion of State and Law), Noah Buckley Lead authors: Dang Nguyen Anh (Di- (Consultant), Professor Yoon Je Cho rector, Institute of Sociology), Gabriel (Consultant), Dr. Duong Thanh Mai Demombynes (Senior Economist), and (Former Director, Institute of Legal Philip O’Keefe (Lead Economist). Science), Prof. Nguyen Nhu Phat (Di- Core team: Prof. Giang Thanh Long rector, Institute of State and Law), (Director, Institute of Public Policy), Prof. Pham Duy Nghia (Fulbright Michael Crawford (Lead Education School of Public Policy), Dr. Thang Specialist), Puja Vasudeva Dutta (Se- Van Phuc (Former Vice Minister of nior Economist), Dr. Nguyen Thang Home Affairs), and Vu Hoang Quyen (Director, Center for Analysis and (Senior Economist). Forecast), Truman Packard (Lead The chapter team is grateful for Economist), Achim Daniel Schmillen guidance and advice from: James (Economist), and Owen Smith (Senior Anderson (Country Manager), Rob- Economist). ert Taliercio (Practice Manager), and Contributors: Reena Badiani- Graham Teskey (Principal Technical Magnusson (Senior Economist), Kari Lead, Governance, Abt JTA). Hurt (Senior Operations Officer), and Vu Hoang Linh (Economist). Additional editing of the report Capable research assistance was was handled by a Vietnamese edito- provided by: Tran Thi Ngoc Ha rial team with participation of Dr. (Consultant). Cao Viet Sinh (former Vice Minis- The chapter team is grateful for use- ter of Planning and Investment, team ful comments and advice from Prof. leader), Prof. Hoang The Lien (Former Ravi Kanbur (Cornell University) and Vice Minister of Justice), Dr. Nguyen Ana Revenga (Senior Director). Quang Thai (Secretary General, Viet- nam Association of Economists), Nguyen Van Vinh (Vice President, Modern Institutions DSI), Pham Chi Lan (Former member Lead authors: Prof. Hoang The Lien of Prime Minister’s Economic Advi- (Former Vice Minister of Justice), Jon- sory Board), Dr. Vo Tri Thanh (Vice xviii VIETNAM 2035 PREFACE AND ACKNOWLEDGMENTS President, CIEM), and Doan Hong for International Relations; Nguyen Quang (Senior Economist). Huu Lam Son, Expert; Ho Anh Tai,- The administrative coordination Expert, Department for International was carried out by the Administra- Relations. tion Office of the Vietnam 2035 Steer- Administration and communica- ing Committee set up at the DSI. The tions activities from the World Bank Committee included: Prof. Bui Tat side were managed by Bo Thi Hong Mai (Senior Communications Officer), Thang (President), Nguyen Van Vinh Tran Kim Chi (Communications Asso­ (Vice President), Nguyen Thi Huong ciate), Vu Lan Huong (Communica- Giang, Bui Thi Huong, Dang Huyen tions Associate), and Vu Thi Anh Linh Linh, Dinh Thi Ninh Giang, Le Quang (Program Assistant). Dao, Nguyen Quoc Truong, Nguyen It is with great pleasure that the Thi My Hanh, Nguyen Dang Hung, Ministry of Planning and Investment Nguyen Quynh Trang, Pham Le Hau, and the World Bank Group introduce Pham Le Hoang, Pham Minh Thao, the report Vietnam 2035: Toward Pham Thanh Hien, and Vu Thu Trang. Prosperity, Creativity, Equity, and Besides, adinistrative activities are Democracy with the hope that Viet- coordinated with by the officials of namese leaders and policy-making the Government Office, including: agencies will find it useful. Le Hong Lam, Director, Department Bùi Quang Vinh Axel van Trotsenburg Minister of Planning and Investment Vice President for East Asia and Pacific The Socialist Republic of Vietnam The World Bank Abbreviations AIIB Asian Infrastructure Investment Bank ALTC aged and long-term care ASEAN Association of Southeast Asian Nations CEO chief executive officer DIV Deposit Insurance of Vietnam GDP gross domestic product GVC global value chain ICT information and communications technology IMF International Monetary Fund IT information technology LPI Logistics Performance Index (of the World Bank) MOLISA Ministry of Labour, Invalids and Social Affairs NPL nonperforming loan OECD Organisation for Economic Co-operation and Development OOP out-of-pocket PPP purchasing power parity R&D research and development SBV State Bank of Vietnam SDG Sustainable Development Goal (of the United Nations) SOE state-owned enterprise SRB sex ratio at birth 3D three dimensional TPP Trans-Pacific Partnership UN United Nations UNICEF United Nations Childrens’ Fund VCA Vietnam Competition Authority WGI Worldwide Governance Indicator VIETNAM 2035 xix Executive Summary The year 2015 marks 70 years since and social inclusion, and bolstering the Vietnam’s Declaration of Indepen- state’s capacity and accountability. The dence, 40 years since Reunification, rapid growth needed to achieve these and just short of 30 years from the aspirations will be sustained only if it launch of Đổi Mới, which catapulted the stands on faster productivity growth nation from the ranks of the world’s and reflects the costs of environmen- poorest to one of its great development tal degradation. Productivity growth, success stories. Critical ingredients of in turn, will benefit from measures to success have been visionary leaders, a enhance the competitiveness of domes- sense of shared societal purpose, and a tic enterprises, scale up the benefits of focus on the future. Starting in the late urban agglomeration, and nurture a 1980s, these elements were fused with creative and innovation-led economy. the embrace of markets and the global Maintaining the record on equity and economy, setting the nation on the social inclusion will require lifting path to becoming the middle-income marginalized groups and delivering country that it is today. Its spectacu- services to an aging and urbanizing lar growth since then, one of the fast- middle-class society. And to fulfill the est in the world, has all but eliminated country’s aspirations, the institutions extreme deprivation and lifted tens of of governance will need to become millions of people out of poverty. modern, transparent, and fully rooted Looking forward to 2035, which in the rule of law. will mark 60 years since its reunifica- tion, Vietnam now aspires to moder- Balancing Economic Prosperity nity, industrialization, and a higher with Environmental Sustainability quality of life. These aspirations and the supporting policy and institutional The goalposts for Vietnam’s future agenda stand on three pillars: balanc- economic success are set broadly and ing economic prosperity with environ- aspirationally­—­the 2013 constitution mental sustainability, promoting equity sets the objective of a “prosperous peo- EXECUTIVE SUMMARY VIETNAM 2035 xxi xxii VIETNAM 2035 EXECUTIVE SUMMARY ple and strong country,” marking little are especially worrisome. A steady ero- deviation from its 1992 version. Party sion in the productivity growth of the and government documents couch the domestic private sector leaves it just income objectives in similarly aspira- as inefficient as the state sector­—­ for tional terms, with an annual GDP per two reasons. First, the institutional capita growth target of 7 percent (equal foundations for an advanced market to around 8 percent annual growth). economy are insufficiently developed, Growth rates in this range would undermining private-­ property rights produce by 2035 an upper-middle- and competition in product markets. income country on the cusp of high in- Second, factor markets are governed come—­ at the level of Malaysia or the by an unclear mix of allocation by Republic of Korea in the mid-2000s. markets and by fiat. Commercialized But this target is extremely ambitious, state institutions—whereby the state is far surpassing Vietnam’s past growth directly involved in economic activity and with few global precedents. through SOEs and indirectly through The Vietnamese qualities of thrift, the influence of vested interests—have discipline, and hard work will have ensured that land and capital alloca- to be deployed in full measure for the tions are guided as much by arbitrary country to stay close to its aspirations. administrative decisions as by efficient The national savings rate needs to re- market signals. main high while the investment rate Productivity is also hurt by mal- rises slightly. Discipline and hard work functioning land markets in at least can help counter the projected rapid two other ways. First, the urbanization aging of the population. But more is of land is outpacing the urbanization needed. Productivity and innovation of people, reducing urban population will eventually have to become the density and suppressing productiv- main drivers of growth. That will re- ity gains from urban agglomeration. quire policies to tackle the stagnation Second, obstacles to consolidation of in productivity and long-term invest- small landholdings in agriculture are ments, especially in urban infrastruc- depressing small-landholder profits ture and innovation capabilities. and sector productivity. What explains the stagnation in The sustainability of Vietnam’s long- productivity? Public investment is not term growth is further threatened by as efficient as it needs to be because of environmental stresses. Growth in the uncoordinated and often incoherent past 25 years has imposed significant investment decisions of a fragmented environmental costs. Rapid depletion state structure. There also is little of natural resources is a particular con- doubt that most state-owned enter- cern. Environmental pollution from prises (SOEs) are inefficient producers. urban and industrial wastewater leaves So, widespread inefficiencies in state in- waterways toxic, while urban water vestment perpetuate the weak produc- and air pollution are beginning to pose tivity trends across the economy. But serious health hazards, especially near they do not fully explain the decline in Hanoi and Ho Chi Minh City, and productivity growth, reasons for which particularly for children. Vietnam is EXECUTIVE SUMMARY VIETNAM 2035 xxiii also one of the countries most vulnera- more market driven and commercial ble to climate change, with settlements approach will be needed to modern- and economic activity in the Mekong ize agriculture. Commitments under Delta at especially heightened risk. Ex- major international trade agree- acerbating the risks is rapidly growing ments (the Trans-Pacific Partnership energy consumption, increasingly reli- in particular) offer a real opportu- ant on coal-powered electricity genera- nity to carry out many demanding tion. In recent years Vietnam’s increase and politically sensitive reforms. in greenhouse gas emissions has been one of the world’s fastest. 2. Spur learning and innovation. Sus- The reform agenda to unleash strong taining high growth over an ex- and sustainable economic growth will tended period will depend on an have four essential elements: aggressive agenda to spur learning and innovation. Neither enterprises 1. Create an enabling environment nor knowledge and research insti- for domestic enterprises. The im- tutions are currently motivated to mediate emphasis needs to be on focus adequately on this agenda. A ensuring more competitive and national innovation system can im- productive domestic enterprises. prove the situation. On the demand Restructuring and equitizing SOEs side, it will encourage firms to seek will remain important, but will not out the best available knowledge be enough­ —­ fi xing the nascent and and strengthen the technical and weak domestic private sector com- financial support to facilitate their mands even greater policy atten- learning. On the supply side, such tion. This will involve strengthen- a system will help build the skills ing the institutional foundations of of the workforce beyond its cur- the market economy, with emphasis rent proficiency in basic education, on protecting property rights and while raising the quality and rel- enforcing competition policies. A evance of research and advanced stable, well-regulated, and inclusive training in universities and govern- financial sector and transparent and ment research institutes. functioning land markets will also be crucial. A more capable and con- 3. Reshape urban policies and invest- fident domestic private sector will ments. For Vietnam to succeed in its deepen linkages with foreign firms, growth and economic moderniza- enabling the transfer of technology tion ambitions, its cities need to do and know-how that are critical for more to nurture private enterprise higher productivity growth. More and innovation, support the growth rewarding participation in global of industrial clusters integrated with value chains will also come from a global value chains, and attract and stronger services sector and more agglomerate talent. Playing this role extensive transport and network credibly will involve reshaping poli- connectivity across the country and cies and investments to amplify eco- with trading partners. Finally, a nomic density in and around large xxiv VIETNAM 2035 EXECUTIVE SUMMARY metropolitan areas such as Ho Chi equalized fiscal transfers across prov- Minh City, Hanoi, Hai Phong, and inces with different levels of devel- Da Nang, as well as a network of opment. Vietnam wants to maintain dynamic secondary cities; reduce the that record. Its central socioeconomic distance to markets to enable spe- philosophy­ —­a market economy with cialization; and equalize access to socialist orientation­—­ captures the bal- services between migrants and urban ance in its preferences for equity and residents. Fulfilling this agenda will market-led growth. require functioning land markets, Past performance and societal pref- coordinated urban planning, and im- erences notwithstanding, sustain- proved connective infrastructure. ing the positive equity trends is not something that Vietnam can take for 4. Sustain the environment. There are granted, especially as the forces of ur- three core elements of the reform banization, globalization, and the ris- agenda to sustain the environment: ing skill intensity of production take protect the quality of natural re- firmer root. Looking toward 2035, sources (air, land, and water); build Vietnam needs to pursue a dual agenda climate resilience into economic for equity and social inclusion. planning, sectoral policies, and in- The unfinished inclusion agenda frastructure investments; and find is ensuring equality of opportunity. ways to tap more clean energy While Vietnam has taken long strides sources, including through regional in lifting living standards since Đổi Mới, power trade. Such a sustainable, in- significant groups remain marginal- clusive, and resilient growth path ized, and the gaps in opportunity for calls for strong policies and institu- children are wide between poor and tions to coordinate actions and in- wealthy households. An ethnic minor- vestments, smart investments (with ity child is four times more likely than a private participation) that internal- Kinh child to die before her first birth- ize environmental and climate costs, day. More than half the children with and more accessible data and in- severe disabilities never attend school. formation for decision making and Such exclusion stands in stark con- monitoring progress. trast to the fortunes of those at the top: Over the last decade, the number of millionaires in Vietnam has tripled Promoting Equity and Social while malnutrition rates among ethnic Inclusion minority children have hardly budged. Vietnam’s emphasis on equity and so- Rectifying such inequities will require cial inclusion has always been strong. renewed efforts. Four elements of the And it is one of the few countries to equality of opportunity agenda for achieve high growth with equity. Its 2035 are key: record rests on a foundation estab- lished by equitable land distribution 1. Reduce the barriers to opportunity in the late 1980s, effective delivery of for ethnic minorities. Targeted ini- basic services such as health and edu- tiatives in education, nutrition, and cation, and public-policy choices that sanitation can close the large gaps EXECUTIVE SUMMARY VIETNAM 2035 xxv in opportunities for ethnic minority action as a short-term measure. Also children. An approach of experi- critical is reducing the imbalance in mentation and evaluation, building the sex ratio at birth, now one of the on new insights from behavioral world’s highest, with 114 boys born economics, could develop effective for every 100 girls. The preference interventions in these areas. Policy for sons would be reduced through actions would also become more expanding the pension system, re- effective through greater voice for forming the population policy, and ethnic minorities. campaigning to highlight the value of daughters. 2. Make people with disabilities full participants in society. Vietnam has Two social megatrends will shape made strong commitments to the the emerging inclusion agenda un- inclusion of people with disabilities folding in Vietnam. The first is the but lags severely in implementation. rise of the middle class, which will Following the example of other be increasingly urban and employed countries, it can realize these prom- in the formal sector. By 2035 more ises by regularly monitoring com- than half of the Vietnamese people mitments and by creating opportu- will be part of the global middle class nities for people with disabilities and (up from just over 10 percent today), their families to be their own advo- with needs distinct from those of the cates through social organizations. mass of rural poor that characterized Vietnam in the past. The second is an 3. Delink the household registration extreme demographic shift, with the system from access to public ser- size of the elderly population climbing vices. At least 5 million Vietnamese dramatically­—­m aking Vietnam one lack permanent registration in their of the most rapidly aging countries place of residence and thus have in the world­ —­ a nd the working-age limited access to public services, in- share of the population shrinking. cluding schooling, health care, and Around 2035 the old-age dependency such administrative services as reg- —­ ratio­ the number of people 65 years istering a vehicle and applying for a of age or older for every 100 people birth certificate. While the force of aged 15–64­ —­ w ill have risen to al- the system has waned, it remains a most 22 (from under 10 today), while source of inequality of opportunity the working-age population will begin and an effective tax on migration. to decline in absolute terms. Four el- Phased reform of the hộ khẩu system ements of the middle-class and aging would place all citizens on an equal population agenda are key: footing. 1. Expand the pension system to cover 4. Reduce gender gaps. More oppor- a majority of the population. Given tunities for women in public leader- the challenges of rapid aging, ex- ship roles could be created by elim- panding coverage to those in the in- inating gender discrimination in the formal sector will be possible only retirement age and using affirmative through a diversified system and a xxvi VIETNAM 2035 EXECUTIVE SUMMARY major reform to make it financially Bolstering the State’s Capacity and sustainable, including raising the re- Accountability tirement age. Political and institutional reforms need 2. Ensure that nearly all children com- to keep pace with Vietnam’s devel- plete upper-secondary school with opment. Evidence from a large num- job-relevant skills. One policy prior- ber of countries indicates that state ity will be ending the exam-based al- effectiveness, or the capacity of gov- location of upper-secondary-school ernment to set objectives and attain places and replacing it with univer- them, is closely associated with better sal secondary-school attendance. development outcomes. State effective- Another is to continuously improve ness rests on three supporting pillars: the quality and relevance of what a well-­organized government with a students learn, to help them de- disciplined, meritocratic bureaucracy; velop the noncognitive and complex an adherence to market rationality in problem-solving skills they need for ­ economic policy making; and mecha- a competitive labor market. nisms to ensure checks and balances in the government and broad public 3. Establish effective representation participation. All three legs of the state of workers through independent effectiveness tripod are necessary for unions. Vietnam needs to move to- satisfactory results. Reforming state ward an industrial relations system structures but rejecting market disci- suited to a mature market economy, pline, or assigning a larger role to the where the interests of workers, em- market mechanism while insulating ployers, and the state are more prop- government decision making from the erly represented in a true bargaining community, are unlikely to generate process, following the recent com- positive outcomes. mitments in a Trans-Pacific Part- The relationship between state ef- nership side agreement. In addition, fectiveness and development outcomes labor market regulations could bet- is evident in Vietnam. Many early ter balance the protection of work- achievements emerged from the coun- ers with the flexibility to promote a try’s state capacity, which was un- vibrant formal sector. usually strong for its level of income. Today, the productivity stagnation 4. Achieve universal health coverage and the weak environment for private- with a rebalanced delivery system. sector development are attributable to Ensuring access to good quality gaps in state effectiveness. Vietnam’s health services without imposing unique history has produced state in- financial hardship will entail both stitutions that are commercialized and reforming the insurance regime and fragmented and face insufficient scru- shifting health care from its current tiny by citizens. focus on hospitals toward high- State commercialization in Vietnam quality primary care at the center of refers to the continued strong engage- an integrated system. ment of the state in economic activity EXECUTIVE SUMMARY VIETNAM 2035 xxvii directly through SOEs, particularly mechanisms for engaging citizen or- through large state economic groups, ganizations are not robust enough to and indirectly through very close links provide true citizen representation, with an exclusive segment of the do- and Vietnam lacks a system of effec- mestic private sector. Vietnam is not tive checks and balances between the alone in having influential vested in- three branches of government. Access terests, but the degree to which rela- to information, which is key to citi- tionships to the state are integral to zens exercising their voice to hold the economic success appears to be unusu- state accountable, is still lacking. ally high. State fragmentation refers to The result is a government that often the lack of clear hierarchy and assign- finds it difficult to articulate coherent ment of roles and responsibilities both economic policies, that is open to ex- within the central government and be- tensive bargaining among state insti- tween the center and the provinces­ —­ tutions and between the state and pri- and the inertia and inefficiencies this vate sectors, and that is shielded from generates in formulating and imple- public scrutiny of policy decisions and menting policy. Horizontal and vertical public reaction to the consequences of fragmentation of power has resulted in economic policy. overlapping mandates with conflicting Modernization of Vietnamese insti- rules and decisions. The result is often tutions will involve an overhaul of the gridlock or decisions that are subopti- state and its relationships to the market mal from society’s point of view. The and society. Efforts to enhance state absence of merit-based management of capacity and accountability will need public servants exacerbates the adverse to move concurrently on a three-point effects of commercialization and frag- agenda: mentation of the Vietnamese state on the quality of public administration. 1. Develop a more rationally orga- Vietnam’s legal framework pro- nized government structure with vides some space for citizens to par- a meritocratic bureaucracy. The ticipate in governance. “Government government needs more rational of the people, by the people, and for organization, and greater coher- the people” and “People know, peo- ence on roles and responsibilities ple discuss, people do, and people among state institutions. This will monitor” are well known affirma- involve decentralization embodying tions in the constitution. In practice, clearer functional assignments for there is a gap between these state- the different levels of government, ments and the actual space that is with corresponding adjustments available for citizens to influence de- in the intergovernmental financial cisions. Citizen participation in social framework that clarify and improve organizations not sponsored by the accountability and overcome inef- government is growing rapidly, but ficiencies in coordination and use this does not mean a corresponding of public resources. The center of improvement in the quality of their government could be strengthened participation. Election processes and to improve policy coordination and xxviii VIETNAM 2035 EXECUTIVE SUMMARY oversight of execution of policies by space for a genuinely independent public agencies. A clearer alloca- private sector will require reduced tion of powers and responsibilities state control over business and pro- is needed among central bodies to fessional organizations, including have greater effectiveness and ac- the Vietnam Chamber of Com- countability. Public-­administration merce and Industry. Allowing these practices need to be reformed to organizations to operate as authen- ensure that merit drives the deploy- tic representatives of independent ment of human resources by the business interests would give voice state. to the domestic private sector and enable these groups to do more in 2. Apply market rationality to eco- monitoring government policy. nomic policy making. State-market relations will have to be character- 3. Strengthen state accountability. ized by a clearer division between The state can be organized in a way the public and private spheres. that provides for genuine checks and Specifically, government agencies balances among the executive, legis- involved in economic regulation lature, and judiciary. The National should not engage in business of Assembly could be transformed into any kind, to avoid the appearance a professional body (consisting of and reality of conflicts of interest. full-time deputies and supported by The state’s role in the economy expert staff), with oversight of all needs to be transformed from a pro- the state’s operations. The judiciary ducer to an effective regulator and needs to be similarly strengthened, facilitator, focusing on providing a with emphasis on its independence level playing field in the economy from the executive and enhanced with enforcement of free and fair transparency in its functioning. A competition and more secure and large and diverse set of citizen or- transparent property rights, partic- ganizations could be allowed to ularly around land issues. This will participate in decision making and require the state to not only signifi- hold the state accountable. The state cantly reduce its SOE portfolio and could provide a legal framework to strengthen corporate governance promote the right of citizens to asso- of the remaining SOEs but also to ciate. It could also adopt legislation stop giving preferential treatment requiring public bodies to be trans- to SOEs and closely linked private parent and provide mechanisms for companies. In addition, there needs citizens to interact effectively with to be an independent and more ca- the state by enhancing citizen access pable, trained, and meritocratic ju- to accurate and timely information diciary to enforce rules and provide and by providing greater media the level playing field. Creating the independence. Vietnam 2035 Toward Prosperity, Creativity, Equity, and Democracy Introduction growth since the early 1990s has been among the fastest in the world, and its Shaking off the legacy of coloniza- pace of poverty reduction almost un- tion and long, brutalizing conflicts is precedented. But the Vietnamese peo- hard­—­ and forging an uninterrupted ple, keenly aware of the big challenges pathway to modernity, perhaps even left, are not yet ready to declare suc- harder. Only a handful of nations cess. And as for countries as for peo- have succeeded at both. Their winning ple, success needs to be measured not formula? Usually some combination of strong leadership and good gover- only against ability, effort, or even the nance, a sense of common purpose and performance of peers, but also against future orientation, a reliance on mar- ambition. kets to allocate resources, and active The Vietnamese people have always engagement with the world on trade, set a high bar for success. The 1992 investment, and knowledge flows.1 constitution exemplified this early on Since the launch of the Đổi Mới (eco- by setting forth the goal for the state nomic renovation) reforms in the late to build “a prosperous life for its peo- 1980s­ —­to move from a closed, cen- ple, a strong country, and an equita- trally planned economy to a globally ble, democratic, and civilized society, integrated, socialist-oriented market ensuring the well-being, freedom, and economy­ —­Vietnam has deployed these happiness of all citizens as well as ingredients to good effect. conditions for their all-round develop- To any external observer, Vietnam ment.” Success thus defined was both is a major development success story. multifaceted and aspirational. There is One of the world’s poorest countries also the strong sense that the journey at the onset of the reforms, it has, in may be just as important as the desti- a single generation, leapfrogged to nation. The tenets of thrift, discipline, middle-income status, while achieving and hard work are cherished means social outcomes typically seen at much to higher living standards in the Viet- higher incomes. Vietnam’s economic namese value system, not to be diluted OVERVIEW VIETNAM 2035 1 2 VIETNAM 2035 OVERVIEW or lost along the way. So are societal of the population, the less hospita- values of equity, compassion, filial re- ble global economy, and the threat of sponsibility, respect for social norms climate change, to which Vietnam is and the rule of law, and the authority heavily exposed. Global technological of elders and teachers. and business innovations, powered by The motivations that fuel Vietnam’s the information revolution, will remain ambitions are both external and in- disruptive ­— ­presenting more oppor- ternal. Externally, the driving force is tunities and risks, with Vietnam’s net Vietnam’s neighborhood­— ­the world’s benefits depending on its responses. most dynamic region. Vietnamese The country’s aspirations and the mind-sets are steeped in the rapid as- supporting policy and institutional cents of Japan and the East Asian agenda thus stand on three pillars: Tigers. They not only serve as powerful balancing economic prosperity with examples but also stoke fears of being environmental sustainability, promot- permanently left behind. Internally, ing equity and social inclusion, and —­ there is pride in a rich past­ justifiable bolstering the state’s capacity and ac- for a society with one of the world’s countability. The rapid growth needed longest continuous histories and civili- to achieve these aspirations will be sus- zations.2 As recently as the early 19th tained only if it stands on faster pro- century, Vietnam was a regional pow- ductivity growth and reflects the costs erhouse, with a much larger economy of environmental degradation. Produc- than those of Thailand, Malaysia, or tivity growth, in turn, will benefit from the Philippines.3 The drive to reclaim measures to enhance the competitive- the country’s place in the community ness of domestic enterprises, scale up of nations is accordingly strong. the benefits of urban agglomeration, Energized by past success but by no and nurture a creative and innovation- means content, Vietnam now aspires led economy. Maintaining the record to modernity, industrialization, and a on equity and social inclusion will re- higher quality of life. The aspirations quire lifting marginalized groups and reflect an emphasis on clean water delivering services to an aging and and clear blue skies; a healthy, secure, urbanizing middle-class society. And learned, and equitable society; and an to fulfill the country’s aspirations, the effective state accountable for improv- institutions of governance will need to ing material welfare. become modern, transparent, and fully Achieving these aspirations will re- rooted in the rule of law. quire bold and decisive action, both to grasp the opportunities and to manage A Record of Strong and Equitable risks. The notable opportunities are an Growth, with Emerging Concerns emergent domestic middle class, prox- imity to a rapidly rising China, and Vietnam is a major development suc- megaregional trading agreements—­ cess story. Its per capita GDP growth particularly the Trans-­ Pacific Partner- since 1990 has been among the fast- ship (TPP), in which Vietnam is the est in the world, surpassed only by only lower-middle-income member. China. Growth has also been remark- The major risks are the rapid aging ably stable and inclusive, which, with OVERVIEW VIETNAM 2035 3 major gains on human development, ture, Vietnam succeeded where many has contributed to impressive progress countries that had been part of the for- in alleviating poverty and improving mer Soviet Union have failed. nonincome dimensions of welfare. But Four aspects of the approach to re- declining productivity growth, insuffi- forms proved most effective. First, Viet- cient progress in including marginal- nam chose to be pragmatic and flexible, ized groups in the country’s develop- both in the sequencing and the pacing ment (ethnic minorities in particular), of reforms. Reforms were introduced and degradation of the environment incrementally, after extensive consensus call into question the durability of the building, and wholesale shock therapies current development model. Vietnam’s were avoided.8 And if internal or global governance structure could also be at experience suggested course correction, an inflection point. The institutions the system proved adaptable. Second, that were adequate to carry the coun- Vietnam played to its strengths by fo- try to its lower-middle-income level cusing on labor-intensive production are now exposing gaps that, unless ad- and agriculture. Third, the emphasis dressed with boldness and urgency, are on building human capital was early likely to impede the journey to upper- and effective. Vietnam already had rel- middle-income status. atively high levels of literacy and life ex- In 1986 an impoverished Vietnam, pectancy.9 The human-capital base was on the brink of an economic crisis, further expanded following Đổi Mới, embarked on a path of economic ren- enhancing the returns on the market- ovation (Đổi Mới). It was an explicit oriented reforms that followed. Fourth, recognition that the “fence-breaking” where a domestic consensus was harder reforms of the previous decade­ —­ to forge, Vietnam used its commit- opportunistically initiated to test the ments under external trade agreements limits of central planning­—­had shown to good strategic effect, particularly promise and that the situation was dire to usher in some of the more com- enough to demand a more systematic plex enterprise reforms. Each of these approach. Annual inflation was run- four aspects of the approach remains ning at more than 400 percent,4 the important for the next generation of real economy on a downward slide and reforms­ —­a subject of this report. heavily dependent on foreign aid,5 food Less than three decades after the in short supply, the budget chronically start of the Đổi Mới reforms, Vietnam short of resources,6 and the vast major- has built up an impressive record of ity of the population in poverty. strong economic growth that has also Thus Đổi Mới began a process of been equitable and stable, as shown in macroeconomic stabilization, unshack- figure O.1. GDP growth per capita has ling the economy from state controls averaged 5.5 percent a year since 1990 and gradually but steadily integrating (panel a), yielding a three-and-a-half- with the global economy.7 More dura- fold increase in average income. Only ble foundations for a market economy China performed better. Growth has were built over time. And in compe- benefited from its remarkable stability tently managing the transition from a (panel b) and a strong external orien- planned to a market-economy struc- tation of the economy. External trade 4 VIETNAM 2035 OVERVIEW FIGURE O.1  Rapid and inclusive growth in Vietnam has yielded shared prosperity and strong gains in poverty reduction a. Vietnam has had one of the fastest GDP per b. . . . catalyzed by economic stability . . . capita growth rates since the early 1990s . . . Vietnam China Guatemala Vietnam India Bangladesh Korea, Rep. Australia United States Poland Malaysia Norway Singapore Sri Lanka Thailand Indonesia China Ghana Brazil Nigeria Israel India Turkey Philippines Egypt, Arab Rep. Kenya Chile Philippines Cambodia Colombia Korea, Rep. Brazil Malaysia United States Indonesia Mexico Singapore Thailand Russian Federation Argentina Kenya Cuba Russian Federation Cameroon Ukraine Zimbabwe United Arab Emirates Iraq –4 –2 0 2 4 6 8 10 0 5 10 15 20 25 Average GDP per capita growth, 1991–2014 (%) Standard deviation of per capita GDP growth, 1991–2014 c. . . . and a very strong external orientation . . . d. . . . accompanied by fairly small increases in inequality . . . 