What has Made Viet Nam a Poverty Reduction Success Story?

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Viet Nam has actively integrated into global markets since it adopted an 'open door' economic policy in 1986. The government has led a series of economic reforms, in conjunction with poverty-reduction policies. This has resulted in steady economic growth, while poverty rates have more than halved. This paper analyses the context and policies that have underpinned this success. Adopting a stepwise approach to reform and liberalisation of agriculture and state-owned enterprises, the government retained strong control over domestic economic policy. This control extends to relations with donors and NGOs, with good aid co-ordination and high levels of budget support. Universal education has supported the development of an educated labour force, while commitment to gender equity has enabled women to benefit from economic development. Nonetheless, civil and political rights remain weak, and there are strong pressures for increased political participation. To avoid fuelling inequalities, political reforms must address the rights of internal migrants and ethnic minorities.
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    What has made Viet Nam a poverty reduction success story? Le Quang Binh Summary Viet Nam has achieved its Millennium Development Goal (MDG) of halving its poverty rate - 10 years before the deadline set by UN. Other social indicators such as education enrolment, healthcare insurance coverage and access to amenities (electricity, clean water and sanitary facilities) have improved significantly. Notably, at the aggregate level, social inequality measured by the Gini index has increased only mildly from 0.34 in 1993 to 0.37 in 2004, despite a high annual economic growth rate of about 8per cent in the last decade. Viet Nam has also made commendable improvement in achieving economic and social rights as well as expanding civil and political participation. Viet Nam has actively integrated itself into the global market and onto the political scene since it embarked on an ‘open door’ economic policy in 1986. It has strived to maintain stable and good relations with its neighbours and other world superpowers. This favourable external environment has facilitated a large flow of foreign direct investment (FDI) into Viet Nam’s economy. Re-integration with the world has pushed Viet Nam to further reform its legal and economic institutions to comply with international standards and practices. Formal membership of the World Trade Organisation (WTO) on 7 November 2006 has opened up more economic opportunities for both domestic and foreign firms as well as further its compliance with the rule of law. Through out this process, Viet Nam’s government has demonstrated leadership and ownership of the country’s development. It bravely abandoned the central-planning system and embraced a free market system. Fortuitously, despite the absence of support from international financial institutions that, for example, some Eastern European countries had, Viet Nam successfully managed the transition from a controlled economy to a market economy. The sequence of economic reforms that Viet Nam followed a logical progression that started with agricultural land reform aimed at producing not only enough food for its population but also surplus for export. Later on, labour intensive manufacturing developed quickly and created employment for rural poor and the young who enter the workforce. Recently, Viet Nam started to look at the electronics and high-tech sectors in the hope of becoming an industrialized country by 2020. However, there are still challenges that Viet Nam has to surmount to become a medium income country given its current per capita GDP of $550. Diminishing returns to capital and its inefficient investment will pose a challenge to growth in coming years. The integration into world markets might weaken the government’s ability to address poverty and social inequality due to harsher economic competition and binding rules that limit government subsidies to the poor and the disadvantaged. The potential social instability caused by the increasing inequality between ethnic minorities and the Kinh majority, rampant corruption and increasing political participation is a great challenge for Viet Nam. This case study was written as a contribution to the development of From Poverty to Power: How Active Citizens and Effective States Can Change the World , Oxfam International 2008. It is published in order to share widely the results of commissioned research and programme experience. The views it expresses are those of the author and do not necessarily reflect those of Oxfam International or its affiliate organisations.    What has made Viet Nam a poverty reduction success story? From Poverty to Power – www.fp2p.org   2 es. Nevertheless, the success that Viet Nam has achieved and the challenges it is facing provide interesting lessons for the developing world. 