ReportNo. 8249-VN Vietnam Stabilizationand StructuralReforms An Economic Report

April30, 1990 Public Disclosure Authorized CountryOperations Division CountryDepartment 11 AsiaRegion FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized

Docunentof theWorld Bank

Thisdocument has a restricteddistribution and may be usedby recipients

Public Disclosure Authorized only in theperformnance of their officialduties. Its contentsmay not otherwise be disclosedwithout World Bankauthorization. Currency Equlvalents

The Vietnamese currency is the dong (D). A currency reform in 1985 replaced ten old dong with one new dong.

Calendar 1989 December 1989 US$1.00 = D 3,996 US$1.00 = D 4,000 D 1,000 = US $0.25 D 1,000 = US$ 0.25

Fiscal Year

January 1 - December 31

Wei2hts and Measures

Metric System

Ust of Acronvms

ASEAN - Association of South East Asian Nations COMECON - Council of Mutual Economic Assistance (CMEA) EEC - European Economic Community FAO - Food and Agricultural Organization GDP - Gross Domestic Product GNP - Gross National Product GVAP - Gross Value of Agricultural Product IMF - International Monetary Fund MPS - Material Product System NFA - Net Foreign Assets NMP - Net Material Product TR - Transferable Ruble UNDP - United Nations Development Programme UNESCO - United Nations Educational, Scientific, and Cultural Organization UNICEF - United Nations International Children's Emergency Fund FOR OFFICIAL USE ONLY VIET NAM

ECONOMIC REPORT

Table of Contents

Page No.

SUFMARY.i......

I. COUNTRY SETTING ...... 1

A. Introduction ...... B. Physical Setting and Human Resource Endowments 2 C. The Economy ...... 7

II. RECENTECONOMIC DEVELOPMENTS ...... 12

A. An Overview of Economic Reforms, 1986-89 .12 B. Developments in Output and Prices ...... 14 C. Public Finance .21 D. Monetary Policy and Interest Rates ...... 26 E. Balance of Payments and External Debt ...... 29 F. Prospects for Growth in 1990 and Beyond .33

III. AGRICULTURE, INDUSTRY AND TRADE .36

A. Introduction .36 B. Agricu .ture ...... I . . . . . 36 C. Industry .48 D. Foreign Trade .58 E. Creating Productive Employment ...... 65

This report was prepared by a mission that visited Viet Nam in August/September 1989. The mission team included Messrs. Gerhard Pohl (mission leader), David Dollar (macro and industry), Zdenek Drabek (macro), Donald Brown (industry), Gerhard Menckhoff (transport), David Klaus (human resources), Patrick Lenain (IMF, balance of payments), Peter Petri (consultant, trade) and Jean-Paul Pinard (energy). Mr. Danny M. Leipziger was senior advisor to the mission, which was assisted by Chanaka R. de Silva (senior country officer) and Philippe Annez (Resident Mission Bangkok). Mr. Thomas Wiens prepared the agricultural annex and parts of the main report on the basis of a joint FAO/ World Bank mission in March/April 1989. Mr. Su-Yong Song provided quantitative analyses, including a re-estimation of national accounts. Peer review was provided by Alan Gelb, Tomothy King, and Johannes Linn. The report was discussed with the government in April 1990.

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Page No.

IV. TRAitSPORT,ENERGY AND COMMUNICATIONS ...... 67

A. Introduction ...... 67 B. Transport ...... 68 C. Energy ...... 73 D. Telecommunications ...... 82

V. HUMAN RES2tTRCES ...... 83

A. Introdiction ...... 83 B. Present Status ...... 83 C. Recent Policy Reforms ...... 88 D. Issues and Options ...... 91

VI. MANAGING A SOCIALIST iS'dKETECONOMY ...... 96

A. Sequencing of Reforms ...... 97 B. Economic Management ...... 99 C. Fostering a Supply Response ...... 104 D. Creating Factor Markets ...... 109 E. Reducing the Conflicts: External Financing ...... 112

TABLES. FIGURES. AND STATISTICALAPPENDIX

Tables

Table 1.1: Economic Characteristics of Viet Nam and Selected Asian Countries ...... 1 Table 2.1: National Income and Estimated GDP, 1984-89 15 Table 2.2: Saving and Investment, 1985-89 ...... 16 Table 2.3: Distribution of Public Investment Among Sectors, 1985-89 ...... 18 Table 2.4: Monthly Inflation Rate, 1987-89 ...... 19' Table 2.5: Official Retail "Business" Prices and Free Market Prices, 1988-89 ...... 21 Table 2.6: Summary of Budgetary Operations, 1984-89 ...... 22 Table 2.7: Analysis of the Public Sector Deficit, 1988 . . . . 23 Table 2.8: Balance of Payments, 1985-88 ...... 31 Table 2.9: External Debt and Arrears, 1984-88 ...... 32 Table 3.1: Foodgrain Production, 1984-88 ...... 37 Table 3.2: Structure of Production in Low-income countries, 1987-88 ...... 48 Table 3.3: Value of Industrial Output by Industry, 1985-88 . . 52 Table 3.4: Trade Structure by Commodities ...... 61 Table 3.5: Direction of Trade with the Convertible Area, 1985-88 ...... 62 Table 4.1: Paved Roads in Selected Countries ...... 68 Page No. Flau

Figure 1.15 Nutritional Indicators for Viet Nam and Selected Asian Countries, 1985-86 ...... 6 Figure 2.1: Monthly Inflation Rate, 1985-89 ...... 13 Figure 3.1: Fertilizer Application and Yields, 1986 ...... 40 Figure 3.2: Organization of the Ministry of Light Industry . .50

StatisticalAppend...... 115 VIET NAM

ECONOMICREPORT

COUNTRYDATA SHEET

Area: 832,000sq km Population(1989): 64.4 million Density (per sq km, 1989): 194 Rate of growth: 2.1%

PopulationCharacteristics (1989) Health (1987) Crude birth rat. (por 1,000): 31 Infantmortality (per 1,000): 48 Crude death rat (per 1,000): 8 Populationper physician ('000): 2.86 Populationper hospitalbed ('000): 0.41 Income Distribution Access to Safe Water (1986) X of nat;oaa:income % of Popuilation - urban: 80 Highest 10%: n.a. - rural: 37 Lowest 20X: n.a. - total: 34 Nutrition(1986) Education(1988) Per capita calorie intake (cal/day):2,025 Primary schoolenrollment: 100 Per capita protein intake ((g/day): 39 (% of relevantage group)

GNP Per Capita (USS 1988): 109 Annual Rate of Growth GROSSNATIONAL PRODUCT (1988) (% Constant Prices ) USS min % 1984-87 1988 GDPat MarketPrices 6,912 100.0 3.9 6.9 Gross DomesticInvestment 668 8.6 n.a. n.a. Gross NationalSaving -168 -2.0 n.s. n.e. Current AccountBalance -726 -10.6 - - Export of Goods 709 10.3 na. n.a. Importof Goods 1,368 19.7 n.s. n.a.

OUTPUT, EMPLOYMENTAND PRODUCTIVITY(1988)

Value Added Labor Force V A per Worker US$ mln %MiWn % US % Agriculture 2,765 40.0 n.a. n.a. n.e. n.s. Industry 2,074 30.0 n.s. n.a. n.e. n.a. Service 2,074 30.0 n.a. na. n.a. n.s. Total/Average 6.912 100.0 28.9 100.0 239 100.0

GOVERNMENTFINANCE CENTRALGOVERNMENT 1988 1984 1988 (bin dong) (% of GNP) CurrentReceIpts 1,817 14.6 11.4 Current Expenditure 2,136 13.4 16.1 CurrentSurplus -518 1.1 -3.7 CapitalExpenditure 649 4.1 3.9 MONEY,CREDIT AND PRICES 1984 1985 1988 1987 1988 ------…(bndong)------

Money Supply (M2) (end of year) n.e. na. 1II 471 2,38s (Percentageof Index)

Money as X of CDP (average of year) n.n n.o. 13.9 14.4 18.9 GenoralPrice Index (CPI) 807 588 3,461 13,849 56,530 (1982=100) Annual P-reentageCh&ngoe In: Goneral Prico Ind-x n.u 91.5 488.9 301.8 808.2

BALANCEOF PAYMENTS 1986 1986 1987 1988 …______------…(US3$i-n)------

Exports of Goods 497 494 599 709 Imports of Goods 903 1,120 1,142 1,865 Trade Balance -406 -827 -543 -666 Service Balance -87 -55 -87 -83 Net Transfers 20 27 17 13 Balance of Current Account -463 -865 -593 -726 Not ULT Borrowing 136 2s3 382 243 Disbursoment 387 617 691 887 Amortization(scheduled) 231 264 229 444 Debt rescheduling 262 0 0 24 Changes In Arrears 31 317 297 396 IncreaseIn Reserves 0 -2 0 0 Gross Reserves(End-Year) 17 1s 1S 1S EXCHANGERATE Annual Average 1986 1987 1988 1989 US8l = Dong 125 S01 2,047 3,998 1,000 Dong = USSI 8.00 2.00 0.49 0.25

MERCHANDISEEXPORTS (Average1986-ad) USS min X Agricultureand Forestry 201 33.4 MarineProducts 112 18.7 Handicrafts 38 8.3 Petroleum 36 6.0 Coffee 20 3.4 Total Exports 601 100.0

EXTERNALDEBT (December 1988) USS mln ULT 6,418 ST 61S Total DOD 7.033

DEBT SERVICERATIO (1988) 24X IBRD/IDA LENDING(6/30/89) IBRD IDA ----…(USS min)------Outstandingand Disbursed 0 59.4 Undisbursed 0 0 OutstandingIncluding Undisbureed 0 69.4 Viet Nam

Stabilization and Structural Reforms

SUMMARY

A. Introduction

1. Viet Nam is in the midst of bold reform that puts it in the forefront of socialist economies attempting to their rejuvenate their economic systems. Price and exchange rate reforms in early 1989 went further than any previous such reform in planned economies. The objective of the reform is to move to a system of allocating most goods and services through markets, by liberalizing prices and decentralizing management to productive units. Furthermore, devaluation of the exchange rate and liberalization of foreign trade is shifting the economy's orientation from an inward bias to an outward orientation. These policies, unilaterally adopted by government, should initiate a period of sustained growth in Viet Nam's per capita income, provided government stands by the reform program during the difficult initial adjustment period.

2. As of March 1990, the stabilization program had been in place for a full year, and the initial response of the economy has been very encouraging. Inflation for the 12 months ending March 1990 was 18.6Z, down from 400Z during 1988. Devaluation and trade liberalization resulted in a 100% increase in exports to the convertible area during 1989. Output has increased substan- tially in agriculture and in the dynamic private sector, which is concentrated in light industry and services. It is quite remarkable that these results have been achieved with little external assistance. Aid from the Comecon countries is being sharply cut back during 1989 and 1990, and during 1989 there was a net resource transfer from Viet Nam to the convertible area as the country kept current on its interest payments to the IMF and made some payments of principal to official creditors.

Salient Features of the Economy

3. A country of abundant natural and human resources, Viet Nam has good potential for long-term economic development. As a result of external conflicts and internal policy choices, however, the economy has produced substantially below potential for decades. The high hopes and ambitious goals set at the time of reunification of the country in 1976 have not been met. While many neighboring countries have surged ahead on the basis of market and outward-oriented economic policies, Viet Nam has followed a development strategy based on central planning and inward orientation.

4. Viet Nam's per capita income at market prices and the recently devalued exchange rate is estimated to be about $109 per capita. This estimate is not strictly comparable to other developing countries, and may well be an underestimate. Nutritional data, for instance, suggest that Viet - ii -

0am has a slightlyhigher per capita income than Bangladesh ($160). Neverthe- less, Viet Nam remainsone of the poorest countriesin Asia. Fifty years ago, Viet Nam had income levels broadly similarto those in nearby Thailand. Today, real income is perhaps one-fifthof Thailand'slevel.

5. While there are many similaritiesbetween Viet Nam and some of its Asian neighbors in terms of physicaland human endowments,Viet Nam has not participatedin their rapid developmentover the past 15 years. The poor growth performance,particularly in agriculture(2.3Z p.a. during 1984-88), combinedwith rapid populationgrowth to produce persistentpoverty and widespreadmalnutrition. Industrialgrowth has been more rapid, accordingto official statistics (10.1Zp.a. during 1984-88),but many products are not competitivein internationalmarkets, and official statisticsprobably overstate industrial growth and development. Data on physical output show growth averagingonly 1Z p.a. during 1985-87.

6. A particularlydisconcerting feature of the Vietnameseeconomy is the low level of saving and investment. The share of investmentin GDP averaged less than 102 in recent years, compared to 38% in China, 24Z in India and an average of 19Z for all other low-incomecountries. Moreover,virtually all investmenthas been financedby foreign loans and grants from the nonconvertiblearea. National savingswere actuallynegative during 1986-88, implyingthat foreign inflows financednot only all investment,but some consumptionas well. In this respect,Viet Nam is similaronly to the small low-incomecountries of Sub-SaharanAfrica. In responseto the economic reforms in 1989, domestic savingshave improved quite dramaticallyto about 5% of GDP. However, this is still very far from the average ratio of 24% for all low-incomecountries.

7. Despite sizeable foreignresource inflows,total governmentrevenues have fallen short of public sector expenditures(including state enterprises), and governmenthas resorted to borrowingfrom the State Bank to financethe deficit,both directly and through excessiveborrowing by state enterprises. The rapid expansionof money and credit resulted in considerableexcess demand for domestic goods and services,and in rapidly increasingprices, first in free markets and then in officiallycontrolled prices as well, as government attempted to mop-up excess liquidityand to ease shortagesof goods through selectiveprice increases. However,price adjustmentswere insufficient,and wage and credit policies not tight enough. Inflationaccelerated well into triple digits during 1985-88, and bordered on hyperinflationin the aftermath of the unsuccessfulcurrency reform of 1985 and again in early 1988.

StabilizationEfforts

8. The shortcomingsof the economicpolicies and isolationof the past fifteenyears have been widely recognized,and the Sixth Congress of the VietnameseCommunist Party in December 1986 initiateda far-reachingeconomic reform program, known as doi moi, or "renovation". However, progress towards stabilizingthe economyand moving towardsa higher growth path was initially slow, as reformswere undertakenin piecemealfashion. A more consistentand far-reachingattempt at stabilizingthe economywas introducedin March/April - iii -

1989. Its main features includedtightened control over credit expansion;an increase in interest rates to positive levels in real terms (Lhat is, abuve recent inflationrates); a depreciationof the officialexchange rate to the parallel market rate; and an almost completedecontrol of prices that were now to be determinedby market forces.

9. The concerteduse of monetary,price and exchange rate policies succeededin restoringthe role of prices in economic decisionsand in dramaticallychanging inflationaryexpectations of the population. Inflation dropped from nearly 102 per month (2002p.a.) in February to slightlynegative rates in May to July 1989. The rapid shift from inflationhedges (gold,dol- lars, rice and other commodities)into domestic currencycontributed supplies for domestic consumptionand exports, and provided a one-time gain in revenue to the governmentin form of increased seignirage arising from the public's willingnessto hold domesticcurrency, which helped to finance the sizeable governmentbudget deficit.

10. The effect of the decontrolof prices, combinedwith monetary stabil- ization and other reforms,was quite dramatic: shortagesof many consumer goods disappearedvirtually overnight. The perennial shortfallin rice pro- duction turned into an export surplusof more than one million tons, due to a record harvest and reductionin rice inventorieswhich until now had served as an inflationhedge and money substitute. Largely due to this rice surplus, convertiblecurrency exportsdoubled in 1989 to nearly $1 billion. Other, non-traditionalexports also increasedrapidly, and the added foreignexchange earningshelped to relieve the critical shortageof foreign inputs for domes- tic production. The sharp increase in interest rates also led to a reduction in inventoriesof manufacturedgoods, as enterprisesand commercialunits tried to reduce their financingcosts and adoptedmore rational inventoryand distributionpractices. This, togetherwith increasedavailability of im- ported consumer goods, led to excess supplies of many domesticallyproduced goods. Many enterpriseswere suddenlyfaced with a "buyers'market and had to rationalizeproduction and reduce costs in order to stay competitive.

11. The price decontrolsuddenly gave an entirelynew meaning to the micro-economicreforms introducedover the previous two or three years in agriculture(return to household-basedfarming) and commerceand industry (removalof restrictionson private sector activitiesand decentralizationof decision-makingto managers of state enterprises). While the supply response is not yet measurablein economic statistics,casual observationgives the impressionthat economic activity is increasingrapidly. Economic statistics do not yet cover many private sector activitiesand may thus underestimate growth, especiallyduring 1989 when the private sector was the main source of growth.

Policy Priorities

12. The year 1989 was thus a watershed for the Vietnameseeconomy, as a fundamentaltransformation in economicmanagement was begun. However, the gains in economic stabilityand efficiencyare still very fragile and need to be consolidatedthrough more far-reachinginstitutional reforms. Most - iv -

importantfor the immediatefuture is a reductionin the governmentbudget deficit, and the relatedproblem of containingstate enterprisefinancing. Otherwisecredit creationwill remain excessiveand will soon rekindle inflationarypressures. The one-time shifts into domesticcurrency of 1989 cannot be relied upon to help finance the governmentdeficit in 1990. Next in importanceare furthermicro-economic reforms to enhance the functioningof Viet Nam's new market economy. This should includeexpanding the scope of price reform to includetransport and energy, furtherprogress in creating a favorableenvironment for private sector activities,and further decontrolof foreign trade. In addition,reform of the banking sector is needed immediate- ly, bot:ifor stimulatinggrowth and for maintaininglow inflation. Other institutionalreforms, such as state enterprisereform, creation of a well- functioninglabor marlet, and streamliningand improvinggovernment adminis- tration,wLll take longer,as these requirenot only new rules, but also considerabletraining and experiencein managing the reformed institutions.

B. Managing Policy Reforms

13. The governmentbudget deficit,at about 7.5? of GDP, remains too high and will need to be reducedurgently if price stabilityis to be maintainedin 1990 and beyond. This reductioncan be achieved through a combinationof expenditurereductions and increasesin revenues. The inflationaryimpact of the remainingdeficit can be neutralizedby shifting from monetary financing by the state bank to non-inflationaryfinancing, for example, through issuing governmentbonds at market interest rates.

Fiscal Policies

14. ExpenditureRationalization. By internationalstandards, government expendituresin Viet Nam are not particularlylarge, relativeto national income. Expenditureson wages and salariesare a surprisinglylow share of the budget, even after conversionof the consumptionsubsidies to wages in 1989. Similarly,public investmentexpenditures on physical and social infrastructureare very low, contributingpartly to the low productivityand many bottlenecksof the Vietnameseeconomy. There has been some decrease in military spendingin the wake of Viet Nam's withdrawalfrom Kampuchea,and there is probably scope for further reductionsin this area.

15. A second expenditurecategory where the governmenthas to remain vigilant is subsidies. In principle,all consumer subsidieswere eliminated in 1989 and replacedwith wage payments. Similarly,state enterprisesare now to be financiallyindependent and do not have recourseto the budget to cover operatinglosses. The challengewill be to adhere to these bold policies in practice. Many enterprisescontinue to generate losses, and future reform measures (viz. opening of the economy, reformsof Comecon tradingpractices) may result in other enterprisesfacing difficultiesand losses. Political pressuresto safeguardemployment and to keep these enterprisesoperating are going to be very strong. It will thus take major efforts to enforce financial discipline. !

16. The governmentwill also need to ensure that budgetarysubsidies to unprofitablestate enterprisesare not replacedby indirect subsidiessuch as bank credit or inter-enterprisecredit. In other socialistcountries that have adoptedpartial market reforms, such hidden subsidieshave remaineda major source of excessivecredit creation,rapid inflation,and continued economic instability.

17. Overall, however, governmentexpenditures cannot be reducedvery much, since increasedexpenditures on infrastructureinvestments and higher salaries for essentialgovernment employees are likely to compensatefor reductionsin subsidiesand military expenditures. Contrary to earlier governmentobjectives, the budget deficit has not been reduced in 1989 and remainsat about 7.72 of GDP, despite a substantialreduction in consumerand enterprisesubsidies. The main increasein governmentexpenditure appears to be in capital spending. While increasesin capital spendingare necessary, maintenanceof price stabilityin 1990 and beyond will only be possible if other, non-inflationarymeans of financingsuch as increasedtaxes and domestic and foreignborrowing can be substitutedfor governmientborrowing from the State Bank.

18. RevenueMobilization. Increasedrevenues through better collection of existing taxes, new tax measures and new or increasedfees for public serviceswill have to be an essentialelement of a two-prongedstrategy of expenditurerationalization and revenuemobilization. Until recently,three- quarters of governmentrevenue were raised throughprofit transfersfrom state enterprisesand less than a quarterthrough taxes with fixed schedules. As a result, tax administrationin Viet Nam appearsto be ratherweak. The present system,with local tax officialscollecting revenues on behalf of the central governmentfrom locally controlledenterprises, is open to conflictsof interest and abuse, and may lead, low tax collectionand only partial transfer of tax revenues to high'r levels. The creation of an independent tax administrationwould be highly desirable,but is also closely related to ownershipand control of state enterprises.

19. As in other socialistcountries, the relianceon enterpriseprofit transfersto the budget has led to weak incentivesfor managers to increase profits and has prompted the practice of negotiatingprofit transfersbetween enterprises,their local or sectoralsupervisory agencies and the central government. Consequently,government revenue collection is characterizedby administrativediscretion and lack of transparency. The governmenthas started to address these problemsand has prepared a number of tax laws to be promulgatedby the National Assembly in 1990. These laws codify existing taxes, clarify and expand the applicabilityof some taxes, introducea number of new tax measures,and includemeasures to strengthentax administration (e.g., through penaltiesfor tax evasion). The tax laws cover eight separate taxes (agriculturalland, profit, turnover,excises, wage, real estate, asset and natural resource tax). Since these measures are still under preparation, it has not been possible to assess to what extent they will increasegovern- ment revenues. - vi -

20. A desirable objective for government would be to cut the budget deficit by about 1 trillion dong, thus reducing the fiscal imbalance from its 1989 level of 7.7% of GDP to about 3.5Z to 4.0X of GDP in 1990. This should be the government's goal regardless of its success in attracting additional sources of foreign aid. While this could be achieved by raising additional revenue, the introduction of new revenue measures may not yield the necessary amounts in their first year of implementation. Therefore, as much of the expenditure reduction as possible should come from non-economic government spending. At the same time, there is urgent need to finance essential infrastructure repairs and improvements, some of which would be employment- creating and facilitate military demobilization, but these will require external financing.

AgriculturalReforms

21. While important changes in agricultural policies have been introduced graduallyover the last severalyears, the adjustmentof rice procurement prices to market levels at the end of 1988 and the general liberalizationof prices, procurementand marketingin early 1989 have now made the initial reform measures much more effective. Recent measures to strengthenand lengthen land tenure rights have also improvedincentives for farmers. Decentralizationof productionand marketingdecisions to households is virtuallycomplete (exceptfor certain industrialcrops), and the supply response is already being felt.

22. Increaseduse of fertilizer,combined with wider use of high-yielding varieties, is likely to be the most importantsource of furtherincreases in food (primarilyrice) production. Increasedfertilizer application in paddy rice production,for example, combinedwith improvednutrient balance through the use of importedcompound (nitrogen-phosphate-potassium)fertilizers, would be advisable. If China's recent experience (with similar agroclimatic conditions)is a guide, one could probablyexpect an increase in paddy productionof at least eight times the weight of additionalfertilizer use. Since fertilizer (on a nutrient basis) costs about twice as much per ton as paddy at world market prices, output value would increaseby approximately four times the cost of fertilizerimports. This increasein yields could be achievedwithout further large investmentsin irrigation,but would requirean initialoutlay of foreignexchange.

23. The improvementof agriculturalextension services to help farmersto adapt new varietiesand techniquesis, of course,of crucial importance. The same applies to supply and marketingchannels for agriculturalinputs and products. The recent adoption of fair market prices and the increasedfreedom for the private and cooperativesectors to provide such servicesshould go a long way towards improvingfarmer incentivesand agriculturalproductivity. The initial reformswill need to be supplementedby changes in land tenure arrangementsand access to credit. A liberalforeign trade regime that respondsefficiently to the needs of farmersand other producersfor imported inputs is an essentialingredient that has been missing until recently. With the devaluationof the real exchange rate in early 1989, import controlshave been reduced and decision-makingdecentralized. However, it is difficultto - vii -

assess to what extent these government policies have already been fully implemented in practice and to what extent decision-making will continue to be dominated by past management and organization practices.

Infrastructure and Energy

24. Infrastructure investments, particularly in transport and communi- cations, have been very low over the past decades and many facilities (bridges, roads, equipment) are seriously dilapidated. The poor status of Viet Nam's infrastructure will require extended and sustained efforts at rehabilitation in order not to be a serious constraint on future development. A large part of foreign assistance has been invested in large power and water control facilities and these are soon to come on stream, removing some bottlenecks and improving flood protection and irrigation in the Red River Delta. From now on, attention should shift towards a more balanced development of infrastructure facilities and less on large projects. The first priority should be repair and upgrading of existing facilities.

25. Organizational and pricing changes can probably do far more to improve service in the short run than additional investment. For example, Viet Nam's trucking fleet has been poorly utilized in the past due to inap- propriate incentives and administrative allocation. A very substantial increase in capacity utilization can be obtained simply by putting transport on a sound commercial basis. The same applies to energy and communications. By adjusting tariffs to reflect the full cost of investments and operating expenses, the providers of these services would be able raise enough revenues to finance necessary investments. The recent price reform should now be expanded to cover transport, energy and communications as well.

26. In transport and energy, the basic flaw of pricing until now has been that the full cost of capital has not been reflected in tariffs. For petro- leum and coal, domestic prices should be raised to international levels in all uses. For electric power, tariffs need to be increased to fully reflect the costs of future additions to capacity, using an appropriate interest (dis- count) rate for the large amounts of capital employed in generation and distribution. Tariffs in neighboring countries are at least twice as high. Tariffs should be differentiated by load (and therefore cost) characteristics, rather than by social objectives as at present.

27. In the case of road transport, it is not possible to charge directly for the cost of building roads and it is thus desirable to introduce excise taxes on transport vehicles and motor fuels to raise sufficient revenues for road construction. This approach has also the merit of making modal choices between rail, road and water transport economically more rational.

28. Better planning and selection of investment projects is necessary in all infrastructure sectors. Economic rates of return should become the principle criterion to select projects and to allocate resources for the public investment program. Staff of the State Planning Committee and the line ministries urgently need to be trained in economic analysis of investment projects. Foreign financial assistance should become an integrated part of a - viii -

balanced investmentprogram, rather than determiningthe compositionof the investmentprogram, as appearsto have been the case in the past.

Industryand Trade

29. One of the main objectivesof Viet Nam's earlier developmentstrategy has been centrallyplanned industrializationwith a bias towards heavy industry,financed by extractinga surplus from the agriculturalsector throughlow procurementprices for agriculturalproducts. Foreign assistance, primarilyfrom the Soviet Union and other Comeconcountries, was also largely geared to developingthe heavy industry sector (includingenergy). Given the limitedsuccess of the governmentin extractinga significantsurplus from the agriculturalsector, investmenthas been largely limitedto projects financed by foreign aid.

30. This strategyhas been unsuccessful. Rather than integratinginto the world economyand exploitingViet Nam's comparativeadvantage of low labor costs to produce labor-intensivemanufactured goods, the governmentpursued a strategyof centralcontrol and autarky. Trade and other contactswere limitedto Comecon countries. Other countriesin the region,by contrast, first used their labor-costadvantage to export simple manufacturedproducts to world markets, and then used the technologicaland managerialmastery gained to move towards producingand exportingmore sophisticatedproducts. In general, their focus has been on light industry first, moving into machineryand heavy industry only as their technicalcapability grew and made these activitiesprofitable at world market prices.

31. Outward-orientedeconomic strategiesand full integrationinto the world economyhave proved to be far more successfuldevelopment strategies than autarky or industrializationwith high protectionfrom foreign competition. A market clearingexchange rate is the single-mostimportant policy tool for an outward-orientedeconomic strategy. The adjustmentof the exchange rate towards the parallelmarket rate in early 1989 has been a very importantstep towards a realisticexchange rate system. However, foreign exchange continuesto be allocatedadministratively and this creates unnecessarybottlenecks. The creationof a foreignexchange market in which enterprisesand individualscan freely trade in foreignexchange remainsthus an essentialcomplementary step that should be introducedas soon as possible during 1990.

32. The secondmost importantelement is to ensure that enterpriseshave easy access to imported inputs for their production. Administrativerestric- tions on imports are thus generallyundesirable with very few exceptionsfor health, social or cultural reasons. Imports should be subject to tariffs that are uniform for each type of import (i.e.,materials, machinery, consumption goods) and which effectivelygenerate customs revenuewithout significantly distortingproduction decisions. The governmenthas alreadymoved towards reducing the former monopoliesof the Foreign Trade Corporationsby reducing enforced specialization,permitting the establishmentof new foreign trade corporations,and granting some enterprisesdirect foreign trade rights. - ix -

These are importantsteps in the right direction. The governmentshould consider abolishingall entry restrictionswith respectto foreign trade.

33. If Viet Nam were to adopt an outward-orientedapproach to industrial- ization and development,it would require fundamentalchanges in industry, commerce,and finance. Foreign trade is currentlymanaged in a way that is tied to top-downplanning and which is likely to become increasinglyincompa- tible with the directionof reforms. One of the most importantguides to domestic resourceallocation decisions is the structureof international prices, as reflectedin market-basedtrade. The inevitableshift from nonconvertibleto convertibletrade will entail some initialadjustments on the part of Vietnameseindustry, but should ultimatelyprovide the possibility of profitabletrading opportunities. To pursue these opportunitiessuccess- fully will require increasedcontacts with internationalmarkets, considerable autonomy for managers, incentivesto pursue profitableactivities and the ability to tap finance and trade freely. In Viet Nam, as elsewhere,state enterprisesare often not very well positioned,in comparisonto the private sector,to engage in these activities.

Institutional Reforms

34. Private Sector Development. Given Viet Nam's labor surplusand limited opportunitiesto increaseagricultural productivity without a reductionin agriculturalemployment, the creation of non-agriculturaljobs is essential. State enterpriseshave, however, failed to provide a sufficient number of jobs, and needed adjustmentmeasures may actuallyeliminate most of the growth in state enterpriseemployment of the past ten years. The govern- ment has recognizedthis, and has changed policies towardsprivate sector activitiesin fundamentalways. The establishmentof private enterprisesis now permitted,and the price reform of early 1989 has removed important obstaclestoward private sector development. There are now no formal limits on the number of employeesin private enterprises,and owners are in principle free to dispose of their profits as long as they have paid taxes.

35. However, the emerging private sector still faces many obstaclesand uncertainties. Perhapsmost importantis the absence of a clear legal frameworkfor private sector transactionsand contracts. The legal protection of private property rights and the introductionof commercialand company law along the lines of those of successfulmarket economiesare urgently needed. The earliernationalizations of private property have a lingeringeffect, so that initial legal protectionof privateproperty rights may not immediately dispel doubts and uncertaintieson the part of potentialprivate entrepreneurs and investors. This is also true for foreign investors. Under these circumstances,the way in which governmenttreats initial cases of foreign investmentor successfuldomestic private firms will be very importantin either dispellingor confirmingthese uncertainties.

36. State EnterpriseReform. State enterprisereform is the other main task in moving towards a market economy. A number of options are available, rangingfrom full privatizationto more limitedchanges in organizationand management. For small enterprises,privatization is often the most desirable - x -

solution,given the difficultiesin monitoringa large number of small and widely dispersedentities. This has alreadyhappened in agricultureand with small commercialand industrialestablishments, in particular,retail trade. Leasing of state enterprisesto managers is a solutionthat falls short of full privatization,but could be useful as a transitionalmeasure. However, enterpriseleasing has considerableshortcomings as lessees do not have strong incentivesto maintain and improvethe value of the leased assets.

37. For large enterprises,privatization is only possible through the vehicle of a joint stock corporation,since individualsor small groups of individualswill not have the resourcesrequired. In the absence of privatization,a number of steps can be taken to "commercialize'the operation of state enterprisesand to increasetheir autonomy and efficiency. Some steps in this directionhave alreadybeen taken, notably the decentralization of production,marketing, and some investmentdecisions to managers; the removal of sectoraland product line restrictions;and the move towardsmarket pricing for the large majority of productsand services. These measures need to be complementedby adoptionof sound accountingpractices and standard techniquesof corporategovernance and planning.

38. Improvedperformance in public enterprisescan help the governmentby stimulatingexports, providingneeded tax revenue,and creating jobs. To promote efficiency,however, it is importantto eliminatesupport for all money-losingenterprises. Policiesundertaken to cut off subsidieshave been courageousand correct. Nevertheless,some troubled enterprisesare still given preferentialtreatment for credit or turnovertax rates. While this is understandablein the short-run,to enable enterprisesto adjust, the governmentshould announce a clear end-date for such preferences,even if it means closing or restructuringthose enterpriseswhich cannot survive. This is a useful step in forcingfirms to competeat home and in export markets.

39. At present, property rights over state enterprisesare not clearly assigned to any governmentagency. As in other socialistcountries, many governmentagencies and Party organs have intervenedin the past in the day to day managementof enterprisesand this has led to confusion,lax management practicesand inefficiency. This has become less of a problem in the past year, as high governmentofficials have stressedthe authorityof managers. However,without some formal enterprise "governance"structure that ensures management autonomy and stresseslong-term profitability, a relapse into past enterprisemanagement practices cannot be ruled out.

40. Autonomous enterpriseswill only behave in a sociallyoptimal way if managers strive to maximize long-termprofitability (or the net value of the firm). Management objectivesshould thus not be overloadedwith other social goals that can be better pursued throughother governmentprograms. Priva- tization is the most far-reachingsolution, but steps short of privatization can also be useful. Clear assignmentof ownershiprights to one (or several) agencieswould be an improvement. However, a single ownershipagency would in all likelihoodtend to stifle competition,and so would sectorallyspecialized ownershipagencies. Multiple and unspecializedownership agencies, such as investmentfunds and similar financialinstitutions, would thus be preferable. I - xi -

The legal structureof joint stock corporationscould provide a useful model of how to structurerelations between ownershipagencies and management. How- ever, vigorous competitionin productmarkets is likely to be more important for efficiency,particularly if the private sector is permittedto competeon an equal basis with state enterprises.

41. The developmentof productmarkets does not yet guaranteeefficient productionand investmentdecisions. Without functioningfactor markets, decentralizationcan lead to inefficientpractices as the experienceof other socialistcountries has amply demonstrated. Without a capitalmarket (in the broadest sense of the term) and without some labor mobility,the benefits of good management tend to be dissipatedin worker benefits. Competitionis stifled,productivity suffers and growth is held back. The control of the central plan must be replacedwith the disciplineof capital and labor markets if decentralizationand market organizationare to work.

42. FinancialSector Reform. Further reformsof the financialsector are a crucial complementto enterprisereform. The principlesof enterprise reforms should be fully applied to financialinstitutions as well: they should become fully autonomousenterprises that strive to maximize long-termprofits and that face competitionfrom other financialinstitutions in order to increasethe quality of their servicesand keep costs down. By intermediating the flow of resourcesfrom enterprisesand individualswith poor investment opportunitiesto others with better investmentopportunities they contribute to equalize rates of return throughoutthe economy and thus to increase productivityand growth.

43. However, for a number of reasons, financialinstitutions are more prone to fail as a result of poor managementdecisions or outright fraud and deception. Prudentialregulation and supervisionof financialinstitutions by the governmentmust thus go beyond that provided by commercialand company law for other enterprises. Liquidity,capital adequacy,and portfolioconcentra- tion, for example, need to be spelledout in banking and other laws, and adherenceto these standardsneeds to be monitoredclosely by the centralbank or another regulatoryagency. Some initial steps towards reformingthe Vietnamesebanking system have already been taken by separatingthe commercial from the regulatoryfunctions of the State Bank. However, the process of "commercialization'of the financialsystem is still very much in its infancy.

44. The next steps should include the introductionof some element of competitioninto the banking sector by abolishingthe forced specializationof the four main commercialbanks, permittingeach to provide the full range of servicesand permittingcustomers to select their bank freely. It is particularlyimportant to eliminatethe Bank for Foreign Trade'smonopoly on trading foreign exchange and to allow other banks into this importantmarket. At the same time, the banks should become increasinglyautonomous (in lending decisions,particularly) and responsiblefor profits and losses. Further rationalizationand market-orientationof deposit and lending rates is, of course a prerequisite. Alternativesto the banking system in form of direct, tradable securitiesissued by government(treasury bonds) or non-financial enterprisesshould also be encouraged(some enterprisesalready issue - xii -

commercialpaper) and so should non-bank financialinstitutions such as investmentfunds, insurancecompanies, and so on.

Social Issues

45. The provisionof well-functioningbasic health care and education systemshas been one of the main achievementsof socialistdevelopment in Viet Nam over the past decades. In comparisonto other low-incomecountries, health and educationindicators are rather favorable. The governmenthas also realizedthat rapid populationgrowth is a major constrainton developmentand an active and well-managedfamily planning programhas recentlybeen introducedto speed up the demographictransition towards sustainablegrowth.

46. Some adjustmentsin health and educationpolicies have been introducedrecently to raise more revenues throughuser fees and to provide incentivesto better utilizationof health and educationfacilities and programs. The single most importantissue for the future is probably the low salaries of health and educationpersonnel. In the medium term the government will need to develop a strategy to improve compensationand to raise sufficientrevenues to do so. Otherwise,employment in these sectorswill become increasinglyunattractive, particularly in comparisonwith employment in directlyproductive private sector activities. A well-educatedand healthy populationremains the most importantfactor in economic development,and more market orientationin productivesectors need not come at the expense of good and equitableeducation and health care.

47. Another importantsocial issue at the moment is growing unemployment resultingfrom demobilizationand public sector layoffs. It is difficultto assess the extent of this problem. Family incomeshave increasedin rural areas as a result of the economic reform, so that soldiersreturning to their families in rural communitiesmay be supportedwithout hardship. In urban areas hard hit by structuralchanges in industry,on the other hand, it may be more difficultto supportthe unemployed. In this situationthere will be strong pressure on the governmentto minimize layoffsfrom state-owned industry. Maintainingworkers in unproductivejobs is not an appropriate solution to the unemploymentproblem, however. It would be far more efficient to follow through on enterprisereform, allowing layoffs (perhapswith some compensation)where necessary,and then to deal with any unemploymentproblem with assistancetargeted to the truly needy. As the reform process continues, it would be extremelyuseful to have householdsurvey data from which changes in the distributionof income and the incidenceof poverty could be reliably calculated.

C. Future Directions

48. The exrferienceof other countrieshas clearlydemonstrated that liberalizationof a highly distortedeconomic system can generate a rapid rate of growth, even if the savingsand investmentrates are initiallyquite modest, as is the case in Viet Nam. Improvementsin the efficiencywith which - xiii -

existing resourcesare utilized provide the main source of growth in this initialperiod. The shift to outward orientationis a very important componentof this kind of liberalization,as external demand is one of the factors that will get the economymoving. It would not be unusual if Viet Nam achieved a growth rate of 62 p.a. during the first few years of reform. Such a growth rate would enable the country to build up its savings and investment rates, while simultaneouslyincreasing per capita consumptionat a modest rate.

49. A higher rate of savingsand investmentwill be necessaryto sustain rapid growth in the medium to long run. Greater saving can come from a number of sources. If price stabilityis maintainedand interest rates provide attractivereturns, then householdswill provide some savings that can be channeledto productiveinvestment. Retained earnings of state-owned enterprisesare another potentialsource of saving,and the extent of their contributionwill depend cruciallyon reorganizingthem so that earningsare invested,rather than dissipatedin excessivebonuses and benefits to employees. Finally, the governmentsector needs to be a major source of saving for the economy. Through taxationand fees for public goods and services (i.e., electricity,gasoline) government needs to collect an amount of revenue that more than covers its current expenditure. This excess of revenue over current expenditurerepresents public savings,which should become the major source of finance for infrastructureinvestment. The current situationis exactlythe reverse: governmentis a large dissaver,with more current expenditurethan revenue.

50. If Viet Nam followsthrough on its reformprogram, its medium-term prospectsare excellent. The economy is in a difficultsituation at the moment, however, in that consolidationof the stabilizationprogram requires further fiscal restraint,while future growth requiresinvestment in critical infrastructureneeds. This is not an unusual position for a low-income developingcountry. What is unusual is that this dilemma coincideswith a basic reorientationof the economy. Viet Nam has through its fundamental price reform and revised incentivepolicies set the stage for a resumptionof growth based on improvedefficiency. To bring this growth to fruition, however,will require: (a) staying the stabilizationcourse; (b) accelerating the institutionalreforms which will prod the supply response;and (c) acces- sing a modest amount of foreignconcessional assistance.

51. There is no question that increasedforeign assistancecould ease the adjustmentdifficulties for Viet Nam at this importantjuncture. However, the reality is that Soviet assistanceis scheduledto decline substantiallyover the next few years and EasternEuropean assistancemight disappearaltogether as these countriesare grapplingthemselves with wrenching politicaland economic adjustments. While deferral of past debts could make a sizeable contributionby the nonconvertiblearea to Viet Nam's financingneeds, new foreign assistancecan only be expected from industrialmarket economiesand multilateralinstitutions.

52. Additionalnet foreign financingcould be instrumentalin easing the fiscal deficit, in removingbottlenecks in infrastructure,and in providing - xi.v -

some breatling space before the supply responseto the recent reforms takes full effect. Even as small an amount as $250 million per year could make a significantdifference in the short run. By internationalassistance standards.such an amount would be quite modest in relation to Viet Nam's level of income and population. Without some signs of acceleratinggrowth, popular support for the reform programmay dwindle rapidly, as price changes and the opening of the economy to foreigntrade displaceworkers in now unprofitable activities.

53. Re-establishment of normal relations with foreign creditors would require a resolution of arrears to official and commercial creditors through a comprehensive rescheduling with the Paris and London Clubs of creditors. As one of the poorest countries, Viet Nam may be eligible for exceptional debt relief. Without some debt relief and additional resource inflows from bilateral and multilateral creditors, it will be very difficult to put Viet Nam quickly back on a sustainable growth path. With increases in productive investment, strong economic management, and continued policy reforms, however, Viet Nam can harbor aspirations of substantial income gains and improvement in the standard of living of its people. 1. COUNTRYSETTING

A. Introduction

1.1 Viet Nam is a country with abundant natural and human resouices and good potential for long-term economic development. As a iesol1tof externial conflict and internal mismanagement, however, the econonmylhas pioduced sub- stantially below its potential for decades. Per capita inmome, eva]uated at the official exchange rate, was only US$109 in 1989. This estimate is not strictly comparable with the per capita GDP figures that appear in the World Development Report and probably underestimates Viet Nam's GDP relative to other low-income countries.l/ Nutritional data, for instance, suggest that Viet Nam has slightly more income per head than Bangladesh, where per capita GDP was US$160 in 1987. Nevertheless, Viet Nam is clearly one of the poorest countries in Asia. Fifty years ago living conditions in Viet Nam were broadly similar to those in nearby Thailand. Today real income is perhaps one-fifth that of Thailand, an indication of how far Viet Nam has lagged behind its potential.

1.2 With nearly 65 million people, Viet Nam is the most populous country in mainland Southeast Asia. It is also one of the most densely populated countries in all of Asia, as can be seen in Table 1.1. Its density of 188 persons per square kilometer is almost twice that of Thailand (105 per/sq km) and close to that of India (243 per/sq km), though far below the level of Bangladesh (736 per/sq km). It is similar to its Asian neighbors in being primarily an agricultural, rural economy.

Table1.1: ECONOMICCHARACTERISTICS OF VIET NAM AND SELECTEDASIAN COUNTRIES

GNP per Area Population Share of Share of capita Population (thousands density labor force population 1987 1987 of square (personsper in in urban (USS) (millions) kilometers) square km) agriculture areas

Viet Nam 109 62 330 188 68 21 Bangladesh 160 106 144 736 76 13 Burma 212 39 677 58 63 24 China 290 1,089 9,661 112 74 38 Indi: 300 798 3,288 243 70 27 Indonesaa 460 171 1,905 90 67 27 Thailand 850 64 514 105 71 21

Source: World DevelopmentReport, 1989, except for Viet Nam's per capita GDP, ohich is a staff ostimatefor 1989 and not strictlycomparable to the figures for other countrios.

1/ Much of the data in Viet Nam is of poor quality, making it difficult to compare Viet Nam's situation with that of other countries, and also to assess trends over time. All quantitative estimates in the report should be treated with some caution. 1.3 While there are many similaritiesbetween Viet Nam and some of its Asian neighbors in terms of underlyingendowments, Viet Nam has not enjoyed the rapid developmentthat has characterizedmost Asian economiesover the past 15 years. Whereas much of Asia has benefitedfrom developmentstrategies that are market and outward-oriented,Viet Nam has followeda differentpath. Since reunificationof North and South Viet Nam in 1976, the country'sdeve- lopment strategyhas relied on collectivizedagriculture and a centrallyplan- ned industrialsector. Furthermore,as a result of planning and an overvalued exchange rate, the orientationhas been inward rather than outward. The inward bias inherent in Viet Nam's economicpolicies has also been reinforced by embargoeson trade and investment,imposed by Western nations and China, as a result of Viet Nam's military involvementin Kampuchea. The result of Viet Nam's developmentstrategy has been slow and unstable growth,with price instabilitybordering on hyperinflationin recent years.

1.4 The poor growth performance,particularly in agriculture,has combinedwith rapid populationgrowth to produce persistentpoverty and wide- spreadmalnutrition. Dissatisfactionwith the results of Viet Nam's develop- ment strategy,especially in comparisonto the resultsachieved in its more market-orientedneighbors, prompted a reassessmentof economic structureand policy at the Sixth Congress of the VietnameseCommunist Party in December 1986. That congress produced proposalsfor comprehensivereform of economic managementat both the macro and micro levels. This reform program--knownas doi moi or "renovation"--wasimplemented slowly and partiallyin 1987 and 1988. In 1989, however, the pace of reform quickeneddramatically, and for the first time Viet Nam adopted a consistentstabilization program aimed first and foremostat halting inflation. Fiscal adjustmentand enterprisereform have been recognizedas the keys to this stabilizationeffort.

1.5 The Vietnameseeconomy is currentlyin the midst of a radical reorientationof its structureand institutions,away from bureaucratic planning, toward market-basedallocation of resources. At the macro level the reform involves sweeping changes in fiscal and monetary policy that succeeded in dramaticallyreducing the rate of inflation. However, the budget deficit has not yet been brought under control and furthermeasures are required to consolidatethe stabilizationgains. Reforms at the micro level are aimed at decentralizingdecision-making and enforcinga hard budget constraintfor state-ownedindustry. This report examines the economic reform process in Viet Nam. It provides backgroundto the reform by consideringthe weaknesses in the previous economicmanagement system. It also analyzes the problems facing the reform program and the main bottlenecksthat still hinder rapid growth in the economy.

B. Physlcal Settinq and Human Resource Endowments

Country Setting

1.6 Viet Nam has a surfacearea of 332,000 square kilometersand stretchesin the shape of the letter S for more than 1,600 kilometers,between latitudes8° and 230 north, forming the easternedge of the SoutheastAsian 3 peninsula. It is bounded on the north by China and on the west by Laos and Kampuchea. In the east and the south, Viet Nam has a coastlineon the South China Sea and the Gulf of Thailandwhich is more than 3,000 kilometersin length.

1.7 A string of plains extends the length of Viet Nam. The dominant plain in the north is the Red River Delta, stretchingfor more than 200 kilo- meters from the Gulf of Tonkin northwestwardto the mountain ranges. The delta is fertile and is intensivelycultivated and is the center of agricul- tural and economic activitiesin the northern part of Viet Nam. It has an averagepopulation density of about 600 persons per square kilometer. South of the Gulf of Tonkin the delta merges with the coastal plain, which is seg- mented where the mountains reach the sea. The soil is very fertilehere, and this is the main rice growingarea of centralViet Nam.

1.8 The highlands of northern and northwesternViet Nam are the southern end of the high plateaux of easternTibet and Yunnan Province in China. Most of the country'sconsiderable mineral wealth (iron,zinc, tin, wolfram, manganese and apatite ores) lies in these northernmountains. The immense depositsof anthracitethat extend t the coast add to this wealth.

1.9 In northwesternViet Nam, the mountain ranges continue southwardsand graduallybecome very narrow and rugged as they reach centralViet Nam, making communicationsbetween the northern and the southernparts of the countryvery difficult. Further south, they widen into a high plain covering an area of more than 50,000 square kilometers;in these sparselypopulated highlands, coffee, tea and rubber flourish,benefiting from its rich red soil. Further south again, the highlandsstart slopinggently into the low plains area of the Mekong Delta.

1.10 Further south, the highlandsgradually descend into the enormous system of deltas formed by the Mekong River and the smallerVam Co, Sai Gon and Dong Nai Rivers. The Mekong Delta is the most importantarea for agricul- tural production in Viet Nam. The Vietnamesepart of the delta is over 65,000 square kilometersin area and nowheremore than 3-1/2 meters above sea level.

1.11 The climate in Viet Nam is varied: in the north, the winds of CentralAsia and the Yellow Sea sweep across the country,while in the south, the monsoons from the Pacific and Indian Oceans dictate the climate. In the north, the climate is similarto that of southernChina, being characterized by extreme differencesbetween summer and winter temperaturesand by sudden changes in temperature. There are two seasons: winter, which lasts from November to April, with the averagetemperature around 160 Celsius and frequent light drizzle from February onwards;and summer, from May to October, a season of great heat, heavy rain and typhoons.

1.12 In the south, the climate is a regularmonsoon type, characterizedby constant temperatures(between 250 and 300 Celsius),distinct monsoons, and a regular rainy season. The year has three seasons: the first correspondsto the summer monsoon (May to October) and is very wet; the second to the begin- ning of the winter monsoon (Novemberto February),a dry and relativelycool period; and the third, covering the end of the winter monsoon (Februaryto April) is a dry, hot, and unpleasantperiod, when the close atmosphererarely breaks into cooling rain. The climateof centralViet Nam is a transition between those of the northern and the southernparts of the country: in general it is cooler than in the southernpart, and the dry and rainy seasons are not as pronounced.

1.13 Of the total area of 33 million ha, about 55? (18 million ha) is now in "productive'use, of which 21? (6.94 million ha) is used for agriculture, with the remainderunder forest. The "unproductive"area, which is generally hilly or mountainous,is truly barren (not even in shrubs). Reclamationfor agriculturaluse has been occurringat a rate of about 90,000 ha p.a., but this has been partially offset by high rates of land absorptionaround urban areas (30,000ha p.a.). There remains some 4.1 million ha which could be reclaimedfor agriculturaluse, with sufficientinvestment; however, only about 1.3 million ha is moderatelyor highly suitablefor agricultureby FAO/UNESCOcriteria.

