Multi-dimensional Review of Viet Nam

Towards an Integrated, Transparent and Sustainable Economy

Report

OECD Development Pathways

1 July 2020

2. Multi-dimensional constraints analysis in Viet Nam

Abstract

The multi-dimensional analysis identifies constraints to Viet Nam’s development along the Sustainable Development Goals. To improve people’s quality of life and opportunities, access to upper-secondary education and more sophisticated skills has to improve, together with coverage of social protection and health system. Boosting productivity requires enhancing the macroeconomic policy framework, tackling inefficiencies in the state sector, handling large pockets of low-productivity firms, and promoting integration between domestic and foreign firms. Global and domestic challenges call for fiscal policies and financial reforms to mobilise private resources. Building capacity of the public administration and building predictability around the legislative process should create a more conducive business environment, ensure effective implementation and re-establish trust in institutions. Finally, a more efficient use of natural resources and horizontal management of impact from natural hazards are required to bring Viet Nam back on a sustainable growth path.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

People – towards better lives for all

The People pillar of the 2030 Agenda for Sustainable Development focuses on quality of life in all its dimensions, and emphasises the international community’s commitment to ensuring all human beings can fulfil their potential in dignity, equality and good health.

Viet Nam has raised living standards and reduced poverty without escalating inequalities. However, this is no longer a given: differences in access are increasing in the face of pressures stemming from a rapidly ageing and modernising society. To ensure that future growth is both sustainable and inclusive the government needs to: i) improve the outcomes of vulnerable groups including ethnic minorities, people with disabilities and urban migrant workers; ii) increase enrolment in upper-secondary education ensuring that students leave with job-relevant skills; iii) adopt a systemic approach to social protection and continue to increase adequate coverage, particularly for informal workers; and iv) provide high-quality and affordable primary healthcare services and develop solutions for long-term old age care (Table ‎2.1). Gaps also remain in terms of the appointment of women to leadership positions and negative perceptions of the value of daughters leading discriminatory practices that favour the birth of sons.

1. Access to upper-secondary education is restricted and students are not equipped with job-relevant skills.

2. The social protection system is characterised by low coverage and high fragmentation.

3. Current pension and health care arrangements, including primary and old-age care, are not financially sustainable and do not guarantee adequate and equal benefits for all population groups.

To date, Viet Nam has combined growth and poverty reduction without losing equity

Viet Nam has made tremendous achievements in human development and social inclusion since the launch of the Ðổi Mới reforms. Over the last decade, household spending has risen in line with GDP per capita and nearly doubled. Over 2010-15, the share of the population living below the national poverty line has halved to 5.8% (Figure ‎2.1, Panel A). Multidimensional poverty (which has been officially adopted by the government and takes into account deprivations in health care, education, water and sanitation, housing and access to information) also halved to 7.9% over 2012-17 (Ministry of Planning and Investment of Vietnam, 2019[1]). Unlike other countries, this has been accomplished without extreme increases in income inequality (Figure ‎2.1, Panel B and C).

Figure ‎2.1. Household spending and living standards have risen, and inequality is lower than that of regional peers

However, some inequalities show signs of widening, and vulnerable groups are at risk of being left behind in the country’s remarkable development story. These include women and the elderly (see below) and, notably, ethnic minorities, who constitute 15% of the country’s 54 ethnic groups and continue to display worse outcomes than the majority Kinh population and the relatively rich Hoa (Figure ‎2.2). Despite relative gains in welfare, ethnic minorities account for 70% of the extreme poor (using a national extreme poverty line), and account for twice the proportion of people without any qualifications, at 43.8% (Ministry of Labour, Invalids and Social Affairs and UNDP, 2018[3]). While 8.1% of adolescent boys and girls aged 11-14 were out of school, in 2016, this rate was much higher for ethnic minority adolescents (24.5% for Khmer children and 28.6% for H’Mong children of the same age group) (Viet Nam Ministry of Education and Training, 2016[4]).

The widening disparities among ethnic groups have multiple drivers. They include geographical isolation (there are visible spatial differences in poverty incidence with the Northern areas performing worse), limited access to public services and quality land, social exclusion due to discrimination, lack of Vietnamese language skills and low rates of out-migration (Mekong Development Research Institute, 2018[5]). Ethnicity – as well as gender – is also strongly negatively correlated with progression on the career ladder and social mobility (OECD, 2014[6]).

Figure ‎2.2. Gaps in living standards between the Kinh and ethnic minority groups are increasing

People with disabilities also have worse well-being outcomes. The poverty rate of households with a disabled member is 20% higher than households without one, and 52% of children with disabilities are unable to access education (UNDP, 2016[7]). Disability represents a significant challenge in Viet Nam, with 15.3% of the overall population and 55% of those aged 70 and over having a disability in 2010 (ILO, 2013[8]). Children with disabilities tend to be stigmatised: 50% of respondents in Viet Nam’s “National Survey on People with Disabilities” believed that children with disabilities should not attend mainstream schools with other children (Viet Nam General Statistics Office, 2018[9]).

Urban migrants are a third group lacking full equality of opportunity, due to the hộ khẩu system, which links household registration to public service access. At least 5 million Vietnamese without permanent registration in their place of residence have only limited access to education, health care and administrative services (World Bank, 2016[10]).

At the same time, at the top of the income distribution, the number of millionaires (USD) has tripled over the last decade and is projected to double again by 2025 (Oxfam, 2017[11]; Credit Suisse, 2018[12]). In Viet Nam, (disposable) income inequality, despite being lower than regional peers, is currently above the OECD average, and growth, rather than redistribution, is responsible for the recent decline in poverty. A majority of the population are worried about disparities in living standards, with the greatest discontent found in urban areas, where 76% of residents perceive inequality as a challenge (World Bank, 2014[13]).

Informal employment is likely to remain widespread

A large share of Viet Nam’s employed population earn their livelihood in the informal economy. In 2016, informal economy workers accounted for 57.2% of non-agricultural employment, a share that rises to 78.6% if agricultural, forestry and fisheries workers are included (ILO, 2018[14]). The prevalence of precarious employment – which overlaps significantly with informal employment – is also high compared to international standards (Figure ‎2.3). There are also marked gender and ethnic minority differences (see below). Nevertheless, the informal sector has grown less than the formal sector in recent years (3.4% vs 6.9% of annual growth in 2014-16). In contrast, the number of workers engaged in agricultural households has declined significantly (5% annually) (ILO, 2018[14]).

Figure ‎2.3. Informality as a total share of employment has fallen, but remains high by international standards

The extent to which informal workers will be able to contribute to and participate in social protection programmes will define Viet Nam’s path towards inclusive growth. Unlike other contexts where informality might be the only way for workers to survive, more than 50% of household business owners prefer it over any other occupation and professed satisfaction with their job (Pasquier-Doumer, Oudin and Nguyen, 2017[15]). However, almost half of informal business owners make a profit below the minimum wage, and those in the middle of the income distribution spectrum are under-represented in the social security system.

Basic education is excellent but restrictive access to post-compulsory education reinforces inequalities, and students graduate without job-relevant skills

Viet Nam has made huge strides in expanding access to primary and lower-secondary education, while simultaneously improving learning outcomes. Net primary and lower secondary enrolment rates are now close to universal and increased from 86% and 72%, respectively, in 1992-93 to 98% and 95% in 2014 (Dang and Glewwe, 2018[16]). Similarly, Viet Nam has made excellent progress in expanding pre-school education, with enrolment rates for 5 year-olds also nearly universal (World Bank, 2019[2]). Several assessments have confirmed exceptionally high academic results during early education, with Viet Nam outperforming many richer countries in Programme for International Student Assessment (PISA) tests, although the results should be interpreted with a measure of caution (Box ‎2.1) (McAleavy, Thai Ha and Fitzpatrick, 2018[17]).

Box ‎2.1. What explains Viet Nam’s strong PISA performance?

Viet Nam’s exceptional performance in PISA tests has received international attention. The country ranked 17th in maths in 2012 and 8th in science in 2015, outperforming many richer economies (Figure ‎2.4). A number of reasons have been cited for this success, including the communication of clear student learning goals to all schools and school subsystems, and frequent monitoring of teacher and school performance (McAleavy, Thai Ha and Fitzpatrick, 2018[17]).

However, Viet Nam’s PISA sample is not representative of all 15 year-olds and, as a consequence, the results may be overstated in comparison with other participating countries, pointing towards unequal access to upper-secondary education. Indeed, only 49% of the 15-year-old population is covered by the 2015 PISA sample – the lowest proportion among the 69 participating countries with comparable data (OECD, 2015[18]). Compared to 15-year-old students in national household surveys, students in Viet Nam’s PISA sample also have a higher socio-economic status. Various post-test adjustments result in somewhat lower test scores, although Viet Nam nevertheless remains a positive outlier given its GDP per capita. Moreover, disadvantaged students in the Vietnamese PISA sample outperform most advantaged students in other PISA participating countries (Glewwe et al., 2017[19]); (OECD, 2015[18]).

Figure ‎2.4. Viet Nam outperforms many richer countries in PISA science test scores

Upper secondary school attendance has also increased in past decades, with enrolment rates reaching 73.4% in 2014, although access is restricted to the highest-performing and most advantaged students. In Viet Nam, compulsory education ends on completion of lower-secondary education, and further progression is subject to competitive entry exams. In addition to being more likely to afford the cost of education, students from more advantaged backgrounds often receive additional support to pass entry tests. Vietnamese households in the top wealth quintile spend 15 times more on private tutoring than households in the poorest wealth quintile (Dang and Rogers, 2016[20]). Other forms of family advantage, such as having a highly educated parent, are also correlated with access to upper-secondary education (Rolleston and Iyer, 2019[21]). Conversely, socially disadvantaged students face substantial barriers: only 50% of ethnic minority children progressed to the first year of upper secondary in 2014, compared to 79% of Kinh/Hoa. This gap has widened since 2004, a trend that is almost completely due to decreasing upper enrolment rates among ethnic minorities rather than higher enrolment of Kinh/Hoa students (Dang and Glewwe, 2018[16]).

Education reform should aim to narrow disparities in access to secondary education. The government should consider moving towards universal upper-secondary school attendance, and either replacing exam-based allocation of places completely, or providing spots for all students even if exams serve to select which specific schools can be attended. Adoption of this model would require additional investment in terms of physical infrastructure and teachers. In addition, authorities need to strengthen the existing vocational training systems and better communicate the potential return from high school education to students who decide not to enrol in upper-secondary (see below).

Additionally, strong academic performance in PISA does not necessarily translate into the creative capacities and interpersonal skills required for a competitive labour market, in which solving non-routine problems is increasingly important. Indeed, an employer survey suggests that between 70% and 80% of Vietnamese graduates do not have the required skillsets for professional or technical high-paying jobs (World Bank, 2014[22]). Relevant transferable digital and interpersonal skills should be integrated into the curriculum as well as into pedagogical approaches, which currently emphasise a rather passive role in learning for students. The currently ongoing textbook and curriculum reform of the Vietnamese Government represents a promising first step in this direction. Chapter 6 addresses challenges in the education system beyond secondary school, focusing on skills mismatch in the vocational sector.

