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This chapter commences with an analysis of changes in the overall lending program in terms of sectoral lending and loan size. It then embarks on a detailed exploration of all Bank loans to Vietnam in the two case study periods by sector commencing with structural adjustment lending. Investment loans are analysed by Bank sector, starting with energy and mining and water, sanitation and flood protection, which are grouped together because of the common approach in these sectors. Transportation is dealt with separately; finance lending is combined with the law, justice and public administration sector, as four out of its five credits were structural adjustment loans. Health and education are also combined because of the small number of loans in each sector.

A Sectoral Analysis of World Bank Lending to Vietnam

Looking at the two case study periods, 1993-1997 and 2000-2004, this section explores the evolution of Bank lending in terms of sectoral focus and the size of loans. The analysis utilises the Bank’s own sector classification system. In 1993-1997, transportation and energy and mining were clearly the focus of Bank lending (see Table 6.1). Together they accounted for almost half of total new Bank lending commitments.

Transportation comprised mainly projects to rehabilitate highways and ports; the energy and mining sector in Vietnam is restricted to projects in electricity generation, distribution and management. Finance, the third largest sector focused predominately on microcredit and banking reform projects. Health and education received scant attention in either period. Indeed, despite the focus on poverty reduction in the PWC, the Bank’s overall levels of lending for education, the environment and health remained fairly stable across the Bank after 1996 at a level lower than the first half of the 1990s. Social

“…sector lending has only increased marginally following the record low of 2.5% of Bank lending in 1996.” 1

1 Wodsak, "World Bank Reform — a Critical Investigation," p. 90.

Table 6.1 World Bank New Loan Approvals to Vietnam by Sector, as a per cent of total country lending: 1993-97 and 2000-04

Sector 1993-1997 (%)

2000-2004 (%)

Transportation 29 16

Energy 20 23

Finance 16 7

Law, justice and public administration 9 18

Health and other social services 9 1

Agriculture, fishing and forestry 7 11 Water, sanitation and flood protection 6 18

Education 4 6

Data source: World Bank Website, Projects & Operations, Projects Database2

The 1998-2002 Vietnam CAS indicated that the Bank program would shift its focus towards poverty, social issues and rural development. There are indications of a shift in emphasis through such projects as the Northern Mountains Poverty Reduction Project and some power projects were targeted at rural areas. Yet, looking at Table 6.1 the negligible expenditure on health and education speaks for itself. Transport and energy (electricity) are the key sectors in both case study periods, though law, justice and public administration and water, sanitation and flood protection moved into equal second place in 2000-04. The increase in the share of Bank commitments in these last two sectors was suggested by the analysis of the PWC, given its renewed emphasis on government’s facilitating the provision of infrastructure to enable economic growth; as well as its focus on property rights and on business and regulatory frameworks to reduce market and government failures. Overall there was a strong focus on infrastructure — water, transport and energy accounted for 57 per cent of new commitments in 2000-04. In an interview, a Bank staff member explained the strong focus as the inevitable result of Vietnam’s pending graduation from IDA to IBRD loans:

…the reality is that countries like to borrow IBRD money for infrastructure, and the Bank has to be able to lend that money otherwise it is going to run out of money sooner or later.3

2 Vietnam received a small number of grants of under $10 million, mainly under the auspices of the Global Environment Fund. Given the focus is on loans these were excluded from the case study.

3 Turk, "Interview."

The Bank has been criticised over many decades for its focus on project quantity rather than quality and loan size as the key indicator. Ranis argued that the fact that average Bank loans are still around $100 million indicates the continuing “…trade-off between the quantity and quality of lending.”4 Vietnam does not deviate from this model. The average loan size shifted only slightly in the case study periods, in 1993-1997 it was

$105 million and in 2000-2004, $124 million. The mean moved from $100 million to

$110 million.