1.14 In per capita terms. Viet Nam's resourcebase is comparableto China's but quite differentfrom its other neighbors: in both countriescul- tivatedarea per capita averagesslightly over 0.1 ha, and cropping inten- sities (sown area divided by cultivatedarea) exceed 140Z. In contrastto China's aggregate irrigatedarea which accounts for 45? of cultivatedarea, in Viet Nam a bit over one-thirdof cultivatedarea receivesirrigation, and there appear to be significantopportunities for expansion. Unlike China, potential remainsto expand cultivatedland by as much as 20Z.

1.15 Viet Nam's land endowmentis unequallydistributed geographically: in the south, the Mekong Delta accounts for 382 of both Viet Nam's cultivated area and its food production,but 242 of its rural population;in the north, the Red River Delta, with 13Z of cultivatedarea, has 22Z of the labor force and accounts for about 182 of food production. Almost all of the good recla- mation potentialis found in the south. However,more than one-half of the Vietnamesepopulation is in the north, as a result of which there are persis- tent northern food deficitsand southern surpluses. The unequal endowments have created pressure for grain transfersfrom south to north, and population transfersfrom north to south.

1.16 The water resourcesof the country are dominatedby the flow in the two great rivers, the Red River in the north and the Mekong in the south. Water availabilityis not a limitingfactor to dry season irrigationin the Red River Delta so much as drainageand flood control requirements. In the Mekong Delta, where drainage and floodingalso remain significantproblems, availabilityof additionalwater resourcesduring the dry season is a major limitingfactor, consideringthe need to control sea-waterintrusion and to provide adequate depth for navigation. Other major rivers of Viet Nam supply extensiveirrigation areas mainly in their deltas,but there is considerable scope for rehabilitationto improvethe performanceof existing irrigation systemsto maximize production. -5-

Human Resources

1.17 The majority of the present populationof 64.4 million (April 1989) are members of the Viet ethnic majority,while minority groups (comprisinglOZ of the population)are concentratedmainly in the highland areas. Since the last census in 1979, the total populationhas grown from 52.7 million at a geometricaverage annual rate of 2.0Z.2/ The rural populationof 50.6 million (802)has grown during the same time period at 1.72 p. a. Rural population densitiesaverage 194 persons/sqkm, but vary greatly regionally: in the Red River Delta, they range in differentprovinces from 839 to 1,092 persons/sq km, about twice the levels found in the Mekong Delta provinces. In the central highlandsand the northernmountainous provinces, densities are well under 100 persons per sq km. These sparselypopulated areas have very high rural populationgrowth rates, owing to immigrationand perhaps the high proportionof minority nationalities. Provinceswhere resettlementand land developmentprograms are importantinclude Gia Lai-Kongtum(rural population growth rate of 6.3? p.a.) and Dac Lac (11.6Z). In contrast,the rural popula- tion in the central coastal areas of Binh Tri Thien and Quang Nam-Danang provinceshas shown little grcwth,presumably because emigrationrates are high.

1.18 The official statisticsindicate a steady decline in population growth rates, from 3.22 in 1976 to 2.1Z in 1989. This decline is partly the result of a fall in the birth rate, from 39.5 to 31.3 per thousand. With a crude death rate of 8.4 per thousand,the natural populationgrowth rate is now around 2.3Z. There has been substantialnet emigrationout of Viet Nam throughoutthe 1980s, however, so that the actual populationgrowth rate in recent years has been 2.1Z.

1.19 The nutritionalstatus of the Vietnamesepopulation is very low, so that nutritionalimprovement should be an importantcomponent of the nation's developmentstrategy. As Figure 1.1 demonstrates,on the basis of average consumptionindicators such as per capita daily energy and protein intake, Viet Nam was among the poorest countriesin Asia in 1985. As a high prupor- tion of the populationof course falls below the mean, overall there is a high prevalenceof micronutrientdeficiencies. The nutritionaldeficiency is less severe in the coastal regionsand the Mekong Delta than inland, in mountainous areas, and in the Red River Delta, as regionalvariations in population density would suggest.

1.20 As the term "human capital" implies,a healthy and educated popula- tion is an importantproductive asset in economicdevelopment. In Viet Nam, unfortunately,a large proportionof the present childrenmay not achieve full physical and intellectualpotential because of widespreadmalnutrition. The small stature and low muscle mass of the Vietnameseadult populationis large- ly due to inadequatefood intake and poor health. These characteristics reduce productivityin situationsrequiring physical effort. The seasons of

2/ The officiallyreported growth rate of 2.132 is not a geometricaverage rate. most severe hunger are before the two rice harvests, in April to May and in September.

Figure 1.1: NutritionalIndicators for Viet Nam and SelectedAsian Countries,1985-86

60

S500

C'~~~~~~~~~~~~~~~~~~~~~~~~~c 504 Tflt IWmn

N. D

4-, 0

40 vea Enrg (lae cly o

35 1700 1900 2100 2300 2500 2700 Energy ( KCa:i/dcay)

1.21 Food availabilityhas improved dramaticallyin recent years as a result of reforms in the agriculturalsector. The overall supply of rice has not been a problem in 1988 and 1989. Hence remainingnutritional problems concern distributionof rice to food-deficitareas of the country, as well as micronutrientdeficiencies in the rice-baseddiet of the Vietnamese.

1.22 In the food-deficitareas, the difficultyof supplyingminimum energy requirementsthrough supplementaryimports from other areas has understandably contributedto a strong emphasison rice self-sufficiency.Paradoxically, this has led to neglect of other subsidiaryfood crops, which are particularly importantin increasingdietary balance and variety, and remedyingnon-energy deficiencies. The more generalover-emphasis on local self-sufficiencyhas reducedthe exploitationof regionalcomparative advantage to well below the country'spotential.

1.23 As a socialistcountry, Viet Nam has made a strong effort to provide basic educationand health care to the whole population. It has achieved con- siderablesuccess and has impressiveenrollment rates and health-care indicatorsfor such a poor country. Consequently,the overallhuman capital situationat the present time is somewhatmixed. Poor managementof resources - 7 - has made the countrypoorer than it should be, with resultingnutritional and health problems. On the other hand, given the low level of income,provision of educationaland health services is very good. Viet Nam appears to have the human resourcesto support a considerablyhigher level of output than is cur- rently achieved and consequentlyhas better potentialfor growth than many other very low-incomecountries.

C. The Economy

Past Performance

1.24 The SocialistRepublic of Viet Nam was createdby the reunification of North and South Viet Nam in 1976. Forging these two areas into one economy has proved difficultbecause of a number of fundamentaldifferences between north and south. In agriculture,per capita output is substantiallyhigher in the Mekong Delta than in the Red River Delta. Furthermore,agriculture in the north has been organizedthrough collectives, along Soviet and Chinese lines, whereas in the south before 1976 the family farm was the basic unit of produc- tion. In industry,the south primarilyhas light manufacturingfacilities developedunder a market framework,while the north has a full range of light and heavy industriesconstructed within a frameworkof centralplanning. Average per capita income is about 50X higher in the south than in the north.

1.25 After reunification,the communistleadership attempted to expand the planning system of the north to the whole economy. In agriculture,however, collectivizationin the south never proceededvery far. In industry,medium and large-scaleenterprises in the south were nationalizedand integratedinto the planningmechanism. In both north and south there are also a large number of collectiveand family enterprisesin small-scaleindustry and servicesthat have never been subjectto planning. This large non-statesector, accounting for roughly one-half of industrialoutput, is a unique featureof Vietnamese socialism.

1.26 The basic goal of the planned system was to channelan agricultural surplus into investmentfor industry,especially heavy industry. During the first half of the 1980s, about 802 of investmentin industrywas allocatedto heavy industry (includingenergy). In practice,this system required setting a low procurementprice for agriculturaloutput, so as to provide subsidized food for the urban sector. In this way, the profitabilityand capital accumulationof urban, industrialenterprises were artificiallysupported. Grain prices that were at times almost confiscatory,however, resultedin very weak incentivesfor agriculturalproduction, and consequentlyproduction and distributionof food was inadequatefor the country'sneeds throughoutmuch of the period 1975-85. The absence of a national market for rice has also retarded regionalspecialization on the basis of comparativeadvantage, limitingagricultural development.

1.27 Performancein industryhas also been disappointing. Investmenthas been spread over many large industrialprojects, without adequateprovision for supportinginvestments to provide transport,energy and materials. - 8 -

Investmentfunds have also tended to go to new projects,rather than to main- tenance and rehabilitationof existing capital stock. The result is that most capital stock is very run down, and industryhas frequentlysuffered from shortagesof materials and spare parts, especiallythose that need to be imported. The organizationof enterpriseshas also providedweak incentives to maintain capital stock and produce efficiently. Consequently,capacity utilizationin industryhas generallybeen very low, well under 50Z.

1.28 It should be noted that Vietnameseplanning has been more similarto the Chinese system, than to Soviet planning. Relativelyfew enterpriseswere actually linked through a centralplan. Most state-ownedenterprises have been managed by provincialor local authoritiesthrough a regionalplan. Consequentlythere tends to be a high degree of duplicationof facilities,and relativelylittle specializationof productionby area. The resultingsmall scale of operationis another source of inefficiencyin industry. The under- developedtransport and communicationnetwork is both a cause and a result of this type of locally administeredsystem.

1.29 Despite the bias in investmentpolicy toward the industrialsector, Viet Nam has remainedprimarily an agriculturaleconomy based on paddy rice production. Although the price structurethat prevailedbefore 1989 tended to understatethe role of agriculture,the sector (includingcrop cultivation, animal husbandryand aquaculture,but excludingcapture fisheriesand agropro- cessing)accounts for 382 of the country'stotal output value and 492 of national income. The sector employs about 62% of the national labor force; accountedfor 24.5% of state investments(1985): and originated42% of total exports,or 552 includingmarine products (1987).

1.30 Food grain and particularlyrice are the main products of Vietnamese agriculture. Crop cultivationaccounts for about three-quartersof agricul- tural output and roughly two-thirdsof this, or almost 502 of total GVAP, consists of grain production,within which rice accounts for 852. Food grain productionamounted to 19 million tons in 1988, of which paddy rice was 16.4 million totis(per capita rice productionof around 300 kg is essentiallythe same today as in the 1930s). Among the other edible produce,maize, sweet potatoes,cassava, potatoes and vegetablesare most important. Rubber is the most significantindustrial crop, but tea, coffee,coconut and sugar cane are also important.

1.31 Low crop yields have combinedwith a poor endowmentof cultivated land to prolong poverty. Vietnamesecrop yields tend to be low relativeto those of neighboringcountries, including the Chineseprovinces bordering Viet Nam on the north (which in turn are among the poorest in China). The average paddy rice yield in Viet Nam is 2.8 tons/ha;yields in nearby Chinese provinces (in tons/ha)are 3.9 in Guangxi, 4.6 in Guizhou and 4.2 in Yunnan. The low yields in Viet Nam are basicallyattributable to low input levels (especiallyfor fertilizer)and poor incentivesfor farmers.

1.32 Poor yields are one reason for the low standardof living in Viet Nam. Another factor is that grain productionabsorbs a greaterproportion of the labor force than necessary (i.e., farm sizes are too small to provide full employmenteven at peak seasons). To cite the extreme case, it is estimated that in the Red River Delta there is an absolute labor surplus of 45? to 50Z. Hence, there is the potentialfor much surpluslabor to be releasedfrom farming in densely populatedareas, for absorptioninto non-agricultural occupations.

Macro-economicManaRement

1.33 The central planning apparatushas resultedin poor managementof resourcesat the micro level, in collectiveagriculture and in state-owned industry. The macro managementof the economy in the 1980s has also been poor, resultingin seriousmacro imbalances: a large governmentbudget deficit, a large trade deficit, and runawayprices that bordered on hyper- inflationby 1988.

1.34 Growth of the aggregateeconomy has been highly volatile since reunification,reflecting, among other things, frequentshifts in policy. In the late 1970s, as the southerneconomy was integratedinto the planned frame- work of the north, GDP was stagnant. Per capita GDP declined steadilyduring this period, as a result of the rapid populationgrowth. Followingan economic crisis in the iate 1970s, limitedreforms were made in 1981 in both the industrialand agriculturalsectors that gave greater scope to private sector production. Because of the substantialamount of underutilizedresour- ces that had developed,these measures resultedin sharp increasesin output in 1982-84. By the end of this boom, per capita GDP had returned to its level of 1975.

1.35 These reforms,however, were not followedup by more fundamental changes. In fact, there was a movement toward renewedcollectivization and centralizationof the economy in 1985. Becauseof this shift in policy, as well as adverseweather, agriculturaloutput growth declined in 1986 and turned negative in 1987. Growth in the aggregateeconomy was also hampered in the 1986-88 period by sharp cuts in investment,reflecting financing con- straintsof the public sector.

1.36 Throughoutthe mid and late-1980s,the consolidatedpublic sector has incurreda very large budget deficit. The actual magnitude of the deficit, relativeto GDP, is difficultto estimate,as estimatesof GDP itself are somewhatunreliable; nevertheless, it is likely that the deficit has been in the range of 82 to 10? of GDP. The economic importanceof the deficit is magnifiedby the fact that the householdsavings rate--at least that part of savingschanneled into the formal banking system--isvery small. Initial steps to provide saverswith positive real interestrates in 1989, however, were successfulin beginningthe process of savingsmobilization.

1.37 The consolidateddeficit is very much related to poor performanceof state-ownedenterprises. Transfersfrom public enterprisesare the main source of revenue for the government,both at the provincialand at the national level. In practice,however, enterpriseshave not earned enough revenueto cover the government'sexpenditures for health, education,defense, etc. In order to make the required transferto the state budget,many enter- prises have been able to borrowed freely from the banking system at low interest rates (usuallynegative in real terms). The end result is that the - 10 - consolidatedpublic sector (governmentplus public enterprises)has been financingmuch of its expenditurethrough credit creation.

1.38 In a fully planned systemwith fixed prices this excessivecredit creationwould generate repressedinflation, shortages and queuing. In Viet Nam, however, a substantialamount of exchangehas always taken place outside of the plan at uncontrolledprices. Consequently,excess credit creation led to persistentinflation in uncontrolledprices and an overvaluedexchange rate, and large gaps between 'officialbusiness prices' and free-marketrates. Severalprice reformswere taken in the 1980s, with large increasesin officialprices to bring them more in line with market prices. The most importantattempt at price reform, in 1985, was accompaniedby a currency reform, in which "new dong" were substitutedfor 'old dong" at a rate of one to ten. That reform aimed at mopping up a considerableamount of liquidityby limitingthe amount of old dong that could be convertedinto the new currency.

1.39 However, the underlyingstructural problem--lack of financial disciplinefor state enterprisesand the governmentadministration--was never addressed. The consolidatedpublic sector continuedto have a large deficit financedby money creation,and hence the price and currency reform in 1985 was followed by a resumptionof inflationin uncontrolledprices and a re- emergenceof gaps between official and market prices. The currency reform in 1985 actually appears to have exacerbatedthe inflationproblem; the creation of the new dong, accompaniedby an absenceof reform of the underlyingstruc- tural problems, apparentlyincreased ..nflationaryexpectations and brought confidencein the currency to a new low. As can be seen in Figure 2.1, the monthly inflationrate accelerateddramatically in the second half of 1985 to nearly 301.

1.40 The effect of the large public sector deficithas spilledover into the external accounts,primarily through the mechanismof a persistentlyover- valued official exchange rate. Viet Nam's externaleconomic relationsduring the 1980s have primarilybeen with Comecon economies,especially the Soviet Union. Western nations and severalneighboring countries have maintainedan economicboycott that has limitedViet Nam's transactionswith the convertible currency area. The trade with Comecon economiesis carried out throughbarter arrangementsnegotiated government-to-government. As part of these arrange- ments, Viet Nam has receivedlarge amountsof credit at low interestrates as well as grant financing. Hence, externalborrowing and aid from the Comecon has financed some part of the government'sbudget deficit;nevertheless, too large a share has been financed domesticallyby printingmoney.

1.41 As a result of past relianceon external financingfor a large part of the public investmentprogram, Viet Nam had an external debt of US$7.0 bil- lion at the end of 1988, mostly in nonconvertiblecurrencies. Debt in trans- ferable rubles has increasedsteadily as concessionalloans from the Soviet Union have financedmuch of the current account deficit. At a cross exchange rate of 2.55 TR/dollar,Viet Nam's nonconvertibledebt was equivalentto US$3.8 billion at the end of 1988. Convertiblecurrency debt has increased from US$1.6 billion in 1984 to US$3.2 billion in 1988, primarilyas a result of arrears on interestpayments. Scheduleddebt payments in convertiblecur- renciesare very large relativeto debt servicingcapacity (a scheduleddebt - 11 - service ratio of close to 1002 of exports in 1988) as convertiblecurrency exportshave performedvery poorly. Recently.Viet Nam has also incurred arrears on its nonconvertiblecurrency debt. A comprehensivedebt resche- duling agreementwould have to be obtained to regularizerelations with external creditors (Chapter2, SectionE). - 12 -

I. RECENT ECONOMIC DEVELOPMENTS

A. An Overview of Economic Reforms, 1986-89

2.1 By 1986, Viet Nam's macro-economicproblems had become acute. The cycle of price reform followedby renewedinflation had resulted in more and more economic agents shiftingout of domestic currency into more reliable media of exchange: US dollarsand gold. The persistentinflation of the early 1980s had acceleratedinto hyperinflation. Confrontedby these events, the Sixth Congress of the VietnameseCommunist Party in December 1986 ini- tiated a reevaluationof the whole strategyof developmentin Viet Nam and commenceda period of far-reachingreforms.

2.2 The key goal of the reformwas to reorganizethe management system in the economy, both at the micro level (managementof farms and enterprises)and at the macro level (managementof monetary and fiscal policy). The guiding principleof the reform effort was that micro-leveldecision-making should be decentralizedto the productionunit, enablinggovernment to concentrateon macro management (viz. the money supply and taxes and expenditure). Modest reformsalong these lines were introducedin a piece-mealfashion in 1987, and there was some abatementin inflation. In 1988, however, inflationand macro imbalancesworsened. By the spring of 1988, inflationwas once again close to 30Z per month.

2.3 Finally, in the second half of 1988 and the first half of 1989, the governmentintroduced radical new measures aimed at bringing inflationunder control and stimulatingproduction. The key reform measures were:

(a) large devaluationof the exchange rate, closing the gap between the official and parallelmarket rates, accompaniedby measures to liber- alize foreign trade and investment.

(b) price reform that eliminatescontrolled prices for most goods, and ' that does away with the long-standingpractice of underpricingagri- cultural output.

(c) reorganizationof agriculturalproduction on the basis of the family farm, with land tenure in principleguaranteed for long periods of time.

(d) establishmentof most state-ownedenterprises on a financially independentbasis with the right to negotiatetheir own contractsfor inputs and outputs.

(e) reorganizationof the banking system into a central bank and several specializedbanks.

(f) regulationsencouraging the developmentof the private sector. - 13 -

(g) limits on credit creation,and adjustmentof interestrates so that they are significantlypositive.

(h) tax and expenditurereforms to reduce the budget deficit, including eliminationof subsidiesto enterprisesand state employees.

2.4 These reforms--inagriculture, industry and macro management--form the main subject of this report. The reforms at the micro and macro levels are very much interconnected,as inefficientmanagement of productiveresour- ces at the level of the farm or the firm has been a root cause of the govern- ment's persistentfiscal problem. While it is still rather early to assess the full impact of the reform package, the immediateresponse of the economy has been very positive. The inflationthat was runningat close to 30Z per month in the spring of 1988 was halted by mid-1989 (Figure2.1). For the stabilizationprogram to fully succeed,however, it will be necessaryto move rapidlyto reduce the budget deficit.

Figure 2.1: Monthly InflationRate, 1985-89 (Z) 30 -30 0MONTIILYRATE OF CHANGE

23 -- 23

16 16

9 9 Free market prices

2 2

-5 ,,,,,,,,i,,,.,I.., ,I,,15 1986 1987 1988 1989

Source: General StatisticsOffice.

2.5 The comprehensivestabilization and reform measures introducedduring 1989 have quickly brought Viet Nam to the forefrontof economic reforms among socialistcountries. In particular,price reform has gone considerably further than in China or most of the Eastern European socialistcountries until now. If appropriateadjustments are made early in 1990 to reduce the governmentdeficit substantially,these measures could provide a solid - 14 - foundationfor further institutionalreforms that would increaseefficiency and stimulateproduction.

B. Developments In Output and Prices

Growth Trends, 1984-88

2.6 Data on gross domestic output in Viet Nam suffer from a number of deficiencies. Estimatesof output exist only from the production side, and are based on the Material Product System of accounting,rather than the System of NationalAccounts approach. Hence, somewhatarbitrary estimates of non- material services and depreciationmust be added to net material product in order to arrive at a figure for GDP. The high inflationof recent years also complicatesdata collection. Vietnameseauthorities calculate NMP in 1982 prices; estimatesof inflationmust then be relied upon for the conversionof constant-pricedata into current-priceGDP. In an atmosphereof hyperinfla- tion, estimatesof the price index can easily be inaccurate,resulting in errors in the estimate of nominal GDP. A final problem is that 1982 relative prices were highly distorted,and in particularundervalued agriculture; that distortionaffects the level, the compositionand the measured growth rate of GDP. For example, the procurementprice for paddy rice was only 50 dong in mid-1988, compared to a free market price of 450 dong. A re-estimateof agri- cultural output for 1989 (which can be done relativelyeasily) would put agriculturalvalue added per capita at US$50 at domestic free market prices, and US$70 at internationalprices.

2.7 With these caveats in mind, the MPS data can neverthelessbe used to form a broad picture of growth trends in recent years. Table 2.1 presents national income in 1982 prices, disaggregatedinto differentproducing sectors of the economy, for the period 1984-89. To arrive at a GDP figure, non- material servicesplus depreciationwere assumed to be a constant 36Z of NMP.3/ While this assumptionis only a rough estimate,it should be noted that it affects only the level, not the growth rate, of GDP. On the basis of. the adjustments,nominal GDP in 1989 was 28 trilliondong, equivalentto US$7.0 billion at the 1989 average exchange rate of 3996 dong/dollar. On a per capita basis, this is only US$109, making Viet Nam poorer than any other country for which data are available. However, the current level of the exchange rate reflects the large economic distortionsof the past and Viet

3/ Initial estimatesassumed that non-materialservices were 132 of NMP, and that depreciationwas an additional5Z. That estimate implieda per capita income of only US $95 in 1989, using present (market)exchange rates, which seemed low. Bank staff's assumptionof a higher share for non-materialservices is based on the impressionthat there is a substan- tial amount of informalsector activitythat is not captured in official statistics. The UNDP also assumes that NMP must be increasedby a factor of 1.36 to yield a reasonableestimate of GDP. However, until an adequate statisticalbasis is established,the detailed structureof the national accountswill remain questionable. - 15 -

Nam's poor competitivenessin externalmarkets. On a purchasingpower equivalentbasis, Viet Nam's per capita income is likely to be slightlyhigher than that of Bangladesh,which is US$160.

Table 2.1: National Income and EstimatedGDP. 1984-89 (in billions of dong at 1982 prices)

1984 1985 1986 1987 1988 19i9 (prelmlinry) Agriculture 79.8 83.4 84.6 81.? 85.1 - Industry 41.2 46.8 48.4 68.9 S9.6 - Comerce 28.4 22.1 2a.4 19.7 25.6 - Transportand comunications 2.5 2.8 8.0 8.6 8.S - Construction 4.6 6.0 6.0 6.8 4.7 - Other 8.8 4.6 6.2 a.7 6.7 - NationalIncome /a 165.8 164.1 169.6 178.9 184.1 186.9 Nonmaterialservices and deprew;ation lb 66.9 69.1 61.1 62.6 66.8 687. CDPat 1982 prices (Ban' staff estimate) 211.2 228.2 230.7 236.6 260.4 264.2 CDPat current prices (Bank staff estimate) /e 64.8 181.1 795.7 8,274.5 14,149.2 28,088.5 Implicit GOPdflator (Bank *taff estimate) (1982 a 100) 807 568 8,461 18,849 56,580 110,S47 (Percentagechange at 1982 prices) ationalInco 8.8 5.7 8.4 2.6 6.9 1.6 Agriculture 4.2 4.7 1.9 -8.4 4.2 8.4 Industry 12.0 12.4 4.6 11.8 10.4 -8.4

La The term national income'refers to tho Material Product System (IPS). The basic difference with GOPIs that national incomedoes not include nonmaterialservices or depreciation. Lb Includes etimates of unreported economic activities. c New dong. Source:Statistical Appendix, Tablo 2.1.

2.8 Growth deceleratedin the 1985-87period, as an effort was made to recentralizethe economy and as inflationspiraled out of control. The decel- erating growth trend is particularlynoticeable in agriculture,in which out- put growth was only 1.9Z in 1986, before turningnegative in 1987. As noted, 1982 relativeprices tended to discriminateagainst agriculture;if NMP were aggregatedusing the relativeprices that prevailedin 1989, its measured growth rate would be lower for the whole period 1984-88. The recorded growth rate for industry is quite high throughoutthis period, above 10% for every year except 1986. It seems likely,however, that these figuresfor industry reflect targets rather than actual outcomes. Data on physical output of industrialgoods, for instance,show growth rates averagingaround 1% in the 1985-87 period, far below the reportedgrowth rate for industry (Statistical Appendix, Table 8.3).

2.9 In 1988, growth of national income strengthened. This was mainly the result of a recovery in the agriculturalsector, which benefited from improved - 16 - weather and an early response to major agricultural reform undertaken begin- ning in 1988. Indi:strialgrowth was basically the same as the year before: some sectors benefited from the beginning of enterprise and pricing reform, as well as the increased availability of electricity, whereas others were hurt by growing import competition that resulted from trade reforms. Construction activity was impaired by the continued decline of investment.

2.10 The official data hence show an aggregate growth rate averaging about 4.5Z p.a. in the period 1985-88. This growth rate is only 2.5Z on a per capita basis, and substantially below the rate achieved in the early 1980s. Furthermore, as noted, this may well be an overestimate. Per capita agricul- tural output decreased between 1984 and 1987, and the data on physical output of industrial goods show per capita declines as well. It appears that by 1988 the authorities were faced with an economy that had been growing sluggishly for some time.

SavinRs and Investment

2.11 Viet Nam's poor growth record over the past decade is primarily the result of the institutional structures that provided weak incentives in agri- culture anr industry. The problem of poor incentives has been compounded by a weak record of saving and investment. Table 2.2 provides estimates of the savings/investment balance for the period 1985-89. There are no reliable data on saving and investment, and these estimates were built up with many ad hoc assumptions. The specific numbers should not be taken as precise estimates, but rather as a means to see the broad picture of the economy. The fact that the economy is characterized by very low resource mobilization is certainly accurate.

Table 2.2: SAVING AND INVESTMENT, 1985-89 (Percent of GDP)

1985 1986 1987 1988 1989'-

Investment 12.9 8.6 8.0 8.5 10.0

State Budget 8.4 4.1 3.5 3.9 6.3 Public Enterprises /a 2.5 2.5 2.5 2.1 0.5 Other Domestic /a 2.0 2.0 2.0 2.0 2.0 Foreign 0 0 0 0.5 1.2

Current Account Deficit 7.3 10.3 9.1 10.5 4.9

National Saving 5.6 -1.7 -1.1 -2.0 5.1

/a Staff estimate.

Sources: Tables 2.6 and 2.8. - 17 -

2.12 The largest source of investmentfunds is the governmentbudget, and the figureson budgetaryinvestment are likely to be reliable. They show a sharp decline between 1985 and 1986 (from 8.4X to 4.1% of GDP), and a further small decline thereafter (to 3.52 in 1987 and 3.9Z in 1988). To arrive at a figure for total investment,staff estimatesof off-budgetinvestment by public enterprisesand private investment(mostly in housing) are added to the budgetaryinvestment. (A small amount of direct foreign investmententers the picture in 1988.) These rough estimatesindicate an investmentrate of 12.9% in 1985, falling to the 8% range in the 1986-88period.

2.13 National saving is equal to investmentminus the current account deficit. Table 2.2 includesestimates of the current accountdeficit relative to GDP. This deficit is in the range of 10Z; it appears to have increased between 1985 and 1986, and been fairly stable in the 1986-88period. The impliednational saving is low but positive in 1985 (at 5.6X of GDP). In the 1986-88 period, however, the currentaccount deficit is estimatedto be larger than total investment,implying that the savings rate was negative. For those three years, external financewas used not only to fund all investment,but also to cover some consumptionand/or governmentcurrent expenditure.

2.14 Preliminarydata for 1989 indicate a substantialimprovement in the savings/investmentsituation. The current account deficitdeclined substan- tially last year, to 4.9% of GDP, while investmentincreased to 10.0X of GDP. Hence the savings rate appears to have increasedby more than 7 percentage points in the wake of the stabilizationeffort, and is now again positive. While this is a dramatic success for the stabilizationprogram, saving and investmentremain relativelylow and will need to be increasedfurther if a rapid rate of growth is to be achieved.

2.15 Not only has the overall level of investmentbeen disturbinglylow in recent years, but it appearsthat the efficiencyof investmenthas also been poor. Table 2.3 presents the official data on the distributionof public fixed investment,for the period 1985-89.4/ Most investmenthas gone to cen- trally managed enterprises,and there has been a strong bias in favor of heavy industry,despite its small role in the economy. Poor efficiencyof invest- ment can be inferred from the fact that centrallymanaged heavy industryhas received a disproportionateshare of investmentfunds, but has grown less rapidly than the rest of the economy in recent years (Chapter3, Section C).

2.16 It should be noted, however, that in recent years much of the heavy industry investmenthas been in the energy sector, particularlyin several large hydroelectricplants. As can be seen in Table 2.3, energy's share of total public investmentincreased steadily from 15.3Z in 1985 to 30.6% in

4/ Governmentdata on total public investmentand its distributionacross sectors are reported in 1982 dong (StatisticalAppendix, Table 2.2). When these figures are convertedto currentprices with the price deflators developedby Bank staff, they are not very consistentwith the budget data on capital expenditures.These data probably do not provide an accurate picture of the overall level of investment,but should give a fair indicationof how investmentis allocatedacross sectors. - 18 -

1988. These energy projects were not necessarily bad choices, but they have taken an extraordinarily long time to bring on line, so that there has been little output generated so far by these large investments. Viet Nam is in a good situation now in that these past investments will be providing increasing amounts of needed electricity over the next five years.

Table 2.3: DISTRIBUTION OF PUBLIC INVESTMENT AMONG SECTORS, 1985-89 (percent)

1985 1986 1987 1988 1989

Gross Fixed Investment 100.0 100.0 100.0 100.0 100.0

By Management Level: Central 56.6 58.9 58.7 67.1 75.0 Local 44.4 41.1 41.3 32.9 25.0

By Sector: Industry 31.2 35.7 43.5 49.2 48.6

Energy 15.3 18.5 23.6 30.6 { ) (38.3 ) Other Heavy 8.5 8.1 9.1 9.6 { ) Light 7.4 9.1 10.8 9.0 10.3

Agriculture 21.7 24.5 20.1 24.1 21.6 Transport & Communications 18.5 16.2 11.6 12.2 13.0 Housing 8.3 8.5 8.2 5.5 5.3 Science, Education, Public Health 7.1 6.4 8.1 6.6 8.7 Other 13.1 8.7 8.5 2.4 2.8

Sourcess Appendix Tables 2.2 and 2.3.

2.17 Other than in the area of energy, the public investment program in infrastructure has been deficient. As noted, budgetary investment was 3.9Z of GDP in 1988, with about half of this going to industry (including energy). The remaining public investment (for transport and communications, agricul- tural infrastructure, housing, health, and education) was consequently around 2Z of GDP. Providing the necessary infrastructure for growth will require both some increase in the overall level of the public investment program, as well as some reorientation of priorities within the program. Budgetary investment in industry (excluding energy) has declined in recent years, and it would be desirable to continue that reduction. Investment in manufacturing can be financed through the banking system and retained earnings of enter- prises and should not be supported by the public budget. That would free up additional resources for investment in infrastructure and the social sectors. - 19 -

Inflation

2.18 In addition to sluggishgrowth, Viet Nam has also been beset by high inflationin the 1980s. While Viet Nam has maintained"official business prices" that were fixed for transactionswithin the plan, much economic activityhas taken place outsideof the plan at uncontrolledprices. For reasons that will be discussedin detail in the next section,there has been persistentinflation in market prices,which has led the authoritiesin recent years to make frequentupward adjustmentsin "fixed"prices. Viet Nam in the second half of the 1980s has thus provided the unusual spectacleof a planned economy borderingon hyperinflation.

Table 2.4: MONTHLY INFLATIONRATE, 1987-89 (percentage change over the previous month)

1987 1988 1989 Free Free Frc - GeneralOfficial market General Official market Ceneral Officialmarket price price price price price Drice price price price January - - 11.8 18.3 20.3 13.1 7.4 7.6 6.9 February - - 11.2 14.9 12.9 21.2 9.2 7.3 16.2 March - - 11.4 28.4 33.0 17.6 6.4 6.6 4.8 April - - 12.7 23.4 23.8 24.2 3.5 2.0 6.4 May - - 13.2 29.6 30.6 26.4 -0.2 0.7 -1.4 June - - 13.4 17.1 17.7 15.1 -2.9 -2.8 -3.0 July 34.8 43.0 13.6 9.6 9.8 9.6 -1.6 - - August 9.1 9.8 9.0 8.2 7.6 10.3 0.2 - - September 8.2 8.3 7.9 6.6 6.0 7.9 1.6 - - October 12.6 14.7 7.0 7.6 8.2 6.3 2.6 - - November 12.9 12.8 6.1 8.0 8.1 7.8 2.6 - - December 11.2 13.3 6.6 4.8 5.4 3.4 3.0 - -

Source: GeneralStatistics Office of VietNam.

2.19 It is difficultto estimate the exact rate of inflationin recent years. Table 2.1 includes a GDP deflator for 1988 estimatedby Bank staff, which was then combinedwith IMF estimatesof inflationin recent years to generate a series of deflators.5/ This estimatedseries indicatesthat the

5/ Bank staff estimatedinflation using the followingapproach: physical output of all major agriculturalproducts in 1988 was valued using the prices that prevailed in 1989. Taking account of the fact that inter- mediate input use averages 23Z of gross output in agricultureand employ- ing the estimate that the price level increased100? between 1988 and 1989, a figure for 1988 agriculturalvalue added in currentprices was derived. The ratio of this estimate to 1988 agriculturalvalue adde-iin 1982 prices is the implicitprice deflatorfor agriculture. Data on relative price changes, 1982-1988,between agriculturaland non-agricul- tural output were then employedto constructa deflator for non-agricul- tural output. From these componentsan estimate of 1988 GDP in current prices can be constructed. The implicitprice deflator for GDP can be derived as the ratio betweenGDP at 1988 prices and GDP at 1982 prices. - 20 - price level has increasedroughly five-hundredfold between 1982 and 1988, an average inflationrate of 106Z p.a.

2.20 While inflationhas been high throughoutthe 1980s, it has also been quite volatile. As noted in Chapter 1, price increasesreached hyperinflation levels after the currency reform of 1985, and then abated somewhat in 1987. Table 2.4 indicatesthe monthly rate of inflation,as measured by the govern- ment, over the past two years. During the secondhalf of 1987 and the first half of 1988, inflationagain worsened, reachinga rate of 29.5% per month in May 1988. In the second half of 1988, the inflationsituation improved some- what, partly owing to the beneficialeffects of increasedagricultural supply.

2.21 It was not until the first half of 1989, however, that the government finallyimplemented a comprehensivestabilization program aimed at halting 'nflation. At the heart of the p:ogramwere fiscal and monetary reforms, describedin the remainderof this chapter. As can be seen in Table 2.4, the immediateimpact of the stabilizationprogram was very positive,at least in the area of inflation. The hyperinflationhad completelystopped by late spring,1989, and there was actuallymild deflationfrom May to July. How- ever, inflationresumed at 2-3Z per month in the fall of 1989 and could increase further if fiscal imbalancesare not corrected.

Price Reform

2.22 The liberalizationof prices in 1989 has been the most far-reaching among socialistcountries. In principle,all domesticprices for agricultural and industrialgoods and servicesare now freely negotiatedbetween buyers and sellers. The only exceptionsare electricityprices, which remain too low relative to system expansioncosts (Chapter4), transportfuels for some uses (water,rail and road transportto border areas), transporttariffs, postal stamps and telecommunicationstariffs. The price reform, togetherwith the stabilizationmeasures, has resulted in a rapid reductionof shortagesand improved supply of many goods and servicesas detailed in Chapters 3 and 4. Exportersnow also receiveworld market prices for convertiblecurrency exports,but trade with the non-convertiblecurrency area continuesat fixed and sometimesarbitrary prices.

2.23 The price reform has involved substantialchanges in relativeprices, as can be seen in Table 2.5. For instance,the controlledprice of rice increasedmore than ten-fold,from 50 to 550 dong/kg,between June 1988 and June 1989. Changes in other official prices over the same period were gener- ally swaller (around200? for kerosene,fertilizer, cement, and steel). Clearly the terms of trade for the agriculturalsector have improveddramatic- ally as a result of the price reform. This terms of trade effect of the structuraladjustment program immediatelyimproved the overall distributionof income,as the rural sector as a whole has been less well off than the urban sector in Viet Nam.

2.24 Some featuresof the remainingorganizational arrangements, however, contributeto make price reforms less effectivethan they could be. For - 21 -

Table 2.5: OFFICIAL RETAIL 'BUSINESS' PRICES, AND FREE MARRET PRICES. 1988-89 (in dong)

Official 'Businessg Prices Free Market Prices June 1988 June 1989 June 1988 June 1989

Rice (kg) la 50 530-550 450 550 Pork (kg) 3,500 5,200-5,300 4,300 5,500 Sea Fish (kg) 1,200 2,200 1,200 2.200 Kerosene (liter) la 180 600-700 240 600-700 Diesel Fuel (liter) b 270 650 - - Gasoline (liter) Lb 360 750 450 800 Nitrogenous Fertil- izer (kg) lb 190 700 500 720-750 Cement (kg) b 110 200-210 120 210-220 Steel (6 mm) /b 500 1,200 800 1,200 Electricity (kwh) Lb 6 80-120 - -

]a Official business prices shown for these products are the ration prices for periods when the items were still subject to ration. The ration system was eliminated in January 1989 for all items except rice and kero- sene. The ration system for kerosene was eliminated in June 1989.

lb Official business prices shown for these items are the prices for sales to farmers.

Sources IMF.

example, state agricultural and industrial supply and procurement agencies still have a dominant position and can keep procurement prices lower and sales prices higher than in a fully competitive system. Similarly, state enterpri- ses continue to be organized into sector-wide unions that used to determine prices in the past and may still contribute to limit competition. Government also continues to use differential tax rates to keep down the relative price of inputs, such as steel, cement, and fertilizer. Price reform will thus become fully effective only once organizational structures have been reformed to promote competition and taxes are uniform across industries.

C. Public Finance

2.25 The root of Viet Nam's persistent inflation problem can be found in its public finances, as well as in certain institutional features. Table 2.6 presents the summary of budgetary operations for the period 1984-88 (plus preliminary figures for 1989), relative to GDP. These official budget figures consolidate the transactions of central, provincial, and district governments, - 22 -

but not those of public enterprises. Obviously,the choice of which particu- lar estimateof nominal GDP to employ in this calculationis important. A higher estimate of non-materialservices and of inflationhas been employed here, compared to earlier estimatesby the IMF, and this yields lower estimatesof budget items relative to GDP.

Table 2.6: SUMMARYOF BUDGETARYOPERATIONS, 1984-89

1984 1986 La 1986 1987 1988 1989 Actual Rev. Target Proliminery ------(in X of GDP) ------Revenue 14.6 14.4 10.5 11.8 11.4 12.2 11.5 Tax revenue 3.1 2.3 2.3 2.1 3.2 4.3 3.6 Transfersfrom stat. enterprises 10.6 11.2 7.6 8.7 6.9 4.8 5.0 Other non-tax revenue 0.9 0.9 0.6 0.8 1.3 3.1 2.9 Current expenditure(excluding interest) 13.4 18.0 10.8 12.1 16.1 13.2 12.9 Wages and salaries 0.5 1.3 0.7 0.9 1.8 4.6 4.6 Subsidies 5.3 4.7 2.3 4.6 5.7 - - Others 7.8 12.0 7.9 8.8 7.6 8.6 8.3 Of which: operationand maintenance 1.0 2.6 2.6 1.7 0.6 0.8 0.7

Capital expenditure 4.1 8.2 4.2 3.6 3.9 5.1 6.3 Overall primary deficit (-) -3.2 -11.8 -4.5 -4.1 -7.6 -6.1 -7.6 Interest /b 0.2 0.2 0.1 0.1 0.2 0.2 0.2 Overall deficit (-) -3.3 -12.0 -4.7 -4.1 -7.7 -6.3 -7.8 Financing 3.3 12.0 4.7 4.1 7.7 8.3 7.8 Foreign grants and loans Le 2.4 4.9 1.8 1.3 2.6 3.7 3.0 Domestic 0.9 7.1 2.9 2.8 6.2 2.6 4.8 State Bank (net) 0.6 7.1 2.9 2.7 3.2 2.1 6.7 Government securities (net) 0.3 - - 0.1 0.1 1.4 - Arrears - - - - 1.9 -1.0 -1.0 l Due to wage/pricereform measures undertaken during the year, 1986 data may not be entirelycomparable to data of other years. /b Includesamortization. /c Includesferstgn grants and gross of amortization. Source: IMF staff estimates,Statistical Appendix, Table 6.1.

2.26 The underlying source of inflationin Viet Nam can be understoodby focusingon the budgetaryoperations in 1988. For simplicity,the important items have been isolated in Table 2.7. The largest source of revenue is transfersfrom public enterprises,which in 1988 accountedfor 60.0Z of governmentrevenue. However, governmentreturns a substantialamount of this revenueto state enterprisesfor capitalexpenditures. In 1988 the budgetary allocationfor capital expenditureswas 3.9% of GDP. Hence the net transfer from public enterprisesto the currentbudget was only 3.OZ of GDP. Tax and other revenuewas a mere 4.5Z of GDP, so that the total resourcesmobilized by governmentto cover currentexpenditures was only 7.5Z of GDP.

2.27 Current expenditureby the governmentin 1988 was 15.12 of GDP, which is also a rather low figure, though clearlyhigher than the revenue taken in. - 23 -

The large item in the budget for "subsidies" mostly consisted of real income support for public employees. These subsidies were ended in 1989 and were partially compensated for by wage increases for public employees. Other current expenditure has declined substantially in recent years, from 12.02 of GDP in 1985 to 7.5Z in 1988. This decline reflects military demobilization as Viet Nam has withdrawn from its involvement in Kampuchea.

Table 2.7: ANALYSIS OF THE PUBLIC SECTOR DEFICIT, 1988 (in I of GDP)

Transfers from state enterprises 6.9 Minus: Budgetary allocation for capital expenditures 3.9

Net transfer from state enterprises 3.0 Tax and other revenue 4.5

Total revenue 7.5 Minus: Current expenditures 15.1

Deficit in the Current Budget 7.6

Memorandum itemss Foreign loans and grants 2.5 Increase in savings deposits in the banking system 0.6 Total domestic credit 11.2 la

la Average of outstanding balances at the beginning and end of year, divided by GDP.

2.28 The picture that emerges then is one of a state sector (excluding public enterprises) that is not particularly large relative to GDP. However, the government's resource mobilization has been inadequate, resulting in a public sector deficit amounting to 7.61 of GDP in 1988. The deficit was financed partly by foreign loans and grants from Comecon countries (2.5Z of GDP); partly by arrears (1.9Z of GDP); and the remainder by credit from the State Bank (3.2Z of GDP) as well as domestic arrears. Urgent revenue measures are required to reduce the size of the budget deficit, particularly since Soviet aiu is declining and arrears are not a viable source of financing.

2.29 Economic importance of the budget deficit is magnified by several features of the Vietnamese economy. First, there was virtually no private savings deposited into the formal banking system before the interest rate reforms in early 1989. Total credit outstanding, equivalent to only 11.2? of GDP, is very low, reflecting the limited use of financial intermediation. Household deposits, which represent the major source of financing in market economies, were virtually non-existent (1Z of GDP). The consequence of a low level of monetization, however, is that credit creation that is relatively modest as a share of GDP can have a large impact on prices. - 24 -

2.30 It can also be said that certain institutionalfeatures of the Vietnameseeconomy are part of the underlyingproblem. Both state enterprises and public administrationhave operatedwith "soft"budget constraints. Financingneeds of public enterprises-- both to cover operatinglosses and for expansion-- have been easily accommodatedby the State Bank. Similarly, expendituresof governmentministries and bureaus have also been readily covered. In this environment,an informal system of indexationquickly developedin response to inflation. Wages and subsidiesfor state enterprise workers and for public employeeswere raised in step with inflation,and became a source of rapid increasesin the nominal budget deficit.

2.31 It is clear from this analysis that fiscal adjustmentand enterprise reform are the keys to stabilizingthe Vietnameseeconomy and bringing about a resumptionof growth. The stabilizationprogram adoptedby governmentin 1989 has placed a limit on credit to state enterprisesand to the budget. The tighteningof credit in the first half of 1981 had a very dramatic and posi- tive effect on inflation. For the stabilizationprogram to succeedin the longer run, however, it will be necessaryto correct the underlyingfiscal im- balance. This will require both increasingrevenue and reducingexpenditure.

BudRetarYDevelopments in 1989

2.32 In 1989 governmentattempted to halt inflationthrough monetary re- straint and interest rate reform (describedin the next section)and througha reductionof the public sector deficit. Overall the disinflationprogram has been successful,but it has been achievedmainly through tight monetary policy, as governmenthas had limited successso far in reducing its deficit. Table 2.6 includesthe budgetarytargets for 1989, as well as preliminary estimatesof actual outcomes.

2.33 It can been seen that governmentplanned a modest increasein revenue for 1989, to 12.2? of GDP, and achieved this target. The budget anticipateda decline in transfersfrom state enterprises,as firms adjusted to a market- oriented environment,but the actual resultwas a little better than planned. Nevertheless,there has been a tendency for enterprisetransfers as a share of GDP to decline, from around 10? in the mid-1980s,to 5.0? in 1989. As the planning system is dismantledand enterprisesbecome increasinglyindependent financially,the state will have to rely less and less on income from its enterprisesto fund current expenditure. This appears to be a general trend during the reform of socialisteconomies: the state's direct command over resourcesthrough the planning apparatusdeclines, and governmentmust find new ways to fund its activities. It may take considerabletime to develop the tax system to replace enterprisetransfers, however, creating fiscal problems during the early part of the reform process.

2.34 Tax revenue currentlycollected by governmentis extremelylow in Viet Nam, and governmentdid not achieve the increase in tax revenue that it anticipatedfor 1989. Tax collectionof 3.7? of GDP was up only slightlyfrom 3.2Z in 1988. This figure is supposedto indicateconsolidated tdx collection for all levels of government,but it is possible that there are additional - 25 - collectionsoccurring at the local level that do not make their way into the consolidatedaccounts prepared in Hanoi.

2.35 If tax revenue is higher than indicatedin the budget figures,then governmentneeds to find out where this revenue goes. It may be possible to reduce some expenditureat lower levels of governmentand improvetax adminis- tration, so that central revenues can increasewithout imposingadditional burdens on the populace. If. on the other hand, total tax collectionis real- ly as small as it seems, then there is considerablescope for increasing taxes. Governmentis currentlyplanning to introducesome new taxes. The National Assembly approved in June 1989 a tax reform proposal that contains the followingtwo key elements: (i) the current tax regime,based on decrees and regulations,is to be replacedby a system with explicit legislationof tax laws; and (ii) taxation of state enterprisesis to be made commensurate with that of the g.owing private sector. At the same time, four new tax laws have been promulgated:agricultural tax, turnovertax, profits tax, and a specialcommodity (excise)tax. These laws are scheduledto be finalizedand approvedby the Assembly in 1990. A study on the introductionof a personal income tax and a natural resource tax has also been targeted for completionin 1990.

2.36 Governmentis also trying to reduce expenditure,and it met with some success in 1989. The rice rationingsystem for public employees,which entailed a heavy subsidy,was ended. Governmenthad to raise wages to some extent to compensateat least partiallyfor the loss to workers, but neverthe- less there was a large savings for the government. Wages plus subsidieswere 7.52 of GDP in 1988; in 1989 subsidieswere eliminatedand wages were 4.6? of GDP. Overall current expendituredeclined from 15.12 of GDP in 1988 to 13.3? in 1989.

2.37 Capital expenditurethrough the budget,however, increasedsubstan- tially between 1988 and 1989, from 3.9Z to 6.62 of GDP. Part of this was an increase in fixed investment,and part of it represents350 billion dong used to make purchases for the Rice StabilizationFund. The expendituredevelop- ments in 1989 were basicallypositive, with the eliminationof subsidiesand reductionin current expenses. With the lack of progress on the revenue side, however, the end result was a budget deficitof 7.71 of GDP, almost exactly the same as the year before. State Bank financingof the deficit, at 6.9Z of GDP, was up substantiallyand far above the target level of 2.1% of GDP. The reasons for the unexpectedlyhigh level of State Bank financingwere, first, lower Soviet aid than had been anticipatedand, second, failure to issue governmentsecurities to the public as planned. It should be noted that in 1988 the accumulationof arrears on foreigndebt was a source of financingfor the budget deficit,whereas in 1989 the clearingup of some arrearswas an additionalfinancing burden on the government.

2.38 The Vietnameseeconomy in 1990 is in an extremelydifficult situa- tion. The Soviet Union will be cutting its aid to Viet Nam further. The budget deficit for 1989 was alreadytoo large, and the reducedexternal finan- cing from the Soviet Union will exacerbatethe problem. To keep the budget deficit in a range consistentwith price stability,government needs addition- al revenue and/or expenditurereductions equivalent to about 1 trillion dong - 26 -

(3.5Z of 1990 GDP). To achieve this goal governmentwill need to undertake some combinationof the followingmeasures. First, the centralgovernment needs to collect additionalrevenue. As noted earlier, it is possible that there are revenuescollected at lower levels of governmentthat are not being spent on importantprograms. There are also the additionaltaxes being intro- duced in 1990. It appearsdoubtful, however, that governmentcan achievemuch of a tax increase in 1990. Revenue can also be raised in a non-inflationary manner by selling bonds to the pvblic; as much of the governmentdeficit cor- responds to public investmentexpenditures, this method of raising revenue is quite appropriate, although nast experiences with hyperinflation make the suc- cess of this approachhard to predict. Much currentexpenditure has been cut already, but it appearsthat there may be room to further reduce noneconomic expenditure.