1 The Socialist Republic of Viet Nam : a brief introduction Viet Nam is located in the heart of South-East Asia, one of the most economically dynamic regions in the world. It borders China, a self-claimed ‘peaceful rising’ power and a globally expanding market. Viet Nam has more than three thousand kilometres of coastline that is conducive to international trade and cultural exchange. However, three fourths of Viet Nam’s areas are mountains that impede economic development and reinforce social and economic disparity. According to statistics released in 2005, the population of Viet Nam was about 82 millions with 75 per cent living in rural and mountainous areas. There are 54 ethnic groups in Viet Nam with the Kinh (Viet) accounting for 85 per cent of the total population. Historically, Viet Nam was founded in 1945 but its independence from France was only officially acknowledged by the Geneva Agreement in 1954. Since then, Viet Nam was temporarily divided into the North, which was supported by the Soviet Union and China, and the South, which was heavily supported by the US. The two parts were reunited in 1975, two years after the withdrawal of the American troops in 1973. In 1978, Viet Nam entered Cambodia to oust the murderous Khmer Rouge regime. In 1979, China attacked Viet Nam and the two countries went through a brief but bloody border conflict. The consequence of the Cambodian intervention was an international embargo and isolation by the West that reinforced the embargo imposed by the US on the North Viet Nam since 1964. In the 1980s, as a result of devastating wars, international embargoes, declining support from the Soviet Union and the inefficiency of the central-planning economic system, Viet Nam faced great economic difficulties and social instability. Consequently, Viet Nam embarked on ‘open door’ economic policies called doi moi  that were officially announced at the Sixth Communist Party Congress in 1986. In 1989, Viet Nam withdrew troops from Cambodia, which led to the re-establishment of diplomatic relations with European countries. One year later, Viet Nam normalised its relationship with China and in 1992, Viet Nam became a member of ASEAN. Two years later, the US lifted the embargo and the relationship between Viet Nam and the US was normalized in 1995. Currently, Viet Nam is expecting to get the Permanent Normal Trade Relation status with the US following the achievement of WTO membership in November 2006. This step marks Viet Nam’s full integration into the world. 2 Viet Nam political context and the leading role of VCP Viet Nam is a one-party state. The Viet Nam Communist Party (VCP) has its cells and members in nearly every village and neighbourhood in the country. According to the current constitution, VCP is the power leading the state and society 1 . Consequently, almost all leading positions within the state, the government and the legislature at all levels 2  are filled by party members. This situation ensures the supreme leading role of VCP in all sectors and class The presence of the VCP has been expanded via mass organisations that also have their outreach to village and communal levels 3 . Through mass organisations, the VCP can mobilize the whole society to implement its missions and objectives. Therefore, when VCP issues an appropriate policy that addresses the needs of people, the implementation can be very quick and effective. Conversely, if a policy is inappropriate, there would be ‘silent resistance’ from people and local authorities. In Viet Nam, there is only independent monitoring and mass organisations are expected to perform the role of bottom-up consultation in Viet Nam. They provide feedback from grassroots to policy makers and transmit the policy messages from the centre to the grassroots. However, due to the top-down system, the feedback process is not sufficiently responsive and it takes a longer time for the government to    revise or abrogate a mistaken policy. This posed a new challenge for Viet Nam when it transformed itself into a market economy and opened its society. Generally, VCP follows the ruling consensus in making important decisions. Despite its monopoly, VCP normally has to balance the interests among regions (North, Central, South), ideologies (conservatives and reformists) and foreign powers (China, Europe, the US.) The ruling consensus could be one of the most decisive factors in determining the gradual pace of reform in Viet Nam, which is discussed later. Currently, there are 160 members of the Central Committee who were elected from 207 candidates at the party congress that is organised every five years 4 . Basically, all provinces, except Dac Nong, have a representative on the Central Committee (normally the provincial party chief). There are more representatives from important cities such as Ho Chi Minh and Hanoi. Similarly, the ministers are normally members of the Central Committee and important ministries such as the Ministry of Defence and the Ministry of Public Security have more representatives. The main tasks of Central Committee are to set the direction and strategy for the country that can then be implemented by the government. From 160 members of the Central Committee, 14 members were elected to Political Bureau – these are the most powerful leaders who oversee the country’s business and make important decisions. Besides the ruling consensus, VCP also adheres to two other underlying principles: national sovereignty and ethnic solidarity. These principles have led to great concern among the party about the increasing inequality between ethnic minorities and the Kinh majority. This concern has deepened due to the social unrest in the Central Highlands that resulted largely from poverty and inequality. Recently, VCP is concerned about the rampant corruption that has incited rural unrest. The pervasive corruption has undermined the credibility of the VCP leadership and raised questions in society about the capability of the one-party system to control corruption. At its recent party congress, VCP