Structural Adjustment Lending in Vietnam

Table 6.2 Word Bank Adjustment Lending to Vietnam: 1993-1997 and 2000-2004

Project Name Year

Approved

Approved Amount

(USD millions)

Loans 1993-1997

Structural Adjustment Credit 1994 $150.0 Loans 2000-2004

Poverty Reduction Support Credit I 2001 $250.0 Poverty Reduction Support Credit II 2003 $100.0 Poverty Reduction Support Credit III 2004 $100.0

Structural adjustment lending increased from almost nine per cent of the value of new commitments in 1993-1997 to over 16 per cent in 2000-2004, which is notably less than the current bank average of 33 per cent of lending.5 Until 2004, Vietnam only accessed four adjustment loans: there was one Structural Adjustment Credit (SAC) in the 1993-1997 period and three — called Poverty Reduction Support Credits (PRSCs) — in the 2000-2004 period.

There is limited information available on the 1994 SAC, however, it supported the initial program of Doi Moi undertaken by the GoV and emphasised those aspects that fit within the Washington Consensus — conservative monetary and fiscal policy, devaluation, price liberalisation, land use rights, foreign trade and investment, etc. The

4Ranis, "The World Bank near the Turn of the Century," p. 86.

5 See World Bank, Annual Report 2003, p. 36.

objective of the credit was to assist the transition to a market economy.6 It included some discussion of the social costs of adjustments and concluded that the Bank should focus on a “broader” approach to aiding the vulnerable rather than direct support for social policy.7 The meaning of broader support becomes clear when loans in the finance sector are analysed. Conditionality seemed to be focused on regulation and competition policy, tax policy and administration and debt management and fiscal sustainability.

Brian Van Arkadie and Raymond Mallon suggested that the SAC was the driving force behind the 1993 Law on Bankruptcy and the 1995 State Enterprise Law, both of which were developed with little consultation and have been poorly enforced.8

The gap in adjustment loans until 2001 paralleled the gap in the IMF program in Vietnam. The failure to reach a consensus continued throughout the Asian Financial Crisis, which negatively impacted economic growth and poverty reduction efforts in Vietnam. This gap and the low level of adjustment lending in general, indicates the relative strength of the Vietnamese historic bloc — because despite the impact of the Crisis on the economy and the state budget reliance on donor flows, the GoV rejected access to quick-disbursing loans in favour of some domestic policy freedom. These policy decisions outlined in Chapter Five, involved conservative monetary and fiscal policy but also trade (import) restrictions. They were clearly preferable to the GoV over the liberalisation and privatisation programs being pushed by the World Bank and IMF.

Equally then the Bank’s position is evidence of its commitment to hegemonic principles over country ownership of macroeconomic policy settings or over mitigating the impacts of crisis on the poorest.9 During this gap, the Bank attempted to implement aspects of its structural reform program though a combination of sector programs and a large program of analytical studies (see, in particular, the power sector).10 As noted

6 World Bank, "Viet Nam - Structural Adjustment Credit I," pp. 1-2.

7 Ibid, p. 5.

8 Van Arkadie and Mallon, Viet Nam: A Transition Tiger?, p. 131. This experienced indicated “…the limited role of legislation as an instrument of change, where the laws are neither supported by a consensus of the concerned parties nor respond to a demand arising from within the society.” Across Asia, transplanted laws have neither been generally well received nor been successful in boosting business performance Van Arkadie and Mallon, Viet Nam: A Transition Tiger?, pp. 104-105.

9 World Bank, "Vietnam - Country Assistance Evaluation" (Report No. 23288, Operations Evaluation Department, November 21 2001), p. 1.