200 42 Vietnam 40 Thailand Share of trade in GDP (%) 150 38 Gini coe cient 100 36 34 Korea, Rep. 50 32 China 0 30 0 500 1,000 10,000 25,000 50,000 100,000 1992 1995 2000 2005 2010 2014 GDP per capita (2005 PPP US$) (figure continues next page) OVERVIEW VIETNAM 2035 5 FIGURE O.1  Rapid and inclusive growth in Vietnam has yielded shared prosperity and strong gains in poverty reduction (continued) e. . . . and faster growth for the bottom f. . . . yielding strong reductions in poverty 40 percent of the population . . . 10 80 8 60 Growth rate (%) Poverty rate (%) 6 40 4 2 20 0 0 8 2 4 6 8 0 2 4 –9 00 –0 –0 –0 –1 –1 –1 1993 1996 1999 2002 2005 2008 2011 2014 –2 93 03 05 07 09 11 13 19 99 20 20 20 20 20 20 $3.10/day $1.90/day 19 Mean Mean of bottom 40% of population GSO–World Bank poverty line MOLISA poverty line Sources: World Bank, World Development Indicators; the General Statistics Office of Vietnam (GSO); Penn World Table 8.0; and authors’ calculations. Note: Dotted lines in panel f indicate periods when substantial changes were made to poverty lines or methodologies. MOLISA = Ministry of Labour, Invalids and Social Affairs; PPP = purchasing power parity. has been a major driver (panel c), much higher, the Vietnamese population of it powered by strong foreign direct is better educated and has a higher investment, with the stocks standing at life expectancy than most countries more than $250 billion, sourced from at a similar per capita income. In re- a diverse group of more than 100 coun- cent international tests Vietnamese tries. And growth has been inclusive, students outperformed the average as seen in a fairly small increase in the for countries in the Organisation for Gini coefficient (panel d) and the faster Economic Co-operation and Develop- income growth of the bottom 40 per- ment (OECD), with remarkably little cent (panel e). As a result, poverty has variation across income groups and fallen rapidly (panel f). urban–rural locations. The maternal Vietnam in 2015 is an unrecogniz- mortality ratio has fallen below the ably transformed, dynamic, middle- upper-middle-­income country average, income economy. Social outcomes while under-five mortality has fallen have improved dramatically across the by half, to a rate slightly above that board. Using a variety of international average. Access to basic infrastructure and national poverty lines, poverty has has also improved substantially. Elec- fallen rapidly since the launch of Đổi tricity is now available to almost all Mới. The $1.90-a-day poverty rate fell households, up from less than half in from 50 percent in the early 1990s to 1993. Access to clean water and mod- 3 percent today. Not only are incomes ern sanitation has risen from less than 6 VIETNAM 2035 OVERVIEW 50 percent of all households to more water has deteriorated considerably. than 75 percent. Water and air pollution have reached In some areas, however, Vietnam serious levels, especially near Hanoi has fallen short. Labor productivity and Ho Chi Minh City, posing major (output per worker) growth has been health risks. In addition, a large part of on a declining trend since the end of Vietnam’s protective mangrove forests the 1990s, seen across most industrial has been destroyed, while overfishing subsectors, as well as in mining, fi- has seriously depleted the nearshore nance, and real estate. In agriculture, fisheries, posing threats to livelihoods. labor productivity has grown robustly, Removing natural forests in some up- but its level is still lower than in most land areas has contributed to more of the region’s middle-income coun- frequent and severe flooding of lower tries. With almost half the workforce altitude farms and human settlements. still engaged in agriculture, Vietnam Finally, Vietnam is one of the world’s has too many workers on its farms. most vulnerable countries to climate Remedies include consolidating agri- change, with adaptation challenges ac- cultural landholdings (which are too cordingly severe, especially in the Me- fragmented and small) and moving kong Delta. With almost all large-scale farmers to the more productive indus- hydropower potential tapped and with try and service sectors. But it does not limited development of other renew- help that job creation in manufacturing able sources, greater reliance on coal is has plateaued at a relatively low level a growing threat to environmental sus- and that services involve mostly infor- tainability and to energy security. mal activity.10 Last but not least, Vietnamese in- Although Vietnam has avoided the stitutions have failed to keep up in large increases in inequality in other important ways with the needs of an fast-­growing countries, the differences increasingly demanding market econ- between rich and poor are still signifi- omy and rising aspirations of a grow- cant. While members of ethnic minori- ing middle-class society. In particular, ties have experienced gains in welfare the country’s unique history has pro- since the early 1990s, they face a grow- duced public-sector institutions that ing gap relative to the majority popu- are commercialized and vertically and lation. With 15 percent of the popula- horizontally fragmented and that face tion, they now make up half the poor. insufficient scrutiny by citizens. De- And in recent years, progress for ethnic spite reforms, the state is still strongly minorities has stalled on poverty re- engaged in economic activity­ —­ directly duction, child mortality, and nutrition. through state-owned enterprises Many ethnic minority citizens remain (SOEs) and indirectly through very largely disconnected from the coun- close links with an exclusive segment try’s larger economic success. of the domestic private sector. State Growth has to a large extent come at fragmentation arises from the lack the cost of the environment. Vietnam’s of clear hierarchy and assignment of greenhouse gas emissions have grown roles and responsibilities both within the fastest in the region, while the envi- the central government and between ronmental quality of its air, land, and the center and the provinces. The ab- OVERVIEW VIETNAM 2035 7 sence of a merit-based management of The geopolitical shifts will, however, public servants exacerbates the gaps in be even more complex. Other regional public institutions. Election processes powers ­—­including developed econo- and mechanisms for engaging citizen mies such as Japan and the Republic organizations are not robust enough of Korea, and emerging powers such as to provide true citizen representation, Brazil, India, Mexico, the Russian Fed- and Vietnam lacks a system of effective eration, and Turkey­ —­are also likely checks and balances between the three to try to expand their own spheres of branches of government. influence. The emergence of a multipolar world order would give rise to multiple pos- Opportunities and Risks sibilities, among them more such col- Global megatrends and external risks laborations as the Asian Infrastructure and opportunities Investment Bank (AIIB) and the New Development Bank of the BRICS states Vietnam’s location on the eastern- (Brazil, Russia, India, China, and most edge of the Indochinese pen- South Africa). There could also be ten- insula makes it a vital link between sions or even conflicts among the rising East, Southeast, and South Asia. The powers, or among rising and existing physical connection to these Asian re- powers. gions and the maritime connections Cooperative relations with a rising to the rest of the world have shaped China will remain essential. Vietnam is Vietnam’s history and will remain cru- one of the signatories to and founding cial for its future. But geography very members of the AIIB. Its infrastructure likely will not be destiny in the same financing needs over the next several way that it was in the past. After all, decades will run into tens of billions the hyperconnectivity of the modern of dollars a year. With most bilateral world (which Vietnam has signed on partners reducing their presence in to) overcomes many of the binds of Vietnam, the AIIB could cover some of geography. Moreover, future oppor- the emerging financing gap. tunities and risks are projected to be Of the geopolitical risks particularly largely supraregional. That will require relevant for Vietnam are maritime is- geopolitical and economic outreach sues with China that go beyond just well beyond the neighborhood. territorial concerns. The maritime wa- Four global megatrends will be im- ters have considerable economic and portant for Vietnam to consider in the strategic value, containing a wealth of next two decades:11 geopolitical, eco- fish stocks and energy and mineral re- nomic, technological, and climatic. serves. They are also critical for ship- ping and communications. With the Geopolitical megatrends Middle East in turmoil, the geopol- The current shift in the world’s eco- itics of energy will also have implica- nomic and geopolitical axis from west tions for Vietnam both as a producer to east and from north to south will and exporter of crude oil and as a rap- define the coming decades. The rise idly growing consumer of petroleum of China is particularly significant. products. 8 VIETNAM 2035 OVERVIEW In the midst of this fast-evolving ers can benefit from its low wages and world order, Vietnam will need to con- from being part of the Chinese supply tinue building its alliances judiciously chains at the same time­ —­ a highly at- with a clear eye on its long-term eco- tractive combination. The agglomera- nomic and political interests. tion of a nascent electronics-industrial cluster in the north-central parts of Global economic megatrends Vietnam (around Hanoi) is an early sign The global economy is projected to of these possibilities. Moreover, with a grow at an average of 3.2 percent an- rapidly emerging middle class, the Chi- nually between 2015 and 2035, with nese consumer market (the world’s fast- continuing expansion in trade integra- est growing) will be increasingly attrac- tion, urbanization, and technological tive for Vietnamese producers. advances the main drivers. The rise of Growth prospects in East Asia will China, India, and members of the As- also be underpinned by the ongoing sociation of Southeast Asian Nations shift toward multilateral (often re- (ASEAN) matched by the (relative) gional) trade agreements. The ASEAN decline of the United States, Europe, integration­—­starting with the ASEAN and Japan would be the most apparent Economic Community that became a shift in the global economic structure functioning trading bloc in 2016­ —­can in coming decades.12 China clearly is bring considerable economic benefits. the biggest part of this story. In this Estimates for Vietnam range from a report’s projections, it would over- 1 to 3 percent cumulative increase in take the United States as the world’s national income.13 Even so, ASEAN largest economy (in market prices) integration is seen in Vietnam as a around 2032. It has been the world’s stepping stone for locking in even more largest exporter since 2009, and the promising partnerships beyond the re- second-largest importer of goods. It gion.14 Especially noteworthy is the is set to become an important source TPP. Also significant are the Free Trade of investment financing for emerging Area of the Asia-Pacific and the Re- economies, particularly regionally. gional Comprehensive Economic Part- Trade with China already accounts nership, each in less advanced negotia- for 20 percent of Vietnam’s total, up tions than the TPP. from 10 percent in 2000. The signifi- The TPP agreement includes the cant flow of foreign direct investment world’s largest and third-largest econo- coming into Vietnam is linked, in part, mies (the United States and Japan), with to a shift in low-wage production from TPP countries accounting for 36 per- China. As real wages in China continue cent of world GDP and more than a their sharp rise, many of its produc- quarter of all world trade. Vietnam is tion bases will continue to look south- well positioned to benefit. According ward in search of lower wages­ —­the to this report’s analysis, implementing “China+1 strategy.” Vietnam’s proxim- the TPP could add a cumulative 8 per- ity to southern China, home to many cent to Vietnam’s GDP by 2035. Oth- of these production networks, gives it ers have estimated double-digit gains a meaningful competitive edge. Produc- for Vietnam, many times larger than OVERVIEW VIETNAM 2035 9 for any other TPP country.15 Vietnam in business models. The Internet erad- could also usefully leverage commit- icates many of the information advan- ments under the TPP to lock in policy tages of colocation and cost-sharing. reforms that might otherwise be politi- Raw materials and other inputs to cally harder to carry out. various degrees of preprocessing are Top-down multilateral trade inte- available for sourcing on the Inter- gration is likely to be complemented net. Online platforms such as Alibaba by important subregional collabora- .com, Etsy, and Maker’s Row make it tions, including that within the Greater possible for manufacturers to search Mekong Subregion. Dwindling and for customers without having to spend increasingly unpredictable water sup- a lot on advertising and distribution. plies along with a rising demand for Crowdfunding sites such as Indiegogo water and energy will require greater and Kickstarter can aid in attracting regional cooperation for energy and finance. water security. For the most part, these trends bring upside opportunities. But some unin- New technological and business tended consequences have to be man- megatrends16 aged. Skill-intensive and labor-efficient Technological innovations, fueled and technology is set to eliminate the more supported by the information revo- routine middle-income vocations while lution, will disrupt production and complementing highly skilled and thus trading patterns across the world. Ad- higher-income jobs. Already, new tech- vances in digital technologies ranging nologies have displaced handicraft pro- from three dimensional (3D) printing, ducers in numerous industries ranging programmable micro­ controllers, and from textiles to metalworking. The second-generation computer numeri- progress of technology may also in- cal control milling and routing make it crease inequality in society, as those easier and less expensive to manufac- leveraging technology gain higher in- ture customized high-quality products. comes. The gap between labor produc- Major advances in renewable energy tivity and wages may also widen. Some (particularly solar) are posing a grow- even raise the specter of premature ing challenge to conventional and usu- deindustrialization in the developing ally environmentally more damaging world, partly because of automation.17 energy sources. Next-generation ge- Vietnam, with its well-deserved rep- nome sequencing and other advances utation as a dynamic and adaptable in the biomedical field are set to open a economy, can view these disruptive trillion-dollar industry in the next de- innovations with optimism (box O.1). cade, enhancing and extending human But to maximize the benefits, long- life. Advanced robots are being de- term investments will have to upgrade ployed on shop floors at an exponential the technical skill sets of the next gen- rate, boosting productivity and driving eration, and the domestic business en- costs down. vironment will have to be the focus. The information revolution is also Some technologies will have associated enabling major disruptive innovations risks that require careful management. 10 VIETNAM 2035 OVERVIEW BOX O.1  Potential benefits and risks of new technologies Solar energy. Solar energy is largely available between 2011 and 2014. Environmental and year round, especially in southern and central consumer groups are demanding more transpar- Vietnam. The potential market for solar pan- ency on health risks and increased regulation of els and water-heating systems is significant, such products. but progress is slow due to high development E-commerce. Opportunities are abundant, as costs. Solar panels have been installed in the foreign companies enter the market and local Nha Trang and other urban areas along the e-commerce firms consolidate. E-commerce sales south-central coast and in rural, mountainous, were estimated at more than $15 billion in 2015, and other remote areas that are difficult to reach driven by rapid Internet uptake and even faster with grid electricity. adoption of smartphones. A lack of apps for Social mobility, analytics, and cloud services. purchasing online, slow online payment growth, These services present opportunities to catch up and concerns over the security of online pur- with the developed countries, if close coopera- chases need to be rectified, and logistics services tion among scientists, enterprises, and the gov- for traceable and timely shipping of small pack- ernment is established for the long term. ages upgraded. E-commerce logistics are more demanding and operationally complex than Genomics and life sciences. Potential benefits those for import-export operations­ —­ the current come from genetically modified foods and other setup in Vietnam. advances in the life sciences. Improved variet- ies of corn can be used as feed to fatten hogs, Additive manufacturing (3D printing). This which should have strong commercial pros- technology can broaden opportunities but un- pects, especially with Vietnam forecast to con- dermine Vietnam’s traditional manufacturing. sume 33 kilo­grams of pork per person by 2020 As it advances, manufacturing will likely turn (more than China and the European Union). small scale, widely distributed, and customiz- Genetically improved crops could also reduce able, prompting investors from developed econo- the country’s feed imports, which quadrupled mies to relocate production back home. Global climate change ters (cm) in the past century, with an ac- Climate change is among the most con- celerating rate of shrinking. Rising sea sequential global issues. Greenhouse levels increase the risk of storm surges gas emissions are on a path to a 3.5– and the fluctuations in precipitation. 4.0 degrees Celsius (°C) warmer planet Vietnam has been ranked among by the end of the century. Climatic the five countries likely to be most af- conditions, heat, and other weather fected by climate change. A high pro- extremes considered highly unusual or portion of its population and economic unprecedented today could become the assets are in coastal lowlands and del- new normal. The impact of global cli- tas. Temperature increases in Vietnam mate change is already being felt, with have averaged about 0.26°C per de- the number of category 4 and 5 storms cade since 1971,18 twice the global av- having risen sharply over the past 35 erage.19 On current trends, annual av- years. The Arctic Sea’s ice has shrunk erage temperatures will (depending on to its lowest on record, and global sea the location) be 0.6–1.2°C higher by levels have risen about 10–20 centime- 2040 relative to 1980–99.20 The pre- OVERVIEW VIETNAM 2035 11 dictions show intensified heat and cold the economic growth boost generated waves, and 28–33 centimeter increases by a bulge in the share of the popula- in sea level around Vietnam’s shores.21 tion of working age. The dividend is Seasonal variability in precipitation is now nearly spent: The working-age also projected to increase, with the wet share peaked in 2013 and is now in de- season getting wetter and the dry sea- cline. Based on United Nations (UN) son drier. Extreme rainfall and flood- projections, the absolute number of ing would also become more likely, people of working age will start to particularly in the northern region, fall soon after 2035. More important, including Hanoi, with increased risk Vietnam reached a turning point in the of landslides in mountainous areas. A size of its older population in 2015 and southward shift has been seen in the will become one of the world’s fastest- typhoon trajectory in the past five de- aging societies. The number of Viet- cades. If this continues, Ho Chi Minh namese older than 65 years will grow City would be at greater risk of being from 6.3 million today to 15.5 million. directly hit. Coastal erosion and salin- The share of the population older than ity intrusion are other unfolding risks 65 years will rise from 6.7 percent in likely to accelerate. 2015 to 14.4 percent in 2035 (figure Agriculture, particularly rice produc- O.2), transforming it from a young to tion, is projected to be hit hard, most an aged society. severely around the Mekong Delta, This demographic transformation where much of the land area is less than has stark consequences. First, the de- 2 meters above sea level. 22 Climate cline in the working-age population change could reduce annual rice pro- duction by 3–9 million tons by 2050, and highly productive areas of coffee FIGURE O.2  The share of population over 65 will more than double between 2015 and 2035 plantations may become unsuitable for the purpose.23 The marine ecosys- 80 tems in Vietnam are also likely to be severely affected. And climate change impacts are also likely to have adverse 60 health consequences, including water- Share of total population (%) and vector-borne diseases and diar- rheal illnesses.24 Flooding would com- pound the risks. The poor and elderly 40 would be especially vulnerable to heat extremes, compounded by the rapid in- crease in Vietnam’s elderly population. 20 Domestic trends, risks, and opportunities 0 1975 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 Demographic megatrends Ages 15–64 Ages 65 and older Ages 0–14 Over the past two decades, Vietnam cashed in its “demographic dividend”—­ Source: UN 2015. 12 VIETNAM 2035 OVERVIEW will mean that a key driver of Viet- likely to be close to the trillion dollar nam’s rapid per capita growth will di- mark (in 2015 prices) by 2035, with minish, making human capital deepen- more than half the population pro- ing and other sources of productivity jected to join the ranks of the global growth even more vital for sustaining middle class with consumption of $15 robust growth. Second, serious fiscal a day or more in 2011 purchasing challenges will be driven by the ris- power parity (PPP) terms (figure O.3), ing burden on the pension and health compared with 11 percent today, giv- systems. Third, institutional arrange- ing new potency to the domestic mar- ments for the provision of care to the ket as a driver of growth. old-age population will quickly be- In addition to being a major oppor- come a major concern. tunity, a rising urban middle class will shift expectations and bring new chal- Vietnam’s emerging middle class lenges. The majority of that population Vietnam’s rapidly emerging middle will aspire to formal jobs and will want class, also increasingly more urban, to gain high-quality skills through ter- will offer another significant opportu- tiary education. And the expansion nity. Vietnam is a country of 90 mil- of wage employment without well- lion people, the 14th most populous on functioning industrial relations institu- the planet. Its $200 billion economy is tions will expose the economy to the FIGURE O.3  By 2035, more than half the Vietnamese population will enter the global middle class 100 80 Share of total population (%) 60 40 20 0 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Global middle class (> $15.00 PPP/day) Emerging consumer ($5.51–15.00 PPP/day) Near poor ($3.10–5.50 PPP/day) Global poor (< $3.10 PPP/day) Source: Vietnam Household Living Standards Survey 2014. Note: Figures here reflect the projected distribution of per capita consumption, based on 2014 VHLSS data, assuming 4 percent annual growth in per capita consumption. PPP = purchasing power parity. OVERVIEW VIETNAM 2035 13 risk of substantial worker-employer competitive private sector–­ led market conflict, evident in the large increase economy remains a major opportu- in strikes since 2006. The urban mid- nity. And while global integration has dle class will also demand greater po- advanced well, with Vietnam embed- litical openness and more accountable ding itself in global value chains, the government, which the existing system benefits are constrained by the ab- would struggle to meet. sence of linkages with domestic firms. Many policy actions to grasp these Unfinished economic modernization opportunities are well known. What agenda and rising political economy has been mostly lacking is follow-up challenges action. It may well be that the politi- Perhaps the biggest and most import- cal economy of some of the needed re- ant opportunity­ necessary for all —­ forms has become a binding problem. other opportunities and to mitigate Reforms are likely to face greater re- —­ risks­ l ies in completing the unfin- sistance than in the past, from interest ished economic modernization and groups that perhaps have more to lose structural transformation agenda. now than 25 years ago. And the bene- Part of this relates to maximizing fits are more uncertain than they were the gains from the ongoing struc- when reforms warded off widespread tural transformations that have been economic crisis. Deploying home- a major contributor to growth since grown and politically feasible solu- the early 2000s. With agriculture still tions—­ a strength of the first-generation accounting for almost half the labor reforms—­ will remain important for force, and with significantly lower next-generation reforms. labor productivity than in the indus- try and services sectors, future gains Aspirations for 2035 from structural transformation could be substantial. By 2035, 60 years after Reunification, The transformation from state to Vietnam aspires to become a modern, private ownership of the economy is industrialized economy—­ next in a suc- even less advanced. The state-owned cession of East Asian economies to enterprises and commercial banks have made the transformative journey continue to inhale too much oxygen to upper-middle or high-income status. out of the business environment, un- The many achievements since the dermining economywide efficiency launch of the Đổi Mới reforms have cer- and crowding out the productive tainly contributed to the ambitious parts of the private sector. The state goals. The strong record of regional also wields too much influence in al- peers such as the Republic of Korea, locating land and capital, giving rise Singapore, Malaysia, China, and Tai- not only to opportunities for corrup- wan, China—­ together with the fear of tion by handing over arbitrary power being permanently left behind in the to officials but also to heavy econ- region—­ has further fueled Vietnam’s omywide inefficiencies. So, adjust- ambitions. There is still an inherent de- ing the role of the state to support a sire to “catch up” with the world and 14 VIETNAM 2035 OVERVIEW the modern institutional norms of comprehensive global development OECD countries for living standards, agenda for the next 15 years and will the rule of law, and creativity, as re- give more concrete shape to some of flected in the broad aspirations for Vietnam’s key long-term goals. 