The health system needs to ensure affordable access to good quality services

Viet Nam has generally good health outcomes given its level of development, such as a relatively high life expectancy of 76 years. However, changing disease patterns imply pressure on health care costs. As in other fast-evolving countries, non-communicable diseases pose an emerging problem and currently account for 77% of total deaths, up from 56% in 1990 (WHO, 2016[23]); (Ministry of Health Viet Nam, 2016[24]). This share, and the implied burden on health system delivery and financing, will continue to rise with an ageing and modernising society. Health expenditure is still well below the OECD average (5.7% vs. 12.4% of GDP in 2015) and Viet Nam’s own targets (10% in 2020); however, the government already spends a larger share of its income on health than almost any other country in developing Asia (OECD, 2019[25]).

In addition to direct spending on health care, further efforts are necessary to create basic health-related infrastructure, such as sanitation, and overcome poor hygiene practices. Access to sanitation and improved drinking water increased from 70% to 83%, and 72% to 78%, respectively, between 2010 and 2016. Further investments are needed to maintain progress in this important area. Beyond infrastructure, poor hygiene practices, especially the practice of open defecation (OD) remain a concern. The national OD rate was 12.8% in 2016, with rates of 38.7% and 2.2% for the poorest and richest quintile of the population, respectively. OD rates are of particular concern in the Mekong River Delta, Central Highlands and Northern Mountains, at 30.9%, 26.4% and 23.9%, respectively (GSO and UNICEF, 2015[26]; GSO, 2018[27]).

Health insurance coverage has expanded significantly in recent years, although national distribution can be further improved. A series of incremental reforms have resulted in population coverage of 87% by 2019 (compared to 68% in 2013) (Viet Nam Social Security, 2019[28]; UNDP, 2016[7]). This exceeds by far the 80% target for 2020 of the Ministry of Health’s Universal Coverage Master Plan. The reforms include compulsory social health insurance (SHI) for formal workers as of 2015, and full premium subsidisation for the poor under the Social Security Agency (although, as in other low and middle-income countries, targeting has an exclusion error rate of close to 50%). However, enrolment rates are much lower among “missing middle” informal workers (classified under the SHI voluntary contributory category), the near-poor and older persons, who are not entitled to social assistance or social insurance pensions (Somanathan et al., 2014[29]). Pilots projects to improve coverage for informal workers, with the support of donor agencies (e.g. the Asian Development Bank), are currently ongoing.

Increased insurance coverage rates have failed to achieve lower costs and access to quality care for patients. Viet Nam is one of the few countries where out-of-pocket health expenditure (OOP) has risen in the last decade (Figure ‎2.5). While public health spending has increased, about 50% of total health expenditures are paid OOP (Ministry of Finance; World Bank, 2017[30]). About 25% of OOP health spending comes from the top economic decile; however, high OOP can be catastrophic, especially for poor households, and lead to inequalities in service utilisation and outcomes (Somanathan et al., 2014[29]).

Figure ‎2.5. Patients spend more on health care despite health insurance expansion

Factors driving high OOP expenditure include the reimbursement rules of the insurance regime and an incentive system for providers that rewards the oversupply of expensive treatments. For example, while the scope of the SHI benefits package is expansive, very few services are fully reimbursed (e.g. drugs are excluded), and there is no cap on co-payment expenditures. Current provider payment mechanisms incentivise hospitals to charge patients for higher-end technical services and supplies that are not part of the official price list and package, and rising pharmaceutical prices are passed on to customers and contribute further to cost escalation (Somanathan et al., 2014[29]). Notably, rising chronic conditions, such as those related to age (e.g. dementia), are not yet covered by the health insurance regime.

Moreover, many patients bypass primary health care facilities due to their low quality. While many hospitals exist at the district level, trust in the primary care system and its often understaffed facilities is very low. Patients prefer to travel to larger cities where they incur higher co-payment rates, or seek care at private health centres, which are not covered by SHI (Takashima et al., 2017[31]). This leads to overcrowded facilities at the central and provincial levels, and much higher inpatient than outpatient spending (World Bank, 2016[10]).

Going forward, it will be essential to improve skills and resources at the primary care level, within an integrated and more efficient overall health system that rewards quality performance and accounts for the health needs of an ageing population and the growing demands of the rising middle class. This will have to involve greater co-ordination and the development of uniform oversight approaches between the agencies involved in the different aspects of health insurance and delivery (Viet Nam Social Security, the Ministry of Health, provincial level Departments of Health).

The pension system does not provide adequate benefits or coverage, and there are concerns about its financial sustainability

While the social protection system covers social assistance in a broader sense and should be viewed as integrated system, adequate pension provision will become especially important given the challenge of rapid demographic change. Viet Nam has made remarkable progress in expanding social insurance coverage beyond public-sector workers in recent years, although overall coverage remains below the 2020 target of 50% and the newly adopted goal of universal coverage by 2035. Vietnamese Social Insurance (VSI) covers about 58% of salaried workers, but total labour force coverage remained at 23% in 2015, due mainly to low voluntary contributions by informal workers (Castel and Pick, 2018[32]).

Only a small proportion of the currently retired population receives a pension or other form of income support. As of the end of 2015, the VSI paid monthly pensions to only 2.5 million individuals, representing the small proportion of the retired private sector workers able to contribute for the minimum 20-year vesting period. Despite arrangements for the payment of social pensions for the poor and merit payments for those involved in Viet Nam’s revolution, only about 20% of the population aged 65 and over received public old-age income support of some sort in 2012 (Castel and Pick, 2018[32]).

Pension transfers are disproportionately captured by those already relatively well-off. More than half the elderly in the bottom two income quintiles receive no public income support in old age (2015), and men are currently more likely than women to receive a contributory pension (12% vs 8% in 2012) (Castel, La and Tran, 2015[33]; ILO/UNFPA, 2014[34]; Evans and Harkness, 2008[35]). In Viet Nam, as in other countries in the region, social security systems that are tied to formal employment disproportionally benefit the non-poor (Figure ‎2.6). As a result, the redistribution effect of social protection programmes is weak compared to the OECD average (Figure ‎2.3, Panel C).

Figure ‎2.6. Social protection schemes disproportionately benefit the non-poor

Young workers tend to cash out their savings early when switching jobs, motivated largely by lack of trust in the sustainability of the system (Figure ‎2.9). This behaviour could be partly mitigated by ongoing efforts to expand coverage of unemployment insurance, including benefits beyond income support. This underlines the importance of viewing social insurance as part of a broader social protection system. Similarly, efforts to ensure that social assistance arrangements provide adequate benefits will be important to offset delays in narrowing coverage gaps in contributory arrangements (Castel and Pick, 2018[32]). Viewing social insurance and assistance as part of a single policy framework would enhance the currently fragmented system, which consists at present of numerous small regulations across agencies and government tiers, which in effect exclude many population groups, such as young children, from benefit eligibility (Figure ‎2.7) (UNDP, 2016[7]). Furthermore, an integrated payment platform and a corresponding unique national identification system (the most recent ID card did not include biometric data) would accelerate efficiency and accountability.

Figure ‎2.7. Younger workers prefer to cash out their social insurances

There are concerns around the long-term financial sustainability of the Social Insurance Fund. Increase in the fund’s expenditure exceeds growth in revenues, while the present value of projected expenditure is higher than projected revenues (World Bank, 2012[36]). This trend is driven by a rapidly increasing dependency ratio, low retirement ages (which remain lower for women under current reform efforts), generous benefit calculations in the face of lower than expected investment returns and indexing of payments to the minimum wage (Castel and Pick, 2018[32]). In addition, pension contributions from employers are not enforced for all enterprises.

The government has already increased contribution rates in recent years, and now needs to focus on expanding the contribution base by enrolling a higher proportion of the workforce, while improving the fund’s financial outlook. Coverage among the large household enterprise sector can be increased by lowering the cost of contributions, easing registration for employers and avoiding punitive measures for belatedly registering employees (Castel and Pick, 2018[32]). Management of the Social Insurance Fund will need to focus on higher returns, potentially expanding investment options beyond government bonds. A 2018 resolution for a Master Plan on Social Insurance Reform included several bold and sensible proposals, such as approximation of replacement rates to international general levels, and a potential target to lower the vesting period to 10 years (ILO, 2018[37]).

Maintaining the long-term solvency of the Social Insurance Fund requires the introduction of automatic balancing mechanisms reflecting demographic or labour market outcomes, at least in the short term. Benefit levels, indexation formulas, retirement age and other parameters determining the accrual rates of the pension system would adjust automatically without the intervention of policy makers or discussions among social partners. This approach could help put Viet Nam’s pension systems on a financially sustainable path. However, the sustainability and adequacy of pension benefits over the long term will ultimately depend on the authorities’ capacity to agree on reform through social dialogue and well-informed policy making.

Viet Nam performs well on many measures of gender equity, but women face worse employment conditions, and some harmful gender biases persist

The level of discrimination against women in laws and social norms is relatively low (Figure ‎2.8). For instance, Viet Nam’s female labour force participation (71%) is by far the highest among the comparison group for which data are available, and significantly above the OECD average (64% in 2017) (OECD, 2019[38]; World Bank, 2019[2]). A gender wage gap persists, but has fallen from 15.4% in 2011 to 12.6% in 2014 (Demombynes and Testaverde, 2018[39]). Women have disproportionally benefitted from contracted wage-paying work in the textiles and apparel export sector, and accounted for 68% of workers in foreign-owned companies operating in Viet Nam in 2015 (although these jobs might be at risk of automation in the future) (Cunningham, Alidadi and Helle, 2018[40]).

Figure ‎2.8. Discrimination against women in social institutions is comparatively low

However, indicators of work quality and representation in leadership positions present a different picture. Leadership in the business, government and political spheres is overwhelmingly male. Only 22.4% of top private sector managers are women, and female-led enterprises tend to be smaller than male-led ones (Cunningham, Alidadi and Helle, 2018[40]). National and local quotas for female representation in electoral lists (35%) were introduced in 2015, but in reality this target has not been met, with female members accounting for only 27% of the National Assembly (2016-21 term), and few women serving as committee chairs (World Bank, 2016[10]). Women are also more likely to work in vulnerable employment and have less access to employment security and benefits (Figure ‎2.9). In addition, well-intended labour laws often lead to de-facto discrimination. For example, Article 160 of the Labour Code excludes women from 70 occupations that policy makers deem as harmful to childbearing and parenting functions (Cunningham, Alidadi and Helle, 2018[40]). Similarly, the pension age for women remains lower than for men (60 vs 62 years) even under current reforms.

Figure ‎2.9. Women in Viet Nam are more likely to engage in vulnerable employment

Traditional gender roles tend to be upheld in Viet Nam with women having greater responsibility for housework and child and elderly care, all of which can be a barrier to labour market entry. Vietnamese women spend on average 5.5 hours per day on unpaid care and domestic activities compared to 3 hours for men (General Statistics Office of Viet Nam, 2014-15[41]). The number of hours is higher for women without an education, who undertake on average more than 9 hours of unpaid care work daily (ActionAid Viet Nam, 2016[42]). Among women who are not in the labour force, 40% say that their time is dedicated to home care, compared with 2% of men (Cunningham, Alidadi and Helle, 2018[40]). Overall, the gender difference relating to unpaid care work is below the East Asian and Pacific regional average, which is close to 4 hours of unpaid care work per day for women and 1.5 hours per men (Ferrant and Thim, 2019[43]). However, constraints on improving female labour outcomes may become more intense as Viet Nam’s ageing population increasingly makes greater demands on women for care.

