The CGPRT Centre The Regional Co-ordination Centre for Research and Development of Coarse Grains, Pulses, Roots and Tuber Crops in the Humid Tropics of Asia and the Pacific (CGPRT Centre) was established in 1981 as a subsidiary body of UN/ESCAP.

Objectives In co-operation with ESCAP member countries, the Centre will initiate and promote research, training and dissemination of information on socio-economic and related aspects of CGPRT crops in Asia and the Pacific. In its activities, the Centre aims to serve the needs of institutions concerned with planning, research, extension and development in relation to CGPRT crop production, marketing and use.

Programmes In pursuit of its objectives, the Centre has two interlinked programmes to be carried out in the spirit of technical cooperation among developing countries:

1. Research and development which entails the preparation and implementation of projects and studies covering production, utilization and trade of CGPRT crops in the countries of Asia and the South Pacific. 2. Human resource development and collection, processing and dissemination of relevant information for use by researchers, policy makers and extension workers.

CGPRT Centre Working Papers currently available:

Working Paper No. 38 Effects of Trade Liberalization on in India: Institutional and Structural Aspects by Ramesh Chand

Working Paper No. 39 Effects of Trade Liberalization on : Institutional and Structural Aspects by Kajonwan Itharattana

Working Paper No. 40 Effects of Trade Liberalization on Agriculture in : Institutional and Structural Aspects by Nguyen Trung Que

Working Paper No. 41 Effects of Trade Liberalization on : Institutional and Structural Aspects by Erwidodo

Working Paper No. 42 Effects of Trade Liberalization on : Institutional and Structural Aspects by Jikun Huang and Chunlai Chen

Working Paper No. 43 Effects of Trade Liberalization on Agriculture in China: Commodity Aspects by Jikun Huang and Chunlai Chen

Working Paper No. 44 Effects of Trade Liberalization on : Commodity Aspects by Muhammad Ramzan Akhtar

(Continued on inside back cover)

Effects of Trade Liberalization on Agriculture in Viet Nam: Commodity Aspects

The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area of its authorities, or concerning the delimitation of its frontiers or boundaries. The opinions expressed in signed articles are those of the authors and do not necessarily represent the opinion of the United Nations.

WORKING PAPER 52

Effects of Trade Liberalization on Agriculture in Viet Nam: Commodity Aspects

Nguyen Trung Que and Nguyen Ngoc Que

CGPRT Centre Regional Co-ordination Centre for Research and Development of Coarse Grains, Pulses, Roots and Tuber Crops in the Humid Tropics of Asia and the Pacific

CGPRT Centre Jalan Merdeka 145, Bogor 16111 Indonesia © 2000 by the CGPRT Centre All rights reserved. Published 2000 Printed in Indonesia

National Library: Cataloguing in Publication

Nguyen, Trung Que Effects of Trade Liberalization on Agriculture in Viet Nam: Commodity Aspects / Nguyen Trung Que and Nguyen Ngoc Que -- Bogor: CGPRT Centre, 2000. xix, 64 pp.; 25.5 cm. -- (Working paper series; No. 52)

Bibliography: 1 p ISBN 979-9317-07-X

1. Viet Nam – Trade, free and protected 2. Viet Nam – Agriculture – economic aspects I. Title II. Nguyen, Ngoc Que III. Series 382.710.959.7

Table of Contents

Page List of Tables ...... vii List of Figures ...... ix Abbreviations ...... xi Foreword ...... xiii Acknowledgements ...... xv Executive Summary ...... xvii

1. Introduction 1.1 Background ...... 1 1.2 Objectives of the study ...... 2 1.3 Overview on state policy for the commercial sector ...... 2 1.3.1 Privatization and domestic market liberalization policy ...... 2 1.3.2 Banking, monetary and exchange rate policy ...... 3 1.3.3 Tax and fee policy ...... 5 1.3.4 New policies of the Government of Viet Nam during 1996-1998 ...... 6 1.3.5 The impact of entering into AFTA, APEC and WTO ...... 7 1.4 Infrastructure development ...... 8 1.4.1 Development of the transport sector ...... 8 1.4.1.1 Land transport ...... 8 1.4.1.2 Railway transport ...... 9 1.4.1.3 Waterways transport ...... 9 1.4.1.4 Airways ...... 11 1.4.2 Development of the electric power sector ...... 11 1.4.3 Water resources system ...... 12 1.4.4 Telecommunications system ...... 13