2035 (box O.2). Vietnam has also The Ninth Party Congress adopted signed up to the UN’s Sustainable De- the phrase “socialist-oriented market velopment Goals (SDGs), which set a economy” as the official way to de- BOX O.2  Aspirations for 2035 Vietnam’s aspirations may be broadly defined in executive branches for adequate checks and the following ways: balances on the government. • A prosperous society that will be at the upper • The National Assembly will comprise full- reaches of upper-middle-income status. Its time deputies with the technical capacity market economy will be private sector–led, and institutional autonomy to represent the competitive, and intensively integrated with sovereign people, exercise oversight over the the global economy. Modern industries and a executive, and pass quality legislation. The knowledge-based economy, housed in an effi- judiciary will similarly be suitably positioned, cient and well-connected network of modern with autonomy and strong capacity to resolve cities, will drive growth. disputes in a more diverse society and econ- omy. The executive will be well integrated • A modern, creative, and democratic society horizontally and vertically, with clear func- will be the driving force for future develop- tions for central and subnational authorities. ment. The emphasis will be on creating an open and free environment that promotes • A civilized society will make every citizen learning and innovation for all citizens, who and every political and social organization will be guaranteed equal access to develop- (the entire political system) equal before the ment opportunities and the freedom to pursue law. Underpinning this will be robust, diverse their vocations, while fulfilling their respon- people’s social organizations that can exercise sibilities without compromising national and fundamental rights, including the people’s di- communal interests. rect democratic rights and the rights to infor- mation and association. • A rule-of-law state will be effective and ac- countable. It will clarify the relationship be- • A responsible member of the global com- tween the state and the citizenry and between munity of nations will build global alliances state and market. It will perform its basic and fulfill global responsibilities for peace functions effectively, including developing and and security while proactively seeking re- enforcing legislation; managing international gional and global opportunities for economic relations; ensuring public safety and national integration. security; and ensuring that markets function • A sustainable environment will protect the freely while addressing market failures. It will quality of Vietnam’s air, land, and water. It develop strong social institutions to ensure will build climate resilience into economic that the power belongs to the Vietnamese cit- planning, social policy, and infrastructure izens and protect their right of pursuing cre- investments to reduce the most severe risks ativity. It will develop clear lines of responsi- posed by climate change. It will develop di- bilities between the legislative, ­judiciary, and verse, clean, and secure energy sources. OVERVIEW VIETNAM 2035 15 scribe Vietnam’s economic system in and in employment at more than April 2001, codified in the 2013 re- 70 percent. vision of the constitution. The 2011– • A private-sector share in GDP of at 2020 Socio-Economic Development least 80 percent. Strategy set forth the objective “to • A score of at least 0.70 on the UN’s become a basic industrialized country Human Development Index. with the foundation of a modern and industrial country by 2020.” How well is Vietnam positioned to Despite broad acceptance, the pre- become a modern, industrial econ- cise definition of the term “modern and omy by 2035? Its GDP per capita­ —­at industrial” economy has not been an- $5,370 (in 2011 PPP) in 2014­ —­would nounced.25 While any definition would need to grow at a minimum of 6 per- be arbitrary, this report sets forth five cent a year to reach the $18,000 mark specific quantitative criteria for meet- by 2035 (figure O.4). This would be ing that objective: significantly higher than the average per capita growth rate of 5.5 percent • A GDP per capita of at least $18,000 between 1990 and 2014­ —­a nd well (in 2011 PPP), roughly equivalent to above the 3.8 percent average for all Malaysia in 2010. middle-income countries over the • A majority (over 50 percent) of the same period. A lower and more fea- Vietnamese population living in sible (but still ambitious) per capita urban areas. growth rate of 5.0 percent (Vietnam’s • A share of industry and services average over the last 10 years) would in GDP at more than 90  percent take its GDP per capita to just under FIGURE O.4  Income per capita growth scenarios for Vietnam to 2035 24,000 7% Korea, Rep., 2002 per capita 21,000 Malaysia, 2013 growth 6% 18,000 per capita GDP per capita (2011 PPP US$) Malaysia, 2010 Turkey, 2013 growth 5% 15,000 per capita Malaysia, 2001 Brazil, 2014 growth 4% 12,000 Thailand, 2010 China, 2014 per capita growth 9,000 6,000 Vietnam 3,000 0 2001 2006 2011 2016 2021 2026 2031 2036 Source: World Bank, World Development Indicators and authors’ calculations. Note: PPP = purchasing power parity. 16 VIETNAM 2035 OVERVIEW $15,000 by 2035 and put Vietnam on the aspirations, six transformations or par with Brazil in 2014, well poised to breakthroughs will be essential: reach $18,000 by 2040. A growth path of 7 percent (Vietnam’s aspirational • Enabling economic modernization growth target) would take per capita with a productive and globally com- GDP to $22,200, roughly the income petitive private sector firmly in the of the Republic of Korea in 2002 or lead Malaysia in 2013. This higher growth • Building the country’s technological rate would also enhance Vietnam’s and innovative capacity for a cre- chances of catching up with Indonesia ative society and the Philippines. • Managing urbanization and other Also in 2035, at least 54 million of forms of spatial transformation to Vietnam’s 108 million citizens would achieve economic efficiency be urban residents, almost 25 million • Charting an environmentally sus- more than today. The urbanization tainable development path with rate, now at around 33 percent, would enhanced capacity for climate need to increase 2 percent a year to resilience meet this target, matching the pace of • Promoting equality and inclusion of the past 20 years. The nonagriculture the marginalized groups for the de- sector has grown at twice the pace velopment of a harmonious middle- of the agriculture sector since 1990. class society This 2:1 ratio of growth rates is also • Building a modern, rule of law state projected over the next two decades, with a democratic society and a fully even with agriculture growing at its established market economy potential 3.0–3.5 percent. That would ensure a 90 percent share of the non- The six breakthroughs serve as the agriculture sector in the economy. The foundation for realizing the 2035 as- 80 percent private-sector share in GDP, pirations, and may be summarized if feasible, would involve a departure in three pillars: economic prosperity, from the past. With the share of the balanced with environmental sustain- public sector in GDP stuck at around ability considerations; equity and so- 33 percent since the onset of the Đổi cial inclusion; and a rule-of-law state, Mới reforms, this would involve a more marked by high capacity and account- meaningful attempt to restructure ability. The rest of this report is orga- the SOEs (including equitizing bigger nized around these three critical as- chunks of them) and providing a bigger pirations for 2035. It covers both the stimulus to the private sector. feasibility and challenges of realizing Thirty years of Đổi Mới reforms these aspirations under current con- have brought many successes. Viet- ditions and lays out a pathway for re- namese development aspirations for form to enhance the prospects of meet- 2035 are bold and significant, but the ing the 2035 goals. Details of the six challenges and risks facing the country breakthroughs are presented in Part II are also enormous. In order to achieve of the final report. OVERVIEW VIETNAM 2035 17 Pillar 1  Economic Prosperity with Environmental Sustainability Vietnam is on a trajectory of rapid Vietnam’s Long-Term Growth in a growth. Past performance has stoked Global Perspective ambitions of even faster growth over the next 20 years, and Vietnamese lead- “Catch-up growth”­ —­i n which late- ers are keen to see per capita growth ac- comers benefit from investment and celerate from its average of 5.5 percent transfer of technology and know-how since 1990 to around 7.0 percent. This from the richer countries­ —­has pro- will require the ratio of gross capital duced extraordinary episodes of eco- formation to GDP to pick up to around nomic success in East Asia and else- 35 percent (from 31 percent currently) where since the end of World War II. and stay at that level for at least a Some economies­ —­ like Japan, the Re- decade­ —­and the gross national savings public of Korea, Singapore, and Tai- rate to stay at 35 percent. But, above wan, China­ —­sustained high growth all, productivity growth, which has for some five decades and were pro- been on a long-term declining trend, pelled to high-income status. Others­ —­ will require greater attention. like Brazil, the Arab Republic of Egypt, The reform agenda will be demand- Indonesia, Mexico, and Thailand­ —­ ing, given that the decline in produc- showed promise for two or three de- tivity growth has been broad based. cades, but then became mired in the The government will need to prioritize “middle-income trap.” China’s ascent, reforms with more immediate payoffs albeit incomplete, seems on a trajec- such as strengthening the microeco- tory similar to the first group’s­ —­ and nomic foundations of the market econ- to Vietnam’s. omy. The reforms with medium-term Having grasped the catch-up oppor- impacts would support ongoing struc- tunities, Vietnam is strongly positioned tural transformations and the deepen- on its long-term income trajectory rel- ing of global integration by developing ative to its global comparators. A long- a market-oriented and commercialized term comparison with China is striking agriculture sector, strengthening Viet- on two counts. First, growth accelera- nam’s position in global value chains, tions in both countries, although 13 and building more resilient and credi- years apart (starting around 1977 and ble macroeconomic institutions. Those 1990), begin at roughly the same per with longer-term gestation would seek capita income of around $1,100 (2005 to create more robust learning and in- PPP). Second, 24 years into its growth novation structures, promote efficient acceleration (2014), Vietnam had kept urban agglomeration, and ensure envi- up with China over the equivalent pe- ronmental sustainability. riod (to 2001) (figure O.5, panel a). 18 VIETNAM 2035 OVERVIEW FIGURE O.5  Keeping on course for catch-up: Vietnam and global comparators a. Vietnam and China b. Vietnam and other high-growth economies 12,000 30,000 10,000 25,000 GDP per capita (2005 PPP US$) GDP per capita (2005 PPP US$) 8,000 20,000 6,000 15,000 4,000 10,000 2,000 5,000 0 0 Base +5 +10 +15 +20 +25 +30 +37 Base +5 +10 +15 +20 +25 +30 +35 +40 +45 +49 year year Vietnam Vietnam (4% per capita growth) China, 2001 Brazil Korea, Rep. Thailand Taiwan, China Egypt, Arab Rep. Vietnam (7% per capita growth) Source: Authors’ calculations based on data from Penn World Table, Version 8.0. Note: Base years are 1951 for Taiwan, China, and for Brazil; 1958 for Thailand; 1962 for the Republic of Korea; 1969 for the Arab Republic of Egypt; 1977 for China; and 1990 for Vietnam. PPP = purchasing power parity. The story remains broadly simi- —­ into their growth accelerations­ where lar when looking at other successful Vietnam is now­ —­the economies that economies (those with at least a three- made it into the high-income ranks and-a-half-fold increase in per capita pulled ahead of the rest. The Repub- income in the first 25 years of their lic of Korea and Taiwan, China main- growth accelerations) and considering tained their growth records of the first a 50-year period. The starting points 25 years over years 25–50, but Brazil, for the growth accelerations were close, Egypt, and Thailand started to see with Thailand at $835 (2005 PPP) at growth rates fall. the lower end and Taiwan, China, at Vietnam is thus seemingly at a crit- $1,365 at the upper end. About a quar- ical juncture. Decisions at this stage ter century into its growth accelera- matter for meeting long-term income tion, Vietnam’s position is broadly at aspirations. If the country can carry par with those successful economies out the reforms to pull up its GDP (figure O.5, panel b). growth to its 7 percent per capita tar- What happens from here on is even get, it would match the trajectory of more important. At roughly 25 years China and by 2035 stand a strong OVERVIEW VIETNAM 2035 19 chance of reaching the incomes of the second period (at 6.6 percent) than in Republic of Korea and Taiwan, China the 1990s. While this slowdown was in the early 2000s. At the higher in part a reflection of the weaker en- reaches of upper-middle-income sta- vironment following the 2008–09 tus, it would be strongly positioned global financial crisis, a slowdown in for the final ascent to high income. It labor-productivity (output per worker) would also have a stronger chance of growth that started in the late 1990s catching up with or even overtaking its was also a contributing factor (figure middle-income neighbors such as Indo- O.6, panel a). In fact, an acceleration nesia and the Philippines. But if Viet- in labor-force growth prevented an nam’s per capita growth slips to around even steeper decline in GDP growth 4 percent a year, that will be good after 2000. Second, decomposition of enough only to take its average income productivity growth in the two labor-­ close to that of Thailand or Brazil periods shows that, since the early today, and its chances of catching up 2000s, the contributions of capital with the neighboring wealthier mid- deepening (panel b) and structural dle-income countries would be lower. transformation from agriculture to What will determine Vietnam’s path? manufacturing and services (panel c) Productivity is fundamental. Econo- have picked up markedly. Conversely, mists generally agree that countries’ growth in total factor productivity, inability to break out of the middle- which accounted for the bulk of labor- income trap (whether or not they have productivity growth in the 1990s, col- been growing fast) is almost entirely at- lapsed in the post-millennium period, tributable to stagnating productivity.26 and labor-productivity growth fell in Summarizing the importance of pro- a majority of the sectors. Labor pro- ductivity in development economics, ductivity actually declined in min- Nobel Prize–winning economist Paul ing, public utilities, construction, and Krugman notes, “Productivity isn’t finance—­ a ll sectors in which SOEs ­ everything, but in the long run it is al- have kept their dominant role. most everything. A country’s ability to Driven by multiple objectives (profit improve its standard of living over time not high among them) and by distorted depends almost entirely on its ability incentives, SOEs have stayed unpro- to raise its output per worker.”27 Here, ductive. Measures of firm-level asset though, the story becomes less rosy for (capital and land) productivity (figure Vietnam. O.7) and labor productivity through- out the 2000s capture their inefficien- cies. Despite a long-running (albeit Trends in Productivity Growth­—­ uneven) SOE equitization process, the A Cause for Concern public sector’s presence in production Behind Vietnam’s impressive growth and its control over factor markets re- since 1990 are some worrying signs. main pervasive. The state still retains Two stand out in comparing the 1990s a majority stake in more than 3,000 with 2000–13. First, GDP growth was SOEs, which account for about a third a full percentage point lower in the of GDP (same as in 1990) and close 20 VIETNAM 2035 OVERVIEW FIGURE O.6  Productivity growth has been trending downward a. Labor-productivity growth has been on b. . . . as total factor c. . . . and labor productivity in a a declining trend since the late 1990s . . . productivity collapsed . . . majority of sectors fell sharply 8 120 100 7 100 80 80 6 60 60 Percent Percent Percent 5 40 40 4 20 20 3 0 2 –20 0 1993 1995 2000 2005 2010 2013 1991–2000 2001–13 1991–2000 2001–13 Contribution of human capital growth Contribution of productivity growth Contribution of TFP growth within sectors Contribution of capital deepening Contribution of structural transformation Source: Authors’ calculations based on the General Statistics Office of Vietnam data. Note: Part a displays a 3-year moving average. In part b, capital deepening is measured as the change in the ratio of capital stock to GDP. to 40 percent of total investment. The and that of assets in the domestic pri- state sector also maintains a virtual vate and SOE sectors (see figure O.7). monopoly (or oligopoly) in critical sec- Vietnamese private firms, on average, tors such as fertilizer, mining, utilities, were using their assets more produc- banking, construction, and agriculture. tively than their Chinese counterparts Under growing pressure to restructure, in the early 2000s, but by 2014 their it has at least sought to ensure that its asset productivity had fallen to less feeble productivity does not deteriorate than half that of their Chinese peers. further. Vietnamese private firms are over- Domestic private enterprise gives whelmingly small and informal, which even more cause for concern. Driven prevents productivity gains through by reforms to first legalize and then specialization and economies of scale. facilitate private enterprise, the private And the relatively few large domestic sector grew exponentially after the late private firms (especially those with 1980s.28 But, its growing presence has more than 300 employees) tend to be been marked by worsening productiv- even less productive than the smaller ity, so much so that there is little day- private firms (on both asset and labor light between the productivity of labor productivity). OVERVIEW VIETNAM 2035 21 What explains these trends, and why FIGURE O.7  Firm-level asset productivity has declined do they differ between the two peri- sharply for the Vietnamese nonpublic enterprise sector ods? The initial pickup in productivity 2.5 growth in the 1990s reflected Vietnam’s move toward a market-economy struc- ture and the removal of many distor- 2.0 tions (multiple price controls, produc- Revenue per unit asset tion quotas, collectivized agriculture, 1.5 trade and investment restrictions, and a ban on formal private enterprise). Most of these restrictions were lifted in the 1.0 initial phases of Đổi Mới, with systems more friendly to the market and private 0.5 sector in place by the early 1990s. These early steps gave a big boost to produc- tivity growth across the economy. 0 2001 2003 2005 2007 2009 2011 2013 But by the end of the 1990s the pro- ductivity gains had been exhausted China, SOEs Vietnam, SOEs China, nonpublic sector Vietnam, nonpublic sector and more fundamental policy and in- stitutional constraints started to bind. Sources: General Statistics Office of Vietnam data, National Bureau of Statistics of China enterprise data, and authors’ calculations. Two distortions in Vietnam’s nascent Note: Asset productivity is revenue per unit of assets. SOE = state-owned enterprise. market economy have hurt productiv- ity growth the most. The first is the gradual commercialization of state and ambiguous approach to giving up institutions (discussed in more detail state control of production and to ac- under Pillar 3), such that the narrow cepting domestic private ownership of commercial interests of those with con- productive assets. This has spawned an nections now dominate and determine entrepreneurial business class within business viability. The innumerable (or closely connected to) the state tacit and explicit preferences handed rather than outside it and permitted a out to firms with connections (such as continuing heavy presence of SOEs in all SOEs, most foreign-invested firms, many sectors. and some large domestic private firms) In the second, the market embrace by officials who also give inadequate has itself been two-speed. Impressive attention to economic efficiency make progress in liberalizing product mar- it very difficult for many private firms kets and integrating them with the to thrive, even if they are productive. global economy under international Commercialization of state insti- trade agreements has been accompa- tutions has produced an uneven and nied by a more subdued and muddled partial approach to market reforms, approach to developing and liberalizing leading to two imbalances. In the first, factor markets, as seen in the largely in- a warm embrace of markets as the efficient allocation of land and capital. mechanism for resource allocation has For example, significant assets (land coincided with a much more cautious and capital) were accumulated in the 22 VIETNAM 2035 OVERVIEW construction, real estate, and banking stitutions, firms turn to informal in- and finance sectors between 2001 and stitutions and networks and often find 2013, even though these sectors were illegitimate means to enter the market, among the least productive. Alloca- grow, and become more profitable.34 tions are likely influenced by arbitrary There is no reason to believe, however, administrative decisions and connec- that those who are more adept at gar- tions, at heavy economic cost­ —­ as sub- nering political capital or exploiting stantiated by a considerable literature. connections are also necessarily better A 2008 study finds that the allocation at running businesses. of bank credit is related to connec- tions and that the most profitable pri- A Reform Agenda to Reignite vate firms do not even attempt to get Productivity Growth bank loans.29 Updating the analysis to 2013, this report finds that the results The imperative to improve pro- hold. Provinces with a high density of ductivity growth is therefore clear SOEs provide less credit to private firms and strong. GDP growth since the and require more time to issue land- early 2000s has been led by forces use rights certificates than other prov- that compensated for weak and de- inces.30 Easier access of SOEs to credit, clining productivity growth but land, and export quotas in the garment are now reaching their natural and textile sector has reduced the prof- limits. Rapid labor-force growth itability and viability of private firms.31 made up for low and declining labor- Another distortion in Vietnam’s productivity growth economywide. market economy that has hurt pro- Large-scale structural transformations ductivity has been the relative neglect offset the low and declining labor- of building critical market institutions. productivity growth at the sectoral The greatest weaknesses are in those level. And an acceleration in capital responsible for protecting private- accumulation counterbalanced the low property rights and ensuring free and and declining growth in total factor fair competition. These institutional productivity. In the next phase of de- shortfalls have impeded the emergence velopment, each of these compensatory of large, competitive, private firms and factors is projected to have a sharply further discouraged small household diminished impact, exposing overall firms from entering the formal sector,32 economic growth much more to the even though switching from informal weak productivity trends. Moreover, to formal activity can raise firms’ pro- the global context is likely to be far less ductivity and profitability.33 hospitable than before the global finan- The adverse impact on the per- cial crisis. formance of domestic private firms, Vietnam’s advantage is being at an while unsurprising, has been substan- early enough stage of development to tial. With noncompetitive and state- reignite productivity growth without controlled factor markets and inade- compromising its 2035 income ob- quately developed formal market in- jectives. At a similar stage of develop- OVERVIEW VIETNAM 2035 23 ment (the early 1980s), the Republic out delay, but their impact would be of Korea saw a major acceleration in felt the most between years five and its labor-productivity growth, which ten. These would aim to support the is encouraging since it suggests that ongoing structural transformations a turnaround in such growth is pos- and deepening of global integration sible. But it also highlights how de- (including the capital account) by manding the agenda for institutional modernizing and commercializing reforms is. Some of that country’s re- agriculture, strengthening Vietnam’s forms launched in the late 1970s and position in global value chains, and early 1980s­—­macroeconomic stabili- building more resilient and credible zation, agricultural modernization, and macroeconomic institutions. greater emphasis on competition and • Reforms and investments with im- market deregulation ­— ­strongly and pacts mostly in the long term. These quite quickly helped improve produc- could be phased in over the next two —­ tivity growth. But others­ in the areas or three years, with payoffs expected of higher education, research and de- only with a significant lag. They take velopment (R&D), and urbanization­ —­ into account the fact that the cur- operated with a significant lag, having rent growth model (supported by begun many years earlier. the short- to medium-term reforms) Reforms in Vietnam would need is likely to start hitting diminishing to be not only comprehensive (given returns no later than a decade or so its broad-based slide in productivity from now, as the economy reaches the growth) but also carefully sequenced upper-middle-income level and envi- with a fixed eye on long-term growth. ronmental degradation reaches its The agenda, accordingly, can be bro- limits. The longer-term focus would ken down into three broad (and over- be on spurring learning and innova- lapping) time horizons. tion, promoting urban agglomera- tion, and ensuring environmentally • Reforms with immediate impacts. sustainable development. Strengthening the microeconomic foundations of the market econ- The impacts of the reforms are not omy would have to be the immedi- mutually exclusive. Functioning land ate priority, with the payoffs most markets and strong microinstitutions significant over the next five years. will be just as important after a de- This should help stem the declining cade as they are in the next three years, trend in productivity growth and, by although the short-term impact will be enabling greater and more efficient felt more acutely because of the current participation of the private sector, distortions that will get eliminated. provide a strong growth stimulus for Elements of stronger macroeconomic the next decade or so. institutions will be needed in the next • Reforms with impacts in the medium two or three years to ensure fiscal con- term. These would comprise mea- solidation and greater efficiency of sures that are also carried out with- spending. The environmental agenda 24 VIETNAM 2035 OVERVIEW can also have some immediate payoffs kets still in their infancy. Land markets through more efficient pricing systems are even less developed and complete. that internalize environmental costs. Moreover, as noted, state influence on credit and land allocations seems ex- cessive, leading to significant economic Reforms with immediate impacts­—­ inefficiencies. Labor market regulations strengthening the microeconomic are less onerous (Pillar 2), but even foundations of the market economy those are not free of policy concerns. The immediate priorities have to be The hộ khẩu household registration sys- stronger microeconomic market- tem (which, among other problems, economy foundations. SOE reforms impedes rural–urban migration) is less stay an important part of this agenda, burdensome than in earlier years but but are no longer enough: creating bet- still imposes efficiency costs (Pillar 2). ter enabling conditions for the private sector, such as strengthening market Building financial markets institutions and liberalizing factor The financial sector has expanded rap- markets, takes precedence. idly since the early 1990s, but still has wide scope to take on an even bigger role. It has done a reasonably good job Strengthening market institutions of mobilizing savings but fallen short The evidence is compelling that in allocating credit to its most produc- well-functioning markets require tive uses and providing an inclusive well-defined rules of the game, en- payment system. Much of the lending, forced transparently and predictably. especially by state-owned commer- The agenda calls for strong market cial banks, has gone to SOEs, or in- institutions whose role is especially creasingly to private companies with important in the early phases when connections, crowding out lending to markets are underdeveloped and small productive segments of the domestic distortions can have amplified effects. private sector. Financial inclusion has The emphasis in Vietnam will have to increased since the early 1990s, but be on enforcing competition policies remains an issue for less well-off Viet- and ensuring the security of property namese, especially those in rural areas. rights. Restructuring the SOE sector The banking sector is struggling, and leveling the playing field for all having taken a big hit after the global enterprises—­ private or public, domes- financial crisis toppled the real estate tic or foreign—­is an important part of market (where the banks had heavy this agenda (discussed under Pillar 3). exposure). Banks’ average return on assets has fallen steeply since the crisis (from 1.8 percent in 2007 to 0.5 per- Liberalizing factor markets cent in 2012). Their reported nonper- Vietnam’s financial sector is still rela- forming loans (NPLs) have risen and tively underdeveloped, with the bank- are generally considered understated. ing sector saddled with deep-seated And their provisions are lower than structural problems and capital mar- in middle-income peer countries in OVERVIEW VIETNAM 2035 25 East Asia. Many of the NPLs and re- ernment debt and legal changes that structured loans are related to SOEs. permit the government to borrow from Moreover, cross-ownership of private the SBV on behalf of the DIV in large banks by each other and by enterprises crises, under well-defined conditions. (including SOEs) remains significant. Compliance with Basel Core Princi- Developing a larger, more diverse, ples is improving but still low, and stable financial sector. This requires many banks lack Basel II’s capital re- steadily increasing bank capital and quirements for market and operational developing the broader financial sec- risks—­ even as the country looks to tor. The first challenge is resolving the move toward Basel III. On-site inspec- large NPL overhang in banks. A good tions, particularly of the state-owned starting point would be confidential commercial banks, have been limited, audits (including operational audits) and consolidated supervision of banks by reputable international firms and is lacking. Off-site monitoring also strong application of prudential norms, needs to be improved. without regulatory forbearance. For Three items are on the agenda for the banks deemed sound and viable, NPL financial system over the next 20 years. resolution would involve direct sales of collateral related to the NPLs and Reducing the risk of major financial transfers of NPLs and collateral, under crisis. Vietnam’s response to potential a more robust legal framework, to a financial crises could be accelerated if strengthened Vietnam Asset Manage- the government strengthens the Na- ment Company for management, re- tional Monetary Advisory Council. covery, and sale. The banks deemed in- The council could meet regularly, sup- solvent would be closed, merged with ported by a dedicated technical team viable banks, or sold (either directly or to provide timely reports and drafts of through the company). notifications and instructions to banks. Improving future performance in Information on the financial system the banking sector will depend on bet- could be improved by better off-site ter enforcement of improved regulation data and supervision from the State and supervision of risks taken by banks Bank of Vietnam (SBV). Improving the (with closer attention to state-owned capacity for crisis management and the banks) and by other sellers of assets framework for bank resolution will im- such as insurance and pension firms. prove the crisis response in the event of One major improvement would be to illiquidity or insolvency in the banking apply macroprudential supervision and sector. This could be further strength- better off-site supervision. A second ened by firming the resources of the would be a gradual shift toward in- Deposit Insurance of Vietnam (DIV) ternational regulatory and accounting and legally enabling it to undertake a norms. Moving toward Basel III would purchase and assumption transaction mean higher requirements for capital, of failed banks’ assets. This measure including capital for market and op- would require both a gradual shift in erational risks, and reduced incentives the DIV’s funds from banks to gov- for excessive risk-taking by banks (in 26 VIETNAM 2035 OVERVIEW a context where some banks are strug- Kenya’s M-Shwari, which launched in gling to meet even Basel II require- 2012, and by end-2014 had 9 million ments). Third would be to gather more accounts, total deposits of $45  mil- information on business groups, which lion, and outstanding loans of nearly could help reduce connected lending. $18 million­ —­ and its deposit holders Deepening the capital markets can apply for short-term loans. Finan- (starting with the market for govern- cial inclusion in Vietnam would also re- ment debt) will also need changes to quire higher-quality credit information the legal and accounting frameworks on borrowers. to bring them in line with international standards. That would make foreign Developing land markets investment through the capital market Land, according to the Vietnamese more attractive. As in most develop- constitution and law, is owned by the ing countries, developing contractual public and managed on its behalf by savings institutions (such as insurance the state. Land-use rights for specified companies) has only begun in Viet- periods are issued to individuals, who nam, but their role will increase over are allowed under the law to transfer the next 20 years as the economy mod- these rights to other individuals. The ernizes. Generating investor interest in state may take back the land and annul insurance companies will depend on the rights in the national interest, based improved clarity of company accounts, on compensation according to law. compliance with international account- The overall legal framework for in- ing and reporting standards, improved dividual rights to land use is subject to corporate governance, and a strength- the interpretation of numerous over- ened Insurance Supervisory Authority. lapping laws, and its implementation is equally riddled with a plethora of Increasing financial inclusion. Viet- implementing regulations and over- nam has done fairly well in lending to lapping mandates. This is just at the individuals35 relative to other lower- national level­—­ provincial and munic- middle-income countries, but not as ipal administrations issue their own well in deposits and remittances. 