Despite Vietnam’s economic transformation over the past 25 years, the country’s institutions have become an obstacle to its aspiration to achieve high-income status by 2045. key insights from a recent World Bank report on how the country’s institutions should be reformed while adapting to new and complex challenges.
Since the Doi Moi institutional reforms of the late 1980s, the Vietnamese economy has experienced one of the most successful economic transformations in the past 25 years. However, to escape the middle income trap, the country’s institutions need to be modernized and updated according to a report titled ‘How will Vietnam flourish? Reform institutions for effective implementation’ by the World Bank (WB). Vietnam’s institutions should be reformed based on the country’s development priorities and, secondly, the new and changing development challenges facing the country according to the WB.
The great challenges of development
The first challenge is that Vietnam has to deal with the repercussions of the pandemic. This challenge is amplified by the global trend towards de-globalization which further accentuates the country’s vulnerability to external shocks, in particular climate change.
The second challenge identified by the World Bank is the uneven record of regulatory implementation over the past 35 years. This has, therefore, made Vietnamese institutions under-prepared to address complex development challenges, such as climate change or supporting a higher-income society. Both underline the need for the country to modernize its current institutional model.
Implementation performance in Vietnam
The World Bank report highlighted that there is a difference between aspiration and implementation which has been uneven and that significant institutional reforms are needed.
To assess Vietnam’s implementation performance, the World Bank report divided the country’s implementation performance into three determinants: vision, capacity and motivation, each consisting of two sub-components.
Variations in these scores for each of these six areas will show uneven implementation of policies against development priorities. For example, trade openness consistently outperformed green growth or infrastructure upgrades in terms of vision, capacity, and motivation.
The finding was that while the country is effectively implementing trade openness, digital transformation and social inclusion, Vietnam has lagged behind in other priorities such as green growth, financial inclusion and modernization. infrastructures.
According to the World Bank, successful implementation in areas such as trade openness can be attributed to these five institutional reforms:
- Create a solid institutional anchor that will transform development priorities into concrete actions;
- the streamlining of administrative processes to increase the efficiency of government at all levels;
- use market-based instruments to motivate public and private actors;
- apply rules and regulations to build motivation, trust and fairness; and
- engage in participatory processes that will produce more transparency and accountability.
A suggested development model for Vietnam
The main point of this report is that Vietnam should reorient its growth model towards more efficiency, following the successful structural change in countries like South Korea between the 1980s and 1990s.
The transition from low to middle income is primarily through the accumulation of physical and human capital and the use of natural resources, but the transition from middle to high income is driven by the efficient use of resources. new and existing assets and resources, including human resources.
Key principles for the country’s growth
Improve the efficiency of each category
Gains should come from the entry or development of competitive firms and the exit of uncompetitive firms, as this mechanism will ensure the allocation of resources to the most productive and innovative firms.
Indeed, Vietnam has made efforts to change its policy by following this principle. For example, the government changed its approach to attracting FDI of high quality rather than quantity, as demonstrated at the 13th National Party Congress.
Improving physical capital in public investment management
This includes the proper and efficient operation, maintenance and use of existing public assets. Priority should also be given to the provision of quality infrastructure through partnerships with the private sector and more efficient public enterprises.
Vietnam has tried to work on this principle. For example, according to the Ministry of Finance (MoF) for the 2022 plan, the ministry should contribute US$440 million to the local budget from shareholding and divestment income that has not been paid to the state. previously.
Improve and invest more in human capital
Although Vietnam scores well in basic education, advanced academic skills and vocational and technical skills and social protection policies are underdeveloped for a middle-income economy. Greater human capital efficiency can also be achieved by removing barriers for miners while bringing greater equality in education and job search.
Regarding health care, while Vietnam has almost achieved universal health coverage, the authorities still need to invest more in the quality of health care, given the rapidly aging population of the country.
Achieve sustainability and resilience gains
Vietnam lags behind many of its peers in green development and sustainability prospects. It also requires a transition to a low-carbon economy, with many opportunities for more efficient management of natural resources, tighter control of pollution, while preparing for the inevitable impact of climate change with cooperation of the country’s private sector to finance and mobilize change. According to a 2018 World Bank report, countries that manage these natural assets with care are poised to move up the development ladder.
Take away food
Vietnamese institutions will need to evolve by relying more on market mechanisms, the rule of law, and through strengthening the roles of national and subnational regulatory bodies, the private sector, and the decentralization of several decision-making processes.
Furthermore, as moving from middle to upper middle income is more demanding than moving from low to lower middle income, overall implementation performance will need to triple what was achieved between 2010 and 2020 for the Vietnam achieves its development. targets.
And for the country to climb another ladder of development, there is an urgent need for the country to replicate the reforms as it did during the Doi Moi reforms in the late 1980s, improve its capital, manpower and its natural resources and builds a clearer institutional anchor in areas that are still lagging in terms of implementation performance, such as green growth.
Vietnam Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices around the world, including Hanoi, Ho Chi Minh City and Da Nang. Readers can write to [email protected] for more support on doing business in Vietnam.
We also maintain offices or have alliance partners who assist foreign investors in Indonesia, IndiaSingapore, The PhilippinesMalaysia, Thailand, Italy, Germany and the United States, in addition to practices in Bangladesh and Russia.