Viet Nam also has one of the most imbalanced sex ratios for children aged 0-4 in the world, pointing to discriminatory practices favouring the birth of sons (Figure ‎2.10). The sex birth ratio has actually increased in Viet Nam over the last decade, with the spread of ultrasound technology that allows prospective parents to easily identify the sex of the unborn child (UNFPA, 2016[44]). Vietnamese families traditionally place a higher value on sons, partly because they are expected to take on the financial responsibility for caring for parents in old age. Improving social protection for the elderly and the development of a comprehensive long-term care system would contribute to reversing this serious imbalance. In other countries, targeted campaigns to communicate the value of daughters’ labour force participation to parents, and class-room discussions about gender equality among adolescents, have shown promising results in changing societal norms about gender roles (Dhar, Jain and Jayachandran, 2018[45]; Innovations for Poverty Action, 2013[46]).

Figure ‎2.10. Viet Nam has one of the most imbalanced sex birth rations

Prosperity – boosting productivity

The Prosperity pillar of the 2030 Agenda for Sustainable Development calls for policies that combine structural transformation with a fair distribution of the growth dividend. Over the long term, growth and transformation depend on continuous gains in productivity (i.e. the ratio of outputs to inputs). If productivity gains and labour participation can be ensured, Viet Nam’s future outlook is decidedly positive. To guarantee productivity gains, Viet Nam needs to ensure future fiscal capacity and a stronger banking sector. A more flexible exchange rate regime would provide resilience against shocks, and most importantly, efforts must be made to overcome inefficiencies in investment and large productivity differences between sectors. Greater integration between domestic firms and foreign ones, for example through participation in supply chains, can help in this regard. Finally, human capital needs a boost to enable Viet Nam transform itself into a hub for high value-added activities (Table ‎2.2).

1. The macroeconomic policy framework needs to be improved to address vulnerabilities (fiscal consolidation, banking sector, exchange rate management).

2. Investment in the state sector is characterised by low efficiency.

3. Large pockets of low-productivity firms persist.

4. There is a lack of integration between domestic and foreign firms.

5. Human capital is insufficient to cope with future challenges.

Robust growth has been supported by a pragmatic and flexible reform process

The economy performs relatively well among its regional peers, and is advancing quickly. The average real GDP growth rate over 2014-18 was 6.6% – one of the strongest among Southeast Asian countries. Growth has been driven increasingly by domestic demand, reflecting the rising income of consumers. Exports have also contributed to resilient economic growth, creating a virtuous cycle where increasing exports bring about increasing imports of intermediate and capital goods. Strong business and construction investment have contributed to rapid import growth, especially intermediate and capital goods (Figure ‎2.11).

Figure ‎2.11. Viet Nam’s economic growth is robust

Viet Nam’s structural reform efforts have focused on lowering trade barriers and integrating into global value chains, notably through accession to ASEAN, APEC and the WTO. Large-scale inflows of FDI have created a globally competitive manufacturing base, notably in the semiconductor sector. In fact, the share of high-technology products in manufacturing exports increased remarkably during the 2010s (Figure ‎2.12). Viet Nam is scheduled to implement a comprehensive set of additional structural reforms in line with the commitment of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement and the upcoming European Vietnam Free Trade Agreement expected to be ratified in 2020.

Figure ‎2.12. In the past decade, Viet Nam has upgraded its industrial structure significantly and swiftly

Going forward, Viet Nam will need to focus on productivity growth supported by continuous reform and good macroeconomic management

Simulations of various scenarios (Figure ‎2.13) highlight the importance of sustaining productivity growth. In addition, Viet Nam will need to address population ageing through the introduction of measures to increase statutory retirement ages. If productivity growth and labour participation are maintained at present levels, per capita GDP (currently similar to that of India) would reach the current level of Malaysia in 2043 and Korea by 2049. In contrast, allowing these growth drivers to decline would postpone attainment of Malaysia’s per capita by eight years, and prevent Viet Nam from achieving Korea’s level of development during the projection period. The rest of this report identifies constraints and opportunities for generating further productivity growth.

Macroeconomic stability is an important enabling condition for further growth and reform. Viet Nam needs to ensure fiscal stability, continue efforts to improve the monetary policy framework and develop the financial sector.

Progress in fiscal consolidation since 2017 has proven very successful, and has significantly improved Viet Nam’s fiscal position. In addition, the new public debt management law has improved debt management and hence helped reduce the debt-to-GDP ratio. In the longer term, a major impediment to the challenge of fiscal consolidation is the limited ability to raise tax revenue. Viet Nam’s tax system has undergone structural changes in recent years, which have created a more growth-friendly tax environment and stimulated investment, growth and job creation, but have had a negative impact on revenues. Ensuring the quality of public expenditure is also necessary to ensure fiscal consolidation.

Figure ‎2.13. Structural reforms would boost Viet Nam’s long-term growth

Development of the financial sector will be key to allocating resources to productive activities. This must include improving the credit standards of a banking sector dominated by state-owned banks in tandem with reform of SOE governance. The government has set a target to align the capital adequacy of commercial banks with Basel II standards by January 2020. The authorities are also seeking to develop the domestic bond market.

Labour productivity growth needs reinvigoration

The misaligned allocation of resources between the state and the private sector needs to be rectified. Aside from a few highly productive sectors, notably FDI-related sectors such as semiconductor manufacturing, there remain large pockets of low-productivity activities (Chapter 1, Figure 1.2). State-owned enterprises still account for one-third of GDP and receive preferential treatment, including favourable access to credit, land and licences. Despite this government support, the investment efficiency of SOEs has declined in recent years and the gap vis-à-vis the FDI sector has widened (Figure ‎2.14).

Figure ‎2.14. The efficiency of state sector has declined

The low level of domestic firm input to foreign manufacturing firms operating in Viet Nam implies that the country is likely to provide low value-added assembly work (Figure ‎2.15). Local supplier firms are generally unable to meet the quality, cost and delivery (QCD) requirements of customer firms, as is also the case in some peer countries (APEC Policy Support Unit, 2017[47]). Enhancing linkages between FDI firms and domestic firms would result in beneficial spillovers of knowledge and technology. Continuing efforts are also required to boost productivity enhancement, skills improvements and technology adoption.

Figure ‎2.15. Linkages with FDI firms need to be strengthened

The government promotes SMEs in the private sector by providing targeted support measures and easing the regulatory environment. The government has also stepped up efforts to streamline business regulation with the promulgation of a resolution supporting and developing enterprises by 2020 (OECD/ERIA, 2018[48]). A particular focus is the streamlining of licensing and permit procedures. However, the SME landscape in Viet Nam is still dominated by family-owned and operated businesses with limited access to finance and improvement of technology and managerial skills.

Household enterprises play an important role in the Vietnamese economy, but this contribution needs to be enhanced significantly, given the need to sustain national productivity growth. Household enterprises are the main employer after agriculture, have provided more new jobs than all other sectors combined over the past two decades and accounted for 23% of Viet Nam’s GDP in 2014 (Pasquier-Doumer, Oudin and Nguyen, 2017[15]) (Figure ‎2.16). However, even though the number of formally registered household enterprises is rising, more than two-thirds are still not registered and thus fall into the informal sector. Household enterprises are characterised by the very small scale of their operations, with average firm sizes amounting to 1.8 and 2.3 workers for informal and formal household businesses, respectively. They also typically have very few linkages and subcontracting arrangements with the formal sector. Labour productivity in the household business sector, especially in the informal part, is low and the contribution of household businesses to gross fixed capital formation is well below their share of GDP (9.4 % in 2014).

Figure ‎2.16. Household enterprises play an important role in the Vietnamese economy

Human capital development is key to promoting better quality growth

Viet Nam’s labour participation rate is relatively high. However, labour input is projected to decline due to rapid ageing. Gradual raising of the retirement age to align with longer life expectancy, beyond current reform proposals, could mitigate the negative impact of the shrinking labour force.

Skills development will also boost productivity gains. The demand for skills is changing as a result of trends such as technological progress, digitalisation, globalisation and demographic shifts. Debate about the impact of technology on jobs in the future is ongoing. It is likely that cutting-edge technology will result in the automation of more and more complex tasks at accelerating speed, fundamentally changing the skills required for many jobs. Some jobs may even become entirely redundant. Estimates suggest that Viet Nam’s workers are exposed to a relatively high risk of automation (Chapter 1, Figure 1.6).

OECD experience suggests that low managerial quality, lack of ICT skills and poor matching of workers to jobs curb the adoption of digital technology across firms. Similarly, evidence suggests that policies affecting market incentives play an important role in technology adoption, especially those relevant for market access, competition and efficient reallocation of labour and capital. The provision of ICT training to low-skilled workers also accelerates the penetration of digital technology. Among OECD countries, 80% provide support for vocational training and higher education in ICTs. At later ages, broader digital strategies also involve lifelong learning, which empirical results suggest may facilitate adoption, hinging inter alia on continuous vocational training, adult learning and on-the-job training. Several countries have taken explicit measures to remedy the gap between the training participation rates of low and high-skilled workers, for instance, by granting priority access to publicly funded education and training leave for low-qualified workers (Denmark, Spain), or by funding employers to contribute to the cost of training in various ways (Estonia, France, the Netherlands). Additionally, the provision of e-government services can encourage ICT use by individuals by helping to foster an affinity with digital technologies (Andrews, Nicoletti and Timiliotis, 2018[49]).

Despite the outstanding performance of basic education in Viet Nam, as measured by OECD PISA scores, there has been little impact in terms of skills development and employability. Employers, particularly those in the most productive industries, often complain of skills shortages, and there is a need for greater investment in vocational training and technical skills (OECD/ERIA, 2018[48]). This is partly reflected in the relatively higher unemployment rate for youth with tertiary education attainment (Figure ‎2.17). A recent OECD study on the gap between youth aspirations and the reality of the labour market shows that, in Viet Nam, 92% of tertiary educated young people aspire to high-skilled jobs, but only 70% actually obtain them; meanwhile, 7.6% of young people aspire to medium-skilled jobs, but in reality 30% end up in this job category. In order to address this misalignment, national policy makers must focus on a two-pronged strategy to: i) help young people shape career aspirations based on relevant labour market information, so that they do not build unrealistic expectations; and ii) improve the quality of jobs with due regard to the conditions that matter for young people (OECD, 2017[50]).

Figure ‎2.17. Graduates from tertiary education have relatively poor labour market outcomes

In Viet Nam, 25% of the population fall into the 15-29 age group, and among those aged 25-29 (out of school) only 31% have an upper secondary education or above. In 2014, approximately 56.5% of employed youth had qualifications matching their occupations. The share of over-educated employees was 12.4%, while undereducated workers accounted for 31% of total employed youth. Although the share of well-matched, young employees remained relatively stable between 2010 and 2014, the share of under-qualified employed youth declined by almost 5 percentage points, while the share of over-qualified employed youth increased by nearly 5 percentage points. Over-qualification was found primarily in low-skilled occupations – a consequence of a degree holder being unable to find a job that matches his or her qualifications. Under-qualification was mostly concentrated in jobs requiring higher skills levels. Being under-qualified for a job can have an impact on the self-confidence of the young worker, as well as on labour productivity, stalling economic growth (OECD Development Centre, 2017[51]).

Strengthening the skills of the young population will provide a unique socio-economic development opportunity, especially if the focus is placed on growing economic sectors (OECD Development Centre, 2017[51]). In addition to improving productivity gains, access to skills development for all will ensure that growth is inclusive and that all members of society have the opportunity to succeed.