36 instructions on land use and transfers. Remittances in Vietnam tend to go The markets for trading land-use through financial institutions, with rights are, in effect, missing.37 Func- much less use of mobile phones and tioning primary markets for land use money-transfer operators. Alterna- rights are virtually absent. The role of tive uses of mobile phones would im- the markets is played by state agencies, prove financial inclusion in remit- often using ill-defined administrative tances and deposits at lower cost. procedures. And the “price” for issuing Although Vietnam would need major land-use rights bears little resemblance changes in regulation­—­for finance and to a true market-determined price. telecommunications— ­t his approach Secondary land markets, more prev- would take advantage of the country’s alent, operate under multiple con- large number of mobile phone subscrip- straints. Market mechanisms are rarely tions. A good international example is deployed in cases involving reclassi- OVERVIEW VIETNAM 2035 27 fication of land use from agricultural rural. Second is strengthening partici- to nonagricultural land. In such cases, pation in global value chains to maxi- land-use planning decisions by local mize the chances of strong productivity administrations (and not demand- gains, given the heavy and probably in- supply conditions or local preferences) creasing reliance on external markets. determine the reclassified purpose of And third is building more resilient and land use. Moreover, the “seller” or the credible macroeconomic institutions, individual giving up land-use rights, which will become more critical with often a farmer, is unlikely to receive fair the impending demographic shifts, compensation: The benefit from the huge spending needs in infrastructure transaction is mostly captured by the and social sectors, and greater capital local government and by the “buyer,” account integration with the global who often receives the land at prices economy. below what a functioning secondary land market would have produced. Modernizing and commercializing The missing land markets are prob- agriculture lematic from several angles. For one, their absence, alongside weak property A move to industrialize more deeply rights, fosters a patronage-based busi- and modernize services is not incom- ness model.38 Their lack undermines patible with a sharp focus on agricul- efficiency in other ways, too. A land- ture. The sector is­ —­and will remain use right holder who would like to —­ for the foreseeable future­ an import- change land use to a more rewarding ant area of Vietnam’s comparative ad- economic activity will find the admin- vantage, and will have to perform at istrative costs high, often prohibitively its high potential to support economic so, and the processes time-consuming. modernization. The lack of land markets also creates While the agricultural sector has distortions in urbanization patterns progressed enormously since the late (see the later section “Using cities to 1990s, emerging concerns over the power the drive to modernity”). The quality and sustainability of its growth development of transparent and func- model require immediate policy at- tioning land markets, therefore, is an tention. Sectoral labor productivity important and urgent policy priority. remains much lower than in compara- tor countries, despite rapid gains since the 1990s. An important factor is the Reforms with impacts in the dominance of rice in its use of the best medium term­—­managing land and much of the country’s irriga- structural transformations and tion capacity. Economic issues include deepening global integration low smallholder profitability, heavy The medium-term emphasis will have underemployment among agricultural a threefold focus. First is moderniz- workers, uncertain food safety, low ing and commercializing agriculture, value addition, price-discounted com- which engages almost half the work- modities in international markets, gaps force in a country almost 70 percent in multimodal farm-to-market connec- 28 VIETNAM 2035 OVERVIEW tivity, limitations in storage and cold- nizing farm services. The second will chain logistics, and limited technolog- modernize the agro-food system by ical or institutional innovation. And processing agricultural commodities some agricultural growth has come at (crops, livestock, and harvested fish) the expense of the environment. into value-added food products.39 Agriculture is at a turning point. Signs of these shifts are already Major opportunities will be in domes- emerging in some areas or corridors in tic, regional, and international mar- the agro-food complex. But how effi- kets, yet the sector will no longer be ciently these processes occur, how in- able to compete on the basis of low- clusive they are, how disruptive they cost, labor-intensive natural-resource are, and whether they follow a straight use. The sector will also face growing or convoluted path will depend heavily domestic competition­ —­from cities, in- on public policy. dustry, and services­ —­for labor, land, For example, the government could and water. Future growth will depend facilitate a more vibrant market for on increased efficiency and innovation. agricultural land and support farmer Change is also needed in the struc- shifts from rice monocropping to tural patterns of production and mixed cropping, including livestock supply-chain organization, which are and aquaculture or other forms of highly fragmented, with limited col- specialization. It will want to deploy lective action at farmer level and weak regulations, incentives, and facilitative vertical coordination. This fragmen- services ­— ­c ombined effectively­— ­to tation has contributed to unnecessary stimulate and monitor a “greener” ag- transaction costs, unrealized econ- riculture and a system for food safety omies of scale in certain functions, and consumer protection that inspires and poor incentives to produce and confidence. Supply chains capable of maintain higher-quality produce and tracing the movement and physical raw materials. Similarly, change is condition of perishable products­ —­ like warranted in the “state management” frozen fish from an origin in the Me- model­ —­that is, in the technical and kong Delta to a consumption market in regulatory services provided by the Western Europe or North America—­ state, in public investments and expen- would contribute to strengthening both ditures in the sector, and in the policies trade competitiveness and food safety. applied to foster farmer and agribusi- There will be greater demand for infor- ness investment. Demand-driven agri- mation and for technical and financial culture needs flexibility. It cannot be instruments, to better manage risks as- centrally planned. sociated with agriculture. The govern- If Vietnam’s agriculture follows ment will need to facilitate these types global patterns, it will see two trans- of services. Improved educational and formations. The first will modernize vocational training services, for in- production methods, change the pat- stance, will quicken the adoption of terns of land use (such as less rice, more improved farm and post-harvest tech- value-added crops, and more livestock), nologies. Creating and maintaining and increased collective action in orga- a favorable environment for agroin- OVERVIEW VIETNAM 2035 29 dustrial and agribusiness investment the TPP. Not only is Vietnam’s export and operations will also be critical basket much bigger than before, it is for adding value to food products and also much more diversified, reflecting rebranding them for quality and sus- a transition from exporting primary tainability. Vietnam can draw on and commodities to low- and medium-tech adapt to many international examples manufactured goods (apparel, furni- of good practice. ture, and footwear), and then to more The government has played a major sophisticated products (machinery and and, in some areas, leading role in the electronics). past development of agriculture. Some Growth in service exports, however, of its functions­ —­ including land-use has been lackluster. Nor does the cur- planner, farm manager, commod- rent GVC model in Vietnam fully ex- ity trader, and technology supplier­ —­ ploit the opportunities. It relies heav- will be less important or even detri- ily on foreign-invested firms operating mental as agriculture moves toward final-stage assembly operations, with a more flexible, market-driven, and limited backward linkages to domestic knowledge-based system. The govern- suppliers in key manufacturing activ- ment can undertake less direct invest- ities and little transfer of technology ment in agriculture if it promotes pri- between foreign and local firms, which vate agricultural services and facilitates often lack the capacity to absorb higher private investment efficiently, including technologies or jump to more sophisti- through public-private partnerships. cated tasks or value chains. A striking That should free resources to achieve feature of Vietnam’s export-oriented excellence in applying environmental, manufacturing operations is the rela- phytosanitary, animal health, and food- tively high value of imported compo- safety regulations. The government nents going into final assembly—­ an will, though, have a continuing role estimated 50–60 percent for garment in supporting farmer organizations, in and footwear exports, for example. maintaining rural infrastructure and Most accessories and parts going into other elements that influence farmer the export-oriented production of and agribusiness transaction costs, and smartphones and tablets also come in coordinating their activities. from abroad. So, while retaining final-assembly production for large-scale job creation Leveraging external trade in manufacturing (at least in the me- opportunities dium term), Vietnam could simultane- Vietnam has gained much from ex- ously deepen the participation of do- ternal trade. Deepening its partici- mestic suppliers into the final-assembly pation in global value chains (GVCs) process by developing more compre- has given it a real headstart over other hensive networks of dependable tier-1 emerging market competitors for the and tier-2 suppliers, as China has done. potentially even more rewarding op- This may better position it to begin portunities from proposed multi- and moving into more sophisticated prod- bilateral free-trade agreements, such as ucts in existing GVCs, increasing the 30 VIETNAM 2035 OVERVIEW value-added share in existing GVCs by ports, growth, and job creation. If the moving into more sophisticated tasks, country can upgrade its human capital and shifting into new supply chains base and its information and commu- with higher value-added shares. nications technology (ICT) infrastruc- Reforms would first promote com- ture and connectivity, it can become petitive private firms capable of es- a regional powerhouse in IT-enabled tablishing production linkages with sectors. foreign-invested firms. The key to mov- Regulatory reforms will be essen- ing up the value chain in each of the tial to energize services. Foreign own- early industrializers in East Asia has ership restrictions in strategic services been a vibrant domestic private sector. such as banking, telecommunications, Eventually, as Vietnamese firms ab- media, electricity transmission and dis- sorb know-how and become globally tribution, road freight, rail transport, more competitive (through technolog- air transport, and port operations are ical upgrading and scale economies), either prohibitive or much more oner- the country could aim for some of its ous in costly approvals than they are firms to be at the head of GVCs, where in comparator countries.41 The re- returns are far higher. Apple, for in- strictions need to be rationalized and stance, retains more than 45 percent eased, allowing market mechanisms to of the wholesale price of a new iPhone predictably allocate investment among as gross profit.40 Samsung (Republic domestic and foreign investors alike. of Korea), Huawei (China), and Tata Addressing gaps in dispute resolution is Group (India) are other examples. another priority. Foreign service firms The second policy imperative is to de- are wary of the legal system, and often velop a modern service sector, a critical specify dispute settlement by arbitra- input for manufacturing, especially on tion in such jurisdictions as Singapore. the export side. This is one area where Vietnam can also be more proactive Vietnam lags behind its competitors. in engaging partner countries to lower The absence of a functioning modern the barriers to service trade within financial sector is a major handicap. ASEAN. Lack of access to early-stage financing Finally, as Vietnam integrates more limits the development of a dynamic fully and profitably into GVCs, it entrepreneurship start-up ecosystem. can also boost its connectivity. Firms Insurance, telecommunications, and that participate in value chains need transport and logistics are also lagging. to move goods across borders cost- This gap will be felt even more as Viet- effectively and reliably, in order to keep nam climbs GVCs and as the value con- inventory carrying costs low and com- tent of its trade goods rises. ply with the strict requirements of lead Service activities like R&D, design, firms for on-time delivery. Connectiv- and engineering should be developed ity has three key attributes, each re- as a way of upgrading participation in quiring policy attention. GVCs (see the later section “Spurring learning and innovation”). Modern Institutional connectivity. The “soft- services are also a direct source of ex- ware” side of things includes trade OVERVIEW VIETNAM 2035 31 TABLE O.1  Logistics Performance Index rankings Overall International Logistics quality & Tracking & LPI Customs Infrastructure shipments competence tracing Timeliness Vietnam, 2007 53 37 60 47 56 53 65 Vietnam, 2014 48 61 44 42 49 48 56 China, 2014 25 27 26 10 32 23 31 Malaysia, 2014 28 38 23 22 35 29 36 Thailand, 2014 35 36 30 39 38 33 29 Source: The World Bank’s Logistics Performance Index (LPI). facilitation, structural and regulatory and these do not connect well to each reforms, and transport and logistics other or to major trade gateways, re- facilitation. Vietnam performs rela- flecting lack of coordination to develop tively well on the World Bank’s Logis- economic zones and transport corri- tics Performance Index (LPI), ranking dors.43 Key issues include poor road 48 among 160 countries on the over- conditions (see the section “Using cit- all rating and the highest among the ies to power the drive to modernity”), LMICs (table O.1), although still lag- grossly underdeveloped freight-rail and ging regional upper-middle-income inland-waterway infrastructure, and countries such as China, Malaysia, and supply-demand mismatches in deep- Thailand. Its rankings have improved water maritime port infrastructure.44 since 2007 across the board, except Although expressways require further for customs procedures.42 Health and investment, transport expenditures sanitation performance standards in- need to be rebalanced from road trans- spections are underperforming, below port (the most costly form of domestic Vietnam’s ASEAN peers. freight transport) to multimodal facil- ities (for handling and storing goods Physical connectivity. A well- in high-capacity warehousing) to take connected country has abundant and advantage of more cost-effective modes high-quality physical infrastructure, such as rail and inland waterways. especially international gateways and Rebalancing from capital to mainte- multimodal interfaces, including ports, nance expenditures in transport is also airports, road and rail links, as well as needed. ICTs. It also includes energy, which is vital to the continued success of man- People-to-people connectivity. The ufacturing firms, and can be traded third attribute refers to ease of move- among neighboring countries. Vietnam ment of people across borders (for ser- comes out well on the infrastructure vice provision, education, and tourism). component of the LPI ranking (44), Vietnam has abolished caps on the but many transport aspects require number of foreign workers that foreign attention. firms can hire, and has new procedures Current modes are overloaded in and for them to obtain work permits. Man- around the major economic clusters agers, executives, and specialists who 32 VIETNAM 2035 OVERVIEW enter the country as intra-corporate independent decision-making body, transferees are allowed to stay for an following a transparent framework, initial three years, subject to extension. conducts monetary policy. Decision But there is still wide scope to better making are responsible to the govern- meet global businesses’ need to bring ment for fulfilling their mandate, and in specialist international staff. they use comprehensive model-based monetary and economic analysis to assess the policy stance and communi- Developing institutions for cate their decisions. macroeconomic management The central lesson for Vietnam is Stability of aggregate price levels, pre- that it needs to overcome the current dictability of relative prices, and sound multiplicity of objectives for the SBV.46 management of public resources are all To do this, the Vietnamese authorities critical for efficient domestic markets can further develop the SBV’s close and long-term competitiveness. Viet- management of the exchange rate or, nam has had episodes of high inflation, preferably, focus on domestic inflation. and public and publicly guaranteed Both options require a clear price sta- debt have built up fast. The efficiency bility mandate and swift development of public expenditure has also been low of operational and analytical capabili- in several key areas,45 while coordina- ties of SBV staff. The SBV could assign tion between the main institutions of the conduct of monetary policy to an macroeconomic management, both at operationally independent Monetary the center (Ministry of Finance, Min- Policy Committee, which requires that istry of Planning and Investment, and a host of analytical and organizational the SBV) and between central and pro- aspects be resolved first, including re- vincial governments, is relatively weak. quirements for appointing committee Resolving these emerging issues and members, frequency of meetings, brief- meeting the anticipated needs of a more ing requirements, structure of policy open and sophisticated economy re- debate, and external communication. quire sustained investments in resilient, In taking monetary operations further, credible, and well-coordinated institu- an operational target consistent with tions for macroeconomic management. monetary policy will need to be cho- sen, and monetary instruments will Managing monetary policy need to be market oriented. Having a Some of Vietnam’s peers pursue very sound framework for managing liquid- different monetary policies but still ity and forecasting items on the central follow sound principles. Chile, the bank balance sheet is also crucial. Republic of Korea, South Africa, and The SBV could pursue price stability Thailand pursue more classical inflation- to help safeguard macroeconomic sta- targeting strategies, while Singapore bility if it had more operational inde- maintains low and stable inflation by pendence. But central bank autonomy tightly managing its nominal effective goes hand in hand with transparency exchange rate. Their central banks and accountability. Stipulating regular have been assigned price stability as external reporting to political stake- the primary mandate. An operationally holders and the public could ensure OVERVIEW VIETNAM 2035 33 the SBV’s accountability for its man- lation and a rising, increasingly urban date. And to ensure that the conduct middle class (Pillar 2). These trends re- of monetary policy is unobstructed by inforce the importance of a budget pro- concerns about fiscal dominance, the cess that prioritizes sound spending and SBV would need to be prohibited from aligns fiscal resources to evolving social quasi-fiscal operations. needs. They also emphasize the more Vietnam thus needs to reduce the self-reliant and autonomous model of SBV’s myriad objectives and strengthen subnational and municipal finances. its operational and research capacity. As Vietnam embarks on the next The current low-­ inflation global envi- phase of budgetary reforms, the inter- ronment provides an opportunity for linkage between fiscal policies and in- getting the monetary policy framework stitutional arrangements will become right before global monetary condi- even more important, pointing to four tions tighten. key reform priorities. Strengthening budgetary institutions Maintaining fiscal discipline and re- The expected economic and social building resilience to domestic or ex- transformations over the next 20 years ternal shocks (or both). Public and will give rise to complex fiscal chal- publicly guaranteed debt, having in- lenges. Deeper global integration and creased rapidly over the past few years, further transition to a market-based now exceeds 60 percent of GDP. While economy will increase exposure to the risks of acute debt distress remain macro­ economic shocks and volatility, manageable, fiscal buffers to handle fu- underscoring the importance of prudent ture macroeconomic shocks are wear- macrofiscal management to maintain ing thin, a matter of concern given fiscal buffers to cope with shocks while rising vulnerabilities, including those ensuring a sustainable debt trajectory. potentially emanating from contingent Vietnam will also have to manage the liabilities associated with SOE debts (at transition from accessing mostly con- about 50 percent of GDP). cessional external financing to relying Strengthening macrofiscal manage- on domestic and global capital mar- ment requires three main institutional kets to meet its fiscal financing needs. measures. First, a credible fiscal consol- While broadening the scope of funding idation plan, institutionally anchored sources, it will intensify refinancing, in a medium-term budget framework, interest-rate and exchange-rate risks, is crucial to stabilize and then gradu- and expose the country more directly ally reduce public debt. Second, the to the scrutiny of global capital markets budget should be more comprehensive, and private creditors, placing additional since many fiscal and quasi-fiscal ac- demands on prudent fiscal management tivities are not yet reflected in the core and transparency, and the country’s budgetary sphere.47 Third, the govern- creditworthiness more broadly. ment’s debt-management function will The fiscal system will also be asked have to be upgraded to enhance the to adjust to profound social changes, coordination and consolidation of debt- particularly to accommodate the management responsibilities, which re- emerging demands of an aging popu- main fragmented across functional de- 34 VIETNAM 2035 OVERVIEW partments in the Ministry of Finance, smart investments in urban transport, the Ministry of Planning and Invest- solid waste management, water and ment, and the SBV. sanitation, and health and education. The focus will have to be on adjusting Mobilizing resources for development. the composition of spending and en- A fair, transparent, and efficient tax hancing its allocative and operational system that minimizes distortions and efficiency, by instituting a clearly artic- generates adequate revenue for the bud- ulated fiscal strategy underpinned by a get is crucial. Vietnam’s current reve- robust, multiyear budget framework, as nue to GDP ratio—about 25 percent envisioned in the Budget Code amend- on average over the past 10 years­ —­is ments adopted in 2015. Incorporating commensurate with its income. But its performance information and regular continuing economic transformation spending reviews in budgetary decision will shift the revenue potential of dif- making could also inform allocation ferent taxes, which tax policy needs to decisions and help in strategically re- accommodate. aligning public spending. For example, trade-related revenue Reforms of intergovernmental fis- (about 10 percent of total revenue) will cal relations should continue to em- decline sharply due to commitments power local authorities to respond to under free-trade agreements. In con- local needs, financially and adminis- trast, the revenue potential of personal tratively, while strengthening account- income tax is expected to rise as wage ability mechanisms and performance employment formalizes. Efficient land incentives. Measures could include and property taxes could become a clarifying expenditure responsibilities, more important revenue source, espe- expanding revenue autonomy, and put- cially locally, and strengthen incentives ting in place a prudent framework for for more efficient land use. Tax-policy municipal borrowing while strength- reforms need to be accompanied by fur- ening interjurisdictional coordination ther modernization of the tax adminis- across provinces. tration, based on risk-based compliance management and modern technologies Enhancing information management. (including e-filing). Environmental A final priority relates to developing taxes should play an increasing role, robust monitoring and evaluation sys- not only from a fiscal perspective but tems, for fiscal policy to be guided by also to encourage energy efficiency by evidence-based decision making. This reflecting the costs of externalities from is the direction taken by most rising natural-resource use. middle-income economies, especially in Latin America. Vietnam has in- Improving strategic allocations of re- vested heavily in its public financial sources and service delivery. The fiscal management system and capabilities, system will need to cope with aging- strengthening basic transaction-related related expenditures in the pension controls and capturing data more effi- and health systems. And demands of a ciently. Yet fragmented organizational growing urban population will require responsibilities hamper full use of these OVERVIEW VIETNAM 2035 35 systems for timely and comprehensive stimulates risk taking and technology reporting and the disclosure of key fis- upgrading. All three were critical to the cal information. Beyond technological rapid growth of Japan, the Republic of changes, organizational and process Korea, and Singapore­ —­ examples that changes may be required to ensure that Vietnam holds up for its own growth financial and nonfinancial data are ambitions. shared, processed, analyzed, and used Vietnam’s national innovation sys- well in decision making. tem is weak and contributes little to output or growth. Still missing is a crit- ical mass of dynamic and innovative Reforms and investments with firms that provides the demand side for impacts in the long term­—­ innovation. Moreover, firms’ capacity developing an innovation-driven, to adopt and carry out new research urban-based, and environmentally is underdeveloped. Also largely absent sustainable economy are longer-term strategic views on firm Structural transformation is unlikely to and product upgrading and the human be as rewarding after Vietnam reaches resources necessary for innovation. upper-middle-income status (around These needs reflect the lack of compe- the end of the 2020s at its current tition in product markets and the low pace). The returns from adapting im- capabilities of firm managers.48 ported technology and know-how will On the supply side, research insti- diminish. And the exploitative use of tutes and universities provide too lit- natural resources will certainly reach tle research, and what is produced is its limits. These checks require policy mostly deficient in quality and rele- makers to make critical choices in three vance. Too few domestic knowledge areas with longer-term gestations­ —­ institutions produce human capi- developing an innovation-driven econ- tal with truly world-class skills and omy that is housed in modern, effi- knowledge. The research and graduate cient, and competitive urban structures (PhD) training systems are separate, and is environmentally sustainable. so the virtuous circle where good re- search in universities also produces high-quality PhD holders barely func- Spurring learning and innovation to tions in Vietnam. Government funding sustain rapid long-run growth for R&D is spread thinly across more Developing an innovation-driven econ- than 600 small government research omy will demand an unambiguous institutes that produce very little valu- commitment to cultivating and up- able output. The allocations, small and grading a dynamic private sector. It fragmented as they are, are abstractly will also demand far-reaching reforms linked to meeting high-level socioeco- in the education and training systems nomic goals in long-term government for generating higher-order human planning documents. It is seldom clear capital. And more generally, it will de- what government-funded R&D’s con- mand a competitive societal climate crete contribution to these goals is sup- that values openness to new ideas and posed to be, and it is nearly impossible 36 VIETNAM 2035 OVERVIEW to measure success (or lack thereof). so the SOE restructuring agenda in Pil- There are few linkages between uni- lar 3 is relevant here. Foreign-invested versities or think tanks and the private firms have the option of outsourcing sector. And the separate systems for their R&D production to countries research institutes and research univer- with more developed science and tech- sities creates duplication, inefficiencies, nology systems. But spillovers within and dispersion of scarce resources. Vietnam from R&D carried out in such Impressive gains in access to higher firms are weak, hampered by the gener- education have been made but a long ally low level of absorptive capacity of agenda remains. Tertiary education Vietnamese firms and concerns about fails to meet demand for high-quality security of intellectual property rights. degree programs. Public universities The response requires improving the are hampered by a lack of de facto firms’ absorptive capacity and securing autonomy, which impedes setting or intellectual property rights. Domestic changing curricula without external private enterprises are either too small approval, raising adequate revenue, or to need innovation or are so preoccu- developing full-time, high-quality fac- pied by the business environment that ulty. Faculty salaries (tightly regulated the paucity of innovation capacity is not for public institutions) are inadequate, holding them back. (The reform agenda limiting the talent that universities can to tackle this challenge was seen earlier draw on and obliging staff to take mul- in the response to the obstacles faced by tiple teaching jobs, often at different the domestic private sector.) institutions. Private universities have more freedom to set their curricula Improving enterprise capacity for and tuition levels, but cannot expand technological learning enrollments to match student demand. The emphasis here will be on helping A more consistent partnership be- firms improve their capacity for “tech- tween the government and the private nological learning,” to know how to sector is needed, as is greater ambition use processes and technologies for in reforming the university and re- production that are in use elsewhere search system. If improvements begin but new to Vietnam. This gradual pro- now, the system can be strong as the cess gives an advantage to the fastest- need for it grows. Today, few firms are learning firms and readies them to seek fundamentally held back by the lack of frontier knowledge, new to the world. indigenous R&D capacity, but as firms A broad system of firm extension paired become more knowledge-intensive, with private-sector organizations, such they will be. as chambers of commerce and banks in Japan and Singapore, can help iden- Placing enterprises at the center of tify high-potential, high-growth firms innovation that may merit further support. As SOEs are sheltered from competitive firms become more sophisticated, they pressures by government support, need higher-order and more tailored which applies minimal pressure on knowledge from universities and gov- them to innovate and remain dynamic, ernment research institutes. They also OVERVIEW VIETNAM 2035 37 need a market-driven system of venture responsiveness and dynamism in ter- capital/private equity to finance tiary education­ —­ in four areas. First, high-risk