2. Analysis of Selected Exportable Agricultural Commodities 2.1 Government policies on the selected agricultural commodities ...... 15 2.2 ...... 16 2.2.1 Area and production ...... 16 2.2.2 Rice milling ...... 17 2.2.3 Trade ...... 18 2.3 ...... 20 2.3.1 Area and production ...... 20 2.3.2 Trade ...... 21 2.3.3 Coffee processing technology ...... 21 2.4 Rubber ...... 22 2.4.1 Area and production ...... 22 2.4.2 Trade ...... 22 2.5 Tea ...... 22 2.5.1 Area and production ...... 22 2.5.2 Trade ...... 23 2.6 Groundnut ...... 24 2.6.1 Area and production ...... 24

v 2.6.2 Trade ...... 24 2.7 Effects of the economic crisis on selected commodities ...... 24 2.8 Recommendations to enhance farm product production and consumption ...... 25 2.8.1 The potential for production of farm products ...... 25 2.8.2 Objectives and major indicators of the target ...... 25 2.8.2.1 Food crops ...... 26 2.8.2.2 Coffee ...... 27 2.8.2.3 Rubber ...... 27 2.8.2.4 Tea ...... 27 2.8.2.5 Groundnut ...... 28 2.9 Conclusion and remarks ...... 28

3. Effects of Trade Liberalization on Selected Commodities at the National Level 3.1 Analysis methodology and selection of commodities ...... 31 3.2 Competitiveness of the selected crops ...... 32 3.3 Trade-related policies ...... 33 3.4 Supply and demand behavior of the selected crops in Viet Nam, 1986-1997 ...... 34 3.5 Vietnamese agricultural trade model for the selected crops ...... 35 3.5.1 Model description ...... 35 3.5.2 Trade liberalization options for the selected crops ...... 37 3.5.2.1 The 1997 base scenario ...... 37 3.5.2.2 Option 1 - removing export quota, export taxes and other distorted factors ...... 37 2.5.2.3 Option 2 - increasing the world price for the selected crops by 7% .... 38 3.6 Concluding remarks ...... 39

4. Effects of Trade Liberalization at the Farm Level 4.1 Selection of location and analysis methodology ...... 41 4.2 Effects of trade liberalization at the farm level ...... 42 4.2.1 Rice ...... 42 4.2.2 Coffee ...... 42 4.2.3 Tea ...... 44 4.2.4 Groundnut ...... 44 4.3 Concluding remarks ...... 45

5. Conclusions and Recommendations 5.1 Conclusions ...... 47 5.2 Recommendations ...... 49

6. References ...... 51

Appendix ...... 53

vi List of Tables

Page Chapter 1 Table 1.1 Increased value of fixed assets of the economic and transport sectors (fixed price at 1989) ...... 8 Table 1.2 Land transport (vehicular roads by economic zone) and proportion of asphalted and earthen roads ...... 8 Table 1.3 Main indicators of railway transport, 1985-1997 ...... 9 Table 1.4 The system of ports managed by the Ministry of Transport and Communications as of 1996 ...... 10 Table 1.5 Main indicators of the sea-borne shipping, 1985-1997 ...... 11 Table 1.6 Some indicators of the electricity sector, 1985-1997 ...... 12

Chapter 2 Table 2.1 Paddy planted area and production, Viet Nam, 1985-1997 ...... 16 Table 2.2 Exportation of rice, Viet Nam, 1994-1998 ...... 19 Table 2.3 Rice exports of Viet Nam to various continents (%) ...... 20 Table 2.4 Coffee planted area, Viet Nam, 1985-1997 ...... 20 Table 2.5 Export of coffee ...... 21 Table 2.6 Shares of major coffee export markets of Viet Nam, 1993-1997 ...... 21 Table 2.7 Planted area and production of rubber, Viet Nam: 1985-1997 ...... 22 Table 2.8 Exportation of rubber ...... 22 Table 2.9 Planted area and production of tea ...... 23 Table 2.10 Export of tea from Viet Nam ...... 23 Table 2.11 Planted area and production of groundnut ...... 24 Table 2.12 Export of groundnut from Viet Nam ...... 24 Table 2.13 Major indicators on production and export of farm products ...... 26