The informal sector and agricultural activities are also mired in low productivity. Reallocation of workers from the agricultural sector to other sectors, following the modernisation of farming, will boost productivity. Rural development will therefore be important for inclusiveness and social cohesion. Urban policy will also remain a key challenge, in particular ensuring that public services, notably education and social protection, as well as housing, are available to migrant labour.

Partnerships – financing sustainable development

The Partnerships pillar of the 2030 Agenda for Sustainable Development focuses on the mobilisation of resources needed to implement the Agenda, and thus cuts across all the SDGs. It is underpinned by the Addis Ababa Action Agenda, which provides a global framework to align all financing flows and policies with economic, social and environmental priorities (Table ‎2.3).

1. Domestic Revenue Mobilisation: tax revenue is insufficient and the tax structure and administration are in need of simplification and upgrading.

2. The environment is not conducive for private sector investment.

3. The financial sector suffers from a lack of diversification.

Viet Nam needs to diversify the mix of domestic resources in line with its transition from a centrally planned to a market-oriented economy, and from a low-income to lower middle-income country. The government has anticipated a move away from official development assistance (ODA) and is tapping into alternative sources, notably domestic debt. Increasing tax revenues and broadening the tax base are also important in this regard.

On the expenditure side, Viet Nam’s prudent approach to fiscal management has helped to significantly improve its fiscal position, creating a window of opportunity to engage in the key reforms presented in this report.

On the investment side, Viet Nam could increase the contribution of private sector resources to sustainable development. This would include addressing imbalances between a burgeoning FDI sector and a relatively weak private domestic investment by promoting financial sector development and strengthening the business environment.

Viet Nam has taken a prudent approach to debt management and recently managed to significantly reduce fiscal pressure

Viet Nam has taken a prudent approach to debt management by imposing a statutory debt ceiling of 65% of GDP. The government initiated an ambitious fiscal consolidation programme in 2017 to rein in public spending, and created a new legal framework to tighten oversight of debt management. This has proven very successful with public borrowing slowing between 2016 and 2018. The public debt-to-GDP ratio fell to 61.4% by end-2017 and to 55.5% by the end of 2018 (IMF, 2019[52]).

This success in fiscal consolidation places Viet Nam on a more sustainable footing, creating a window of opportunity for reform. Debt sustainability analysis suggests that at the current pace, the debt-to-GDP ratio will remain below the 65% ceiling until 2030 (Figure ‎2.18); however, a slowdown in growth to the average growth rate of middle-income countries would imply more serious fiscal pressure. Broadening the tax base and strengthening tax collection could help halve the primary deficit from about 2.3% to 1.5% of GDP and, thereby, stabilise the public debt-to-GDP ratio. Revising and improving the quality of public expenditure is also pivotal to fiscal sustainability.

Figure ‎2.18. Recent fiscal consolidation efforts have significantly strengthened Viet Nam’s position

As part of efforts to better control the level of public debt, a new legal framework was created to tighten oversight of debt management. The 2017 Public Debt Management Law has improved governance of debt management by integrating debt management responsibilities into the Public Debt Management Office in the Ministry of Finance, although fragmentation still exists. Moreover, the Law tightens the conditions for government guarantees to public entities by imposing annual limits on government guaranteed loans, and limiting the list of entities that are eligible. Finally, the 2015 State Budget Law imposes debt ceilings for local provinces.

New sources of revenue and new strategies for working with development partners are needed, as Viet Nam’s eligibility for and use of ODA change

Following reforms in the 1980s and 1990s, Viet Nam enjoyed access to official development assistance. In 2016/17, Viet Nam was the 6th largest recipient of ODA with commitments amounting to USD 4.3 billion. However, with the country’s graduation from the International Development Association in 2017 and the Asian Development Bank’s concessional lending window in January 2019, volumes of ODA have started to decrease, while loan terms are expected to become less concessional.

Viet Nam’s reliance on ODA to finance its development has decreased, accordingly: ODA amounted to 9.8% of public expenditure in 2016, down from 12% in 2010. During the same period, only four comparator countries showed a similar decline (Figure ‎2.19).

Figure ‎2.19. Reliance on ODA as a way of financing public expenditures has declined compared to other countries

At the same time, demand for official development finance has decreased as Viet Nam increasingly taps into alternative sources. Notably, Viet Nam has developed a domestic bond market, which has grown from around 4% of GDP in 2005, to 13% in 2010, and to 21% in 2018 (see below). As a result, the domestic share of public sector debt has increased significantly (Figure ‎2.20). The ratio of domestic to external borrowing has thus reversed from 40:60 in 2011 to 60:40 in 2018.

Figure ‎2.20. The government increasingly raises debt domestically

However, financing from development partners is still available. While multilateral lenders such as the World Bank and ADB have phased out their ODA assistance, they increasingly provide loans at less concessional terms. Japan and a number of bilateral partners still provide ODA to Viet Nam, albeit at higher terms than in the past, and new players such as the Asian Infrastructure Investment Bank (AIIB) have entered the market. While the diversification of borrowing sources is desirable in itself, it is important that effective and strategic use is made of the resources provided by development partners, which often include embedded technical assistance and transfer of know-how.

Public revenues should be diversified to build up resilience against socioeconomic vulnerabilities

In the 1990s, Viet Nam introduced a comprehensive legal framework to modernise the tax system. Taxes, which previously had been applied differently to the public and private sector, were unified into one integrated system, and standard tax instruments such as value-added tax, and corporate and personal income tax were introduced to systematically mobilise domestic resources. As a result, tax revenue became the main revenue source of the national budget. Tax revenue as percentage of GDP rose from 10.5% in 1991 to 14.8% in 2000 and peaked at over 20% in 2012 (Figure ‎2.21).

Figure ‎2.21. Tax revenue as a share of GDP has increased overall due to reforms, but has declined recently

However, in recent years, tax revenue has decreased as a share of GDP, falling to 18.6% in 2018. Several factors have driven this trend. The large size of the informal economy constrains the ability of the government to capture revenues, and a steady reduction in corporate tax rates from 28% in 2008 to 20% in 2017, and a generous system of tax incentives, have further slowed growth in tax revenues.

The downward trend in the tax-to-GDP ratio is of concern, especially considering the demographic pressures that constrain the financial sustainability of the social protection system, explored earlier in the People section. Public expenditures on social services such as education and health, which are crucial to ensure inclusive growth and social cohesion, could be affected by lagging tax performance.

A breakdown of Viet Nam’s tax revenues points to a number of potential paths to improve the tax structure and prepare it for future changes. Personal income tax and indirect taxes on goods and services (VAT or sales tax) generate relatively little revenue (around 43% of revenue between 2015 and 2017, 10 percentage points lower than in China and the average OECD country). Trade taxes accounted for around 12% of revenue between 2015 and 2017 (Figure ‎2.22). However, Viet Nam’s participation in a range of trade agreements that come with an increasing number of tariff eliminations implies that revenues from trade taxes will decline rapidly. A broader tax base and updated tax structure will thus be essential to finance Viet Nam’s future development needs.

Figure ‎2.22. Viet Nam’s tax structure relies too much on trade taxes and too little on personal income and indirect taxes

The enabling environment can be improved to mobilise private capital and investments

In addition to a re-orientation away from ODA towards domestic sources of finance, Viet Nam needs to transition from a reliance on public towards private resources. Due to constraints on public spending, the government is increasingly looking to the private sector to finance investments that are critical for continued inclusive growth. Private sector promotion was also announced as one of the government’s priorities at the 2018 Viet Nam Reform and Development Forum.

Currently, private investment amounts to 20% of GDP compared to 8% for public investments. The private share of investment is lower than for other comparator countries, with the exception of Cambodia and Malaysia. In light of the fact that Viet Nam has proven highly successful in attracting FDI over the years (averaging 6% of GDP), the relative weak performance of private investment is surprising (Figure ‎2.23). Removing the FDI component from the private gross capital formation would result in an even less favourable picture.

Figure ‎2.23. The private sector’s share of total investment is relatively low

In spite of recent improvements, persistent flaws in the business environment may challenge the mobilisation of private finance. The IFC’s Ease of Doing Business Indicators show a jump in Viet Nam’s score for quality of the business environment (from 82nd in 2016 to 68th in 2017), an improvement linked to the simplification of tax payment and customs clearance procedures (e.g. through the introduction of online filing systems). However, despite improvements, the average time required to pay taxes (rank in ease of paying taxes: 131) and/or complete customs procedures (rank in trading across borders: 100) is still quite long in international terms. Dealing with insolvent businesses remains another challenging area (rank: 133).

Simplification of tax collection could also boost revenues. Despite progress and the possibility to file taxes electronically, it still take almost 500 hours (equivalent to 12.5. weeks of full-time work) to pay taxes (Figure ‎2.24). This enormous administrative burden implies ample use of informal short cuts or full tax evasion, even among businesses and individuals that might be willing to pay taxes.

Figure ‎2.24. The average time required to pay taxes is still long

Moreover, overall regulatory quality is still perceived to be low. The Regulatory Quality Index ranks Viet Nam 121st out of 193 countries (World Bank, 2019[2]) (for a more detailed discussion, see Chapter 4). Observers note a general scepticism about the private sector in political and bureaucratic circles and an unwillingness to cater to investor needs and concerns (ADB, 2012[56]). There are also other shortcomings in areas not fully captured by the Ease of Doing Business Indicators. The Peace section and Chapter 4 explore the absence of clear guidance on land ownership rights and usage, as well as a lack of clarity on procedures for land transfers, which are identified as a key concern of investors.

The financial sector needs diversification

Viet Nam’s financial system is large for a middle-income country, as shown in the high levels of credit extended to the private sector (Figure ‎2.25). Nevertheless, the financial sector remains bank-centric and dominated mostly by state-owned banks, while non-bank financial institutions are relatively small.

Figure ‎2.25. Viet Nam is performing well in terms of domestic credit extensions

Lagging competition in the banking sector may jeopardise the efficient allocation of resources. The Ðổi Mới reforms have mildly liberalised the sector by limiting the functions of the State Bank of Viet Nam (SBV) – once a central and a commercial bank – to monetary policy and banking supervision, and creating several other state banks. As of 2018, 96 banks operated in Viet Nam, including 7 state-owned credit institutions, 35 joint stock commercial banks, 46 foreign bank subsidiaries, 4 joint-venture banks and 5 wholly foreign-owned banks. Yet, in spite of this increasing diversification, four major state-owned credit banks (SOCBs) account for 45% of banking sector assets and provide half of total credit (IMF, 2017[57]).

This monopoly may be a source of inefficiency. SOCBs tend to open preferential lines of credit for SOEs, conceding low interests and accepting government guarantees that companies without political connections could not afford. According to a survey of Vietnamese enterprises, financial access was the main business environment constraint for SMEs (World Bank Enterprise Survey Database, 2015). Only 29% of small enterprises have an active line of credit, compared to 57% of large firms. This implicitly crowds out potentially more promising private companies that are willing to expand. Without the support of SOCBs, these firms usually re-invest their earnings or rely on informal sources of capital (e.g. “back-alley banks”, trade credits, and money from family and friends) to upgrade (Malesky and Taussig, 2008[58]; Katagiri, 2019[59]). Recently, SMEs have been gaining access to banking services due to rapid innovation in financial technology (especially cashless payments and mobile banking services) (IMF, 2019[60]).

