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toiling people… [It] is the force leading the state and society.”3 Membership of the Party, state administration and business interests overlap; generally the Party decides key administration appointments. However, a 1995 government reorganisation by the

‘pro-reform’ Prime Minister Vo Van Kiet and his faction (and supported by the IMF and World Bank) started a process of insulating government administration from the Party.4 The Party seems to have largely acquiesced to this reduced role and, since the late 1990s, it has limited its role to “…orientation and policy-making, rather than direct participation in management activities.”5 This enabled the administration to develop property rights and an increase the importance of the rule of law.

The Constitution provides for a unitary system of government operating at four levels:

national, provincial, district and commune. At the national level, the Constitution provides for a National Assembly with 450 deputies elected for five-year terms. The National Assembly elects the President and Prime Minister, each for five-year terms;

the President is the ceremonial Head of State and Commander-in-Chief of the armed forces. The Prime Minister selects the ministers or heads of the state’s 22 ministries and 26 other agencies and heads the Council of Ministers.

The Prime Minister also selects the leaders of the Provincial People’s Committees, which administer the 59 provinces and five municipalities. There is a separate provincial legislative arm, Provincial People’s Councils, but membership of the two bodies often overlaps.6 A similar structure operates at the district and commune level.

There is also organisation at the village or ward level. Despite the unitary structure and strong national control, provincial administrations have increasing autonomy with respect to budgeting and operations. The degree to which this has been utilised varies among provinces and depends in part, not surprisingly, on the standing of local leaders.7

3 The Constitution of Vietnam 1992, cited in Van Arkadie and Mallon, Viet Nam: A Transition Tiger?, pp. 58-59.

4 Gabriel Kolko, Vietnam: Anatomy of a Peace (London: Routledge, 1997), pp. 132-135.

5 Cited in Irene Nørlund, Tran Ngoc Ca and Nguyen Dinh Tuyen, "Dealing with the Donors: The Politics of Vietnam's Comprehensive Poverty Reduction and Growth Strategy" (Policy Papers 4/2003, Helsinki:

Institute of Development Studies, University of Helsinki, 2003), p. 53.

6 For an account of how provincial government operates see the interesting study of Ho Chi Minh City by Martin Gainsborough, Changing Political Economy of Vietnam: The Case of Ho Chi Minh City (London:

Routledge, 2003).

7 Van Arkadie and Mallon, Viet Nam: A Transition Tiger?, p. 61.

Despite being a one-party and unitary state, Vietnam was never as centrally planned or controlled as other socialist countries. Stein Tønnesson explained this as the result of necessary compromise between the many layers of the Vietnamese state: social, political-doctrinal, economic and geographic. For example, an important Viet Minh legacy is that key social forces remain committed to social justice, which to an

“…extent reduces the capacity of those Vietnamese decision-makers who want to combine social stability with market-oriented reforms.”8 Such doctrinal commitments can cut across regional differences (between the north, centre and south) and combine in various ways with the diverse but linked class grouping (for example, linking various groups focused on security concerns or commercial matters) and with Confucian and Vietnamese cultural traditions. As Adam McCarty concludes, it is appropriate to describe Vietnam as “…a rather unique form of consensus governance” or a “managed democracy” that allows mass representation under Party control.9

The Grassroots Democracy Decree legislated in 1998 is a good example of the consensus process. The decree was partly a reaction to peasant uprisings especially the widespread disturbances in 128 villages in Thai Binh Province in 1997-8. The disturbances appear to have been caused by a combination of the reaction to economic reform in rural areas, local corruption and governmental unresponsiveness to these issues. The Decree gave people at the commune level specific rights to participate in decision-making, petition authorities and oversee local budgets; it was overlain with a commitment to promote democracy at the commune level.10

The consensus system, a cautious leadership and the continuing perception that the Party and State are concerned about the welfare of the general population, means the Party and State have retained a fair degree of legitimacy in Vietnam.11 The process of reform or renovation, called Doi Moi, initiated in 1986 coupled with a willingness to admit to previous mistakes undoubtedly assisted with the retention of legitimacy.

8 Stein Tønnesson, "The Layered State of Vietnam," in Kjeld Erik Brødsgaard and Susan Young (eds.), State Capacity in East Asia (Oxford: Oxford University Press, 2000), p. 243.

