Designing Viet Nam’s socio-economic development strategy for the 2011- 2020 period: should changes be made in the designing process?

.VEMR. Economic policy debate DESIGNING VIETNAM’S SOCIO-ECONOMIC DEVELOPMENT STRATEGY... Number 1 Winter 2006 Vietnam economic management review ECONOMIC POLICY DEBATE Designing Vietnam’s Socio-Economic Development Strategy for the 2011- 2020 Period: Should Changes Be Made in the Designing Process? Nguyen Mai* ABSTRACT Since launching its economic renovation policy, Vietnam has prepared two Socio- Economic Development Strategies. The shortcomings of the strategies and the changing world create a pressing need for change in their design. But the questions are what form the changes should take and how should they be made. This paper addresses those questions and suggests some solutions. Introduction Vietnam has gone through different periods of economic development, during which time there were a number of five-year Socio-Economic Development Plans and two Socio-Economic Development Strategies designed for the 1991-2000 and 2001-2010 periods. Designing the country’s Socio-Economic Development Strategy (the Strategy) for the 2011- 2020 period should be based not only on lessons learned from designing and implementing previous Strategies but also on market-oriented concepts, international experience and the new world context. This paper discusses key issues in designing Vietnam’s Socio-Economic Development Strategy and makes policy recommendations to improve the quality of the Strategy. 1. A review of previous strategies Professor Nguyen Mai is the former Deputy Chairman of Vietnam’s State Committee for Cooperation and Investment (SCCI). 1 .VEMR. Economic policy debate DESIGNING VIETNAM’S SOCIO-ECONOMIC DEVELOPMENT STRATEGY... Vietnam’s first Strategy for the 1991-2000 period aimed at “rescuing” the country from socio- economic crisis, stabilizing the macroeconomic balance, and doubling its gross domestic product (GDP) in 2000 compared to 1990. It is worth noting that during the first half of the Strategy period (1991-1995), due to an under- valuation of the positive impacts brought about by doi moi (economic renovation) and open-door policies, particularly those for foreign direct investment (FDI) inflows, the country’s targets were set at rather low levels. As a result, all of the country’s socio-economic achievements far exceeded those targets. GDP growth averaged 8% per annum; well in excess of the targeted 5-5.5% per annum. Thanks to effective economic policies, Vietnam had overcome socio-economic crisis much earlier than expected. In the second half of the Strategy period, Vietnam’s economy performed in the opposite direction regarding the targets. Due to an under-estimation of the difficulties and obstacles facing the country’s economic development and an over-reliance on the achievements reached in previous years (in the 1996-2000 five-year plan), targets were set at very high levels. For example, average GDP growth was targeted to be 8-9%. The economy, however, only performed smoothly during the first year and half of the five-year plan. Early in the third quarter of 1997 the Asian financial crisis erupted and thereafter brought about adverse impacts on Vietnam’s economy in subsequent years. As a result, almost all of the objectives in the country’s five-year plan were not met. In respect to developing Vietnam’s Socio-Economic Development Strategy for the 2011-2020 period, the question to be asked is why there were two opposite outcomes in the implementation of the Strategy for the 1991-2000 period. In the context of economic integration, while Vietnam’s economy has gradually integrated into the global economy and been more influenced by changes in the international economic and political environment, forecasts/projections for its economic indicators over a five-year period is not an easy task and even more so for 10 years. Hence, the designing of the ten-year strategy, from which the five-year plans originate, cannot and should not provide for a single scenario with fixed targets, but rather be flexible and adjustable. In line with developing the Strategies, Vietnam has also compiled an enormous number of master plans for industrial and regional development. These master plans have been comprehensive and costly in terms of both state budget spending and time, but appear to be inefficient. In general, the design of the strategies and master plans still bore many legacies from centrally- planning economic mechanisms and did not follow the principles of a market economy and international economic integration. There are some key shortcomings in the designing process, such as: (i) the strategies and master plans have been built on a subjective basis with consideration given to achievements from previous period(s); (ii) the building of the strategies and master plans still lack a firm basis due to not taking into account the forecasts of the economic and political outlook in the world and the region and poor analysis of the impacts of Vietnam’s economic integration process on the economy; (iii) the approach to and the tools used for designing are still backward and old- Vietnam economic management review Number 1 Winter 2006 2 .VEMR. Economic policy debate DESIGNING VIETNAM’S SOCIO-ECONOMIC DEVELOPMENT STRATEGY... Number 1 Winter 2006 Vietnam economic management review fashioned; and (iv) planning staff have been equipped with inefficient planning methodologies and, in many cases, the designing has been based on targets provided at the Communist Party Congress or on the ideas of some of the country’s leaders. These shortcomings in planning must dealt with adequately during the designing of the country’s Strategy for the 2011-2020 period. 