Efforts to strengthen asset quality and bank capital are underway, but vulnerabilities persist. The SBV initiated a series of reforms to mitigate the risk borne by the banking sector, including restructuring, mergers of banks and the enhancement of a legal framework for the management of non-performing loans (NPLs) (IMF, 2019[60]).1 As a result, the ratio of NPL to total gross loans decreased to a record low of 1.9% in the second quarter of 2019.2 Most large private banks are well capitalised to meet Basel II requirements, thanks to more profitable earnings and equity injections from foreign investors (IMF, 2019[60]). State-owned banks, however, have on average a capital adequacy ratio (9.8%) that is just above the minimum threshold set by Basel II and much lower than more solid joint ventures and 100% foreign-owned banks (24.84%). Systemic state-owned enterprises, moreover, face a capital shortfall of 2% of GDP (IMF, 2019[60]).

In addition to having a large banking sector, Viet Nam is also seeing the development of capital markets for corporate equity and other financing tools. Stock market capitalisation amounted to 39% of GDP in 2017, compared to the ASEAN average of 114%. For many companies, including SOEs, transparency and accounting requirements for listing on the stock market can be a burden. The bond market, though growing rapidly, is predominantly tilted towards public sector borrowing (Figure ‎2.26). Things are changing, however. The creation of credit rating agencies is improving transparency and opening up opportunities on the stock market for large credit-worthy companies; meanwhile, the issuance of corporate bonds is on the rise (IMF, 2019[60]). The swift emergence of Ho Chi Minh City as a sophisticated financial centre is facilitating the trading of corporate securities and venture capital, and could enhance the issue of innovative assets, such as green bonds, which are key to financing the low carbon transition (see Chapter 7).

Figure ‎2.26. The bond market is predominantly used to raise government debt

Institutional investors could play a pivotal role in building the capacity of a domestic capital market. In developing countries, public and private pension funds, life insurers and sovereign wealth funds usually channel savings into physical and intangible investment needs across all sectors, and could help fill Viet Nam’s infrastructure gap (Della Croce, 2014[61]). At the same time, institutional investors could contribute to stabilising stock return volatility in Viet Nam through the promotion of corporate management expertise and active monitoring of firms in which they invest (Vo, 2016[62]). Currently, around 1% of Viet Nam’s securities markets is made up of institutional investors. Financial and non-financial policies that increase the stability and transparency of the regulatory environment and encourage institutional investment in infrastructure and low-carbon projects are required to attract more institutional investors.

Peace and institutions – strengthening governance

The Peace and Institutions pillar of the 2030 Agenda for Sustainable Development encompasses peace, stability and trust, as well as effective governance and the performance of the public sector more broadly.

Over the last 30 years, Viet Nam has significantly reformed its institutions and legislative framework in order to establish an effective and accountable law-ruled state. However, four main challenges remain: (i) the efficiency and capacity of the public administration; (ii) the unpredictable regulatory framework; (iii) governance of SOEs; and (iv) persistent gift-giving for favours (Table ‎2.4).

1. The public administration lacks capacity.

2. There is a lack of transparency and predictability surrounding implementation.

3. SOE governance needs reform to improve efficiency.

4. Gift-giving for favours and corruption persist.

Viet Nam has been modernising its laws and administrations, but informal behaviours continue to be a challenge

The process of economic renovation (Ðổi Mới) initiated in 1986 was accompanied by profound changes to the country’s institutions. Administrative reforms in 1994 represented the first attempt to reduce burdens for businesses and citizens, and were followed in 2001 by the first of several masterplans enacted by the government to improve state efficiency. Then, in 2013, the new Constitution opened up legislative drafting to consultative and participatory policy-making processes (World Bank, 2016[10]).

The simplification of administrative procedures combined with a legislative framework that promoted competition and secured property rights has led to improvement in the business environment. For example, a new law, in effect from July 2019, imposes strong measures against forms of anti-competitive behaviour such as market dominance and economic concentration. Since 1993, the state has also successfully allocated land-use certificates (LUCs), guaranteeing their owners limited rights over their land. In 2005, the government strengthened the protection of intellectual property rights – thus aligning the country with WTO commitments – and raised awareness of the legal and institutional IP protection framework among the business community (OECD, 2018[63]). A 2018 law simplified administrative procedures and introduced other fiscal measures to encourage the development of SMEs (OECD, 2015[64]).

Lack of participation and increasing constraints on liberties raise concerns about the future. A large share of people claim to lack the power or capacity to participate in politics and influence the government, yet consider political freedom to be at least as important as tackling economic inequality. Future trust in institutions may depend on how the state enforces recent controversial laws. For example, the cyber security law that came into effect in January 2019 compels Internet providers to monitor, verify and remove content that could harm public security. There is a risk, however, that the law could be used to limit freedom of speech and punish undesirable public expressions (London, 2019[65]).

Bribery and gift-giving in exchange for favours and advantages continues, in spite of efforts to combat corruption. Since the 1990s, the National Anticorruption Strategy has worked to increase transparency around the income and assets of officials and civil servants, decrease the incidence of corruption among businesses, enhance societal awareness about preventing and combatting corruption, and increase inspections, audits and subsequent punishments for corrupt individuals (Malesky and Phan, 2019[66]). However, the legislative framework remains fragmented and no single independent agency is responsible for pursuing corruption cases. As a consequence, in 2017 Viet Nam placed 109th out of 144 countries in the World Economic Forum’s Irregular Payments and Bribes Index – the same position held in 2010. The World Bank Enterprises survey indicates that in 2015 91% of responding firms assumed that others offered gifts to public officials to ease administrative procedures – by far the highest value among all comparator countries; and 57% admit to giving bribes to receive government contracts (Table ‎2.5). The “2017 Provincial Competitiveness Index” report by the Vietnam Chamber of Commerce and Industry states that informal payments have become “so ingrained in daily behaviour that it has virtually become a social norm” (Malesky, Phan Tuan and Pham Ngoc, 2017[67]).

	Viet Nam	China	India	Indonesia	Malaysia	Mexico	Morocco	Myanmar	Philippines	Poland	Thailand	Turkey
	2015	2012	2014	2015	2015	2010	2013	2016	2015	2013	2016	2013
Public officials “to get things done”	91%	11%	17%	21%	38%	12%	16%	16%	59%	14%	18%	6%
Secure government contract	57%	42%	40%	33%	51%	35%	58%	10%	20%	19%	41%	19%
Get a construction permit	25%	19%	39%	45%	47%	25%	20%	48%	40%	1%	33%	2%
Tax officials	25%	11%	15%	22%	24%	10%	29%	20%	14%	2%	9%	1%
Get an operating licence	15%	8%	26%	19%	29%	18%	17%	37%	10%	0%	6%	10%
Get an import licence	12%	19%	43%	46%	41%	1%	46%	26%	23%	0%	0%	1%
Get an electricity connection	11%	3%	51%	4%	1%	5%	13%	36%	20%	0%	15%	17%
Get a water connection	5%	6%	52%	1%	9%	37%	7%	29%	11%	0%	3%	4%

Source: World Bank Enterprise Survey 2010-16, a firm-level survey of a representative sample of an economy’s private sector, covering manufacturing firms only.

Bribery aside, in some cases, public officials have other ways to abuse their entrusted authority and realise illicit gains. Powerful groups with narrow self-interests can adopt governance practices that may not be considered illicit or corrupt, but that can still undermine the transparent allocation of resources and equality of opportunities (OECD, 2012[68]). For example, patronage in Viet Nam is a widespread phenomenon. Other examples include the transfer of resources to local governments from the central state according to political allegiances, rather than objective social and economic needs; and easier access to credit and preferential administrative treatment for firms with political connections (Malesky and Taussig, 2008[58]). The state can also extract rents on land transactions without breaking any law.

This section points to three major institutional weaknesses that, if addressed, could enhance the integrity of the public sector: (i) the capacity of the government and public administration; (ii) the predictability of the legislative framework; and (iii) the management of SOEs. Building adequate statistical capacity underlies all these issues, since high-quality and open data are essential to ensuring efficient, predictable and transparent institutions.

Multi-level governance and public administration capacity need improvement

The gap analysis identified three major obstacles to government performance: (i) horizontal fragmentation; (ii) partial decentralisation; and (iii) non-competitive recruitment and remuneration of talent in the Civil Service.

Fragmentation and inefficient public spending

Recent reforms have improved public spending accountability and capacity in Viet Nam. Selected ministries and provinces have harmonised the planning and budgeting process, enhancing the management of information and strengthening the public finance management. For instance, budget execution, accounting and fiscal reporting have become more accurate and transparent thanks to the Treasury and Budget Management Information System. The government has, moreover, restructured budget allocation between central and provincial government, recurrent and capital investment, and within sectors (World Bank; Government of Vietnam, 2017[69]).

Insufficient co-ordination between government agencies continues to hamper effectiveness. For example, fragmented governance affects the effectiveness of the social protection system (as discussed earlier in the People section), environmental regulation (discussed later in the Planet section), and the design and implementation of urban policies. Barriers to co-operation and collaboration include: i) restrictions on sharing information across ministries; ii) different organisational cultures; iii) the division of whole-of-government budget into separate ministerial allocations; iv) public managers who only have experience within a single ministry; and v) accountability structures that focus mainly on ministry-specific issues (OECD, 2018[70]).

Box ‎2.2. The organisation of the Vietnamese state

Viet Nam is divided into 58 provinces and 5 cities – Hanoi, Ho Chi Minh City, Hai Phong, Da Nang and Can Tho – all of which are administered directly by the central state. Each province is further divided into three types of districts: “provincial cities”, “towns” and “rural districts”, while centrally administered cities are divided into “urban districts”, “rural districts” and “towns”. Districts are subdivided into municipalities (communes, wards and townships) based on a complex system of characteristics, such as population density and shares of the agricultural labour force (Table ‎2.6).

Level of governance	OECD classification	Number of units
Provinces Provinces (tỉnh) Centrally administered cities (thành phố trực thuộc trung ương)	Territorial level 2 (TL2)	63
Districts Provincial cities (thành phố trực thuộc tỉnh) Towns (thị xã) Rural districts (huyện) Urban districts (quận)	Territorial level 3 (TL3)	713
Municipalities Town (thị trấn) Ward (phường) Commune (xã)	Territorial level 4 (TL4)	11 875

Level of governance

OECD classification

Number of units

Provinces

Provinces (tỉnh)
Centrally administered cities (thành phố trực thuộc trung ương)

Territorial level 2 (TL2)

Districts

Provincial cities (thành phố trực thuộc tỉnh)
Towns (thị xã)
Rural districts (huyện)
Urban districts (quận)

Territorial level 3 (TL3)

713

Municipalities

Town (thị trấn)
Ward (phường)
Commune (xã)

Territorial level 4 (TL4)

11 875

Note: The OECD classification of territorial levels is detailed on www.oecd.org/cfe/regional-policy/regionalstatisticsandindicators.htm. Data on the number of units are provided by General Statistical Office.

At the central level, the National Assembly and the government hold legislative and executive power, respectively. This division of power is mirrored at the provincial, district and commune level, where the People’s Councils and the People’s Committees function as the legislative and executive bodies, respectively. Each People’s Committee is normally accountable to both the People’s Council at the same administrative level and to the committee at the higher level. Members of the People’s Councils are in principle accountable to constituents, who elect them every five years together with the delegates to the National Assembly. However, there is virtually no electoral competition at the central or local level.