10 Between 1990 and 1999, analytical work accounted for 26 per cent of Bank work in Vietnam on lending, supervision and analysis. This compares to a Bank-wide average of 18 per cent, ibid, pp. 11-12.

earlier, the Bank-chaired CGV also pressured Vietnam by offering additional funding, subject to Vietnam following World Bank reform prescriptions.11

Despite its title and the analysis of poverty in the report, the policy reforms in PRSC I do not directly address poverty.12 PRSC I proposes action in five areas: the private sector climate; SOE reform; banking reform; trade reform; and public expenditure management. In other words, these are largely Washington Consensus policies focused on developing markets and global integration. The connection to poverty requires two leaps of faith, first that making such reforms will increase economic growth, and second that economic growth will decrease poverty. In contrast, Van Arkadie and Mallon found that in Vietnam, “…improvements in enterprise performance have usually preceded changes in the legal framework.”13

There is a significant shift from PRSC I to II/III, as the later loans incorporate some of the issues in Vietnam’s interim-PRSP released between PRSC I and II.14 From PRSC II the policy reform agenda was expanded mostly around social issues. New issues included: health, education, land use and transferability, environmental sustainability, government planning and legal reform. However, the five sectors from PRSC I that conform to the Washington Consensus agenda continued to receive the most attention.

Decentralisation and corruption appeared in PRSC II and became more prominent in PRSC III, these are part of the PWC focus on governance and provide new grounds for the Bank to propose ‘reforms’ to Vietnam’s legal and regulatory system.

The number and types of conditions also changed — PRSC I for $250 million contained 24 conditions for the two tranches in the five sectors mentioned above. By PRSC II ($100 million), conditions were dropped in favour of “policy actions,” 19 of them. In addition, PRSC II included a list of 14 “triggers,” which are additional targets to be

11 Masina, Vietnam's Development Strategies, pp. 86.

12 Porter and Craig, "The Third Way and the Third World," p. 402. See also their analysis of the tenuous links between the loan objectives and poverty reduction on p.403.

13 Van Arkadie and Mallon, Viet Nam: A Transition Tiger?, pp. 104-105.

14 World Bank, "Program Document for a Proposed Credit to the Socialist Republic of Vietnam for a Second Poverty Reduction Support Credit" (Report No. P-7584, May 30 2003), World Bank, "Program Document for a Proposed Credit to the Socialist Republic of Vietnam for a Third Poverty Reduction Support Credit" (Report No. 28916-VN, May 25 2004), World Bank, "Report and Recommendation on a Proposed Poverty Reduction Support Credit to the Socialist Republic of Vietnam" (Report No. P-7446-VN, April 23 2001).

achieved, prior to PRSC III being negotiated. By PRSC III ($100 million) only triggers remained — 15 of them. Conditionality has been a controversial area for the Bank particularly in relation to structural adjustment loans.15 The Bank claims that triggers

“…are not conditions,” however the explanation of what they are suggests otherwise:

“[p]rogress on most triggers and no backtracking on any of them leads in principle to the preparation of the next PRSC operation…”16 The triggers in PRSC III (for PRSP IV) included both broad directives and specific actions, for example, Vietnam must draft new “…Enterprise and Investment Laws in accordance with the Guiding Concepts and Principles date April 26, 2004.”17 As Griffin noted, these broad “post-conditionality”

mechanisms often increase the Bank’s “…encroachment into the day-to-day governance of developing countries.” The Bank’s argument that PRSCs are merely a retrospective of what the country has done over the last twelve months is not convincing, they need to be seen as an opportunity for the Bank to influence the government’s agenda or as a way of continuing conditionality in a more expansive form.18 The GoV demonstrated its strength by only negotiating a limited number of structural adjustment loans. Further, it has not always met SAL conditions, particularly when conditions have conflicted with the needs of the historic bloc. For example, if equitisation of SOEs or trade liberalisation measures threatens the interests of powerful groups, they tend not to be implemented.19

One of the most controversial aspects of the PRSCs was the requirement for equitisation of SOEs. From 1992 to 2000, there was pilot equitisation of about 450 firms. PRSC I required equitisation of more than 450 firms prior to the release of the first tranche of funding (which was obviously already the case) and adoption of a five-year SOE reform program covering one-third of SOEs. The second tranche release included five conditions (of 12) on equitising SOEs: streamlining the equitisation process, completing equitisation of 200 major and 200 minor SOEs, equitising non-core assets of General Corporations and modification of a redundancy fund for equitising SOEs.20 It is

15 In late 2004, SALs were renamed Development Policy lending.

16 World Bank, "Viet Nam PRSC III," p. 17.

17 Ibid, p. 32. The Guiding Concepts and Principles document was formulated under a World Bank grant attached to PRSC II.