2.39 Finally, it is possible that Viet Nam will normalize its relations with lenders from the convertiblearea and find new sources of assistance. The additional1 trilliondong that needs to be mobilizedis equivalentto around US$ 250 million. One way to look at Viet Nam's fiscal problem is that between 1988 and 1989 the governmentmade great stridesin reducing the gap between revenue and current expenditure,to a deficit of only 1.1 of GDP. At the moment, however, governmenthas no satisfactoryway of financingthe public investmentprogram. In the long run it would be desirableto fund most of that investmentout of taxes, user fees, and/or household savings (by issuingbonds). In the short run, on the other hand, the only optionsmay be a drastic curtailmentof that investment,inflationary finance, or tappingnew sourcesof external finance. Of these three options, the last is the only option which would allow for both price stabilityand a resumptionof growth. Moreover, it is the option which would validate the market-orientedreform program unilaterallyundertaken by the government.

D. Monetary Policy and Interest Rates

2.40 Excessivegrowth in credit and money has been a major cause of Viet'. Nam's high inflationin recent years. As noted in the previous section,the very large demand for credit is primarilya result of the government'sinabil- ity to mobilize resourcesto cover its expenditures. Governmentborrows directly from the banking system,and also generatesadditional demand for credit indirectlyby requiringtransfers from public enterprisesthat cannot be covered by enterpriseincome. The large demand for credit has been met more or less automaticallyby the banking system,because the State Bank lacks authorityand effectiveinstruments to restraincredit. With a view to reducing inflation,the Sixth Party Congress issued directivesin late 1986 for the adoption of a policy of monetary restraintand, in its support,called for a reorganizationof the banking system to provide the State Bank with effectivecontrol of money and credit and improvethe efficiencyof financial intermediation.

2.41 To achieve these aims, a number of steps were taken during 1987 and 1988 to reorganizethe banking system. Thus, in mid-1988, the State Bank relinquishedall commercialbanking functionsand vested them in four special- - 27 - ized banks: the Bank for Foreign Trade, the Bank for Constructionand Invest- ment, the AgriculturalDevelopment Bank, and the Industrialand Commercial Bank. Some joint-stockshareholding banks have also been allowed to operate.

2.42 In the past, monetary controlwas mainly exercisedby implementing the national credit plan or, more specifically,by placing quarterlyceilings on credit extended by each State Bank branch. These ceilingswere derived by aggregatingthe credit needs of all users. Projectionsof the credit needs of economicunits were based on productionplans, the normal turnover speed of working capital, and official forecasts of input and output prices. They were largelyextrapolations of past credit use. To the credit needs of economic units was added the anticipatedborrowing requirement of the Government. Sub- sequently,the aggregatednational credit plan was submittedto the Council of Ministers for approval. In theory, credit in excess of the ceiling required the prior approval of the State Bank head office and also, in the case of excess credit on a national scale, the Council of Ministers. However, sub- stantialoverruns of the ceilings usually occurredbecause the bank branches had li tle power to resist excessivecredit requestsby enterprisessince both are under the control of local People'sCommittees. The State Bank lacked authorityand effectiveinstruments to enforcecomplirnce with the ceilings. Also, nominal interest rates were maintainedwell bel w the level of infla- tion, and the resultingnegative real interest rates tended to encourage, rather than restrain,the demand for credit (Statis ocalAppendix, Table 4.2).

2.43 The separationof commercialbanking activitiesfrom the State Bank was an importantfirst step in monetary reform. In order to establishfirm controlover the money supply, however, three additionalreforms are necessa- ry: developmentof effectivetools for the State Bank to control reserve money; interest rate reform; and developmentof an effectivemanagement and regulatorysystem for commercialbanks. The last reform is the most diffi- cult, and needs to be closelycoordinated with enterprisereform more broadly.

2.44 Without these deeper reforms,the mere separationof commercial banking from the State Bank in 1988 did little or nothing to restrainmoney growth. The governmentand public enterprisescontinued to have a large demand for credit,which was readilyaccommodated by bank branches. The State Bank attemptedto set credit limits,but had no effectivetools to enforce these limits. Bank branches could easily overdrawtheir accountswith the State Bank, without penalty. Furthermore,interest rates were held stable in 1988, while inflationaccelerated, so that real rates became increasingly negative. In such an environment,households made no net addition to their savingsaccounts; rather they increasinglyshifted their assets into dollars and gold.

2.45 As a result,outstanding domestic credit at the end of 1988 was about 400Z higher than the year before (StatisticalAppendix, Table 4.1). Most of this was credit to the governmentand public enterprises;and 90Z of credit to the latter was for working capital. As in previous years, domestic credit growth was the main source of overall liquiditycreation. Cash in circulation rose nearly two and one half times faster than originallyplanned, indicating the State Bank's inabilityto maintain credit and money targets. - 28 -

2.46 In 1989, Vietnameseauthorities made importantadvances concerning the first two areas of monetary reform noted above: establishingmechanisms to control reservemoney and reformingthe interest rate structure. The State Bank has establishednew accountingprocedures, so that branch banks must keep separateaccounts at the State Bank for borrowingand depositing. Under the new system there are controls and penaltiesto limit overdraftsby branches. The State Bank has also establishedreserve requirements,initially set at 20? (102 for the AgriculturalDevelopment Bank).

2.47 The most imnortantchange has been in the area of interest rates. The State Bank has establisheda new policy under which most interest rates will be kept positive in real terms by settingnominal interestrates with referenceto inflationin the previous quarter.6/ Effective from March 16, 1989 the State Bank introducedan interestrate structurein which deposit rates ranged from 6.2? per month for demand deposits to 12? per month for household savingsdeposits of over three months'maturity; most lending rates were raised to 102 to 112 per month (StatisticalAppendix, Table 4.3). The new interest rates were computedwith referenceto the averagemonthly rate of inflationin the fourth quarter of 1988 (7Z) and on that basis all were highly positive in real terms (by 2Z to 5? per month), except for the rate on demand deposits of economicunits. The nominal rate structurehas since been changed twice, on April 1, and July 1, 1989, in responsteto a sharp decrease in the inflationrate in the first two quarters of 1989. Measured against the sharp reductionin inflation,most rates remain highly positive in real terms. The principalexception is the rate on enterprisedemand deposits.

2.48 The institutionalreform, particularly the increase in interest rates to levels that were positive in real terms, had an immediateimpact on the growth of the money supply. Bank credit to state enterprisesincreased by only 282 during the first half of 1989, down from 3502 during 1988, and infla- tion halted quite dramatically. With the hardeningof financingconstraints, enterprisescame under pressure and respondedby reducinginventories and sel- ling idle equipment. The first half of 1989 witnessed a substantialincrease in demand for money and a reconstitutionof money balances,with the result that total liquidityincreased an estimated31? while inflationthrough the K period was only 18Z. Currency in circulationincreased by 422, or 20? in real terms between December 1988 and June 1989. Householdsavings deposits in- creasedmore than fivefold over the period in response to the sharp increase in real interest rates on these deposits. Demand deposits,on the other hand, declined in absolute amount reflectingthe tight financialposition of much of the public enterprisesector, and low interest rates on enterprisedemand deposits.

2.49 The initial successof the disinflationprogram was quite remarkable. It should be kept in mind, however, that there are a number of one-time gains associatedwith this kind of stabilizationprogram that make it easier to achieve a rapid decline in inflationthan to maintain the low level of infla- tion that is realized. The large and sudden increasein interest rates caused

6/ Interest rates are decided by the national Financialand Monetary Commis- sion on recommendationof the State Bang. - 29 - agents to shift back into domesticcurrency (out of dollars,gold, and non- perishablecommodities). There has also been a sharp increase in savings depositedinto the formal banking system, increasingthe amount of funds availableto lend to enterprises. Finally,dishoarding of inventoriesand commoditystocks increasedsupply in many markets, helping to put downward pressure on prices. All of these were basicallyone-time phenomena. Already in the third quarter of 1989 inflationarypressure had resumed, as the fundamentalproblem of financingthe fiscal deficithad not been dealt with adequately. As noted, the fiscal deficit in 1989 was larger than targeted. The State Bank extended credit to the budget totalingdong 1.6 trillion during 1989, far in excess of the target of D 600 billion. It is clear from this developmentthat the central bank still lacks independence. As a result of this credit extended to the budget, reservemoney increasedby 50Z in the third quarter alone, and is estimatedto have increased170X in 1989 over the year before. The growth target for reservemoney was 74X. By October, infla- tion had increasedto a rate of 2.5? per month (a compound rate of 352 p.a.).

2.50 It should also be noted that governmenthas yet to make much progress in the third key area of monetary reform noted above, establishinga sound managementand regulatorysystem for commercialbanks. The previous system under which bank branches automaticallysatisfied the credit needs of enter- prises has ended, because now there is an effectiveceiling on the lending of individualbranches. However, bank branches are not playingmuch of a role in deciding how the limitedamount of credit is to be allocated. It appears that enterprisesare still entitled to borrow certainamounts for working capital --admittedlyat high interest rates--andthat banks have no real E.uthorityto refuse requests as long as they are within the credit plan. Finar.cialsector reformsare further discussedin Chapter 6.

E. Balance of Payments and External Debt

2.51 Viet Nam's large external imbalancesand obligationsreflect the influenceof the autarkic economic and expansionaryfinancial policies pursued . until recentlyand their failureto promote export developmentand efficient import 3ubstitution. Inward-orientedtrade policieswere associatedwith the heavy reliance on centralizedeconomic decision making and distortionaryex- change rate systems. Balance of paymentspressures were intensifiedby trade and financialembargoes. The retentionof foreignexchange by exporting enterpriseswas tightlyconstrained, and direct contactsbetween industries and foreignbuyers or supplierswere preventedby the mandatorychanneling of goods through state-ownedforeign trade companies, Foreign investmentwas also discouraged. These policieshave led to severe shortagesof basic commo- dities,considerable strain on the balance of payments,depletion of official foreign exchange reserves,and mounting arrears on debt service obligations.

2.52 Between 1985 and 1988 Viet Nam maintaineda large current account deficitwith the nonconvertiblearea, as well as a modest deficitwith the - 30 -

convertiblearea.7/ The deficitwith the CMEA countriesincreased from 721 million transferablerubles in 1985 to TR 1.2 billion in 1986 and TR 1.3 bil- lion in 1987 and 1988. The cross exchangerate employed by the IMF for 1989, 2.55 TR/dollar,provides the most accuratepicture of the real value of this deficit, and at that exchange rate the deficitwith the nonconvertiblearea grew from US$283 million in 1985 to US$518 million in 1988 (Table 2.8). The deficitwith the convertiblearea is smaller,reflecting Viet Nam's low amount of trade with, and political isolationfrom, countriesoutside of the CMEA group. The current account deficitwith the convertiblearea was US$208 mil- lion in 1988. The total current deficitof US$726 million in 1988 was slightlymore than 10? of Viet Nam's GDP.

2.53 The financingof Viet Nam's large current account imbalanceshas been made possible by the availab'.lityof high levels of external financingfrom the nonconvertiblearea, in the form of loan disbursements,averaging about 1 billion rubles annually. The SovietUnion has announced,however, that its aid to Viet Nam will decline substantiallyover the next few years. A sub- stantialreduction in the real transferfrom the CMEA was alreadyvisible in 1989, as preliminaryfigures show a 42? decline in the deficitwith the non- convertiblearea (from TR 1.3 billion in 1988 to TR 756 million in 1989).

2.54 Viet Nam's trade with the convertiblearea has been hampered by the embargomaintained by a number of western countriesand China. However, the country'sterribly overvaluedexchange rate againstthe dollar was also a factor hindering trade in recent years. This situationwas rectifiedwith a large devaluationof the dong in early 1989 that brought the currency's officialvalue closely into line with the parallel rate. Since early 1989 the authoritieshave followed a policy of maintaininga stable real exchange rate by devaluing in line with the now-modestrate of inflation. This change in the exchange rate regime had an immediatepositive effect,with exports to the convertiblearea doublingbetween 1988 and 1989, from $490 million to $968 million. As a result, Viet Nam had a small surplusof $71 million in its trade with the convertiblearea. Owing to its interestobligations, the current accountwith the convertiblearea was still in deficit ($45 million on

7/ The balance of payments statisticssuffer from weaknessesthat severely limit their reliability. These weaknesses involveparticularly the coverage of data, the accuracyof reporting,and inconsistenciesof definitionsfrom year to year. Moreover, the compilationof balance of payments statisticsis complicatedby the need to aggregatetransactions with the convertiblearea (which is compiled in US dollars)and the non- convertiblearea (which is compiled in transferablerubles). The un- availabilityof market exchange rates between the ruble and the dollar, as well as the existenceof multiple rates between the dong and the ruble and the dollar, respectively,make it difficultto constructan exchange rate series that is free of distortions. In this report the balance of payments and debt statisticswith the nonconvertiblearea have been convertedinto US dollars at a constantrate of 2.55 rubles/dollar,the cross rate employedby the IMF for 1989. At the time of publication, balance of payments data for 1989 were preliminaryand incomplete. - 31 - an accrual basis). The overall current accountdeficit in 1989 was $341 mil- lion (4.9Z of GDP), down more than 50Z from the 1988 deficit.

Table 2.8: BALANCE OF PAYMENTS,1985-88 (In millions of US Dollars)

1985 1986 1987 1988

CurrentAccount -453 -655 -593 -726 Convertiblearea -170 -174 -85 -208 Nonconvertiblearea -283 -481 -508 -518 Trade Balance -406 -627 -543 -656 Convertiblearea -123 -146 -35 -138 Nonconvertiblearea -283 -481 -508 -518 Exports, total 497 494 599 709 Convertiblearea 336 307 430 465 Nonconvertiblearea 161 187 169 244 Imports, total -903 -1,120 -1,142 -1,365 Convertiblearea -459 -453 -465 -603 Nonconvertiblearea -444 -667 -667 -762 CapitalAccount 192 363 399 286 Receipt of Loans 367 517 591 687 Convertiblearea 51 10 28 60 Nonconvertiblearea 316 507 563 627 Scheduledrepayments -231 -264 -229 -444 Convertiblearea -197 -237 -166 -284 Nonconvertiblearea -34 -27 -63 -160 Amortizationof Debt Relief 0 0 0 0 Short term (net) 55 111 37 43 Errors and omissions -8 -23 -104 19 Overall Balance -269 -315 -297 -420

Financing 269 315 297 420 Change in NFA (excl. IMF, incr.) 0 2 0 - Net use of Fund credit -14 -4 0- Gold revaluation 0 0 0 - Debt rescheduling 252 - - 24 Change in arrears 31 317 297 396

Memorandum items: Transferable ruble per US$ 2.55 2.55 2.55 2.55 Current account/exports(percent) Total -91 -133 -99 -102 Convertible area -51 -57 -20 -45

Sources: IMF, based on data provided by the Vietnameseauthorities. - 32 -

2.55 Viet Nam's external debt reachedabout $7.0 billion in 1988, of which $3.8 billionwas due to the nonconvertiblearea (Table 2.9).8/ Of the $3.2 billion due to the convertiblearea, more than half reflectsarrears incurred on debt service obligations. Between 1984 and 1988, external debt increased by more than 100? owing to an accumulationof loans from the nonconvertible area and to short-termcredits in convertiblecurrencies, as well as to increasedinterest arrears. Viet Nam's overall debt is about 100X of its GDP, making it one of the most heavily indebtedcountries in the world. Average indebtednessfor low-incomecountries other than China and India is 69? of GDP.

Table 2.9: EXTERNAL DEBT AND ARREARS, 1984-88 (in millions of US dollars)

OutstandingAmount at End of Period 1984 1986 1986 1987 1988 Total debt outstanding 3,226 4,250 6,095 8,142 7,033 Nonconvertiblecurrencies L 1,610 2,336 2,829 3,216 3,814 Principal 1,810 2,336 2,816 3,169 3,674 Arrears - - 14 47 141 Convertiblecurrencies 1,615 1,914 2,268 2,928 3,219 Principal 1,461 1,712 1,991 2,680 2,727 Of which: in arrears (486) (472) (711) (1,062) (1,247) Interestin arrears 96 108 164 178 288 Imputed late interest/b 69 94 121 167 224

/ The debt due to the nonconvertiblearea, which is officiallyrecorded in terms of transferablerubles, was convertedinto US dollars at the cross rate of 2.66 TR/dol-

lb Imputed late intereston privatesources was calculatedat assumed interestrates which yield a weightedaverage of 3.6% to 4.0%, reflectingthe largeproportion of officialcredit on concessionalterms. Source: AppendixTable 3.6.

2.56 The externaldebt in convertiblecurrencies is large in comparison with the country'sexports and debt-servicingcapacity: in 1988, external debt outstandingwas about seven times the level of exports to the convertible area, while scheduleddebt serviceobligations constituted 442 of total exports. Actual paymentswere only 4Z of total exports. Large amounts of external debt in convertiblecurrencies were contractedin the late 1970s to finance food and oil imports as well as importsrequired for reconstruction. Since 1980, however, there have been very few new medium- and long-term creditsas a result of Viet Nam's political isolationfrom the West and its

8/ Viet Nam's debt statisticsare compiledand centralizedby the Bank for Foreign Trade, which is also responsiblefor making debt servicepay- ments. There is no World Bank Debt ReportingSystem. - 33 - weak track record on debt servicing. About 452 of the debt is owed to official creditors,notably Algeria, France, Iraq, and Japan; another 43% (includingshort-term debt) is owed to private creditors,particularly in Japan; and the remaining10% representsobligations due to international organizations.

2.57 Arrears have been incurredon obligationsto all categoriesof creditorsin the convertiblearea. However,most Vietnamese importershave met the debt serviceobligations arising from their short-termsuppliers' credits. In 1988, as in previousyears, debt servicepayments were strictly limited, reachingonly $31 million or about 8 of the scheduledpayments.

F. Prospects for Growth In 1990 and Beyond

2.58 In the past two years Vietnameseauthorities have made far-reaching changes in the financialsystem and interestrates that have succeededin reducing the rapid inflation,at least for now. Governmenthas also begun to make other reformsthat will be necessaryto consolidatethe stabilization effort,by reducing the public sector deficitand the trade deficit. The new management system for state enterprisesshould improvetheir financial situation. Governmentexpenditures are being cut, particularlyin the area of subsidiesto state employeesand public enterprises. Reform of the tax system, includingthe introductionof new taxes, should improvepublic finances. In the area of externaltrade, the exchange rate has been unified and devalued,and the trade regime has been substantiallyliberalized. These measures are already improvingexport performance.

2.59 In the midst of this stabilizationeffort, during 1989, growth in the real economywas uneven. Not surprisingly,state-owned industry is growing slowly, if at all, as it adjusts to the new regime. Governmentestimates that industrialoutput dropped 3.4% during 1989. Agriculturaloutput, on the other hand, continuedto expand. Furthermore,the decline in inflationand the high interestrates have led to reductionsin agriculturalstocks, and Viet Nam actually exported1.4 million tons of rice during the year. While it is dif- ficult to measure, output of collectiveand private enterprises--inservices and small-ocalemanufacturing--also appears to have risen during 1989. Real growth in GDP is estimatedto have increased1.5% during the year. This is a good performancefor an economy in the midst of rapid disinflationand wrenching changes in economicmanagement.

2.60 Perhaps the most encouragingdevelopment in 1989 was the large increase in the savingsrate, amountingto around 7 percentagepoints of GDP. The experiencesof other highly distortedeconomies suggest that during the first few years of liberalizationlarge output gains can be achieved through the better use of existing resources. In the medium to long run, on the other hand, substantiallyhigher savingsand investmentrates will be necessaryto sustain a higher rate of growth. It should be possible for Viet Nam to build up its savings rate, while at the same time allowingconsumption to increase at a moderate rate. As an illustrativeexample, supposeper capita output growth of 4% can be achieved;this rate is not at all unrealistic,even with - 34 - the current low investmentrate, as there is much scope to improvethe efficiencywith which existing resourcesare employed. If growth of govern- ment current expenditure(on a per capita basis) is held to that same 4% level, and consumptiongrows at a lower rate, then the savingsrate will increaseyear after year. For instance,if per capita consumptionincreases at 22 per year, then savingswould rise from the current level of 5X of GDP to 1O in 5 years and 18Z in 10 years.

2.61 While the achievementsof the reform program to date are very impressive,there are some areas for seriousconcern. Layoffs from state- owned enterprises,the civil service,and the military could cause a major open unemploymentproblem in urban areas. Furthermore,the governmentbudget deficit is excessive,and it is not at all clear that the fiscal adjustments to date will reduce the government'sdeficit to a manageablelevel.

2.62 The most importantissue that the governmentmust address immediately is the budget deficit. The overallbudget deficit is likely to be more than 2 trillion dong in 1990 unless major new fiscal initiativesare undertaken. Net foreign financingfrom the nonconvertiblearea is decliningand may cover only one-quarterof this amount. Net financingprospects from the convertible currency area are limited in the short run, as the regularizationof relations with creditorswould actually require a small net outflow.

2.63 A rec'uctionof the budget deficit by one-halfwould requirean increase in governmentrevenues of the order of one trilliondong, or one- third of 1989 revenues. This is equivalentto about $250 million. Some external financingfrom the convertiblecurrency area could thus play a significantrole in easing the fiscal adjustment. However, in view of the low resourcemobilization effort by the government,it seems preferableto rely as much as possible on increasedtax revenuesto reduce the budget deficit and to use most external financingfor productiveinvestment in infrastructureand directlyproductive activities.

2.64 A rapid supply responsewill come about only if the recent stabil- ization can be consolidated. The stabilization,however, is a necessarybut not sufficientstep. Far-reachingchanges in organizationand incentiveswill be required in agriculture,industry, commerce, infrastructure services and the social sectors if Viet Nam is to reach a sustainablehigh growth path to make up for some of the ground lost during the past three decades. The creation of markets for products is not enough. Far-reachingchanges in state enterprisemanagement, the role of the private sector,and the functioningof still almost non-existentmarkets for capital, labor, land and other product- ive factorswill be required. If the consolidationof the stabilization program is successfuland if deep structuralchanges are implementedrapidly, the outlook for the Vietnameseeconomy could be very promising. If the experienceof reforms in other socialistcountries is a guide, then the greatestdanger lies in incomplete,inconsistent, and underfundedreform measures.

2.65 The remainderof this report focuses on agriculture,industry, energy, transport,the externalsector, and social infrastructure(health and education). The report examineshow the reform program is affectingthese - 35 - specific areas, and what the responsehas been to date from the various productivesectors. Attention is paid to the key bottlenecksthat remain and to policy recommendationsthat can help ease these constraintson growth. The last chapter discusseskey reformmeasures in moving towards a socialist market economy. - 36 -

111. AGRICULTURE.INDUSTRY AND TRADE

A. Introduction 3.1 Economic stabilizationis one importantprecondition for returning Viet Nam's economy back to a stable growth path and has been discussed in the previous chapter. Economic and institutionalreforms leading to a larger role of market mechanismsin the main productivesectors are among the precondi- tions for attaininga high growth path so that Viet Nam can make up for some of the growth lost over the past decadesand catch up with some of her more successfulneighbors. This chapterdiscusses performance, recent policy changes and future issues and options in the two main productivesectors, agricultureand industry,that account for over three quarters of total employment. It concludeswith a section on foreign trade, as this could become one of the main engines of economicgrowth in Viet Nam during the 1990s and will be a critical element in improvingproductivity and growth in the domestic economy. While there have been far-reachingchanges in the past few years, and in particularduring 1989, there is considerablescope for further measures to improve the functioningof Viet Nam's emergingmarket economy.

B. Agriculture

3.2 Viet Nam remainspredominantly an agriculturaleconomy based on paddy rice production,with agricultureemploying two-thirds of the labor force and accountingfor two-fifthsof total output. Agriculturereceived about one- fifth of total state investmentfunds largely for irrigationand flood control. Foodgrainproduction amounted to 19.6 million tons in 1988, of which paddy rice was 17.0 million tons. Among the other edible produce, maize, sweet potatoes, cassava,potatoes and vegetablesare most important. Rubber is the most importantindustrial crop, followedby tea, coffee, coconut and sugar cane. Vietnamesecrop yields tend to be low relativeto those of neighboringcountries. This is basicallyattributable to low input levels and, for crops other than paddy, lack of varietal improvementwork.

3.3 Between 1976-86,Viet Nam succeededin reclaimingor resettlingsuf- ficient land to increasethe cultivatedarea by about 20Z (to 5.6 million ha), but most of the additionalarea has been planted to industrialor tree crops. Incrementalfood requirementswere met largelythrough improved crop yields. Stagnant in the late 1970s, rice yields grew at 6Z p.a. in the first half of the 1980s due to wider applicationof improvedvarieties and increaseduse of fertilizer. Subsequently,however, agriculturalgrowth has suffered from poor weather (notablyin 1987) and the effects of a worseningeconomic crisis, includinghigh inflationand distortedprices and incentives. Foodgrainpro- duction declined in 1987 to approximatelythe 1984 level, but recoveredin 1988 (Table 3.1), reflectingbetter weather, substantialgrowth of fertilizer supplies,and a variety of measures to improve farm incentives. In comparison to many other Asian countries,however, Viet Nam's "green revolution" - 37 -

(increased use of fertilizer and improved varieties) has been slow and overall yields are still comparatively low.

Table 3.1: FOODGRAIN PRODUCTION, 1984-88

1984 1985 1986 1987 1988

Production ('000 metric tons) 17,800 18,200 18,379 17,529 19,580 By product Paddy 15,506 15,872 16,003 15,103 17,000 Spring and summer crops (8,193) (9,043) (9,127) (8,029) (10,400) Winter crop (7,313) (6,829) (6,876) (7,074) (6,600) Subsidiary crops 2,294 2,325 2,376 2,426 2,580 By region North 7,475 7,593 7,688 7,620 8,320 South 10,325 10,607 10,691 9,909 11,260 Mekong Delta (6,942) (6,986) (7,203) (6,576) (7,800)

Source: Statistical Office.

3.4 The growth in the Vietnamese agricultural sector during the last decade has been largely offset by population growth rates averaging about 2Z. Production and consumption per capita remain close to subsistence levels and the nutritional status of the Vietnamese population remains tenuous (Chapter 1, Figure 1.1). Although the mean nutrient intake levels are marginally satisfactory, a high proportion of the population falls below the mean. In the food-deficit areas, ths difficulty of supplying minimum energy require- ments through supplementary imports from other areas has contributed to a strong emphasis on rice self-sufficiency. Paradoxically, this has led to neglect of other subsidiary food crops, which are particularly important in increasing the dietary balance and variety, and remedying non-energy deficien- cies. The over-emphasis on local self-sufficiency has reduced specialization in cash crops for which Viet Nam has comparative advantage and which could provide higher farm incomes.

Recent Institutional and Policy Changes

3.5 Until recently, the agricultural sector was organized on the model of Soviet and earlier Chinese central planning, with some adaptation to local circumstances. Plans at the national, provincial and district level embraced the entire economy and specified detailed targets for production, distribu- tion, services and investments. Since 1988, agricultural cooperatives and private farmers have been excluded from this administrative planning system and no longer face compulsory production and delivery targets. The overall policy framework under which Vietnamese agriculture now operates stems from decisions made or affirmed at the 6th Congress of the Vietnamese Communist - 38 -

Party in December 1986. Governmentpolicy began to shift from the earlier policy of collectivizationtowards renewed emphasison family farming as early as 1983. However, tenure arrangementsinitially remained unclear and procure- ment prices unfavorable. Since 1988, land contractsare supposedto provide at least 15 years of tenure security.

3.6 The cooperativesremain the focal points for distributionof inputs and services,collection of taxes and fees, and procurementof outputs. Coop- eratives continue to own major items of capitalequipment, such as tractors and trucks,but managementhas been contractedto individualoperators and private ownershipis now permitted. Most livestockand fisb productionhas been fully privatized. Family farming is recognizedas the main basis for future development.

3.7 Viet Nam has long used forced procurementof agriculturalproduct at low prices by the governmentas the main device for extractinga surplusfrom the farm sector to facilitaterapid industrializationby keeping urban food prices artificiallylow. This system providedweak incentivesto farmersto increaseoutput, and the state monopoly on procurementand marketing created many shortages. Earlier and unsuccessfulefforts to replace the forced pro- curement system with a unified "contract"price system were extended in April 1988 to more radical reforms. Insteadof a compulsoryfamily obligationin return for land use rights and provisionof all major inputs and servicesby the cooperative,the new contractsallow farmersto pick and choose among inputs or services desired and pay at fixed prices or barter ratios only for those services. Farmers are now free to sell a higher proportionof their productionat negotiated or market prices. The end of internaltrade barriers which, prior to 1988, preventedany significanttransport of free market produce between localities,has led to rapid expansionof market volume and improved farm morale.

3.8 From a system based on administrativeprocurement pricing of most agriculturalcommodities, the governmenthas thus steadily reduced its control over agriculturalproduct and input prices to the point that market pricing now predominates. The Governmentretains partial control of the farm price of paddy rice through its supply of chemical fertilizerat a fixed exchange rate of 1 kg of urea for 2 kgs of paddy, a ratio which approximatesinternational prices. Because of the near-monopoliesof some state trading firms, procure- ment pricing of some exportableagricultural products does not yet adequately reflect internationalprices.

Constraintsto AgriculturalGrowth

3.9 Land and Water Development. Of a total land area of about 33 million ha, some 22Z is arable, and 20Z is now cultivated. An additional2.8 million ha have been identifiedas having some agriculturalpotential, but only about 1 million ha has fairly high potential,and less than half of this may be suitablefor paddy rice. The major potentialreclamation areas are in the Central Highlands (uplandfood and cash crops),where both food and labor shortagesare constraints,and in the Mekong Delta, where acid sulphatesoils, drainage problems,and water shortagecor.strain development. The costs and - 39 - physical constraintson further land reclamationforce an emphasis on intensi- ficationof agriculture,through increasedmultiple cropping and heavier input use.

3.10 About 2.1 million ha were under paddy field irrigationin 1987, plus another 350,000ha of upland and industrialcrop irrigation. Nearly 60% of the paddy-irrigatedarea was in the Mekong and Red River Deltas. About 2.5 million ha are served by irrigationsystems, indicatinga potentialto in- crease irrigatedareas by about 400,000ha (water resourcespermitting) with the existing irrigationinfrastructure. Exploitation of this potentialmay be the most economicalway to increaseirrigated area in the next few years.

3.11 The potentialfor intensificationseems highest in the Mekong Delta, where two-thirdsof the cultivatedarea is still single-cropped.However, present limitationson dry season water supply allow an increaseof only 200,000 ha above the current irrigatedarea. A Master Plan study is being initiatedto review the problems of potentiallyconflicting developments and environmentaldamage involved in furtherland and water developmentin the delta, where undevelopedareas may prove less economicallysuitable for rice productionthan for aquaculture,timber and certain other cash crops.

3.12 Extensionof irrigationand improvementof drainage and flood protec- tion has potential in the Red River Delta, where prioritiesinvolve stabiliza- tion of the rainy season crop, through improveddrainage on some 240,000ha of waterloggedarea; better utilizationof existing systemsto add up to 300 to 350,000 ha of winter crops; and expansionof irrigationto up to 100,000ha presentlylacking electricpower and pumps. The Red River Delta has long been a food deficit area, and even with such improvements,the Red River Delta is unlikely to ever become self-sufficientin grain.

3.13 The rest of Viet Nam includesa long, narrow, densely-populated coastal strip and a sparselypopulated highlands, both far less developedthan the two deltas, but both with high developmentpotential. Despite the tenden- cy to focus on the two deltas,the remainingarea is extremelyimportant: it contains 581 of total populationand 512 of total cultivatedarea. Central Viet Nam is poorly served by infrastructure,and is the most significantlocus of poverty and malnutrition. In the central coastal areas, there is potential for further irrigationexpansion based on small to medium-scaleprojects, many of which are less attractivethan projects in the deltas because of the addi- tional cost of dam construction. In the highlandsagricultural land use needs to be based on sustainablesoil and water conservationpractices; other land will need protectivetreatments.

3.14 In general, land and water developmentshould focus on increasingthe efficiencyof the existing system,with prioritiesas follows:

(a) Achieve full utilizationof existing irrigationprojects through rehabilitationof canals, completionof tertiaries,and supply of pumps, to add up to 700,000ha of irrigatedarea nationwide; - 40 -

(b) intensify cropping and increase yield by expanding multiple cropping in areas where water resources exist to permit substitution of high- yielding dry season crops for low-yielding rainy season or floating rice crops, on up to 370,000 ha in the north;

(c) give priority to small and medium-scale works drawing on local capital and labor, and turning management over to the local com- munity, in lieu of large-scale works, to reduce both investment and operations and maintenance costs; and

(d) expand multiple cropping in the two deltas by enlarging irrigation systems in the Mekong Delta and expanding pumped drainage in the Red River Delta.

FiRure 3.1: Fertilizer Application and Yields. 1986

DPP Korea 7 0

Rep Korea 0

6

cnina

(I) I ndonesla U4

S1 Lanka 3 Vietnam Malaysia PhiI(ppeFme 0 0

Thai iand 2 0 0 100 200 300 400 Nutrient Ckg/fna)

3.15 Fertilizer Supply. Viet Nam's intensity of fertilizer use is about half the world average for developing countries, and among the lowest in Asia (Figure 3.1). Moreover, nutrient is applied at ratios averaging 100:16:6 - 41 - nitrogen:phosphate:potassium(N:P:K), compared to a world average of 100:47:36 and developingcountry average of 100:37:17. This seriousnutrient imbalance is also a cause of low yields, particularlyin the more intensivelycropped areas. There is also evidenceof geographicalmaldistribution of government- suppliedfertilizer, with the north highly privilegedand the central areas deprived of adequate supplies. Current planningprojections anticipate an increase in total suppliesof plant nutrient to 1.17 million tons with N:P:K proportionsof 100:50:25in 1995, followinga growth rate of 13.6Z p.a. in 1988-95. Doubled intensityof fertilizeruse with improvedbalance would put Viet Nam in the range where Indonesiaand Sri Lanka were in 1986, sufficient to supportpaddy rice yields in the range of 3 to 4 t/ha. Still, this inten- sity level would remain low by the standardsof other countrieswith high man/land ratios, and more rapid growth of fertilizerimports can be justified (fertilizeruse in Thailand is comparativelylow due to its low man/land ratio).

3.16 Varietal Breeding and Seed Supply. Since 1982, Viet Nam has developedsome of the infrastructureand institutionsrequired for supportof varietal improvement. However, lack of coordinationand cooperationamong multiple institutionsinvolved in varietal breeding and seed supply limits the effectivenessof the system. The underlyingproblem is the underfundingof research institutionsand universities,which forces them to competewith each other in seed developmentand production,which is one of the most lucrative sourcesof outside income. The resolutionof this problem through adequate budgetaryfunding, central regulation,and negotiatedrevenue-sharing arrange- ments should be a prerequisitefor any furtherexternal support for expansion of the national system. For most major crops, productionyields are not seriouslyconstrained by lack of developmentof improvedvarieties, but improvedmultiplication and distributionof such varietiesdeserves urgent attention.

3.17 Plant Protection. Pest problems account for a major part of field losses of crops, as well as losses and qualitydeterioration in storage. Shortage of foreignexchange for pesticideimports (now US$20 million against an estimateddemand of US$30 million) is one constraint;other serious issues are the lack of control over the type, quality and effectivenessof chemical imports or domestic formulations;the effects of environmentalpollution (notablyon aquacultureand capture fisheries);and the health hazards arising from use by inexperiencedfarmers. At a time of decollectivization,an effort is needed to maintain the functioningof plant protectionteams and to encour- age emergenceof private teams. Organizationof pest control as a specialized activity is advantageousfor reasons of safety,potential economies of scale, and minimizationof pesticideuse.

3.18 Mechanization. Although Vietnamesefarming relies mainly on draft animals and hand tools, mechanizationis growing,particularly in the south, and based mainly on small-scaleequipment of types common to most of Asia. Greatermechanization and larger scale machineryare confined to state farms. Private ownershipof farm machineryis allowed and contractualprivate manage- ment of state or collectively-ownedmachinery is now encouraged. Rapid growth of contractualprovision of machine servicescan be expected,and should be - 42 -

encouragedas an efficientalternative to own-accountuse of machinery. Many machines are old and in poor condition,and there is a general shortageof spare parts. At the same time, currentlyimported machinery, largely from the Soviet Union. is often of a scale inappropriateto individualfarm use.

3.19 Research and Extension. The agriculturalresearch system suffers from geographicalimbalance: most institutionswith national mandates are located in the north and tend to concentratetheir attentionon northern agri- culture; whereas centralViet Nam is served by only one major institution. Despite formal coordinativemechanisms, rivalry rather than cooperation characterizesthe relationsamong research institutionsand this is unlikely to change as long as research institutionsremain underfunded. Equipment supply for researchactivities depends almost entirelyon foreignassistance, and little foreignexchange is made availablefor recurrentcosts and spare parts. Budgetaryallocations appear to cover only about 252 of the expendi- tures of major research institutes,the balancebeing generatedby sales of products or services. While dependenceon revenuesfrom clients ensuresmore relevanceand greater emphasison practicalitythan better-fundedprograms in some neighboringcountries, excessive reliance on contract researchhas also serious drawbacks:

(a) It providesno basis for funding long-termresearch programs, without immediatepayoff but importantfor future discoveries;

(b) the need for quick financialreturn tends to reduce "research"to adaptationof importedtechnology, and to induce prematureextension of technologieswhich have not been adequatelyverified;

(c) concern by research institutionsto captureall the potential revenuesfrom new technologyprecludes rapid diffusion (e.g., of plant breeding);and

(d) it encouragesconcentration on state farms and other organizations with the resourcesto provide lucrativecontracts.

3.20 The formal extensionsystem is characterizedby extremelyhigh staff numbers, low qualifications,geographic maldistribution of qualifiedstaff and poor salaries. Most extensionworkers collect data and deliver Government instructionsrather than transferringtechnical information. The latter is more frequentlyperformed by procurementand distributioncompanies, and research institutes. With the restorationof a household-basedfarming system, the extensionsystem requires fundamentalrestructuring. Previously, the cooperativeadministration could serve as the major deliverypoints for technicaldirectives, and team leaderscould be relied on for enforcement. Now the need is to deliver technicalinformation to the farm level to provide a basis for farm-leveldecisions, and equally to serve as a conduitto feed back farmer demands for informationor technologiesto the extensionmanage- ment and the research system. Correspondingly,the role of researchersin direct extensionto the end-user should be reduced as the linkagebetween extensionand research systemsis improved,so that the extensionsystem can serve as the "marketingarm" of research. - 43 -

3.21 Transportand Power. Post-harvestprocessing and marketing of agri- cultural products suffers from transportationbottlenecks and electric power shortages. Investmentsin rehabilitationof the transportinfrastructure snd extensionof the power distributionappear often to providehigher returns than further investmentin land improvement. Transportbottlenecks (not transportcost) are seen as the main obstacleto regionaldevelopment of specializedproduction capabilities in both perishableproducts and non-per- ishablecrops which require provisionof food to farmers. The greatestpro- blems are in the interior,hilly or mountainousareas which have development potentialbut cannot get their products to market or obtain reliable food supplies.

3.22 The existing rural power supply does not facilitatean expansionof economicallymore attractiveelectric pumping to replace diesel pumping. Partly as a result of the very limited coverageof the power distribution system at present, agricultureaccounts for only about 9Z of total electric power consumption. The two deltas are both served by the power network, but distributiononly reaches the suburbs of cities and towns and the major pumping stations,whereas rural areas often lack access to power. In ^-n

3.23 Processingand Storage. The weak transportationsystem prevents long distance transportof raw material and finishedgoods. Obsolete technology causes high processinglosses, and results in low-quality. Inadequatehygiene and packagingmaterials also contributesto poor quality. Management skills are often inadequateand a severe shortageof financialcapital and market or technical informationimpedes growth. In the large-scale(mainly state-owned) subsector,most plants operatewell below design capacity,due to obsolete equipmentand spare part shortages,compounded by insufficientmanagement attentionto maintenanceand repair.

3.24 In small-scaleagro-industry, which processesthe majority of domes- tically consumed product, the equipmentis largelylocally-designed, with little infusionof improvedtechnology from other countries,and there is limited access to sources of investmentfunds or foreign technicalassistance. High product losses and/or poor-qualityare somewhat compensatedby more effi- cient management. As the majority of raw materialsare processed in the small-scalesector, and the gap between existing and best practice is large, attentionto small-scaleprocessing promises the greatestoverall improvements in productivity. Rice is the productwith greatest significanceto the national economy,and attentionto post-harvestlosses (includingquality deterioration)attributable mainly to inadequatedrying, poor milling equip- ment, and poorly-managedstorage facilitiescould increaseboth the quantity and value of the product availablefor utilization. - 44 -

Policy Issues and Options

3.25 The recent reforms in the agriculturalsector--similar to those implementedin China during 1979-86--areexpected to provide a large boost to agriculturalproductivity and rural incomesover the next few years. Inter- national experiencehas clearly shown that decentralizedorganization of agri- cultural productionwith family farms as the basic decision-makingunit, facing fair, market-determinedprices, remains the best way to organizemost agriculturalactivities. But family farming can thrive only in an environment of reasonablystable prices, appropriateincentives for long-terminvestments in land improvementand an efficientsystem of agriculturalsupport services. The pace of agriculturalproduction growth and rural developmentthus depends cruciallyon policiesbeyond the reach and responsibilitiesof government institutionsin the agriculturalsector.

3.26 The continuedsuccess of the macro-economicstabilization program is of utmost importance. Increasedspecialization and intensificationof agri- culture is only possible if markets for products and inputs are reasonably efficient. Keeping inflation low -- preferably at single digits -- is one importantprecondition and will requirecontinued monetary restraintand fiscal reforms, as further discussedin Chapter 6.

3.27 Viet Nam has alreadymade more progresswith respectto price reform than, for example, China and some of the Eastern European socialistcountries, and maintenanceof market determinedpricing is even more essentialthan keeping inflationat low levels. As price stability is maintained,the con- fidencein the stabilityof the currencywill graduallyreturn and people will be increasinglywilling to use money, rather than rely on complexbarter arrangementsor local self-sufficiency.This will permit increasedspecializ- ation of farmers in higher value cash crops, for example, in the centralhigh- lands of Viet Nam. Eventuallysome of these farmerswill switch entirely to cash crops and buy food on the market, once market supply becomes sufficiently reliable. Many cash crop exports are now directed to Comecon markets and present trade arrangementsoften do not provide incentivesto increaseexports or to improve quality. Options for improvingthese arrangementsare discussed in SectionD.

3.28 Market-orientedforeign trade policies are perhaps the most important element to bring about rapid increasesin food productionand rural incomes. Fertilizerapplication in Viet Nam remainsvery low by the standardsof neighboringcountries, and nutrient suppliesare imbalancedwith too little phosphateand potassium. The major constraintin the past were foreign trade policies that relied primarilyon barter trade with Comecon countries,and fertilizersupply was by and large limitedto urea imports from the Soviet Union. Imports of more and better (compound)fertilizers from the convertible currency area were limitedby low foreignexchange earnings,due to an over- valued exchange rate and administrativerestrictions on foreign trade (SectionD below).

3.29 The governmentprojects a doublingin fertilizeruse to 109 kg/ha (nutrientbasis) by 1995. Experienceof neighboringcountries suggests that - 45 - good yield responsesmay be obtained up to 150 kg/ha, and the objectivesof the State PlanningCommittee with respectto fertilizeruse may thus be too conservative. In China, for example, fertilizerapplication increased between 1978 and 1984 from 88 to 174 kg/ha, with paddy rice yields increasingfrom 4.0 to 5.6 t/ha. No expansionof irrigationoccurred, double croppingwas actual- ly reduced and the area sown to food crops fell. For each additionalton of fertilizer,grain productionincreased by about 15 tons, compared to a yield responseof only 8 tons in the projectionsof the State Planning Committee.

3.30 The doubling of fertilizeruse would require additionalimports of fertilizerof about $250 million per year--a large amount when compared to Viet Nam's present hard currency earnings,but equivalentto only one million tons of rice exports at currentprices. The required foreignexchange resour- ces are not an insurmountableconstraint, even if fertilizeruse triples to 150 kg/ha by 1995. In fact, importsof fertilizershould easily pay for them- selves.At currentworld prices, the relativeprice of fertilizeris around 2 tons of paddy rice per ton of fertilizer.As long as the physical response rate is above 2:1, it makes economic sense to import additionalfertilizer. For example, using the conservativeestimate of an 8:1 response rate, US$100 million of fertilizerimports would generate additionalrice output worth US$400 million in the internationalmarket. There would be some minor addi- tional costs (for instance,transportation), but neverthelessthe fertilizer import could clearlypay for itself throughrice exports and leave a substan- tial surplus that could either be consumeddomestically or also exported. The impendingcreation of a foreignexchange market should help to remove adminis- trativebarriers towards higher fertilizeruse through imports. Rapid dif- fusion of improvedseeds and public informationcampaigns about optimal seed and fertilizeruse through the extensionsystem and the media will also be essential,if input levels are to increasemore rapidly than projected.

3.31 InstitutionalReforms. A variety of institutionalreforms are neces- sary in order to reduce the scope of administrativeintervention in the economy and enlarge the scope of market activity;increase the financialand decision-makingautonomy of individualenterprises involved in production, distribution,and serviceprovision; increase the degree of competitionfaced in all activities;and promote the most efficientforms of managementregard- less of form of ownership (public,private, cooperative or mixed).

3.32 To be consistentwith the directionsof economic reform,administra- tive and service institutionswill need to be restructuredin order to decrease size and complexityof administrativeunits whose functionshave been reduced through growth of market activitiesand reductionof administrative interventionsin the economy. Expandingand upgradingthe quality of these services is importantin promotingproduction, processing and marketing in a household-basedagriculture. This implies a decrease in numbers of adminis- trators and supportstaff, and an increaseand upgradingof personnelinvolved in extension,information collection, analysis, and publicationas well as basic and applied research.

3.33 For the productioncooperatives, the basic principleof reform should continue to be that their role should emphasizeprovision of servicesto the - 46 - farmingcommunity, which should be genuinelyfree to choose the servicesthey requireon a contractualbasis, and should have electivecontrol over coop management. Private-sectoralternatives should be allowed to develop,because the presence of alternativesis the best way of ensuring that coops evolve on the basis of farmer interests. Competitionwould probably force coops to sell off or rent out equipmentwhich can be more efficientlymanaged by individual entrepreneurs. The main path of expansionfor coops lies in the sponsorship and financing (not necessarilydirect management)of sidelineor non-farm production. Coops can serve as conduits or guarantorsfor bank lending and may serve as useful nodal points for provisionof extensionservices.

3.34 The coop's exclusivepowers in managing the distributionof land are still the foundationof its existence. Its possessionand use of these powers must be evaluatedon two criteria: does it provide adequate incentivefor farmer investmentin land development,and does it encouragesome degree of land consolidationinto the hands of efficientfarmers (and release redundant farm labor which finds employmentoptions off-farm)? Lengthy and secure farmer tenure,with normal renewabilityand heritability,may be necessaryfor the first, and means of land transferwith adequatecompensation for release of use rights may be necessaryfor the second. It may also be crucial for promotionof family planning in the rural areas that future redistributionsof land not take increasedfamily size into account (otherwisechildbearing becomes a means of land acquisition). Finally,whatever policies are determinedin this area, they need to be buttressedby a legal code which provides protectionagainst local abuses.

3.35 The appropriatedirections for the restructuringof state farms are similar to those for state enterprisesin general (SectionC below). As far as agricultureis concerned,economies of scale exist only to a limited extent in some farmingand cropping systems,for example some tree crops, some live- stock operationsand some types of agro-processing.Otherwise, family farming tends to evoke the highest degree of effort and efficiency. State farms (or other large-scaleplantations) may be justifiedoutside these areas by non- economic functions,for example as a source of technicaland financial assistance,and processingor marketingfacilities. The model for the state farms of the future may thus be found in agriculturaldevelopment authorities or nuclear estate operationsthat combine family operationsfor some activities (planting,harvesting), with centralizedprovision of support services (technical,finance, processing and marketing).

3.36 InvestmentPriorities. In view of the critical shortageof domestic and foreign funds availablefor investmentat present and during the next few years, it is imperativethat Viet Nam strive for the maximum benefit/cost ratio (or minimum payback period). In examiningthe requirementsof each sub- sector, the proper order of priority should be improved systems of management, training and technicalassistance; replacement of parts; replacementof equip- ment; and new facilitiesin general. Emphasis should be on rehabilitation rather than expansion. Increase in productioninputs, particularlyfertil- izer, will be far more importantfor increasingoutput and incomesthan investmentsin land improvement. - 47 -

3.37 Self-sufficiency.While governmentpolicies in the agricultural sector have been reorienteddrastically towards a market system based on family farming, other and perhaps outdated,ideas appear to live on in some official pronouncements,for example, self-sufficiency.At present, Viet Nam's agricultureis not self-sufficientbecause it relies on importsof fer- tilizer and other agro-chemicalsto sustainhigher yields than otherwise possible. This relianceon imported inputswill, and should, increase in the future. Indeed, it may become desirablefor Viet Nam not only to import agro- chemicals,but also animal feed or even foodgrains. The extreme policy of local food self-sufficiencyof the past has contributedto depress income levels in the poorest areas of Via Nam, and while the objectiveof national food self-sufficiency(disregarding imported inputs)is not nearly as constrainingas local self-sufficiency,it needs to be recognizedthat food security can be better achievedwith outward-orientedeconomic policies.

ProductionPotential and Medium-termTargets

3.38 The government'sprojections of agriculturalproduction for 1990-95 appear broadly feasible. In some products,notably rice, it may actuallybe possible to exceed the targets,provided the recently introducedreforms are continuedand the proposed institutionalrestructuring is completed. In other areas, for examplemeat production,the projectionsdo not seem fully consistentwith input requirements. However, greateruse of rice as animal feed, or, better, increasedimport of feed grains are feasibleto achieve the productionand nutritionalobjectives.

3.39 Nutritionalstandards of averageVietnamese would rise by over 202 from daily intake in 1985 of about 2,025 kcal of energy, 39 g protein, and 17 g fat to reach an intake of 2,400 kcal energy, 48 g protein, and 24 g fat by 1995. This gain would be sufficientto greatly reduce the proportionof the populationsuffering from malnutrition. This assumes a populationgrowth rate of well under 2.0?, which is unlikely even with vigorous implementation of the family planning program. It also assumesnotable reductionsin post- harvest losses,which now absorb a considerablefraction cf production.