2. International experience All countries around the world have their own development strategies but preparation and expression vary from country to country. In many developed countries there are no long-term development strategies. Instead these countries mainly focus on macroeconomic management via monetary, credit, interest rate, exchange rate, technology, and human development policies. The United States has not had long-term economic strategies. The American people have referred to the President’s ideas expressed during elections, inauguration speeches, or in the annual national address. Americans pay more attention to macroeconomic management on a monthly and quarterly basis. Several Asian countries have worked out their visions for longer periods of 20 or 30 years. In the early 1990s, Malaysia proposed its Vision of 2020, with the overall target of becoming an industrialized nation, but then adjusted the Vision in 2000. The People’s Republic of China (PRC) has seen significant changes in the designing of its strategies and plans. It transformed its State Planning Commission into the Commission for Economic Reform and Development. Recent Chinese Socio-Economic Development Strategies set forth aggregated directions and solutions with an emphasis on qualitative changes, for instance the reduction of energy losses or increases in the knowledge content of a single unit of production. Depending on the specific industry/sector, the implementing period of a plan does not have to last five years; it can be three years or even six or seven years. It is worth noting that the PRC has made remarkable changes in the content of the strategies and master plans, adopting modern economic concepts from around the world. International experience shows that socio-economic development strategies are considered an important macroeconomic management tool. Nevertheless, as the present global market becomes more volatile, particularly in the price of oil and production inputs, the setting of long-term targets and solutions face the risk of becoming inaccurate and ineffective from the very beginning of their implementation. 3. Key redefinitions for Vietnam The designing of Strategies in the years to come should take into account the following considerations. First, the redefining of the role of government and the market The functions of the government in economic life in Vietnam today should be redefined. The government should not intervene too much into economic life, nor do so too rarely (i.e. the concept of a “minimum State”). 3 .VEMR. Economic policy debate DESIGNING VIETNAM’S SOCIO-ECONOMIC DEVELOPMENT STRATEGY... The government plays an important role these days in economic development. Although the market performs with its “invisible hand” it has its own failures, which stem partly from information imperfection. Key market failures can be seen in the form of public goods, monopolies, externalities, etc. There are cases where monopoly or oligopoly leads to high costs and poor quality products. This circumstance calls for appropriate intervention by the government to improve market efficiency and competition. There are, however, cases of government failures due to insufficient information, weak administrative institutions, high costs of institutional compliance, and distortions caused by regulations. For Vietnam, both political and market aspects of economic policies should also not be neglected in economic governance. This is because these two aspects do not always coincide. In many cases, some economic policies have been supported by the people but “rejected” by the market. Likewise, many market-based policies have faced resistance from the people. Second, the State and integration Vietnam has been gradually integrating into the regional and global economies. The country’s bright outlook on becoming a WTO member raises issues of how to integrate its economy effectively into the global economy. One of the country’s key challenges relates to the issue of the nation-state and global institutions such as the United Nations (UN), the UN Security Council, the World Bank (WB), and the International Monetary Fund (IMF). There is a view that the internationalization of capital, trade, and migration has weakened nation-states. Others believe that nation-states and the nation’s leaders can constitute an essential foundation of global supervision and set forth reforms in global institutions to meet the world needs in the 21st century. In November 2000, governments and national leaders made the “Millennium Declaration” in five areas: security, human rights, democracy and governance, poverty and development, and the environment. The declaration formed a framework for action by all global actors/entities: governments, global institutions, and the private sector in developed and developing countries. Democracy and governance are considered the essential issue in the Declaration. In September 2005, leaders from states and governments gathered to discuss the implementation of the Millennium Declaration. The summit concluded that the progress of the Millennium Declaration was not meeting the challenges; leaders of states and governments emphasized necessary collaboration amongst states in implementing the abovementioned five issues. The process of Vietnam’s