9 McCarty, "Governance Institutions and Incentive Structures in Vietnam," p. 5.

10 Nørlund, Ca and Tuyen, "Dealing with the Donors", p. 44.

11 McCarty, "Governance Institutions and Incentive Structures in Vietnam," p. 6. See also Gainsborough, Changing Political Economy of Vietnam, pp. 14-15 and Masina, Vietnam's Development Strategies, p. 47.

Kolko, in contrast, argued throughout his 1997 book that the Party’s acquiescence to (neoliberal) reform has undermined its legitimacy and cause an internal crisis, Kolko, Vietnam: Anatomy of a Peace.

Gabriel Kolko suggested that Doi Moi was strongly influenced by the IMF — or rather that IMF staff had strong influence on a few key Vietnamese policy-makers who were the key architects of the reform.12 However, McCarty and others disagree and have pointed to Vietnam’s strong political structure and culture that give it a notable capacity to resist donor pressure for political reform. McCarty explained that:

…the traditional role played by programme aid in supporting reform has been of limited relevance in Vietnam… examination of the political economy of Vietnamese reform further supports the idea that policy dialogue has been of limited relevance… The policy making process in Vietnam is diffuse and does not follow the formal structures that a political scientist may map out. The system is one of consultation and consensus, with many different bodies being involved in a single decision…13

The capacity of Vietnam’s historic bloc to resist the Bank’s hegemony is a reoccurring theme of this case study.

Socio-economic Changes and Policy in Vietnam since 1986

There is an interesting academic debate about the nature of Doi Moi and the Vietnamese socio-economic system more generally. It revolves around two central issues: first, the relative strength or weakness of the Vietnamese state (political society) and its contribution to the country’s notable economic growth over the past two decades. The second issue is the level and pace of reform required to ensure continuing economic growth. Similar to the literature on East Asian development, a rough dividing line can be made between ‘free market’ (or neo-liberal) and more critical (‘statist’) perspectives.

The former group point to the weakness of the Vietnamese state and concurrently the

12 As Kolko noted, the IMF remained engaged with Vietnam after the war and made loans from its Trust Fund (later the Structural Adjustment Facility) in 1976 and 1978. The conditions on these loans (which Vietnam needed for debt repayments) were, Kolko argued, a significant influence on Doi Moi as was the IMF’s refusal to provide further loans in 1985. He concluded that Doi Moi indicates a full acceptance of IMF structural adjustment, Kolko, Vietnam: Anatomy of a Peace, pp. 32-33.

13 J. Donge, H. White and Le Xuan Nghia, Fostering High Growth in A Low Income Country: Program Aid to Vietnam (Stockholm: SIDA, 1999), cited in McCarty, "Governance Institutions and Incentive Structures in Vietnam," pp. 21-22. See also Nørlund, Ca and Tuyen, "Dealing with the Donors", p. 9 and Martin Painter, "The Politics of Economic Restructuring in Vietnam: The Case of State-Owned Enterprise 'Reform'," Contemporary Southeast Asia, Vol. 25, No. 1 (2003), pp. 35-38.

need to speed up market-based reforms.14 Whereas the critical scholars find that the Government of Vietnam (GoV) has provided relative stability, continuity of political institutions and decisive economic decision-making and has thus been a key determinant of Vietnam’s poverty reduction and economic growth performance.15 Equally, they have highlighted the bearing of regional and international geopolitical and economic developments on Vietnam’s policy choices. While I do not engage directly with these debates, I take more from the critical position than the neoliberal one.

Following formal reunification in 1976, economic growth was low and unable to keep pace with population growth. The demands of rehabilitation and reconstruction competed with security needs as Vietnam was forced to engage militarily with both Cambodia and China, and thus led to a doubling of the size of the army. The difficulties were exacerbated by the US-backed UN economic embargo after Vietnam’s intervention in Cambodia. Domestically, the attempt at collectivisation in the south generally failed, while in the north, collectivised agriculture performed poorly. The performance of manufacturing enterprises was highly variable. Already in 1979, a sporadic process of relaxing constraints on economic activity and decentralising of decision-making commenced. After initial improvements, poor structures combined with high levels of military expenditure resulted in further economic deterioration. In 1986, inflation was 500-700 per cent per annum and the budget and trade deficits had escalated — a situation made worse by the cessation of Communist Bloc and Chinese aid in the following years.16 On an expenditure basis, over 70 per cent of the population

14 This position is particularly clear in the work of Adam Fforde and Stefan de Vylder. See for example, Stefan de Vylder, "State and Market in Vietnam: Some Issues for an Economy in Transition," in Irene Nørlund, Carolyn L. Gates and Vu Cao Dam (eds.), Vietnam in a Changing World (Surrey: Curzon Press Ltd, Nordic Institute of Asian Studies, 1995) and Adam Fforde, "Vietnam in 2003: The Road to Ungovernability?," Asian Survey, Vol. 44, No. 1 (2004). A somewhat more moderate version can be found in William Turley, "Viet Nam: Ordeals of Transition," in Karl D. Jackson (ed.), Asian Contagion:

The Causes and Consequences of a Financial Crisis (Boulder, Colorado: Westview Press, 1999).