3.40 The projectionsof farm productionimply a 1985-95trend growth rate of per capita farm incomes as high as 7.7? p.a. Urban per capita incomes could well grow at similar rates. Although these rates seem high, China achieved comparablegrowth during 1978-87based on similarreforms in the agriculturalsector. Assuming Viet Nam's agriculturehas a comparative advantagein paddy rice cultivation,international trade may play a positive role in resolvinginconsistencies between compositionsof supply and demand. Future Vietnameseexports of 1 to 2 million tons of rice could probably be absorbedby the world market. This could finance agriculturalimports mainly of products like maize, soybean,and/or soymealwhere domestic supply is not likely to meet rising domestic demand for "quality"protein (livestockor vegetableprotein products).

3.41 FeasibilityRelative to Resourcesand Support Services. The projected growth rates of crop productionare based on assumedcompletion of major irrigationand reclamationprojects already underway,and projected - 48 -

increase in use of fertilizers(with better nutrient balance) from about 60 kg/ha to 115 kg/ha in 1995 (nutrientbasis). The higher fertilizerinputs will require additionalimports or new investmentin domesticproduction capa- city, and external financingwould also be needed for timely completionof irrigationworks. As it is most unlikely that irrigationinvestments not already underway could be planned, initiatedand completedby 1995, increasing suppliesof chemical fertilizerand other inputs and improvementsin other support servicesare the most tangiblemeans of raisingmedium-term production growth.

C. Industry

3.42 While agricultureis the largestproductive sector in Viet Nam, industryalso makes a substantialcontribution to total output. In the re- estimatednational income accounts for 1988, industry comprised30X of GDP, compared to shares of 40% for agricultureand 302 for services. As can be seen in Table 3.2, this structureof productionis typical of low-incomecoun- tries, other than China, where industry'sshare of GDP (46X) is quite high. Industry'sshare in Viet Nam is the same as in India, and much higher than in Bangladesh(131). The divisionof the labor force between agricultureand industry is also fairly typical of low-incomeeconomies. Industry accounts for 14% of employmentin Viet Nam, comparedto agriculture'sshare of 73X. This employmentshare for industry is virtuallythe same as in Tndia and China, and considerablyhigher than in Bangladesh(62).

Table 3.2: STRUCTUREOF PRODUCTIONIN LOW-INCOMECOUNTRIES, 1987188

2 of GDP Contributedby: AgricultureIndustry /a

Viet Nam 40% 30Z

Low-incomelb 33Z 27Z China 311 46% India 30% 30% Bangladesh 47% 13%

la Manufacturing,energy, mining and construction.

lb Excluding China and India.

Source: Vietnameseauthorities, and World DevelopmentReport, 1989. - 49 _

Organizationand Recent Performanceof Industry

3.43 Large-scalemanufacturing in Viet Nam is state-owned,and until recentlyhas been organizedalong the lines of centralplanning. This has been true in the north since the 1950s. Large privatemanufacturing firms in the south were nationalizedand incorporatedinto the plan after the reuni- fication of the country in 1976. In the past few years, enterprisemanagement has been reformedby decentralizingdecision-making to the firm level. There is also a substantialnon-state manufacturing sector in Viet Nam, consisting of collectivesand private firms. Until recently,private firms were mostly family operations. The non-statesector is particularlyactive in the south.

3.44 CentrallyOwned Enterprises. The core of the planned economy in Viet Nam consistedof enterprisesowned and managed by line ministriesof the central government. For manufacturing,the relevantministries are Metallurgy and MechanicalEngineering, Light Industry,and Construction,and the General Departmentof Chemistry,which has riinisterialstatus. In 1988, there were 576 centrallyowned manufacturingenterprises, with a total employmentof 355,000. These are generallythe largestenterprises in the economy,with an average employmentof 616 employeesper firm. Before 1989, productionof these enterpriseswas organizedthrough a centralplan, with each firm receivinginputs from the governmentand in turn providinga specifiedoutput. Transactionswithin the plan took place at fixed, "officialbusiness prices".

3.45 The organizationof the Ministry of Light Industry is typical of the traditionaladministrative structure, end is shown in Figure 3.2. The ministry has severalprofessional departments, including one that is respon- sible for allocationof skilledlabor (cadres). Within the Ministry there are several "unions"of enterprises,such as the Union of Textile Enterprises. Before the reforms,the union was in charge of managing production. The typicalunion also has a vocationaltraining school,a technicalresearch institute,and an export/importcorporation.

3.46 Income from centrallymanaged firms has been transferredto the Ministry of Finance, and these transfershave been the main source of revenue for the government. In return,state enterprisesreceived allocations from the governmentbudget for working capitaland for new investmentand have borrowed additionalworking capitalfrom the State Bank. In part, bank loans have been used to finance the transfersfrom state enterprisesto the budget, disguisingthe underlyingreality that the sector as a whole does not generate much income. The majority of investmentfunds has been allocatedthrough the governmentbudget and has been channeledto state-ownedenterprises. Until recently,priority was placed on investmentin heavy industry. In the first half of the 1980s, for instance,about 80X of public investmentfor industry went to the heavy sector (includingenergy). There has also been a focus on large, new projects. Relativelylittle investmenthas gone to replacementand maintenanceof existingequipment. - 50 -

Figure 3.2: ORGANIZATIONOF THE MINISTRY OF LIGHT INDUSTRY

Ministry of Light Industry Profesional Divisions:

Planning

Accounting

Technical

Labor I F Vocational Schools International |ra sUnion* of Entlrp Ce) ResearchInsitute

_ Export/I-prt j j ~~~~~Corporation

Centrally Contro ed Enterprises HHbbbbbbI

3.47 Locally Owned Enterprises. In additionto centrallymanaged enter- prises, there are a larger number of public enterprisesowned and managed by the People's Committeesat the provinciallevel (2,186in 1988 with over 400,000 employees). Some locally owned state enterpriseshave been incorpo- rated into the central plan. All state enterprises,both central and local, have been allowed to engage in activitiesoutside of the plan throughoutmuch of the 1980s. These outside activitieshave taken place at uncontrolled prices.

3.48 Non-stateSector. Almost three-quartersof manufacturingemployment in Viet Nam is in the non-statesector, a total of 2.1 million workers in 1988. The non-statesector comprisescollectives and private firms. Some of the collectivesare quite large. With few exceptionsprivate firms are family operations. Non-stateenterprises have generallyhad poor access to invest- ment funds and working capital and have been constrainedto operate on a small scale with labor-intensivetechniques. Private firms have also been hampered - 51 - by the lack of a clear legal frameworkfor their activity or a coherentpolicy toward the private sector. As a result of their small scale and lack of capital, gross output per employee in non-statefirms is only one-thirdof the productivitylevel in state enterprises. Nevertheless,the non-state sector produces almost one-half of total manufacturingoutput. Non-stateoutput is divided roughly in half between collectivesand private firms. The non-state sector has never been subject to planning at either the local or central level, and has been generallyfree of controlledprices. Non-stateenterpri- ses have to pay a turnover tax of 1OZ.

3.49 Developmentof the private sector in Viet Nam has been hampered in the past by frequent shifts in policy and the lack of a clear legal framework for private activity. Furthermore,gauging the current scope of the private sector is difficultbecause it is lumped togetherwith collectivesas part of the "non-state"sector in industrialstatistics, and because the quality of statisticson the non-state sector is particularlypoor. Private and family enterprises,as distinct from collectives,are generallyquite small in Viet Nam. Nevertheless,they probably account for 20Z to 252 of manufacturing output.

3.50 IndustrialOutput. While large amounts of investmentfunds have been channeledinto heavy industry,manufacturing output and employmentin Viet Nam remain overwhelminglyconcentrated in light industries. Textiles (including garments and footwear),for instance,accounted for 18Z of manuf-icturingout- put and 24Z of employmentin 1988 (Table3.3). Food processingrepresented an additional282 of output and 26Z of employment. Hence these two relatively labor-intensivesectors between them make up roughlyone half of manufactur- ing. By way of comparison,the same industriesaccount for 26Z of manufac- turing value added in China, and 27% in India. The most capital-intensive sectors,metals and chemicals,accounted for 5Z of employmentand less than 122 of output in Viet Nam's manufacturingsector in 1988. Thus, despitethe previous orientationtoward heavy industry,Viet Nam's manufacturinglabor force is actuallywell placed as the country shifts its orientationtoward export-orienteddevelopment.

3.51 The official statisticsshow a respectablegrowth rate of industrial output in recent years, with growth at 6.8Z in 1986, 8.8Z in 1987 and 12.6Z in 1988. Despite the fact that centrallyowned industryhas been favored in the allocationof goods and investmentfunds, its growth rate has been below that of locally owned state enterprisesand the non-statesector. Between 1986 and 1988, output of centrallyowned enterprisesis reportedto have increasedby 16%, compared to 31Z for local state enterprisesand 24Z for the non-state sector. These statisticsneed to be used with some caution. Physical output indicatorsincreased at a much lower rate (an unweightedaverage of 4.8Z p.a. during 1986-88). On the other hand, there is probably substantial underreportingof noui-stateindustrial activity in the official statistics. - 52 -

Table 3.3: VALUE OF INDUSTRIAL OUTPUT BY INDUSTRY, 1985-88

1985 1986 1987 1988

Total (billions of 1982 dong) 105.3 112.5 122.4 137.8

State 59.5 63.9 68.7 77.9

Central 35.6 38.4 40.2 44.4 Local 23.9 25.5 28.5 33.5

Non-state 45.8 48.5 53.7 60.0

BY Industrs

Energy, fuels 6.0 7.1 7.4 7.4 Metals 1.4 1.6 1.7 2.1 Chemicals 11.2 10.8 12.1 13.0 Machinery 14.7 16.2 18.6 24.0 Textiles 17.8 18.8 20.4 23.4 Food products 28.9 30.5 32.5 37.0 Building materials 21.1 23.0 24.5 24.4 Other 4.4 4.5 5.3 6.6

Sources Data provided by Vietnamese authorities.

3.52 This mixed structure has created a number of problems. First, there has been a serious imbalance in investment. State firms have had access to credit at low or no cost, whereas the non-state sector has had to find funds outside of formal channels. Poor investment choices by planners and lack of financial discipline in state enterprises has led to inefficiencies in the state sector, while non-state firms did not have access to the most basic equipment and supplies. For the state sector, investment choices have been made with little regard for expected return to the investment. Priority was usually given to large industrial projects, without adequate consideration for supporting investments (such as roads) or for the cost of imported inputs. As a consequence, capacity utilization in industry has generally been very low, around 40? to SOZ.

3.53 A second problem with the dual structure is that throughout the 1980s expansionary fiscal and monetary policies have generated high inflation in market prices. Official business prices have generally lagged far behind market prices, contributing to financial problems of state enterprises and distorting incentives. From time to time, official business prices were raised to the level of market prices, but before long the gap would reappear, as the underlying sources of inflation had not been dealt with. - 53 -

Capacity in Specific Industries

3.54 Viet Nam has a relativelysmall investmentin heavy industry (steel, machine tools. chemicals,fertilizer, cement, and paper),most of which was constructedprior to 1975. Many facilitiesdate from before 1965. Technology is even more antiquated,based primarilyon older technologyfrom China and the Soviet Bloc. Some paper industry technologyis relativelymodern. Virtuallyall of the heavy industryis small scale, 1/2 to 1/10 the size normally consideredcompetitive by today's internationalstandards. While some of the facilitiescould possibly survive on a sunk cost basis, most would have to be judged as not viable, unless managementreform enables substantial cost cuts over current performance.

3.55 The original rationalebehind planning of investmentsin heavy industry appears to have been the goal--typicalof centrallyplanned economies--ofself-sufficiency in all sectors and developmentof Viet Nam's natural resources. The continuedoperation of extremelyantiquated facilities suggests that planners have been reluctantto discard or replace facilities once they wear out. The present reform has already led to some restructuring in heavy industry but much more needs to be done, includingclosure of clearly uneconomicunits. Viet Nam is fortunatein that overall employmentin heavy industry is very low, so that the adjustmentcosts associatedwith restruc- turing this sector should not be too great.

3.56 Heavy industrycontinued to be favored in three ways under the reform program introducedin 1989. The turnover tax rate for most heavy industrial enterpriseswas lower than that for light industry (in many cases, 3-5 p.a. rather than 102 p.a.). In a number of electricity-intensiveenterprises (i.e., steel and fertilizerproducers), power costs were substantiallysub- sidized (at D 80/kwh comparedto D 120/kwhpaid by light industry).If elec- tricity prices are increasedby a large amount, as recommendedin Chapter 4, the financialsituation of heavy industrywill decline considerably. Finally, distressedfirms, many of which are in heavy industry,can obtain some working capital at interest rates below those charged to other firms (2-3Z/morather than the normal interest rate of 3.7Z per month during September1989). The lower interest rate on limited levels of working capital is part of the cur- rent adjustmentprocess and there are indicationsthat this preferential treatmentof interest rates on working capitalwill be phased out by mid-1990.

3.57 Part of Viet Nam's poor economicperformance in the past has been the result of uneconomicinvestment in heavy industry. The governmenthas made considerableprogress in reducingthe biases in favor of heavy industry,and should persevere in this policy by eliminatingthe few remainingimplicit subsidiesnoted above. In the absence of subsidies,some cxisting heavy industrymay have to be closed down, and there is unlikely to be much new investmentin this area as the sector'scapital intensityand long payoff period make such investmenta poor choice for Viet Nam. In the near term, investmentsin other sectors, includinglight industry and export industries, will provide a higher return. In the longer term, any investmentstrategy for heavy industry should be based on a critical assessmentof investmentpropo- - 54 - sals and only after the policy of no budget support and no subsidiesis clearly establishedand the joint venture law is consideredfully operational. At that point in time it is conceivablethat private investorscould be attractedbased on Viet Nam's underdevelopednatural resources(petroleum, natural gas and minerals). But such developmentshould not be encouragedin the near future and certainlyshould not receivepreferential treatment.

3.58 Viet Nam has a diverse and extensivemix of light industry,including textiles,garments, footwear, plastic processing,ceramics, bicycles, light engineeringgoods, electric items, diesel motors, agriculturalimplements, bicycle tires/tubes,and light chemicals. Overall,most existing light industry is viable and has the potentialto make a major contributionto increasingexports, cmployment,and overalleconomic growth. The dynamism of light industry is impressive,in spite of the age and small scale of most facilitiesand the lack of a competitiveenvironment. Given the recent deval- uation of the exchange rate, industrialwages in Viet Nam's state-ownedenter- prises are in the range of US $10-25/month. In a number of garment enter- pzises that have been able to obtain some imported sewing machines from Japan or other qualityproducers, productivity appeared to be quite high. The com- bination of high productivityand low wages could make Viet Nam very com- petitive in a range of light industrialproducts, provided the requisitesup- porting infrastructureis put in place. Of particularimportance would be improvementsin telecommunicationsand transport,and access to raw materials on the internationalmarket.

Recent Reforms

3.59 In 1989, the governmentintroduced far-reaching reforms of the management system. The plan has virtuallybeen abolished,except for a small number of firms that rely heavily on imported inputs from other centrally planned economies. Officialbusiness prices have been eliminated,and decision-makinghas been decentralizedto the enterpriselevel. Enterprises will now be financiallyindependent, and have to rely on retained earningsand bank borrowing for working capital and investmentfunds.

3.60 These changeshave been a great shock to the state sector. Previous- ly, enterprisesreceived an allocationof working capital and investmentfunds from the state budget, and borrowed additionalfunds at negative real interest rates. Most output was sold to state tradingcompanies at fixed prices. Any losses were covered by loans or grants. Now firms must market their own out- put and negotiateprices. They must borrow working capital and investment funds from the banking system at very high real interest rates. In August 1989, the lending rate to state firms was 2Z to 41 per month, at a time when inflationhad virtually stopped. The new policy is to allow firms that lose money to go bankrupt and close.

3.61 An importantquestion is how the state is going to receive revenue from its enterprisesnow that they have been given so much autonomy. For 1989, the state is charging a 1O turnover tax (identicalto the long-standing tax on the non-state sector). In addition,firms must pay one-half of their profits to the state. The other half of profits is retainedby the enter- - 55 - prise. The retainedportion is divided into three roughlyequal parts, for worker bonuses,worker benefits,and reinvestment. There are many exceptions to these general rules, however,both for the turnovertax and for the share of profits remitted to the Ministry of Finance. Enterprisesthat are having financialdifficulties have so far been able to negotiatereductions in the rate of turnover tax and/or tFe share of profits remitted.

3.62 Enterprisemanagers generallyfelt that the changesput a great burden on them in the short run, but also providednew opportunitiesin the medium to long run. The official data show a declineof 3.4Z in industrial output during 1989. This seems to be an accuratepicture of the state sector during 1989, which overall is stagnating,and has been sheddingemployees in responseto its financialcrisis. The overall stagnationmasks the fact that certain segmentsof the state sector are doing quite well, such as garments and footwear. The heavier industries,particularly chemicals and machinery, appear to be having the most difficultywith adjustment.

3.63 It is difficultat this point to get an accurate assessmentof the immediateemployment effect of the enterprisereform. The governmenthopes to reduce overall state employmentby more than half a million; this has clearly not happened yet, and if it is implementedwill involvethe whole state sector,not just industry. There probably have been substantiallayoffs during 1989 in building materialsand machinery. The total decline in employ- ment by state industrymay be as much as 100,000 (13Z) in 1989.

3.64 Private Sector. After a period of suppressionof the private sector in the mid-1980s,government policy has shifted in the past few years to tolerate and even encourageprivate activity. Expansionof small-scale industry is now viewed as a key to absorbing Viet Nam's burgeoning labor force. Governmenthopes that small-scaleindustry will create 2 million addi- tional jobs in the period 1991-95. This would require $1 billion in invest- ment, accordingto governmentestimates that it takes about $500 to generate one job in small-scaleindustry. This figuremay well be an overestimate.A $500 investmentmay be necessaryto generateone position in an export- oriented light industrialfirm, such as a garment shop. However, there are likely to be small-scalemanufacturing firms producingfor the domestic market that are less capital intensive.

3.65 The shift in attitude toward the private sector can be seen in the Resolutionon New Regulationsfor the Non-StateEconomic Sector (Resolution No. 16 of July, 1988), which expressesa desire to "fully tap the potentials of the non-stateeconomic units ... '. The resolutionlays down principlesfor the activitiesof the non-state sector that provide for non-discrimination between the state and non-state sectorsin the provisionof services and in- puts (includinginvestment funds) by governmentinstitutions. The resolution also allows non-stateenterprises to negotiateforeign sales contractsdirect- ly and to retain foreignexchange earned throughexport to use for imported machinery. However, there has as yet been no clear elucidationof private property rights,nor is there at present a legal frameworkto guaranteeand enforce these rights. Consequently,there is considerableuncertainty about what actually is permissibleand what will be permissiblein the future, and - 56 - that uncertaintyretards productiveinvestment. The rights of private enter- prises have to be clearly codifiedand protected if the sector is to play the role in industrialexpansion that the governmentenvisages for it.

3.66 Prospectsfor the Private Sector. On strictlyeconomic grounds, p.rospectsfor the private sector are very good. There is clearly a large reservoirof entrepreneurialtalent in Viet Nam, and the private sector is already quite dynamic on a very small scale. If its right to expansion is clearly defined, and it is given access to credit on a non-discriminatory basis, growth should be very rapid. Furthermore,an export orientation,sup- ported by appropriatetariff and exchange rate policies,would provide a strong stimulus to the private sector. The processingand labor-intensive activitiesin which Viet Nam has comparativeadvantage can be efficiently organizedon a small scale,which means that many private firms can quickly become exporters.

Future Directionsof EnterpriseReforms

3.67 Viet Nam has already taken one essentialstep towards enterprise reform that most other socialistcountries have not yet taken: a comprehen- sive decontrolof prices. However, price reform is only one of a number of preconditionsto improve efficiencyin agriculture,industry and commerce. Without complementarymeasures, the reformsto date are likely to be most effectivein agriculture,where economiesof scale are very limitedand where large-scaleorganizations thus do not play an essentialrole. In industryand commerce,price reformwithout complementarymeasures will only have a limited effect. Among the essentialcomplementary measures are more freedom for the private sector,with a clear legal definitionof the rights and obligations; organizationalreforms of state enterprisesto make managers responsibleand accountable;and the establishmentof a competitiveenvironment that includes not only productmarkets, but factormarkets for capital, land and labor as well. Because of the central role of enterpriseand market reforms in moving towards a socialistmarket economy, these are discussedtogether in Chapter 6.

InternationalExperience

3.68 To date, the internationalexperience with reformsof state enter- prises in socialisteconomies is relativelylimited and not exactly reas- suring. The general problemwith the highly centralizedmodel has been that the centralizedbureaucratic organizations created to guide and supervise enterprisescould not cope effectivelywith the mass of informationrequired to keep a modern economy running. This was accompaniedby limited relianceon incentivesfor managers and workers and resulted in poor motivationand per- formance of the work force, stiflingindividual initiative, innovation and technicalprogress. A number of organizationalchanges have been introduced to make informationflows more manageable. One is organizationof entire branches into Kombinate,first pioneeredin East Germany, and widely applied in Viet Nam under the label of enterpriseunions. However, these measures did not solve the fundamentalproblem. - 57 -

3.69 A more radical change was the shift to worker self-management,imple- mented first in Yugoslaviain the mid-1960sby abolishingthe central invest- ment fund (replacedby banks), reducingcapital chargesand looseningcontrols on enterpriseswith respect to wage and price setting,hiring, productionand most investmentdecisions. The secondwave of enterprisereforms in Yugoslavia,implemented in the 1970s,went furtherby disaggregatingexisting companiesin to many independentunits, controlledby the workers (basic Organizationsof AssociatedLabor). Investmentdecisions were made through so-calledself-management agreements and social compactswith little regard to economic efficiency.

3.70 Recent enterprisereforms in Hungary and China are comparableto the first stage of the Yugoslav reforms of the 1960s, decentralizingdecision- making to enterprisemanagers and providingsome greaterdegree of freedom in setting prices and in making production,hiring and some investmentdecisions. While they have not gone as far as the Yugoslav reforms of the 1970s in putting small groups of workers in charge (and thus diluting the responsibil- ity of managers),they share some of the same characteristicsand problems. Most importantly,market forces are permittedto operate only to a very limited extent. Distortions (and resultinginefficiencies) have been particu- larly large when price controls remainedpervasive and, especiallyin Yugoslavia,this was exacerbatedby rapid inflation.

3.71 Another consequenceof these partial reformswas that workers became in effect the residualclaimants ("owners"),whether or not this was formal- ized along Yugoslav lines. High profits resultingfrom good managementor innovativeproducts and serviceswere quickly dissipatedin worker bonuses or amenities (housingand welfare facilities),rather than being plowed back to expand production. As a result,well managed enterpriseswere not able to expand as rapidly as comparableenterprises in market economies,and overall productivitylagged. Nevertheless,these partial enterprisereforms usually proved better than highly centralizedorganization of enterprisesinto sectoral unions and line ministries. Occasionally,outstanding managers have been able to convinceworkers that it made sense to forego short-termbenefits for long-termgains, but this has been more the exceptionthan the rule.

3.72 In the presence of price distortions(as in China and Hungary) or high levels of inflation (as in Yugoslavia,but also in Latin American market economies),the attentionof managers is often distractedfrom productionand marketing to dealingwith extraneousmatters such as pleading for suppliesat officialprices, or trying to obtain relief from price controlsor dealing with the many ad hoc interventionsthat characterizecountries with high levels of inflation. This is furtherexacerbated in the socialistcountries by the unclear definitionof property rights and the confusionbetween the regulatoryand ownershipfunctions of government. It is often far more bene- ficial for an enterprisemanager (as a captiveof the workers) to negotiatea lower profit transfer to the budget, or tax relief, or credit at low interest rates than to attend to production,marketing or investmentdecisions.

3.73 As a result of these rathermixed resultsof partial enterprise reforms, governmentsin a number of socialistcountries are now looking for - 58 - more far-reachingmeasures. Yugoslavia,for example,has recentlychanged the Constitutionand the Law on Enterprises,to abolish the Basic Organizationsof AssociatedLabor and to remove decision-makingpowers from the Workers' Coun- cils and to give it to managers. Under the new law, firms can be privately, cooperativelyor sociallyowned. Social joint stock corporationshave been introducedwith the investors (individualsand all types of enterprises)ac- quiring rights and responsibilitiesin proportionto their invested capital (this interestin a company can be freely sold). Similarly,Hungary has provided through the CompanvLaw of 1988 and the TransformationLaw of 1989 a frameworkfor the transformationof state enterprisesinto joint stock corpo- rations. The governmentis now proceedingcautiously, with the advice of internationalexperts, with the first batch of these transformations.A State PropertyFund has been establishedto exercise the state'sownership rights in the course of privatization. Legislativeaction is being taken to privatize domestic trade. Enterprisereforms are complementedby measures to restruc- ture the financialsystem, foreigntrade, domesticprice and taxes and subsi- dies. As in other Eastern European countries,reforms are likely to accele- rate over the next few years. Chapter 6 discusseselements of such reforms in some furtherdetail.

D. Forelan Trade

3.74 Like most other countries,Viet Nam does not have the ability to produce all goods and servicesit needs. Moreover, for some products that could in principlebe produced domestically,it may be cheaper and thus more efficientto rely on imports. Such products are likely to involve relatively advanced technology,which Viet Nam does not yet master, or economiesof scale that exceed the limits of the domesticmarket, or raw materials or other factors that Viet Nam does not possess. Engaging in foreigntrade thus permits the attainmentof a higher standardof living than would otherwisebe possible. More importantare the dynamicgains frum an outward-oriented developmentstrategy: importsof foreigngoods and servicesand close contact with foreign buyers and suppliersare importantsources of technologythat enable domestic producersto improvequality and productivitymore rapidly. For a small, poor developingcountry, the likely gains from such an outward- oriented economic strategy can be quite large.

Past Performance

3.75 Unlike other countriesin Asia, Viet Nam has for years pursued an inward-lookingdevelopment strategy, characterized by the orientationof agriculturaland industrialactivities toward the domesticmarket. Rather than encouragingenterprises to export,the governmentmanaged foreign trade transactionsthrough trade agreementswith foreigngovernments. This system of direct administrativeinterventions resulted in poor export performance, which contrastedwith the rapid export-leddevelopment of other Asian coun- tries. However, since 1988 the Governmenthas initiateda major deregulation of foreigntrade and enterpriseshave been given more freedom and motivation - 59 - to trade abroad. This has already caused a sharp improvementin export performance.

3.76 Viet Nam is poorly integratedinto the world trading system. Exports are small despite a substantialpotential arising from low labor costs and rich agriculturaland mineral resources. In 1988, Viet Nam's exports of goods were equivalentto only $709 million, much less than Bangladesh ($1.29bil- lion), or Sri Lanka ($1.48 billion).l9 This weak export performanceresulted in a ratio of export per capita of only $11 in 1988, one of the lowest among Asian countries; in comparison,China's export ratio is US$43 per capita.

3.77 Only 1OZ of Viet Nam's domesticproduction is devoted to exports, compared to 13Z in China, 29Z in Thailand,45Z in South Korea and 64Z in Mal- aysia. With an annual growth in value terms of only 3.5Z during 1977-88, Viet Nam's exports have been among the slowestgrowing in Asia. During the same period, exports grew by 8Z annuallyin India, by 10? in Bangladesh,by 17X in China, by 15Z in Thailand and by 19Z in Korea. Viet Nam's export performance is more similarto other centrallyplanned economies: during 1977-88, Poland's exports grew by only 2? annuallyand Hungary'sby 6Z.

3.78 Since 1988, the governmenthas initiatedmajor reforms to enhance the performanceof exports. There are already clear signs that export performance has benefited from this recent liberalizationof trade policies. Exports to the convertiblearea of rice, marine products,garments, light industrial goods, and crude oil have all surged during 1989, approximatelydoubling total convertiblecurrency exports over 1988.

InstitutionalFramework

3.79 Like other centrallyplanned economymembers of the Council of Mutual Economic Assistance (Comeconor CMEA), Viet Nam has a dual foreigntrade sys- tem, with separateprocedures for trade transactionswith nonconvertibleand convertibleareas. Central planning authoritiesmanage trade relationswith Comecon countriesalong the lines of the Soviet model. They intervenedirect- ly to control all exports and importswith these countriesaccording to five- year plEns and annual protocols. This plan aims at ensuring that enterprises have adequate supplies,and at procuringgoods for the supplyingof consumer markets.

3.80 Because the currenciesof Comecon countriesare nonconvertible,bila- teral trade between countriesis balanced under barter arrangements,where quantitiesexchanged are valued at fixed prices. The implementationof the plan requires strict centralplanning to ensure the fulfillmentof export obligations. The Foreign EconomicMinistry is responsiblefor the execution of the plan. Specifictargets and quotas are set by ministriesand local-

f9 External trade flows between Viet Nam and the nonconvertiblearea are denominatedin transferablerubles. These flows were convertedinto US dollars at a cross rate between the transferableruble and the US dollar of TR 2.55 = US$1. - 60 -

ities. Actual transactionsare executedby foreigntrade companiesunder the jurisdictionof ministriesor provinces. The Governmentbegan to reform the proceduresof transactionswith the nonconvertiblearea in 1988, as discussed below. However, deep-seatedreforms will depend on transformationsof the Comecon itself,which might take place within the frameworkof the next five- year plan (1991-95). Initial indicationsare that starting in 1991 Comecon trade will take place on a decentralizedbasis at prices negotiatedbetween buyers and sellers and that trade imbalanceswithin the group will be settled with hard currency.

3.81 Unlike transactionswith Comecon countries,transactions with the convertiblearea are more decentralized. Trading companiescan determine themselves (underministerial monitoring) their externaltransactions, and can channel their foreignpayments directlythrough the banking system. Until recently,domestic firms were not authorizedto establishdirect contactswith foreign firms and had to resort to trading companiesfor their external trans- actions. The governmenthas initiateda liberalizationof contactswith foreign firms since 1988: some enterprisescan now trade directlywith foreign firms; others can choose more freely the trading company they entrust for their foreign transactions.

Consequencesof Past Policies

3.82 Poor Quality. Viet Nam's industrieshave operated for years behind closed doors, which protectedthem from foreigncompetition. As a result, domestic firms had no incentivesto improvethe quality of products. The penetrationof Comeconmarkets did not require a high quality of products, because it was ensuredby centrallymanaged procedures. Problems of low qual- ity of industrialproduction are a common problem in administeredtrading arrangements,and stem from a lack of incentivesand a lack of contactwith foreign firms. Through direct contacts,managers and engineerscan learn about technicaldevelopments and can obtain free advice on market trends. Moreover, they can get feedbackon the performanceof their products. Since 1988, Viet Nam has opened its doors and liberalizedcontacts with foreign firms. Decentralizationand open doors have already caused a rapid improvementin the qualityof goods.

3.83 Export Structure. The structureof Viet Nam's exports is highly concentrated: exports are largelydominated by traditionalcommodities such as agriculturaland mineral products. Industrialgoods account only for a marginal share of exports despitethe emphasisplaced on this sector. As a result, the share of manufacturesin total exports is only 26Z, one of the lowest in Asia. In comparison,manufactures account for 70% of China's exports. In that respect, the export structureis similar to the structureof low-incomeAsian and African countries(Table 3.4). - 61 -

Table 3.4: TRADE STRUCTUREBY COMMODITIES

PercentageShare of MerchandiseExports in 1987 Agricultural Minerals commodities incl. fuels Manufactures

Viet Nam 55 20 25

Low-incomecountries /a 27 48 25 China 16 14 70 India 22 9 69 Bangladesh 33 16 41

La Excluding China and India.

Sources: Vietnameseauthorities, and World DevelopmentReport, 1989.

3.84 ForeignMarkets. Until 1989, Comecon countries,in particularthe Soviet Union, accountedfor about 50? of Viet Nam's trade. This orientation of exports is similarto other Comeconcountries but implies,for Viet Nam, a dependencyon remote markets. In contrast,exports to the fast growingAsian region are small. This trade pattern resultspartially from trade embargoes, but also from-Viet Nam's economic system which has put an emphasis on exports to the nonco-uverriblearea which representsonly a small part of world trade. As Eastatr£zr:,ean countriesenhance their relationswith Western countries, Viet'Namrai;r-. lose its preferentialaccess to Comeconmarkets. It will then have tc coizet'w.th other countrieswhich might result in losses of market shares,o&:ing to the low quality of exported goods.

3.85 Foreign Trade Embargoes. Foreign trade relationswith Western European and ASEAN countriesresumed rapidlyafter re-unificationin 1976. However, they were abruptly cut off in 1979 by the trade and financial embargoesimposed by a number of countriesin response to Viet Nam's military involvementin Kampuchea. These embargoesentailed a rapid decline in imports, reflectingthe sharp curtailmentof financing. Viet Nam's poor export performancein the first half of the 1980s was the result both of the embargoesand of its own internalpolicies which createdweak incentivesto export. It is difficultto sort out the relativeimportance of the two factors,but it is the case that trade and exchange rate reforms in 1989 led to a surge in trade with the convertiblearea, despite continuingembargoes. In many case Vietnamesegoods are now finding their way to western markets through indirectroutes, such as Hong Kong or Singapore. Nevertheless,the continuingembargo by some western countriesis a hindranceto trade, especiallyas it discouragesdirect foreign investmentand other lendingto Viet Nam. - 62 -

3.86 Within the convertible area, Japan is Viet Nam's leading trade part- ner. Viet Nam's exports to Japan increased from $60 million in 1985 to $162 million in 1988, while its imports from Japan grew from $190 million to $222 million (Table 3.5). The other major trading partners are Singapore, Hong Kong, Republic of Korea, and France.

Table 3.5s DIRECTION OF TRADE WITH THE CONVERTIBLE AREA, 1985-88 (in millions of US dollars)

1985 1986 1987 1988

ElDorts 336 307 430 465

Japan 60 37 130 162 Singapore 80 130 120 140 Hong Kong 40 57 95 56 Korea, Rep. of 10 22 6 12 France 5 20 25 26 Other 141 41 54 69

ImDorts 459 453 465 603

Japan 190 135 138 222 Singapore - - - 80 Hong Kong 30 40 52 28 Korea, Rep. of 2 5 141 34 France 1 10 27 71 Other 231 256 103 162

Source: Data provided by the Ministry of Foreign Economic Relations.

Recent Reforms in Trade Policies

3.87 Since 1988, major reform in foreign trade policies have been imple- mented. These reforms aimed at enhancing incentives and freedom to engage in foreign trade transactions. They are all characterized by fewer administra- tive interventions and more deregulation in enterprise activ'ities.

3.88 Exchange System Reform. Until recently, the exchange system was marked by a system of overvalued and multiple exchange rates. Overvalued exchange rates artificially lowered the price of imported goods, making quant- itative controls necessary. They were also at the origin of poor export per- formance. In March 1989, the exchange rate was devalued to a level which virtually unified it with the parallel market exchange rate. This devaluation implied an increase of the exchange rate for trade transactions within the - 63 - plan from D 900 per US dollar to D 4,500 per dollar. Simultaneously,all export subsidieswere eliminatedand a number of quantitativeimport restric- tions were phased out. The adoption of a realisticexchange rate has created the right incentivefor the promotionof exports.

3.89 Decentralizationof Foreign Trade Decisions. In January 1989, the governmentdecided to liberalizethe establishmentof foreigntrade companies. The regulationsconcerning these companieswere streamlined,and there are plans to eliminatethe minimum turnover requirementof $2 million. As a result, the number of such companieshas increasedfrom 80 in 1987 to 156 in June 1989. Trading companiesare now permittedto competeamong each other to offer better prices and better services. In addition,foreign trading rights began to be granted to enterprises. In 1989, 30 state enterpriseswere granted authorizationto engage directly in foreign trade of commoditiesthey either use as inputs or that they produce for exports,without using the intermediationof foreigntrade companies.

3.90 Import Liberalization. Until 1988, the import regimewas marked by highly protectivequantitative restrictions, such as import tariffs, quotas and licenses. During 1988 and the first half of 1989. most quotas were eliminated,and the licensingsystem was streamlined. As a result, access to importedcommodities has become easier. This was also facilitatedby the far- reaching liberalizationof prices for domesticallyproduced goods combined with the adjustmentof the exchangerate towards a market-clearinglevel. However. dual pricing is still a problemwith respectto trade with the Comecon area.

3.91 There is some evidence that enterprises still face a problem in buyi- ng foreignexchange to purchase importedmachinery or materialsfor proces- sing. The devaluationof the exchange rate was an importantstep in the right direction,and the availabilityof foreignexchange has improved. Neverthe- less, the supply of foreign exchange is not yet stable,which in turn makes import supply unstable.Government was able to build up its reservesmodf tly in 1989, so that further improvementsin the functioningof the foreign ex- change market should be possible in the near future.

3.92 Reform of ForeignDirect Investment. In order to encourageforeign direct investment,the NationalAssembly adopted a foreign investmentlaw in December 1987. The law permits foreign ownershipof up to 1002 and all investmentprojects may be directedby foreignmanagers. There are guarantees against expropriationand confiscation,as well as generoustax exemptions, guaranteesof full repatriationof all profits, and other favorablefinancial incentives. As a result of these new policies,foreign investorshave made applicationsequivalent to $450 million. However, these are mostly concen- trated in oil explorationand exploitation. Other projects include light industry,tourism, and telecommunication.There remainsconsiderable uncer- tainty among foreign investorsabout the implementationof the law. In par- ticular, the unclear legal frameworkunder which Vietnamesepartners operate make many potentialinvestors reluctant. - 64 -

3.93 Viet Nam has adoptedall of the policies necessaryto shift its orientationfrom an inward bias to an outward-lookingstrategy, and is already reapingbenefits from this adjustment. The most importantpolicy issue now in the trade area is simply followingthrough in practicewith all of the radical reforms that have been enacted in principle. Maintaininga level of the real exchange rate that maces exportingprofitable is the single most important componentof an outward-orientedstrategy. With a modest rate of inflation, this will requireperiodic small devaluationsof the nominal exchange rate. It would be desirablealso to further simplifyimport proceduresand to ensure that the foreign exchangemarket has a reliablesupply of hard currency avail- able to importers. Furthermore,while the direct foreign investmentlaw is very liberal in principle, it will take considerableeffort to make it fully operational.

Export Potential

3.94 Agriculturalexports have been substantialand are growing rapidly. Recent developmentsare dominatedby large rice exports,of 1.4 million metric tons worth $310 million in 1989. This dramatic growth in rice exports is partly due to special factors, includingthe reductionof stocks following price stabilizationand the eliminationof the rationingsystem. Future exports of rice will depend on increasedavailability of fertilizer. Other agriculturalexports have very substantialgrowth potential. New, high- quality rubber plantingswill be coming on stream in the next few years, although there is as yet insufficientprocessing capacity to absorb the new crop. The exportsof other agriculturaland marine productshave been growing at a very rapid rate; this growth could acceleratefurther.

3.95 At the same time, recent trends in Viet Nam and the experienceof other Asian economiessuggest that manufacturedexports could also develop rapidly. Average factorywages in Viet Nam (510-25 per month) are consider- ably lower than in most other Asian countries,except Bangladesh. Manufac- tured exportshave excellentintermediate and long-termpotential in both Comecon and convertiblecurrency markets. Exports of handicraftand manufac- tured products are beginning to accelerate. These industriesare likely to concentrateat first on assembly from imported raw materials. There is al- ready a substantialgarment and footwearmanufacturing industry servingthe Comecon market, and there are signs also of acceleratingcontact with the convertiblearea. The growth potentialfor this labor-intensivemanufacturing is substantial,since other countriesin the region are quickly losing their competitiveposition due to rising wages. Within the Comecon, Viet Nam has an even stronger position as the only low-wageeconomy with strong comparative advantagein labor-intensiveproducts. The recent decision to put Comecon trade on to a convertiblecurrency basis, startingin 1991, carriesboth risks and opportunitiesfor Viet Nam.

3.96 Viet Nam is well positionedto pursue a comprehensiveoutward- oriented developmentstrategy. Given its relativeisolation in the past, it could achieveparticularly large gains from this policy and expandedcontacts with world markets. To be sure, this strategywill involvemany difficult decisionsand fundamentalinstitutional changes. Yet Viet Nam has already - 65 - shown strong commitmentto comprehensivereform and its efforts in external trade have been particularlysuccessful. If such reforms continue at their recentvigorous pace, there is good reason to expect that Viet Nam's trade will expand rapidlywith considerablepositive spilloversfor the entire economy. The recent decision to move to convertibilityand international prices for Comecon trade by 1991 makes the switch to outward-orientedpolicies even more importantand will in a relativelyshort time lead to consistency between convertiblearea and Comecon trade practices.

3.97 Viet Nam is situatedamongst some of the most dynamic economiesin the world. Furthermore,these dynamic economiesin East and SoutheastAsia are at differentstages of development,ranging from lower-middleincome (Thailand),to upper-middleincome (Korea),and to advanced industrialstatus (Japan). There are enormous advantagesto economic integrationwith these neighboringeconomies, but there are some risks as well. The advantagesare obvious:Viet Nam can draw in managementexpertise and technology,through foreigntrade and investment,that will accelerateits development.

3.98 The main risk of integrationis that the developmentof indigenous entrepreneursand firms can be hampered if the economy comes to be dominated by foreign firms. This problem is likely to arise if governmentprovides excessiveregulation of the domesticprivate sector,while allowing foreign firms to operate in a less regulatedenvironment. In developingits policy toward foreign investment,neutrality should be the guidingprinciple: it should not be necessaryto provide foreignfirms with special incentivesnot availableto domestic producers.

E. CreatingProductive Emplovment 3.99 The reform process currentlyunderway in Viet Nam's agriculture,in- dustry, and foreign trade has the potentialto rapidlyexpand productive employmentopportunities. Employmentcreation is a crucial issue for the country. Viet Nam's arable land is extremelydensely populated,and there already appears to be considerableexcess labor in agriculture. Furthermore, rapid populationgrowth in recent decades translatesinto a high rate of growth of the labor force that will continue even after the populationgrowth rate declines. Finally, recent demobilizationof the sizeablemilitary and layoffsfrom the governmentbureaucracy and state industryhave exacerbated the unemploymentproblem.

3.100 While the supply of labor has grown rapidly in Viet Nam in recent years, the economy has not been generatingproductive employment opportunities in sufficientnumbers. State-ownedindustry has been favored in the alloca- tion of investmentfunds, but has failed to grow rapidly. Furthermore,the orientationtoward heavy industryhas resulted in relativelylittle employment being generatedby investmentin the state-ownedsector. Between 1986 and 1988, employmentin that sector increasedonly 4.2Z; in 1989 employmentde- clined,probably erasing any gains since the mid-1980s. Growth in the non- state industrialsector has been more rapid in recent years, with employment - 66 - expanding14.12 between 1986 and 1988, and apparentlycontinuing to grow during 1989 despite the difficultadjustments that are occurring.

3.101 The solution to the unemploymentand underemploymentproblem in Viet Nam lies in the coordinatedimplementation of agriculture,industry, and foreigntrade reforms discussedin this chapter. Expansionof agricultural output will not rely to any great degree on greater employmentin this sector; rather it depends on the more extensiveuse of other inputs,notably fertili- zer, and improvementsin infrastructure.Expansion of industrialcrops, and perhaps aquacultureand fisheries,should create some additionalemployment, but by and large the agriculturalsector as a whole will probably release labor as the economy grows. Nevertheless,the agriculturalreform is extreme- ly important,as it can substantiallyincrease family incomes in rural areas. The experienceof China with similaragricultural reforms in the early 1980s is that they brought about a rapid increasein the demand for servicesand manufacturesin rural areas,with a correspondingincrease in rural non-agri- cultural employment. Most of this employmentgeneration came from small private or collectivefirms.

3.102 Viet Nam's small-scaleprivate and collectiveindustry has similarly experienceda boom in the last few years. Further reformsin industryand the foreign trade regime are necessaryif this trend is to continueand accele- rate. The policies that create an outwardorientation, discussed in SectionD above, will provide strong incentivesfor light manufacturingindustry at all levels (private,collective, and state-owned)to expand. Private firms will respond to these incentivesif they have clear legal rights to expand and to keep the income earned from their activity (afterpaying reasonabletaxes). Collectiveand state-ownedfirms will respondsimilarly provided that they are organizedso that managers are rewardedfor profitableexpansion.

3.103 The various reforms that are necessaryat the micro level are very much interconnected. Reform of industry--improvingthe rights of the private sector and reorganizingstate-owned enterprises--is more likely to generatea rapid supply response if it is supportedby agriculturalreform and an outward orientation. The agriculturalreform increasesrural income and provides domesticdemand for manufactures,whereas the outward orientationcreates externaldemand for light industry. Similarly,sustainable improvements in agriculturerequire an outward orientationof the trade regime,as Viet Nam needs imported fertilizerand other inputs in order to increase farm output. The industrialsector also needs importedmachinery, materials, and parts. In the short run some imports can be obtained throughaid or external borrowing, but in the long run large quantitiesof importedinputs can only be achieved if the economy likewiseproduces large quantitiesof exportablegoods.

3.104 Hence a rapid supply response is most likely to be achieved by a con- sistent applicationof reform measures across all sectors. Furthermore,a developmentstrategy that is outward orientedand provides a prominentrole for the private sector will result in the maximum employmentgeneration from a given level of investment. This approach is the best hope for absorbingViet Nam's rapidly growing labor force. - 67 -

IV. TRANSPORT,ENERGY AND COMMUNICATIONS

A. Introduction

4.1 The recent economic reforms have focused on the directly productive sectors, in particular agriculture and industry. The most important elements of these reforms were decentralization of decision-making to an appropriate level--the household in agriculture and enterprises in industry--and a comprehensive price reform that left most prices to be freely negotiated by sellers and buyers. Most importantly, two key prices, the exchange rate and interest rates, have been set close to market clearing levels and were important elements in stabilizing Viet Nam's hyperinflation. As discussed in the previous chapter, the reforms are still incomplete in important respects, particularly in ensuring that the now independent managers behave in a social- ly efficient way. The reforms thus need to be deepened by giving managers strong incentives to increase long-term profitability and by creating an appropriate legal framework that clarifies the rights and obligations of newly independent economic units through commercial and company laws. At the same time, the reforms need to be broadened by applying the same principles to the transport, energy and telecommunications sectors. These infrastructure sectors are of key importance to the success of the overall reform program. So far, they have been touched by the reforms only in a limited way and the characteristics of Viet Nam's old "shortage economy" still apply to many infrastructure services. Potential demand continues to outstrip supply either because prices have not yet been adjusted to fully reflect costs and/or investment has for several years been too low -- often because low prices provided insufficient revenues to the operating units in these sectors.

4.2 The recommended overall direction of the broadening reforms to include most infrastructure services could be labeled the "commercialization of transport, energy and telecommunications." It would involve as a first (and relatively easy) step the broadening of price reform to encompass most infrastructure services. These services are largely inputs into other productive activities. Keeping their prices at artificially low levels is inadvisable and social objectives can be more appropriately pursued by taxes, direct subsidies and public spending on education and health. Moreover, infrastructure services are often among the most capital-intensive activities in the economy, and without full cost recovery, revenues would perpetually fall short of required current and capital expenditures. As past experience has shown, this is likely to lead to continued shortages of these critical services. A second element would be to apply the basic principles of state enterprises to the public utilities. Most importantly, this involves a separation of policy-making, regulation and supervision (at the ministry level) from operating and investment decisions (at the company level).

4.3 Because of the nature of their technologies, several of the operating units will tend to be natural monopolies in their respective service areas. Some government regulation and supervision will thus remain necessary. But regulation should be limited and focus only on a few important issues (prices, quality of services, profitability) rather than endless instructions to the managers of these entities on many minute details. In a number of - 68 - infrastructureservices, competitive pressures can be brought to bear, for example, competitionamong differenttransport modes (rail, road, water, etc.), as well as among differentcompanies operating within the same mode (road transportcompanies or shippingcompanies). Tax and pricing policies can be used imaginativelyto render such competitionfair.

B. Transoort

4.4 Geography,history, income and economicmanagement patterns have shaped Viet Nam's transportsector. Viet Nam's elongatedshape, stretching over 1,600 km from north to south providesboth challengesand opportunities. On the one hand, the main populationcenters, the Red River Delta in the north and the Mekong Delta in the south, are separatedby a distance of over 1,000 km. On the other hand, most places in Viet Nam can be reachedby inexpensive water transport,and very few towns are more than 50 km from the coast or one of the 6,000 km of inlandwaterways. The road network of 12,000 km paved and 94,000 km unpaved roads is basic, but not out of line with a country of Viet Nam's level of development(Table 4.1). The road and water transportsystem is complementedby railwaysand major cities are served by air. Total freight traffic, at 185 ton-km per capita is low in comparisonto other countries (for example, India with 334 and China with 869) and reflects limited exchange among largely self-sufficientlocalities and the absenceof a significant heavy industry sector. Passengertraffic, at 262 passenger-kmper capita, is also low, but somewhathigher than in China. In terms of freight transport, waterways account for the overwhelmingshare with 78? (60Z coastal shipping plus 18? inland water transport),while road transportaccounts for only 13z. In most other countriesthe share of roads in total freighttransport is much higher, and usually increasingwith income (for example,India 33?, Japan 402).

Table 4.1: PAVED ROADS IN SELECTEDCOUNTRIES

Lenathof PavedRoad Network (km) Total Per 1,000 Per 1,000 Per Per 1,000 ('000) sq. km area population I millionCDP vehicles VietNam 12 SE 0.2 1.7 71 Chins 173 16 0.2 0.6 103 Indai 122 87 0.2 0.6 47 Myanmar 8 12 0.2 1.1 73 Philippines 14 47 0.2 0.4 16 South Korea 10 101 0.2 0.1 8 Theiland 28 64 0.6 0.6 20

Source: Road Deteriorationin DevelopingCountries, World Bank. WorldBank files. - 69 -

Status of the TransportSystem

4.5 Infrastructure. Most roads, railways and ports date back many years, were partly destroyedor dismintledduring the war, and received inadequate maintenancethereafter. As a consequence,the majority of Viet Nam's tran- sport infrastructureis in a deplorablecondition. Even facilitiesbuilt as recently as 1965-75 are severelydeteriorated, as their constructionquality was often poor, reflectingthe short-termobjectives of the time. Most of the post-1975 repairswere carriedout as temporar-works, under financialand time constraints,and are themselvesin need cf upgrading. Except for some sections in the south, road surfaces are substandardin width and roughness, therebykeeping truck operatingcosts high. Heavy vehicles are barred from one third of the country's8,200 road bridgeswhich urgently need replacement or structuralstrengthening. About 200 railwaybridges are in disrepair, forcing trains to slow down (in some cases to walking speed). Similarly, waterways in the north are heavily silted, reducing the access to Haiphong port to vessels of 10,000 deadweighttons (insteadof the 16,000 DWT that would otherwisebe possible),and limitingthe capacityof barge trains on the Red River.