economic integration puts more focus on more stringent requirements for dealing with the country’s socio-economic problems, paying adequate attention to global problems/challenges, and the goals/targets set by international institutions. Last but not least, the rethinking of reform Vietnam economic management review Number 1 Winter 2006 4 .VEMR. Economic policy debate DESIGNING VIETNAM’S SOCIO-ECONOMIC DEVELOPMENT STRATEGY... Number 1 Winter 2006 Vietnam economic management review The socio-economic reform process calls for creative thought in building economic institutions, the creation of a favorable business and investment environment, and the “re- creation of government”, as pronounced by politicians from many countries. Inertial thoughts based on the successes and failures of preceding period(s), in order to design development strategies for subsequent period(s), seem unsuitable to the new requirements of the contemporary world. One of the factors significantly affecting the designing of development strategies has been the huge fluctuations in world prices, particularly those for crude oil, production inputs, and gold, etc. High volatility in world prices has made forecasts/projections increasingly difficult. In addition, capital flows in the billions of US dollars have a complex impact on global investment and credit pools. In this context, it is vital for Vietnam to create effective institutions and build material/physical bases in order to deal effectively with the uncertainties of the global economy. It should not only take into account short-term and timely forecasts, but also create a flexible mechanism for economic governance so that it can seize opportunities and overcome challenges that come from international economic integration. The global political context is also a sensitive issue for Vietnam. Changes in the external/global strategies of the major powers have taken place more frequently. In the context of global volatility, reform ideas need to be adapted to these circumstances. It is worth repeating that the things that created yesterday’s successes are unlikely to do so today and tomorrow. Creativity in thinking is vital to enhance effective governance, including economic governance, in the long-term. This is a pressing issue when designing strategies. 4. Five important issues We have spent a lot of time defining the figures in Vietnam’s economic growth rates. At the recent Communist Party Congress X, socio-economic growth targets towards 2010 and the vision to 2020 were set forth. Ironically, provincial economic growth rates set by the Party Congress have been much higher than the national rate. For instance, Hanoi and Ho Chi Minh City, two of the country’s economic locomotives, set forth targets for economic growth that were 1.3 to 1.5-fold higher than the national growth rate. Other provinces normally follow in a similar manner. Subsequently, the average GDP growth rate of provinces is believed to be higher than that of the country as a whole by at least 2 percentage points. Are these targets firmly based on scientific and practical grounds or merely subjective opinion and desire, or “necessity”, set before each Party Congress? It is regretted that we have not had the occasion to conduct a retrospective review of designing the strategies and plans using scientific and constructive methods and, based upon these, drawn the necessary conclusions on the feasibility and efficiency of the strategies and plans. 5 .VEMR. Economic policy debate DESIGNING VIETNAM’S SOCIO-ECONOMIC DEVELOPMENT STRATEGY... In order to avoid the mistakes and shortcomings of previous Strategies and enhance the quality of the Socio-Economic Development Strategy for the 2011-2020 period, the following important issues should be taken into account. Firstly, adopting a new approach to designing the Strategy Building strategies should be based on vigorous research and long-term forecasts of global economic development with different scenarios, provided by research and forecasting institutions. Vietnam should pay more attention to short-term forecasts and promptly adjust to world development trends/patterns. It is dangerous to “sleep tight” on the Strategies. The September 11 attacks happened shortly after Vietnam pronounced its Socio-Economic Development Strategy for the 2001-2010 period. The event reshuffled the external/global strategies of the US and other powers and had a profound effect on economic and political lives in many countries around the world. Since September 11, though, Vietnam has been virtually uninterested in adjusting its socio-economic strategy, leaving it unchanged in the context of a changing world. Vietnam has been busily integrating into the regional and global economies. Implementing regional and international economic commitments (the ASEAN-China Free Trade Area, the Vietnam-US Bilateral Trade Agreement, and those from the forthcoming WTO accession, among others) is expected to have far-reaching implications for the country’s trade, investment and economic growth, etc., in the years to come. Nevertheless, no comprehensive or rigorous research has been conducted to date that focuses on the integration and growth issues facing the country. In regards to the 2011-2010 Strategy, Vietnam should focus on identifying development trends and patterns, set two or three scenarios (pessimistic, business as usual (normal), and optimistic), and put more emphasis on Strategy implementing tools and macroeconomic management. Secondly, issues