Chapter 3 Table 3.1 Composition of Viet Nam’s agricultural GDP ...... 31 Table 3.2 Viet Nam’s import and export by sector ...... 32 Table 3.3 Sown area and yield by crops in Viet Nam ...... 32 Table 3.4 Some economic indicators for the selected crops in Viet Nam ...... 33 Table 3.5 Demand and supply elasticity of the selected crops in Viet Nam, 1986-1997 ...... 34 Table 3.6 Exogenous variables used in the MOVAT (for base scenario) ...... 36 Table 3.7 Summary of base scenario: distorted markets in Viet Nam ...... 37 Table 3.8 Result of removal of all trade restrictions (option 1) in comparison with base scenario of distorted markets ...... 38 Table 3.9 Result of full removal of all export restrictions plus 7% increase in world price (option 2) for selected crops in Viet Nam in comparison with base scenario of distorted markets ...... 39

Chapter 4 Table 4.1 Profiles of representative farmers and their farms, 1996-1997 ...... 41 Table 4.2 Partial budget for rice production (per ha) in Mekong ...... 43 Table 4.3 Partial budget for coffee production (per ha) in Dak Lak province...... 43

vii Table 4.4 Partial budget for tea production (per ha) in Thai Nguyen province ...... 44 Table 4.5 Partial budget for groundnut production (per ha) in Nghe An province ...... 45

viii List of Figures

Page Chapter 2 Figure 2.1 Marketing channels of rice in the Delta ...... 18 Figure 2.2 Marketing channels of rice in the Mekong River Delta ...... 19

ix

x Abbreviations

AFTA Free Trade Area APEC Asia Pacific Economic Cooperation ASEAN Association of South East Asian Nations CEPT Common Effectively Preferential Tax CP In Vietnamese means the “Government” CPV Communist Party of Vietnam ESCAP Economic and Social Commission for Asia and the Pacific EU European Union FAO Food and Agriculture Organization FOB Free on board GAP Gross agricultural production GDC General Department of Customs GDP Gross domestic product GOA Gross output of agriculture GSO General Statistical Office HDBT in Vietnamese means “Council of Ministers” HH Household IAE Institute of Agricultural Economics MARD Ministry of Agriculture and Rural Development Million VND Millions of Vietnamese dong MOF Ministry of Finance MOI Ministry of Industry MOT Ministry of Trade MOTAC Ministry of Transport and Communication MPI Ministry of Planning and Investment MRD Mekong River Delta PM Prime Minister QD-TTg Decision of Prime Minster RRD Red River Delta SOE State-owned enterprises SPS Sanitary and phytosanitary TC-TCT The circular of Ministry of Finance TTg in Vietnamese means Prime Minister TTLB/TM-CN Inter-ministerial circular/ Trade-Industry UIG Union of Independent Governments USD US dollar VAT Value added tax VND Vietnamese dong WTO World Trade Organization

xi

xii Foreword

Responding to the growing concern for the effects of trade liberalization on regional agriculture, the CGPRT Centre has implemented a three-year research project “Effects of Trade Liberalization on Agriculture in Selected Asian Countries with Special Focus on CGPRT Crops (TradeLib)” since March 1997, in collaboration with partners from ten countries: China, India, Indonesia, Japan, Malaysia, Pakistan, the Philippines, the Republic of Korea, Thailand and Viet Nam. In all these countries, important issues regarding trade liberalization were investigated with an identical research framework by national experts.

The investigation covers major crops which might receive either favorable or unfavorable effects of trade liberalization both in export and import. I believe that the project will provide broad and practical knowledge on various aspects of the effects of trade liberalization; moreover, the information will be useful for researchers and policy planners not only in participating countries but also in other countries in the region. However, I would like to note that, since this project was conceived and started before the current currency and economic crisis began in the middle of 1997, the analysis handles basically the period before the crisis with available current information.

I am pleased to publish Effects of Trade Liberalization on Agriculture in Viet Nam: Commodity Aspects as the report of the second phase of the country study of Viet Nam. A report of the first phase of the country study, which includes institutional and structural aspects on the same subject, was published recently. I certainly hope these reports will be fully utilized for the improvement of agricultural trade and the encouragement of regional agriculture.