The current system of allocation of resources does not create incentives for efficient public spending. Provinces can receive two types of transfers: unconditional balancing transfers and targeted transfers. The allocation of balancing transfers depends on the combination of a wide set of criteria (including population and geographic location), whereas the distribution of targeted transfers depends on proposals submitted by local governments. In principle, targeted transfers are granted if proposals are in line with a range of social and economic objectives. However, interviews conducted by the OECD seem to suggest that the allocation process is more discretionary and dependent on the political relationship between the central and provincial leaders.

The complicated relationship between the central and local governments hinders the creation of transparent state budgets. The committee at each level of subnational government drafts its budget proposal, has it approved by the local council and submits it to the committee at the higher administrative level. The central government then consolidates budget proposals into the state budget. However, higher-level provincial councils and committees may not have enough time and resources at their disposal to review the proposals. Moreover, the state publishes only the budget proposals and not the actual expenditures and revenues by functional classification and administrative unit, which makes the entire process unaccountable. Viet Nam does have a General Auditor with sufficient independence, autonomy and resources to review the budget; however, auditing reports are often published with a delay and are rarely examined by the National Assembly.

The state administration lacks capacity

Viet Nam needs to improve the incentives and mechanisms used to select, promote and retain the best-quality officials. Civil servants enter the public sector through a competitive recruitment process. The examinations are open to all candidates but take the form of standard tests that do not take into account the background and skills of applicants (Poon, Khắc and Trường, 2009[71]). As a result, the selected civil servants tend to lack practical administrative and management skills. Promotion is not always based on skills either, but rather on seniority and sometimes on having the right connections within the Communist Party. Competitive remuneration of civil servants is an important factor in helping to attract and retain talent. As of 2018, the average basic monthly salary of a public servant amounted to USD 801 (in power purchasing parity) and is regarded as low with respect to basic living needs. An increase in civil servant salaries could help reduce incentives for corruption.

Localism impedes the effectiveness of the public administration. Officials are not mobile and rarely build experience in distant provinces. This is a double-edged sword. On the one hand, civil servants sharing the same local culture and values may communicate more effectively and build support for central policies. On the other hand, greater proximity between officials and localities may increase collusion. Home officials may leverage close ties with local stakeholders to give favours to politically connected firms and extract private rents, while escaping monitoring from the central government (Xu, Bertrand and Burgess, 2018[72]).

Regulatory burdens have been lifted but implementation of laws remains unpredictable

Many laws and regulations are too vague and frequent contradictions between laws remain. For example, the Public Investment Law (that is currently under revision) lacks clear guidance on public investment decisions at the central and local level, and the scope for punishing debt mismanagement is uncertain. Administrators may thus hesitate to take or sign off on investment decisions, especially if they are afraid of incurring penalties. This reason helps to explain why over USD 18 million in committed ODA remain undisbursed – another reason being the willingness of the government to restructure debt (as discussed in the Partnerships section). The rest of this section discusses two other recent reforms that have improved the regulatory framework, but which contain norms that are vague and ill-defined and contradict existing laws.

The independence of the judiciary system is also a crucial determinant of the predictability of the legislative framework. Courts in charge of law enforcement in Viet Nam have little independence from the executive power, making it easier for illicit actors to exploit these loopholes.

The new competition law does not resolve old issues

Viet Nam will soon enforce a new regulatory framework designed to improve the capacity of authorities to detect harmful anti-competition practices. The new competition law consolidates the previous two agencies into a unique National Competition Commission (NCC), in line with the single-agency model adopted by other Asian countries (e.g. Japan, Indonesia, Malaysia and Singapore) and OECD countries (e.g. France and the United Kingdom). The commission will adjudicate harmful practices by assessing a company’s actual market power and its potential disruptive effect on market competitiveness, rather weighing its size alone. Small companies with technological and technical infrastructure advantages or those capable of controlling the distribution and consumption of goods and services may still be presumed dominant. Likewise, notification of mergers is now compulsory depending on the merging companies’ total assets, turnover and value of transactions. The prohibition on concentration does not depend on the companies’ market share, but rather on the effects of that concentration on the market (OECD, 2018[73]).

In spite of this progress, the new competition law still has some limitations. Several norms (especially those related to mergers and acquisitions and agreements restricting competition) do not apply to firms that enhance Viet Nam’s competitiveness on international markets. These exemptions may violate the competition laws of importing countries and be incompatible with Free Trade Agreements and multilateral trade agreements (including the Comprehensive and Progressive Trans-Pacific Partnership) that Viet Nam has signed in past years. It is, moreover, difficult to provide evidence that concentrations may increase the country’s competitiveness, leaving room for discretionary interpretations of the law. The law seems to exclude SMEs from most of the rules, presumably because their employee numbers and capital are too small to distort competition. They could instead jointly dominate the market and abuse it if they have integrated value chains (OECD, 2018[63]).

Lack of autonomy and capacity may thwart the activity of the new competition authority. As the NCC will depend on the Ministry of Industry and Trade (MoIT) for all decisions concerning budget, personnel and internal organisation, the Ministry could use this power to discourage the NCC from investigating and ruling against those companies it governs. The NCC needs adequate staff and capital in order to outperform the two agencies that it replaces, especially with respect to other competition authorities in comparator countries (Table ‎2.7). Co-operation with relevant state agencies is, moreover, problematic due to absence of knowledge of competition law and lack of capacity to collect relevant information, both at the central and the local level (OECD, 2018[73]).

	Budget of the competition authority in USD thousands	No. staff members working on competition
Mexico	24 071	287
Turkey	15 487	134
India	11 770	168
Indonesia	10 524	355
Philippines	9 289	120
Malaysia	2 791	58
Poland	2 035	150
Korea	1 130	482
Viet Nam	620	27

Note: Data from Indonesia and Viet Nam refer to 2017 and 2016, respectively.

Source: (OECD, 2018[73]).

Rights on land are established, but major limitations still exist

Since the 1980s, the state has successfully transferred rights over land to individuals while retaining formal ownership. This process is based on land use certificates (LUCs), “red books” that include details of all land parcels allocated to individuals, initial registration information and any changes in registration details. Every LUC owner in principal is allowed to buy, sell, exchange, lease, inherit and mortgage land. Since the introduction of certificates, farmers with a formal title have benefited from significantly higher rice yields and easier access to credit and land markets than those with no defined rights (Kemper, Ha and Klump, 2015[74]; OECD, 2015[64]).

The law permits the appropriation of land for public use in a manner that is non-transparent and does not guarantee adequate compensation. For example, the law does not detail the conditions under which the state – and, more frequently, provinces – can seize land. Clarifying these conditions is a prerequisite to making the legislative framework more predictable and transparent to LUC owners, and preventing any use of appropriated land other than that foreseen under the law. Meanwhile, compensation for state acquisition often reflects the current use of land (mostly agricultural) rather than its future or alternative use. State agencies setting agricultural land prices have thus kept prices as low as 30% of the estimated market price. Lastly, although existing legislation provides strong provisions on resettlement plans, such provisions are rarely enforced (OECD, 2015[64]).

Land users do not have instruments at their disposal to fend off compulsory land acquisitions. State appropriations of land have sharply increased contentious land disputes. Over 2003-13, 70% to 90% of all formal petitions and complaints in Viet Nam concerned land disputes (Wells-Dang, 2013[75]). The first destination of formal complaints are local authorities, with provincial people’s committees taking second-settlement decisions, which are final. Hence, these complaints risk remaining unheard most of the time.

Current land law limits the rights of land users through restrictions on deal size and land use prescription. Transactions between users can occur for a limited amount of land, depending on the region, the type of crops and how the land was acquired. Transactions are further complicated by the lack of cadastral maps at the local level and of official documents proving the actual dimensions of a property (OECD, 2015[64]). Regarding land use prescriptions, restrictions preventing users from disposing of their land as they wish hamper agricultural productivity. The state has required farmers to devote 3.8 million hectares (or 39% of overall agricultural land) to rice production by 2020 in order to guarantee food security and meet export targets. As a consequence, users cannot convert rice paddies into perennial crops without the permission of the competent agencies. Removing these restrictions would lead to increases in agricultural labour productivity, real GDP per capita and average farm size (Le, 2019[76]).

The limitations of the land law may have disruptive consequences on the prospects for sustainable and inclusive growth in Viet Nam. For example, unfair compensation for land confiscation may fuel poverty and inequality within and across provinces. Since revenues from transactions are not centralised, local governments have an incentive to sell as much land as possible, especially when their fiscal capacity is low. This phenomenon is leading to urban sprawl, food insecurity and inadequate allocation of land uses (OECD, 2018[70]; Hirsch, Mellac and Scurrah, 2015[77]). Caps on the accumulation of land undermine land productivity by keeping land holdings small and preventing the formation of economies of scale. Finally, these restrictions might have negative effects on land productivity. Farmers cannot put lands to their most profitable use, thereby limiting diversification of the crop mix, potentially lowering farm incomes and increasing poverty (Markussen, Tarp and Van Den Broeck, 2011[78]).

The judiciary system is not independent from the executive power

The independence of the judiciary system from the executive power is crucial for the predictability of the regulatory framework and the protection of individual rights, as well as for attracting investments. Independent courts contribute to the enforcement of contracts and property rights, and settle contractual distances without the interference of the government and politically powerful or connected parties. They also underpin the checks and balances essential for the free participation of citizens in making and monitoring public policies.

Viet Nam has made significant progress in improving its judicial system. The new Civil Code, which became effective in 2017, harmonises the legal system overruling any inconsistent provisions of other civil laws. In the same year, new legislation recognised for the first time commercial arbitration as a viable, alternative method of dispute resolution. Viet Nam’s 2010 Arbitration Law reflects the country’s intention of becoming a pro-arbitration jurisdiction and recognises arbitrators seated in the country but operating under the rules of a foreign arbitral institution. Finally, in 2004, the state established an official training institution for all aspirant-judges. Once in office, moreover, judges may be required to attend annual short-term training courses to remain updated about newly enacted laws and new developments in judicial practice (Dung, 2014[79]).

However, the judiciary system remains relatively weak relative to the executive power. Central and local governments as well as the Communist Party make the decisions regarding court personnel. A candidate also needs a letter of endorsement from a court cell of the Party at the relevant administrative level (Nicholson and Quang, 2017[80]). Local governments, moreover, make decisions concerning the budget and internal organisation of courts. Local leaders could thus use courts to perpetuate their interests and entrench their system of power.

The actual powers of the courts and the role of judges are also limited. Courts can only accept a limited number of administrative cases. As seen for disputes over land rights, courts do not hear cases in which individuals and business have accused the local government of violating their rights. Judges are not allowed to interpret the law. In the absence of written law, lower courts frequently ask higher courts for instructions. Only with the new Law on the Organisation of People’s Courts (in force since 2015), the Supreme People’s Courts gradually select decisions issued by any court at any level and declare them “court precedents”, allowing judges some discretion in the interpretation of the law.

