Vietnam Development Report 2012: An Overview

January 12, 2012

The theme of this VDR is market economy for a middle-income Vietnam. The report focuses on weak institutions, distorted incentives and inadequate information - labled as the three "I's" of the market economy - as the explanation for Vietnam's current tribulations.

In 1986, Vietnam launched Đổi Mới - a homegrown, political and economic renewal campaign—that marked the beginning of its transition from a centrally planned economy to a socialist-oriented market economy. Between 1990 and 2010, Vietnam’s economy has grown at an annual average rate of 7.3 percent, and the per capita income almost quintupled. Vietnam’s transition from a centrally planned economy to a market economy and from an extremely poor country to a lower-middle-income country in less than 20 years—is now a case study in many development textbooks.

But Vietnam’s other transition—to becoming an industrialized and modern economy—has barely begun. According to its recently approved Socio-Economic Development Strategy for 2011–2020, Vietnam aspires to achieve a per capita income level of US$3,000 (in current U.S. dollars) by 2020. This translates into a nearly 10 percent annual growth in per capita income over the next decade—requiring the country to replicate and sustain the economic success it achieved in the last 10 years. The Socio-Economic Development Strategy goes on to identify the country’s key priorities to meet this ambitious target: stabilize the economy, build world-class infrastructure, create a skilled labor force, and strengthen market-based institutions.

Meeting these aspirations will not be easy. The country has experienced bouts of macroeconomic turbulence in recent years—double-digit inflation, depreciating currency, capital flight, and loss of international reserves—eroding investor confidence. Rapid growth has revealed new structural problems. The quality and sustainability of growth remain a source of concern, given the resource-intensive pattern of growth, high levels of pollution, lack of diversification and value addition in exports, and the declining contribution of productivity to growth. Vietnam’s competitiveness is under threat because power generation has not kept pace with demand, logistical costs and real estate prices have climbed, and skill shortages are becoming more widespread.
As the country celebrates the Silver Jubilee of Đổi Mới, this Vietnam Development Report (VDR 2012) looks ahead at some of the pressing issues Vietnam needs to tackle to build a strong foundation for its quest to become an industrialized country by 2020. According to the recently approved five-year plan, three areas that need urgent attention are restructuring of the state-owned enterprises (SOEs), improving the effectiveness of public expenditure and stabilizing the financial sector. The analysis undertaken in this report focuses on first two of these priorities.

Vietnam Development Report 2012  shows that the SOEs, which own disproportionately more fixed capital (land and credit) to their size, are less efficient at using them than nonstate and foreign enterprises—requiring restructuring of the state-owned sector (read Chapter 2 for details) . Second, the analysis finds that Vietnam is allocating its public resources in a way that is creating a suboptimal and fragmented infrastructure at the local level that does not always contribute to building an effective infrastructure system at the national level, thus justifying changes to the allocation mechanism (see Chapter 3 for details). Finally, the Report finds that the amount and quality of fiscal, financial, and economic information that the Government of Vietnam currently collects and releases to the market is inadequate for the smooth functioning of a middle-income country (see Chapter 4 for details). The report then identifies the reasons for SOE inefficiencies and ineffectiveness in public investment and offers some broad policy options for discussion.

The Report argues that the root causes of the current problems lie in the country's incomplete transition to a market economy. Specifically, the report focuses on weak institutions, distorted incentives and inadequate information--labeled as the three "I's" of the market economy--as the explanation for Vietnam's current tribulations. The report provides a number of ideas and suggestions to address these problems which can help to create a foundation to sustain rapid growth for Vietnam in the next 10 years.