I thank Dr. Nguyen Trung Que and Mr. Nguyen Ngoc Que of Viet Nam for their intensive research and the Institute of Agricultural Economics for allowing them to work with us and for providing continuous support. I am very much obliged to Dr. Boonjit Titapiwatanakun for his devoted contribution to the project as the regional advisor. I would also like to express appreciation to the Government of Japan for funding the project.

Haruo Inagaki Director CGPRT Centre

xiii

xiv Acknowledgements

During the last two decades under the implementation of market-oriented renovation policies, Vietnamese agriculture has achieved spectacular results. This study on effects of trade liberalization on agriculture in Viet Nam, which was initiated by the United Nations ESCAP CGPRT Center in collaboration with Vietnamese national experts, has a great practical and theoretical meaning. I wish to express my deep gratitude to Dr. Haruo Inagaki, Director, CGPRT Center, Dr. Michio Kanai, Project Leader, CGPRT Center and Dr. Boonjit Titapiwatanakun, Kasetsart University, Thailand, Regional Adviser of the project, under whose guidance and support Phase II of this study was undertaken. I am grateful to Dr. Nguyen Ngoc Kinh, Professor, Director, Department for Science and Technology, Ministry of Agriculture and Rural Development, Viet Nam, Dr. Huynh Xuan Hoang, Director, Department for Planning and Projection, Ministry of Agriculture and Rural Development, Viet Nam, and Dr. Nguyen Tien Manh, Director, Institute of Agricultural Economics, Viet Nam. Various experts, of the Ministry of Trade, General Statistic Office as well as scientists of the Institute of Agricultural Economics, Viet Nam who provided generous help for with I am grateful.

Hanoi, Viet Nam Dr. Nguyen Trung Que October, 1999 Head of Planning and Science Office Institute of Agricultural Economics and Nguyen Ngoc Que Director of Centre for Research Information and Data Analysis Institute of Agricultural Economics

xv

xvi Executive Summary

During the last two decades, under the implementation of economic structural adjustment, agriculture of Viet Nam has been diversely developed with regard to production for both domestic consumption and export. Implementing the renovation policy shifting from a subsidized, bureaucratic, centrally planned production to market-orientated commodity production with the development of many economic sectors under the management of the State has paved the way for the expansion of trade. The main exportable crops of Viet Nam have grown both in quantity and export value. They have contributed considerably to Viet Nam’s economic development. Viet Nam has emerged in the world market as one of the main exporters of rice. Besides rice, there is also high potential for developing various exportable upland and root crops such as coffee, tea, rubber, groundnut and so on. The ongoing momentum of internal and external trade liberalization and the expansion of national, regional and international markets have notably impacted on agriculture in Viet Nam. Deeply concerned about this matter, the Government of Viet Nam, therefore, has launched a series of economic and institutional reforms encouraging farmers and agents to promote their agricultural activities and creating possibilities for market expansion. During implementation of the renovation policy, Viet Nam has devised numerous policies in order to guide the economy such as the promulgation of the foreign investment law, the development of different economic sectors enjoying equality before the law and the import- export tax policy and at the same time Viet Nam has conducted administrative reform, re- organizing the system of trade, customs, quarantine control, etc. To meet rapidly increasing demand Viet Nam has invested in the expansion and upgrading of infrastructure such as communication roads, the system of ports, railway stations, airports, the building of power plants, oil refinery facilities, and and telecommunication systems. This has created favourable conditions for the circulation of commodities nation-wide and the expansion of exports. However, infrastructure, especially the transport system, is still very backward and weak. The effect of trade liberalization at the national level in this study is based on different methods including econometric estimation of supply and demand behavior parameters and partial equilibrium modeling of Viet Nam’s agricultural trade with special focus on four major exportable crops: rice, coffee, tea and groundnut. Together, these sub-sectors contributed 70% of total sown area and 66% of agricultural exports during the last decade. The model analyzes two trade policy options to examine the effects of trade liberalization at the national level on the production, marketing and demand of the selected commodities. In the first policy option, all export quota and other trade restrictions are assumed to be totally removed. Apart from the elimination of all trade restrictions, the second policy option also includes the assumption of an increase of 7% in the world prices for exports of the four crops in Viet Nam. According to the analysis results of various simulations, some preliminary conclusions could be formed: if Viet Nam removes all her export restrictions the country’s overall agricultural export is likely to increase by nearly 26%, and in addition to this, if the WTO agreement on agriculture is fulfilled bringing about a 7% increase in the world prices for Viet Nam’s agricultural export commodities, Viet Nam’s agricultural export earnings might increase by more than 40%. In short, the analysis shows that the effect of national and global trade liberalization seems to be great for Viet Nam’s agricultural sector. However, many