15 See for example, Benedict J. Tria Kerkvliet, "Land Regimes and State Strengths and Weaknesses in the Philippines and Vietnam," in Peter Dauvergne (ed.), Weak and Strong States in Asia-Pacific Societies (St Leonards: Allen & Unwin, 1998), Masina, Vietnam's Development Strategies, Van Arkadie and Mallon, Viet Nam: A Transition Tiger? and Keun Lee, Justin Y. Lin and Ha-Joon Chang, "Late Marketisation Versus Late Industrialisation in East Asia," Asian-Pacific Economic Literature, Vol. 19, No. 1 (2005).

‘Developmental’ state literature can tend to ahistoricism and a privileging of the nation-state as argued by Berger, The Battle for Asia, Chapter Seven. Not all of the authors here accept or promote academic

‘developmental state’ models but they do all allow space for the state and for the impact of external factors on Vietnam’s development.

16 Van Arkadie and Mallon, Viet Nam: A Transition Tiger?, pp. 51 and 67. They noted the importance of pre-1986 reforms in setting the context for the later high growth. Of particular importance was the high

was living in poverty and some areas were on the verge of famine.17 Most commentators considered that the resultant social unrest, (articulated so forthrightly by key Party members at the Sixth Party Congress in 1986), was a key impetus to Doi Moi.

In addition, Doi Moi can be seen as a delayed recognition of informal activities already occurring in trade and exchange, which, in effect, drove formal policy changes.

Dzung The Nguyen described Doi Moi as comprising three main periods.18 The first period, “Path Seeking” (1986-1988), was driven by informal activity. A series of micro-economic reforms were undertaken to reduce the limits on private sector activity and domestic trade. This was followed by increases in official prices for non-essential consumer goods to bring them closer to market prices. Price reform was undertaken fairly systematically through to 1992 by which time prices for all but a few commodities were at market levels. The price reform effectively lifted a significant burden from the state budget. In 1987, a law allowing private land-use rights was passed and in 1988 land was re-allocated in an equitable manner to households; this combined with additional freedoms for farmers (connected to the dismantling of cooperatives) and new forms of support (e.g. agricultural extension services) was central to significant improvements in farm productivity from the late 1980s.19 These improvements were at the core of the dramatic reductions in poverty.20

Macroeconomic reform started in 1987 with the first currency devaluation, although a major devaluation of the Dong did not take place until 1989. This devaluation brought the Dong close to its market rate and resulted in positive interest rates.21 The year 1989 was also the start of the second phase of reform, which Nguyen argues was the key

level of investment in human capital and the development of strong rural structures and institutions, ibid, pp. 51-53.

17 Dzung The Nguyen, "Social Welfare Aspects of Development in a Transition Economy: Application to Vietnam," (Doctor of Philosophy: University of Wollongong, Wollongong, 2001), pp. 198. By 1993, poverty had dropped to around 60 per cent, Joint Donor Report to the Vietnam Consultative Group Meeting, "Vietnam Development Report 2004: Poverty" (Hanoi: 2003), available from:

http://www.vdic.org.vn, accessed: June 2004, p. 9.

18 Nguyen, "Social Welfare Aspects of Development in a Transition Economy," pp. 166-170. Vu Tuan Anh dates path seeking from 1980, see Vu Tuan Anh, "Economic Policy Reforms: An Introductory Overview," in Irene Norlund, Carolyn L. Gates and Vu Cao Dam (eds.), Vietnam in a Changing World (Surrey: Curzon Press Ltd, Nordic Institute of Asian Studies, 1995).

19 Van Arkadie and Mallon, Viet Nam: A Transition Tiger?, p. 70.

20 Masina, Vietnam's Development Strategies, p. 61.

21 Van Arkadie and Mallon, Viet Nam: A Transition Tiger?, p. 83.

transition phase. From 1989 to 1993, reforms systematically moved Vietnam towards a market-type economy and macroeconomic stabilisation took place.22 This period saw:

ƒ a formal end to the two-tier price system;

ƒ increasing formal acknowledgement of the role of the non-state sector in industrial production, in particular via enactment of laws on companies, private enterprises and foreign investment;

ƒ a gradual reduction in foreign exchange and trade restrictions;

ƒ legalisation of foreign direct investment;

ƒ legalisation of gold trading;

ƒ development of a two-tier banking system; and

ƒ legislation on land-rights trading.