4.6 As transportdemand is rather low for a country of 65 million inhabitants,the fixed infrastructureis generallysufficient from the viewpoint of capacity. The only major bottleneckencountered was Saigon port, where ships have to wait an average of 3 days before being loaded or unloaded. The beginningof traffic congestionwas also observedon some sectionsof National Roads 1 and 5 near Hanoi and Ho Chi Minh City, and some streets inside the cities themselves;these sections could rapidly develop into major bottlenecks,once the economy becomes stronger -- thereby raising the demand for passenger and freight transport.

4.7 Equipment. Similarto the fixed infrastructure,transport equipment tends to be over-age and often derelict. Where specificdata have been provided on equipmentconditions, they paint a dismal picture: only 37X of all railway locomotivesare availablefor operation,45? of railway cars, 48? of road repair equipment,and 70Z of sea-goingships. The situationappears to be similar for trucks, buses, river barges and port handling equi_ment. Much equipmentis outdated,thereby imposingunnecessarily high costs to the economy; examples are the still-usedsteam locomotivesand ancient cranes in several ports. Some equipmentis no longer appropriate. As a consequenceof the central planning system, a large share (78Z) of the nation's truck fleet is used by enterprisesfor own-accounttransport, with only half the capacity utilizationof specializedtransport companies. Followingthe recent economic reforms, servicequality has, however, greatly improved. As a consequence, vehicles reserved for own-accounttrucking can be reduced to less than 50X of the total fleet.

4.8 Regulationsand Tariffs. Until 1988, most cargo allocationwas determinedby central and provincialgovernments, generally without much regard for client'sneeds. In that policy environment,the producersand consumersof goods had little to say on wl,t transportmode they could use, unless they controlledthe transportmeans themselves--hencethe enormous growth of own-accounttrucking mentioned before. Tariffswere set without - 70 - regard to costs and representeda complex system of subsidies,cross subsidies and implicit taxation. More recently,the transportsector has been freed from cargo allocation,tariffs have been adjustedto better reflect the costs of providingtransport services, and transportcompanies have been given autonomousstatus--which includes the stipulationthat they must be financiallyself-sufficient.

4-9 There are now a large number of state-ownedtransport companies competingfor clients. Moreover, severalproduction and trading companies have begun to offer public transportservices with their own-accounttrucks and buses; this was legalizedin August 1989, with the proviso that those vehicles pay the same tax as public transportvehicles (5X to 10% of revenues). Particularlyin the south, there are also many cooperativesand some private firms providing road and river transportservices. Cooperative and private transportenterprises are now being encouraged,but their numbers are still small.

4.10 Tariffs are still controlledby the central Government,at least for servicesprovided under a predeterminedplan for each transportcompany. For any servicesprovided outside that plan, "flexible'tariffs are charged based on negotiationsbetween the transporterand his client. This facility seems to be extensivelyused to attract cargo for otherwiseempty back-haul trips. The official tariffs are establishedby the State Pricing Committeefor five commoditytypes, ranging from coal and other bulk cargos to high-valuegoods such as fresh fruit and personal goods. For trucking,these tariffs also depend on the road type and the distance travelled,and for inland water transporton the river classification;the railwayshave a separate,higher tariff for transportdistances under 30 km.

4.11 The railways and state-ownedriver transportcompanies receive subsidizeddiesel fuel (154 donglkg). Road transportcompanies also receive subsidizedfuel for trips to border provinces;for all other trips they must pay the full price (624 dong/kg),which approximatesborder prices. The differencein fuel prices is given as one of the reasonswhy government controls the tariffs of each transportmode.

Effects of Recent Economic Reforms

4.12 Tight regulatorycontrols, non-economic pricing and centrally determinedsubsidies governed the transportsector until 1988. This has caused economic distortions. The positive effectsof the reformscan already be seen in improvedservice quality and increasedequipment utilization. Equipment shortageswere reportedto be common before 1987; few such problems exist now, althoughneither the fleets nor the transportvolumes have changed substantially. Some companiesindicate that they could further increasethe productivityof their equipment.

4.13 The new policy which requires financialself-sufficiency from all transportenterprises has obliged their managementsto think of innovative ways for increasingrevenues. For example,half of the 1,000 persons employed by the Hanoi river port are now making bricks. One of the river transport companieshas gone into the buying and sellingof sand, rather than iust transportingit for clients. The dismissalof staff is generallyregarded - 71 - only as a last resort. Nevertheless,staff layoffswill become necessary for several companiesto avoid insolvency.

TransportSector Issues and Options

4.14 The Governmenthas been implementinga program of reformswhich aim to create the right institutionaland financialframework for economic growth. These reforms open up opportunitiesfor improvedtransport efficiency, but also present the sector with difficultchallenges to adjust to the new economic environment. The transportersthemselves have to adapt their approach to such managementaspects as marketing,accounting and financial control. Officialsresponsible for the broader aspectsof the sector have to learn new decision criteriawhen dealingwith such issues as pricing, taxation,subsidies, regulations, and employment.

4.15 Tariffs and Subsidies. Some major reformshave been achievedwith the introductionof market pricingmechanisms and the partial eliminationof subsidieswhich had consumed a large share of the Governmentbudget. Despite these achievements,further measures are requiredto s.rengthenthe market orientationof the transportsector. Most freighttariffs are still controlledby Government,and transportersare subsidizedby receiving facilities,equipment, and fuel at uneconomicallylow prices. While certain subsidiesmight need to be retainedon social and possibly economic grounds, they should be transparentand designatedfor specificpurposes. The applica- tion of economicprinciples to the pricing of transportservices will no doubt cause considerabletariff increasesover their present levels. At present, tariffs do not cover economic costs of fuel and other inputs. Even the high "commercial"fuel price barely covers its economiccost (the price of diesel fuel is actually 8Z below border prices). Hence there is a need to adjust the tariffsupwards.

4.16 Cost Recovery for Infrastructure. In principle,the railway and port enterprisesmust now generate their own funds for the maintenanceand possible expansionof their facilities. Roads and inlandwaterways, however, continue to be funded directlyby Government. Road and river transportthus receivean implicitGovernment subsidy under the current system. In order to remove this subsidyand economic distortionsbetween differenttransport modes, a system of road (and river) user charges should be devised.probably consistingof surtaxeson fuel and vehicles.

4.17 Most European countries,for example,not only cover their recurrent and capital highway expendituresfrom road user taxes, but also financepart of the general budget. India does the same, while Thailandmeets about 40Z of its current highway sector budget from users' taxation (primarilythrough a 502 ad valorem tax on fuel). Irrespectiveof whether user taxes finance only the road sector or also the general budget, it is importantthat they be raised in ways which do not cause misallocationin resourceuse.

4.18 Regulations. The Ministry of Transportcontrols access to the public transportindustry at the national,and the provincialTransport Boards at the local levels. Current governmentpolicy is to encouragethe cooperativeand private sectorst this is likely to increase investment,stimulate employment and, through increasedcompetition, improve transportservices. There is, - 72 - however, a possible conflict of interestwhich deserves close monitoring: the institutionsresponsible for regulatingaccess to the public transport industry are themselvesowners of transportenterprises, and might thus eventuallybe temptedto use their authorityto limit competitionwith their own companies.

4.19 An issue of particular importanceconcerns the role of public carriers in the transportindustry compared to that of own-accountcarriers. The latter refers to enterprisesthat transporttheir merchandisein their own trucks (or barges), rather than contractingtransport out to public carriers. At present, the share of own-accounttrucking is extremelyhigh in Viet Nam. In the past, many enterprisespreferred to rely on their own internal organizationsto provide transportationbecause of the poor servicesof specializedtransport enterprises under the system of administrativealloca- tion. This has led to an inefficienttruck utilizationof the country's overall fleet (para. 4.7).

4.20 In market economies,own-account trucks typicallymake up only a relativelysmall proportion (20% to 40Z) of the total fleet, generally providing specializedor construction-relatedtransport. As the transport industrybecomes more competitiveand efficient,enterprises will find out that they can save money by contractingout transportationto specialized transportfirms. Also, they may wish to use their frequentlyidle trucks to transportgoods for paying clients, i.e. to provide public carrier services. Own-accounttrucks providingpublic carrier servicesshould be obliged to pay the same taxes as the public transportcompanies themselves; steps in this directionare already being taken.

4.21 Rehabilitationand Maintenance. The rehabilitationof the existing infrastructureis an urgent priority to achievesubstantial gains in transport efficiency. This is already reflectedin the Government'sinvestment proposalswhich aim primarilyat road upgrading,bridge repairs, dredging,and similarworks, rather than new projects. Moreover, the 1989 road maintenance budget appears to have been increasedover that of 1988, while funds for new constructionhave declined -- anotherwelcome sign of changing prioritiesin the transportsector. Mechanismsneed to be devised to ensure adequate fundingfor road maintenance. With increasedrevenues from road user charges, it should become possible to develop a reliablyfunded road maintenance program.

4.22 InvestmentPriorities. There is an enormous discrepancybetween the needs to upgrade the obsoletetransport system, and the resourcesthat are likely to be availablefor transportinvestment. It is thus vital that those resourcesbe used efficiently,following the overall objectiveof servingthe country'seconomic developmentas effectivelyas possible. In the short term, this will mean: (a) rehabilitationof key infrastructure;(b) selective modernizationof obsoleteequipment; and (c) upgradingof the capacity for recurrentmaintenance. If the economy starts expandingat a more rapid pace, transportdemand could increase rapidlyand severe bottleneckscould develop by the mid-1990s. Thus, the planning and design for capacity expansionis anotherhigh-urgency task to ensure that additionaltransport infrastructure could be built rapidly once the need arises. Housing constructionalong major roads will probably continue at a rapid pace and might later prove a major - 73 - obstacle to capacity expansion. Rights of way should thus be earmarkedearly on.

4.23 The optimizationof investmentpriorities is unusually difficultin Viet Nam for two major reasons: first,most previous transportplanning was focused on non-economiccriteria, and thus only a rudimentarytransport data base has been compiledwhen comparedwith other countries;and second,the recent economic reforms are greatly affectingsuch key planning parametersas goods production,intermediate and final consumption,and economic transport costs; past trends in transportcharacteristics may thereforenot be relevant for forecastingfuture demands. Thus, the preparationof a transportinvest- ment strategy for the 1990s is a high priority. A UNDP-sponsoredTransport Sector Review, planned for 1990, is a welcome first step in that direction.

4.24 Above all, the costs of possible transportimprovements need to be related, in a quantitativeway, to the benefits they are likely to generate. The country cannot afford uneconomicinvestments, such as the new road/rail bridge near Hanoi which carriesvery little traffic--forthe same investment hundreds of derelict bridges could have been rehabilitated. The future strategy for the railwaysneeds to be studiedcarefully. In view of the readily availablealternative of cheap water transportnearly everywhere,the railways'share in bulk commoditytransport will probably remain small, as in Japan.

C. Enersv

4.25 Compared to most other developingcountries, Viet Nam is relattvely rich in energy resources,but both productionand consumptionof energy are still at very low levels on a per-capitabasis. Viet Nam's energy endowment includeslarge coal (anthracite)deposits of excellentquality, an important hydropowerpotential and a large but shrinkingsupply of biomass. There is also a possibilitythat Viet Nam will become a substantialproducer of oil and gas. Viet Nam thus has more options for meeting its energy needs than most developingcountries: not only does it have the capacityto meet the require- ments of a growing economy, but at the same time the role of the energy sector could be transformedinto an importantsource of economic growth and foreign exchangeearnings.

4.26 Over the short-term,however, inadequaciesin the delivery of energy to productivesectors could emerge as a constraintto economic growth. The Governmentneeds to addresswith some urgency three major issues: (a) large amountsof financialresources need to be mobilizedbecause of the high capital-intensityof energy investments;(b) the efficiencyof public sector entities involved in the sectorwill require strengthening;and (c) following years of relativeisolation, a major infusionof modern technologyis neces- sary.

4.27 While large amounts of public resourceshave been allocatedto the energy sector over th.elast decade (aboutone-fifth of total public invest- ment), the sector remains relativelyunaffected by the economic reforms undertakenby the Governmentin other sectorsof the economy,with the result - 74 -

that sectoralperformance, as measured by output or efficiency,is not as high as it could have been. Greatercommercialization of sector activitiesand closer reliance on market forces are in order. Two issues in particularneed to be tackledwith some urgency to facilitatethe orderly developmentof the sector: (a) pricing reformsshould be broadenedto encompassenergy prices, particularlyelectricity tariffs which need to be brought up to a level commensuratewith system developmentcosts; and (b) the institutionalframe- work of the sector needs to be rationalizedby strengtheningthe autonomy of operatingcompanies, while at the same time improvingsector-wide planning and coordination.

Electric Power

4.28 Since 1975, the electricpower sectorhas receivedpriority in the allocationof availableinvestment resources as the Governmentemphasized access to electricityas a means of fosteringeconomic development,both in the urban and rural areas. Yet, the supply of electricityhas remained extremelylimited: total installedcapacity amounts to a little less than 2,000 MW with availablecapacity only about half this amount. Present electricitygeneration is about 7 billionkWh. The Governmentanticipates electricitydemand to increaseto 17.5 billion kWh by 1995 and 25 billion kWh by the year 2000. Meeting these targetswill depend upon a number of factors, in particularits ability to mobilize the large amounts of resourcesrequired for investment. Power supplywas for many years characterizedby extreme scarcity,which requiredthe establishmentof an elaboraterationing system. This situationhas only of late seen a measure of improvement,at least in the northern and southern regions,as additionalthermal and hydroelectric generationcapacity installedwith Soviet aid is being commissioned. Yet, per-capitaelectricity consumption figures indicate that substantialsup- pressed demand remains.

4.29 Electricitysupply is organizedin three separatesystems: two interconnectedgrids in the northern and southern regions,respectively; and a compositeof small isolatednetworks in the central region. These three systems are managed by three separatecompanies which operateunder the purview of the Ministry of Energy. The power sector has been the recipientof a major share of public investmentover the last decade and most of these investmentshave been for power generationand, to an extent,associated transmission. As a result, electricityoutput has increasedrapidly in recent years. In the north, the (4 x 110 MW) Pha Lai coal-firedplant came on line between 1983 and 1986, and the first of the eight (240 MW) units of the large (1,920MW) Hoa Binh hydro projectwas commissionedin 1988 with completion scheduledby 1995. In the south, the first two units of the (4 x 100 MW) Tri An hydro plant were commissionedin 1988 and the two remainingunits will be commissionedby the end of 1989. The central region is still entirely dependenton isolateddiesel stationsinstalled in the coastal cities and provincialcenters.

4.30 Hydropower. Viet Nam has a large, albeit largely untapped,hydro- power potential. This potentialderives essentiallyfrom the water resources of the two river delta systemswhich dominate the country'shydrology: the Red River Delta in the north and the Mekong Delta in the south. In general, water flows show a strong imbalancebetween rainy and dry seasons,with on the - 75 - average as much as 802 of water dischargetakLng place during the six-month rainy season. While the amount of firm energy varies from plant to plant, the power developmentprogram of each regionwill need to feature sufficient thermal capacity to supplementthe output of hydropowerplants during the dry seasons.

4.31 Because of the central ;ole of water resources,hydropower develop- ment needs to be planned in the context of an overallwater management strategy that takes account of the multiple possible contributionsof water management schemes, includingelectricity generation, flood control, irrigationand improved river navigation. Multiple usages add to the attract- ivenessof hydropowerdevelopment but make planningmore difficult. Thus, constructionof the Hoa Binh hydro project has significantlyreduced down- stream flooding and has improved irrigationin the Red River Delta.

4.32 While hydropowerprojects are likely to form a substantialpart of a least-costpower system expansionprogram, especially if water control benefits are taken into account, the data base required to plan such develop- ment is largely lacking. Cost data are either unavailable,outdated or based on incompletefeasibility studies. Previous constructionexperience is also of limited relevancebecause of improperproject cost accountingprocedures (relatedin part to the valuationof Soviet imports and to the use of unrealisticexchange rates). This notwithstanding,a preliminaryassessment of possible hydro developmenthas been carriedout and a large number of possible sites suitableto meet future power demand have been identified.

4.33 Thermal Plants. Thermal stationstotalling 960 MW presentlyaccount for the largest share of power generationand will remain an essentialelement of future developmentplans as thermalcapacity will continue to be required to compensatefor the seasonalityof hydropoweroutput. Thermal power stationshave traditionallybeen fired in the north with coal, and in the south with oil. In the future,the choice in the south will be between fuel oil, northern coal and offshorenatural gas. The coal option clearly faces difficult short-termconstraints but would still warrant investigation particularlyif opportunitiesfor coal exports are not as plentifulas expected. Coal-firedpower stations locatedin the north suffer from a number of difficultiesrelated to the transportand handling of coal; in particular, unloading facilitieshave caused problems and plant technologyis outdated. Moreover,use of poor quality coal without significantpollution abatement equipmentis rapidly becominga source of environmentalconcern as the impact of ash dispersalon agriculturaloutput in surroundingareas is increasingly being felt.

4.34 Transmissionand Distribution. While most provincialcapitals are now linked to a power source, the capacityof transmissionlines as well as that of local distributionnetworks is grossly insufficientin relation to the developmentof generatingcapacity and potentialdemand. Constructionof some 5,000 km of 110/220kV lines is envisagedduring 1991-95 to provide sufficient capacity to handle the increasedoutput from Hoa Binh and other planned gene- ration facilities. In comparison,little attentionhas beer.given to local distributionnetworks which are the weakest link in the system. Investmentin Qistributionequipment has been minimal for the past 15 years in the south and for a much longer period in the north, and distributioncontinues to receive - 76 - the smallest share of investmentresources. As a result, existing networks in the north are in a severe state of disrepair,with very high losses being recorded in low-voltagenetworks (up to 40Z in some sectors, including metering losses). Not only are the distributionsystems very old and ineffi- cient, but with the growth in demand,they have become overloadedand unre- liable. This problem is compoundedby the undersizingof new lines because of resourceconstraints.

4.35 The utilitiesare aware of the need to place major emphasis on upgradingand expandingtheir distributionsystems. They estimate that more than two-thirdsof losses are due to the incidenceof antiquatedequipment and to metering losses (owingto a severe shortageof meters). Reducing power losses representsan efficientand desirablemeans of effectivelyincreasing consumptionand needs to be pursued actively. Yet, current plans for expandingthe geographicalcoverage of existingdistribution networks appear insufficientin relationto the magnitudeof investmentsproposed for genera- tion and transmission. This is partly due to the fact that Soviet aid, which is the dominant source of investmentfinance, has traditionallybeen focused on large-scalegeneration projects (and associatedhigh-voltage transmission lines) to the detrimentof less visible investmentin distributionfacilities.

4.36 InvestmentPriorities. While the power sectorhas consistently receiveda large share of availableinvestment resources, power availability could remain a major constraintto economicdevelopment unless this level of investmentis increasedand more sharplyfocused on priority areas. While substantialadditional generating capacity will come on stream over the next few years, particularlyin the north, strengtheningof the transmissionand distributionsystems will be required to make full use of the additional supplies. Assuming completionof the Hoa Binh and Tri An hydro projects and associatedtransmission lines takes place as scheduled(with Soviet assist- ance), prioritiesfor investmentwould include: (a) additionalgeneration capacity in the southernand central regions; (b) expandingthe capacity of distributionnetworks in urban areas to ensure maximum utilizationof addi- tional power supplies;(c) selectiverural electrificationin areas with high irrigationloads (both in the Red River and Mekong Deltas); and (d) rehabili-'- tation of existing generationand transmissionfacilities to improve effi- ciency.

4.37 Power System Planning. While a number of discrete feasibility studieshave been completedor are under preparation,the integrationof potentialinvestments into a consistentstrategy has not yet taken place. An immediatepriority is to establisha least-costpath to system expansion. Proposalsfor new hydro developmentneed to be prioritizedin order to ensure that the lowest unit-cost sites are developedfirst. Similarly,with constructionof a national transmissionsystem set as a long-termgoal, the various proposals for transmissionlinks, interconnectionof load centers,and expansionof distributionnetworks need to be placed in the context of an internallyconsistent least-cost framework. More generally,the orderly developmentof the sector requires that the basis for investmentdecisions be shifted from discreteproject developmentas has been the rule in the past to integratedstrategic planning. For this purpose, appropriatemethodology, includingcomputerized tools, will have to be used. - 77 -

Oil and Gas 4.38 Petroleumhas recentlyacquired a specialpreeminence within the energy sector as the generallyfavorable outlook for petroleumproduction has been confirmedby severaloil and gas discoveries. A number of exploration contractswere signedwith foreignoil companieswhich will ensure a continua- tion of explorationon a significantscale, and oil output is picking up as past investmentfor offshore developmentfinally comes to fruition. Crude oil productionnow amounts to about 1.5 million tons per year (mty),compared to current imports of 2.6 mty of oil products. Viet Nam has the potential,if not of becoming a substantialexporter, at least of producingincreasing quantitiescommensurate with its growingneeds as its economy expands. The General Directoratefor Oil and Gas is responsiblefor coordinatinggovernment policies in the area of petroleumexplorution and production. PetroVietnam, which was establishedin 1977, acts as its technicalarm. Oil production is now concentratedin a joint-venturecompany with the Soviet Union (Vietsovpetro)which operatesunder the purview of a joint-governmentmanage- ment council.

4.39 Exploration. Petroleumexploration undertaken during the mid-1970s resulted in three significantdiscoveries in the southernoffshore area. Additional smaller discoverieswere made in the 1978-80period as a few foreigncompanies briefly resumedexploration following the end of the war. Explorationby internationaloil companiescame to a standstillstarting in 1981 as all remainingcompanies withdrew from the country. However, this preliminaryexploration effort had by then largelyconfirmed that the offshore areas south of the Mekong Delta were among the most promisingpetroleum bearing zones in the South China Sea as prognosticatedby earlier geophysical surveys. In comparison,little is known about the offshoreareas located north of the 13th parallel because of the paucity of earlier exploration results. Comparedwith offshore areas, the onshorepetroleum potential of Viet Nam appears limited. Explorationhas not yielded any significant discoveries,although some positive resultshave been reported south and northeastof Hanoi.

4.40 The Governmenthas recentlybeen quite successfulin its strategyof attractingforeign capital to undertakeoffshore exploration. Actually, active explorationhas now resumed followingthe finalizationof a number of productionsharing contracts in 1988/89. Six foreign companies(or partner- ships) are now active in Viet Nam, having contractedexploration rights for a total of 14 blocks. Explorationlicenses are based on standardproduction sharing contractarrangements under which all explorationrisks and costs are borne by the foreign companies. Contract terms vary with each block although they are generallyin line with conditionsapplied in similarcountries in the region. However,while this resumptionin explorationactivity augurs well for the future of Viet Nam's petroleumsector, much remainsto be done to establisha comprehensiveregulatory and administrativeframework to guide the relationshipbetween host country and foreignoperators.

4.41 Oil Production. While oil productionstarted about twenty years ago, output has only recentlystarted to pick up. Productionfrom the Bach Ho (White Tiger) field, the only one currentlyin production,is now averaging - 78 about 1.5 million tons per year and is expected to increaseto 5 mty by 1993/94. Productionfrom other fields (e.g., Big Bear, Dragon) is expected to start around 1992, contributingto a plateau productionof about 5.5 million tons per year during 1993-99. The oil is rather light (API of 39 to 39.2), with a low sulfur content (0.05Z)but high paraffin content. In general, oil quality is similarto that of the waxy Indonesian/Malaysiancrudes (e.g., Minas, Tapis).

4.42 Natural Gas. A small gas field was discoveredin the Red River Delta in the course of petroleumexploration. Productionfrom this field (Thai Binh) amounts to about 50 millionm 3/year, which is used mostly for power generation. More generally,the northern onshorepart of the country is consideredgas prone and additionalquantities could over time be discovered. In the immediatefuture, however, the main potentialin the gas subsectorlies with the possible utilizationof the quantitiesof gas being produced in associationwith oil in the southernoffshore.

4.43 With the anticipatedincrease in oil production,the possibility arises of identifyingeconomic uses for the associatedgas which is now being flared. Developmentof this gas resourcewould call for the constructionof a 130-km offshore pipeline and onshore distributionfacilities. The economics are promisingenough to warrant a detailedreview of productionand utiliza- tion prospects. Possible gas uses would includepower generation,local industriesand commercialusage in the Ho Chi Minh area. A comprehensivegas utilizationstudy should be undertakenfirst.

4.44 Oil Refining. With the advent of oil productionon a substantial scale, Viet Nam is now consideringthe constructionof a refineryto process domestic crude. A preliminaryconcept study carriedout by Soviet advisors recommendeda hydroskinmingfacility with an initialcapacity of 3 mty. Basic engineeringdesign is expected to be completediby mid-1990. In the meantime, land preparationhas been started. Constructionof a refinery is seen as a way of alleviatingthe country'sdependence on petroleumproduct imports. The alternativewould be to continue exportingcrude and importingproducts, or to contract a foreign refinery to process domesticcrude for a fee. Although a cost-benefitanalysis of domestic refininghas not been carried out, the governmentis aware of the limitedeconomic viability of this refinery project. The main difficultyis that domesticrefining would result in surplusproduction of fuel oil, which would account for about 50? of total output in the absence of secondaryconversion facilities. Export of the residual fuel oil would considerablyreduce the attractivenessof the refinery investment. The merits of exportingViet Nam's low-sulfurwaxy crude oil to countrieswhere low-sulfurproducts are at a premiumbecause of more advanced industrialization,or where suitablecracking facilitiesare available,should be carefullyweighed. Alternatively,inclusion of a residualcatalytic cracking facilityas part of the originalplant configurationshould be actively considered.

Coal

4.45 Viet Nam's large coal reservesconsist almost entirely of anthracite of differentgrades. Deposits,which are locatedmostly in the north, are generallyof good quality and many of the fields are suitable for open-pit - 79 - mining. However,while coal still accounts for almost half of Viet Nam's primary commercialenergy needs, the current level of exports is way below what was achieved in earlier years. Productionin 1988 was 6.3 million tons, of which about 300.000 tons were exported (down from over 1 million tons ten years ago). The Governmentis intent on resolvingthe operationaldifficul- ties that have plaguedmining operations.

4.46 Output has fluctuatedin recent years, being constrainedby a combinationof infrastructurebottlenecks and mining problems due to failures and shortagesof equipment. Sizeableinvestments would be needed to expand coal production,including: (a) wharf rehabilitationand channel dredging; and (b) rehabilitationand expansionof washing plants. Investmentfor mine capacity expansionis also envisaged (particularlyunderground mining equipment). Estimatesof capital requirementsduring the period 1990-95 range up to US$250 to $300 million; this investment,however, will have to be financedby the producingenterprises themselves, possibly throughjoint ventureswith foreignpartners. However,before proceedingwith such a large investment,a number of issueswould require careful review, includingexport prospects in view of the shrinkingworld market for anthracite.

4.47 Biomass. Viet Nam has a substantialbiomass endowment,consisting of forestry resourcesand agriculture-relatedproducts. Overall, approximately 9Zo of energy consumptionby householdscomes from vegetablesources, repre- senting about 32 million tons of wood equivalent (12 million toe), with fuelwood accountingfor 80Z of the total. The sustainableannual yield of biomass, includingfirewood and agriculturalwastes, is estimatedat about 80 million tons of wood equivalent. This indicatesthat the country'sfuelwood supply could in theory sustain a reasonableincrease in consumption. However, there are indicationsthat deforestationis becoming an increasinglyacute problem in denselypopulated parts of the country. An importantmeans of effectivelyincreasing fuelwood supplies is through the promotionof more efficientwood stoves and charcoalkilns. Both the Energy Instituteof the Ministry of Energy in Hanoi and the Power CompanyNo. 2 in Ho Chi Minh have sponsoreda number of pilot projects,although successhas been limited for lack of funds.

Issues and ODtions in the Energy Sector

4.48 Price Reform. In the past, Viet Nam has sufferedfrom energy shortageswhich have been one factor in the poor capacity utilizationand performanceof the industrialsector. Low energy prices have been one importantreason why capacityhas not increasedin line with demand, as revenues of the power companieswere not sufficientto financenecessary investments. Very often, revenueswere even inadequateto provide basic maintenance. The extensionof price reform to include electricpower, petroleumand coal is an essentialstep towards removingbottlenecks in the energy sector. Without removing these bottlenecks,future developmentof industry and non-agriculturalemployment in rural areas could be severely handicapped. Energy is by and large an input into other industrialand commercialactivities, and users will use energy efficientlyonly if they face the true economic costs. Particularlyin the electricpower sector, these should include an allowancefor the cost of capital employed. - 80 -

4.49 Remainingdistortions in coal and petroleumprices relate mostly to the use of diesel in water and railwaytransport. As discussedin the transportsection above, plan allocationprices in transportshould be eliminatedas soon as possible. Road transportfuel should not only reflect the full cost of imports and a margin for distribution,but should in addition includea road "user fee" in form of a surtax in the order of 502 to finance road maintenanceand construction. With a road user fee, the rationalefor continued fuel subsidiesfor the railwayswould disappear. The coal mines are now receivingthe full export price for exports,but domestic sales are still at about half export prices. Domestic coal prices should be increasedto reflect total productioncosts (includinginvestment costs) and the electric power companiesshould be permittedto pass on the price increaseto consumers. Financingthe requiredinvestments in mining and coal handling should then be less of a problem.

4.50 A major revision of electricityprices has been introducedin August 1989, and this has improved the financialsituation of the electric power companiesconsiderably. The new tariff scheduledifferentiates by user, with householdsand industrialusers paying the lowest prices (2 to 3 USc/kWh) and commerce and foreign entitiesthe highest (6 to 9 USc/kWh). Except for tariffs applicableto commerceand foreignentities, tariffs are still very low by internationalstandards and do not fully reflectthe costs. Systems costs are unlikely to be very differentfrom neighboringcountries, where industrialusers pay 5 to 6 USc/kWh plus a demand (kW) charge and consumers generallypay 6 to 9 USc, except perhaps a special "life-line"rate for the first 50 kWh per month to protect poor consumers. The present tariff structureshould thus be revisedas soon as possible to better reflect capacity and fuel costs. An upward revisionof electricpower prices to reflect long-runmarginal costs of power system developmentwould make a major contributionto the poor financialstatus of the electric power companiesand would make it possible to manage these as commercialentities. The self- financingof their investmentprogram could then be raised significantly,with the remainderprovided by external financing.

4.51 Organizationand Planning. To meet the growingenergy needs of the economy the Governmentenvisages a continuationof public investmenton a large scale, particularlyfor power development,combined with increased relianceon alternative,mostly private, sources of financingespecially for oil explorationand developmentand possibly also for coal development. Accordingly,government attention needs to focus on measures designed to: (a) strengthenthe quality of public investmentin the areas where continua- tion of direct governmentintervention is required;and (b) facilitateand better regulate the activitiesof other participants.

4.52 The implicationsof economic reformson the organizationof the energy sector have not yet been fully worked out and the sector'sinstitu- tional frameworkstill largely reflectsthe pattern of responsibilitiesas it prevailedbefore the reformswere enacted. In particular,despite calls for greater enterpriseautonomy, responsibilities of the power companiesand other operatingentities in the energy sector have not been clearly delineated. Responsibilityfor long-termplanning is vested with the Ministry of Energy. While the power companiesare directlyresponsible for plant operations,they - 81 - have little say in the area of system planning;nor have they developedthe necessary in-house expertise. The et-essivefocus on large-scalegeneration and transmissionto the detrimento' lower voltage facilitiesresults to a large extent from the limited invo:iementof the operatingcompanies in strategicdecisions.

4.53 In general, the Governmentneeds to define more clearly the respon- sibilitiesto be assumedby the supervisoryministries and the operating companies,respectively. The current ambiguityis evidencedby the number of governmentofficials carrying multiple assignments(at once within a coimpany and its supervisorybody). This approach to public service and public enterprisemanagement clearly makes for insufficientaccountability at the company level and a dilution of supervisoryresponsibilities at the ministeriallevel, leadingultimately to conflictsof interest. Sectoral efficiencywould call for substantialreinforcement of operatingentities, both in regard to their functionsand staffingposition in some categoriesof personnel. At the same time, ministerialresponsibilities should be focused on policy making, strategicplanning and regulatoryfunctions. In particular, primary responsibilityfor investment(system) planning and project implemen- tation should be directlyassigned to the companiesconcerned.

4.54 Responsibilityfor project implementationhas traditionallybeen diffused among a number of ministriesand entities,and the resulting ambiguityhas been partly responsiblefor a generallypoor implementation record. Until 1988, constructionof all major works (includingpower genera- tion facilitiesover 100 MW) was handled by the Ministry of Construction. While most key decisionsalso involved the Ministry of Energy and, for hydropowerprojects, the Ministry of Water Resources,the power utilitieshad little direct involvementuntil the new facilitieswere ready for commis- sioning. This set up was recentlymodified and the utilitiesare now at least nominally responsiblefor plant design and constructionsupervision. The Ministry of Constructionwould in the future act as a contractorrather than as an independentparty.

4.55 A review of availableinvestment options in the energy sector underscoresthe need for close coordinationamong subsectors(coal, petroleum, electricityand biomass). Actually,the interfaceamong subsectorsis likely to grow more complex as more developmentalternatives become available (e.g., associatedgas development,oil refining)and governmentattention is called on a broader range of issues (e.g., coal-relatedpollution in urban areas, long-termsustainability of biomass supply). As the sector is presently organized,no single governmentbody is responsiblefor overall energy planning. In view of the tasks ahead, the Governmentmay want to consider merging the present GeneralDirectorate for Oil and Gas with the Ministry of Energy, thereby creatingan entitywith sufficientcoverage to be in a position to exercise the necessaryarbitration among alternativestrategic decisions. Such an integratedinstitutional framework would greatly facil- itate policy making and coordinationof investmentdecisions at a difficult time. - 82 -

D. Telecommunications

4.56 While the mission has not been able to cover telecommunications separately,it is quite obviousthat telecommunicationsservices in Viet Nam are very poor. Existing equipmentis old and obsoleteand provides poor and exceedinglyunreliable service. The number of telephonesubscribers and circuits is only about one-tenthof that of other countriesat a similar level of income. More sophisticatedservices, such as telex, telefacsimileand electronicdata transmissionare even more rudimentaryor entirelymissing. The developmentof a market-orientedeconomy and particularlyof the export sector will requirerapid expansionand improvementof telecommunications services,otherwise Vietnamese enterprises will not be able to operate efficientlyand to compete in internationalmarkets.

4.57 The organizationalstructure of the teleconmunicationssector is similar to that of the transportand energy sectorsdiscussed in more detail above, with a governmentdepartment, the GeneralDepartment of Post and Telecommunications,in charge of operations,planning and sector development. What is being recommendedfor the agencies in the transportand energy sectors is also broadly applicableto telecommunications.There should be a clear delineationof policy and regulatoryfunction on the one hand, and operating functions (includingsystems planning and investment)on the other, preferably vested in an autonomouspublic enterprisethat has the same structure, responsibilityand autonomy as other state enterprises. Like transportand energy enterprises,the telecommunicationscompany could be entirely self- financingand shouldbe responsiblefor profits and losses. As opposed to industrialenterprises, however, the telecommunicationscompany is unlikely to face any competitionand considerableslack and inefficiencymight creep into its operations,even if it is made an autonomousenterprise. But this may still be preferable to the present situationwhere only a tiny fractionof the required communicationsservices can be provided. - 83 -

V. HUMAN RESOURCES

A. Introduction

5.1 Viet Nam has given high priority to free public educationand health care, both as basic rights to all citizens in a socialistsociety, and as means of speedingeconomic development. In the educationsector, the govern- ment's goals have been to provide (a) free access to basic educationfor all, and (b) free access to educationand trainingbeyond the basic level to all who meet the entrance requirements. In the health sector, the government's goals have been to control endemic and communicablediseases, ensure adequate nutrition,encourage family planning,and provide an egalitariansystem of basic health care to the populationat large. Governmentpolicy in the health sector has deliberatelyfocused on preventivecare for all, rather than curative care for a few.

5.2 The governmenthas attemptedto achieve these goals in educationand health through careful planning and through rigidlycontrolling costs, particularlythe salariesof teachers and health-carepersonnel; Viet Nam hac thus been able to avoid the excessivelycostly educationand health systems which characterizemany other countries,both developedand developing. At the same time, Viet Nam has managed to achieve levels of basic educationand health status that are relativelyhigh comparedwith other low-income countries. However, there remain seriousdeficiencies in both the quality and coverage of social services,and the same system of centralizedplanning which has been relativelysuccessful in generalizingbasic educationand health has also stifled the economy to such an extent that resourceshave not been adequate to expand the educationand health systemsto keep up with the growingpopulation and respondto pressing social needs. Indeed,within the last few years, some indicatorsof educationand health coveragehave gotten worse, and as the economyundergoes further reform,there will be even more pressures on the availabilityof resourcesfor the social sectors. It will thus be particularlyimportant in the future to attend to the social aspects of the economic adjustmentprocess to avoid erosion of services,support basic needs of vulnerablegroups, and prepare for longer term developmentof Viet Nam's considerablehuman potential.

B. Present Status

Achievements

5.3 It has long been an explicitpolicy of the governmentto provide basic educationand basic health care to all. Starting in 1954 in the north and in 1976 in the south, the governmentclosed pri-rateschools, clinics, and hospitalscatering to the wealthierpopulation and redirectedresources to free, public basic educationand basic health care. Coveragehas expanded dramatically,particularly within the last 15 years. Although scattered evidence indicatesthat urban areas continue to be somewhatbetter provided - 84 - with schools and health-carefacilities than rural areas, and that provinces in the Mekong and Red River Deltas are better provided than the mountain provinces,one still finds neighborhoodand villageprimary schools and health posts throughoutthe country.

5.4 Education. This impressiveexpansion of coverage is reflectedin availableeducation indicators. In 1986, Viet Nam had estimatedgross enroll- ment ratios of 1002 in primary educationand 43Z in secondaryeducation, and net enrollmentis above 902, second only to China among low-incomecountries around the world. Even more impressiveis the fact that 64Z of children completedthe primary cycle (1985),which is significantlyhigher than other low-incomecountries and compares favorablywith the average of 62% for Asian countries. Similarly,Viet Nam's estimatedadult literacy rate, 82X in 1987, was surpassedby only two countriesin a group of 23 low-incomecountries and is comparableto more economicallyadvanced countriesin the Asia region. Enrollmentratios by sex and other data indicatethat Viet Nam does particularlywell in getting girls into school:the ratio of females to males in primary and secondaryeducation is among the highest among low-income countries. Other notable featuresof the educationsystem are the high pro- portion of children going throughkindergarten before entering primary school and the relativelyhigh incidenceof math and sciencesin both lower and secondarycurricula.

5.5 Health. The expansionof coverage is also reflectedin available health indicators. In 1987, the life expectancyat birth in Viet Nam was 66 years for the populationat large, 64 years for males, and 68 years for females. Although the figuresfor China were three to four years higher, this is significantlybetter than other low-incomecountries and compares favorably with severalmore economicallyadvanced countriesin Asia. Maternal mortality in Viet Nam per 100,000 live births in 1980 was about 110, a figure far lower than those of the other low-incomecountries except China and Zambia. Similarly,infant mortality in Viet Nam per 1,000 live births in 1987 was about 46, a figure lower than those of the other low-incomecountries except China, although there is considerableregional variation, with some areas reportingvery high infantmortality rates. The crude death rate in 1987 in Viet Nam was 8 per 1,000; among the comparatorcountries, only China's Was lower (7 per 1,000). Despite these achievements,health status in Viet Nam could still be improved to levels that would comparemore favorablywith other neighboringcountries which are more developed,and targetedhealth interven- tions to deal with endemic diseaseswould yield high returns.

5.6 Local Responsibility. Although the Vietnameseeconomy has been, at least in theory,highly centralized,the provisionof social services is in fact highly decentralized. While the Ministry of Educationdetermines the salary scale for teachers,the financingof educationis largely the respon- sibilityof the provinces. Similarly,the Ministry of Health determinesthe salary scale for health personnel,but the financingof most hospitalsis the responsibilityof the various provinces,and the financingof basic health care in health posts is the responsibilityof the communes (villages,in rural areas; neighborhoods,in urban areas). The strengthof this system is that it is more successfulthan a centralizedsystem at mobilizingresources at the grass-rootslevel. When local people have the responsibilityfor providing their own social services,and when they can see that their resourcesare - 85 - being used to meet local needs, they are more likely to contributewillingly. In addition,the costs of collectingresources centrally and then redistri- buting them are avoided.

5.7 Family Planning. The governmentrecognizes that rapid population growth is a seriousconstraint to economicdevelopment. In October 1988, the Council of Ministers adopted a new populationpolicy intended to slow popula- tion growth by promoting a two child norm for most families.101 A system of incentiveand disincentiveshas been createdto encouragefamilies to practice family planning and limit their familiesto two children. In spite of decliningbudgets in almost every other sector,the National Family Planning Program appears to be well funded and well staffed, relativeto other govern- ment programs,and enjoys the supportof the highest levels of government.

Areas of Concern

5.8 The social sectors in Vietnam suffer from problemswhich are similar to those experiencedin other very low income countries. Widespreadpoverty is associatedwith extensivemalnutrition and inadequateresources to respond to basic human needs and developmentof skills needed for economic develop- ment. Beyond these typical problems,Viet Nan.faces particulardifficulties stemming from several decades of war experience. Exacerbatingboth these sets of problems is the potentialimpact of economic reform and restructuringon vulnerablegroups of Vietnamesepeople and on social service delivery and financing.

5.9 Malnutrition. Malnutritionhas foz years been a seriousand wide- spread problem in Vietnam,which has been alleviatedto a certainextent in recent years by agriculturalreform and good harvests. Research has indicated a high prevalenceof protein-energymalnutrition, It was estimatedin 1988 that over 40Z of the populationhad less than the minimum recommendedintake of 2,100 Kcal per day. The problem is not limited,however, to insufficient energy intake. Mineral and vitamin-deficiencydiseases are also prevalent in Viet Nam. Such diseases common in Viet Nam include iron deficiencyanemia, endemic goiter (due mostly to iodine deficiency),and beriberi (due to Vitamin B deficiency).

5.10 Malnutritionis particularlyserious among small children. In rural Viet Nam, some estimatesindicate over 40Z of the children from one to five years of age suffer from first- or second-degreemalnutrition, some 55-60Z of the children aged one to five are reportedly"wasted" and will not reach their full genetic potential,and perhaps as many as 60-702 are "stunted,"that is, small for their age.ll/ Of course,malnutrition statistics must be inter- preted with care since their referencestandards can be quite arbitrary. Nevertheless,it is clear that large numbers of children are hospitalizedwith

10/ Ethnic minorities,couples married previously,and parentswith two hand- icapped children are allowed to have an additionalchild. ll/ Estimates from draft Viet Nam Agricultureand Food ProductionSector Review, FAO, 1989. - 86 - marasmus (progressiveemaciation), kwashiorkor (severe protein deficiency),or both in the period May-October,and particularlyin September,when the old rice crop has been finishedand the new crop is not yet harvested. The major causes of morbidityand mortalityamong children--intestinalparasites, diarrhea,and respiratoryinfections--are commonly associatedwith, and exacerbatedby, malnutrition;low birth weight is also commonlyassociated with malnutritionof the mother. In 1985, 18Z of Vietnamesebabies had low birth weights; in the group of comparatorcountries for which data were avail- able, only five countrieshad a higher (worse)percentage. By 1988, however, the proportionof babies with low birth weight had declined to 14%.

5.11 SeriousFinancial Constraints. Despite the government'sserious efforts, the countryhas neither the physical infrastructurenor the financial resoarcesto adequatelycontrol endemic and communicablediseases, ensure adequatenutrition, or achieveuniversal basic educationand universalcover- age of basic health care. This shouldnot be a detractionfrom impressive achievements,but rather a recognitionof Viet Nam's very low income status. Entry to educationand trainingbeyond basic educationhas been severely restricted. The expansionof the more sophisticatedlevels of the health- delivery system has also been severely limited. In addition,the scarcity of resourceshas had the followingconsequences:

(a) Teachers,doctors, nurses, and other educational,medical and health- care staff are extremelypoorly paid. The national salary scales for teachers and for health-carepersonnel are so low that people are increasinglyunwilling to enter or remain in the teachingand medical professions.

(b) Physical facilities(schools, hospitals, and health posts) are often inadeauateor in a state of disrepair. Even the country'sshowcase schoolsand best urban hospitalsare badly in need of maintenanceand repair.

(c) Teaching and medical equipment,specialized furniture for scheols, hospitals,and health posts, and teachingaids are often unavailable, or availablein insufficientquantities. Where they exist, they are often twenty or thirty years old and in a state of disrepair.

(d) Textbooksare produced in insufficientquantities and of poor-quality materials and deterioratequickly, even with normal use.

(e) Drugs and medicines of all sorts are in very short supply. Some are produced domestically,but in insufficientquantities.

(f) Health campaigns (e.g.,malaria control, immunization,maternal and child health care) are seriouslyunderfunded and understaffed,with the result that diseases such as malaria and tuberculosisare still endemic in some parts of the country,and rates of infant and maternal mortalityare still unacceptablyhigh in some regions (some coastal areas report infant mortalityrates of 150 per thousandlive births). - 87 -

(g) Although the National Family PlanningProgram is well funded and well staffed relativeto other governmentprograms, it needs additional inputs of all kinds if it is to be really effectivethroughout the country.

5.12 Shortageof skills needed for development. At present Viet Nam is facing a critical shortageof entrepreneursand managers familiarwith the up- to-date technologiesneeded for economicdevelopment, in virtuallyall sectors of the economy. There are particulardeficiencies in the areas of economics and management. Unquestionably,curriculum reform is a high educational priority. Upon independencefrom France,Viet Nam was left with textbooksand handouts which had been prepared in France and were not updated for many years. A few innovationswere then brought from Eastern European countrieson a piece-mealand fragmentedbasis. Accounting,economics, finance and manage- ment are areas where priority should be accorded in future curriculumimprove- ments for both general educationand technicaltraining.

5.13 Problems Related to the War Years. Although Viet Nam has been at peace internallysince 1975, health problems related to the war years persist. One problem is a seriouslyunbalanced sex ratio,with women outnumberingmen in abnormalnumbers. Data from 1989 indicatethat the ratio of females to males for the country as a whole is 106:100. For those aged 25-44, the group most likely to have been affected by the war (and also the most productiveage group in the labor force),the ratio of females to males in 1985 was 115:100. Although illustrativedata for 1989 will not be availableuntil the recent census resultshave been fully tabulated,scattered evidence indicatesthat those provincesmost affectedby the war have even higher female-to-male ratios,particularly in the age group most likely to be in the labor force, a phenomenonwhich apparentlyis not fully explainedeither by males' normal higher death rates or by migratorymovements occasioned by employmentoppor- tunities.

5.14 A second health problemwhich appears related to the war years is the high incidenceof cancer among both men and women, and an abnormallyhigh incidenceof birth defects. Although Vietnamesehealth authoritiesare care- ful to emphasizethat there is no conclusiveproof, the incidenceof such cancersand deformedbabies is highest in areas which were heavily sprayed during the war with the defoliantAgent Orange, one componentof which is known to be highly carcinogenic.

5.15 Psychologicalproblems which afflictboth men and women, particularly former soldiersand populationswhich live in areas heavily affected by the war, are a third health problemwhich apparentlyis relatedto the war. Finally,many schools,hospitals, health posts, and pharmaceuticalfactories were damaged or destroyedduring the war years; not all have been repairedor replaced.

5.16 Social Costs of Adjustment. The economic reform measures that the Governmenthas already undertakenand furtheractions that may yet be taken have already and will continue to have a major impact on the livelihoodand well-beingof the Vietnamesepeople. While in the medium and longer term these measures should result in increasedeconomic growth and family incomes, the path of adjustmentis likely to create increasedstresses in the short - 88 - term for some groups adverselyaffected by these reforms and in the delivery and financingof social services. As noted above, fiscal constraintsmay already be weakening educationand health indicatorsand increasingthe risk of lower quality and coverage of basic services. In addition to these problems,the public enterprisereform and possible reductionof the armed forces may create dislocationsin the labor market that will furtherstrain governmentand family supportmechanisms. Other particularlyvulnerable groups are likely to be the urban unemployedand upland farmers,who will benefit less directly than lowland farmers from the liberalizationof prices, especiallyfor rice.

C. Recent Policy Reforms

5.17 The governmenthas recognizedthat it lacks sufficientresources to provide free public educationof good quality at all levels,ensure adequate nutrition,promote family planningnationwide, control endemic and com- municablediseases, and provide free public health care of good quality to all. It has also recognizedthat in attemptingto plan, control, and implementall of its policies for the social sectorsby itself, it has smotheredprivate initiativeand left untappedpotential resources from the private sector which could be used to develop the social sectors. In this context, the Council of Ministersrecently promulgated a series of measures designed to establishclearer priorities and mobilize new resourcesfor the social sectors,particularly through the introductionof cost-recovery mechanismsrequiring payments from users (students,in the educationsector, and patients, in the health sector)or their familieswho can afford to pay, yet protectingthose who cannot afford to pay. These measures are discussed in the followingparagraphs.

EducationPolicy Reforms

5.18 Partial Privatizationof Kir.dergarten.Kindergarten was formerly public and free for all childrenaged 3-5, at least in theory. In fact, a large proportionof the age group did not have access to kindergarten. In order to increase coverage,the governmentis now experimentingwith private kindergartenswhere parents pay for each child they wish to place. If the experimentis successful,cost-covering fees will be introducedin kinder- garten classes throughoutthe country.

5.19 School fees. The governmentis also experimentingwith school fees in primary and secondaryeducation, where the intentionis not to privatize the system but rather to tap some of the resourceswhich householdsare willing to pay for education,to help cover costs. Until this school year, the first twelve years of educationwere virtuallyfree. In September1989, a system of limited studentfees was introducednationwide. The fees charged are very low. Grades One throughThree are still entirely free. Pupils (or their parents) in the higher grades pay the equivalentof US$0.15-0.40per month, with the fee linked to the price of rice to keep it currentwith infla- tion. Pupils and studentswho can provide a certificationfrom their village or neighborhoodPeople's Committeethat their familiesare too poor to pay the fees are not requiredto pay. The fees are collectedat the school level and - 89 - may be used by the school'sdirector to pay for maintenanceand upkeep, to purchase school suppliesand equipment,or to pay limitedsupplements to teachers'salaries. The fees are importantbecause schools receivevirtually nothing from the provincesfor maintenance,upkeep, supplies,and equipment, and teachers'salaries are very low. To avoid increasinginequity, however, it would be necessaryto increasefees at the higher educationlevel as well.