and high-return innovation the average workers should raise their activities. skills by completing more and bet- ter education in a wider range of eco- Ensuring relevant skills and knowledge nomically useful disciplines, entering Raising the quantity, quality, and rele- firms as lifelong learners to stay cur- vance of research, knowledge produc- rent with the leaders in their sectors tion, and advanced training of human and industries. Second, students would —­ capital­ while creating and deepen- see an expanding range of choices of ing connections to global knowledge high-quality, relevant degree programs, networks­— ­requires the government’s as externally determined enrollment research institutes, and especially quotas would disappear when a greater its higher education institutions, to range of providers compete to give po- achieve a new dynamism in teaching tential students the best programs at and research. The reform path includes the best prices. Third, private univer- many of the same elements that other sities and colleges would proliferate countries have successfully used: as tuition caps are lifted and those in- stitutions that best meet the needs of • Investing more in producing re- students are allowed to easily expand. search, knowledge, and advanced As part of this, financial aid would be- human capital come routinely available to qualified • Evaluating the quality and relevance but needy students so expansion does of all research outputs and related not harm equity. And fourth, infor- activities mation systems would provide aspir- • Rewarding the best and most pro- ing students with essential facts about ductive researchers through merit- each university or college, such as the based allocation and awarding them employment success of graduates, their enough resources salaries on graduation by degree pro- • Balancing the promotion of basic re- gram, and faculty qualifications. search and thematic research on na- tional priorities Using cities to power the drive to • Uniting the research and university- modernity and industralization based graduate education systems and building strong domestic grad- By enabling agglomeration economies, uate education through strong PhD cities enhance productivity and spur programs innovation and economic diversifica- • Accessing the global knowledge fron- tion. Rising population and economic tier through international linkages densities enable savings in transport and communication costs, lead to fre- Continuously improving the quality and quent interactions, enable finer special- relevance of skills ization and knowledge spillovers, and Improving the quality and relevance of heighten competition in product and skills in the labor force calls for greater labor markets. Cities create viable mar- 38 VIETNAM 2035 OVERVIEW kets for specialized business services, Over the past three decades, Viet- freeing firms to focus on their core nam has undergone an extensive urban competencies and take creative ideas transformation that has driven its struc- to commercial scale. Cities are also in- tural transformation and economic strumental in matching skills with job development. In 1986, Vietnam had opportunities, and density allows for fewer than 13 million urban residents; an integrated “thick” labor market. it now has 30 million of them, and Just as many Indian children who grew urban areas contribute over half of na- up to become software engineers lined tional GDP. Alongside rising economic up to move to Bangalore, a flourishing density, the country also has an impres- Ho Chi Minh City can help Vietnam- sive record in keeping rural–urban and ese children find the firm that wants regional disparities in check through them­ —­ and will pay for their skill set. central transfers aimed at poorer areas Evidence from today’s developed that has allowed for the expansion of countries and rapidly emerging econ- basic services and infrastructure. Even omies substantiates the tight link be- within cities, slums and urban segrega- tween economic development and ur- tion appear less of a challenge than in banization fairly conclusively (figure many other developing economies. O.8). No country in the industrial age As Vietnam embarks on an even has sustained economic development more ambitious growth trajectory, cit- without rapid urbanization. Interna- ies could be prepared to play a greater tional evidence suggests that doubling role in nurturing a burgeoning do- a city’s population raises its productiv- mestic private sector, supporting the ity by 5 percent. growth of firm clusters that integrate into GVCs, and providing the logistics FIGURE O.8  Urbanization in Vietnam appears to be on a support and managerial capabilities to path as strong as in the Republic of Korea and in China enhance productivity and accelerate growth. Policies and investments can 100 be reshaped so that economic density is amplified around large metropolitan areas as well as secondary cities with Urban share of population (%) 80 demonstrated potential; economic dis- 60 tance to large markets is reduced to en- able specialization; and social division 40 in access to services between migrants and urban residents is dissipated to en- 20 courage human-capital development for social inclusion and greater ag- 0 0 500 1,000 10,000 25,000 50,000 100,000 glomeration economies. GDP per capita (2005 PPP US$) Reshaping policies is important as Korea, Rep. China Vietnam All countries there are signals that the current ur- banization model is constraining eco- Sources: Authors’ calculations based on the the World Bank’s World Development Indicators database and Penn World Table, Version 8.0. nomic transformation. The main sig- Note: PPP = purchasing power parity. nal is the land conversion–based urban OVERVIEW VIETNAM 2035 39 development model, with industrial oases rather than parts of an integrated zones developed ahead of demand and marketplace. a proliferation of small, fragmented The third signal that Vietnam’s spa- urban expansions that are not well tial transformation is being thwarted connected to transport networks and relates to social division, where mi- service delivery nodes. The area of grants to urban areas have consider- land for industrial zones increased by ably lower access to urban services and around 77,000 hectares from 2000 to lower wages (see Pillar 2). Without hộ 2010, with major fiscal implications as khẩu, migrants face numerous difficul- zones need to be serviced with roads ties in applying for a job, trying to get and infrastructure. This could still be a loan, registering a business (or mo- a worthwhile use of public resources torbike), buying or renting a house, if the economic returns were there. and signing up for medical insurance. But this is not yet the case, with an Two main sets of policies could be average occupancy rate in industrial addressed for Vietnamese cities to bet- zones of less than 50 percent. Small, ter enable economic growth: upgrading fragmented development of urban in- institutions and expanding connective dustrial and residential land poses an infrastructure. even bigger problem: 70 percent of the land occupied by industry in Ho Chi Upgrading institutions Minh City is in areas outside formally Enable land markets. Land markets approved industrial zones, damping need to emerge and flourish. Reform- economic density. Urban areas need to ing land institutions, like strengthening be developed at scale. land registration and bringing in mar- The second signal is the limited con- ket land valuation, is a priority to re- nectivity between cities and markets duce excess and fragmented urban land as well as unreliable supply chains and conversion. Increasing the transparency high logistics costs. Logistics costs ac- of land pricing by establishing mecha- count for 21 percent of GDP­ —­against nisms to regularly publicize land values an estimated 19 percent in China and obtained in auctions and individual 15  percent in Thailand­—­primarily land sales is a good start. These efforts driven by unreliable supply chains. At could be tied to local-government fiscal the greater metropolitan level, bottle- reforms that promote broader use of necks hamper economic efficiency and land and property taxes as an alterna- diminish their attractiveness to pro- tive to land-conversion fees. spective homeowners and businesses. It takes nearly two hours to travel from Enhance coordination. Local gov- the central business district of Ho Chi ernments are rewarded for business Minh City to the center of Binh Duong expansion within their boundaries, New City even at off-peak hours, a undermining potential clustered de- distance of only 40 kilometers. Weak velopment or economies of scale in regional connections add to the eco- infrastructure investment. The city nomic distance, with Vietnam’s prov- classification system encourages local inces and cities more like independent infrastructure development and frag- 40 VIETNAM 2035 OVERVIEW ments urban development. Institutions planning for transport and logistics need to be strengthened for integrated across modes, geographic areas, and urban planning­ —­w ithin and across public-sector functions. One primary sectors and at the corridor, metropoli- reason for transport modes to be mis- tan, and regional levels.49 Urbanization aligned on supply and demand and is at a critical juncture, and its proper relative to each other is that they are management requires a “whole-of- planned individually, largely decentral- government” approach. The mandates ized and fragmented. within line ministries need to be re- viewed and aligned with international Improve road quality and logistics. best practices. Congestion in major urban areas has led to bans on trucks operating Strengthen urban planning capabilities. within city limits. The limited capac- There is an urgent need to strengthen ity of bridges and roads and the over- capabilities in urban planning depart- all condition of transport infrastruc- ments to integrate socioeconomic re- ture increase costs. Road access to big alities in developing physical plans. ports— ­Hai Phong and Cai Mep-Thi Master plans and other physical plans Vai being the priority­— ­could be re- could be linked to the budget process; built, and key road corridors and ex- if plans can be supported by key in- pressways need more investment.50 vestments, their credibility will rise. Coordination mechanisms that can Expand the level and quality of urban align provincial and city plans are es- transport services. These are closely sential, because the socioeconomic de- tied to refinements in urban planning. velopment plans, urban master plans, In addition, there is a need to syn- and sector infrastructure plans are pre- chronize policies for rural and urban pared by different departments often development; currently, these policies running on different schedules and are developed in isolation. This is un- using inconsistent data and projections fortunate and is leading to a growing for planning. The timing of planning perception that rural and urban areas could be synchronized and the number are in competition—for example, for of plans within a territorial space cut water resources—or that urban devel- heavily (ideally to two or three). Viet- opment has been predatory—for exam- nam also needs a professional cadre ple, in inequitable land acquisition and of urban planners who can plan and compensation policies. It is important manage cities. A greater emphasis on to see that rural-urban relations are this discipline is required in university the venue for the structural transfor- education and in the talent that minis- mation of the economy. A symbiotic tries and provinces hire. relationship between rural areas and a hierarchy of urban areas will likely de- Expanding connective infrastructure termine how inclusive Vietnam’s future Mainstream integrated transport and urbanization will be. logistics planning. The government In implementing projects and sup- could push to mainstream integrated porting investments, the authorities OVERVIEW VIETNAM 2035 41 may want to recalibrate the roles of the quality of life in general, but also the state and the market in managing for income growth. Four environmen- the urbanization process. In particular, tal challenges stand out for the last of they could: the longer-term gestation responses. • Refocus the role of the state and im- Four environmental challenges prove its capabilities in areas that Deteriorating natural resources. The only the government can manage. nation depends on natural resources These areas include strengthening much more than most other countries the capacities and coordination of in the region. This is most evident in urban planning, augmenting public employment, with more than half the finances, improving social services, labor force depending on agriculture. In and increasing investment in infra- the mountainous northwest and central structure to support urban plans. areas, poorly planned expansion of ag- • Redistribute responsibilities, powers, riculture has eroded soil and removed and resources among national, local, biodiverse natural forests, degrading and metropolitan governments to the land. The soil erosion has, in turn, ensure that issues addressed at the contributed to more frequent and se- regional scale are not undermined vere flooding of lower-­ altitude farms by local interests. and human settlements. A significant • Relax the state’s control of and in- portion of the protective mangrove for- volvement in activities managed ests has been destroyed, resulting in es- more efficiently by markets, particu- timated losses of US$34 million a year, larly land markets, where regulation while overfishing has seriously depleted has produced costly distortions. The nearshore fisheries resources, threaten- solution is not new regulations but ing the livelihoods of several hundred fewer restrictions. thousand people. Agricultural output has risen, but at the cost of increased land use and of chemical fertilizers and Environmentally sustainable pesticides. Without regulatory and in- development stitutional checks, the next 20 years The sustainability of Vietnam’s long- are likely to see greater competition term growth is threatened by the en- over scarce arable land, more conver- vironmental problems that have built sion of forests for agriculture, and even up. These hazards are expected to faster depletion of these precious natu- worsen at an increasing pace between ral resources. now and 2035 as the current model of economic growth, industrialization, Deteriorating environmental quality. and urbanization further strains the The quality of land, water, and air has country’s limited land, water, and en- worsened considerably. Water pollution ergy resources. One of the lessons of has reached serious levels, especially development is that the environmental near Hanoi and Ho Chi Minh City. Air quality of water and the air is import- quality has also declined due to growth ant not only for ecosystem health and in fossil fuel use for power genera- 42 VIETNAM 2035 OVERVIEW tion, industrial energy, and transport. energy use is one of the main reasons. A high incidence of respiratory infec- The energy policies adopted over the tions among children under age five is next few years­—­ on energy efficiency, observed, due to poor air quality, and renewables, natural gas, and coal­ —­ an estimated 4,000 premature deaths will largely determine the trajectory annually are related to coal-fired power of the energy sector and of associated generation. In urban areas, environ- issues. mental pollution from urban and indus- trial wastewater has resulted in toxic Making the right choices waterways with impacts on economic Given the confluence of these four chal- production, and unknown­ —­ but likely lenges, Vietnam is at a juncture where severe­—­impacts on human health. the right choices can help it avoid the irreversible environmental degradation Threats from climate change. Vietnam and major environmental remediation is among the countries most vulner- costs facing some other countries. A able to climate change given its loca- low-carbon growth path prioritizes in- tion, share of population in low-lying vestments that take account of environ- deltas, and dependence on climate- mental costs and results in inclusive and vulnerable sectors. Forecast changes resilient growth, and is a more sustain- in precipitation, temperatures, and able and affordable long-run option. It sea level all point to substantial risks requires strong institutions to monitor in high-density and economically im- and enforce plans, policies, and regu- portant areas. The country’s response lations for sustainable natural resource must consider the demographics, socio­ - and environmental management; in- economic context, political dimen- centives for sustainable investments sions, and biophysical landscape when (with private participation) that benefit allocating resources and coordinat- the environment and the poor; and im- ing land and resource planning and proved access and use of information use, in a climate-resilient approach to for decision making, monitoring, and development. transparency and accountability. Rapidly growing energy consumption. Strong policies and institutions. Much Energy use is growing faster than in sustainable growth is about policies any country in the region, led by elec- that address market failures and “get tric power. Reflecting current trends the prices right” by introducing tar- and policies, the share of coal for geted incentives such as environmental power generation will rise from 32 per- taxes, pricing environmental external- cent in 2014 to 54 percent by 2030. ities such as carbon, creating tradable Around 60 percent of coal used for property rights, and reducing inap- electrical generation will be imported. propriate subsidies. Such growth also The intensity of energy consumption requires reduced resistance to change (the amount of energy used per unit with, for example, information on the of economic output) is also among the economic value of environmental ser- highest in the world, and inefficient vices provided by natural assets. OVERVIEW VIETNAM 2035 43 Vietnam needs well-coordinated permitted in renewables other than hy- public institutions that can correct the dropower. It will also significantly in- market failures related to the environ- crease the proportion of electricity pro- ment, and can enforce regulations and duced for renewable sources through standards. They are especially needed the development of hydro, wind, solar, in the Mekong Delta, which is highly and biomass, in conjunction with the vulnerable to climate change and is in- expansion of cleaner natural gas. stitutionally complicated, with planning and implementation across several min- Information systems. Disclosure and istries and agencies with little coordi- harmonization of information must nation of investment decisions by prov- underpin effective management of nat- inces. Institutions also need to ensure ural resources and mitigation of envi- that agricultural promotion policies do ronmental pollution and land degra- not conflict with environmental goals. dation. The systems must enhance the For example, some locations have sub- data and information used for manag- sidies to expand their fish-processing ing natural resources, and make the capacity or boat building while making information understandable and ac- efforts to conserve fisheries. cessible to the broader public. Vietnam could accelerate the adoption of tech- Climate-smart investments. One move nology in upgrading the environment- would be to accelerate the restructur- related information systems. But it ing and equitization of SOEs in natural must first update, scale up, and further resource sectors, as well as in energy harmonize the information platforms and heavy industry. This would also re- that already exist. quire enforcing standards, such as food The net cost of sustainable and safety and bio­safety in aquaculture or climate-resilient growth is usually improved energy efficiency (especially modest in the long run. The up-front on the demand side). The government capital investments are often recouped can establish public goods and services through subsequent savings from low to enable greater private involvement operating costs or new markets, and in such investments. Better pricing of an improved skill base (if suited to the energy products (particularly electric- needs of the market economy). Most ity) will improve the efficiency of their estimates indicate that investments to use while attracting greater private in- decarbonize energy systems often pay vestment. Private investment could be for themselves. 44 VIETNAM 2035 OVERVIEW Pillar 2  Equity and Social Inclusion Equity is a deeply held value of the khẩu system can help realize the full Vietnamese people. The preamble to potential of structural change from the Constitution of the Socialist Re- low-productivity rural employment public of Vietnam sets the goal of “a to formal-sector urban work. An ade- prosperous people and a strong, dem- quate social safety net allows people to ocratic, equitable, and civilized coun- take entrepreneurial risks with the con- try.” And Article 50 stipulates, “The fidence that they will not face destitu- State shall create equal opportunities tion if their business fails. And univer- for citizens to enjoy social welfare.” sal health coverage ensures that people Vietnam’s economic growth, partic- are productive students and workers, ularly in the 1990s, rested heavily on channeling otherwise high precaution- the equitable distribution of land-use ary savings to more productive uses. rights in the early years of Đổi Mới, driving a rapid increase in agricultural The Unfinished Agenda: Ensuring production. The government chan- Equality of Opportunity neled substantial resources from this growth to fund pro-equity spending, Vietnam’s move from collectivism to- which helped the country avoid the ward a market economy has created in- spike in inequality experienced in some centives that allow talented, entrepre- other fast-growing countries. But past neurial, and hard-working individuals performance is no guarantee of future to flourish. But it also leads inevitably results, and signs of growing inequality to some inequality in outcomes­ —­ the are emerging. Looking to 2035, Viet- result of interaction between opportu- nam faces a dual agenda: one unfin- nities, effort, and luck. While inequal- ished, for equality of opportunity, and ity in outcomes is expected in a market one emerging, for a rising middle class economy, inequality of opportunity and aging population. is inherently unfair and incompati- Underpinning both agendas is the ble with the ideals in the constitution. need for a new vision of social policy. Equality of opportunity prevails when Historically, and especially in planned social outcomes are independent of cir- economies, social sectors have been cumstances at birth. It can be under- considered “nonproductive.” This stood as a “level playing field,” giving view is changing. The social sectors all children an equal chance at success. are very much productive and becom- Despite significant social achievements, ing increasingly central to realizing the profound inequality of opportunity goals of knowledge-based and glob- remains. ally competitive upper-middle-income The discussion here focuses on in- countries. Education contributes to equality of opportunity for three mar- productivity growth. Labor-market in- ginalized groups: ethnic minorities, stitutions balance productivity growth people with disabilities, and urban and societal welfare. Reforming the hộ migrants. Members of these groups­ —­ OVERVIEW VIETNAM 2035 45 who collectively make up one in four FIGURE O.9  Ethnic minority children face higher inequality Vietnamese ­—­h ave faced particular of opportunity challenges, despite strong government commitments to their full inclusion in Infant mortality rate society. The discussion also reviews (per 1,000 live births) gender equity, focusing on the imbal- ance in leadership positions and the Rate of stunting sex ratio at birth. (% of children under age five) Ethnic minorities Improved sanitation (%) The single greatest equity challenge is the persistent and substantial gap Rate of enrollment in in socioeconomic outcomes between upper secondary school (%) most members of the country’s 52 eth- nic minorities and other Vietnamese. 0 20 40 60 80 100 This divide is driven in part by steep Ethnic minority Ethnic majority disadvantages in opportunities among Sources: Analysis of the 2014 Vietnam Household Living Standards Survey and UNICEF’s 2014 ethnic minority children (figure O.9). Multiple Indicator Cluster Survey. Over the long term, migration will likely be a pathway to economic inte- gration for many ethnic minorities, out of school early, be malnourished, which points to a need to focus on and lack adequate sanitation. In these providing equality of opportunity for three areas, focused policy interven- the next generation of ethnic-minority tions could close the opportunity gap. children, so that they will be equipped Improving education access for eth- to lead prosperous lives wherever they nic minority children is the first policy end up in adulthood. Three interre- priority, to be addressed by expand- lated circumstances generate a triangle ing current government initiatives: of inequality of opportunity for ethnic- childhood education high-quality early-­ minority children: poor education, programs; placing teaching assistants malnutrition, and low access to sanita- who know the local mother language tion (figure O.10). The higher poverty among ethnic FIGURE O.10  Triangle of unequal minorities can be attributed in substan- opportunity for ethnic minority children tial part to low educational attainment. The modest ethnic minority enrollment Poor education at tertiary and upper-secondary levels are a consequence of many factors, including childhood malnutrition, in turn driven by poor sanitation. Com- pleting the cycle, children who grow up in poor households with less-educated Poor sanitation Malnutrition parents are much more likely to drop 46 VIETNAM 2035 OVERVIEW FIGURE O.11  Large gaps in child health and nutrition by ethnicity persist a. Malnutrition rates b. Infant mortality 40 50 Share of children under age ve who are stunted (%) 44 35 35 40 31 Deaths per 1,000 live births 30 30 27 25 22 20 20 20 16 10 10 15 10 0 2010 2011 2012 2013 2014 2002 2004 2006 2008 2010 2012 Ethnic majority Ethnic minorities Sources: Analysis of National Institute of Nutrition Surveys and UNICEF’s Multiple Indicator Cluster Survey 2006, 2011, and 2014 reports. Note: For the nutrition figures, the ethnic-majority group includes only Kinh, while in the infant-mortality figures it includes both Kinh and Hoa. Figures shown are point estimates based on household survey data. As with any survey-based estimate, they are subject to sampling error. The sampling error­—­ and thus the confidence interval around the point estimate­ —­ is larger for ethnic minorities because their sample size is small within the survey. The MICS reports do not specify the confidence interval for point estimates. in the first few years of primary school include promotion of exclusive breast- to ease the transition for children who feeding of infants under six months do not learn Vietnamese at home; old, coupled with extension of mater- and financial support, including cash nity leave for women in wage employ- transfers to households, conditional on ment. It could also introduce a compre- school attendance, to make it possible hensive program to fortify basic foods for children to attend upper-secondary with vitamin A, iron, selenium, and school. zinc. And it could develop new variet- Improving nutrition is the second ies of bio-fortified rice and maize and priority. A vast literature has shown provide free nutritional supplements to that early-childhood nutrition has women of childbearing age. substantial effects on early cognitive The third policy priority is sanita- development and readiness to learn tion. Major drivers of malnutrition are in school. Despite existing programs, poor hygiene practices and lack of ac- high rates of malnutrition persist cess to improved sanitation facilities. among ethnic minority children (figure In communities without improved la- O.11, panel a). The National Nutri- trines, children are often exposed to tion Program in Thailand, which re- bacteria, viruses, fungi, and parasites duced malnutrition rates by more than that cause intestinal infection. The high 75 percent in 10 years, shows what a rates for diarrhea and parasitic infec- concerted national effort can achieve. tion are two leading causes of morbid- Such a campaign in Vietnam could ity in the northern mountains, and lack OVERVIEW VIETNAM 2035 47 of access to sanitation is one reason for Conspicuously lacking is a strong the persistently high infant mortality ethnic minority presence in the Com- rates among ethnic minorities (figure mittee for Ethnic Minority Affairs, O.11, panel b). And stunting rates for and local authorities are typically Kinh children below the age of five are high even in mainly ethnic minority areas. precisely among the ethnic minority Vietnam can benefit from having eth- communities most likely to lack such fa- nic minority social organizations take cilities. A targeted sanitation program, part in developing and implementing with incentives to promote community- policy. wide behavior changes, can do much to achieve universal use of improved sani- People with disabilities tation among ethnic minorities. In developing education, sanitation, Vietnam has many people with dis- and nutrition programs for ethnic mi- abilities, in part a legacy of conflict. nority children­ —­ and programs to ad- They merit particular consideration dress ethnic minority poverty more in a vision of social inclusion for sev- generally­ —­the government could ben- eral reasons. Their number is likely to efit from experimenting, monitoring, increase rapidly as the old-age pop- and evaluating, since in many cases the ulation expands, by one projection evidence on “what works” is thin. Pilot to more than 12 million by 2035. As approaches could be carefully evaluated Vietnam reaches upper-middle-income before programs are expanded to scale. status, it will face the rising expecta- And for all three points of the triangle, tions of people with disabilities and initiatives could draw on promising their families for greater inclusion. new insights from behavioral econom- And given greater resources, it could ics. Choices about sending children to meet the promise of its commitments school, feeding infants, and construct- to inclusion. Foremost among them ing latrines are determined by a variety are the Law on Disabilities, passed in of factors other than cost-benefit calcu- 2010, and the UN Convention on the lations. Interventions in all three areas Rights of Persons with Disabilities, that seek to “nudge” behavior can be which Vietnam ratified in February effective and cost-efficient. 2015. Protecting people with disabili- Policies and programs to achieve ties is also in the constitution. equality of opportunity for ethnic mi- The UN Convention’s purpose is norities need to tackle prejudice and “to promote, protect and ensure the stereotyping and getting ethnic mi- full and equal enjoyment of all human nority voices heard. Although the legal rights and fundamental freedoms by framework is adequate in recognizing all persons with disabilities, and to equality of status between ethnic mi- promote respect for their inherent dig- norities and Kinh, prejudice against nity.” The Law on Disabilities guaran- minorities is still common. 