expressed the view that corruption is the most serious threat to the survival of the regime. Consequently, it has to accelerate social and political reforms to address corruption - uncharted waters for the VCP. 3 Viet Nam’s Development Success Story to Date Since doi moi  started in 1986, Viet Nam has achieved impressive social and economic changes that have improved the lives of millions of people throughout the country. The economic growth rate has been quite high and stable at around 7-8 per cent a year. According to Viet Nam Living Standard Survey 5 , during the period of 1993-2004, consumption-based poverty rate plummeted from 58.1per cent in 1993 to only 19.5per cent in 2004. This is exceptional in relation to the UN’s Millennium Development Goals (MDG) of halving poverty in 25 years from 1990 to 2015. Other social indicators such as school enrolment rate, health-care insurance coverage and access to amenities (electricity, clean water and sanitary facilities) have also improved. For example, the enrolment rate for upper secondary school has gone up from 7.2per cent in 1993 to 63per cent in 2004. The health insurance coverage also increased sharply from 16per cent in 1998 to 38per cent in 2004. The access to electricity almost doubled to reach 94per cent in 2004 from only 48per cent in 1993. The possession of TV set rose sharply from 22per cent in 1993 to 78per cent in 2004. Furthermore, inequality (measured by Gini index) has increased very modestly from 0.34 in 1993 to 0.37 in 2004. This is considered by many international donors as a great success; Viet Nam has achieved a high economic growth rate while maintaining a relatively equal society. 6   What has made Viet Nam a poverty reduction success story? From Poverty to Power – www.fp2p.org   3    Table 1: GDP growth rates, poverty reduction rate and some social indicators Enrolment rate (net) Year Poverty rates GDP growth rate (average for period) per cent of HH owning a TV set Gini index per cent of HH having access to clean water Lower secondary Upper secondary (1991) –1993 58.1 7.53 22.19 0.34 26.2 30.1 7.2 (1994)-1998 37.4 8.12 55.71 0.35 40.6 61.7 28.6 (1999)-2002 28.9 6.38 67.89 0.37 48.5 72.1 41.8 (2003)-2004 19.5 7.48 78.05 0.37 58.6 90.1 63.0 Source: Nguyen Thang et al, 2006, WB 2004 and GSO Besides its success in social and economic spheres, Viet Nam has created a stable political environment. While maintaining the supreme leadership of the communist party, it has gradually improved the quality of governance and civil participation. Despite the controversy surrounding the speed of political reform in Viet Nam, Viet Nam has successfully balanced economic growth and political stability to a large extent. Political stability has been cited by investors as one of the Viet Nam’s strengths that contribute to the security of their investments 7 . The success of Viet Nam in promoting economic growth was widely attributed to the comprehensive reform that transformed the central-planning economy into a dynamic market economy. Macro-economic stability has led to a high rate of direct foreign investment (FDI) and international trade. The success of land reform and the implementation of favourable agricultural policies have established a foundation for a broad-based economic growth, especially at the beginning of doi moi . The rather flexible and literate labour force has helped to attract investment and absorb new technology. The quality of the labour force has been invigorated by universal education and health-care policies implemented by the government. These economic reforms have been possible thanks to the stable political context that Viet Nam has been able to maintain. 3.1 Gradual transition and sequencing of development Before doi moi , Viet Nam adopted a Soviet-style socialist economy by expropriating individual properties and nationalising assets such as land and capital to form cooperatives in the North. After reunification, a similar process took place in the South in 1976. However, collective ownership in agricultural production proved to be a failure due to the lack of incentives. The controlled pricing system that offered low prices to cooperatives for their products, in the hope of maintaining low living costs for the waged sectors, prohibited the cooperatives from producing at their full potential. This in turn led to a shortage of food. Furthermore, because of the disequilibrium between supply and demand in the controlled economy, the price of goods and services was higher on black market. This led to a diversion of resources from the ‘formal’ economy to the ‘informal’ one. These factors, coupled with the ineffective use of subsidies to obsolete state-run industries, plunged Viet Nam into an economic crisis at the end of 1970s and the beginning of 1980s. In September 1985, the government decided to liberalise the price system and monetise state employees’ wages. The rise in living costs led to a large budget deficit that forced the government to increase money supply. The uncontrolled printing of money caused galloping inflation of more than 300 per cent a year. This forced the government to transform the economy and allow market forces to determine the price of goods and services as well as the allocation of resources. Fortuitously, despite the absence of support from international financial institutions that some Eastern European countries What has made Viet Nam a poverty reduction success story? From Poverty to Power – www.fp2p.org   4
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