5.20 Legalizationof PrivateEducation. Although private schoolswere closed starting in 1954 in the North and in 1976 in the South, private classes, particularlyevening classes,never entirely disappeared. Given the new climate of willingnessto draw on the resourcesof the private sector, private schools,although not encouraged,are now tolerated,although they presentlyenroll only a very limitednumber of students. Many teachersand universityprofessors can now legallytutor privately. This allows teachers to supplementthe very low salariesthey receivefor servicein the public system.

5.21 Sale of textbooks. Textbookswere formerly free for all pupils and students. In September1989 the governmentbegan sellingtextbooks to those pupils and studentswho could afford to pay for them. Prices ranged from USSO.15 equivalentfor a first-gradereading textbook to US$0.40 equivalent for a twelfth-gradephysics textbook. Studentsand pupils who can provide a certificatefrom their village or neighborhoodcommittee that their families are too poor to buy the textbooksmay borrow (but not keep) copies from their school library.

Health Policy Reforms

5.22 Introductionof Health-CareFees. The govern-menthas introduceda fee system for health care similarto the student fee system introducedin the educationsector. On May 1, 1989, followinga decisionof the Ministry of Health, a fee systemwas introducedin the three higher levels (district, provincial,and national)of the health-caredelivery system, requiringthose patientswho are able to do so to pay at least a minimal part of their health care. Primary health care at the health-postlevel continuesto be free, but fees are paid at the inter-communalpolyclinics. The basic fee per consulta- tion ranges from US$0.07 to US$0.25 equivalent,depending on whether the hospital is district,provincial, or national. This basic structure, establishedby the Ministry of Health, is apparentlyapplied differentlyin differentparts of the country,with some hospitalscharging more than the basic fees listed above. Supplementaryfees are charged dependingon the servicesprovided and the drugs or other suppliesconsumed. A maternity,for example,costs about US$1.30, and an appendectomy,about US$3.40. People able to produce a certificatefrom their neighborhoodor village People'sCommittee that they are too poor to pay these fees are treated free.

5.23 Legalizationof PrivateMedical Practice. As was the case for educa- tion, when health care was in theory free for all, doctorswere forbiddento practice privately,and everyonewas expectedto use the public health system. Given the new willingnessto draw on the resourcesof the private sector, private clinicsand hospitalsare now tolerated,although there are still very few. Doctors are now allowed to practice privately (i.e.,charge fees) after office hours in the public clinics. - 90 -

5.24 Sale of Pharmaceuticalson the Open Market. Drugs and medicineswere formerlydispensed free to all patients through the public health network. In July 1989, the governmentbegan to allow pharmaceuticalfactories to open retail pharmaciesand sell drugs directly to individuals,hospitals, and health posts. (Exceptionsare made for the indigent). The introductionof this measure has allowedpharmaceutical factories to recover their costs of productionand has reduced the drain on the public treasury of subsidizingthe factoriesand of providingdrugs and medicinesfree to the entire population.

5.25 Reform of the PharmaceuticalIndustry. The possibilityof setting their own prices and seekingtheir own me-kets for their products is not the only liberalizationmeasure now allowed to pharmaceuticalfirms. Since April 1989, pharmaceuticalfirms (and also factoriesproducing or repairingmedical equipment)have had the freedom to make their own decisionsconcerning produc- tion and financialmatters such as mix of inputs,wage levels,production levels,and sellingprices of drugs and medicines. Pharmaceuticalfirms had also been told that they have to cover costs or else go out of business (i.e., they can no longer rely on governmentsubsidies). Initially,most firms have a difficulttime. It was virtuallyimpossible to dischargethe large numbers of redundantworkers. Initial prices,determined by high productioncosts, were too high, and it was difficultto find buyers for their products. Things started to get better in July 1989, when pharmaceuticalfactories were allowed to begin sellingtheir products on the retailmarket to private individuals (insteadof only to public hospitalsand health posts). Firms have become more efficient,costs have declined,and sales have increased. Although redundantlabor is still a problem,most firms appear to be adaptingwell to the new economic context.

Family Plannint Incentives

5.26 As part of its new populationpolicy the governmenthas introduceda system of incentivesand disincentivesto encouragefamilies to practice family planning and limit their familiesto two children. This recent policy measure is differentfrom those discussedabove in that its is not a short- term cost-recoverymeasure; rather, its benefits are long-term: the benefits to the economy over time in terms of a reduced Dirth rate and lower future expenditureson social servicescould be substantial. In general, incentives are offered for practiceswhich reduce the birth rate, and disincentivesare used to discouragecouples' having more than two children. For example, insertionsof IUDs, vasectomies,and tubal ligationsare not only psrformed free of charge,but in addition,patients receivea small financialincentive (US$1.0O-5.OO)for undergoingthese procedures. Condoms and contraceptive pills (whereavailable) are either distributedfree or else are sold at highly subsidizedprices. Disincentivesinclude (a) the discontinuanceof additional living space to familieswith more than two children, (b) the discontinuance of salary supplementsfor all but the first two children and (c) the introduc- tion of a fee for deliveringevery child beyond the first two (which are still deliveredfree of charge). - 91 -

D. Issues and OPtionS

5.27 Viet Nam's options for developing the social sectors are likely to be limited in the short term by the country's resource constraints and by the necessity of focusing on urgent financial issues to the exclusion of all others. For that reason, this section focuses on financial issues and options in the social sectors. In this context of very scarce financial resources, the country's first priority in the social sectors will be to try to protect the gains already achieved, particularly the widespread coverage of basic education and basic health care. In addition, and in spite of limited resources, social pressures and the growth of population will force the government to continue trying to improve and expand its education, nutrition, health, and family-planning programs to respond to priority needs and the particular stresses of the adjustment process.

5.28 There are four basic areas where future government policy and action will be critical for social development and management of the human dimension of structural adjustment. These are: (a) how to maintain resource levels for the social sectors in the face of fiscal constraints on the central government budget and needs for investment in the productive sectors of the economy; (b) how to reduce government subsidies and expand contributions from the bene- ficiaries of social investments; (c) how to increase internal efficiency in use of resources available for the social sectors; and (d) how to prioritize investments in social sector development under severe fiscal constraints. These issues and possible areas tor government action are discussed in the following paragraphs.

Resources for the Social Sectors

5.29 The most important means of obtaining adequate resources for the social sectors is the adoption of policies that will promote broadly based economic growth and government revenue increases. Beyond this there are two other ways in which additional resources could be obtained for social sector expenditures: an expanded share of the central government budget and increased private financing of social services.

5.30 Share of Budget. Although information on social sector expenditures is limited, and international financial comparisons are fraught with difficul- ties, the available data suggest that the budget proportions Viet Nam spends on education and health are low by international standards. Table 5.3 in the Statistical Appendix shows that current consolidated public expenditures on the social sectors (including education, health, pensions, social relief and other) are projected to amount to about 361 of total current expenditures, or 4.2Z of GDP in 1989. Education and health combined account for 23S of current expenditures, or 2.6Z of GDP, which compares with 4.2Z for other Asian countries. The share of education of 2Z of GDP compares with an average of 32 allocated by other Asian countries. As conditions permit, and as reduc- tions in subsidies and military expenditures take place, it would be appropriate to increase the share of budget resources allocated to social services. In the short-run, it is important to protect these expenditure categories from budgetary cuts. - 92 -

5.31 Public/PrivateSector Roles and Reductionof Subsidies. As described above, the governmenthas already taken a number of steps aimed at expanding private financingof social services. This signifiesa shift in long-standing policy that the governmentshould provideeducation and public health care to all, free of charge. This policy was defended on groundsof equality,but in economic terms it eliminateda useful cost recoverymechanism and created an additionaldrain on public resources. As the governmentbegins to promote the private sector role in the social sectors,it is importantto distinguish between expansionof private provisionof services and increasedprivate financing. While further steps should be taken to increasecontributions from the beneficiariesof social serviceswho can afford to pay, it is importantto ensure that expansionof private deliveryof servicesdoes not merely result in replacingpresent publicly provided servicesat higher costs. Thus in developingpolicies for an expandedprivate sector role in the social sectors, careful attentionshould be paid to ensuring complementaritybetween the public and private sector roles, and in measureswhich foster quality improve- ments.

5.32 Three specificareas where reducingsubsidization and increasingthe contributionsof beneficiariesmight be possible are in textbook prices in secondaryand higher education,scholarships and living stipendsfor univer- sity students,and the fee structurefor publicly provided curativehealth services. Current efforts at cost recoveryshould be expanded,bearing in mind of course the income positionof vulnerablegroups, particularlyduring the current adjustmentperiod.

InternalEfficiency

5.33 It is importantto try to identifyways in which resourcescould be used more efficientlyto improve educationalachievements and health status. This is an area where focussed researchand analysis of the present education and health delivery systems in Viet Nam would be worthwhile,and where the experienceof other countriescould be beneficial. For example, in education there is a problemnot only of getting childreninto school but of keeping them there. About one third of childrendo not complete the primary school cycle. An effort is required,therefore, to attack the causes of this drop- out. Of the many differentcauses, the one most easily influencedby the educationauthorities is the quality of education. A related problem is the high rate of repetition. Every year, about one pupil in ten in primary school repeatsa grade. This repetitionincreases the cost of producingeach primary-schoolgraduate and representswasted resources. An improvementin the quality of primary educationcould be expectedto lower the repetition rate as well as the drop-out rate.

5.34 Another area that could be examined is the appropriatequalifications required for lower-levelteachers and health care personnel. It appearsthat at present in Viet Nam, lower-levelteachers and health-carepersonnel may be overqualified,in terms of the number of years of their training. At present, even kindergartenteachers must completea three-yearprofessional education course followingat least nine years of general formal education. Primary school teachersmust follow a two year course in pedagogy followingcompletion of upper secondaryschool. Similarly,all health-carepersonnel, including auxiliarynurses, auxiliarypharmacists, and auxiliarymidwives, are required - 93 - to complete at least nine years of generalformal educationbefore beginning their specializedmedical training,which may be more formal educationthan requiredfor the tasks they perform. These requirementsare appropriategoals for the long term. In the short term, however, they may be excessivelycostly for a country at Viet Nam's present level of development.

Prioritiesfor ResourceAllocation

5.35 Under the severe fiscal constraintsfacing the social sectors in Viet Nam, it is essential that resourcesbe allocatedto highest priorityneeds. However, in spite of official policy favoringbasic educationand preventive health care, governmentrequests for foreignassistance often focus on high- cost university-leveleducation or curative technology. Although such invest- ments in higher-leveleducation are undoubtedlyeffective in producingfirst- rate scholars,they benefit only a few. Similarly,although state-of-the-art curative technologiesare undoubtedlyeffective in saving lives, many of them can be used for only a very limitednumber of people. Some donors have exacerbatedthis phenomenonby being more willing to financethe construction of large-scaleeducational institutions or hospitals,equipped with the latest technology,than to finance literacycampaigns, basic education,health programs,or basic health delivery systems. It would be desirablefor the governmentto re-examineits investmentpriorities, especially for external assistance,with a view to re-orderingthem based on official policy.

5.36 In this respect it may not be realisticto expect that all of the Government'spresent goals and objectivescan be met in the medium term. Some options that could be consideredare to give priority to primary education,to limit enrollmentsat the upper levels to numbers justifiedby the economy's needs for skilledmanpower, and to reconsiderthe timetablesfor expanding computer educationand achievinguniversal literacy of adults.

5.37 Primary Education. At present,the Government'sstated goal is to provide universaland compulsoryprimary and lower-secondaryeducation for the entire age group by 1995. Although the goal of providingboth universal lower-secondaryeducation is appropriatein the long term, the Government stated goal of achievingboth by 1995 may be overly optimistic. At present, it is believed that the net enrollmentratio in lower-secondaryeducation is over 50X. Educationauthorities fear that these enrollmentratios are declining,with the school-agepopulation growing faster than the creationof new school places. Attempts to provide good-qualityeducation for the entire age group 6-15 in the short term are likely to fail, for lack of sufficient resources. Since research indicatesthat the greatest returns to an economy come from an expansionof basic educationwhich permits the mass of the popu- lation to obtain functionalliteracy and numeracy,the emphasis should be placed, in the short term, on getting all childrenaged 6-11 into primary school and keeping them for the full cycle. Concurrently,the expansionof capacity at the lower-secondarylevel could be curtailed,at least for the time being, even though an increasein the output of primary schoolswill create a demand for more places at the lower-secondaryschool level. It may be necessaryto introducean entranceexamination to lower-secondaryschool to ration the number of availableplaces. - 94 -

5.38 Enrollmentsin Upper Secondaryand Higher Education. Upper-secondary and higher educationare far more costly,per student, than primary and lower- secondaryeducation. A countryat Viet Nam's level of developmentshould limit entry to upper-secondaryand higher educationto the minimum needed to meet the country'surgent manpowerneeds. The mechanisms (entranceexamina- tions) are in place to select those studentswho may continue on to higher levels of education. It may be possible to achieve savingsby raising the entry requirementsto upper-secondaryand higher education,either across the board or (for higher education)in specificareas, thereby reducing the number of studentsat these levels (and, concomitantly,the recurrentbudget for education). A note of caution is requiredhere: the process of correlating the output of a country'seducation and training system with the economy's manpower needs has been attemptedfor years, and the general experienceis that it has been notoriouslyinaccurate. Particularlyin rapidly growing economies,it is not easy to predict, in either numbers or specialization,the types of trainedmanpower which will be needed two or three years from the present. Nevertheless,it is possible to make some decisionsby observing whether new graduatesobtain employmentconsonant with their specialization and level of training.

5.39 Computer Education. The Ministry of Educationhas announcedthat computersare to be introducedinto upper-secondaryeducation, at the rate of four computersper school,by the end of 1990, and into lower-secondaryeduca- tion by the end of 1992. Generalizedinstruction in the use of computersis a laudable goal, over the long term, but the attempt to acquire and install computersaccording to the scheduleproposed is unlikely to be successful. Calculationsshow that the total cost of introducingcomputers according to the proposed schedulewould amount to US$100 million equivalentor more. It is unlikely that the Ministry of Educationwill have the budget (or the foreign exchange),to allocate so much to the acquisitionof computersover the next three years. Money is not the only problem: the country also lacks teachers trained in teaching the use of computers,and only a very limited amount of software is availablein Vietnamese,the language of instruction throughoutthe educationsystem. A more realisticgoal might be, over the next few years, to acquire computersfor those upper-secondaryschools specia'!- lizing in mathematicsand natural science.

5.40 UniversalLiteracy. It is an official governmenttarget to achieve a literacy rate of 100? by 1995 among the populationover 15 years of age. UNICEF/Hanoiestimated the rate to be 82Z in 1987. Calculationsshow that the effort to be undertakento close the gap is still very large: to achieve a rate of 10O by 1995, it would be necessary,over the next six to seven years, to teach a million people per year to read and write. It may be desirableto re-examinethe goal in order to ensure that expectationsare realistic. It will be even more importantto undertakea focussedprogram, giving priority to young adults (with longer life expectancies)and to areas where large numbers of illiteratesare concentrated,to gain the benefits of scale.

Salaries in the Social Sectors

5.41 One final issue that is importantfor the longer-termdevelopment of the social sectors is the level of pay for teachersand medical and health- care personnel,which are extremelylow and often lower than wages of un- - 95 - skilledworkers. Salary levels for teachersand health workers also appear to be very low relativeto pay levels for these occupations,in other countries. For example, the averageprimary school teacherspay in Viet Nam is estimated to be in the range of 0.8-1.2times per capita GNP. This compareswith an average for other Asian countriesin the mid-1980s of about 2.6 times per capita GNP for primary teachers. Similarly,the average pay for secondary school teachers is estimatedto be in the range of 1.2-1.7 times per capita GNP in Viet Nam, comparedwith an Asian average of 3.8.

5.42 The implementationof any meaningfulacross-the-board increase in salary scales would have a profound impact on the educationand health budgets. Given the government'spresent extremelydifficult fiscal situation, it may be impossibleto do anythingabout salariesin the social sectorsin the short-term. Over the longer-term,as the government'seconomic reforms take root, the wages of educatedpeople are likely to be bid up as demand for their services rise. In this context,the salariesof educationand health personnelwould probablyneed to rise in tandem to avoid a seriousproblem of exit from these professions. Thus over the longer-term,the government'swage policy for civil servantswould requirecareful scrutiny. At the same time, as teacher and health personnelcosts escalate,using their time efficiently would increasinglybecome a pressing issue. - 96 -

Vi. MANAGING A SOCIALIST MARKET ECONOMY

6.1 Viet Nam's developmentstrategy has in the past relied on the state to directlymanage productionand distribution. The resultsof this manage- ment system have been very disappointing,and the economic disarray of recent years has prompted the current attempt at "renovation". The reformsthat are under way aim at developingthe kind of market and outward-orientedsystem that has produced such dynamic growth in many of Viet Nam's Asian neighbors. Tremendousprogress was made in 1989 with the restorationof the family farm in agriculture,decentralization of decision-makingin industry,elimination of most price controls,devaluation of the exchange rate, and a return to monetary and price stability.

6.2 The explicit goal of the reform program is rapid developmentof the economy on the basis of comparativeadvantage. Given Viet Nam's natural resources,high populationdensity, and a very limited capital stock--its comparativeadvantage in the short run clearly lies in primary products and labor-intensivemanufactures. Certain processingactivities combine both of these advantages. Vietnameseauthorities envision rapid expansionof the agriculturaland labor-intensiveindustrial sectors, on the basis of reformed state enterprises,re-emergence of the private sector,and substantialforeign investment.

6.3 As part of the renovationprocess, the role of the state in the Vietnameseeconomy will have to change quite substantially. The state will no longer be directly involved in the productionof most goods and services. Decisionsabout employment,production, pricing and marketingwill be made by enterprises(in the state-ownedindustrial sector) and by households (in agricultureand private industry). This decentralizeddecision-making can produce efficientand sociallybeneficial results only if takes place in the proper institutionalenvironment. One of the key roles of governmentin the reform process is to create the regulatoryframework and institutional environmentin which producersoperate. In some cases this task will simply involve the governmentwithdrawing itself from activitiesthat it previously controlled. In other areas, however, the state will have to take a more active role, as for instancewith the developmentof financialmarkets.

6.4 The second importantrole for the state in a market-basedeconomy is to provide public goods and services. In order to fulfillthis role efficiently,the state must generate revenuethrough taxation,and attempt to do this with a minimum of distortion. The revenuecollected determines a budget constraintfor the government,and these limited resourcesmust then be allocatedto differentuses: defense,physical infrastructure,health, education,etc. An importanttask for governmentis to evaluate the economic and social return to differentpossible public investmentsand to make choices among differental'ernatives. Investmentplanning in the past has been very weak in Viet Nam, and this is an area in which governmentneeds to improve its capabilities.

6.5 The chang:ng role of the state as Viet Nam proceedswith its "renovation"is the focus of this final chapter. The first sectionexamines the issue of sequencingof reform measures. Measures to consolidatethe - 97 - stabilizationprogram are consideredin SectionB, which examines government's role in raising revenueand providingpublic services. The micro reforms that will be necessaryto bring about a rapid supply responsefrom the economy in the wake of the stabilizationprogram are addressedin Section C. The fourth sectionexamines longer term institutionalissues, especially the development of factor markets. Finally, SectionE looks at the potential role of external finance in stimulatinga resumptionof sustainablegrowth in Viet Nam.

A. Sequencinaof Reforms

6.6 So far, the pace and the sequencingof economicreforms in Viet Nam have been commendable. The measures have focusedon quickly re-establishing macroeconomicstability, while at the same time improvingefficiency through decentralizationof decision-makingto enterprisesand households,and opening the economy to make greateruse of foreign technology. The coordinatedintro- ductionof stabilizationand liberalizationmeasures (i.e., credit control, devaluation,interest rate adjustments,and comprehensiveprice decontrol)in the spring of 1989 was particularlyimpressive.

6.7 There are neverthelessreasons to worry about the future timing and sequencingof reform. First, as Viet Nam moves from the initialstabilization phase to structuralreforms, policy measureswill be increasinglycomplex, but the governmenthas only a limited ability to formulateand implementdifferent reform measures simultaneously. Second, as long as there remain substantial distortions,it could be dangerousto introducecertain measures; for example, liberalizingfinancial markets in the presence of distortedprices could shift capital into apparentlyprofitable, but in fact inefficient,activities. While there is so far little detailedexperience available on the proper sequencingof reforms in a socialistmarket economy, experiencefrom other countriessuggests that as a generalproposition the sequencingshould be macroeconomicstabilization first, microeconomicreform measures second,and longer-terminstitutional reforms last. However, since the later reformshave a definite impact on the successof the stabilizationeffort, attemptingto compressthe time lag between stages of reform has merit. This is more like'ly to be possible if: (i) policy signalsare clear and irreversible,(ii) policy measures are coordinatedand not countermandedat local levels, and (iii) the costs of stabilizationand benefits of reform are widely shared in the society.

Stabilization

6.8 Stabilizationhas to be attemptedfirst because hyperinflationand macroeconomicinstability divert attentionfrom (long-horizon)productive to (short-horizon)speculative activities. In an unstablecontext, microeconomic reforms can be unproductiveand even harmful, as they increasepressure on public financesand aggregatedemand.

6.9 Over the last decade, Viet Nam has initiatedseveral rounds of micro- economic reformswithout stabilizingthe economy. On three occasions,these policies resultedin macroeconomicchaos. In 1989, however, Viet Nam cor- rected this sequencingerror and adopted a rigorousstabilization program, - 98 - featuringa large devaluation,sharp curtailmentof credit through high real interest rates and an ambitiousplan for reducingthe money-financedfiscal deficit. The initialresults have been very encouraging. The stabilization program,however, is still fragile. In 1990, it will be no longer possible to finance a large fiscal deficitwithout reignitinginflation. Stabilization will require either substantialexternal financing(which is uncertain,given the likely reductionof Soviet assistanceand the slow process of normaliza- tion of relationswith western creditors),or a combinationof domestic revenuemeasures and further reductiLonsin non-economicexpenditures.

Hicroeconomic Reforms

6.10 Once stabilityis assured, addressingthe microeconomiccrisis is the logical second step. An ideal sequenceputs price reform first,management reform second and factor market reform third. Among microeconomicreforms, price reform should come first because price signalsprovide essential informationin a decentralizedeconomy. If prices are distorted,even the best-run enterpriseswill functioninefficiently and it may be harmful to implementother reforms such as settingprofit maximizationas the performance target. In the Soviet Union and China, for example,price reform has been slow and profit incentiveshave generatedwide-ranging "arbitraging" activi- ties which merely shift under-pricedcommodities from official channels into competitivemarkets. Viet Nam correctlybegan its current round of micro- economic refoLm with price reform and has made remarkableprogress. Price reformsshould be expandedquickly to encompasstransport and energy as well.

6.11 Management reform should be the second element of microeconomic reform and is designed to provide incentivesto use resourcesrationally. Management reform should precede factor market reform because enterprises should be efficientat using resourcesbefore it makes sense to reallocate resourcesamong enterprisesaccording to financialcriteria. In practical terms, managers need to be given clear incentivesto raise profits as well as the authorityto change outputs and inputs.

6.12 The final step of microeconomicreform should be the liberalization of labor and capital markets. So far, however, the preconditionsfor factor market reform have not been satisfied. Financialinstitutions are not yet ready for this task and profits do not yet reflectthe economic potentialof enterprises. Constraintson outputs and inputs and bad management inherited from the past continueto keep some enterprisesfrom operatingat potential. Loss-makingenterprises must be forced to adjust (by sustainedfinanciAl pressure, improvedincentives, removal of constraintsand dismissalof ineffectivemanagers). Once these adjustmentsare completedand a competent financialsector is developed,resource allocation can be transferredto capitalmarkets operatingunder the usual investmentevaluation criteria.

InstitutionalReforms

6.13 Once Viet Nam's currentmacro and microeconomiccrises are solved, its developmentproblems will be similar to those that confront other developingeconomies. Solutionsto these problems are importantbut do not have the same urgency as stabilizationand microeconomicreform. Policies that will need to be pursued include: (a) adoptionof regulations,tax - 99 - policies and institutionsthat are trade-neutralor encourageexport growth; (b) redirectionof the economy toward convertiblecurrency markets; (c) major investmentsin infrastructure;(d) developmentof competitionpolicy; and (e) establishmentof institutionsto collectand disseminateinformation.

B. Economic Management

6.14 Most goods and servicescan be providedefficiently by producersnot directly controlledby the state. As argued in the next section,Viet Nam can move to that kind of decentralizedproduction system by eliminatingvarious restrictionsand regulationsthat currentlyexist and by developingsome new institutionsand regulations. There are also some goods and services that the state will want to provide directly,either because these items cannot be allocatedthrough markets (such as defense) or because they involve such importantsocial objectivesthat they cannot be entrustedto profit-oriented producers (such as education). In order to provide public goods and services efficiently,the state must develop its capacitiesin two areas: revenue generationand expenditureplanning. Managing these fiscalmeasures effectivelyis the key to consolidatingthe stabilizationprogram.

Monetary Stability

6.15 Arguably the most import public good that the stateneeds to provide is a currencywith a stable value in terms of real purchasingpower. As has been seen in Viet Nam in recent years, rapid inflationdistorts decisionsin production,consumption, and savings. With the stabilizationprogram of 1989, governmenthas for the moment restrainedinflation and restoredconfidence in the currency,with immediatebenefits to the economy.

6.16 One of the keys to the stabilizationeffort was providingthe State Bank with effectivetools to control credit disbursedby commercialbanks. The experienceof other countriesclearly demonstrates that maintenanceof a low inflationenvironment is more likely if the central bank as an institution has considerableautonomy from the governmentand is chargedwith the single objectiveof maintainingthe real value of the national currency. If the central bank is not autonomousfrom government,then it can easily be given other objectives,such as financinggovernment deficits, that are inconsistent with price stability. Hence in consolidatingthe gains that have been made in the area of disinflation,government may want to think seriouslyabout insti- tutional change that would ensure the operationalautonomy of the State Bank.

Fiscal Policy

6.17 Monetary stabilityalso requiresthat governmenthandle its finances carefully. In recent years governmentexpenditure in Viet Nam has far exceededgovernment revenue. The resultingbudget deficitmust be financed either out of private savings, or by the State Bank creatingmoney, which is a tax on holders of monetary instruments. Private savingsdeposited into the banking system have been virtuallynonexistent, hence this tax base was very narrow, and a very high inflationrate was requiredto collect this inflation tax. To maintain the disinflationprogram, it will be necessary for - 100 - governmentto reduce the size of its deficit relativeto national income. The budget deficitneeds to be reduced substantiallyand whatever remains should be borrowed from the public at positive real interestrates, preferablyby issuing freely tradable governmentbonds or treasurybills. This would quickly help to establisha market interestrate for financialinstruments (determinedby the interest rate and any discount or premium of these bonds in the market).

6.18 The issues of fiscalmanagement and autonomyof the State Bank are closely related. In countriesin which the central bank is not autonomous, the governmentknows that if it fails to live within its budget constraint,it can always fall back on printingmoney to financeits activities. When the central bank is autonomousand refusesto accommodatethe governmentbudget deficit,on the other hand, a deficitwill have an immediateimpact on interest rates. When governmentabsorbs some private savings to financeits deficit, there is less saving availableto allocate to other uses, including investment. The governmentdeficit consequently puts upward pressure on interest rates. Thus autonomy of the central bank tends to make the implica- tion of the budget deficitmore transparent,and this often generatespressure from producersand the public to eliminatethe deficit.

6.19 Revenue Generation. In the case of Viet Nam, the key measure for reducing the budget deficit in the medium term has to be increasinggovernment revenue. In 1988, the net transferfrom state enterprisesto the budget was only 3X of GDP, while tax and other revenuewas a mere 4.6% of GDP. Viet Nam's current expenditureis not excessiverelative to GDP, at only 15.2X, but it far exceeds the government'sincome.

6.20 Improved efficiencyin public enterprisescan help the government's fiscal problem. The most importantmeasure is to eliminateall supportfor money-losingenterprises. The state has made a step in the right directionby eliminatingbudgetary subsidies to most enterprises. Nevertheless,during 1989 troubled enterprisesare being given preferentialtreatment in terms of interest rates on bank loans and the turnovertax rate on their output. This policy is acceptablefor a short period, to give enterprisestime to adjust to the new regime. However, there is a danger that this supportwill become permanent for those enterprisesthat are not viable. Governmentshould announcea clear ending date for the allocationof low-interestcredit to troubledenterprises and establishprocedures for closing, restructuringor privatizingenterprises that cannot survivewithout subsidy.

6.21 Transfersfrom enterpriseshave been the main source of revenue for government;however, many enterpriseshave borrowed freely from the banking system to make these payments. In 1989, with credit constraintand high interest rates, enterprisetransfers to the budget declined as a share of GDP. Furthermore,even if the enterprisereform is successful,it would probably be better for growth if most enterpriseprofits are reinvested,rather than turned over to the state to fund currentexpenditures.

6.22 The most desirablesolution to the fiscal problem is to increase tax revenue. The governmentis presentlyconsidering a Dumber of revenue measures, includingthe introductionof taxes on state enterpriseturnover and profits. A tax on wages is also being considered. At the moment, many - 101 - private sector activitiesare subjectto a 102 turnover tax. The proposed turnover tax on state enterpriseshas been set at lower rates, ranging from 22 to 6Z. These rates may be too low to generate sufficientrevenue. Rather than collectinga turnover tax at a low rate from all establishments,the governmentmight consider levyinga somewhathigher tax (10?) on production and wholesale trade only, to minimize cascading. Over the longer run, the governmentshould move to convert the turnover tax to a value added tax. The main reason for this is that the turnovertax tends to discriminateagainst products that go throughmany differentstages of processingby different enterprises. The turnovertax encouragesvertical integrationthat may not be efficient. Collectingthe turnover tax will require improved record-keeping by most enterprises. Within a few years, it should be possible to introduce other accountingreforms that would make the value added tax feasible.

6.23 Reform of tax administrationis also urgent. At present, tax collectionis decentralizedand local tax officialsare under the control of local People's Committees. In practice,this means often that local govern- ments are not particularlyinterested in collectingtaxes from local enter- prises, once their tax share has been collected. If the governmentis to obtain sufficientrevenues, an independentcentral tax administrationmay be required.

6.24 User Fees. There are both fiscal and efficiencyreasons why govern- ment may want to charge higher prices for some of the services that it pro- vides. This is especiallyclear in the areas of energy and transport,two sectors in which governmenthas not yet decontrolledprices. The prices establishedby governmentfor energy and transportare low by international standards. The principalreason is that users of these servicesare not charged the full cost of capital for these generallyvery capital-intensive undertakings. As discussedin Chapter 4, this had led to excessivedemand and insufficientsupply, with shortagescreating many inefficienciesand imposing large costs on other sectors and activities.

6.25 The budget deficit could be reducedconsiderably by imposingappro- priate user fees on the users of these services,through higher electricity prices, excise taxes on transportfuel and so on. An alternativeapproach would be to make many of these activitiesautonomous enterprises that have to generate sufficientrevenues not only to cover recurrentcosts, but a very substantialpart of their capital expendituresas well. The remaindercould be financed by borrowing from financialinstitutions or by issuingbonds and other financialinstruments directly to the public.

6.26 In the social sectors,education and health, Viet Nam is experi- menting with partial cost-recoveryschemes. In education,there are very modest fees, starting in the first grade and escalatingas studentsproceed through primary and secondaryschool. The state has also begun to charge modest prices for textbooks. There are also mechanismsfor poor familiesto be relieved of these charges. These measures have been introducedon an experimentalbasis, and as long as they do not result in a marked deteriora- tion of primary and secondaryschool enrollment,they seem to be an appro- priate response to the government'sfinancial situation. They could be expanded,particularly in health-care,by introducingadditional cost-recovery mechanisms. - 102 -

6.27 ExpenditurePlanning. Expenditureplanning in the past has been extremelyweak in Viet Nam, partly because the governmentwas trying to do too many differentthings. It appears that the overall state budget was divided fairly arbitrarilyamong differentcategories, such as defense,education, transport,etc. There was little explicit attemptto assess the economic and social return to differentkinds of expenditureand to establishpriorities on that basis. Furthermore,even within a particulararea, such as transport, funds were not allocatedsystematically to projectswith the highest return.

6.28 A natural role for the State PlanningCommittee, now that industrial productionand investmentdecisions have been decentralized,would be to concentrateon expenditureevaluation and planning in infrastructureand the social sectors. The technicalcapacity of the State Planning Commissionto evaluatethe economic return to differentprn.ects would then have to be up- graded quickly. This is an area in which external assistancecould be important. The lack of attentionin the past to the economic return of projects resulted in too many large projectswith low returns. Moreover,many more projectswere startedthan could be financed,with the resuiltthat all projects tended to take far longer to implementthan necessary if resources had been concentratedon fewer projectswith high returns. Finally, the prioritiesof external donors distortedtne investmentprogram by concen- trating on a few large projects,with inadequateattention to complementary expenditures. In transport,for instance,there has been very little invest- ment in maintenanceof ports, roads and railway bridges. Similarly,in elec- tric power, the large investmentsin power generationhave not been adequately supportedby investmentin transmissionand distribution.

6.29 Major governmentexpenditures, in infrastructure,health, education and elsewhere,need to be plannedwithin the context of an overall budget ,-nstraintand in light of their economicreturns. This will require adoption of a better methodologyfor the evaluationof investmentprojects and other expenditures,a capacitynow being sought by the government. It will also require reorganizingand simplifyingthe structureof government. Currently, there are too many ministries,with much duplicationof effort. Many of these offices can be combined. The planning functionas it has worked in other countrieshas been to evaluate the relative importanceof differentinfra- structureinvestments, but this has worked best in structureslike Korea's Economic Planning Board, where coordinationwith other economicministries was assured.

IndicativePlanning

6.30 While the State Planning Committeewill no longer be involvedin setting output targets for individualsectors and enterprises,it may want to engage in indicativeplanning, an approach that has been used successfullyin many market economies. Indicativeplanning requires that the planning agency develop the capacity to prepare consistentprojections, engage in effective monitoringof the attainmentof socio-economicobjectives, and contributeto effectiveeconomic management by clearly indicatingthe future directionof governmentpolicy. - 103 -

6.31 Indicativeplanni.- does not aim at settingproduction targets that must be fulfilled,as in central planning,but rather attempts to provide informationto producers that might be useful to them in making investment choices. It can be an effectiveway of instillingconfidence in the stability of governmentpolicy. For instance,Viet Nam has recently liberalizedthe trade regime,which is likely to stimulatecertain sectorsof the economy, especiallyagro-processing and labor-intensivemanufactures. If the govern- ment issues an indicativeplan for the next five years that shows rapid growth in these sectors,that should have the effect of strengtheningconfidence in government'sshift to an outward-orientedstrategy and keeping the nascent private sector appraisedof the government'splans.

6.32 Good indicativeplanning can also be an importantinput into the government'splanning of its own expenditures. For instance,if the indicativeplan 4mpliesa certaingrowth of exportsand imports,that obviouslyrequires a matching growth in port capacity. Further down the road, Viet Nam will find that educationplanning will be influencedby long-term projectionsof which industriesare likely to grow rapidly.

6.33 Informationand Statistics. An importantprerequisite for good indicativeplanning is that reliabledata on economic activity are quickly available. At present, Viet Nam's statisticalsystem leaves much to be desired. Only very few economic indicatorsare availableand these are often not very reliablebecause coverage is incompleteor concepts are inadequate. Most statisticsnow rely on administrativereporting and thus often exclude the non-state sector. It is thus importantthat a major effort be undertaken to improve the collection,analysis and disseminationof ecofomic statistics. In view of the changing nature of the economy,greater reliancewill have to be placed on survey data.

6.34 Recommendationsthat could be implementedimmediately include:

(a) Apply the 10? turnover tax uniformlyto all economic activityand step up collectionefforts so as to increasegovernment revenue.

(b) Replace import quotas and any other non-tariffbarriers with a uniform set of tariffs. This will rationalizethe trade regime and increase governmentrevenue.

(c) Increase the price of energy to fully reflect internationalprices and investmentcosts and introducea substantialtax on transport fuel as a user fee.

(d) Make further reductionsin noneconomicexpenditures.

6.35 Recommendationsfor the medium term include:

(a) Streamlinethe organizationof governmentand :educe the total number of ministries. Upgrade the planning capabilityof the governmentto allocate public investmentfunds and carry out indicativeplanning. - 104 -

(b) Improve economic statisticsto make them a more useful tool in planning and policy-makingfor the public and private sector.

(c) Introducea broader reform of taxationand tax administration.

C. Fostering a Supply Resoonse

6.36 Consolidatingthe stabilizationprogram through fiscal reform is a necessarybut not sufficientcondition for stable growth to resume. The micro managementof resourceshas been poor in Viet Nam, and variousmicro reforms need to be undertakento improveefficiency and stimulategrowth. Government has taken initial steps in the right direction,by eliminatingcentral plan- ning of most productionand by attemptingto harden the budget constraintfor state-ownedenterprises. The authoritiesin 1989 eliminatedmost subsidiesto enterprisesand began chargingpositive real interestrates on loans to enterprises.

6.37 These reformshave exposed the fact that many enterprisesare in poor financialcondition. Governmentestimates, reported in the press, indicate that only 30% of state-ownedenterprises operated in the black during 1989. Another 402 require temporaryassistance from the state while they reorganize. The remaining302 are in serious,probably terminaldifficulty. Governmentis reportedlyconsidering selling ailing firms to private investorsor the firm's workers, but fears that as many as half of the ailing firms are in such shape that they could not be divested.

6.38 For the firms in serious financialtrouble, government must decide whether to close the units or restartsubstantial subsidies. This is a crucial decision that will have a major impact on the whole effort to reform public enterprises. It is essentialthat governmentdevelop a mechanism to close enterprisesthat cannot surviveon their own. Their lack of profitabil- ity is an indicationthat they are not creatingmuch value from the resources devoted to them, and that the capital and raw materialsthat are channeledto these enterprisescan be utilizedmore productivelyelsewhere in the economy. While it is painful to close enterprisesand lay off workers, some adjustment of this kind will be necessaryto improve the efficiencyof industry.

6.39 Ceasing to provide subsidiesfor loss-makingenterprises will eliminatethe worst inefficienciesin Viet Nam's industryand improvethe state's fiscal position. Making enterprisesfinancially independent, however, will not of itself guaranteethat a firms' resourcesare utilizedmost effi- ciently or that the state will derive the maximum possible income from its enterprises. Enterprisesand their managers now have strong incentivesnot to make losses, but there do not appear to be very strong incentivesto make the most efficientuse of resources. Reorganizingthe management structurewithin public enterprisesis the next logical step in the process of micro reform.

EnterPriseManagement

6.40 An importantstep in reform of the managementsystem has been under- taken by allowingmanagers more autonomy. In principleenterprise managers - 105 - can now make decisionsabout production,pricing, investment,and foreign trade. The problem that remains is that it is not clear whom the managers representand what their principalobjectives are. Instead of givingmanagers simple and manageableobjectives, such as increaselong-term profitability, managers are given far too many and often conflictingeconomic and social objectivesfrom various representativesof the state as owner. In practice, managers'decisions currently are very much influencedby workers and their trade union, local authorities,industrial and other ministriesand so on. The most importantobjective that these groups can agree on is the preser- vation of existing jobs and further expansionof employment,if feasible. Unfortunately,this is often done with little regard to efficiency.

6.41 The governmentappears to be aware of these problems,and there are a number of plans for reorganizingstate industrythat are being considered. One proposal to is to value the total assets of the firm that have been contributedby public investment,and to make the enterprisepay a fixed percentagereturn on this amount. If the state insists on getting a return in the short run from some of the misguided investmentchoices of the past, this may very well lead to the bankruptcyof enterprisesthat should be viable. It is not in the interestof the economy or of the state to force such firms into bankruptcy. Nevertheless,this could easily happen if the "value"of a firm's capital is estimatedby adding up past investments.

6.42 Cumulatinginvestment flows is a backward-lookingapproach to valuing assets. A forward-lookingapproach is to attempt to estimate the future income stream from the assets, and to assign a value to the assets based on this expected income. Estimatingthe future income stream from the capital assets, however, is very difficultto do at the moment; all enterprisesare having difficultyand current income for many enterprisesis far below poten- tial income. If the state overestimatespotential income and charges a capital fee based on the overestimate,the firm will generatelosses. On the other hand, if the state underestimatesthe future income stream, it will cheat itself out of revenue.

6.43 Because of this uncertainty,it is tempting as an intermediatestep to negotiate the firm's capitalpayment year by year, a practice that is common in China. The current system in Viet Nam also allows some negotiation by the firm to reduce its payments to the government,either by reducingthe turnover tax on its output or reducing the share of profit remitted to the government. This approach,however, results in a lot of time being wasted in negotiationand leaves considerablescope for corruption. It also seriously underminesthe incentivesfor the enterpriseto use assets efficiently. The governmentis now consideringan approachwhereby the enterpriseswill be given an option to refuse to accept the revaluedassets if they deem the price too high. This may be a reasonablesolution, provided it is only done once and does not lead to annual bargainingsessions on transfersto the government.

6.44 Having the enterprisepay a fixed percentagereturn on assets is similar to leasingthe assets of the firm to the manager and workers. This system is likely to be more efficientthan central planning,but it does not give the managers and workers much incentiveto develop the long-termprofit- ability of the firm, unless the initialagreement is itself a long-termone. - 106 -

There is also a danger that this kind of schemewill turn the enterprisesinto de facto workers' collectives. The collectiveform of organizationcan be efficienton a small scale, but is not likely to generate efficiencyin a large enterprise. Collectivestend to employ unnecessarilylarge numbers of workers and usually do not expand their scale of operationvery rapidly.

6.45 The experiencesof enterprisesin both socialistand capitalist economiesindicate that there are two prerequisitesfor efficient,long-term productions (a) that managers have clear authotityover workers and can expand or reduce employmentin line with the needs of the enterprises;and (b) that managers have strong financialincentives themselves to maximize the long-runprofitability of the firm. The situationat the moment may well be that neither of these conditionsis satisfiedin Viet Nam's state-owned industry. The difficultfinancial situation during 1989 did result in significantlayoffs; however, as the conditionof some enterprisesimproved during the second half of 1989 there apparentlywas strongpressure on managers to rehireworkers even if their labor was redundant.

6.46 There are very few examplesanywhere of government-ownedfirms that meet conditions 1 and 2 above for efficientproduction. Most efforts to reorganizestate industry in socialisteconomies have yielded disappointing results. There are some examples from market economiesof large, state-owned enterprisesthat operate efficiently. Generally,these are organizedas joint-stockcorporations in which the state owns all or at least a majority of shares. Viet Nam may want to considerreorganizing its large enterprisesas joint-stockcorporations in which initiallyall of the shares are held by public agencies.

Comnetition

6.47 Domestic Competition. For decentralizeddecision-making to lead to efficientproduction it is necessarythat the state reorganizeits enterprises so that they have the single objectiveof maximizingprofits. There are a small number of industriesin which it may not be possible to have competition among producers;electric power is an example. In such cases the state will want to regulateprices or profits and servicequality, as discussedin Chapter 4. For the vast majority of goods and services,however, it is desirableto allow competitionamong producersand to leave prices uncon- trolled. The importanceof competitionin promotingefficiency and innovation cannot be overemphasized.

6.48 Viet Nam has taken a major step in this area by decontrollingthe prices of virtuallyall goods and servicesin 1989. The state must now developvarious institutionsand regulationsto supportcompetition; in the absence of competition,profit-maximizing behavior by firms will not lead to desirableoutcomes. For agriculturalproducts, competition among producers will be the inevitableresult of having very large numbers of producers. The government'sconcern should be with competitionin industryand services, especiallywholesale trade. In developingthe frameworkfor a market economy, governmentneeds to think about three types of competition: among state enterprises;between state enterprisesand the private sector;and between domesticproducers and foreignproducers. - 107 -

6.49 For a large number of products,there are severalor even many state enterprisesproducing similar goods, creatingthe potential for competition. There are two factors restrainingcompetition, however. In the past, enterpriseswith similar output were typicallyorganized into "unions"of producers,with the union fulfillinga managementrole for the entire sector. In principle,the unions now will functionas trade associations,providing technicalassistance and marketing servicesto their members. There is a danger,however, that the unions will now functionas cartels--settingprices, dividingup markets, and stifling competition. To avoid this development, governmentneeds to clearly establishthe lega' independenceof the enterprise from the unior.,a-id, most importantly,allow free entry into markets. Uinions or other cartelswill not be abLe to exercisemonopoly power as long as firms have the right to shift from one product line to another. A second factor limitingcompetition among enterprisesis that under the regionalizedplanning system of the past most enterprisesdistributed their product only locally. Hence there tend to be quite distinct geographicmarkets. Governmenthas made progress in reducingbarriers to trade between differentregions, but some informalbarriers still remain. A high priority should be placed on ensuring that firms can market their productsnationwide.

6.50 A great force for competitionand innovationis the private sector, which could unleash rapid growth of productionif obstaclesto its expansion are removed and adequate supportprovided. There is tremendouspotential for private sector growth in view of the highly educated,industrious, and basic- ally profit-orientedlabor force. Growth of the private sector is hampered at the moment by the lack of a clear legal frameworkfor private activity. Private activity has been encouragedby recent regulations,but that is not sufficient. Developmentof commercialand company laws covering both the public and private enterprisesectors should be a high priority. In establishingthe rights of the private sector, it will be highly beneficialif private firms are allowed to competedirectly and on an even footingwith state enterprises. The experienceof other countriesclearly demonstrates that competitionfrom the private sector is an importantmechanism for improvingthe efficiencyof public enterprises.

6.51 InternationalCompetition. There are a number of manufacturing industriesin which it would be inefficientfor Viet Nam to have a large number of producers. In the productionof steel or nitrogen fertilizer,for instance,the economiesof scale are so substantialthat the Vietnamese economy could support at most a handful of producers. In these heavy industries,in particular,import competitionplays an importantrole in spurring efficiency. Viet Nam no doubt will want to have moderate tariffs as a way of generatingincome. What is importantto avoid, however, is very strong protectionthrough tariffsor quotas for heavy industrialproducts. If an industry like steel or machine tools is protected,then the small number of producerswill act like a monopoly,and decentralizingdecision-making to this monopoly is not going to improvequality and efficiency. On the other hand, with a relativelyopen import regime, it will be impossiblefor the domestic industry--evenif it consists of only one firm--toact as a monopoly.

6.52 The experienceof other economiesin Asia has clearly demonstrated that competitionand efficiencycan be enhancedby an outward-orientedtrade regime. The key policies to achieve such an orientationconcern the trade - 108 - regime and the exchange rate. Viet Nam has mad3 a large stride in the right directionby devaluingand unifyingthe exchange rate for transactionswith the convertiblecurrency area. The new exchange rate provides a strong incentiveto export, and this is already encouragingfirms to upgrade the quality of their products and improveproductivity. The next step is to further liberalizethe trade regime, as discussedin Chapter 3. Formal and informal quotas on imports should be replacedwith moderate tariffs. Certain institutionalchanges are needed as well: more enterprisesshould be allowed direct access to the internationalmarket, and competitionamonig state trading companiesshould be encouraged. The latter should lead to high-quality,low- cost intermediationbetween small producersand the world market. Government may also want to consider some of the policies that have been used success- fully to encourage exports in other countries, such as allowing dtuty-free import of materialsto be processedfor export or developingcredit allocation mechanismsthat ensure that the working capitalneeds of exportersare met.

6.53 Viet Nam can also rationalizeits Comecon trade in the short run by commercializingas much of it as possible. This would involveselling imports procured in bilateralagreements to the highestbidder, in a competitive market; and purchasingthe items to be exported through such agreementsin a similar,competitive manner. This systemwould provide benefits to producers, as it would ensure that their exports to Comeconmarkets were profitable. Such a system would also help the governmentin planning and negotiatingits trade agreements.

6.54 Foreign investmentcan also make an importantcontribution to expandingViet Nam's trade. Governmenthas introducedregulations which on paper make Viet Nam very receptiveto direct foreign investment. There are still considerableimpediments to investmentin practice,however. For example, foreign investorshave to hire labor through the state bureaucracy and pay approximatelyten times the going wage. This approach is short- sighted; it may provide the governmentwith a small amount of revenue,but will discouragea large number of foreign investors.

6.55 In encouragingforeign investment,it should be kept in mind that even in economiesthat are very open to foreign investment,foreign partners at best play only a small direct role in the country'soverall investment. The principalbenefit of foreigninvestment is the indirecteffect that foreign investmenthas on the rest of the economy, as a conduit of foreign technologyand managementtechniques, and as a competitorand collaborator with domestic industry. The other reformsdiscussed above, in particular greaterdomestic and internationalcompetition, are prerequisitesif foreign investmentis to play this positive role. If, on the other hand, foreign investmentsare insulatedfrom the rest of the domestic economy through various barriers to competition,then such investmentis not likely to have much effect on the overall developmentof the economy.

6.56 The recommendationsthat could be implementedimmediately are thus:

(a) Give managers in state enterprisesthe single goal of maximizing profits and the authorityto make all decisionsconcerning production,employment and marketing. - 109 -

(b) Eliminateall subsidiesor budgetary support (includinginvestment funds) for state enterprises.

(c) Ensure easier access to export markets for producers,by allowing more firms direct tradingrights and by promotingcompetition among state trading companies.

(d) Ensure easier access to importedmaterials and machi ry by meeting all demand for foreign exchangefor current account transactionsat one market-clearingexchange rate.

Recommendationsfor the medium-terminclude:

(e) Establishcommercial and company laws to regulatecommercial transactions. Ensure the rights of the private sector to compete with state enterpriseson an equal basis and provide for the bankruptcyof firms.

(f) CommercializeComecon trade within Viet Nam, or where possible reorganizeit on the basis of decentralizedtransactions carried out in convertiblecurrencies.

(g) Ensure that the foreign investmentcode is carriedout in practice, and in particularreduce the cost of labor to foreignproducers.

D. Creating Factor Markets

6.57 Competitivemarkets lead to efficientoutcomes because they result in productiveresources flowing to their most productiveuses. Clearly the existenceof factor markets is necessaryif this process is to occur smoothly. Viet Nam has decontrolledprices of most goods and is allowingmarkets to allocate these outputs. Capital, labor, and land are not allocatedthrough markets, however, and the creation of markets for these "factors"needs to be promoted if the economy is to developefficiently and in the national interest.