51 Educa- tees the following rights to people with tion can be the basic platform, focus- disabilities: ing on appreciating and respecting the diversity of Vietnamese ethnicity and • To participate on an equal basis in culture. social activities 48 VIETNAM 2035 OVERVIEW • To live independently and integrate basic opportunities to participate in so- into the community ciety and to engender attitudes of inclu- • To enjoy exemption from or reduc- sion among others. tion of certain contributions to so- One simple step would be to regu- cial activities larly monitor policy implementation. A • To be provided with health care, mechanism for this is, in fact, one of functional rehabilitation, education, the government’s commitments under vocational training, employment, the UN Convention on the Rights of legal assistance, access to public fa- Persons with Disabilities. cilities, means of transport, informa- Another step would be to create tion technology and cultural, sports, space for social organizations for peo- tourist and other services suitable to ple with disabilities. In other countries, their forms and degrees of disability such people and their families have ad- vocated for themselves through their Many people with disabilities own organizations. Such campaigns around the world have been hidden have guided governments on policy from society and sometimes been seg- implementation and ensured that they regated in residential institutions and follow through on commitments. special schools. But global policy has recently shifted toward including them Urban migrants and the hộ khẩu in society, making them subjects of the system law with clearly defined rights rather than objects of charity. This approach Urban migrants are a third group lack- recognizes that disability is the result ing equality of opportunity, due to the not of impairment but of the interac- hộ khẩu system. More than 5 million tion between a person and his or her Vietnamese do not have permanent environment. For example, a person registration where they live, 2.7 mil- in a wheelchair might have difficul- lion of them in Ho Chi Minh City. Al- ties finding a job not because of her though the registration system has less condition but because of such barriers force than it once did, it perpetuates as staircases in the workplace. And a inequality of opportunity. Citizens in child with a disability might have dif- major urban centers without perma- ficulties going to school due to the at- nent registration face difficulties in ac- titudes of teachers and school officials cess to services for health, schooling, who cannot adapt to students with social protection, and utilities as well particular needs. as challenges in employment and social On paper, Vietnam’s policies for peo- connections. Applicants for permanent ple with disabilities are highly inclusive. registration face steep hurdles, includ- But there are substantial shortcomings ing large unofficial payments to local in implementing a broad agenda. More officials, such that some people live in than half the children with severe dis- major cities as temporary residents for abilities never pass through the doors several years. of a schoolroom. Getting them into The broad objective of policy reform schools is crucial to provide them with could be to further loosen the link be- OVERVIEW VIETNAM 2035 49 tween service access and permanent leadership positions is low, mostly at registration status. One option is to lower levels. There is a target that all make it easier to obtain permanent reg- ministries should have at least one fe- istration. Many countries have some male vice-minister, but the system for form of local registration for service that is yet to be developed. Women’s access, and in most of them, obtaining representation also remains low in local residence requires some proof of key bodies of the Communist Party: residence, such as a property title or the Politburo, the Central Committee, lease. What distinguishes Vietnam’s hộ and the Secretariat. Women constitute khẩu is that permanent registration is only 18 percent of party leadership in possible only after two or three years communes, 14 percent in districts, and of residence, and both the payment 11 percent in provinces. and document requirements are heavy. Measures to boost women’s lead- Costs and inequities would be greatly ership could focus on equalizing re- reduced if these requirements were tirement ages in the labor code, using lightened. A second option is to elim- affirmative action as a short-term inate differences in service access be- measure to ensure qualified women tween those with temporary and per- are fast-tracked to management posi- manent registration. A third, suitable tions, adopting a long-term program to for the long term, is to replace hộ khẩu identify potential women leaders early with a national identification card, in their public career, and addressing with details held in a unified national gender stereotypes that limit women’s database. career choices. This demands a long- term approach to update the education system and to promote healthier views Gender equity of masculinity and gender roles in the Vietnam has made impressive achieve- media, and perhaps social media. ments in gender equity. Differences in The second area of difference is the school enrollment and attainment by sex ratio at birth (SRB)­—­the number of gender are minimal, and the gender male births per 100 female births. The wage gap is modest by global stan- much higher number of boys than girls dards. In two areas, however, sharp born because of sex-selective abortion differences still exist­—­ i n leadership is gender discrimination and a threat and in the sex ratio at birth. to gender equity. The ratio was in the First, in business and particularly in normal range of 105–106 in 1979 and government and political spheres, the 1989 (figure O.12). Since around 2005 leadership is overwhelmingly male. In it has risen rapidly, reaching nearly 114 the last decade and a half, the share in 2013, placing Vietnam­ —­ with India of women in the National Assem- and China­ —­ among the countries with bly has been declining and is now at the highest SRBs. This imbalance will 24 percent (as of 2015). Few chairs of see a large number of surplus men National Assembly committees are fe- starting in about 20 years, which may male. The civil service has a large share increase antisocial behavior, violence, of women, but their representation in and human trafficking. 50 VIETNAM 2035 OVERVIEW FIGURE O.12  Total fertility rate has fallen over time, and factors: in a more prosperous country, the sex ratio at birth has increased sharply since 2005 the high opportunity cost of time and the wish to invest more in each child 6 116 Sex ratio at birth (males per 100 females) have reduced the desired family size. Total fertility rate (births per woman) 5 114 It is likely that easing the two-child policy will help reduce the sex ratio 4 112 at birth but not bring it down fully to 3 110 normal levels. Government legislation to prohibit sex identification of fetuses 2 108 to reduce sex-­ selective abortions has 1 106 not proved effective. The imbalance in the SRB probably will change substan- 0 104 1975 1980 1985 1990 1995 2000 2005 2010 2015 tially only as parent preferences evolve. The government may be able to speed Total fertility rate Sex ratio at birth this evolution with, for example, pub- Sources: 1989, 1999, and 2009: Population and Housing Census; other years: Population lic campaigns to emphasize the value Change and Family Planning Surveys. of daughters, or by providing sufficient old-age support to lessen parents’ con- The high SRB is a result of a com- cerns about not having a male offspring bination of factors, including the high to support them in their later years. value placed by Vietnamese families on having sons, and the ready avail- The Emerging Agenda for the ability of ultrasound technology al- Rising Middle Class and the lowing sex identification. Families Aging Population prefer sons in part because they tra- ditionally have the roles of carrying The second element of Vietnam’s social- on the family line and worshipping inclusion vision for 2035 is the emerg- their ancestors. Another driver of ing agenda of supporting the growing the preference for sons is that they middle class to manage risks and pur- traditionally have the main respon- sue opportunities in a market economy. sibility for taking care of parents in The country will also face a rapidly old age. The population policy dis- aging population, creating new chal- couraging couples from having more lenges of elderly financial protection, than two children is a contributing health care provision, and long-term factor. What would happen if that care. policy were loosened? Although the Social policy should respond to the impact is highly uncertain, the slight needs of an increasingly urban but also increase in the total fertility rate in aging middle class whose needs are 2012–2014­ —­possibly the result of a very different from those of the mass of perceived policy shift­—­ suggests that rural poor that characterized Vietnam full elimination may well result in in the past. By 2035 Vietnam will be modestly higher fertility. The broader overwhelmingly a middle-class society, economic dynamics of fertility are and the focus of social policy will have probably more important determining shifted from moving out of chronic OVERVIEW VIETNAM 2035 51 poverty to helping the middle class mirrored by emerging societal risks: achieve rising prosperity and manage the demands of health care as well the risks that could set back social as social protection for an aging and and economic progress. While poverty middle-class population will create will have been all but eliminated, in acute fiscal risks. the middle-class society of 2035 there will still be a substantial group of poor Ensuring high-quality basic education and a larger population vulnerable to for all falling back into poverty. The growing share of elderly are likely to be at par- In Vietnam’s increasingly market- ticular risk. oriented economy, the prospects for By 2035 more than half of Vietnam’s success in life are far greater for those population will be members of the with a high-quality education. Despite “global middle class” ($15 or more per large gains over time in education at- day consumption in 2011 PPP), with tainment among Vietnamese at all in- new expectations and challenges. They comes, the goalposts are constantly will expect that the state will provide moving, and the country will require a minimum standard of services, finan- increasingly higher levels of educa- cial protection, and conditions for de- tional attainment to meet its economic cent work, including affordable health and social goals. The picture remains care, quality education to at least mixed, however, and suggests a need senior-secondary completion (and often for continuing improvement. A child beyond), old-age financial protection from a wealthy family in Hanoi or Ho and care services, and basic worker Chi Minh City will typically receive protections. They will also demand high-quality instruction through upper- more voice, in independent-worker secondary school, supplemented by representation in the workplace, cit- private tutoring, and go on to complete izen oversight of public services, and a university degree. In contrast, a child broader civic participation. Middle from a poor family in a rural area is classes globally have also tended to pre- unlikely to advance past lower second- fer avoiding high income inequality. ary school (figure O.13). These changes will bring with them Advances in education are also crit- substantial new risks. For individuals, ical to Vietnam’s overall economic with aging and the rise of urban and success. High-income countries have sedentary lifestyles, health risks are workforces with high levels of ad- shifting to noncommunicable diseases, vanced skills gained through educa- which require more complex treatment tion. These skills are essential to eco- regimens than the infectious diseases nomic growth. The myriad specific that previously dominated Vietnam’s skills combine in complementary ways risk profile. The shift from family with technology, and the educational farming to wage jobs offers the prom- foundations of the workforce, allow ise of a better life but also exposes individuals to change and adapt more workers to new risks from economic quickly as the changes in technology volatility. These individual risks are and the demands of work accelerate. 52 VIETNAM 2035 OVERVIEW FIGURE O.13  A large gap in upper secondary school attendance remains between the poorest and richest 20 percent 18 17 16 Age (years) at start of school year 15 14 13 12 11 10 9 8 7 6 5 100 75 50 25 0 25 50 75 100 Poorest 20% Richest 20% Share of children attending school (%) Vocational Tertiary Upper secondary Lower secondary Primary Preschool Source: Vietnam Household Living Standards Survey 2014. The Vietnamese education system they grew richer (figure O.14). In Viet- is inclusive, high-quality, and largely nam, this change will also mean that equitable through lower-secondary upper-secondary schools will have stu- education. It then becomes exclusive, dents with a greater range of abilities. inequitable, and mediocre. It provides Currently, students not admitted to students with excellent foundations for academic senior-secondary school are success, but then fails to build on those usually offered a place in a technical foundations. Too many students fail and vocational high school, many of to graduate from high school. Too few which suffer from low skill relevance, continue on to tertiary education; those low graduation rates, and low student who continue often do not receive a motivation. The fast pace of techno- high-quality, relevant education. logical change and the increasing skill A key policy priority will be end- needs of industry will put even more ing the exam-based allocation of pressure on the system. Consider- upper-secondary-school places and ation could be given to transforming replacing it with universal secondary- the two separate subsystems (aca- school attendance. This is consistent demic and technical/­vocational upper- with global experience­ —­t he Repub- secondary schools) into a single system lic of Korea and other countries made offering two tracks to a high school high school completion universal as diploma. OVERVIEW VIETNAM 2035 53 A second priority is to continuously FIGURE O.14  Vietnam can follow the Republic of Korea’s improve the quality and relevance of path in high school completion rates what students learn, allowing them to 100 succeed in a more diverse and demand- 2010 ing tertiary-education system. Such Share of people ages 25–34 with 80 a high school degree (%) gains would let them offer employers up-to-date skills and a high capac- 60 ity to adapt to constant change in the 40 1980 2015 workplace. The Vietnamese school sys- tem excels at accomplishing tasks that 20 are more straightforward, but faces new challenges in developing noncog- 0 0 500 1,000 5,000 10,000 50,000 100,000 nitive and complex problem-solving GDP per capita (2005 PPP US$) skills to prepare young adults for the labor market of a competitive upper- Korea, Rep. Vietnam middle-income country. Sources: Barro and Lee (2010) educational attainment data and Vietnam Household Living Standards Survey. Note: PPP = purchasing power parity.. Effective labor-market institutions To realize the full productivity bene- words, Vietnam can aim to protect fits of a better-educated population, workers rather than jobs as it deepens the Vietnamese labor market will need its structural transformation. to encourage greater formality of em- Improving industrial relations will ployment while avoiding overly rigid be key, given the weakness of the cur- regulation. This will depend in part on rent system, exemplified by the large labor-market policies­—­and more specif- number of wildcat strikes since 2006. ically, on whether the country uses its In the medium term, Vietnam could current opportunity to address already- consider more proactive measures to apparent weaknesses as it transitions strengthen the system and promote from farms to factories and firms. harmony in the labor market. The Policy can help promote the growth Vietnam General Confederation of of formal employment while ensuring Labor and its affiliated unions could that workers receive a fair share of the bar company executives and managers benefits of growth. from key union positions (such as head One concept that characterizes the of an enterprise union), following the policy goals toward which Vietnam example of other countries­ —­such as might aim in its labor-market policies Singapore, where company managers is “flexicurity.” This involves striking cannot hold principal union positions a balance between flexible labor reg- or sometimes even union membership. ulation that maximizes productivity Vietnam could also continue to sim- growth and “creative destruction,” plify regulations for resolving work- and the needs of workers for decent, place disputes. And it could consider increasingly formal-sector employment allowing firm-level worker councils that is equitably compensated. In other or labor-management councils, as in 54 VIETNAM 2035 OVERVIEW many European countries and the Re- A crucial element in determining public of Korea. productivity and labor-market-equity Finally, Vietnam could move more outcomes is the minimum wage, which fundamentally toward an industrial- would be most effective if determined relations system suited to the needs of a primarily with reference to productiv- mature market economy, where the in- ity and competitiveness. Vietnam has terests of workers, employers, and the so far taken a “living wage” approach, state are more properly represented in a with a primary focus on the cost of true bargaining process by independent living. Shifting to a “wage floor” ap- unions. Vietnam has already made proach that puts a primary emphasis strong commitments along those lines on productivity and competitiveness as in the United States–Viet Nam Plan for the drivers of minimum wage adjust- the Enhancement of Trade and Labour ments should be considered. Relations, a side agreement to the TPP. To achieve this shift, in the short The main provision is as follows: run, the private sector would benefit from moderating the rate of minimum Viet Nam shall ensure that its laws wage adjustments. In the medium run, and regulations permit workers, existing plans to anchor minimum without distinction, employed by wage adjustments to real productivity an enterprise to form a grassroots growth could be put in place. (Many labour union (to chuc cua nguoi upper-middle- and most high-income lao dong) of their own choosing countries exemplify the elements that without prior authorization. . . . A Vietnam could incorporate in a mini- grassroots labour union registered mum wage–setting mechanism.) with the competent government Vietnam would also benefit from body shall have the right auton- streamlining regulations in employ- omously to elect its representa- ment protection to promote greater tives, adopt its constitution and labor-market flexibility. It would ben- rules, organize its administration, efit, first, from loosening regulation including managing its finances of labor-leasing enterprises and tem- and assets, bargain collectively, porary and outsourcing contracts. To and organize and lead strikes and ensure that increased flexibility in the other collective actions. regulated labor market is accompanied by adequate worker security, Vietnam Vietnam further agreed that within would ideally gradually expand its cov- five years, grassroots unions may erage of unemployment insurance and form organizations “across enter- active labor market programs which, prises and at the levels above the en- when well designed and implemented terprise, including the sectoral and (such as public-employment services), regional levels.” If fully implemented, can help enhance labor-market effi- these measures will address many of ciency and worker welfare. 52 Since the weaknesses in the current system, such interventions tend to have import- making for effective mediation of ant social-protection and fiscal implica- worker-employer conflicts. tions, Vietnam should keep close track OVERVIEW VIETNAM 2035 55 of the fiscal impacts of any expansion FIGURE O.15  The old age dependency ratio of unemployment insurance. It should will increase rapidly also monitor the labor-tax wedge and Older people as a share of working-age population (%) explore options for financing a greater 50 share of social insurance and active labor market programs out of general 40 tax revenue. 30 Pensions and the social safety net As countries move up the development 20 ladder, they typically expand their social protection systems to respond 10 to the demands of a growing middle class. A key social protection challenge 0 for Vietnam will be to expand pen- 1975 1995 2015 2035 2055 2075 sion coverage in a fiscally sustainable manner even as the ranks of the old- Source: UN World Population Prospects, the 2015 Revision (medium variant). age population grow rapidly. This can be accomplished through diversifying the country’s approach to pensions, re- people to support for every person of forming the existing public pension sys- working age. tem, and gradually increasing pension Overall, contributory pension cover- spending. Separate from changes to age in Vietnam is currently low, though pension policy, reforms are also needed not out of line with countries at similar to modernize and defragment the so- levels of income (figure O.16). The pen- cial safety net system. Additionally, as sion system faces the common problem the old-age population expands, policy of middle-income countries of a “miss- will need to address the growing need ing middle” in coverage: roughly the for aged and long-term care (ALTC). top 20 percent are in formal pension Part of the social protection reform schemes, and a small bottom segment agenda is driven by the fact that Viet- is covered by targeted social pensions, nam is at a demographic turning point, but the majority of the population do facing a slowdown in the growth of the not have any pension at all until age 80 labor force and a sharp expansion of when they qualify for a social pension. the old-age population. The old-age de- Countries typically expand contribu- pendency ratio­ —­a common measure of tory pension coverage as they move to- the age structure of the population­ — ward upper-middle-income status, and has been roughly constant for decades Vietnam has set a goal of 50 percent in Vietnam but will climb from 9.6 to coverage by 2020. Currently, however, 21.7 between 2015 and 2035 and con- it lacks a viable strategy to achieve this tinue to rise in the following decades goal. (figure O.15.) In other words, Vietnam Scaling up pension coverage so dra- will soon have many more old-age matically will require a diversified ap- 56 VIETNAM 2035 OVERVIEW FIGURE O.16  As countries move to upper-middle-income and cutting the number of special cat- status, pension coverage usually increases egories of workers entitled to preferen- tial early retirement. 100 Share of working age population covered (%) Even with these cost-cutting mea- 80 sures, the combination of an aging Japan population and ambitious pension 60 coverage goals means that pension Korea, Rep. spending is likely to rise considerably. 40 Countries with old-age dependency China ratios equal to Vietnam’s projected 20 Vietnam level in 2035 typically spend 8–9 per- cent of GDP on public pensions, well 0 0 1,000 2,500 5,000 10,000 25,000 50,000 above the 2–3 percent that Vietnam GDP per capita (2011 PPP US$) has spent over the past decade. At the same time, average pension spending Source: World Bank, Pensions database. Note: PPP = purchasing power parity. relative to country income and old-age dependency rates has generally been lower in East Asia than in other parts proach, including subsidized coverage of the world. Projections for pension for informal-sector workers to incen- spending in Asia-Pacific Economic tivize their participation in contribu- Cooperation countries suggest spend- tory schemes, and phased lowering of ing for lower-middle-income coun- the age for access to social pensions. tries of around 6 percent of GDP by Changes to the existing contributory 2035. While these estimates need to pension system will also be needed. be treated with caution, it seems rea- The formal-sector pension scheme is sonable to project pension spending by not financially sustainable, despite 2035 of 6–8 percent of GDP, a marked some reforms in 2014. It will begin to increase from current levels. incur deficits from the 2020s and ex- Changes will also be needed in the haust accumulated funds by around social safety net by 2035. Vietnam de- 2035. Even at current low coverage votes considerable resources to its social levels, the country cannot afford both safety net system, but fragmentation, the existing system and the contribu- poor targeting, and outdated delivery tion subsidies and wider social pen- systems limit its effectiveness. Reforms sions that will be needed to expand are needed along four dimensions. coverage to informal workers. Needed First, a more coherent policy ap- reforms to the contributory system proach is needed for social transfers to include raising the official retirement households, moving away from multi- age, gradually eliminating the differ- ple fragmented programs with overlap- ence in retirement ages for men and ping target populations and objectives. women, removing incentives for early Fragmentation leads to high costs and retirement, further reducing the annual poor program delivery. accrual rate while broadening the base Second, better systems for benefi- for collections to full compensation, ciary identification and screening in OVERVIEW VIETNAM 2035 57 targeted social-assistance programs those with somewhat higher needs ac- will be needed to improve their pov- cess community-based care, and only erty reduction impact. This would be a small and very frail portion require built on improved integration of the residential care. China’s national pol- proposed national ID system in social icy, for example, is that around 90 per- assistance program delivery, an im- cent of people should be cared for at proved poverty census to identify poor home, 7 percent in the community, and and vulnerable households, and more 3 percent in residential care. systematic enrollment procedures for It is important to recognize that the social-assistance programs. government’s role in financing ALTC Third, modernization of the admin- can be distinct from the role of pro- istrative machinery of the social assis- viding care. While the state may pro- tance system is needed. This will re- vide financing for ALTC (usually with quire significant investment in payment copayment for all but the poor and systems, management information people with disabilities), the private systems, and improved client outreach sector may have a substantial role in and case-management mechanisms. provision of care. But this, in turn, will Fourth, the design of area-based place new demands on the state for antipoverty programs needs to be re- standard-setting, human-resource de- thought to emphasize more diversified, velopment in the caring industry, and community-driven income-generation regulation of quality and the market approaches. Given Vietnam’s rapidly rules of the game. aging population, these area-based programs could also expand to in- Universal health coverage and the clude community-based care services health system for elderly people and people with disabilities. The major policy challenge facing Distinct from the pension and social Vietnam’s health system over the next safety net reform agendas is the need to 20 years will be to achieve univer- respond to rising demand for ALTC be- sal health coverage­ —­that is, to en- yond traditional family support. While sure that everyone has access to high- there is a need for greater public sup- quality services without suffering finan- port for ALTC, it is equally clear that cial hardship. The objective of univer- the state cannot do it all, and the ex- sal health coverage is closely linked to pressed preferences of older people in Vietnam’s overall equity agenda, both East Asia and the Pacific are typically in ensuring access to services to pro- for care in the home or community. mote social inclusion and in reducing ALTC systems should be built prin- poverty due to out-of-pocket payments cipally around a system of home- and for health care. Health-system perfor- community-based care, though with an mance will also become increasingly enhanced financing role for the state. relevant for many of the broader trends The framework is the “continuum of facing Vietnam, including meeting care”: the large majority of older people the expectations of a growing middle in need of care receive it in the home, class, addressing the challenges of an 58 VIETNAM 2035 OVERVIEW aging population, and pursuing eco- els of the system are insufficiently coor- nomic growth. There is now strong dinated. Vietnam has a hospital-centric evidence that conditions during early system in which referrals and self- childhood—­ especially child nutrition—­ referrals to overcrowded facilities at the have a substantial impact on a wide central and provincial levels are largely range of economic and social indicators a result of low public confidence in the later in life, including schooling, learn- quality of primary-care health systems ing, employment, and productivity. at the district level and below. The Ulti­mately this reality also has implica- primary-­ care system is fragmented and tions for economic growth. Increasingly ill prepared to address the challenge of the health of older adults will matter noncommunicable diseases. There is a for economic performance, as Viet- split between the preventive health sys- nam’s aging population will pose new tem, which primarily implements inde- challenges to maintaining a healthy and pendent disease control programs, and productive workforce. Healthier older the curative system, which is largely workers can help mitigate the impact of responsible for treating illness, but not a rising dependency ratio. detecting or preventing it. For many Two big policy questions stand out patients the first point of contact is a for Vietnam’s health system­ —­ on ser- private pharmacy, which is not con- vice delivery and health financing. On nected to the public service delivery or service delivery, will the health system health insurance system at all. maintain its current orientation, in Strengthening service delivery for which too many health-care services primary care is arguably the most im- are delivered at hospitals while too lit- portant task facing health policy mak- tle is done at primary level facilities? Or ers over the next 20 years. For quality will the system transition to focusing on and cost reasons, a strong primary-care primary care, with primary providers function based on a continuous doctor- at the center of an integrated system? patient relationship is central to a mod- On health financing, how can the cur- ern, efficient health system. Interna- rently high level of total health expen- tional evidence shows that a disease diture be stabilized, with a concurrent profile dominated by noncommuni- reduction in reliance on out-of-pocket cable diseases requires more complex spending? An important question here case management and coordination of is how the current pace of insurance care, and an integrated primary-care enrollment can be accelerated, because system is critical in the process. by some estimates it may not be rapid To strengthen the primary-care sys- enough to achieve 100 percent coverage tem, a sustained program of reforms by 2035 (from 70 percent today). would include human-resource poli- cies and development, more efficient Service delivery resource allocation through reforms The challenge is rooted in two inter- of provider payment mechanisms, im- related problems: Hospitals are doing proved gatekeeping modalities to en- too much, and primary care is doing sure that people are treated at the ap- too little. In addition, the different lev- propriate level of care, coordination OVERVIEW VIETNAM 2035 59 of care across levels of the health-care less than one-third of the total. Some delivery system, and quality-assurance mix of government spending and in- mechanisms. This long-term agenda surance contributions will be needed to will require sustained commitment and lower OOP spending. investment. Strengthening primary Key to reducing reliance on OOP care can also be supported by strong spending will be to expand insurance public health measures, especially re- coverage to the roughly 30 percent un- lated to tobacco control. insured population, but the current ap- Strengthening hospitals can be proach may not be adequate to achieve done by balancing hospital autonomy full coverage by 2035. Vietnam is rely- granted under the “socialization” pol- ing on individual or household contri- icy with greater accountability. Both butions and the gradual transition to a the government and the public can play larger formal workforce. This process a role. For the government, a major is slow and uncertain, and there will factor will be to exert greater influence likely be a greater need for publicly over hospitals through a more active financed contribution subsidies to en- role for a strategic purchasing agency courage wider participation of nonpoor (whether Vietnam Social Security or informal workers in health insurance. another agency) to promote quality The rebalancing of health expen- and efficiency. This objective will re- diture between the state and citizens quire a shift from simply paying the would require higher public spend- bills submitted by providers to using ing on health care by 2035. A strong information to ensure that patient care achievement would be for current and cost-effectiveness are emphasized health spending of around 6 percent over hospital revenues. For the public, of GDP to remain stable over the com- patients need recourse to grievance- ing two decades, but with a gradual redress mechanisms in case of clinical increase in the share of government or financial wrongdoing. spending from 2.5 percent of GDP to around 3.75 percent and a concomitant Health financing decline in OOP spending by individu- The agenda over the next 20 years will als from 3 percent of GDP to around be to stabilize the share of GDP spent 1.75 percent. Donor and private insur- on health near its current level and to ance contributions are likely to