Reform of state-owned enterprises (SOEs) got underway during this period too, initially via mergers and closures. Between 1988 and 1992, the number of such enterprises fell from 12,000 to 6,000 and the SOE labour force was reduced by one third. In 1992, the process of ‘equitisation’ was initiated. The GoV describes equitisation as transforming the ownership of the mode of production. It can take place through one of four methods:

maintaining the existing state capital value and issuing shares to attract capital; selling part of the existing state capital value of the enterprise; selling part of the enterprise; and selling the entire state capital value of an enterprise and turning it into a joint stock company.23 A 2004 study of the forms of equitisation suggested that it generally amounts to little more than privatisation.24

Commentators on both the ‘left’ and ‘right’ have characterised the program of reform as equivalent to a typical IMF stabilisation package. However, there are at least five reasons to be cautious with this interpretation and to examine the impact of indigenous influences on Doi Moi in some detail. First, as Stefan de Vylder pointed out, in Vietnam microeconomic reforms preceded macroeconomic reform — the reverse of the standard IMF approach.25 Second, despite reductions in the SOE sector and tight monetary and fiscal policy, government expenditure actually increased during the reform period, in

22 Nguyen, "Social Welfare Aspects of Development in a Transition Economy," p. 167.

23 Mark Evans, "Embedding Market Reform through Statecraft - the Case of Equitization in Vietnam,"

Workshop on Equitisation in Vietnam (Institute of Social Science, Ho Chi Minh City: 2004), p. 6.

24 Ibid, p. 1.

25 de Vylder, "State and Market in Vietnam," pp. 37-38.

stark contrast to standard IMF prescriptions of reducing government expenditures.26 Third, the Vietnamese opted for a gradual process of reform, with much ‘learning by doing’ — it cannot be characterised, regardless of IMF preferences or the picture of some analysts as a ‘big bang’ approach.27 The fourth reason is an outcome of the first three — Vietnam was not able to meet IMF or World Bank requirements to receive adjustment loans between 1995 and 2001. Finally, the process was more than mere

‘adjustment’ of the economy, it “…revolutionised the entire set of development concepts and strategies.”28 And this ‘revolution’ has been as much influenced by socialism and the model of the East Asian ‘developmental states’ as it has been by neoliberalism.29 It is a process in which Vietnam is still engaged.

The positive economic developments — economic growth jumped to 5.1 per cent in 1988 and inflation stabilised — cannot be explained only by the Doi Moi reforms. A key factor was the end of the war in Cambodia.30 In 1991, inflation spiked briefly prompting further macroeconomic stabilisation, consolidation of the SOE sector and reform of banking. By 1993, growth reached close to 10 per cent and remained at high levels until mid-decade. Much of the early growth was attributable to the farm sector, which employed around 70 per cent of the working population. Given the egalitarian land distribution, growth had a strong impact on poverty; by 1998 the poverty rate had fallen to around 37 per cent of the population.31

Prior to 1986, Vietnam was performing better than countries with similar levels of per capita income assessed by development indicators such as levels of literacy (1980:

males 91 per cent, females 78 per cent), primary schooling (gross enrolments in 1980:

108 per cent of age group) and maternal mortality (200 per 100,000 live births).32 Thus the existing social welfare structure underpinned the ongoing reductions in poverty.

Serious problems remained: malnutrition affected 52 per cent of under-five year olds in

26 According to Nguyen, government per capita expenditure was nearly twice as high in 1994 than in 1989, Nguyen, "Social Welfare Aspects of Development in a Transition Economy," p. 174.

27 This characterisation is from Turley, "Viet Nam: Ordeals of Transition," p. 278.

28 Nørlund, Ca and Tuyen, "Dealing with the Donors," p. 78.

29 Masina, Vietnam's Development Strategies, p. 28.

30 Kolko is one of the few analysts who give adequate weight to the economic impact of the American war and the engagement with Cambodia in understanding the crisis in 1986, Kolko, Vietnam: Anatomy of a Peace, p. 34.