regarding socio-economic targets Party Congress X set forth socio-economic targets towards 2010 and the vision to 2020, according to which Vietnam shall become a basically-industrialized country by 2020. However, the key criteria for judging whether a country is industrialized or not remains unclear. As mentioned earlier, general targets for development should be based on three scenarios, each of which is accompanied with various growth goals and corresponding implementing tools. The growth targets of each industry/sector should be formulated on the basis of these three scenarios. Targets should not be fixed or too specific and should place more emphasis on qualitative criteria such as the productivity in each industry/sector, value-added aspects, the reduction of energy and fuel consumption per product unit, investment efficiency, and human development, etc. Thirdly, enhancing the effectiveness of macro-economic management tools Previous Strategies often declined to set general and industry-specific targets. Policy measures have been too generic to the extent that they could be applied to any strategy. To Vietnam economic management review Number 1 Winter 2006 6 .VEMR. Economic policy debate DESIGNING VIETNAM’S SOCIO-ECONOMIC DEVELOPMENT STRATEGY... Number 1 Winter 2006 Vietnam economic management review overcome existing shortcomings it is important to improve the effectiveness of macroeconomic management tools based on market economy principles. The major philosophy in using the tools is that it tends to ensure equity for people and enterprises in seizing opportunities in socio-economic development, exploring more efficiently the existing potential, proactively integrating into the global production network, and strengthening endogenous capacity to ensure the country’s sustainable development. With its characteristics, Vietnam should pay greater attention to macroeconomic management policies such as monetary, fiscal, and land policies, and the governing function of the State. Monetary policy can be regarded as the most important in the forthcoming socio-economic strategy. To date, Vietnam has practically no concept of or clear targets in monetary policy for different development stages. In order to improve the quality of monetary policy, it is very important for Vietnam to increase expenditure on monetary policy making and involve eminent experts (both local and international). It was not luck that saw Alan Greenspan appointed as Chairman of the US Federal Reserve under many US presidencies; it was because he was an eminent “brain” in US monetary policy management. Fiscal policy also plays an important role. The parliaments of many countries do not discuss economic growth rates as much as focusing on annual state budget allocation. Perhaps Vietnam’s National Assembly should tighten the time limits on debates over “white elephants”, instead paying more time to collective discussions on fiscal policy. It would be better if consultant organizations with economic experts were to part of this collective discussion in the National Assembly in order to avoid a practice where deputies have to accept any government proposals already submitted to the National Assembly. It is crucial to note that Vietnam should have an effective mechanism to ensure that National Assembly deputies are truly representative of the interests of voters, instead of being mere spokespeople for the government about why there is no extra state budget allocation to their provinces/industries. Possession of assets and land are real issues in Vietnam. The right to possession of assets and land is considered to be a basic right of citizens. Studies show that if citizens have the right to possess land and to utilize it as investment capital in a favorable investment/business environment, land can be an important source of economic development in developing countries. Thailand has established a governmental body responsible for the transformation of land from a possession into investment capital. Perhaps Vietnam should seriously rethink the issue of possession of land from an economic perspective. Recognizing land possession and transforming it into investment capital are important for Vietnam in dealing with problems relating to targets in the country’s Socio- Economic Development Strategy for the 2011-2020 period. There are some questions for Vietnam that should be answered clearly about the role and function of the State as regards economic governance: what should the State do (or not do) and 7 .VEMR. Economic policy debate DESIGNING VIETNAM’S SOCIO-ECONOMIC DEVELOPMENT STRATEGY... how should it do it? This is important because the role and function of the State are repeatedly pronounced in Party documents as “of the people, by the people, for the people”. The governing role of the State stems from the state structure, which is separated in legislative, executive, and jurisdiction powers. These three powers exist in Vietnam but are not clearly separated. There is no effective mechanism of inter and mutual control and supervision forcing each body to implement properly within its power. As a result, abuse of power prevails and cases of non-responsibility are rampant because there remains a vacuum and/or interference in responsibility. Twenty years of Vietnam’s doi moi process have brought about remarkable socio-economic achievements. Sustainability of economic development means a pressing need exists to deal with the shortcomings and constraints of the state structure, particularly regarding