remain shift the composition of spending to re- modest. However, keeping overall duce reliance on out-of-pocket (OOP) health spending stable in the face of a expenditures. Vietnam now spends a rapidly aging population will require larger share of its GDP on health—­ sustained efficiency improvements to about 6  —­ percent­ t han almost any control cost escalation. other country in developing Asia, a Strengthening the efficiency of the burden on household budgets and the health system will depend primarily on public purse. About 50 percent of total stronger provider-payment mechanisms health expenditures are paid OOP. for hospitals to discourage overtreat- Most upper-middle- and high-income ment and reforms to pharmaceutical countries rely on OOP spending for procurement to control high costs. Hos- 60 VIETNAM 2035 OVERVIEW pitals purchase drugs at widely varying and financing arrangements, the pub- prices, and the high costs are passed on lic and private sectors may be equally to the government or the population. prone to under- or overprovision, low Centralized procurement and better quality, inefficiency, and other short- use of state purchasing power to nego- comings. As with public providers, if tiate prices under a framework contract private providers are to receive gov- with pharmaceutical companies would ernment funds, they should be held ac- help control costs. countable for their activities. Account- ability requires clearly delegating tasks, Public and private roles in health adequately financing service provision, An important question for both ser- collecting and analyzing information vice delivery and health financing is on what providers are doing, and en- the role of the private sector. Around forcing the rules of the game. Regu- the world, governments are trying to latory and supervisory authorities can achieve the right balance between pub- oversee public and private providers. lic and private participation in all as- As Vietnam charts a path toward pects of health-system reform. Global a stronger health system by 2035, a experience indicates that public financ- central challenge will be the difficult ing will play a dominant role in paying political economy of health reform. for health care, but a significant role From tobacco lobbies to pharmaceu- for private provision is more common. tical companies to doctors, vested There is no clear evidence from in- interests are likely to resist certain ternational experience that either pub- reforms. But Vietnam has made sig- lic or private provision is “better.” nificant strides in the past decade or What matters most is strong account- more—an important foundation for ability. Depending on organizational further progress. OVERVIEW VIETNAM 2035 61 Pillar 3  A Capable and Accountable State Why Institutional Quality Matters icies, and close informational gaps be- for Growth and Development tween buyers and sellers.53 Almost as a rule, they also have highly developed Institutions­—­ the formal and infor- political institutions­ —­ of voice and mal rules of the game for interactions accountability. All the countries that in society­—­facilitate economic growth have reached 50 percent of productiv- and development over the long term. ity of the United States are either 1s or They constrain or condition behavior 2s (the highest scores) on the Freedom by providing incentives to individuals House civil liberties index,54 with one and groups. These incentives determine exception (Singapore).55 whether and to what extent activities There is also a surprising confluence are fostered to create wealth, promote in eastern and western thinking on in- efficiency, and enhance welfare. For in- stitutions and even on their desired at- stance, an institutional framework that tributes (box O.3). allows for easy and quick business reg- Not only are institutions import- istration provides greater incentives for ant for economic and social devel- new firms to enter the market, increas- opment—­ a capable and accountable ing competition, allocating resources state is also desirable in and of itself. more efficiently, and ultimately fueling For a given level of income, it is safe economic growth. A rich literature doc- to say that almost all societies would uments the strong positive correlation prefer a more accountable and less au- between institutions and development—­ thoritarian state to a despotic one. The such as that between property-rights Vietnamese constitution describes the enforcement and economic growth and country as a “rule of law State of the between the quality of educational insti- People, by the People, and for the Peo- tutions and educational attainment. ple,” reflecting its people’s desire to live No country (barring some resource- as an open, democratic, and rule-based rich ones) has risen to high-income society. status without strong economic and Nevertheless, while global experi- political institutions. While there is ence is clear on the long-term impor- much country variation in political tance of good institutions, there is less and economic organization, aggre- clarity both about the specific institu- gate indicators such as the Worldwide tions most important at various points Governance Indicators (WGI) show a in a country’s development and about robust correlation between high rank- the precise path for institutional re- ings on institutional quality and over- form in different countries. The inter- all prosperity (figure O.17). Advanced play between political institutions­ —­ to economies have a system of highly promote accountability, transparency, evolved economic institutions that and inclusion in the political system­ —­ convey prices, define property rights, and income growth is especially com- enforce contracts and competition pol- plex and hard to determine. A strong 62 VIETNAM 2035 OVERVIEW FIGURE O.17  The robust long-term correlation between positive link between political openness prosperity and the quality of governance and the quality of economic institutions appears only at higher incomes.56 In ad- 5.5 dition, the shape of political reform and how to bring it about are even harder to 5.0 Singapore establish. Taiwan, China Korea, Rep. How Vietnam Performs on Log of GDP per capita (PPP US$) 4.5 Russian Federation Institutional Quality 4.0 Poland China How should international experience be interpreted in light of Vietnam’s 3.5 Vietnam positive record on growth and poverty reduction? Has the quality of its insti- 3.0 tutions kept pace with its economic and social progress, and can they support 2.5 sustained progress in the future? These questions first require delving further 2.0 into the various components of institu- 0 1 2 3 4 5 tional quality and comparing Vietnam Weak Average of WGI Strong with other middle-income countries. Sources: Kaufmann, Kraay, and Mastruzzi 2010; World Bank, World Development Indicators; The WGI dataset provides one way to World Bank, Worldwide Governance Indicators (WGI); and authors’ calculations. Note: “GDP per capita (PPP US$)” is the average of GDP per capita in purchasing power unbundle and measure different aspects parity in current U.S. dollars from 1996 to 2013. “Average of WGI” is the average of the six WGI Good Governance Indicators from 1996 to 2003. The scale of the WGI scores has been of institutional quality (or governance). transformed from –2.5 (weak)/+2.5 (strong) into 0 (weak)/5(strong). Since 1996 the WGIs have measured BOX O.3  State effectiveness and development: Confluence of Eastern and Western thought Economists who have studied in the Western tra- maintenance of a meritocratic bureaucracy, legal dition look to Adam Smith for the first definitive protection for property rights and contracts, mil- statement of the role of the state in economic de- itary defense, and public works, especially water velopment. For Smith, the proper realm of state control. The aim of government was to protect action was limited to defense, justice, the rule of the general welfare of people through mecha- law, the establishment of public institutions, and nisms like stabilizing food prices, redistributing the provision of public goods.a While often cited rice to the poor, and providing famine relief.c as an advocate for a limited state, Smith made it The ideal monarch was expected to govern vir- clear that state action included public education, tuously and to give equal emphasis to adminis- control of monopolies, and other forms of busi- tration and moral guidance. ness regulations. He understood the importance The characteristics of modern bureaucracy of an effective state to economic prosperity.b that Max Weber describes would not be unfa- Vietnamese economists have recourse to an miliar to Chinese or Vietnamese officials under older tradition, similar in many respects to the the ancien régime: fixed jurisdictions, hierar- ideal state that Smith described. Confucian po- chical organization, meticulous record keeping, litical philosophy is based on the creation and meritocracy, full-time employment (no moon- (Box continues next page) OVERVIEW VIETNAM 2035 63 BOX O.3  State effectiveness and development: Confluence of Eastern and Western thought (continued) lighting), and rule-based authority with all cit- basis of patronage rather than merit. Hierarchi- izens subject to the same treatment.d Like the cal structures are undermined by politics and philosopher-officials of ancient China, Weber clientelism. And overlapping responsibilities cre- had in mind an ideal type of a properly function- ate confusion and lead to power struggles. The ing state, a model that governments in the real philosopher-kings of the Confucian ideal were world may aspire to but rarely achieve. In the real challenged in practice by regional aristocrats and world, rules, often unclear, are designed to serve warlords in China, the Republic of Korea, and special interests. Appointments are made on the Vietnam. Source: Pincus 2015, background paper for the Vietnam 2035 report. a. Smith 1904. c. Nolan 2004. b. Viner 1927. d. Weber 1946. six dimensions of institutional quality, relative ranking across all countries has and they now cover 215 economies.57 fallen since 1996. Second, it also com- Collectively, these indicators measure pares poorly with middle-income coun- perceptions of “the process by which tries on regulatory quality, which mea- governments are selected, monitored sures the perceptions of the capacity of and replaced; the capacity of the gov- the state to formulate and implement ernment to formulate and implement policies aimed at private-sector devel- sound policies; and the respect of the opment; its ranking on this dimension citizens and the state for the institu- has stagnated in the past 20 years. tions that govern the economic and so- On the other two dimensions­ —­rule cial interactions between them.”58 of law (which measures confidence in Among these dimensions, Vietnam societal rules, including in contract does best on government effectiveness enforcement and property rights) and and on political stability (figure O.18). control of corruption (which looks at On both aspects, it is close to the av- perceptions of the extent to which pub- erage for all countries. It compares lic power is used for private gain and to well with upper-middle-income coun- which the state has been “captured”)­ —­ tries and does better than other lower- Vietnam does worse than the average middle-income countries. On govern- of upper-middle-income countries al- ment effectiveness, which measures though it is roughly the same or better perceptions related to the quality of than other lower-middle-income coun- public services and the government’s tries. Its ranking has remained roughly commitment to sound policies in that the same on both aspects since 1996. regard, Vietnam has improved its rela- These comparisons indicate the as- tive performance in recent years. pects of institutional quality (or gover- But on two dimensions Vietnam nance) that Vietnam might focus on in does particularly poorly. First, on voice the coming years if it is to achieve the and accountability, it remains in the biggest development impact. As coun- bottom tenth of all countries, and its tries move up from lower to upper- 64 VIETNAM 2035 OVERVIEW FIGURE O.18  Worldwide Governance Indicators, 2014 There is compelling evidence that in the long run countries with more open and inclusive political institutions gen- Government effectiveness erate greater room for innovation and personal creativity, thus stimulating Political stability and absence productivity improvements and higher of violence/terrorism standards of living. 59 For Vietnam, Rule of law finding ways of building more open and accountable political institutions Control of corruption will eventually be essential. Regulatory quality Institutional Constraints to Vietnam’s Development Voice and accountability What institutional factors are likely to limit Vietnam’s development pros- 0 20 40 60 pects? To answer this, the discussion Percentile rank here adopts a framework that has three Vietnam specific elements underpinning state ef- Upper-middle-income country average Lower-middle-income country average fectiveness.60 The first is bureaucratic capacity based on hierarchy, unified ju- Source: World Bank, Worldwide Governance Indicators, www.govindicators.org. risdiction, meritocracy, and rule-based Note: The Worldwide Governance Indicators (WGI) are a research dataset summarizing the views on the quality of governance provided by a large number of enterprise, citizen, authority. The second is the use of mar- and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey institutes, think tanks, nongovernmental organizations, ket signals to allocate resources and international organizations, and private-sector firms. The WGI do not reflect the official fiscal discipline to match policies with views of the World Bank, its Executive Directors, or the countries they represent. The WGI are not used by the World Bank Group to allocate resources. the state’s financial capacity. And the third is popular participation to align policies and programs with the needs middle-income status, their economies and aspirations of citizens. The crucial become more complex and diversified. point of this framework—­ and one di- The quality of government and par- rectly relevant to Vietnam’s program ticularly its ability to work with and of developing modern institutions­ —­ is regulate the private sector efficiently that all three legs of the state effec- become even more important. This can tiveness tripod are necessary for satis- be seen in the large difference between factory results. Reforming state struc- lower-middle- and upper-­ m iddle-­ tures but rejecting market discipline, income countries in such indicators or assigning a larger role to the market as regulatory quality, rule of law, and mechanism while insulating govern- control of corruption. Voice and ac- ment decision making from the com- countability in turn appear to become munity, are unlikely to generate posi- more important as countries make the tive outcomes. transition to high-income status, even Three mutually reinforcing factors if the exact timing and nature of the dominate in explaining Vietnam’s state relationship are hard to determine. effectiveness challenge: commercial- OVERVIEW VIETNAM 2035 65 ization of state institutions, their ex- ment budgets to reduce deficits. Over cessive fragmentation, and few checks time, growing tolerance toward these and balances within the government and other “fence-breaking” activities and limited voice and participation of created underground markets for com- citizens.61 modities and factors of production that gradually gained legitimacy and accep- tance. The state increased the space for Commercialization of state market transactions and, more import- institutions ant, was itself effectively marketized or Commercialization of state institutions commercialized.63 in Vietnam refers to emergence of an State commercialization has im- entrepreneurial business class within posed efficiency costs on the economy or closely connected to the state (rather and contributed to the stagnation in than outside it). It also refers to the con- productivity (Pillar 1). One set of costs tinuing strong engagement of the state arises from the poor performance of in economic activity directly through SOEs, which have consistently been in- SOEs, particularly through large efficient users of land and capital and state economic groups, and indirectly which retain a dominant role in key through close links between the state sectors of the economy. Their presence and an exclusive segment of the domes- is not unusual in many economies, es- tic private sector. Vietnam is not alone pecially in sectors that are natural mo- in having influential vested interests, nopolies (public utilities) or are capital but the degree to which relationships to intensive (large infrastructure), with the state are integral to economic suc- competitive markets leaving plenty of cess appears to be unusually high. room for the private sector to prosper. Commercialization of state insti- But in Vietnam the SOE presence is tutions is not new, dating as far back almost across the board­ ­ —­from gar- as the beginning of central planning ment manufacturing to mobile tele- in the mid-1970s (immediately after phone services and to banking­ in ac- —­ Reunification). Pressure for reform tivities where private players could do started from below and grew from a better job. the cracks in central planning. With And if the state decides to keep its pervasive shortages and the economy extensive role in production, it needs on the brink of collapse shortly after to be neutral to private competition. central planning was instituted, indi- This argues against state subsidies to viduals and entities with access to ex- SOEs, preferential tax treatment, and ternal aid began to trade outside the privileged access to land, finance, and central planning system.62 Managers government procurement contracts­ —­ of state companies became adept at all undermining the viability of do- trading in scarce commodities, and mestic private firms. Crowding out a local authorities tolerated cross-border genuinely private commercial class in- smuggling to gain access to essential dependent of the state or its function- supplies in exchange for illegal levies, aries is the second cost of the commer- with part channeled into local govern- cialization of state institutions. 66 VIETNAM 2035 OVERVIEW BOX O.4  Webs of state connections driving the pharmaceutical industry The pharmaceutical industry has 170 companies, ruption, with allegations of high markups for including 20 joint-venture foreign-invested firms, producers making payments to hospital adminis- with the largest company controlling less than trators. Foreign enterprises, prohibited from dis- 5 percent of the market. SOEs have emerged in tributing pharmaceutical products in Vietnam, every province to supply generic medicines to rely on local distributors. Product registration, local hospitals and clinics. Direct sales to hospi- a responsibility of the Drug Administration of tals account for about one-third of the market, Vietnam, requires lengthy local trials and is con- and pharmacies the remainder. ducted case by case, with the regulator retaining Although the largest former SOEs have been considerable discretion. Under these conditions, equitized, they continue to prosper on the basis genuinely private and foreign firms are disadvan- of close relationships with distributors and hos- taged in market access, enabling small producers pitals in their areas. Procurement is largely by of generic drugs to survive in what on the surface individual hospitals, and bidding is open to cor- looks like a highly competitive market. Source: Pincus 2015. The blurred division between the related and mutually reinforcing. State state and the private sector imposes fragmentation refers to the lack of clear static inefficiencies on the economy as hierarchy and assignment of roles and high-cost producers are rewarded at responsibilities within the central gov- the expense of consumers and more ef- ernment and between the center and ficient firms (box O.4). Dynamic ineffi- the provinces—­ and to the inertia and ciencies also arise as potential investors inefficiencies this generates in formu- are discouraged by regulatory risk and lating and implementing policy. Hor- concerns that markets will be captured izontal and vertical fragmentation of by connected firms. Beyond its costs power has resulted in overlapping man- to the economy, commercialization of dates, conflicting rules and decisions, state institutions weakens the effec- and space for interagency bargaining tiveness of the state itself. It creates in the bureaucracy. Apex institutions powerful incentives for public officials in central government include the Of- to exploit their regulatory powers and fice of the Government, the Ministry of allocations of property rights to lock Finance, and the Ministry of Planning in long-term benefits for themselves, and Investment. These entities formu- their families, or their networks. Such late policies, often deploying intermin- abuses of public authority undermine isterial task forces to achieve consen- the legitimacy of state institutions. sus. Cohesion in planning is in theory provided by the guiding role of the Excessive fragmentation of the state Communist Party. However, in prac- tice power within the state apparatus is In tandem with commercialization of fragmented across numerous agencies state institutions is their fragmentation—­ at every level, and between the center OVERVIEW VIETNAM 2035 67 BOX O.5  Narrow interests block a master plan The development of the Ho Chi Minh City port Minh City is owned and operated by different system is a good example of institutional frag- companies or government agencies. Saigon Port mentation. As a major producer of exported is a subsidiary of Vinalines, the national ship- goods, Ho Chi Minh City and surrounding ping general corporation. Ben Nghe port is oper- provinces need a modern port easily accessed ated by a local state-owned company under the from the main industrial zones. Ho Chi Minh People’s Committee of Ho Chi Minh City. The City residents would like to move inner city Vietnam International Container Terminal is a ports to places where they will cause less traffic joint venture of the state-owned Southern Water- congestion—a change that would also free land borne Transport Corporation, the NOL Group for riverfront property development. of Singapore, and Mitsui & Co. of Japan. Saigon The prime minister approved a master plan New Port is owned by the navy. in 2005 calling for four ports to relocate to the In the end, the central government could not coastal province of Ba Ria-Vung Tau by 2010. implement the master plan because the individ- Shortly afterward the Japan Bank for Interna- ual state agencies saw it as against their interests. tional Cooperation approved a loan of ¥36.4 bil- Each agency used the regulatory powers and po- lion (US$328.6 million) for the Cai Mep-Thi Vai litical influence at its disposal to advance a set of port complex. But each of the ports in Ho Chi narrow financial interests. Source: Nguyen and Pincus 2011. and provinces. The absence of a clear notably by creating and supporting hierarchy and distribution of authority local state enterprises to raise funds and creates room for individual agencies to implement infrastructure projects.64 resist decisions they see as against their Foreign direct investment and interna- interests (box O.5). The result is often tional trade were no longer a monopoly gridlock or decisions that are subopti- of the central state units, and the high mal from society’s point of view. concentration of foreign participation The origins of state fragmentation, in just a few provinces strengthened the too, date back a few decades. The re- hand of these localities immeasurably jection of the planned economy that since the central government relied on started with the Đổi Mới reforms shifted them for the surplus needed for redis- the balance of power from the central tribution to poorer areas. state to enterprises and local author- Vietnam is one of the most fiscally ities in various ways. As output and decentralized countries in East Asia, prices were no longer centrally deter- which has its benefits but also makes it mined, the central government had more difficult for central institutions to fewer resources to allocate, so it be- set policy and to monitor and enforce came increasingly dependent on prov- delivery standards. The 1996 Law on inces for contributions to the treasury. the State Budget, revised in 2002 and Constraints on central budget funding in 2013, recognized the increasing role meant that provinces were forced to of local authorities and put in place a rely on alternative sources of revenue, form of fiscal decentralization in the 68 VIETNAM 2035 OVERVIEW unitary state budget. Decentralization and fragmentation of the Vietnamese has included granting provinces powers state institutions on the quality of pub- over planning public investment, licens- lic administration. Developing merito- ing foreign investment, and managing cratic systems takes a long time and public-sector human resources. Prov- responds to particular political impera- inces have been granted increasing fis- tives,65 but some features of Vietnam’s cal powers to raise revenues and broad system present problems for efficiently provincial discretion in determining recruiting and deploying public-sector the composition of expenditures and staff. While low pay and difficulties in transfers to lower-level governments. recruiting people with skills are chal- Subnational governments account for lenges in most developing countries, more than half the total public ex- two specific features impede a more penditures and more than 70 percent strategic approach to the civil service of public investments. This is accen- in Vietnam. tuated by the numerous provincial- First, though reforms were enacted level governments­ —­ 63 (58 provinces to switch to a position-based system in and 5 municipalities), a large number 2008, they have not been implemented, for a country of 90 million. and recruitment and promotion con- The growing diffusion of state power tinue largely on seniority rather than has created tensions between the at- merit. Second, managing the civil ser- tempts of central agencies to coordinate vice remains incoherent, with human- and rationalize policy and the efforts resource functions carried out by three of subnational governments and sub- entities within the government plus the ordinate units of central government to Central Committee Secretariat and Or- assert their autonomy. In addition, the ganization Commission. Third, dupli- lack of adequate incentives for regional cation between party and government coordination on investment decisions, rules prevents deploying talent where it despite the regional steering commit- is most needed and limits the develop- tees chaired by the deputy prime min- ment of talent across the services. As a ister, has exacerbated the inefficiencies result, a highly professional public ser- created by Vietnam’s nested budgeting vice has yet to emerge that can plan, and planning systems. A prime exam- design, and implement policies and ple is excessive capital investment by strategies for an increasingly sophisti- subnational units. For example, almost cated economy and society.66 all of Vietnam’s coastal provinces have their own deep seaports. Similarly, Few checks and balances in there are about 260 industrial parks, government­—­and limited citizen in nearly every one of the 63 provinces, voice and participation with plans to build 239 more by 2020. Yet the average occupancy of existing Vietnam’s political system has adapted parks is well below half their capacity. to create space for informed discus- The absence of merit-based man- sion of policy issues and assessment agement of public servants exacerbates of government performance. The in- the adverse effect of commercialization stitutionalization of the National As- OVERVIEW VIETNAM 2035 69 sembly, provincial People’s Councils, bers of the people’s committees, which and “grassroots democracy” at the vil- form the local executive.68 But con- lage level are examples. But Vietnam straining their autonomy is an array of does not yet have a robust account- intersecting relationships and report- ability system that can strengthen the ing requirements involving the Viet- state’s effectiveness. Two constraints nam Fatherland Front, the council’s are fundamental. party organization, the local people’s The first is the absence of an effec- committee, the standing committee of tive system of checks and balances the National Assembly, and the central in the functioning of the different government. The supervisory function branches of the state. The National As- of the councils, limited to compliance sembly now engages in more meaning- with national policies and laws, does ful discussion when passing legislation not touch on the performance of local and is thus less of a rubber stamp for government in implementing policies the executive’s proposals. Indeed, in and programs.69 a few recent cases it has turned down The judiciary­ —­ the third branch of proposals by the executive, such as re- government­ —­is also weak, with its jecting the plan for a high-speed rail impartiality undermined by heavy de- link from Hanoi to Ho Chi Minh City. pendence on the executive. Appointing But its role in formulating policy and judges is subject to political and admin- supervising government remain weak. istrative pressures, while the hierarchi- And while disseminating information cal system of control in the judiciary and attracting public interest in polit- undermines judges’ independence in ical affairs, it is not yet a vehicle that carrying out their duties. Many aspects can transform interest and opinion of the executive’s operations expressly into accountability.67 do not fall under judicial supervision, A key factor is a nomination process while the courts are beholden to the that limits competition and the result- executive for administering the court ing composition of the assembly. Mem- system. So, it is unsurprising that Viet- bership is overwhelmingly part-time, nam’s rankings on its judiciary’s inde- with members in regular jobs in the ex- pendence are below those of regional ecutive at national or provincial levels. peers. Quite a few are also leaders of SOEs, Nor is the judiciary effective at arbi- which creates conflicts of interest and trating among economic and social in- a resulting bias to accepting whatever terests. Vietnam’s formal legal frame- the executive proposes. Part-time mem- work has been augmented to meet bership and high rates of turnover be- the needs of a more complex market tween sessions (70 percent of deputies economy and to support its global in- are new in the present convocation) tegration. But the court system has not also constrain the assembly’s profes- kept pace. The complexity of cases is sionalization. People’s councils, the increasing, given the growing sophis- equivalent of the National Assembly at tication of economic transactions and the provincial, district, and commune the body of law regulating them. The levels of government, elect the mem- court system has remained effectively 70 VIETNAM 2035 OVERVIEW flat, with only a modest increase in Decision-making power remains with the total number of courts and judges the local people’s committees. over the past 10 years. Underlining the Access to information, key to cit- weaknesses in the judicial system is the izens exercising citizen voice to hold low public readiness to use the courts. the state accountable, is still lacking. The second major constraint is the The country’s governance practices limited voice and participation of citi- have neither encouraged openness and zens. Vietnam has thousands of citizen transparency nor promoted public dis- organizations, and more than a third cussion of the state’s actions. Informa- of the population is a member of one tion and data are difficult to acquire, or more sociopolitical organizations.70 even when public officials are required The substantial increase in the number by law to provide them. Limits on the of business associations, credit groups, independence of the media constrain religious bodies, sports and cultural as- its ability in making information avail- sociations, and groups for the elderly able to citizens. Vietnam’s transforma- is good. But they are not given the tion since Đổi Mới has included more chance to participate in the same way openness and transparency in gover- as state-sanctioned organizations. So, nance and more space for citizens to the system is not inclusive enough, par- discuss a range of sensitive issues pub- ticularly as society becomes more com- licly. But a culture of more open public plex and government-sanctioned mass debate on the state’s performance will organizations lose their relevance. be required to achieve the country’s The government has only a few for- long-term aspirations. As Vietnamese mal channels for consultations with citizens become more prosperous, they citizen organizations