31 Joint Donor Report to the Vietnam Consultative Group Meeting, "VDR 2004 Poverty," p. 9.

32 Nguyen, "Social Welfare Aspects of Development in a Transition Economy," p. 200.

1980-1985; in 1997-2000 it still affected 37 per cent of under-fives, which is high by regional standards.33

While Vietnam progressed on most human development indicators between 1986 and 1992, the overall social welfare system — covering health, education and social support

—was largely neglected. Education and health were least neglect but in education, lower and upper secondary enrolments actually declined until 1995. In health, the number of beds, medical assistants and nurses declined, accompanied by reduced access to the formal health care system.34 The introduction of user-fees meant that by the year 2000, households directly covered approximately 43 per cent of the costs of education and 35 per cent of public hospital costs. A public hospital visit cost a household from the poorest population quintile on average around 45 per cent of their annual non-food expenditure. 35 But from the mid-1990s state allocations to health and education increased and these combined with the income from user fees to produce noteworthy quality improvements.36

Other forms of social welfare such as transfers and poverty reduction programs were severely neglected. Under the old system, the provision of housing, food, utilities, health, education, etc was organised around cooperatives, SOEs and the arms of the state. But cooperatives largely disappeared and SOEs had most social obligations removed in the transition to market operations. Only after 1992 were steps taken to adjust social services to the new economy, these are discussed below.

Dzung The Nguyen argued that the third period of Doi Moi, 1994 to 2001, focused on consolidating reforms. Tight fiscal and monetary policy was maintained and incremental reforms continued including decentralisation of budget management and a general focus on public sector management from 1995.37 Irene Nørland, Tran Ngoc Ca and Nguyen Dinh Tuyen see the incremental process as the government’s attempt “to

33 World Bank, "Country Assistance Strategy of the World Bank Group for the Socialist Republic of Vietnam" (Report No. 24621-VN, September 16 2002), Annex 5, Vietnam Social Indicators.

34 Nguyen, "Social Welfare Aspects of Development in a Transition Economy," p. 200.

35 Ibid, pp. 251-254.

36 Masina, Vietnam's Development Strategies, pp. 140-1.

37 Nguyen, "Social Welfare Aspects of Development in a Transition Economy," p. 168. For a summary of key developments from 1998 to 2002 see Annex A6 of World Bank, "Vietnam CAS 2003-2006."

set up rational and harmonious development structures before creating a common playing field for all economic components.”38

Since 1994, further steps have been taken to integrate Vietnam into the world economy, including tariff reductions, removal of various quantitative restrictions and quotas and further liberalisation of export and import licensing requirements. Some of the steps were requirements for accession to the World Trade Organization, which occurred in January 2007. In 2000, business licensing procedures were simplified and a stock exchange was established in Ho Chi Minh City. The GoV plans to complete planned equitisation of SOEs by 2010, but the pace has been relatively slow and this deadline might not be met. SOE equitisation has been a major focus of the Bank and is discussed in more detail in the section on the Bank’s structural adjustment lending in Chapter Six.

The Asian Financial Crisis reduced GDP growth, though not nearly as heavily or as long as for regional neighbours such as Thailand and Indonesia. This was in part due to the continuing controls on foreign investment and exchange, which meant funds were long-term investment-oriented not short-term and speculative. FDI to Vietnam did decline in the lead up to the Crisis but this was not, as the World Bank argued, due to foreign investors concerns about slowing down of reform. Rather, it was due to a decline in real estate investment and fluctuations in oil and gas investments.39 The decline during the Crisis was mostly due to the fact that over 60 per cent of Vietnam’s FDI came from East Asia, that is from other countries affected by the Crisis.40 The Crisis also appreciated the value of the Dong, reduced exports and hit government revenues. In 1998, growth dropped to 5.8 per cent and in 1999 to 4.8 per cent. However, the government acted to maintain macroeconomic stability by controlling imports, devaluing the Dong and adopting conservative monetary policy.41 By 2000 growth had recovered to 6.8 percent and in 2004, it was 7.7 per cent. Poverty continued to decline significantly — from 37.4 per cent in 1998 to 28.9 per cent in 2002 and 20 per cent in 2004. However, the gap between the rich and poor in Vietnam is steadily increasing.42

38 Nørlund, Ca and Tuyen, "Dealing with the Donors," p. 59.

39 Masina, Vietnam's Development Strategies, pp. 77-8.

40 Ibid, p. 79.

41 Ibid, pp. 84-86.

42 Joint Donor Report to the Vietnam Consultative Group Meeting, "VDR 2004 Poverty", pp. 12-13.