Governance of SOEs allows the state to distort the market and discourage local private initiative

After the Đổi Mới reforms, Viet Nam has committed to an ambitious plan for restructuring SOEs; however, this process has slowed down since 2017. Between 1992 and 2015, over 4 400 SOEs were equitised, and 127 more were planned to be equitised between 2016 and 2020 under Official Letter No. 991/TTg-DMDN (dated July 2017) and Decision No. 26/2019/QD-TTg of the Prime Minister (dated August 2019). Yet, by the end of 2019, only 36 of the expected 127 SOEs had actually been equitised. Divestment of State capital has also remained below expectations in the past 5 years. Decision No. 1232/2017/QDTTg (dated August 2017) approved a list of 406 SOEs to be divested between 2017 to 2020. However, by the end of 2019, the state only managed to divest 100 enterprises. To speed up the restructuring of SOEs, the government issued Resolution No. 73/NQ-CP (dated September 2019) which sets out an action plan to better monitor the equitisation and divestment process, and introduces disciplinary measures on the agencies that are responsible for any delay.

The equitisation process still faces some challenges that can partly explain the slow progress. First, investors are only rarely able to access information about companies about to begin equitisation. This is because SOEs can be equitised without listing on a stock exchange, which would otherwise impose significant disclosure requirements (OECD, 2018[63]). According to the State Auditor General, it is indeed difficult to obtain an independent evaluation of the assets of certain SOEs, namely land holdings and brand valuation. Before finalising equitisation plans, SOEs need indeed to submit plans about current and future use of all land plots to local authorities for approval. However, the approval of such plans by local People’s Committees is often delayed. Moreover, SOEs usually own land plots in multiple provinces, thus complicating the reporting. Second, a 2018 report on the state of the SOE process to the National Assembly showed that SOEs offer only a negligible rate of 1-2% of their total stake to private investors. Third, the state can still influence the nomination of presidents and members of the boards of SOEs undergoing equitisation. Lack of transparency and a persistent state presence therefore allows certain SOEs to escape market laws, thus obstructing competition and hindering productivity growth.

As a consequence, governance of SOE may distort the efficient allocation of resources and affect the productivity of the private sector. According to the Provincial Competitiveness Index, 41% of entrepreneurs believe that provinces privilege SOEs, resulting in difficulties for other firms. Provinces with a high density of SOEs provide less credit to private firms and require more time to issue land use rights certificates than other provinces (Nguyen, Le and Freeman, 2006[81]; Malesky, Phan Tuan and Pham Ngoc, 2017[67]). In addition, easier access by SOEs to credit, land and export quotas in the garment and textile sector reduces the profitability and viability of private firms (Nguyen, Le and Bryant, 2013[82]). To invigorate the SOE sector’s productivity, an insolvency regime to manage the orderly market exit of inefficient SOEs’ would boost productivity.

A glance at Vietnam’s National Statistical System

Statistical capacity encompasses the ability of a country’s national statistical system to collect, produce, analyse and disseminate high-quality and reliable statistics and data to meet users’ needs. While Viet Nam’s national statistical system is prepared to respond to domestic and international data requirements, efforts to improve standards and quality assurance in production and dissemination of statistics should continue.

Resources

Viet Nam’s statistical activities are implemented on the basis of the 2016 Statistics Law. The national statistical system consists of a centralised statistics system, sectoral statistics organisations, and Ministerial-level and government agencies. The General Statistics Office (GSO) is the national statistics agency, and has a mandate to consult with and assist the Ministry in managing statistics, co-ordinating and organising statistical activities, and providing socio-economic statistics. GSO is vertically organised at the commune, district, provincial and central levels.

In contrast to other countries in the same income group, the majority of resources used by the national statistical system (94%) come from domestic sources (PARIS21, 2019[83]). Indeed, other lower middle-income countries depend on external support for the development of statistical activities. However, the information about the contribution of development partners to GSO’s overall statistical activities differs from the details provided by ministries and agencies. A consistent methodology is needed to harmonise the collection of information and to map potential gaps in funding levels.

Data provision

Since 2011, Viet Nam has been acting on recommendations relating to the agricultural census, health surveys, the population census, poverty surveys and the coverage of vital registration systems. While economic data provision in Viet Nam is considered adequate for surveillance (IMF, 2018[84]), several areas for improvement have been identified in fields such as public finance, national accounts, and monetary and trade statistics.

Viet Nam’s government finance statistics are incomplete. At present, they exclude relevant information on quasi-fiscal activities of the central bank (e.g. on state-owned enterprises) and extra-budgetary funds, including the Social Security Fund, the Enterprise Restructuring Fund, the Development Assistance Fund and the Export Support Fund. The OECD was unable to obtain access to detailed budget statistics by function and level of government. Important data gaps in the state and evolution of public finance statistics represent a challenge. In response, efforts started in 2018 to ensure full coverage of fiscal data and alignment with the Government Finance Statistics Manual 2014. This was followed by the introduction of technical assistance for the development of a residential property price index, under the auspices of IMF’s Data for Decisions (D4D) trust fund (IMF, 2019[85]).

With regard to National Accounts, the use of a grassroots approach to data collection from local to central authorities has highlighted areas for improvement in overall data quality. Currently, the GSO provides quarterly and annual data on GDP by economic activity and expenditure. Under the current strategy, Viet Nam is expected to implement the 2008 System of National Accounts (SNA) by 2020. The compilation and harmonisation of provincial GDP data that this involves has proven challenging, and GSO has been recommended to compile discrete and independent quarterly GDP data. Centralised data collection by GSO could reduce discrepancies between subnational figures and national estimates.

Monetary statistics are collected by the State Bank of Viet Nam (SBV), which reports monetary data for the central bank on the basis of limited information. External sector statistics rely on limited data sources and data quality – especially in areas such as foreign direct investment (IMF, 2019[85]). Government finance statistics (GFS) are not currently reported to the International Financial Statistics (IFS).

The implementation of social protection policies could benefit from better targeting. Current individual identification mechanisms for targeting social protection and poverty reduction policies are limited, as no underlying unique national ID system or beneficiaries registry exists.

Planet – conserving nature

The Planet pillar of the 2030 Agenda for Sustainable Development covers six environmental areas: water, clean energy, responsible production and consumption, climate action, life below water and life on land.

Viet Nam’s rich natural resources and biodiversity system have contributed to the country’s wealth and development. However, these advantages are diminishing. In recent years, the government has started to focus on a green and sustainable growth path. In 2012, the “Strategy of Renewable Energy Development to 2030” outlined an increase in feed-in tariffs for renewables, putting green economic development at the core of the government’s socio-economic agenda. More recently, Viet Nam has set a target of reducing greenhouse gas (GHG) emissions by 8% by 2030 through the “Intended Nationally Determined Contributions” (INDC) under the Paris Agreement. This contribution can be increased up to 25% conditional on international support. However, inefficient resource management and degraded environmental quality threaten the green growth ambitions of Viet Nam. Much more must be done to address emerging environmental challenges through a mix of policy instruments (Table ‎2.8).

Use of some natural resources is inefficient.

Air pollution, emissions and waste generation levels are high.

Environmental regulation and management is inadequate (roles and responsibilities, economic instruments, local participation).

Mismanagement of natural resources could hamper their contribution to Viet Nam’s growth path

Viet Nam is endowed with reasonably rich natural resources including minerals, oil, gas and hydropower. The country has the 13th largest coal reserves globally (Bahr, Benitz and Bremer, 2017[86]), with mining activities accounting for 7.3% of GDP in 2017 (MPI, Ministry of Planning and Investment, 2019[87]). In addition, Viet Nam’s water resources are key to the most important sectors, especially agriculture and energy. Agriculture, which employs around 40% of the workforce, accounts for over 90% of total water resources (UN-Water, 2013[88]). Water also plays a significant role in energy security, with hydropower producing on average over 40% of energy supply over the past five years.

In addition, Viet Nam’s diverse ecosystem supports growth, development and human well-being, and underpins the economy and society. The country’s coastline stretches for 3 260 km and provides favourable habitats for 27 000 species of plants and animals (MONRE, 2015[89]). These environments are fundamental to the development of important sectors such as tourism and agriculture, and provide jobs for more than 20 million Vietnamese. Such biodiversity is also key to sustaining life, supplying critical ecosystem services such as food provisioning, water purification, flood and drought control, nutrient cycling and climate regulation (Upton, 2014[90]).

However, the advantages of natural resources should not be taken for granted. Even though Viet Nam has made great efforts in recent years to follow a green and sustainable growth path, the country needs to strengthen its management of water resources and biodiversity conservation to achieve its ambitious green growth development objectives.

Uneven regional distribution of rainfall coupled with inadequate infrastructure and overexploitation of groundwater put water supply at risk

As a relatively water-rich country, Viet Nam should not be vulnerable to water stress. Nevertheless, climatic characteristics and poor infrastructure expose the country to droughts and floods. Viet Nam’s surface water sources represent 2% of the total flow of all rivers globally (OECD, 2016[91]); however, the country experiences water scarcity in the dry season which lasts from November to April (Figure ‎2.27). This prolonged period exacerbates water shortages, with river runoff reaching only 15-30% of total annual volume (MONRE, Worldbank and DANIDA, 2003[92]). Limited storage capacity and flood management infrastructure further risk water supply.

Figure ‎2.27. Uneven regional and seasonal rainfall distribution exposes Viet Nam to higher water scarcity in the dry season from November to April

Cycles of floods and droughts have major consequences, resulting in much higher damage in Viet Nam than in comparator countries (Figure ‎2.28). Since agriculture – a major economic activity in Viet Nam – is dependent on water and most of the affected areas are agro-based, the lack of water causes significant economic damage. In 2015, drought alone cost the country USD 6.7 million, equivalent to 3.5% of GDP, and affected 1.7 million people (EMDAT, 2015[94]). Following the historic disaster, saltwater intrusion extended up to 90 km inland, leading to aggravated water shortages for consumption, irrigation and fish-farming production, especially in the South Central region (FAO, 2016[95]).

Figure ‎2.28. The damage resulting from droughts and floods is much higher in Viet Nam than in comparator countries

Unsustainable exploitation of groundwater has caused a fall in groundwater levels resulting in land subsidence (Erban, Gorelick and Zebker, 2014[96]). Groundwater is increasingly extracted (Minderhoud et al., 2017[97]), mainly through wells, to serve agricultural and industrial needs. The resulting subsidence is affecting the Mekong River Delta, one of the three most vulnerable deltas worldwide (ADB, 2011[98]), which is now subsiding at rates of up to several centimetres a year, exceeding current absolute sea-level rise (Minderhoud et al., 2017[97]; Erban, Gorelick and Zebker, 2014[96]). If the Mekong River Delta continues to sink at a rate of 2.5 cm per year, all other things being equal, it will be submerged by 2200 – possibly even earlier if the rising sea level effect of climate change is taken into account. This process will subject agriculture to a high level of risk, as the Mekong River Delta is considered the “rice bowl” of Viet Nam.

Evidence exists of threats to biodiversity

An increasing number of species in Viet Nam are at risk of extinction, while the level of marine and terrestrial protected areas remains low. In 2004, 188 animals were listed as endangered, representing a seven-fold increase from 25 in 1996, according to the Red List of the International Union for Conservation of Nature (IUCN). One hundred marine creatures have also been added to the red lists of Viet Nam and IUCN. Despite this alarming rate, the proportion of marine and terrestrial protected areas in 2017 was one of the lowest among the comparator group (Figure ‎2.29). The share of marine and terrestrial protected areas has not shown any improvement in recent years, remaining static at 2.93% of total territorial areas in 2016 and 2017.