The FinancialSystem

6.58 Previously,most investmentfunds were mobilized throughthe govern- ment budget and allocatedto state enterprises. In allocatingfunds, very little if any attentionwas paid to expected financialreturn of different investments. As discussedin SectionB, the state will have to continueto allocate investmentfunds to producepublic goods and services,such as educa- tion and roads. The governmentshould not be directly involved,however, in allocatinginvestment funds for the vast majority of goods and services. The government is not in a good position to evaluate the likely return on invest- ments in every line of activity in industry,agriculture and commerce,and allocationof investmentfunds to these activitiesshould be left to autono- mous financialinstitutions and markets. Financialsector reformswill thus need to be closely coordinatedwith enterprisereforms. Neither can move too far ahead of the other. Indeed, one could regard financialsector reforms - 110 - just as an integralpart of enterprisereforms, with the same generalprin- ciples (managementautonomy, responsibility for profits and losses, account- ability, etc.) applying to banks and other financialinstitutions as well.

6.59 The Banking Sector. At the moment, however,Viet Nam's banks functionmore as an accountingoffice of the governmentthan as banks. Reorganizingthe banking system so that it can efficientlyallocate credit must be a high prioritv. Viet Nan has made progress in this area by establishingcommerciaI bankcs, separate from the State Bsnk. However, these newly establishedbanksi as yet play little roLe in allocatingcredit to dif.. ferent producers. Allocationdecisions are still made adm.inistratively,by differentlevels of the government. As with other enterprises,banks aeed to hlaveindependence from state organs and need to be organizedso that manage- ment has strong incentivesto maximize profits. Banks are, however, different from other producers in some respects,particularly in terms of the risks that poorly or fraudulentlymanaged banks pose to depositors. The governmentthus needs to regulate and supervisethe financialcondition of banks through the central bank or a separate supervisoryagency. The personnelof the State Bank at provincialand lower levelswill need greater independencefrom local governments,otherwise implementation of monetary policy and prudential regulationsmay prove ineffective.

6.60 At the moment, relianceon financialintermediation is extremelylow. Because of high inflationand negative real interest rates in recent years, household savingshave generallynot been depositedwith banks, although the situationhas improved in 1989. With increasesin interest rates to levels that are substantiallyhigher than the rate of inflationand with the sub- sequentdecline in inflation,households have dramaticallyincreased their savingsdeposits. Continuedmonetary stabilitycombined with attractive interest rates are the most importantthings that the governmentcan do to encouragehigher savings. It would also be desirableto allow a certain amount of competitionamong banks in deposit-taking,which could stimulate savings. If allowed to compete, banks will develop new savings instruments and servicesfor their customers,and offer attractiverates of interest.

6.61 Interest rates are now rather high because inflationhas slowed abruptly. But there also remainsconsiderable uncertainty in the minds of people as to whether inflationhas been permanentlyhalted, and hence it will be necessaryto keep interest rates fairly high in real terms for some time. If monetary stabilityis maintained,then it will be possible to gradually lower nominal interest rates. Once a record of price stabilityhas been maintainedfor more than a year, it would be desirableto allow banks some flexibilityin setting interestrates. In competingto obtain savingsfrom the household sector,banks may very well establishinterest rates that are fairly high in real terms, thus increasingthe pool of savings. On the lending side, it would also be desirableto allow some competitionby leaving it to enterprisesto select their bank freely,and permittingall banks to provide all kinds of banking services to all kinds of clients, thus termina- ting the enforced functionaland customer specializationto encouragebetter services.

6.62 In order for banks to play their proper role in allocatingcredit, enterpriseswill have to maintain better financialrecords, on the basis of - ill - uniform accountingstandards. Banks need this informationin order to make intelligentjudgments about the likely returnsto differentinvestment proposals. Company law should also make provisionfor banks to claim the assets of enterpriseswhen the latter are unable to repay their loans. This will necessarilyinvolve provisionsfor restructuringand bankruptcyof enterprisesthat are no longer viable. If banks have accurate information about the financialcondition of the enterprisesto which they lend money, then it will be possible for the regulatorsof the banking system to have a clear picture of the financialsituation of each bank.

Labor Markets

6.63 Improved efficiencyin Viet Nam's Industryis also hampered by restrictionson movement of labor from one enterpriseto arother and by rigid controls on wages. There is very little differencein officialwages for differentskill levels. This system providesweak incentivesfor skilled labor to work effectivelyand also encouragesexcessive use of skilledlabor. At the same time, there are growingdisparities in wages for the same type of work in differententerprises, as workers now receivea substantialshare of profits,which differwidely from one firm to anotherand often for reasons entirely unrelatedto skills or effort.

6.64 Efficiencyis promoted by a wage system in which higher skills are rewardedwith higher wages, and in which workerswith similar skills receive similarwages. The labor market is an area in which governmentcan produce the desired outcome simply by removing the regulationsand restrictionsthat are in place. Workers and enterprisesshould be allowed to make employment contractswithout substantialinterference from the state. This system would allow workers the freedom to move from one job to another,and would also give firms the right to dismissworkers. Again, social objectivescan be achieved by replacingthe state'sdirect interventionwith labor market regulation. For instance, che state might want to regulate the age at which workers can begin employment,or the maximum length of the work week. The state might also want to establishsome kind of unemploymentcompensation scheme for workers who are laid off.

6.65 One of the reasonswhy real income is so low in Viet Nam is that too few people are actually employedproductively. Freeingup the labor market may result in a decline in wages for some industrialworkers in the short run. In the medium term, however, a competitivelabor market is a prerequisitefor rapid expansionof productiveemployment. It should be noted that in the informal sector in Viet Nam the labor market is competitive,and employmentin recent years has expandedmuch more rapidly than in the formal sector. If governmentwants to bring this kind of dynamism into the state-ownedindus- trial sector, it will have to drasticallyreduce its control of employmentand wages.

The Market for Land

6.66 Farmers and enterprisesin recent years have been given certain rights over the land that they occupy. In some cases these rights can be traded. It would be useful,however, for the state to fully specify these rights in a legal code. This is certainlynecessary before company law can be - 112 - developed. Enterprises must have well-defined property rights over land and other real property that can be traded, pledged as collateral, and taken away in court proceedings. Clear definition of these rights is necessary for development both of financial markets and land markets. As in the case of capital and labor, a competitive land market is necessary if land resources are to be put to their best economic use. The absence of such rights leads to inefficient use of land, buildings and equipment.

6.37 Recommendations that could be implemented immediateiy inc1 lude:

(a) Apply stete enterprise reform mear'res (viz. management independen.ce. accountability to board of directors, auditing) to banks and ottr.l fir.ancialinstitutions.

(b) Strengthen prudential regulation of banks and then allow greater competition among banks in taking deposits and making loans.

(c) Introduce treasury bonds at market interest rates.

(d) Permit employees (and managers) to quit their jobs freely and give enterprises full autonomy in hiring and firing employees.

Recommendations for the medium-term include:

(e) Make banks and other financial institutions fully independent financial enterprises and create a supervisory body to regulate them.

(f) Grant substantial autonomy to the State Bank so that it can implement monetary policy independently; ensure that employees of the State Bank are fully independent from local governments.

(g) Allow a market for land to develop, including in urban areas.

E. ReducingThe Conflicts: ExternalFinancing

6.68 Viet Nam is in a difficult position in that consolidation of its stabilization program requires further fiscal restraint, while developing the infrastructure needed for growth requires additional expenditure. It is not impossible to meet both of these goals at once: additional taxes and mobiliza- tion of private saving can be used to close the fiscal deficit and at the same time increase expenditure for necessary investments in transport, education, and health. Noneconomic government expenditure, particularly in the area of defense, probably can also be reduced. Viet Nam is a very poor country, how- ever, so that extracting additional taxes and/or savings from households will not be easy and may have heavy social costs.

6.69 The government is aware of these conflicts and hopes that they will be mitigated bv increases in financial flows from the convertible currency area. However, Viet Nam's present convertible currency debt is large relative to its convertible currency exports. Incurring more foreign debt is thus only possible if that debt is highly concessional and if reforms will lead to a - 113 - rapid increase of convertiblecurrency exports from present depressedlevels. The 10OZ increaseof exports during 1989 is a good beginning,but was based on exceptionalcircumstances. The governmentwill need to reassure external creditorsthat adjustmentefforts and structuralreforms will be continuedand deepened. Thus, it would be desirableto reduce the remainingand large consolidatedbudget deficit as much as possible through domestic resource mobilizationand expenditurereduction measures.

6.70 At the same time, the internetionalcozm:unity could contributein a crucialway tc the sitccessof V'et Nsmi'seconomic refocms through technical and financislassistance. Clearly, giver irmnensechanges in policies ani institutionsthat the governmenthas embarkedupon, an initial inflow of $200- 300 milliotnper year (the equ.valentof perhaps $5.00 per capita)would allow Viet Nam to move rapidlyto remove some of the most importantbottlenecks in transport,energy and telecommunications.This level of foreignassistance is about average for medium-sizedeveloping countries receiving Official DevelopmentAssistance. This could then lay the basis for the private sector to become involved in rebuildingViet Nam's economy through trade, program investmentand technologytransfer.

6.71 In order to make the best use of increasedpublic and private assist- ance and capital flows, it is importantthat the governmentstrengthen its ability to deal with a large number of foreignpartners. A major step has been taken by creatingthe State Committeefor Cooperationand Investment. However, its staff capabilitieswill need to be strengthenedquickly if it is to fulfill its wide-rangingresponsibilities. Equally important,is the developmentof a coherent and feasibleinvestment program so that projects are not driven by donor preferencesbut rather by a coherent developmentstrategy.

6.72 In additionto external financing,Viet Nam is also greatly in need of technicalassistance in a wide range of areas. It is already receiving some such assistance(for instance,from France) in statisticalmatters, such as developingthe national accounts,and in the drafting of new tax laws. Technicalassistance could also play a major role in areas such as developing company law; prudentialregulations for the banking system; reorganizationof state-ownedenterprises; pianning public investment;financing the social sectors; and designingand implementingimport tariffs.

6.73 Viet Nam now stands at an importantjuncture as it attempts to intro- duce the principlesof markets into its socialistmodel. The reform of the incentivesystem has wide-rangingimplications, particularly for re- integratingthe country economicallyinto the world's trading system. If sup- ported by normal actionsby its creditors,and with the assistanceof the internationalcommunity, the policy measures undertakenby the governmentof Viet Nam on its own accord stand a good chance of success. - 114 -

STATISTICALAPPENDIX

Page No.

Table 1.1: Population ...... 115 Table 1.2: Total Employment ...... 116 Table 1.3: Employment in State Sector, Central Management . . . 117 Table 2.1: Fational Income and Estimated GDP, 1984-88 a118 Table 2.2! Fixed Investment...... Table 2.3: State Investment Outlays in Industry ...... 120 Table 2.4: State IrLvesLmentOutlays in Agriculture ...... 121 Table 3.1: Balance of Payments, 1985-88 ...... 122 Table 3.2: Balance of Payments with the Convertible Area . . . 123 Table 3.3: Balance of Payments with the Nonconvertible Area, 1985-88 ...... 124 Table 3.4: International Reserves, 1984-88 ...... 125 Table 3.5: Services and Transfers, 1988 ...... 126 Table 3.6: External Debt and Arrears, 1984-88 ...... 127 Table 3.7: External Debt in Convertible Currencies, 1987-88 . . 128 Table 3.8: Scheduled and Actual Repayments of Medium and Long-term Loans by Area, 1984-88 ...... 129 Table 3.9: Merchandise Exports by Commodity and by Area of Destination, 1984-88 ...... 130 Table 3.10: Major Imports by Commodity and by Origin, 1984-88 . 131 Table 4.1: Monetary Survey, 1986-89 ...... 132 Table 4.2: Interest Rates, 1986-88 ...... 133 Table 4.3: Recent Interest Rates Development ...... 134 Table 4.4: Cash Plan, 1986-89 ...... 135 Table 4.5: Composition of Credit, 1986-88 ...... 136 Table 5.1: Summary of Budgetary Operations, 1984-89 ...... 137 Table 5.2: Government Revenue, 1984-89 ...... 138 Table 5.3: Functional Classification of Current Expenditures 1984-89 ...... 139 Table 5.4: Economic Classification of Current Expenditures, 1984-89 ...... 140 Table 5.5: Government Capital Expenditu.e, 1984-89 ...... 141 Table 6 1: Retail Price Index ...... 142 Table 7.1: Agricultural Production, 1984-89 ...... 143 Table 7.2: Industrial Crop Production and Yields, 1984-88 . . . 144 Table 7.3: Foodgrain Production and Yields, 1984-88 ...... 145 Table 8.1: Industrial Production and Number of Enterprises . . 146 Table 8.2: Major Industrial Products ...... 147 Table 8.3: Quantity Growth Rates of Industrial Products . . . . 148 Table 9.1: Freight Transport ...... 149 Table 10.1: Production and Imports of Selected Energy Products, 1985-88 ...... 150 Table 10.2: Consumption and Prices of Petroleum Products, 1984-88 ...... 151 Table 10.3: Production, Consumption and Prices of Electricity, 1984-88 ...... 152 Table 11.1: Domestic Trade, 1976-88 ...... 153 - 115 -

APPENDIX 1 Page 1 of 3

VIET NAM

ECONOMICREPORT r.

Table 1.1: POPULATION

Year Population Growth rate ('000) (X)

1975 47,683 2.57 1976 49,160 3.10 1977 50,413 2.55 1978 51,421 2.00 1979 52,462 2.00 1980 53,722 2.40 1981 54,927 2.24 1982 56,170 2.26 1983 57,373 2.14 1984 58,653 2.23 1985 59,872 2.08 1986 61,109 2.07 1987 62,452 2.20 1988 63,727 2.04 - 116 - APPENDIX1 Page 2 of 8

VIET NAM ECONOMICREPORT Table 1.2: TOTALEMPLOYMENT (end of year)

Year 1988 19S4 19eS 10oe 1987 1988 (Got .) (;ActualI) …------…(in thousands)…------

Social labor force 24,362.4 26,114.2 26,025.2 27,071.6 28,677.2 28,921.6 Stat, sector 3,434.8 3,6186.1 8,744.0 8,971.0 4,087.4 4,094.2 By level: Central level 1,421.9 1,620.9 1,626.2 1,690.0 1,612.0 1,6B8.6 Materialproduction (1,121.8) (1,193.6) (1,289.4) (1,263.0) (1,261.0) (1,266.6) Nonmterial production (800.1) (827.8) (887.1) (328.0) (361.0) (312.1) Local level 2,012.7 2,086.2 2,117.6 2,380.0 2,476.0 2,625.6 Materialproduction (1,100.2) (1,147.2) (1,180.0) (1,372.0) (1,489.0) (1,488.1) Nonmat*rialproduction (912.5) (918.0) (938.0) (1,008.0) (4,036.0) (1,037.6) By unit: Centralgovernment ------Local government - - - State enterprises - - - - - Other 20,927.8 21,370.2 22,06.9 23,100.0 24,490.0 24,827.9 Of which: Cooperatives 18,687.0 16,846.8 18,616.0 19,488.0 20,068.0 20,998.8 Private sector 7,290.2 6,624.4 3,444.4 8,687.0 4,422.0 3,829.6

Soure: Data providedby th- Vietnames authorities;data for 1984 and 1985 do not add to the totals. APPENDIX1 Pago 3 of 3

VIET NAM

ECONOMICREPORT

Table 3: EMPLOYMENTIN STATESECTOR, CENTRAL MANAGEMENT (in thousands of people)

1088 Year 1976 1977 1978 1979 1980 1981 1982 1983 1984 1986 1986 1987

886.1 981.8 1,048.0 984.8 1,053.7 1,046.8 1,062.6 1,121.8 1,193.6 1,327.0 1,262.6 1,268.6 1,256.3 Material production 469.8 469.0 Industry 318.8 351.8 372.0 370.3 376.2 379.4 387.4 397.9 422.6 456.7 448.0 266.6 290.1 307.0 302.7 301.7 290.8 247.8 281.9 263.0 308.6 302.6 300.4 294.5 Building 216.9 4 Agriculture 80.7 94.1 87.0 69.8 86.1 87.8 128.6 182.8 203.0 237.7 237.8 233.1 23.1 27.7 32.6 Forestry 10.0 - - - 8.7 9.3 11.2 10.7 16.0 22.8 83.7 103.5 122.0 121.8 90.8 93.1 94.7 91.3 97.3 99.4 97.1 97.0 100.3 Transportation 37.3 29.0 - - - 32.8 32.9 33.0 3S.0 36.0 38.3 35.7 35.8 Past & coi_unicatione 97.8 rce 144.1 139.2 156.0 115.6 164.3 148.9 143.8 161.3 161.0 E15.6 110.0 132.7 Comme 8.1 Other 3.3 3.3 4.0 4.3 5.1 S.8 6.0 7.9 7.3 8.1 8.3 8.0 331.8 314.9 Nonmaterialproduction 228.8 252.8 289.3 218.4 28S.1 285.1 288.8 300.1 327.3 34a.5 327.9 1.8 1.9 2.1 0.4 Housing 0.6 0.8 0.3 0.7 1.2 1.1 1.4 1.3 1.2 40.1 168.8 134.0 133.8 49.8 49.9 49.8 49.3 60.0 53.8 54.2 54.2 49.8 Sci;nce 60.9 68.2 Education 58.8 - - - 59.7 59.0 57.8 59.0 69.0 62.5 6.8 6.0 5.1 6.3 3.2 10.6 - - - 8.5 6.8 8.0 5.4 5.2 Culture 24.6 26.0 Health, soclal ins. 23.0 - - - 22.0 20.8 21.0 21.8 23.6 23.3 24.7 81.3 80.7 Finance 30.4 31.1 33.0 37.8 38.8 41.8 43.4 47.7 51.5 83.7 81.1 30.0 64.1 92.0 48.1 40.1 40.3 43.8 46.0 71.2 49.2 51.0 81.2 41.7 State menagmeent 81.2 47.9 Other 35.3 - - - 86.0 S6.4 65.6 89.4 65.7 87.4 49.7 1.670.2 Total 1.114.7 1,234.6 1.307.3 1,203.2 1.338.8 1.330.9 1.341.3 1,421.9 1.520.6 1,637.5 1,S90.6 1.618.3 - 118 -

APPENDIX2 Page 1 of

VIET NAM ECONOMICREPORT

Takle 2.1: NATIONALINCOME AND ESTIMATEDGOP, 1984-88 (in billionsof dong at 1982 prices)

Year 1984 1985 1986 1987 1988

Agriculture 79.8 83.4 84.6 81.7 86.1 Industry 41.2 46.8 48.4 63.9 69.6 Commerce 23.4 22.1 23.4 19.7 25.6 Transport and Conmunication, 2.5 2.8 8.0 3.5 8.6 Construction 4.6 6.0 5.0 6.3 4.7 Other 3.8 4.6 6.2 3.7 6.7 NationalIncome/a 1665. 164.1 169.6 178.9 184.1 NonmaterialServices and Depr-ciation/b 65.9 59.1 61.1 62.6 68.3 GOP at 1982 Prices (Bank staff estimate) 211.2 223.2 230.7 236.6 260.4 GOP at Current Prices (Bank staff estimateLc 64.8 131.1 795.7 3,274.6 14,149.2 Implicit GOP Deflator (Bank staff estimate (1982= 100)Lc 807.0 688.0 3,451.0.13,849.0 58,520.0

(PercentageChange at 1982 Prices) NatlonalIncome 8.8 5.7 8.4 2.5 6.9 Agriculture 4.2 4.7 1.9 -8.4 4.2 Industry 12.0 12.4 4.6 11.3 10.4 Inv-stment 2653 6.9 -17.2 -22.1 -15.5

La The term 'nationalIncome' refers to the MaterialProduct System (MPS). The basic differencewith the United Nations System of NationalAccounts (SMA) is that the UPS does not includenonmaterial servicesor depreciation. lb Includesestimates of unreportedeconomic activities. cNow dong. Proxied by average lncroasein consumerprices.

Source: Date providedby Vlitnameseauthorities and staff estimates. 1:FLM lNESTMET (in"fAMof dons at 1982 prices)

Year 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 19W (In millions of dong *t 1982 price.)Ll

11.651 Crose Fimed Invostmnt 12.808 15.995 17,477 17,047 15.959 14.361 14.409 18,540 23,226 2t,839 20.559 16,020 13.544 (Percent of National Income) 10.8 13.2 14.1 14.0 13.3 11.7 10.6 12.8 14.9 15.0 12.0 9.1 7.3 By Type of Managet Central Manamnt 8,0S3 9,446 10.064 11.343 11.842 11.293 10,632 13.215 14,06e 13,807 12.101 9,404 9,064 8,739 2.912 Loeal fMnaemt 4,775 6,549 7,393 5,704 4,217 3.088 3,577 5,325 9,16e 11.032 8,458 8.616 4,460 by Type of Outlay 9.805 7.806 Conetruction Aseably Works 8,196 10,204 10,829 9,02S 8,024 8,118 8,327 11,732 15,417 17,875 14.979 11,974 Machinery and Equipment 3,603 4.65C 5,062 6,801 6,663 4.589 4,407 4,490 4,830 3,477 2,957 2,426 2,124 2,1.2 1,713 Other 1,009 1,132 1.786 1,423 1,272 1,649 1,675 2.318 2.979 3,487 2.623 1.620 1,613 by sector 11.906 10.020 Productive Sector 11,022 13,510 15,131 15,L.d6 14,406 12,886 12.808 15,838 19,34 19.356 16.700 12,787 Industry 4,087 5,013 5,88l S,674 6,499 6,644 6,830 7.486 7,642 7,752 7,3s6 8,975 6S.64 5.62 4 456 Heavy Industry 2,742 3,837 4,172 4.497 4,717 4,965 4,667 5,'99 5,622 5,926 5,473 5,252 5.445 1.204 Light 1,345 1,1Z6 1,706 2,177 1,782 1.679 2,163 1.495 2 020 1.826 1.86s 1.72S 1.219 Agriculture and Forestry 2,857 4,301 4,560 3,919 3,478 3,253 2,622 3.548 5,121 5.395 5S133 3,213 3,265 2.517 1,8S4 1.653 1.515 Transportation and Communications 2,793 2,824 3,179 3,449 3,315 2,207 2,618 3,305 4,944 4,595 3,322 326 Other 1,286 1,572 1,511 1,144 1,114 784 740 1,199 1,397 1,614 1,009 745 324 1,636 1,631 Nnproductive Sector 1,786 2,485 2,345 1.861 1.53 1,463 1,601 3,002 3,922 56483 9,859 3,233 617 Housing and Community Services 659 956 817 620 544 W6C 686 1,296 1,560 2,017 1.756 1,315 746 Science, Educetion, Public Health, 892 1,014 end Social Welfare 841 1,232 1,285 945 863 567 738 1.178 1,479 1,768 1.315 1,294 Other 288 297 244 296 146 36 191 528 893 1,648 788 624

(Shares in Percent)

100.0 Oros Fixod Investmnt 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 By Type of onagement 67.1 7S.0 Central Manament 62.7 89.1 57.5 66.8 73.6 78.6 78.2 71.3 60.6 85.6 68.9 s5.7 41.3 52.9 25.0 Local anagement 37.3 40.9 42.3 3S.5 26.4 21.4 24.8 2B.7 39.5 44.4 41.1 ey Type at Outlay Construction Projects 64.0 63.8 60.8 52.9 50.3 56.5 57.8 63.3 68.4 72.0 72.9 74.7 72.4 67.0 18.3 Mbchinery and Equipment 26.1 29.1 29.0 38.7 41.7 32.0 30.6 24.2 20.6 14.0 14.4 15.1 15.7 14.7 Other , 7.9 7.1 10.2 8.3 8.0 11.5 11.6 12.5 12.8 14.0 12.6 10.1 11.9 By Sector 48.6 Industry 31,9 31.3 33.6 39.2 40.7 46.3 47.4 40.4 33.8 31.2 35.7 43.5 49.2 Heavy Industry 21.4 24.0 23.9 26.4 29.6 34.6 32.4 32.3 25.1 23.9 26.6 32.8 40.2 3S.3 10.3 Liobt Industry 10.5 7.3 9.7 12.8 11.1 11.7 15.0 8.1 8.7 7.4 9.1 10.8 9.0 24.5 20.1 24.1 21.6 Agriculture end Forestry 22.3 26.9 26.1 2S.0 21.8 22.7 16.2 19.1 22.0 21.7 12.2 13.0 Tranortetion end Counications 21.8 17.7 18.2 20.2 20.8 15.4 16.0 17.8 21.8 16.5 16.2 11.6 5.3 Houing and Comnity Services 5.1 6.0 4.5 5.6 3.4 3.9 4.6 7.0 6.7 8.3 6.6 8.2 5.5 Science, Education, Public Health, end Social Welfare 6.6 7.7 7.4 5.5 5.4 4.0 5.1 6.4 6.4 7.1 6.4 6.1 6.6 8.7 6.5 Other 2.2 1.9 1.4 1.7 0.9 2.3 1.5 9.3 9.9 13.1 8.7

price developmentsin the yecono. IS Official prices at which investmente*penditure are calculatd. Theg are o'hat higher then the 1982 fined pricen, but do not fully reflect APPENDIX2 Page 3 of 4

VIET NAM

ECONOMICREPORT

Table 3.4: STATE INVESTMENTSOUTLAYS IN ACRICULTURE (in billions of dong at 1982 prices)

Year 1976 1977 1978 1979 1980 1981 1982 1983 1984 1986 1986 1987 1988

GrossFixed Investment 2,866.7 7,300.6 4,569.7 3,918.6 3,417.7 3,252.8 2,622.0 3,647.6 6,t21.2 6,394.6 6,033.0 3,213.0 3,823.4

Detailed Breakdown

Agricultureand Irrigation 2,661.8 3,792.2 3,971.6 3,433.6 3,038.3 2,938.9 2,390.2 3,100.6 4,427.1 4,808.5 4,060.0 2,920.2 3,226.1 Irrigation 1,202.3 2,056.8 2,016.4 1,648.4 1,224.2 1,240.4 1,112.2 1,609.8 2,086.0 2,283.7 2,616.0 1,346.3 1,631.2 Forestry 294.9 608.3 688.2 486.0 439.4 313.7 231.8 447.0 894.1 788.1 483.1 292.8 697.3

Source: Data providedby the Vietnsme, authorities. Page 3 of 4

VlEr NAMe

ECONOMIC RPQ

Table 2.3. STATEINVESTMNTS OUTLAYSIN INDSTRY (in b.lbion. of dong at 1982 pr-ces)

yea, 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1965 1988 1987 1988

(In .;lflona of old donqg t 1982 p,..-s)

Crows Fixad 0nn. 4,087.4 5.012.5 5,881.1 8,673 6 6.498 9 6,643 8 6.829 9 7,48e 7.842 7,752 7,336 6.074 6 7,029 7 En.rgy.Combustibles 906.9 1.099.5 1,476.5 1.506 3 13,832.0 1,988.8 2,615.4 3,373 3,334 3,803 3,809 3,788 0 4,139 8 etalluroy 279.9 348./ 270.0 169.9 123.1 8S.0 36 8 12c i36 109 67 71 6 82 9 Machinery 435.6 697.0 748 5 639.8 721.4 615 4 488.0 693 828 646 540 285 3 317 1 Ch*alcal Indoatry 350.9 356 0 383.1 268 3 304.6 310.2 406 9 705 514 459 376 512 1 894 1 Con.truction Material, Earthen.are, Porcelain, Ol.ra.ar., Wood, Forest Prod.cta, CellulosaPasta and Paper IndAoat,;. 1,306.7 1,634.4 1,784.1 2,570.1 2,581 6 2,423.9 1,S35 9 1,256 1.186 1,161 873 734 0 810 6 Food and Fooa.t.Fts 292.8 444.6 794.2 663 7 634.0 487.3 659.6 523 2.053 718 898 73S 0 504.9 Was.ing. Leather, S- ine and Dyeino 338.3 178.9 194.4 671.7 665 8 593.7 899.9 S32 514 446 289 54.2 490.2 Printing ard Cultural Product. 7.1 28.0 11.5 36.5 22.9 9.1 0.3 2 19 20 29 20 3 16 6 Other Induatries 111.4 225.4 220.6 127.2 72.3 130.4 187.1 276 256 400 484 284 1 373 5

(Share. in Percentage) t

Cross Fiaed In-estent 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100 0 100.0 100.0 100 0 100 0 Energy, Co*.**t,blaa 22.2 21.9 25.1 22.6 21.3 29.9 38.3 45.0 54 5 49.1 46.7 54 3 54 3 Natallury 6.8 7.0 4.6 2.5 1.9 1.3 0.5 1.7 1.7 1.4 1.4 1.0 1 1 Machinery 10.7 13.9 12.7 9.6 10.9 9.3 7.1 9.3 10.8 8.3 7.8 4 1 4.2 Chemical Industry 8.6 7.1 6.5 4.0 4.7 4.7 6.0 9.4 6.. 5 9 6.2 7.3 11 7 Construction N.ta.ial. Ea,th enva, Porcelain, Cla- ara. Wood, Forot Prod.cte, Cl lulo. Paat.. Paper Industries 32.0 32.6 30.3 38.5 39.7 36.5 22.5 16.8 15.1 15.0 14 0 10.5 10.6 Food and Foodatuffs 7.2 8.9 13.5 10.2 9.8 7.3 9.7 7.0 13.4 9.3 11.4 I.S 6.6 Wean.ng, Leather, Seeing and Dyeing 8.3 3.6 3.3 1I.1 10.2 8.9 13.2 /.1 6.5 5.8 6.5 7.9 6.4 Printing and Cultural Productrs 1.6 0.6 0.2 0.5 0.4 0.1 0.0 0.0 0.2 0.1 0.2 0.1 0.2 Other Ind.strin 2.6 4.4 3.8 2.0 1.1 2.0 2.7 3.7 3.3 5.1 5 4.3 4.9

Source: Data prcdded by the Vietnames. authorities. - 122 -

APPENDIXS Page Iof 10

VIET NAM ECONOMICREPORT Table 8.1: BALANCE OF PAYMENTS,1985-88 (in mill ons of US8 dollars)

1986 198U 1987 1988

CurrentAccount -468 -6S5 -693 -726 Convertiblearea -170 -174 -85 -208 Nonconvertiblearea -288 -481 -608 -161 Trade Balance -406 -627 -648 -666 Convertiblearea -123 -146 -8S -188 Nonconvertiblearea -283 -481 -608 -518 Exports,total 497 494 599 709 Convertiblearea 386 807 480 465 Nonconvortiblearea 161 187 169 244 Imports,total -908 -1,120 -1,142 -1,866 Convertibleare -469 -465 -466 -608 Nonconvertiblearea -444 -67 -677 -762 Servicesand transfers (convertible area) -47 -28 -50 -70 Interestpaymntc -64 -68 -58 -106 Inputed Interet on arroe -20 -28 -36 - Private remittanceo 32 8o 10 7 Freight and Insurance -11 1 -2 - Official transfers 20 27 17 18 Other 2 9 20 22 Capital Account 192 868 899 286 Receiptof Loans 887 517 691 687 Convertiblear" 61 10 28 60 Nonconvertiblear" 16 607 568 627 Scheduledroepyments -281 -264 -229 -444 Convertible area -197 -287 -168 -284 Nonconvertiblearea -B4 -27 -6s -160, Amortizationof DebtRelle 0 0 0 0 Short-term(net) 66 111 87 43 Errorsand omissions -8 -28 -104 19 OverallBalance -269 -815 -297 -420 Financing 269 815 297 420 Change in NFA (exel.IMF, Incr.) 0 2 0 - Net use of Fund credit -14 -4 0 Cold revaluation 0 0 0 - Debt rescheduling 262 - - 24 ChangeIn arrears 31 817 297 B98 Memorandumitems: Transferabloruble per US$ 2.66 2.55 2.56 2.56 Currentaccount/exports (X) Total -91 -188 -99 -102 Convertiblearea -61 -67 -20 -45

Sources:IMF, based on dataprovided by tho Vietnameseauthorities. - 123 -

APPENDIX8 Page 2 of 10

VIET NAM ECONOMICREPORT Tabl- 8.2: BALANCE OF PAYMENTSwith the ConvertibleArea (in millionsof US8 dollars)

1986 1986 1987 1988

Current Account -170 -174 -85 -208 TradeBalance -128 -146 -as -188 Exports 886 807 430 465 w/o petroleum - - SO - other exports a88 807 480 465 Imports -469 -458 -468 -6oJ w/o petroleum_-relatedoutflows - - -80 - other Imports -459 -4S8 -485 - Servicesand transfers -47 -28 -50 -70 Interestpayment. -64 -6s -68 -108 Inputed lnterest on arrere -26 -26 -a8 - Interest on rescheduled amounts Private reittances and tourism 82 8o 10 7 Freight and Insurance -11 1 -2 - Official transfer. 20 27 17 18 Other 2 9 20 16 Capital account -91 -116 -151 -167 Recelptof Loans 61 10 28 6o Scheduledrepayment. -197 -287 -166 -284 Short-term(net) 66 111 -18 67 Receipt. 148 269 187 866 Amortization -92 -148 -200 -299 Errors and omissions -9 -26 -11 14 OverallBalance (before relief) -269 -816 -247 -851 Financing 269 815 247 861 Net use of Fund Credit -14 -4 - - Change In NFA (exclIMF, Incr-) 0 2 - - Debt rescheduling 252 0 - - Change In arrears 82 817 247 351 UnfinnncedCap Potential sources - - SAF resources - _ _ _ Maximum potentialdebt reached Bridge financinggap - - - - Residualfinancing gap - - - - Memorandumlteo: Schedulod debt service 801 886 281 - Arreareoutstanding 683 1,000 1,247 - lw arrearsto the Fund 80 117 - As a percentageof exports: Current accountdeficit 50 56.7 19.8 44.7 - 124 -

APPENDIX8 Pag a of 10

VIET NAM ECONOMICREPORT

Table 8.8: BALANCEOF PAYMENTSWITH THE NONCONVERTIBLEAREA, 1986-88 (in millions of transferable rubles)

1986 1988 1987 1988

Curront Account Trade Balance -721 -1,222 -1,276 -1,827 Exports, total 410 480 450 815 Imports, total -1,131 -1,702 -1,728 -1,942 Servicoe and transfers (net) Capital account 721 1,222 1,403 1,130 Receipt of Loans 807 1,292 1,486 1,600 Schdu i ed repayments -88 -70 -160 -408 Short-term (not) - - 127 -62 Receipts - - 660 754 Payments - - -424 -816 Errors and omissions - - - 37 Overall Balance 0 0 -127 -176 Financing 0 0 127 176 Arr re 0 0 127 116 Debt rescheduling - - - 60

Sources Dnat provided by the Vietnameseauthorities.

i - 125 -

APPENDIX3 Page 4 of 10

VIET NAM ECONOMICREPORT

Toble 3.4: INTERNATIONALRESERVES, 1984-88 (inmilliono of USS dollars,end of period)

1984 1986 1988 1987 1988

GrossInternational reserves 17 17 15 15 15 Gold (valuedat 842/oz) 4 4 4 4 4 SDRs _ _ _ _ _ Fund isition Foreignexchange 12 12 10 10 10 StateBank 6 6 4 4 4 Bank for ForeignTrade 6 6 6 6 6 Liabilitiesto IMF 20 31 86 40 38 Net Internationalresrves -11 -16 -20 -26 -23 MemorandumItem: Arreareon Fund credit la 12 sO as 40 38 Net Internationalreserves (excludingIMF) 17 17 15 16 16 Coldvalued at marketprice 86 32 37 44 43

Sources: IMF

La ExcludesTrust Fund and Intorestand chargesIn *rrears. - 126 -

APPENDIX8 Page 6 of 10

VIETNAM ECONOMICREPORT

Table3.6: SERVICESAND TRANSFERS, 1988

Convertible Aro- Nonconvertiblearea/1 credit debit Credit Debit

Totalservies andtransfers 86.20 63.20 43.10 16.20 Freightand lnourance 34.90 22.40 8.30 8.0 Insurance 6.20 2.60 - - Freight 14.00 19.50 - Airline 13.30 0.30 8.20 - Postal 1.40 0.10 0.20 0.10 Interestson bankingtransactions 9.80 0.40 0.10 - Intrestson deposit 7.10 0.40 0.10 Interestsfrom lending* 2.70 - 0.10 0 Actuslpaymnt of interestson totaldebts Lb - 26.0 - - Tourism and privatetransfers 10.80 2.90 2.60 0.10 Tourlm 6.90 0.10 2.60 0.10 Privatetransfers 4.40 2.80 - - Officialtransfers 18.0 - 3.90 - Otherservices 17.20 11.60 28.20 6.20 Aid 0.70 - - - Specialist'sremittance 4.10 - - - Vietnameseoffices abroad - 2.70 - 2.60 Outgoingmissions 0.90 - 0.30 Manpowercooperation - - 14.60 - Nonresidenttransaction 1.60 0.60 3.60 - Import/exportof culturalproducts 0.10 - 0.10 1.90 Servicesof Diplomaticcorps 8.90 - 1.10 - Port feesand charges - - 3.20 Agent'efoes and charges - 1.10 - Ship chandler - - 0.60 - Others 6.90 7.30 3.90 0.50

1 a Convertedat ruble2.66 perUS dollar. On a paymentsbasis; differ from the balanceof paymentsIs on an accrualbasis and IncludesImputed Interests.

Source: Vietnameseauthorities. - 127 -

APPENDIX3 Page 6 of 10

VIET NAM

ECONOMICREPORT Table 8.8: EXTERNALDEBT AND ARREARS, 1984-88 (In millionsof US dollars)

OutstandinaAmount at End of Period 1984 1985 I98e 1987 1988

Total debt outstanding 8,226 4,260 6,095 8,142 7,033 Nonconvertiblecurrencies / 1,610 2,838 2,829 3,216 3,814 Principal 1,610 2,836 2,816 3,169 3,674 Arrears - - 14 47 141 Convortiblecurrencies 1,615 1,914 2,286 2,926 3,219 Prlncipal 1,461 1,712 1,991 2,680 2,727 Of which: In arrears (486) (472) (711) (1,062) (1,247) InterestIn arreare 98 108 154 178 268 Imputed late lnterost /b 69 94 121 167 224

International organizations Ie 180 198 287 307 314 Principal 174 198 228 291 273 Of which: in arrears (18) (89) (61) (132) (102) Interest in arrears 6 6 9 le 41 Official creditors /d 992 1,116 1,227 1,497 1,464 Principal 916 1,011 1,088 1,820 1,241 Of which: in arrears (808) (381) (587) (688) (757) Interest In arreare 64 79 98 118 126 Imputed lateInterest Ld 14 26 48 64 88 Prlvate creditors 860 462 648 809 834 Principal 269 861 421 476 637 Of which: in arrears (161) (44) (89) (62) (190) Inberest In arrears 26 24 47 49 101 Imputedlate Interest Lb 64 87 76 85 98

Short-term credits 98 148 269 618 e81 Prlnepl 92 147 26e 496 676 Of which: In arrears (8) (6) (44) (192) (199) Intaiest in arrears - - - Imputed late interests /b 1 1 8 18 40 Memorandumi tss: IMF (including Trust Fund) 99.2 108.8 125.8 144.9 168.0 Principal 90.8 90.8 104.1 114.8 119.3 Of which: In arrears (44.4) (61.6) (67.8) (83.2) (96.8) ChargesIn arrears 7.4 12.6 21.2 80.1 38.7 Arrears a60 674 988 1,413 1,880 Convertiblearea 650 674 996 1,397 1,739 Nonconvertibloaroa - - - 16 141

/a The debt due to the nonconvertiblearea, which io officiallyrecorded in terms of transferable rubles,was convertedInto US dollars at ruble 2.66 per US dollar. /b Imputed late Intereston privatesources was calculated at assumedInterest rates which yield a welghtedaverage of 8.5-4.0%, reflecting the large proportion of official credit on concessional trom. Ic IncludingIMF. IncludesIn 1988 loansfrom the nonconvertiblearea denominated in convertiblecurrencies. Sources: IMF - 128 -

APPENDIX8 Page 7 of 10 VIET NAM

ECONOMICREPORT

Table 8.7: EXTERNALDEBT IN CONVERTIBLECURRENCIES, 1987-88 (in millions US dollars)

1987 1988 Debt out- Draw- Amorti- Valuation debt out- Prin- Inter- Imputed standing ings zation adjustment stsnding total cipal *et interestb

InternationalOrganizations 269.8 2.6 1.2 9.4 272.8 148.7 101.8 41.9 -

AsDB 28.9 - 0.8 1.6 80.1 4.5 2.9 1.6 - OPEC 18.8 - 0.9 - 12.4 2.2 2.0 0.2 - IBRD/IDA 62.0 - - 5.1 87.1 - - - - IhIF/b 113.6 - - 3.4 119.0 187.0 98.9 40.1 - MIB - 2.6 - - 2.6 - - - - MBES 22.1 - - -0.8 21.6 - - - -

OfficialCreditors 1.232.8 6.9 8.7 4.6 1.240.6 969.9 766.8 126.1 88.0

Algeria 220.2 - 0.1 - 220.1 248.6 220.2 28.3 - Bolgium 6.5 - - - 6.6 - - - - Denmark 46.0 - - -0.4 44.6 4.8 4.8 - - France 179.9 - - -6.8 178.1 138.5 88.9 49.6 - India 84.8 8.6 - -3.6 87.8 16.4 8.8 6.6 - Iraq 848.1 - - - 847.0 421.8 299.0 11.8 - Italy 26.8 ------Japan 208.1 - - 15.6 221.6 82.0 68.6 15.4 - Kuwait 29.8 0.4 1.1 0.7 29.8 - - - - Libya 40.2 - - - 40.2 41.7 40.2 1.5 - Netherlands 18.3 - - - 18.2 4.6 2.0 2.6 - Czechoslovakia 6.0 - - - 5.0 7.0 6.0 2.0 - Poland 8.8 - 1.8 -0.8 7.0 8.0 2.0 1.0 - USSR 86.0 - 0.1 -0.6 64.8 - - -

Private Creditors 591.1 49.5 0.9 -8.2 637.8 886.6 189.6 101.0 98.0

Austria 40.3 - - 4.6 44.8 - - - - Belgium 84.7 - - -0.4 84.8 80.6 21.3 9.3 - Denmark 7.3 - - - 7.8 9.2 7.3 1.9 - Germany,Fed. Rep. of 14.7 - 0.8 -0.2 18.9 4.7 8.7 1.0 - India 50.1 - - -5.0 46.1 - - - - Italy 89.1 2.9 0.3 - 41.7 46.4 83.0 12.4 - Japan 841.8 - - -2.8 838.8 129.9 67.5 62.4 - Kuwait 28.0 - - 0.4 28.4 28.4 23.4 - - Norway 6.8 - - 0.2 6.4 6.2 3.8 1.4 - Singapore - 46.6 - - 46.6 - Sweden 0.8 - - -0.8 0.8 0 S- United Kingdom 84.2 - - 0.6 84.7 41.9 29.3 12.6

Short-Term CreditS&/ 496.3 868.7 298.8 12.0 676.2 239.4 199.4 - 40.0

Totol In Convertible Currency 2.679.8 425.8 3(4.8 22.8 2.727.7 1.739.6 1,247.8 26e.0 224.0

L Imputed interestfor private creditorswas estimatedat an assumedrate of 11.3X until 1984, 10X in 1986, and 8.3% in 1988. The rate assumed for official creditorswas 3.01. For internationalorganizations, these charges are included under interestcharges. /b Based on Fund records. c Less than two-year maturity

Source: Data provided by the Vietnamese authorities.

I - 129 -

APPENDIXS

VIET NAM ECONOMICREPORT

Table 8.8: SCHEDULEDAND ACTUALREPAYMENTS OF MEDIUMAND LONG-TERMLOANS BY AREA, 1984-98

1984 1985 1986 1987 1988

(In millionsof US dollars) Schedulecdebt servicepayments Convertible area 226 288 3al 280 390 Principal/a 149 197 237 166 284 Interest 46 64 es S8 49 Imputed Intereston arrears 31 26 28 38 67 Nonconvertiblearea 47 85 27 74 198

Total 278 321 368 334 88e Actual debt servicepayments Convertiblearea 41 23 19 24 31 Principale la 29 4 2 4 6 Interest 12 19 17 21 28 donconvertiblearea 47 35 14 33 16e Tota l 88 s8 33 67 187 (As percentof exports to the area concerned) Scheduleddebt servicepaymetne Convertiblearea 82 85 108 60 84 Principal /a 64 69 77 39 61 Interest 17 19 22 13 11 Imputed lntereston arrears 11 8 8 8 12 Nonconvertiblearea 31 22 14 44 81 Total 64 e6 73 6e 8S Actualdebt service paymentt Convertiblearea 15 7 6 6 7 Principalle 9 2 1 2 2 Interest a 4 3 4 4 Imputed Intereaton arrears - - - - -

Nonconvertibl*are& 31 22 8 20 64 Total 20 12 7 10 28 le Excludesrepurchase to the Fund. Sources: Data providedby the Vietnameseauthorities. - 130 -

APPENDIX3 Page 9 of la VIET NAM ECONOMICREPORT

Table 3.9: MERCHANDISEEXPORTS BY COMMODITYAND BY AREA OF DESTINATION,1984-88 (In millionsof US dollars/transferablerublen)

1984 195 1868 1987 1988

Total Exports (inmillions of USt) 429 497 494 699 709

To the ConvertibleArea (in millio'aof US$) 276 836 307 430 466

Rubler 7 2 2 6 6 Quantity ('000 tons) a 4 6 6 2 Unit Value ('000 USS/ton) 1.2 0.6 0.8 1.0 2.0 Tea 3 6 4 2 8 Quantity('000 tons) a 2 2 2 13 Unit Value ('000 USt/ton) 1.0 2.6 2.0 1.0 0.2

Coffee - 2 2 24 25 Quantity('000 tons) - 2 6 12 16 Unit Value ('000 US/ton) - 1.0 0.4 2.0 1.6 Marine Products 74 80 95 l1 124 Quantity ('000tons) 26 86 11 12 16 Unit Value ('000 US$/ton) 2.9 2.8 8.6 9.4 3.6

Agriculture and Forestry Products 89 120 110 18 197

Handicraftsand Light IndustrialCoods 81 92 e6 8o 18

Petroleum - - - 80 79 Quantity('000 tons) - - - 235 680 Unit Value ('000US/ton) - - - 128 1l6 Unclassified - - - 77 - To the Nonconvertible Area (in millions of T.R.) 889 410 476 431 622 Coal 4 6 5 2 2 Quantity('000 tons) 90 100 202 118 s0 Unit Value ('000 T.R./ton) 44 60 26 17 40 Rubber 24 28 28 22 26 Quantity (000 tons) 29 82 80 85 32 Unit Value ('000 T.R./ton) 828 875 9g8 629 818

Tes 11 15 8 4 4 Quantity ('000 tons) 8 10 9 8 8 Unit Value ('000 T.R./ton) 1.4 1.6 1.4 1.7 1.6 Coffee 10 14 14 4 7 Quantity ('000 tons) a 6 1s 15 14 Unit Value ('000 T.R./ton) 8.8 2.3 1.1 0.8 0.6

MarineProducts - 20 12 - - Agricultureand ForestryProducts 115 120 106 160 205 MemorandumItems Exports to Nonconvortible Area in Percentof Total Exports 86.6 82.4 87.8 28.2 84.4 TransferableRuble*/US$ 2.66 2.55 2.56 2.66 2.56

Source: IMF - 131 -

APPENDIX3 Page lOof lO VIET NAM ECONOMICREPORT Table3.10: MAJOR IMPORTSBY COMMODITYAND BY ORIGIN,1984-88 (In millionsof US dollars/transferablerubles)

1984 1986 1988 1987 1988

Total Iports (in millionsof US2) 896 903 1.120 1,142 1.065 From the ConvertibleArea (in million of USS) 488 469 463 466 608 Rice 62 48 71 62 47 Quantity ('000 tons) 867 422 528 415 280 Unit Value ('000US$/ton) 174 114 184 149 168 Fertilizere 82 67 94 98 72 Quantity ('000tons) 498 489 896 702 400 Unit Value ('000 USS/ton) 124 137 187 140 18O Stel 72 84 98 167 271 Qu!ntity('000 tone) 280 800 820 880 45U Unit Value ('000 USS/ton) 267 280 3oo 413 698 Unclassified 272 280 192 148 213 From the NonconvertibleArea (in millionsof T.R.) 1,092 1.181 1.702 1.728 1.942 Petroleumproducts 457 461 492 681 556 Quantity('000 tons) 1,878 1,899 2,028 2,100 2,200 Unit Value ('000T.R./ton) 244 243 248 268 258 Cotton textiles 32 44 26 28 21 Quantity(Un mtetrs) 40 65 82 29 27 Unit Value (T.R./meter) 800 800 781 793 778 Fertiliers 230 230 821 327 828 Quantity ('000tons) 1,496 1,487 2,059 2,100 2,120 Unit Value ('000T.R./ton) 154 167 1se 155 155 Raw cotton 62 58 58 62 65 Quantity; 000 tone) 40 41 41 48 50 Unit Value ('000T.R./ton) 1,800 1,298 1,298 1,292 1,300 Steel 82 41 71 72 88 Quantity('OUO tons) 248 162 282 286 560 Unit Valuo ('000T.R./ton) 260 268 252 268 261 Sugar 10 10 8 12 7 Quantity ('000tons) 70 70 6S 85 60 Unit Value ('000T.R./ton) 148 148 146 141 140 UnclassiftedLo 249 292 782 699 877

MemorandumItems Import from nonconvertible area In percent of total exports 47.8 49.1 69.6 59.8 56.8 TraneterableRublo/USS 2.66 2.66 2.66 2.65 2.66

/a Consistsminly of capitol and intermediategoods.