18 The retrospective argument is from Turk, "Interview."

19 Masina, Vietnam's Development Strategies, p. 103.

20 World Bank, "Viet Nam PRSC I," pp. 41-42. The Bank supported the program via its administration of various trust funds, including $4 million from the Policy and Human Resources Development Fund for

surprising to see the use of single numerical targets in the PWC period. This is, as the Bank itself has noted, a simplistic and inadequate form of conditionality, which leaves the Bank with only a pass or fail outcome. Where a target is likely to be missed, it provides no incentive for getting close to the target and it offers no leeway in case of unforseen events.

In PRSC II, the Bank shifted from broad numerical targets to a program listing enterprises and target dates for equitisation. This is an even more coercive (but likely even less effective) form of conditionality pursuing a Bank hegemonic principle. In PRSC III, the Bank finally dropped numerical targets for SOE equitisation, though the section analysing or outlining current government policy supported the government’s plan to equitise, sell or liquidate around 2,400 SOEs between 2004 and 2006.21

The Bank/GoV debate on equitisation needs to be understood in the context of the reform and performance of SOEs during Doi Moi. Significant rationalisation of SOEs was undertaken prior to the Bank’s engagement in Vietnam. Perhaps for this reason, despite variable performance of individual SOEs, as a group they outperformed domestic private enterprises in terms of growth until around 2001. They remain a very important source of stability and government revenue.22 Van Arkadie and Mallon found little evidence to support the idea that SOEs have ‘crowded out’ growth in private enterprise.23 Further, the experience of rapid privatisation in Eastern Europe provided good reasons not to undertake ‘big bang’ privatisation. At least six other factors influence and/or constrain the GoV position on SOEs:

i. Equitisation is a sensitive process impacting on multiple interests and involving many actions including: “…state business interests, state bureaucrats, party leaders and other state actors.”24

ii. Connected to the above, there remain substantial and explicit political commitments to retaining state ownership of SOEs in strategic parts of the

diagnostic audits of SOEs and a $7.57 million trust fund for the trial restructuring of three General Corporations.

21 World Bank, "Viet Nam PRSC III," p. 22.

22 Van Arkadie and Mallon, Viet Nam: A Transition Tiger?, pp. 112-113.

23 Ibid.

24 Painter, "Politics of Economic Restructuring in Vietnam," p. 22.

production chain, as well as for key utilities, some military production and in a range of other ‘sensitive’ areas of the economy.

iii. SOEs are central to government revenue generation; it is difficult to replace them with other sources given that it is difficult for developing countries to effectively tax private businesses.25

iv. Equitisation is administratively and managerially complex and has stretched the regulatory capacity of the government in Vietnam.

v. The “…considerable labour retrenchment” involved is politically sensitive.26 vi. The government has made some progress on hardening the budget constraint

faced by SOEs (limiting subsidies and preferential access to cheap credit in particular), thus they are not the drain on government resources they have been in the past. 27

Combine these factors with the tendency for consensus decision-making in Vietnam and the GoV approach to SOE reform can be better characterised as: “…successful management and containment of the conflicting ambitions of” various domestic social forces, with the aim of improving performance of SOEs and maintaining key state interests.28

As seen in the PRSCs, such social, political and economic considerations appear to have had little impact on Bank enthusiasm for privatising the ownership of enterprises and the pace of equitisation was a significant source of tension between the Bank and the Government until at least 2004, when the Bank seemed to slightly relax its attitude — long after the Bank had supposedly shifted away from simplistic Washington Consensus programs.29 The reasons for the Bank’s cooling on the topic are not clear — it tends to tread carefully in Vietnam to avoid backfire,30 or it may have felt that pro-reform voices had gathered enough support to push the pro-reform agenda without the

25 Kolko, Vietnam: Anatomy of a Peace, p. 56. Painter noted that across the 1990s SOEs accounted for 23 per cent of total government revenue in Vietnam, excluding crude oil royalties, Painter, "Politics of Economic Restructuring in Vietnam," p. 26.