Figure ‎2.29. Viet Nam has a low level of marine and terrestrial protected areas

Forest cover is increasing, but this is linked mostly to growth in plantation forest which has a low biomass and low biodiversity. Forest areas increased by 3.1 million hectares over 2000-16, thanks to the Five million Hectare Reforestation Programme (5MHRP). However, the programme’s success remains questionable, as primary forests are still fragmented and overexploited, covering only 0.57 million hectares scattered in the central highlands, south-eastern and north-central region (CBD, Convention on Biological Diversity, 2019[99]). Meanwhile, 67% of mangrove forests – which are crucial for biodiversity – have been lost since 1943 (MONRE, 2015[89]).

Land conversion, urban development, climate change, pollution and overexploitation of resources, including biological resources, threaten biodiversity. Current land use policy may represent a particular threat in this regard. The rapid loss of primary forest might result from the relative freedom of local governments to convert protection forests under 20 hectares into other uses, according to Viet Nam’s Land Law from 2013. Converted forests have been used mainly for cash crop plantation and aquaculture. Going forward, unsustainable agricultural practices and destructive fishing techniques should pay for the inherent ecosystem services they use. Effective policy instruments to mainstream biodiversity into national and sectoral policies can help alleviate emerging pressures (OECD, 2018[100]).

Environmental quality is a growing issue

Increasing pressures from a high population growth rate, rapid urbanisation and accelerating industrialisation, on environmental quality in Viet Nam, have produced multiple challenges linked to the management of air pollution, solid waste and wastewater.

Air quality is worsening, posing significant health and economic impacts

Viet Nam is one of 20 countries with the most polluted air in the world (Figure ‎2.30, Panel A). The situation tends to be even more severe in big cities, industrial zones and traditional craft villages. The level of air pollution in large Vietnamese cities is very high (Figure ‎2.30, Panel B); and in most industrial zones, particle levels often exceed the National Standard by a wide margin, in some areas even up to 8-12 times. Total Suspended Particles (TSP) concentration is higher in the North than in other regions, mainly due to the concentration of large-scale coal-fired plants and cement factories using obsolete technology (MONRE, 2015[89]). In traditional craft villages, there is an increasing trend of hazardous pollutants and metal vapours, while the level of fine particulates remains high (MONRE, 2015[89]).

Air pollution was ranked the second highest concern among Vietnamese (MDRI, 2018[101]) and has caused severe negative impacts. Air pollution was linked to more than 60 000 deaths in 2016 (WHO, 2016[102]), five times higher than the equivalent figure caused by traffic accidents (about 11 000 per year). Premature mortality rates associated with ambient air pollution exposure in Viet Nam are also among the highest in Asia (Lelieveld et al., 2015[103]). Bad air quality can hamper economic growth through a decrease in labour productivity due to worsening health conditions, and a reduction in tourism revenue if tourists start to move to other destinations to avoid exposure to air pollutants.

Figure ‎2.30. Viet Nam is one of the countries with the most polluted air in the world, especially in large cities

High use of private vehicles and limited access to public transport networks further drive air pollution. Viet Nam has the highest level of motorcycle ownership per capita in the world, with motorbikes accounting for 96% of the total number of vehicles. Over the past decade, the number of cars has increased three-fold (OECD, 2018[70]) and is likely to continue due to high demand and possibly lower car tariffs following trade agreements. The expansion of public transport systems is planned, although efforts are concentrated mostly in Hanoi and Ho Chi Minh City.

The degradation of air quality is not expected to halt, as Viet Nam is becoming more reliant on coal in its energy structure. The use of coal in primary energy supply has increased from 11% to 33% over the past two decades and is planned to rise even further, up to 53.2% by 2030 (Figure ‎2.31). As of 2017, 54 new coal-fired plants are under development and 34 are under construction. Since 2015, Viet Nam has turned from a coal exporter to a net importer.

Figure ‎2.31. Viet Nam is becoming more and more dependent on coals in its energy mix

Increasing the level of fossil fuels in the energy mix may be a realistic but ultimately polluting and costly solution, threatening environmental sustainability. Failure to move away from coal, the most carbon-intensive of all fossil fuels, will increase the likelihood of severe, pervasive and irreversible impacts for human activities and ecosystems (OECD, 2015[106]). Coal-fired plant emissions (e.g. NOx, SOx, and particulate matters) were linked to 4 250 premature deaths in 2011, a figure that is projected to increase up to 19 220 by 2030 (Koplitz et al., 2017[107]). In addition, burning fossil fuels for energy will raise the level of CO₂ emissions, which have already increased seven-fold since 1990, with Viet Nam ranking highest among the comparator group. Unlike many countries, including China, Korea and Philippines, Viet Nam shows no sign of decoupling emissions of NOx and SOx from output (Figure ‎2.32). The significant level of CO₂ emissions may intensify climate change effects, since global warming has the potential to increase ground-level ozone, resulting in health problems, particularly for children.

Initiatives to support renewable energy have emerged; nevertheless, incentives may not suffice to encourage adequate investments in this sector. In accordance with the Power Development Plan 2011-2020 (PDP Revised VII), investors in renewable energy are granted increased feed-in tariffs, and exemptions on land rents and import tariffs for equipment, as well as preferential corporate taxes. Nevertheless, the current share of renewable energy, excluding hydropower, is still significantly below its potential (DEA, 2017[108]), remaining at 0.2% in 2016 compared to the target of 6.5% by 2020 (Figure ‎2.31). There are several key challenges including legal weaknesses for renewable energy and poor transmission infrastructure. The current Power Purchasing Agreement (PPA) imposes high risks on investors in the event of a breakdown in the transmission grid, which is currently monopolised by Electricity of Viet Nam (EVN). Difficulties in obtaining land use rights and insufficient absorption capacity of transmission and distribution infrastructure also disincentivise investors.

Figure ‎2.32. Unlike many countries in the comparator group, Viet Nam does not show any sign of decoupling emissions from output

The waste management challenge is two-fold – significant waste generation and poor waste collection and treatment

Viet Nam generates significant volumes of waste, and its policy mix does not suffice to accommodate the transition toward a circular economy. Each Vietnamese individual produces on average 1.46 kg of waste per day, while in China and Lao PDR, the equivalent figures are 1.02 and 0.7, respectively (Figure ‎2.33). In addition, waste composition shows a high potential for composting, recycling and waste-to-energy. However, no regulations or comprehensive instructions exist to separate waste at the source.

Figure ‎2.33. Waste generation in Viet Nam is comparable with the OECD average, but much more than its peers

Furthermore, waste is not appropriately disposed of and is subject to illegal dumping and open burning. While 40-60% of solid waste in sub-urban and rural areas is collected, the equivalent figure in remote areas is only 10% (MONRE, 2015[89]). Even in urban areas where the collection rate is 84-85%, treatment quality remains low and varies across cities (OECD, 2018[70]). Across 63 provinces, there are only 25 solid waste treatment and 37 wastewater treatment plants. Dumping solid waste, including hazardous waste, in open landfills and disposing of wastewater directly into water sources are usual practices. However, only 30% of landfills in operation meet the national standard (OECD, 2018[70]), while a large number of temporary landfills have much poorer hygiene. In addition, the share of households connected to the public sewerage system remains low at 60%, with only 10% of household waste receiving treatment (World Bank, 2013[111]).

Poor waste management contributes to adverse environmental outcomes and significant economic loss. Bad environmental quality has been reported in the surrounding areas of open landfills such as Khanh Son (Da Nang), Thuy Phuong (Thua Thien Hue), Deo Sen and Ha Khau (Quang Ninh). “Black rivers” created by poor water quality flow throughout urban agglomerations and industrial zones (ADB, 2014[112]), posing severe health risks. GHG emissions from landfills and domestic wastewater account for 35.9% and 45.6%, respectively, of emissions from the waste sector (MONRE, 2017[113]). The associated costs of pollution from untreated wastewater alone were estimated at 5% of Viet Nam’s GDP (GIZ, 2013[114]).

Tackling concerns about mounting waste would require effective policies for an incentive-based financing scheme and the promotion of waste separation at source. The government has produced comprehensive national strategies for integrated management of solid waste, drainage and sewerage systems. Collection and treatment fees vary across provinces, but are relatively low. Solid waste collection costs about VND 15 000–20 000/household/month (EUR 0.56-0.75), while the cost of sewage treatment is equivalent to only 15% of the price of clean water. If households are not connected to the sewerage system, an environmental pollution fee of 10% of the water tariff is charged.

Environmental reform requires better regulation and management capacity, coupled with a good mix of policy instruments

A lack of clear roles and the absence of a co-ordination framework in the public sector are jeopardising environmental protection. For example, responsibility for waste management is shared between MONRE, the Ministry of Construction (MOC) and the Ministry of Health (MOH), while implementation falls under local governments. Clear mandates and co-ordination are notable by their absence, with confusion over responsibility impeding the execution of tasks (OECD, 2018[70]). In 2017, the government issued Decree No. 155/2016/ND-CP dated 18 November 2016 on “Penalties for Administrative Violations against Regulations on Environmental Protection” with stricter fines; however, it has yet to establish a conducive regulatory framework for organising and delivering enforcement and inspections. For example, investigations are conducted only once per year with prior notification. The choice of fixed-time investigations in place of a responsive, risk-based approach neglects the cumulative negative effects caused by significant pollutants which may require more frequent examination.

Environmental protection is also undermined by lack of financial and technical capacity. Decree No. 155/2016/ND-CP requires evidence of environmental monitoring, however local authorities often lack the capability to undertake such measurements. Some provinces have set up monitoring centres but lack adequate human resources and equipment (MONRE, 2015[89]). In addition, the regulation of a large number of enterprises poses a significant challenge for local authorities, despite the existence of a self-reporting system that requires registered firms to report on the management of industrial waste (OECD, 2016[91]).

Environmental policy tends to be dominated by regulations, but implementation is weak. Economic policy instruments, where they exist, are not effective. In many cases, regulations cannot be applied because they are unsuited to the actual situation (MONRE, 2015[89]). Out of 826 enterprises investigated in 2014, 639 violated environmental regulations (MONRE, 2015[89]). Viet Nam has started to make use of economic instruments (i.e. tariffs, fees and taxes), but their application is still limited. In 2010, the government passed the Environmental Protection Tax Law, but some pollutants such as industrial emissions, rubber and electronic devices were not addressed. Furthermore, waste has generally been considered a problem rather than as a source of revenue, while inherent ecosystem services are not fully compensated. In addition, charges such as waste collection fees are too low to incentivise behavioural change.

Finally, the policy-making process is not participative, further hindering implementation. Even though the Vietnamese government has adopted a new method to develop masterplans from the bottom up, most environmental strategies are drafted and approved using a top-down approach. The role of civil society has yet to be fully integrated into the decision-making process (MONRE, 2015[89]) and the wider public is neither consulted during the development nor sufficiently informed about newly adopted policies (Schirmbeck, 2017[115]). Policies, therefore, do not necessarily address the rising concerns of stakeholders, resulting in a lack of incentives to facilitate policy implementation and monitoring.

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Notes

← 1. Resolution 42 of 2017, for example, facilitates NPL resolution by providing banks with greater legal powers to seize collateral and opportunities to sell NPLs at auctions (IMF, 2019[60]).

← 2. The ratio increases to 6.5 of total loans when NPLs restructured or sold to the Vietnam Asset Management Company (VAMC) are taken into consideration. The VAMC is a government agency established in 2014 that buys NPLs from banks in exchange for special government bonds.

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