Source: IMF - 132 -

APPENDIX4 Page 1 of 6

VIETNAM ECONOMICREPORT

Table4.1: MONETARYSURVEY, 1988-89

1986 1987 1988 1989 La

(Inbillions of dong,*nd of period) Foreignassets (net) -28 -210 -277 -1,646 Not domesticassets 134 680 2,662 4,383 of which: Domesticcredit 152 581 2,688 - Government(not) 19 809 699 970 Nonfinancial public enterprises 117 876 1,709 2,183 Cooperatives 18 44 171 - Private businesses and households 4 32 84 Other ittms (not) -18 149 29 _ TotalLiquidity (M2) 111 471 2,385 2,687 Currency outside banks 65 205 1,024 1,419 Deposits (in dong) 64 238 1,118 1,268 Deposits (in foreign currency) 1 29 242 - (ChangesIn percent of M2 outstand;ng at beginning period) Foreign assets(net) - -169 -14 -57 Domestic crodit - 848 446 - Government(not) - se 126 13 Nonfinancial public enterprises - 234 288 20 Cooperatives - 28 27 - Private businesses and households - 25 11 - Total liquidity (M2) - 828 406 18 Of which:Currency outside banks (186) (174) (17) MemorandumItems: Savingsdeposits (billions of dong) 7 58 162 - CurrencyLb /ODPratio 8.9 68.3 7.2 _ Liquidity(M2)/CDP ratio 18.9 14.4 16.9 - Credit/CDP - 10.4 11.2 -

/a Preliminary estimates. CurrencyIn circulation. Source: Date provided by the Vietnameseauthorities. - 133 -

APPENDIX4 Page 2 of 6 VIET NAM ECONOMICREPORT

Table4.2: INTERESTRATES, 1986-88 (in percentpna)

1988 1987 1988

Lendingrates on workingcapital State onterpries Undertho Stat.Plan 14.4-19.72 21.6-24.84 In exces of the StatePlan 16.84-20.16 32.4-37.26 Cooperatives 16.84-22.32 25.2-28.08 Statedistribution and procurement 17.28-18.0 23.78-31.88 Privatesector 100.80-12 100.80-122.40 Lendingrates for capitalconstruction Stateenterprises 12.96-15.84 18.00-24.12 Cooperatives 188-20.88 20.18-26.28 Deposit Rates Standard enterprises 8.88 10.8 Cooperatives 10.8 14.4 Savingsdeposits /a 72 72 Timedeposits 98 96 Credit cooperatives Lendingrates 112.91 122.71 Deposit rates 112.91 116.32 (In real terms)Lb Lending rates on working capital Stateenterprise (under Plan) -79 -89 -89 Privatesector -S2 -46 -46 Lending ratesfor capitalconstruction state enterpriss -80 -S9 -70 Deposit rates Stateenterprise -81 -72 -73 Savingsdeposit. -71 -68 -58 Tim deposits -37 -61 -52 Credit cooperatives Lendingrates -84 -44 -46 Depositrates -84 46 -47

/ No interestIs paidon savingsdeposits of lossthan D 200; Instead,holders of such deposit automaticallyparticipate in a monthlylottery. /b Nominalinterest rates adjusted for the averageannual rate of inflation.

Source: Data providedby the Vietnameseauthorities. - 134 -

APPENDIX4 Pag. 8 oi 5

VIETNAM ECONOMICREPORT

Table4.8: RECENTINTEREST RATES DEVELOPMENT

April 1, 1989 July 13 1989 Nominal Real /a Nominal Real /x

DepositMoney Banks Ib Depositrates Demanddeposits (economicunits) 4 -1.4 1.8 1.0 8-monthdeposits (economic units) 5.8 0.8 8 8 Demand deposlts (households) 9 8.8 6 6 8-month saving deposits(households) 12 6.2 7 7 Lendingrates Presidentialrates Fixed capital 6.96 0.42 3.8 3.3 Working capital 6.00-8.10 0.470-0.67 8.61-3.67 3.51-8.57 Normalrates Fixed capital 6.18 0.66 8.68 8.83 Working capital 6.24-8.80 0.70-0.76 -0.08 8.69-8.76 Services sector Fixed capital 6.88 0.79 8.87 3.87 Working capital 6.42-8.60 0.87-0.95 8.93-4.0 3.93-4.0 Overdue charges (X) Le 20-60 20-60 Lowest Interest rateto enterprises 6 2.1 2.1 State Bank of Viet N- /d Deposit rates Requiredreserves 5.8 0.28 8 a Demand deposits 4.06 -0.14 1.8 1.8 8-month savingsdeposits Le 12.2 8.4 6.25 6.26 Lendingrates Within ceilings 5.9 0.88 8 a Above ceilings 6.15 0.62 8.8 8.8 Overdue charges (X) /c 20-60 20-60

Le Nominal interestrates adjusted for the averagemonthly rate of Inflationin the previous quarter. Lb Ratescharged or paidby depositmoney banks with respectto economicunite (public enterprise,cooperatives, and privateenterprises) and households. c To be addedto respectivelending ratee. Ratescharged or paid by the StateBank of Viet Nam to depositmoney banks. Excessdeposit. Source: Date providedby the Vietnameseauthorities. - 135 -

APPENDIX 4 Page4 of 6 VIET NAM ECONOMICREPORT

Table 4.4: CASHPLAN, 1988-89

1986 1987 1988 1989 Plan/a Actual Plan /a

(In billionsot dong)

Cash Absorption 158 604 2,128 2,856 4,860 Officialretail sales 119 416 1,506 1,448 2,660 Taxoe and other contributions 14 69 858 268 796 Public services 5 22 100 108 160 IncreaseIn savingsaccounts 7 67 115 827 8oo Other 8 40 s0 206 585

Cash Injection 198 764 2,898 8,146 5,140 Wages and other paymnts 44 170 G68 1,088 2,994 Withdrawalsof depositsfrom savings accounts 18 48 240 884 230 Pensionsand social security payments 10 45 106 214 411 Procurement 87 298 1,208 1,018 1,200 Other 42 208 16O 496 806 Change In cash In circulation (Il-I) 48 16O 270 789 790 (In Percentof OCP)

Cash absorption 19.2 1.4 16.0 16.7 14.7 Ot which: Official retalls sales 15.0 12.7 10.6 10.2 8.6 Taxesand othercontributions 1.8 1.8 2.5 1.9 2.7 Cash Inl1ctlon 24.6 28.8 16.9 22.2 17.8 Of which: Wages 5.6 6.2 4.8 7.7 10.1 Procurement 10.9 9.1 8.5 7.2 4.0 Pensionsand social security payments 1.8 1.4 0.7 1.6 1.4 Change In cash In eirculation 5.4 4.9 1.9 5.6 2.7

/a Originalplan.

Source: Data providedby tho Vietnameseauthorities. - 136 -

APPENDIX 4 Page 5 of 5

VIET NAM

ECONOMIC REPORT

Table 5.5: COMPOSITION OF CREDIT, 1986-88

1986 1987 1988 /a

(In billions of dong: end of period)

Credit for capital construction 20.4 40.1 119.4 Agriculture, forestry and fisheries 4.1 14.2 41.7 Industry 14.9 24.3 71.6 Commerce 1.3 1.4 3.5 Other 0.0 0.0 2.3

Credit for working capital 111.6 400.2 1,605.7 Agriculture, forestry and fisheries 8.1 41.0 179.3 Industry 29.0 74.4 207.3 Commerce 63.1 246.1 899.6 Other 11.1 38.6 319.4

Total Credit 132.0 440.3 1,725.2

(In percent of GDP) (during the year)

Credit for capital construction - 0.9 0.6 Of which: Agriculture - 0.3 0.2 Industry - 0.6 0.3

Credit for working capital - 7.8 7.1 Of whichs Agriculture - 0.7 0.8 Industry - 1.6 1.0 Commerce - 4.7 4.0

Total Credit - 8.7 7.7

la Data do not fully agree with corresponding credit data in Table 1 owing to the revision of the monetary survey following the introduction of the two-tier banking system in July 1988.

Source: Data provided by the Vietnamese authorities. - 137 _

APPENDIX S

VIET NAM

ECONOMICREPORT Table 5.1: SUMMARYOF BUWGETARYOPERATIONS, 1984-89

1984 1985 1986 1987 1988 1989 ------(Actual)------Rev. Budget

(in millions of dong) Revenue 9,414 18,936 83,648 379,279 1,617,000 2,890,000 Tax Revenue 2,014 8,067 18,380 67,672 466,000 1,106,000 Trahafersfrom state enterprises 6,812 14,688 60,889 284,802 971,000 1,656,000 Othor nontax revenue 688 1,191 4,929 26,806 191,000 310,000

Current Expenditure (excl. Interest) 8,660 23,65 86,292 396,726 2,136,000 3,890,000 Wages and salaries 317 1,767 6,639 29,618 266,000 1,176,000 Subsidies 3,402 8,112 18,211 150,914 812,000 - Other 6,061 16,786 82,642 216,299 1,068,000 2,216,000 Of which: operationand maintenance 679 8,279 20,109 67,061 80,000 170,000

Capital expenditure 2,867 10,700 33,410 116,104 549,000 1,000,000 Overall primary deficit (-) (2,061) (16,419) (36,054) (183,561) (1,067,000) (1,600,000) Interest 100/b 2566L 1,096b 2,107/b 26,000/ 86,000 Overall deficit (-) (2,la (16,674Y (7,152J (135,6658 (1,098,000Y (1,636,000) Financing 2,131 16,674 87,162 136,658 1,093,000 1,636,000 Foreign grants - - - - - 68,000 Foreign loans (net) 1,626& e,3e4/L 14,246/i 43,487/i 8S6,000/s 858,000 Nonconvertible(not) - - - - - 1,023,000 Utilization - - - - - 1,803,000 Short-term - - - - - Mediu- to long-term ------Amortization - - - - - 60,000 Convertible(not) - - - - - (166,000) Utilization - - - - - 99,000 Short-term - - - - - 99,000 Medium-to long-term - - - - - _ Amortization - - - - - 264,000 Domestic loans (not) 605 9,310 22,906 92,171 737,000 620,000 State Bank (net) 406 9,269 22,888 89,169 460,000 600,000 Government securities (net) 200 41 18 3,012 17,000 20,000 Gross issue 200 41 18 8,012 17,000 20,000 Amortization - - - - 270,000 - Arreare - - - _ _ _ (In percent of GDP) Revenue 14.6 14.4 10.6 11.8 11.4 9.8 Tax revenue 8.1 2.8 2.8 2.1 3.2 3.4 Transfersfrom state enterprises 10.6 11.2 7.6 8.7 6.9 5.3 Other nontax revenue 0.9 0.9 0.6 0.8 1.3 1.0

Current expendit ure (excld. interest) 13.4 18.0 10.8 12.1 16.1 11.4 Wages and salaries 0.6 1.3 0.7 0.9 1.8 4.0 Subsidieo 6.3 4.7 2.8 4.6 6.7 - Others 7.8 12.0 7.9 6.6 7.6 7.5 Of which: Operationand maintenance 1.0 2.6 2.5 1.7 0.6 0.8 Capital expenditure 4.1 8.2 4.2 8.5 3.9 8.4 Overall primary deficit (-) -3.2 -11.8 -4.6 -4.1 -7.6 -6.1 Interest 0.2/b 0.2/b 0.1/b 0.21b 0.2/b 0.1 Overall deficit (-) -871 -12.0 -4.7 -4.1 -7.7 -5.2 Financing 8.3 12.0 4.7 4.1 7.7 6.2 Foreign grants and loans (net) 2.4/d 4.9Ld 1.8 1.83 2.6L 2.9 Domestic granet (net) 01 7.1 2.9 2.8 6.2 2.1 State Sank (net) 0.6 7.1 2.9 2.7 3.2 2.0 Governmentsecurities (net) 0.8 0.0 0.0 0.1 0.1 0.1 Arrers 0.0 0.0 0.0 0.0 1.9 0.0

/a Due to sage/price reform measures undertakenduring the year, 1985 data may not be entirely commensuratewith date of other years. /b Includes amortization. Z Includesforeign grants and gross of amortization. Gross of amortixation. Sources: Data provided by Vietnameseauthorities and staff estimates (GDP). - 138 -

APPEOIX6 Pag 2 of 5 VIET NAM ECONOMICREPORT

Table 6.2: COVERNMENTREVENJE, 1904-89

19N4 116 La 1986 1987 1988 1989 Rev. Budget

------(In millions of don)------Tax revenue 2,014 8,067 18,880 67,672 455,000 1,016,000 Taxeson nonagricultural cooperativesand the privatesector 1,345 1,940 e,825 88,056 180,000 630,000 Turnover tax 48 696 8,1689 10,167 77,000 127,000 Profit tax 876 514 2,076 10,600 38,000 164,000 Licensotax 77 80 165 1,260 7,000 22,000 Coemoditiestax 72 106 676 2,200 28,000 91,000 Wholesaletax 200 278 1,070 2,620 9,000 26,000 Slaughter tax 81 60 206 1,800 10,000 40,000 Other 1U6 16 1,006 3,216 16,000 61,000 Agricultural tax 484 678 8,684 12,176 186,000 870,000 Taxeson trade 285 489 0,171 17,441 189,000 115,000 Nonco_ercial import tax 285 489 6,171 17,441 56,000 40,000 CoamarcialImport and export dutite /b - - - - 88,000 76,000

Nontax revenue 7,400 16,879 06,818 811,607 1,162,000 1,875,000 Transfers from stateenterprie 6,812 14,6088 60,89 284,802 971,000 1,566,000 Operatingsurplus 6,019 18,609 56,908 270,220 987,000 1,426,000 Depreciationallowances and other transfers 793 1,079 8,481 14,582 a4,000 140,000 Other 688 1,191 4,929 26,805 191,000 810,000 Total Revenue 9.414 18.980 88.648 879.279 1.617.000 2.890.000 (In percent of COP) Tex revenue 8.1 2.8 2.8 2.1 8.2 8.4 Taxes on nonagricultural cooperatives and the private sector 2.1 1.6 1.0 1.2 1.8 1.8 Ariecultural tax 0.7 0.5 0.5 0.4 1.0 1.2 Taxes on trade 0.4 0.8 0.8 0.5 1.0 0.41 Nontax revenue 11.4 12.1 8.2 9.6 e.2 6.8 Transfers from state enterpriese 10.6 11.2 7.6 8.7 6.9 6.8 Other 0.9 0.9 0.6 0.8 1.8 1.0 Total Revenue 14.6 14.4 10.5 11.6 11.4 9.8 (In percent of total revenue) MemorandusItems: Tax revenue 21.4 16.1 21.9 17.8 26.7 86.1 Taxes on nonagericultural cooperatives and the private sector 14.8 10.2 10.0 10.0 11.1 18.3 Of which: Turnovertax 4.8 8.7 3.8 4.8 4.8 4.4 Profits tax 4.0 2.7 2.6 2.8 2.4 6.7 Agricultural tax 4.6 8.6 4.6 8.2 7.4 12.8 Taxeson trade 2.6 2.8 7.4 4.6 8.2 4.0 Nontax revenue 78.6 88.9 78.1 82.2 78.8 64.9 Of which: Transfers from state enterprise 72.4 77.6 72.2 76.1 68.8 64.2

Le Due to wage/price reform meoures undertaken during the yer, 1986 date my not be entirely comnenurate with data of otheryears. Sources: Date provided by Vietnameseauthoritieos and IMF estinate. (GOP). - 139 -

APPENDIX6 Pagea of 6 VIETNAM ECONOMICREPORT

Tablo 6.8: FUNCTIONALCLASSIFICATION OF CURRENTEXPENDITURES, 1984-89

1984 1986 Lo 1986 l987 1988 1989

(Inmillions of dong) Ceneraladministrative service 469 1,820 6,402 18,766 64,000 190,000 Economicservies 708 8,400 20,467 58,114 117,000 860,000 Agriculture 101 810 1,600 - - - Forestry 84 98 492 - - - Industry 58 111 1,165 - - - Transportation,cooperativo, public *orks,and other 515 2,886 17,310 - - - Socialservice 1,589 4,700 19,430 70,805 893,000 1,250,000 Education 818 2,040 8,181 80,729 176,000 690,000 He Ith 279 761 8,838 18,222 67,000 190,000 Ponsions,social rellf 861 1,862 6,769 21,809 180,000 430,000 Other 831 647 1,207 6,046 21,000 40,000 Interest 100b 266/b 1,098/b 2,107/b 28,000 86,000 Other(including subsidies) 6,00 14,261 40,988 249,042 1,571,000 1,600,000 TotalCurrent Expgnditures 8.870 289910 87.890 898.888 2.18.000 8.426,000 (In percentof CDP) COeneraladministrative service 0.7 1.0 0.7 0.0 0.4 0.6 Economic services 1.1 2.8 2.6 1.8 0.8 1.2 Socialservices 2.6 8.6 2.4 2.2 2.8 4.2 Interest 0.2/b 0 2/b 0 1/ 0.2/b 0.1 0.1 Other(including subsidles) 9.8 1.9 652 7.6 11.1 5.4 Total Current Expenditure 18.7 18.2 11.0 12.2 1653 11.6

/ Due to wage/pricereform measures undertaken during the year,1985 datemay not be entirely commensurate wIthdata of otheryears. lb Includesamortization. Sources:Data provided by the Vietnameseauthorities and staffestimates (CDP). - 140 -

APPENDIX6 Prage4 of

VIET NAM ECONOMICREPORT

Table 6.4: ECONOMICCLASSIFICATION OF CURRENTEXPENDITURE, 1984-89

1984 1986 / 1986 1987 1988 1989 Rev. Budget

(In millionsof dong)

Wage and salarlis 317 1,767 5,589 29,518 265,000 1,175,000 Subsidles 8,402 6,112 18,211 150,914 612,000 - Food procurement 8,082 4,900 12,480 104,292 486,000 - Production 190 500 2,297 8,200 51,000 - Exports 190 712 8,484 88,422 276,000 - Interest 100/b 266/b 1,098/b 2,107/b 26,000kb 88,000 Other 6,061 16,786 62,642 216,299 1,068,000 2,216,000 Working capitalfor state enterprises 649 600 1,221 18,798 88,000 60,000 Contingencyfund 8 6 100 2,484 4,816 48,000 100,000 Administrativeexpensoe 892 944 4,777 14,688 80,000 88,600 Medicaland social benofits 280 517 2,461 9,707 47,000 118,460 Educationand scholarship 878 962 8,882 14,868 87,000 108,640 Operationand maintenance 679 8,279 20,109 57,061 80,000 170,000 ResidualId 2,722 9,194 27,658 102,898 788,000 1,611,400 Total CurrentExpenditure 8.870 28.910 897890 896.88B 2.161.000 3.426.000 (In percent of GDP) Wage and salaries 0.S 1.8 0.7 0.9 1.6 4.0 Subsidies 5.8 4.7 2.8 4.6 6.7 0.0 Of which: Food procurement 4.7 8.7 1.6 8.2 8.4 0.0 Interest 0.2Lb 0.2/b 0.1/b 0.Lb 0.2 0.1 Other 7.8 12.0 7.9 6.6 7.6 7.6 Of which: Operationand maintenance 1.0 2.6 2.5 1.7 0.6 0.6 Residuol/d 4.2 7.0 8.5 8.1 6.2 6.4 TotalCurrent Expenditure 18.7 18.2 11.0 12.2 15.8 11.6

/a Due to wag*/pricereform measures undertaken during the year,1985 data may not be entirelycommensurate withdate of otheryears. /b Includesamortization. _ Contingencyagainst famine and shortagesIn otherway key materials. Primarilyspending on nationaldefense. Sources:Date provides by tho Vietnameseauthorities and staffestimates (GDP). - 141 -

APPENDIX6 Page5 of 5

VIET HAM ECONOMICREPORT

Table 6.5: OOVERNMENTCAPITAL EXPENDITURE,1984-89

1984 1985 Lo 1996 1987 1988 1989 ----- __---- (Ktua)------Rev. Budget

(In millionsof dong) Industryand construction 9S6 8,562 12,894 61,666 244,000 371,000 Agricultureand forestry 860 1,887 5,446 18,684 68,000 76,000 Irrigation 241 984 2,706 9,686 49,000 113,000 Transportationand coamunication 670 1,979 6,879 18,468 64,000 128,000 Commerceand services 94 449 1,186 8,947 19,000 17,000 Nonproductivesector Lb 462 2,864 6,281 28,458 100,000 146,000 Other 8 46 70 860 6,000 60,000 Unallocated - - - - - 00,000 TotalCapital Expendituro 2,676.0 10.700.0 883410.01160104.0 5498000.0 1,000.000.0 (In percent of GOP) Industryand construction 1.6 2.7 1.6 1.6 1.7 1.3 Agricultureand forestry 0.5 1.0 0.7 0.4 0.6 0.3 Irrigation 0.4 0.8 0.8 0.8 0.3 0.4 Transportationand communicatlon 0.9 1.6 0.7 0.4 0.6 0.4 Commerceand services 0.1 0.3 0.1 0.1 0.1 0.1 Nonproductivesector /b 0.7 1.8 0.8 0.7 0.7 0.6 Other 0.0 0.0 0.0 0.0 0.0 0.2 Unallocated ------Total Capital Expenditure 4.1 8.2 4.2 8.6 3.9 3.4

/a Due to wage/pricereform measures undertaken during the year. 1986 data may not be entirelycommensurate wIth data of other years. Lb Includeseducation, health, culture,finance and government.

Sources: Data providedby the Vietnameseauthorities and staff estimates(GDP). Apend dix 6 VIET NAM

ECONOMICREPORT

Table 1: RETAIL PRICE INDEX (X change from the previousyear)

Year 1975 1978 1977 1978 1979 1980 1981 1982 1983 1994 1988 1986 1987 1998 1989

General Price Index 121.9 118.6 120.9 119.4 125.2 169.6 196.4 149.6 164.9 191.6 487.2 301.3 308.2 74.3

Foodgralnand Foodstuff 128.6 126.1 124.6 128.4 133.8 12.0 182.0 155.1 165.0 191.6 553.2 314.6 367.3 43.0 Foodgrain 117.9 129.7 125.3 118.1 121.0 146.8 152.8 134.4 182.0 288.3 264.2 405.1 448.4 30.0 Foodstuff 134.2 124.4 123.6 130.9 -138.5 152.6 186.6 157.3 152.0 181.8 691.6 287.3 840.5 50.0 Other Consumer Goods 109.6 106.6 104.4 116.0 117.8 196.1 205.4 138.8 179.9 190.8 492.7 289.3 265.0 101.0 Agri-production Materials 126.4 118.6 133.8 134.2 131.8 127.0 194.8 119.7 139.3 204.4 650.8 291.7 269.0 101.0 OfficialPrice Index /a 99.1 101.1 104.3 108.3 109.8 202.0 241.8 142.8 156.8 210.9 467.4 289.9 313.2

Foodgroinand Foodstuff 98.9 100.6 108.8 1069 116.7 160.0 217.9 160.1 155.1 210.8 646.4 311.2 378.5 Foodgrain 100.0 100.0 99.7 100.1 105.7 144.1 168.3 135.0 151.7 366.2 227.9 416.8 468.7 Foodstuff 98.2 100.8 112.8 112.9 126.8 161.0 226.6 153.1 158.9 196.2 602.6 272.4 344.4

Other Consumer Goods 98.7 101.9 100.0 100.6 107.1 238.0 245.9 130.9 167.2 210.3 395.6 274.9 220.4

Agri-production Materials 100.0 100.0 100.0 100.0 101.4 122.0 250.0 101.5 163.2 220.9 692.0 270.2 287.6 FreeMarket Price Index / 150.3 136.0 39.0 140.0 143.8 147.4 165.0 157.6 176.3 164.7 582.8 337.6 294.8

Foodgrainand Foodstuff 149.4 148.0 133.6 138.1 142.5 147.8 164.2 159.6 164.5 160.2 68.9 322.6 S41.0 Foodgrain 135.1 164.7 163.3 131.1 131.9 148.6 143.8 134.1 173.0 147.0 468.3 353.2 382.4 Foodstuff 167.7 137.2 126.7 140.8 145.0 147.6 166.4 163.3 149.0 163.1 573.4 317.0 836.2

Other ConsumerGoods 164.2 123.8 123.0 165.0 146.6 164.0 163.9 150.8 217.4 146.8 56W.1 362.9 217.1

Agri-product;onMaterials 136.3 124.4 145.5 148.5 141.1 131.1 186.0 183.9 128.9 179.6 791.7 342.1 386.0

/ The weights of the official and froe merketprice Indices in the o gnral price indx are adjusted annually. The weights for 1908 were 0.743 and 0.267, respectively.

Source: Date provided by the Vietnamesesutorities. - 143 -

APPENDIX7 Page 1 of a

VIETNAM ECONOMICREPORT

Table 7.1: AGRICULTURALPRODUCTION, 1984-89

Officialestimate Year 1984 1986 1988 1987 1988 1989

(In millionsof dong at 1982 prices) Grossoutput 89,472 91,669 96,044 06,308 98,477 108,600 Crop cultivation 68,861 70,289 72,842 70,648 74,596 80,000 Food crops (48,223) (49,lf9) (49,702) (47,621) (62,886) (66,200) Industrialcrops (20,188) (21,080) (22,640) (22,927) (22,260) (24,800) Animal husbandry 21,111 21,480 28,702 2Z,765 23,881 26,600 Of which: Livestock/ (12,380) (12,485) (14,087) (15,420) (14,028) (16,075) (Inthousands of metric tons) Foodgrains /b 17,800 18,200 18,879 17,629 19,000 20,000 Paddy 16,506 16,876 16,008 16,103 16,442 17,600 Other 2,294 2,826 2,876 2,426 2,268 2,500 Meworandaite : Areacultivated ('000 ha) LC 6,817 6,884 6,812 6,710 6,948 7,011 Fertilizeravailability ('000 tons) 1,832 1,820 1,681 1,542 1,828 2,224 Foodgrain output per capita (kg) 808 804 801 281 298 307

I Excludingpoultry. Paddyequivnlent. Foodgrains.

Source:Date provided by the Vietnameseauthorities. - 144 -

APPENDIX7

VIET NAM ECONOMICREPORT

Table 7.2: INDUSTRIALCROP PRODUCTION AND YIELDS, 1984-88

Year 1984 1986 1986 1987 1988

Production ('000metris tons) Jute 60 44 64 68 as Rush 92 92 97 104 86 Mulberry 72 66 67 64 s0 Sugarcane 8,587 6,360 4,985 5,470 S,635 Peanuts 168 201 211 232 212 Soybeans 89 86 85 98 82 Tobacco 3S 8 38 3 32 38 Tea 27 28 30 29 30 Coffee 4 6 19 20 23 Rubber 47 62 60 52 61 Coconuts 623 612 711 791 s8o Area cultivated ('000 ha) Jute 20 22 28 32 1s Rush 16 16 17 17 17 Mulberry 9 7 7 7 7 Sugarcane 165 146 126 137 140 Peanuts 170 213 224 238 227 Soybeans 91 102 10e 118 226 Tobacco 37 43 37 19 39 Tea 49 61 58 69 69 Coffee 29 41 6s 32 110 Rubbor 148 177 202 204 210 Coconuts 119 127 168 199 209 Average field (metricton/ha) Jute 2.2 2.1 2.1 1.8 2.2 Rush 6.8 6.8 6.7 8.1 6.0 Uulberry 8.0 7.9 8.1 8.0 7.6 Sugarcane 39.8 39.8 39.7 40.0 39.6 Peanuts 1.0 0.9 0.9 1.0 0.9 Soybeans 0.8 0.8 0.8 0.8 0.8 Tobacco 0.9 0.9 0.9 1.1 0.9 Tea 0.6 0.6 0.5 0.6 0.4 Coffee 0.1 0.1 0.3 0.2 0.2 Rubber 0.3 0.8 0.2 0.3 0.2 Coconuts 4.4 4.8 4.6 4.0 4.1

Source: Data provided by the Vietnamese authorities. - 145 -

APPENDIX7 Page 3 of 3

VIET NAM ECONOMICREPORT

Table 7.3: FOODCRAINPRODUCTION AND YIELDS, 1984-88

1984 1986 1986 1987 1988

Production('000 metric tons) 17,800 17.200 18.379 17.629 19.000

By product Paddy 16,606 14,875 16,008 16,103 16,442 Spring and summer crop (8,198) (8,046) (9,127) (8,029) (10,351) Winter crop (7,313) (6,829) (6,876) (7,074) (6,091) Subsidiarycrops /a 2,294 2,326 2,376 2,426 2,658 By region North /b 7,476 7,593 7,688 7,620 9,075 South 10,326 10,607 10,691 9,909 10,926 Mekong Delta (6,942) (6,986) (7,203) (6,576) (7,681)

Area Cultivated('000 ha) Ic 6.817 6.834 6A812 6.709 68942 By product Paddy 5,675 6,704 6,889 6,588 6,711 Spring and summer crop (2,466) (2,622) (2,743) (2,732) (2,878) Winter crops (8,220) (3,082) (2,946) 2,856) (2,836) Subsidiorycrops 1,142 1,130 1,123 1,121 1,231 By region North 3,162 3,188 3,146 3,170 3,197 South 3,e66 3,646 3,666 3,640 3,746 Mekong Delta (2,307) (2,800) (2,338) (2,264) (2,308) Average yield (metricton/ha) 2.61 2.68 2.70 2.61 2.74 By product Paddy 2.78 2.78 2.81 2.70 2.88 Spring and summer crop (3.34) (3.07) (3.33) (2.94) (3.60) Winter crop (2.27) (2.22) (2.33) (2.48) (2.16) Subsidiary crops 2.01 2.06 2.12 2.16 2.08 By region North 2.36 2.88 2.44 2.40 2.53 South 2.84 2.91 2.92 2.80 2.91 MekongDelta (3.01) (3.04) (3.08) (2.92) (3.28) FertiIlzer availability Ld ('000 metric tons) 1,332 1,320 I,831 1,642 1,828 Fertilizeravailability (kg/ha) 196 193 239 230 283

/ In paddy equivalent. The North is defined as comprisingthe 17 provincesnorth of De Nang. Pertainingto sowng area, taking into accountmultiple cropping. Nitrogenousfortilizer, ammonium sulphate (SA) equivalent. Not all the availablefertilizer is used for foodgrainproduction. Source: Data providedby the Vietnameseauthorities. VIET Nr ECONOMICREPORT

Tabl# 8.1: INDUSTRIALPRODllCTIDN AND 1OR OF ENTERPRISES (In millions of dong at 1982 prices)

Veas 1976 1977 1978 1979 1980 1981 1982 1903 1984 1985 1986 1907 1988 1989 (Proj.)

Oroe_ industrial production 65,344.0 72,399.0 78,300.0 74,594.0 b6,025.0 67,594.0 73,468.0 8S,033.5 93,982.5 105,340.0 112,451.0 122,379.0 137,828.0 146,700.0 By sector 19,613.0 23,198.0 25,742.0 27,122.0 25,298.0 24,334.0 25,278.0 28,302.9 30,935.1 34,463.0 35,862.5 39,S38.0 40,682.0 43,500.0 Light ;ndustry 45,731.0 49,201.0 522,S56.0 47,472.0 41,627.0 43,260.0 48,185.0 54,730.6 63,017.4 70,677.1 7e,sM8.9 82,991.0 96,946.0 103,200.0 1 type of manag.t Central management 28,841.0 33,564.0 34,bU1.0 29,516.0 24,428.0 25,010.0 26,181.0 29.10b 32,607.1 35,618.3 38,42S.2 40,151.0 44,412.0 45,800.0 Local mnaoa_t S6,0S.0 38,856.0 43,788.0 45,078.0 42,497.0 42,SS4.0 47,262.0 532,928.0 61,345.4 69,721.8 74,028.2 82,228.0 93,416.0 101,000.0 By industrial brancho. Enrgy cobust;bl, 3,929.0 - - - 4,210.0 4,533.0 4,879.0 5,420.2 5.483.6 6,042.6 7,059.0 7,35S.0 7,395.0 9, 00.0 Ntal lurgy 1, 49.0 - - - 1,459.0 952.0 1,13S.0 1.145,9 1,211.7 1,353.8 1,593.7 1,089.0 2,057.0 1,900.0 Nachinery 6,312.0 - -- 9,086.0 9,241.0 10,052.0 11,055.6 12,352.5 14,677.4 16,178.2 18,606.0 23,960.0 22,300.0 Ch_e;cml industry 540.0 - _ - 6,331.0 6,832.0 6,738.0 8,003.6 9,656.8 11,209.1 1,085.3 12,060.0 12,979.0 14.400.0 Construction _tr erl, earthjmare, porcelain, sateaere, od, foret ' product., 'ulubeg peat,, and paper industries 13IS.0 - - _ 15,962.0 15,104.0 16,270.0 17,951.4 19.358.3 21,065.0 22,962.2 24,465.0 24,431.0 19,100.0 Food *nd foodstuffs 22,923.0 - - 16.586.0 18,223.0 19,329.0 22,325.6 25,589.7 28,906.0 30,495.1 32,456 0 3e.957.0 S8,600.0 Was,ing, l-ther, sesinag and drying 9.999.0 - - 10.68.0 10.484.0 12,546.0 14,008.0 16,570.1 17,770.1 18,835.4 20,392 0 23,437.0 25,100.0 Printing and cultu-rl products 1,927.0 - - - 247.0 255.0 279.0 271.8 330.7 388.6 454.0 498.0 785.0 - Other industries - - - - 2.356.0 2,470.0 2,435.0 2,901.4 3,379.1 3,927.0 4.058.5 4,840.0 S,527.0 5.80D.O lKber of enterprises 1,913.0 2,2S7.0 2,518.0 2,526.0 2,627.0 2,883.0 2,902.0 2,932.0 3,111.0 S3220.0 5,224.0 3,032.0 2,867.0 - By sector Hnawy industry 1,063.0 1,233.0 1,400.0 1,476.0 1,514.0 1,664.0 1,686.0 1,917.0 1,784.0 1,851.0 1,750.0 1,612.0 1,460.0 Light industry - 880.0 1,004.0 1,118.0 1,050.0 1,113.0 1,219.0 1,216.0 1,233.09 1,327.0 ...369.0 1,474.0 1,420.0 1,407.0

By type of _nngat Central nset 540.0 567.0 623.0 609.0 621.0 89m.0 691.0 719.0 728.0 746.0 724.0 . 719.0 681.0 Local mnegesst 1,373.0 1,670.0 1,696.0 1,917.0 2,00D.0 2,188.0 2,211.0 2,233.0 2,363.0 2,412.0 2,50.0 2,313.0 2,188.0i

L The number of central industrial enterprise affected by the mergr of a number of enterpriooo to establish federations.

Source: Dats pro,idsd by the Vietnamese suthorities. APPENDX e Pege 2 of 3

eCONOMIC Sn

Thbtl 8.2 lM INZlRIAT. PROiCT

1963 1984 1985 1986 1987 1988 'ear 1976 1977 1978 1979 1980 1981 192 (Act.*) (Aetua I)

Energy 5.218.0 565C.3 6,193.? 6,954.8 Electricity (SIn tkWh) S,064.0 3,503.0 3,817.0 3,871.0 8,627.0 3,840.0 4.18.0 4,269.0 4,954.0 5.0 5.6 6.2 6.6 6.9 Coal (min tons) 5.7 6.2 6.0 5.6 5.2 6.0 K.2 6.3

Raw materials, and machinery 50.8 53.6 61.6 66.5 69.1 74.1 Steal (C000 t on) 63.8 85.9 94.3 106.4 60.3 36.1 30.1 4.5 4.1 3.3 4.0 2.6 Chroniu- 14.4 8.5 11.3 19.5 9.4 8.5 9.9 6.2 Metalworking, echin- tools 914 0 964.0 1,208.0 1,190.D 1,11S.O (piwec) 1.609.0 1,973.0 2,254.0 4,507.0 964.0 813.0 8'1a.0 850.0 3,900.0 S,362 0 5,315.0 6,210.0 6,650.0 7,158.0 Oiasol mator piace) 3,240.0 5,090.0 4,lDO.O 4,530.0 3,116.0 2.91n0 3 ,600.0 Electric rOteting engines 8,637.0 13,271.0 15,859.0 15,149.0 13,846.0 19,633.0 (pieces) 10,952.0 12,229.0 13,029.0 19,420.0 15,112.0 10,7755.0 8,543.0 564.9 355.0 479.0 437.0 720.0 680.0 tranaforera (piece) 547.0 654.0 811.0 858.0 673.0 473.0 468.0 307.0 665.0 753.0 850.0 690.0 1,227.0 Water pumps (pice) 1,844.0 2,748.0 1,729.0 1,765.0 1,496.0 1,379.0 938.0 870.0 1,319.0 1,196.0 1,218.0 1.176.0 1,209.0 Rice sill *quipnnnt (pi ce) 828.0 430.0 514.0 - 476.0 694.0 589.0 552.0 315.0 309.0 323.0 S52.0 516.0 Plugh. and herrows ('DDO tons) 359.0 483.0 595.0 430.0 892.0 369.0 S55.0 289.0 460.0 531.0 502.0 484.1 503.0 Chemical fertilizers ('000 tons) 435.0 545.0 591.0 298.0 360.0 268.0 230.0 11.0 14.0 15.0 18.0 6.6 12.0 13.0 Insecticides ('000 tone) 1 0 20.0 19.0 10.0 8.0 10.0 11,116.0 15,046.0 15,550.0 13,429.0 12,028.0 11,265.0 Bicycle tires ('000 pieces) 5,233.0 5,301.0 5,376.0 5,176.0 4,857.0 5,962.0 6,359.0 5,926.0 6,035.0 4,500.0 5,622.0 6,431.0 Bicycle tubes ('000 pieces) 4,864.0 4,596.0 5,23F 0 4,366.0 4,814.0 4,820.0 6,672.0 7,671.0 972.0 1.336.0 1,503.0 1,47S.0 1,635.0 1,954.0 Cent ('000 tons) 744.0 838.0 827.0 701.0 633.0 554.0 725.0 2,712.0 2,678.0 2.932.0 2,957.0 3,332.0 3,807.0 Bricks (SIn pieces) 3,704.0 3.402.0 3,404.0 2,840.0 2,297.0 2,157.0 2,241.0

Conou_r good. - 40.0 51.0 57.0 60.0 52.6 41.0 Class and glass products ('000 tone) ------167.0 169.0 184.8 208.0 Porcelain (min pieces) 79.0 168.0 154.0 265.0 101.0 106.0 131.0 148.0 155.0 1,482.0 1,41.0 1,680.0 1.488.0 - Seo wood ('000 3) 1,563.0 1,660.0 1,564.0 1,741.0 1,577.0 1,354.0 1,295.0 1,410.0 208.0 208.0 158.0 146.0 138.0 117.0 Matches (pin packets) 292.0 279.0 331.0 295.0 251.0 188.0 225.0 79.0 85.0 87.6 88.0 Paper ('000 tons) 75.0 69.0 71.0 45.0 49.0 45.0 56.0 57.0 75.0 71Z.0 670.0 723.0 847.0 851.0 Salt ('000 ton) 564.0 740.0 522.0 5'.7.0 478.0 466.0 55O.0 595.0 555.0 627.0 567.0 561.0 629.0 Sea f,rh ('000 tons) 605.0 595.0 527. 0 4t9.0 399.0 *12.0 477.0 518.0 304.0 438.0 402.0 504.0 340.3 38. 0 Sugar ('000 tone) 73.0 96.0 91.0 141.0 167.0 202.0 240.0 5S.0 84.0 87.0 85.0 8S.0 98.0 Boer (sin I iters) 28.0 43.0 54.0 31.0 61.0 56.0 66.0 1,062.0 1,151.0 1,087.0 995.0 688.0 Cigarettes (min packets) 404.0 416.0 400.0 348.0 396.0 845.0 694.0 924.0 21.0 20.0 19.0 21.4 24.0 Tes ('000 tons) 12.0 17.0 16.0 16.0 24.0 17.0 17.0 17.0 141.0 143.0 14S.0 185.0 176.0 Fish asuce (sin liters) 99.0 420.0 121.0 101.0 83.0 95.0 115.0 134.0 563.0 51.0 53.0 57.0 62.0 Textile fibers ('000 tone) 34.0 58.0 38.0 33.0 29.0 51.0 58.0 45.0 Cat 307.0 384.0 374.0 362.0 367.0 S".0 ton febrice (SIR _ters) 218.0 283.0 S09.0 260.0 179.0 167.0 288.0 Cetton fe;becs fair _;ito net - 50.0 64.0 75.0 109.0 113.0 106.0 (SIn eter) - - - - - 38.0 51.0 50.0 51.0 52.0 sosa for seine ('0O0 tons) 28.0 25.0 24.0 22.0 25.0 29.0 31.0 26.0

La Stat Enterpriesee

Source: Date prondd by the Vi;tro_se authorities. - 148 - Ape2nd;xa -Table 3

VIET NAM

ECONOMICREPORT

Table 8.8: QUANTITYGROWTH RATE OF INDUSTRIALPRODUCTS

1984 1N6 1988 1987 1988

Energy Electricity 16.0 5.8 8.4 9.6 12.3 Coal -20.6 12.0 10.7 9.7 1.5 Raw materialsand machinery Steel 4.7 15.8 8.0 8.9 7.2 Chromium -27.4 -8.9 -19.6 21.2 -36.0 Metalworkingmachine tools 7.5 6.5 25.8 -1.5 -6.3 Diesel motors 87.6 -0.9 16.8 7.1 7.6 Electricrotating engines 68.7 16.7 -1.4 -8.6 43.2 Transformers -2.6 84.9 -8.8 84.8 22.2 Water pumps 29.2 16.0 12.9 -18.8 77.8 Rice mill equipment 51.6 -9.8 1.8 -8.4 2.8 Ploughs and harrows -10.6 -1.9 4.6 9.0 -10.2 Chemicalfertilizers 59.2 16.4 -5.6 -4.1 4.6 Insecticides 7.1 20.0 -88.8 81.8 8.3 Bicycle tires 86.4 -23.2 16.3 -10.4 -6.3 Bicycle tubes -22.7 1.8 -26.4 24.9 14.4 Cement 87.4 12.5 -1.9 10.8 19.5 Bricks 8.1 1.9 0.9 12.7 14.3 Consumergoods Glass and glass products 27.5 11.8 6.8 -12.8 -22.1 Porcelain 4.7 7.7 1.2 9.8 12.6 Sawn wood 5.1 -2.8 16.6 -11.4 n.a Matches 0.0 -24.0 -7.6 -6.5 -16.2 Paper 81.6 6.8 7.6 8.1 0.6 Salt 19.8 -6.0 7.9 17.2 0.6 Sea fish 7.1 18.0 -9.6 -1.0 12.0 Sugar 44.1 -8.2 -24.4 11.9 7.6 Beer 68.5 8.6 -2.8 -2.4 18.1 Cigarettes 14.9 -1.0 8.4 -8.6 10.8 Tea 23.5 -4.8 -6.0 12.6 12.1 Fish sauce 5.2 1.4 1.4 6.9 18.5 Textilefibers 17.8 -8.8 8.9 7.6 8.8 Cottonfabrics 18.6 2.7 -8.2 -1.4 7.6 Cottonfabrics for mosquitonet 28.0 17.2 46.8 3.7 -6.2 Soap for washing 88.6 41.7 -2.0 2.6 1.4 Unweighted average quantity growth rat. of total industrial products 18.4 6.0 0.6 7.8 6.6 Real growth rat. of Industrial sector In official national accounts n.s. 12.8 4.6 11.4 10.4 APENI 9

VIEr NAM

ECaNtlUC REPWRI

Tab le 9.1: FtEI TRAN

1988 1966 1987 1988 Your 1976 1077 1978 1979 16 181 10 1988 1984

12.2u8 18,268.9 12.446 Total fr.eht transport 6,628.7 8,970 9.856 9,708.8 9,828.8 7,808.8 S,88.1 11,766 11,S1S 12,710 960.8 1.001.1 1,071.7 Rauilwe 912.6 672.0 990.9 904 787.5 786.8 880.8 788 ee869 1,47.2 1,708.5 1,588.s motor trasort 1,805.8 1,698.9 1,727.4 1,866.5 1,807.8 1,218.4 1,200.7 1.388 1.409 1,849 2,288.0 2,860 2,2S6.6 Waterways transaprt 1,409.7 1,787.9 1,874.1 1,681.9 1,678.8 1,610.6 1,747.4 2.248 2,216 2.184 8,199.8 7,802.2 Seabome shipping 2,910.9 4,U6.8 4,768.6 8,881.4 6,170.7 4,284.8 4,9084.7 7.876 7,142 8.102 7,42S.3

(In theaand of tone)

SJ region 19,47 19,781 18,958 - . Mrth 20,041 28,281 24,488 28,228 18.993 15,800 14,122 17,848 19,048 21,"61 28,418 - South 17,676 18,286 16,268 15,475 12,152 13,482 14,720 20,849 20,498 21,782

144 1SS 146 Total freight transport 78 108 109 118 118 92 100 138 18 140 R*i leWy 140 i8O 152 1*0 1t6 121 100 117 28 184 149 184 168 119 142 132 MUoM tranaprt li 141 144 180 181 101 100 118 117 120 138 131 Waterw trnwport 81 0 107 o1 90 92 100 120 127 1281 187 168 1S5 Se.bene Shipping 69 92 06 109 126 S6 100 149 144 164

8j. region 14t 168 178 164 84 110 100 108 112 114 118 14 Soth 120 104 10 106 t 1:100 116 117 124 12

Source: cOts presided by the Vletimee authorities. - 150 -

APPENDIX10 Page 1 of a

VIET NAM ECONOMICREPORT

Tabl- 10.1: PRODUCTIONAND IMPORTSOF SELECTEDENERGY PRODUCTS, 1085-89

1985 1988 1987 1988 (MT) (USS'OOO) (iT) (US'OOOT)YY? (US8'00) (UT) (US8'000)

Oil Production - - - - 400,000 80,000 700,000 79,000 Imports Asphalt 6,632 1,866 17,478 2,464 9,300 1,623 24,000 4,664 Convertiblearea 1,560 299 1,360 287 6,100 1,089 21,956 4,328 Nonconvertible 5,082 1,067 18,128 2,177 3,200 434 2,692 826 Fuel oil 326,282 81,856 334,981 8,430 2,480,000 513,676 580,800 188,003 Convertible area ------Nonconvertible ------_ Diesel oil 615,507 183,044 892,707 199,281 1,068,800 238,732 1,086,300 243,165 Convertibleore - - 24,892 5,158 - - - Nonconvertible - - 867,815 194,126

Sources: Data provided by the Vietnameseauthorities. - 151 -

APPENDIX10 Page 2 of 8 VIET NAM ECONOMICREPORT

Table 10.2: CONSUMPTIONAND PRICESOF PETROLEUMPRODUCTS, 1984-88 La

Year 1984 1985 1966 1987 1988

(In thousandsof tons) Consumption Kerosene 160.1 154.6 142.4 189.8 200.0 Gasoline 480.8 482.0 407.6 682.0 694.0 Diesel 849.1 616.6 892.6 1,068.8 1,120.0 Fuel oil 898.9 496.0 576.5 638.9 664.0 Total 1.873.9 1.898.8 2?1079.0 2,419.6 2_508.0 (In millionsof barrels) (14.7) (14.8) (16.2) (18.9) (20.1) (In millionsof liters) Consumption Kerosene 159.9 164.9 151.7 201.6 213.0 Gasoline 658.8 687.2 656.5 724.9 807.6 Diesel 1,066.6 1,024.5 1,121.1 1,836.1 1,406.7 Fuel oil 460.8 679.6 678.7 740.8 764.2

Total 2.840.8 2.886.0 2.682.0 8.008.4 8.191.4

Dom ttc ptrice CoCD rative rice*-March1989 (In dong/litcr) (In U/gSl Ion) Dec 1988 Mar 1986 Domstic Id International Kerosene Businesspric /b 180 860 54.7 56 Free market 820 65o 54.7 55 Gasoline Businessprice b S80 6001c 50.5 40 Free mrket 800 800-80 67.8-71.5 46 Diesel fuel Buesnesspric /b 620 520 48.? 55

a Import data In metric tons; conversioneto litersand barrel*are approximate. Businessprices are prices charged at officialsales outlete and are to be morket/costrelated. c Domesticprices convertedat D 4,500 per US dollars. Mid-FebruarySingapore price quotationsfor cargo lots as given In the PetroleumEconomist, Aprll 1989. Source: Data providedby Vietnamee authorities. - 152 -

APPENDIX10 Page3 of a VIETNAM ECONOMICREPORT

Table10.8: PRODUCTION,CONSUMPTION AND PRICESOF ELECTRICITY,1984-88

Year 1984 1986 1988 1987 1988

(Inmillions of kWh) Production 4.9S6 5230 6 883 6.312 6.91S Hydro 3,367 3,758 4,281 4,936 6,416 Fuelbnsed 1,698 1,472 1,402 1,376 1,500 Consumption 3.612 3.887 4.146 4.600 6 067 Producors 2,766 2,886 3,062 3,367 3,738 Industry (2,028) (2,114) (1,197) (2,389) (2,697) Agriculture (307) (308) (332) (387) (448) Transport (38) (36) (46) (38) (40) Other (382) (428) (483) (643) (661) Generalconsumption 867 981 1,094 1,243 1,331 Balance 1,343 1,373 1.637 1.721 1.848 Own use 340 366 392 448 470 Losses 1,003 1,008 1,146 1,273 1,378

Priceschargd: December1988 January1989 /j (In dongper kWh: In bracketsUS centsper kWh) /b Producers/farmers 80 120 (2.7) Urban consumers ) Office use ) Capitol construction ) 60 80 (1.8) Metallurgy branches ) Civilservants 6 41 (0.9) Privatesector 120 160 (3.6)

La Continuesto date-- May1989. lb The currenttariffs in dong has beenconverted at the rateof D 4,500/USdollar to obtainrates in US centsper kWh (in parenthesis). Source: Data providedby the Vietnameseauthorities. Noto for text or table: The currentrate structure results in a lossof about0 4 billionper quarter;an Increasein ratesto an averageof D 220 per kWh wouldeliminate the lossat current costs. Consumptiondata suggestthe currentaverage rate is aboutD 110 per kWh. Depreciation chargesare likelyto be greatlyunderstated. APPIOIX 11

VIET NAM

ECONOMICREPORT

Table 11.1: DOMESTIC TRADE 1976-68 (in millions of current dong)

1988 1980 1981 1982 1983 1984 1985 1986 1987 Year 1976 1977 1978 1979

bomee,ticgoods procured 20,200 39.200 62,500 111,600 231,000 113,200 641,900 2,373,000 by the coemercial sector 3,300 4,769 6,372 4,779 6,600 9,400 18,600 30,800 53,600 108,900 47,300 225,200 899,uOO Industrial goods Is 1,900 3,636 3,765 3,183 3.300 10,800 20,600 31,700 58,100 122,100 65,900 316,700 1,474,000 Agricultural products 1,400 1,233 1,607 1,596 3,300 44.000 111,000 175.400 313,600 650,600 333,900 1,453,500 7,233.215 Retail sales 13,700 14,945 15,346 17,747 23,700 18,700 45,300 72.700 138,900 378,700 195,700 826,000 3,586,983 Organized market 6,200 7,120 74,656 7,793 9,300 25,500 65,700 102,700 174,700 271,900 138,200 627,500 3.646,232 Unorganized market 7,500 7,825 7,890 9,954 14,400 - 30,300 7S,200 120,000 215,700 476,000 235,700 1,000,00O Retail sles of pure coneerce 9,900 10,824 11,190 12,442 16,900 i 39,300 64,600 121,000 343,800 174,100 743,100 Organized market 5,500 6,342 6,661 6,724 7,800 16,100 14,200 35,90U 55,600 94,700 132,200 61,600 257,500 Unorganized mrket 4,400 4,482 4,629 5,718 8,100

La Excluding procurement for export. provided by th- Vistnamese authoritie.. Source: Viet Nam, General Stetistical Office, Stetettical Date, 1980-84 adn date MAP SECTION C H N A ______H z MY-MAR-

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