Vietnam: Achieving Success as a Middle-income Country

Challenge

Competitiveness: To succeed as a MIC, Vietnam will need to increase value addition and decrease its reliance on its low-cost labor. This will require higher skills levels than currently available in Vietnam’s labor force, despite significantly increased school enrollment at all levels.  Expansion in infrastructure will need to be complemented by significant improvements in efficiency and quality to close growing infrastructure gaps that constrain competitiveness.

Sustainability: Vietnam is among the top five countries in the world most vulnerable to climate change, and natural disasters are causing economic losses of 1.5 percent of gross domestic product annually.  Many poor depend on natural resources for their livelihood, yet supplies are threatened by unsustainable practices. Insufficient investment in water supply and sanitation, solid waste management, and transport is contributing to pollution.

Opportunity: Inequality is rising. By 2010 ethnic minorities accounted for 65 percent (up from 53 percent in 2006) of the poorest 10 percent. Systemic changes in education and social protection, as well as upgrades in basic public service delivery and access are needed to improve livelihood opportunities.

Solution

The Bank program supports government’s 2011-2020 development strategy that focuses on skills development, improvement of market institutions, and infrastructure development for Vietnam to achieve success as a MIC. The Bank has used multiple instruments to support development of Vietnam’s higher education system, including a series of development policy operations (DPO).  Bank engagement in the energy sector has included financing of investments complemented by advisory work and support for reforms aimed at developing a competitive market that attracts private investment in electricity generation and providing incentives for energy efficiency.

To address poverty and inequality, the Bank has financed investments to increase access to basic services in water and sanitation, energy, and roads as well as promotion of agriculture livelihoods. Bank support for more sustainable urbanization has included financing of investment in water and sanitation, transport, and urban upgrading.

The Bank has also supported capacity building for climate change mitigation and adaptation, and for better natural disaster preparedness and risk reduction. Policy advice on macroeconomic management and the Public Investment Reform DPO series have supported reforms for improving government’s project selection and implementation, financial management, and monitoring and evaluation.

Results

As of January 2013, Vietnam has borrowed a cumulative total of US$14 billion from the International Development Association (IDA), with striking results in many sectors.

- Rural Electrification: In 1998, electrification of rural households was below 50 percent. With IDA support since 2000, rural household electrification reached 97 percent by 2011, with a significant improvement in the rural population’s standard of living, including by increasing agriculture production efficiency and enabling children to do homework at night.

- Rural Transport: With financing from the Third Rural Transport Project covering 33 provinces, the share of the rural population living within 2 km of an all-weather road, including marginalized communities in remote areas, increased from 76 percent in 2006 to 84 percent in 2010, and travel time to the nearest schools and markets decreased by 8 percent during the same period.

- Road Safety: Supported by the Road Safety Credit, a national road safety public awareness program is now in place with emphasis on obeying speed limits and using quality motorcycle helmets, reinforced by fines for violations. From 2004 to 2012 in the project’s demonstration corridors, accident rates decreased from 39 to 25 per 100 million vehicle-km, and fatality rates declined from 13 to 5.1 per 100 million vehicle-km.

- Rural Credit: From 2009 to 2011 under the ongoing Third Rural Finance Credit, 86 percent of surveyed households reported an annual income increase of more than US$290, and about 58 percent of surveyed enterprises reported an annual profit increase of more than US$12,000. By 2012, half of participating microfinance borrowers were women.

- Gender Equality in Land Titling: Under the ongoing Land Administration Credit, nearly 700,000 land titles have been issued during 2008-2012, including in ethnic minority communities.

- Water Supply and Sanitation: From 2001 to 2012, the Ho Chi Minh City Environmental Sanitation Project reduced flooding for 88,000 households and connected 265,800 households to centralized wastewater collection systems.

- Poverty Reduction in Remote Areas: Under the Northern Mountains Poverty Reduction Project (2002-2007), about 280 predominantly ethnic minority communes in rural areas benefited from improved irrigation systems, 75,000 households benefited from construction of commune health stations, and 47,000 households benefited from improved village primary school classrooms.

- Health Services: With support from the Regional Blood Transfusion Centers Credit in 33 provinces, the volume of Vietnam’s transfusion system increased from 60,500 to 250,000 blood units during 2002-2009 and is free of the HIV/AIDS virus.  With about 2 million beneficiaries from 2008 to 2011, the Mekong Regional Health Support Credit supported an increase in health insurance coverage of the near poor from 7 to 65 percent, and investments that led to an increase in patient satisfaction with treatment and facilities from 52 to 83 percent.

- Bank Modernization: During 2005-2011, the Second Payment System and Bank Modernization Credit improved the speed and reliability of interbank payments in Vietnam from two weeks to within the same day, financial transactions increased more than six-fold, and participating banks settled customer fund transfers within minutes as opposed to days.

Bank Group Contribution

Vietnam is the second largest IDA borrower. From fiscal year FY10, when it became a blend borrower, through FY12 Vietnam borrowed a total of US$1.87 billion from IBRD and US$3.76 billion from IDA, for average total annual commitments of US$1.875 billion. As of January 1, 2013, Vietnam’s portfolio consisted of 46 active IDA/IBRD investment and development policy operations totaling US$6.15 billion and US$1.87 billion in net IDA and IBRD commitments, respectively.  As of January 31, 2013, International Finance Corporation commitments totaled US$791 million, concentrated mainly in finance and insurance (63 percent) and transportation and warehousing (15 percent), and the Multilateral Investment Guarantee Agency had one active guarantee in the infrastructure sector.
 
Partners

The Bank and government work with many partners in Vietnam. The apex partnership forum has been the Consultative Group’s semi-annual meeting with participation by multilateral and bilateral donors as well as international nongovernmental organizations. Now that Vietnam is a lower MIC, its partnership modality is changing to an annual high-level development policy forum and away from a focus on resource mobilization.

The Bank is an active member of the Six Banks Group, of which the other members are the Asia Development Bank, the Japan International Cooperation Agency, the German development bank, the Agence Française de Développement, and the Export-Import Bank of Korea. The group advises government on a broad range of reforms, including in public procurement, financial management, and social and environmental impact assessments.

Moving Forward

The Bank is sharpening its strategic focus on the structural constraints to competitiveness:
• a new Economic Management and Competitiveness DPO series complemented by analytical work will focus in particular on the SOE and financial sectors;
•  the Fostering Innovation through Research, Science and Technology Project aims to enable more effective science and technology development; and
• to help address constraints to value addition, the Bank will issue a flagship report on “A Skilled Workforce for a Middle-Income Vietnam,” and a flagship Bank-IFC initiative is being planned to address supply chain gaps in the agriculture sector.

Planned or recently approved lending for sustainability includes the Managing Natural Hazards and Industrial Pollution Management Projects, and an ongoing Climate Change DPO series.

The Bank is also introducing more systemic approaches for greater impact in enhancing opportunity and improving governance through:
• support for investment in social and health insurance systems;
• a newly approved Program-for-Results (P4R) operation supporting government’s National Targeted Program for Rural Water and Sanitation;
• programmatic analytical work for more sustained engagement on poverty, gender, and governance;
• systematic consideration of integrating gender and governance into the design of all new operations; and
• lending and analytical work aimed at enhancing rural and disadvantaged areas’ access to services for wider participation in the economy.