xvii difficulties and challenges emerging from world competition and the risk of economic instability caused by world trade fluctuation should be further considered. The impact of trade liberalization on agriculture at the farm level was also studied by using the partial budget approach. The cost and returns for the selected crops in specified locations were computed based on data drawn from the Institute of Agricultural Economics’ commodity-specific study. For the scenario with full trade liberalization, only prices for outputs of the four selected crops were assumed to be changed. The result of partial budget analysis with and without trade liberalization demonstrated some very impressive potential impacts of free trade at the farm level. If there were totally free trade, net return per hectare in the case of rice in the Mekong River Delta, coffee in Dak Lak province, tea in Thai Nguyen province and groundnut in Nghe An province would increase by 1.4, 8.7, 9.3 and 1.4 million VND. The study of the impact of trade liberalization on agriculture, both at national and at farm levels, is based on a limited amount of data and resources. Therefore, the findings of this study need to be further investigated. The analysis, however, could contribute to the clarification of the effects of trade liberalization on agriculture in Viet Nam. Due to the influence of trade expansion, the production of agricultural commodities of farmer households has increasingly developed. The lives of farmer households has increasingly developed. The lives of farmer households in zones producing export commodities, such as rice in the Mekong river delta and coffee in Tay Nguyen, have clearly improved compared to the period before implementing the expansion of trade and zones, which are still undertaking self- sufficient production. Besides the positive impacts of expansion of trade on agriculturally production, there are also numerous restrictions: administrative procedures have not been improved thoroughly and their implementation has been delayed. The relationship between farmer households and organizations dealing with processing and export has been loose, with no firm contracts. The producers have not been sponsored, so when market prices go down below the production cost, they suffered losses. Being aware of the important role of the expansion of trade in boosting agricultural production, the Government of Viet Nam has devised a strategy and measures for the year 2010 aimed at bringing into full play the competitive advantage of agricultural commodities such as rice, coffee, rubber, nuts, pepper, , , fruits, , and meats. In short, the benefit of free international trade has been proved in this study with its findings that appear to be very convincing for Viet Nam. However, the implementation of binding commitments under the WTO and AFTA agreements on agriculture is hardly easy in real life. Acceding to the regional and world trade organizations, Viet Nam may still have various problems and challenges of its own, which need extra precautions and further comprehensive studies. The following are recommendations to increase agricultural production and exportation further: • Price stability and food security for its low-income population may become great concerns of Vietnamese policy-makers, when the country liberalizes its foreign trade in the agricultural sector. There is a need to further accelerate agricultural diversification, income-generation and poverty alleviation programs in rural and marginal areas. • In order to ensure smooth flow of agricultural products from production to exportation, a well-developed organization system, operation mechanism and infrastructural conditions are necessary for Viet Nam. • As a country of high potential for export of agricultural products, Viet Nam needs to further improve its competitiveness in international agricultural markets through expanded programs for enhancing product quality, upgrading its physical infrastructure, strengthening the banking system, reforming the inefficient state enterprise sector and creating more access for the private sector to domestic and foreign trade.

xviii • For better marketing and exportation, investment for processing, preserving, packaging and wrapping technologies is necessary. • For adjustment to trade liberalization, it is necessary to reform administrative procedures, to plan specialized agricultural zones and to ameliorate laws and policies. • For Viet Nam, the shift to tariffication from non-tariff border measures and removal of import licensing procedures may result in lack of effective protection in agriculture; the current tariff level in agricultural commodities is not high compared to that of other countries. However the application of the so-called minimum-buying price list in calculating import tax tends to increase the protection level of the current tariff system. Thus, removing this minimum-buying price list when joining regional and world trade communities may weaken the protection level of Viet Nam’s agricultural production compared to that of other member countries. • Establishing really fair trade with other countries of the regional and international communities under the general agreed system of binding trade protection measures is not easy for Viet Nam, since it lacks sufficient experience and capacity in these areas. Thus, efforts must be made to improve the technical and managerial capacity of government officers working in related fields. • Positive measures have been devised to implement AFTA and APEC for integrating into regional and world markets and at the same time preparing for admission to the WTO.

xix

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