on policy and will want to participate more effec- planning. Grassroots democracy de- tively in governance to influence policy crees have been put in place, beginning choices. They will also want the eco- in 1998, to constrain the behavior of nomic, social, and political freedoms local officials. The decrees define or that citizens enjoy in more advanced give a role to citizens in local decision societies. making, including planning and man- aging locally funded projects, elaborat- The Way Forward for the State ing village codes, and handling some aspects of sanitation, village security, Modernizing the state will involve ad- village boundary changes, development dressing all three pillars of state effec- plans, and complaints. These decrees tiveness: building a coherent and hi- require holding more meetings between erarchically organized state, applying commune leadership and citizens, and the rationality of markets in economic making budget information available policy making, and strengthening ac- to the public.71 But the mode of citizen countability through greater public participation in local governance has involvement in decision making and not changed appreciably, and the abil- stronger accountability mechanisms ity to influence the decisions of com- within the government. In 2035, the mune governments remains limited. government will be less horizontally OVERVIEW VIETNAM 2035 71 and vertically fragmented, with a clear tional goals. Reforming Vietnam’s de- separation between public and private centralization framework is key. interests and between the commercial Vietnam needs a much clearer as- and regulatory functions of the state. signment of public-sector responsi- Economic regulations will be based on bilities and associated expenditures, market principles, and the government especially between the central and will enforce clearly defined property provincial governments. To the extent rights. Greater separation between possible, responsibility for planning, the executive, legislative, and judicial financing, and implementing public- branches will enable each to perform sector functions would rest with a sin- the assigned roles without interference. gle level of government. Of course, this Nonstate organizations, including so- would not rule out delegating tasks be- cial, religious, and professional organi- tween levels of government or dividing zations, will participate actively in pub- tasks within an area of public service—­ lic life, monitoring the performance of such as education, where personnel is- government and partnering with gov- sues are handled centrally while deliv- ernment agencies to implement activi- ery is local. ties and programs for the public good. Three adjustments to the intergov- ernmental fiscal framework are also needed to match these changes. First, Building a rationally organized state the nested budgeting system could with a meritocratic bureaucracy be reformed to have financing more The elimination of overlapping juris- clearly follow functional responsibil- dictions is essential for reducing verti- ity. Such reforms in functional assign- cal and horizontal fragmentation, and ment and the corresponding systems thereby decreasing the scope for bar- for intergovernmental finance will gaining and foot-dragging in the bu- likely improve accountability both up- reaucracy. A guiding principle should ward to the central government and be to see that responsibility and au- downward to citizens. Second, a closer thority for various public-sector func- match between functions and finances tions are assigned to a single agency at could inform capital investment plans, the specified level of government. Del- providing greater discipline in sectors egation of tasks between and among where subnational governments spend, levels of government would of course as well as making more explicit re- continue, but through clearly specified sponsibility for recurrent costs when mechanisms and on the basis of objec- assets are built. Third, greater incen- tive performance targets. tives to subnational governments to raise own-source revenues should ac- Reforming center-local relations company their increased accountabil- Addressing state fragmentation will re- ity for financial management. In ad- quire mechanisms for efficient center- dition to providing greater authority local relations to clarify accountabil- with greater clarity in responsibilities ities and enable both tiers to work in for services, building a stronger direct consonance with clearly defined na- link between subnational taxes and 72 VIETNAM 2035 OVERVIEW government outputs would strengthen these reforms is that more than a fifth accountability. of civil servants will retire in the com- ing decade, increasing the freedom to Strengthening the “center of reorient the age composition. government” Given the scale and complexity of Viet- Applying market rationality to nam’s transformations in the next two economic policy making decades, strengthening the center of government will be critical in address- Vietnam aspires to be a fully fledged ing fragmented decision making. A market economy and to be recognized stronger center will have several roles as such by international partners. The that cut across government agencies, legal framework for a market economy managing strategy, coordinating pol- has been put in place incrementally, icy, monitoring and reviewing perfor- from amending the Law on Enterprise mance, communicating results, and in 1999, 2005, and 2014 to giving equal being accountable for implementation. treatment of all economic sectors in the Coordinating different agencies of 2013 constitution. The government un- government and aligning their objec- derstands the need to level the playing tives with the overall priorities of the field for all economic actors and clearly government will be part of this role, separate the regulatory and commercial as will monitoring the performance of activities it assigns to itself. This will in- different units of government, whether volve providing for security of property in different sectors or in the provinces. rights, enforcing free and fair competi- Communicating information to citi- tion, and transforming the state from a zens about development outcomes can producer to an effective regulator and contribute to greater accountability. facilitator. The government will also need to make sure that agencies directly Improving public administration or indirectly involved in economic reg- Reforming the civil service can reori- ulation do not engage in business of ent it in line with the changing role of any kind to avoid the appearance and the state from producer and owner to reality of conflicts of interest. regulator, facilitator, and service pro- Creating the space for a genuinely vider. The capacity of the civil service independent private sector will require could therefore be enhanced and its or- political commitment at the highest ganization revamped, along three lines. levels of government and reduced state First, merit can be a much greater fac- control over business and professional tor in recruiting civil servants. Second, organizations, including the Vietnam the profile of the civil service can be Chamber of Commerce and Industry. determined in line with the functions Allowing these organizations to oper- expected of it (rather than historical ate as authentic representatives of inde- trends). Third, the compensation sys- pendent business interests would give tem for civil servants can be upgraded voice to the domestic private sector to attract and retain the required tal- and enable these groups to do more in ent. One advantage in undertaking monitoring government policy. OVERVIEW VIETNAM 2035 73 Enhancing the security of property Enforcing competition rights Vietnam needs a comprehensive com- The reform agenda would focus on petition policy framework to open transparency and on more stringent markets to entry and competition and guidelines to reduce official discretion. enforce effective competition poli- The major challenge in the short to me- cies. This policy and legal framework dium term is to reduce the opportuni- would apply equally to all firms (pri- ties for rents in valuing and converting vate or public). It would combat the land use. most harmful anticompetitive prac- First, publishing information on tices, such as cartels. It would con- land transactions in auctions and (to centrate on deterring anticompetitive the extent practical) in market sales of behavior and not on price control and land-use rights needs to be enforced. regulation. It would be fair, transpar- All information in the property ca- ent, rule-bound, and nondiscrimina- daster, including descriptions of each tory, and deviations from these prin- type of property, of rights held over ciples would be rare, and only for the property, and of any restrictions meeting clearly defined national objec- on use, needs to be public. Any asso- tives applied fairly and transparently. The reform agenda associated with ciated fees for access to this informa- defining and implementing this frame- tion could be minimized to reflect the work (besides leveling the playing actual costs of providing it. Land-use field between SOEs and private firms, planning could be fully open to public which is discussed in the next section) consultation, and changes in land use, includes the following: rather than ad hoc, could be planned with lead times for public review. • Strengthen and give more autonomy Oversight mechanisms for procedural to the Vietnam Competition Au- violations can be strengthened. And thority. Lacking operational inde- the rules for the government to ex- pendence, at a significant productiv- propriate land could be tightened to ity loss,72 the VCA is a department ensure a demonstrable public purpose directly under the Ministry of In- and compensation could more closely dustry and Trade, comprising min- match market terms. isterial representatives rather than In the longer run, the legal frame- independent technical experts. It work for property rights could include lacks the basic authority to ask busi- full fee-simple ownership rights. In ad- nesses for information to investigate dition, commercial investments could competition cases. Remedying these be made to obtain land through prop- anomalies would make the VCA erty markets, with voluntary participa- more independent and more capable tion of use-right owners, rather than in its regulatory and enforcement state expropriation, which would be functions. allowed only when there is a public- • Align the legal framework with goods rationale such as building trans- consumer protection. In addition port infrastructure. to enhancing economic efficiency, 74 VIETNAM 2035 OVERVIEW improving consumer welfare is the defense is used, and to the prime other major objective of competi- minister in some other defense such tion policy. The laws on competi- as contributions to exports. tion and consumer protection and their enforcement accordingly need Transforming the role of the state in to be closely aligned to maximize the economy from a producer to an the impact on consumer welfare. effective regulator and facilitator But a review of the consumer pro- Consistent with international good tection and competition laws shows practice, the government could con- that they are far from aligned. The sider SOE ownership policy with clear VCA’s mandate could be expanded ownership goals, focusing first on over time to include aspects of con- maximizing state capital. Globally, the sumer protection directly related to best SOEs focus on financial perfor- competition­—­following the example mance. It may be useful to supplement of the United States Federal Trade this focus with explicit statements on Commission, an independent federal supporting goals. Three fundamental agency that enforces both competi- and interrelated principles would drive tion and consumer protection. this policy: • Rationalize exemptions to tackle cartels and other forms of concen- • Adopt a commercial approach to tration. Addressing cartel behav- state ownership. This approach re- ior is an essential part of antitrust quires hard budget constraints and enforcement. Cartels have been reliable and timely financial infor- associated with price increases of mation, disclosing SOE financial 10–45 percent in developing coun- statements for transparency, ac- tries73 and reductions in labor pro- countability, and fiscal discipline. ductivity and innovation.74 Hard- Across-the-board improvements are core cartels in Vietnam are exempt also needed in accounting and finan- from anticompetitive enforcement cial disclosure practices. Vietnamese if the market share of their partic- accounting standards could be made ipants is below 30 percent.75 Even consistent with international finan- when the shares are above 30 per- cial reporting standards. In addition cent, several exemptions protect to internal audits, independent ex- them. These and other exemptions ternal audits of SOEs could be con- in the Competition Law need a ducted in accord with International critical review to eliminate most Standards on Auditing. of them, if not all. They create Each SOE could have an appro- economic distortions, and in some priate dividend policy, approved cases they open the door to polit- by its board of directors. The state ical interference. For instance, the shareholder would not allow an decision on whether to grant an ex- SOE to retain or reinvest substan- emption goes to the minister of in- tial cash surpluses without careful dustry and trade if the failing-firm supervision by the SOE’s board and OVERVIEW VIETNAM 2035 75 the state shareholder. If an SOE can- government entities would have no not expect to earn an adequate risk- authority or right to intervene in adjusted return on reinvested cash, SOE affairs. the surplus cash could be returned The state shareholding funds to the Ministry of Finance as a reg- could support efforts to further pro- ular or a special one-time dividend. fessionalize SOE management, pro- Vietnam has too many SOEs and viding market-based compensation, the government could reduce its linking pay to performance, and con- SOE portfolio to a manageable size. trolling and disclosing related-party Many operate in manufacturing transactions. To act with authority, activities where there is no compel- an SOE board will require members ling rationale for state ownership. A to act in the interest of the company, central government target portfolio face no conflicts in doing so, and of about 20 “parent” SOEs seems have relevant experience and exper- reasonable for 2035, with a focus on tise, including in the private sector. strategic sectors, but even strategic Selecting the SOE chief executive SOEs should face competition. officer (CEO) and top management • Strengthen corporate governance. should follow good practice, which Vietnam’s SOEs need an active des- calls for empowering the board to ignated state shareholder. In the in- appoint or remove the CEO. This appropriate current arrangement, power reinforces the board’s key re- the government is the state share- sponsibility for overseeing manage- holder, many ministries or agen- ment and ensures that the CEO is cies exert ownership authority, and accountable to the board rather than no specific government official is to the government. responsible for SOE performance. • Level the playing field. To comple- Taking Singapore as a model, the ment stronger competition policies, government could establish four or the government needs to level the so state shareholding funds. To ex- playing field between SOEs and pri- ercise ownership rights, these funds vate domestic or foreign firms. If could review regular financial re- an SOE is required to perform non- ports and disclosures and partici- commercial work, the government pate in annual and special share- could ensure that it receives ade- holder meetings. They would vote quate compensation. Relevant laws the state shares in appointing direc- could be reviewed and amended to tors to the board (and other matters achieve greater consistency between for shareholder consideration). And the rules for SOEs and those for pri- they would help appoint an effec- vate firms. Vietnam’s insolvency and tive board at each SOE, appropri- creditor-debtor regime would also ately staffed and organized. Except need to be consistent with interna- for normal matters relating to eco- tional good practice and applied to nomic, environmental, and social SOEs. Finally, the government could regulation that affect all enterprises, seek greater alignment between pub- 76 VIETNAM 2035 OVERVIEW lic and private laws and regulations sonnel could also be independent of for labor and for procurement. executive influence. In exchange for heightened autonomy, rigorous laws and enforcement mechanisms could Strengthening state accountability ensure ethical conduct and counter any By 2035 the Vietnamese state will have conflicts of interest among judges. a well-functioning system of checks Finally, specialized oversight agen- and balances between the different cies such as the State Audit of Viet- branches of the state, and citizens will nam, the Government Inspectorate, have the ability to hold the state ac- and ministerial and subnational In- countable. Both should also promote spectorates, could be strengthened a stronger sense of individual respon- with greater autonomy, resources, and sibility and accountability among state technical capacity. officials. Enhancing the ability of citizens to hold Enhancing checks and balances the state accountable The state will need to provide for genu- Vietnam has made some progress in ine checks and balances among the ex- creating conditions for citizens to par- ecutive, legislature, and judiciary. Allo- ticipate in governance and demand cating power among the three branches accountability from government. will increase deliberations over govern- Membership in non­ government citi- ment policy, and greater scrutiny of zen organizations has grown rapidly—­ implementation should improve policy though not in all locations. The last making and implementation. several years have seen more public The National Assembly could debate on development challenges, in- have its oversight span all the state’s cluding corruption, the performance operations­—­reflecting all resources, of ministers, and the weaknesses and assets, and liabilities in which the poor management by SOEs. High In- state has an interest. It could also be ternet penetration now allows more better equipped with full-time mem- use of social media for public debate. bers, backed by trained staff. And Three areas for reform could further measures could be put in place to increase accountability to citizens: address conflicts of interest that may diminish their oversight and to allow • Relax limits on the space for peo- constituents to hold their legislators to ple’s social organizations. Enabling account. citizen organizations to take part in Vietnam needs a modern, indepen- decision making would give them a dent and professional judiciary. Moves platform to take up issues and in- in this direction include increasing its fluence state action. A stronger legal transparency, disclosing more judg- framework would allow citizens to ments and case records, and clarifying address their concerns and interests, the roles of judges as arbiters rather and to have organizations with the than participants in cases. Selecting administrative and fiscal capacity and promoting judges and other per- to pursue these interests. The draft OVERVIEW VIETNAM 2035 77 Law on Associations, if enacted, ment would be major gains. Greater would help autonomous people’s so- transparency would strengthen peo- cial organizations develop. ple’s social organizations and in- • Enhance citizen access to accurate crease their ability to hold officials and timely information. Enacting to account. the Law on Access to Information, • Provide greater independence for the under discussion for several years, media. Separating media regulation and ensuring that the right to request from management and using civil information applies to all types of (not criminal) remedies to improve information (other than specific ex- the quality of reporting would allow clusions) and to all levels of govern- the media to be more constructive. 78 VIETNAM 2035 OVERVIEW Summary and Conclusions Building on the nation’s extraordinary political will to carry out the needed record of success and energized by the reforms. The broader reform agenda aspirations of a rising middle-class so- will also be financially demanding. ciety, contemporary Vietnamese leaders Given the state budget constraints, the are charting a bold and ambitious fu- needed investments will require much ture. Their ambition is emboldened by greater involvement of private invest- the opportunities that continue to un- ment together with ways to increase fold for Vietnam with greater regional the efficiency of public spending so and international integration, including as to free up additional resources for through the ASEAN Economic Com- investment, scale up revenue mobiliza- munity and the TPP. In the 2035 vision, tion, and enhance access to domestic Vietnam will be at the higher reaches and external capital markets. of upper-middle-income status. It will The country’s aspirations and the be a modern, creative, equitable, open, supporting policy and institutional and democratic society with clear blue agenda stand on three pillars. The first skies, clean water, and equal access to one is balancing economic prosperity opportunities for all its citizens. This and environmental sustainability. The vision also foresees a state rooted in the immediate emphasis has to be on en- rule of law with clear roles for the state, suring more competitive and produc- citizens, and the market; economic tive domestic enterprises, for which freedoms ensured by strong market in- development of critical market institu- stitutions; and robust mechanisms to tions is important. Particular attention hold the government to account. is needed to the institutions that pro- The Vietnamese people realize that tect private property rights and enforce achieving these aspirational goals will competition policies. A stable, well- not be easy. Stagnation in productiv- regulated, and inclusive financial sector ity growth, inadequate attention to and transparent and functioning land vulnerable groups, and growing envi- markets will also be crucial. And as ronmental degradation are particular the country embarks on an ambitious concerns. Current rates of labor pro- growth and economic modernization ductivity growth, for instance, will trajectory, its cities will need to better yield per capita GDP growth in the nurture private enterprise and innova- range of 4.0–4.5 percent, well short tion, support the growth of industrial of the aspirational 7 percent needed clusters integrated with global value to take Vietnam to the higher reaches chains, and attract and agglomerate of upper-middle-income status by talent. Sustaining high growth over 2035. While a turnaround in produc- an extended period will also require tivity growth is yet possible, the re- an aggressive agenda to spur learning form agenda will be challenging. In- and innovation. An incentive-based na- ternational experience on this front is tional innovation system, focusing on also sobering, since only a handful of the demand for and supply of innova- countries have mustered the necessary tion, can be very useful in this regard. OVERVIEW VIETNAM 2035 79 Finally, Vietnam has to protect its nat- environment for private-sector develop- ural resources, tap more clean energy ment are attributable to demonstrable sources and build climate resilience gaps in state effectiveness. Vietnam’s into economic planning, sectoral poli- unique history has produced public- cies, and infrastructure investments so sector institutions that are commer- as to reduce the most severe risks posed cialized and fragmented and that face by climate change. insufficient scrutiny by citizens. Efforts The second pillar is promoting eq- to address these issues will build more uity and social inclusion. The main coherent government structures and elements of the middle-class and aging a stronger, more meritocratic bureau- population agenda are expanding the cracy. Market rationality can be ap- pension system to cover a majority of plied more to economic policy making the population, ensuring that nearly by clearly demarcating the public and all children complete upper second- private spheres, implementing conflict ary school with job-relevant skills, es- of interest provisions, enhancing the tablishing effective representation of security of property rights (particularly workers through independent unions, around land issues), enforcing market and achieving universal health cover- competition, and streamlining state age. To reduce the barriers to inclu- participation in the economy. And sion for ethnic minorities, targeted public accountability can be increased initiatives in education, nutrition, and by allowing for genuine checks and sanitation can close the large gaps in balances among the three branches of opportunities for ethnic minority chil- government, providing a legal frame- dren, along with giving them more work to promote the rights of citizens voice. To make people with disabilities and improve their access to accurate full participants in society, Vietnam and timely information, and assuring a can regularly monitor implementation stronger role for mass media. of its strong commitments and create Vietnam is at a turning point on its opportunities for people with disabili- development path. There are tremen- ties and their families to be their own dous opportunities on offer, as well as advocates through social organiza- major challenges and difficulties. To tions. Eliminating the link between the achieve the 2035 vision, the only viable resident registration system and access choice is for the country to carry out a to public services (currently affecting bold program of reforms that is consis- 5 million people) will improve urban tent with the three pillars. Without this, migrants’ access to schooling, health Vietnam will find it very hard to avoid care, and administrative services. And the “middle-income trap” and will fall minimizing gender discrimination in well short of its significant potential. the retirement age and using affirma- Current and future generations of tive action as a short-term measure will Vietnamese people have the strong create more opportunities for women will, the spirit, and the capacity to in public leadership roles. implement the reform agenda success- The third pillar is bolstering the fully and to move toward a prosperous, state’s capacity and accountability. To- creative, equitable, and democratic day’s stagnant productivity and weak Vietnam. 80 VIETNAM 2035 OVERVIEW Notes 20. MONRE 2012. 21. These projections do not take into ac- 1. The Commission on Growth and De- count land subsidence, which further velopment, 2008 Growth Report. exacerbates the impacts of sea-level 2. https://en.wikipedia.org/wiki/History rise. _of_Vietnam. 22. Wassmann et al. 2009. 3. The Maddison Project database, 2010. 23. Bunn et al. 2015. 4. Rama 2014. 24. Coker et al. 2011. 5. Tran 2015. 25. Tran 2015. 6. Vu et al. 2015. 26. Eichengreen, Park, and Shin 2011 and 7. Major steps included the decollectiv- Agenor and Canuto 2012. ization of agriculture in 1988, the cre- 27. Krugman 1994. ation of tradable land-use rights under 28. Today the government registry com- the 1993 Land Law, the 1992 Law on prises more than 650,000 domestic Enterprises, the 1996 Foreign Invest- private enterprises, compared with ment Law, and liberalization of the just 40,000 in 1999 and virtually trade regime, which paved the way for none in 1990. World Trade Organization member- 29. Malesky and Taussig 2008. ship in 2007. 30. Van Thang and Freeman 2009, for 8. Rama 2008. example. 9. Van Arkadie and Mallon 2003. 31. Nguyen and Le 2005. 10. Since 2008 the ratio of employment 32. Malesky and Taussig 2009. in the manufacturing sector to total 33. Boly 2015. employment has stagnated at about 34. Steer and Sen 2010. 14 percent. 35. Eighteen percent of Vietnamese adults 11. The discussion on the four global have borrowed from a financial in- megatrends draws on Centennial Asia stitution in 2015, up from 16 percent Advisors (2015). in 2011. In comparison, only about 12. The three Asian economies are pro- 7.5 percent of the population in the jected to contribute more than 40 per- average lower-middle-income country cent of the increase in global GDP has currently borrowed from a finan- between 2014 and 2035, with their cial institution (World Bank’s Global collective share in world GDP rising Findex database). from 22 percent in 2014 to 29 percent 36. As per the Global Findex database, in 2035. 31 percent of Vietnamese adults have 13. ERIA 2012 and Thanh 2015. accounts with financial institutions 14. Thanh 2015. (the SBV estimates that 50 percent of 15. Petri and Plummer 2014. adults have accounts), much less than 16. This subsection draws on Centennial the lower-middle-income country av- Asia Advisors (2015). erage of 43 percent. The gap is even 17. Rodrik 2015. worse for poor adults­ —­19 percent in 18. Nguyen, Renwick, and McGregor Vietnam compared with an average 2013. of 33 percent in lower-middle-income 19. Intergovernmental Panel on Climate countries. Change (IPCC) 2007 report, available 37. Cung 2015. from the General Statistics Office of 38. According to a report by Nhân Dân Vietnam. (The People), the official Communist OVERVIEW VIETNAM 2035 81 Party news agency, the government Support Funds, and the Accumulation received more than 1.2 million com- Fund for Foreign Debt Repayment. plaints and denunciations between In addition, fully state-owned, quasi- 2003 and 2010, of which 70 percent fiscal, special-purpose vehicles ­— ­such were related to land. See http://www as the Vietnam Development Bank­ —­ .nhandan.com.vn /mobile/_mobile intermediate official development as- _chinhtri/_mobile_tintucsukien/item sistance disbursements like lending to /788102.html, accessed on October SOEs. 19, 2015. 48. Bloom and Van Reenen 2007; Malo- 39. Changes in this realm typically in- ney and Sarrias 2014. volve a rising share of food distribution 49. In countries like Japan and the Re- through modern supermarkets and out- public of Korea, the institutional man- of-home eating establishments, greater dates for land, infrastructure, trans- consumption of branded processed/ port, and water resources are vested in convenient foods, a consolidation in one line ministry, which enables better agricultural collection and intermedi- coordination of policies at the territo- ate trading, the spread of cold-chain rial and city levels. storage and logistical methods, and the 50. Including the regional corridors of application of increasingly stringent Hanoi–Hai Phong, Ho Chi Minh standards and sophisticated product City–Cai Mep-Thi Vai, and Can Tho– traceability and quality management. Ho Chi Minh City and the interre- 40. http://www.digitaltrends.com/mobile gional corridor between the Central /iphone-cost-what-apple-is-paying/. Highlands and Ho Chi Minh City. A 41. World Bank 2012. compelling economic case has yet to 42. Customs procedures were evaluated be made for a corridor linking Hanoi before the 2014 rollout of Vietnam’s and Ho Chi Minh City. This corridor web-based, single-window, e-customs may emerge organically once the eco- system VNACCS/ VCIS (Vietnam nomic returns of the regional corri- Automated Cargo and Port Consol- dors become apparent. idated System and Vietnam Customs 51. World Bank 2009. Information System). This system will 52. World Bank 2014. almost certainly lead to improved cus- 53. The Commission on Growth and De- toms performance. velopment, 2008 Growth Report. 43. World Bank 2013. 54. The Freedom House civil liberties index 44. Hai Phong port in the north has ca- captures freedom of speech, the press, pacity shortfalls, while Cai Mep- association, and religion, on a scale Thi Vai port in the south has excess from 1 (completely free) to 7 (unfree). capacity. 55. Dollar 2015a. 45. World Bank and Ministry of Finance 56. Dollar 2015b. of Vietnam Public Expenditure Re- 57. Voice and accountability; political view, 2015. Unpublished draft. stability and absence of violence/ 46. Brand 2015. terrorism; government effectiveness; 47. There are more than 30 extra-­ regulatory quality; rule of law; and budgetary funds at the central and control of corruption. subnational levels, such as the Viet- 58. See the World Bank’s Worldwide Gov- nam Social Security Fund, the Enter- ernance Indicators 2014. prise Restructuring and Development 59. Acemoglu and Robinson 2013. 82 VIETNAM 2035 OVERVIEW 60. This follows the “hybridity” model 74. Broadberry and Crafts 2001; Even- developed by Peter Evans (2005). ett, Levenstein, and Suslow 2001; 61. Pincus 2015. Symeon­idis 2008. 62. Fforde and Paine 1987; Abrami 2002. 75. Hard-core cartels include firms act- 63. Cheshier 2010; Fforde 2007. ing in collusion and engaging in price 64. Vu 2014. fixing, market partitioning, and bid 65. 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