the role and function of agencies in each of the three powers. The Project Management Unit (PMU) 18 case revealed serious shortcomings in the state structure and economic governance function of Vietnam’s political bodies. The country cannot achieve sustainable economic development if these shortcomings are not fundamentally resolved in the years to come. Fourthly, hedging the risks In a changing world with frequent uncertainty, including natural calamities, disease, etc., all countries are interested in dealing with the associated risks via two tools: a mechanism for risk adjusting and national reserves for the prevention of and fight against risks. A mechanism of risk adjusting, particularly trade- and finance-related risks should be incorporated into the Strategy in case of trade shocks and disputes and economic/financial crises. Pro-activity and flexibility are two principal requirements in forming the mechanism of risk adjusting. It is regretted that due to a lack of a mechanism for risk adjusting when the regional financial crisis erupted in the third quarter of 1997, Vietnam suffered adverse impacts despite being out of the “eye of the storm”. If there were such a mechanism, Vietnam may well have converted the challenges into opportunities to attract more foreign resources for the country’s development. National reserves of food, energy, foreign exchange, etc., should be consolidated to ensure stability during economic development. Countries around the world do their utmost to ensure national food security. As a major rice exporter, Vietnam should take this matter into account more seriously and deal with it more effectively. Energy security policy should also be paid greater attention because the oil, coal, and electricity industries are still without proper development strategies and are still driven by vested groups hampering the national interest. Foreign exchange reserves should also be consolidated with consistent and effective measures. It seems the case that the volume of Vietnam’s foreign exchange reserves remains a “mystery” to both the domestic and international public. This lack of disclosure and transparency can impede the mobilization of foreign exchange sources, which are very important for consolidating the country’s reserves to deal more effectively with financial/monetary risks. Vietnam economic management review Number 1 Winter 2006 8 .VEMR. Economic policy debate DESIGNING VIETNAM’S SOCIO-ECONOMIC DEVELOPMENT STRATEGY... Number 1 Winter 2006 Vietnam economic management review In addition, issues of natural resource utilization and environmental protection should also be taken into consideration in the designing of Strategies. The above-mentioned tools are crucial and should be paid adequate attention in building the Strategy for the 2011-2020 period. An analysis of other tools available is beyond the scope of this paper. Lastly, properly organizing the strategies’ design We have seen that many changes in socio-economic targets were made during preparations for Party Congress X. These changes occurred due to opinions being expressed by high-ranking Party officials and, at times, due to the wishes of a minister. Target setting and their amendment have primarily been based on subjective opinions without serious economic consideration. The Strategy for the 2011-2020 period would be a true tool for the orientation of economic development if Vietnam would fundamentally change its process of strategy design. First of all, it is necessary to review all Strategies and industrial/provincial master plans approved by the government. Based on new thoughts about designing strategies and master plans, Vietnam should amend and supplement the content of these documents. All of these can be useful for designing the Strategy for the 2011-2020 period. Second, it is important to carry out forecasts on the performance of Vietnam’s economy for the next 5, 10 and 15 years, taking into account forecasts on global economic performance. Meanwhile, short-term forecasts on the global economy are crucial to properly adjust domestic forecasts and effectively deal with any new challenges and seize new opportunities. Third, a nationwide information system, including an updated socio-economic database for authorities at all levels, industries, and enterprises needs to be established. Last but not least, eminent experts must be involved in designing the Strategy. This is a critical requirement as current authorized agencies still lack expertise, capabilities and facilities. The Chinese Politburo has paid significant attention to the use of experts; prior to discussing national policies, experts are invited to conduct information sessions for Politburo members. Vietnam should have an effective mechanism and policies to attract talented people and, in particular, new ideas and breakthrough measures should be applied to build effective strategies for the nation. In a changing world it can be difficult for us to think about the work needed in the second decade of the 21st century. Vietnam can rely on the old methods for designing strategies but the outcomes from the two previous strategies reveal serious shortcomings. The new era requires deeper reform in all economic fields/sectors, including the designing of the Socio-Economic Development Strategy ” References ƒ Rethinking the future (in Vietnamese), the Youth Publishing House, Ho Chi Minh City, 2002. ƒ Hermando de Soto (2006), The Mystery of Capital (in Vietnamese), Political Publishing House, Hanoi. 9