26 World Bank, "Viet Nam PRSC III," p. 37. The World Bank estimated that from 2004-2006, 300,000 to 400,000 workers would be made redundant.

27 However, this remains an ongoing concern for the Bank, see Klaus Rohland, "Recurring Themes,"

Vietnam Economic Times (2004), pp.12-13.

28 Painter, "Politics of Economic Restructuring in Vietnam," p. 23.

29 The Bank may have cooled on the topic but it is hardly off their agenda as this article from the previous Bank Country Manager for Vietnam suggests, Rohland, "Recurring Themes."

30 Painter, "Politics of Economic Restructuring in Vietnam," p. 33.

Bank’s explicit support. Further, World Trade Organization accession, according to one Bank staffer, covered much of what would have been on the conditionality agenda.31 Ultimately though, as Martin Painter argued, Vietnam has accepted the resources of donors and even made public pronouncements on timetables for equitisation but these co-exist “…with other policy pronouncements that speak of another trajectory altogether — the entrenchment and strengthening of the state sector.”32

In terms of the actual process of SOE reform, one of the biggest issues is valuation of enterprises and land. Early on, to speed the process, the Bank pushed successfully to have the required independent audit prior to equitisation dropped. A decade later, there are still concerns that firms are not appropriately valuing assets, in particular land, but given that the land market remains underdeveloped, this is almost inevitable.33 Managers have utilised undervaluation in order to gain control over enterprises.34

Workers receive priority access in purchasing shares, so the lack of reliable information also makes it more difficult for them to make judgements about the value of the company. Given their limited knowledge of share owning in the first place (the process ignores the issue of worker education), it is not surprising that one survey indicates that, at best, 55 per cent of worker’s are taking up shares and only 24 per cent are retaining them.35 The point of this is that the Bank’s continuing pressure on the Government to equitise SOEs quickly, despite its own judgement that “insider privatization” is taking place, is indicative of its judgement regarding the relative importance of government versus market failures.36 Clearly NIE’s ‘lessons’ about market failure and pace and

31 Turk, "Interview."

32 Painter, "Politics of Economic Restructuring in Vietnam," p. 34.

33 This is noted, for example, in Gainsborough, Changing Political Economy of Vietnam, pp. 24-28, Ho Xuan Hung, "Equitization of State-Owned Enterprises in Vietnam: Results, Obstacles, and Solutions,"

Vietnam Economic Review, Vol. 1, (2005), p. 34.

34 Evans, "Embedding Market Reform through Statecraft," p. 13. See also Nguyeãn lan Höông B,

"Labour's Mastery through Owning of Shares," Workshop on Equitisation in Vietnam (Institute of Social Science, Ho Chi Minh City: 2004), p. 4, Truong Thi Minh Sam and Bui Duc Hai, "An Overview of the Most Crucial Period of Equitization in Vietnam," Workshop on Equitisation in Vietnam (Institute of Social Sciences, Ho Chi Minh City: 2004), pp. 4-5.

35 Höông B, "Labour's Mastery through Owning of Shares," p. 1. The survey was only of a few enterprises. Most researchers believe that the overall rates of share purchase and retention in SOEs are less than this. See Painter, "Politics of Economic Restructuring in Vietnam," pp. 31-32.

36 Quoted in Sam and Hai, "Overview of the Most Crucial Period of Equitization in Vietnam," p. 3. The Bank documentation I read does not analyse the impact of equitisation on new capital investments — equitisation may attract capital otherwise may have been funded greenfield investments. Slowing new