Official development assistance for middle - income countries: The case of Viet Nam

48 OFFICIAL DEVELOPMENT ASSISTANCE FOR MIDDLE-INCOME COUNTRIES: THE CASE OF VIETNAM Phung Thanh Quang pt_quang@neu.edu.vn Khuc The Anh theanhnhd@gmail.com National Economics University, Vietnam Abstract Since the reconnection with international financial institutions in 1993, Vietnam has swiftly become one of the main ODA recipients from the international sponsors. ODA has significantly contributed to infrastructure construction, poverty reduction, institutional reforms, economic growth and socio-economic development. This paper examines the main features of ODA in Vietnam during the period 1993-2015, points out some new characteristics of the ODA flows in the middle-income status. It found that the total committed ODA and the level of favor have decreased sharply. The relationship between Vietnam and international donors has changed from “assistance” to “partners” relationship. However, the role of international non-governmental organizations in providing ODA is expected to increase. To pave the way for ODA graduation, Vietnamese government should encourage the oversight mechanism for civil society to monitor and supervise ODA projects, speed up the ODA disbursed rate and enhance the development of private sector. Keywords: ODA, middle-income, Vietnam, aid effectiveness. 1. Introduction Official development assistance (ODA) is defined as government aid designed to promote the economic development and welfare of developing countries. ODA can be provided bilaterally, from donor to recipient, or channeled through a multilateral development agency such as the United Nations, the World Bank or the Asia Development Bank. ODA includes grants, "soft" loans (where the grant element is at least 25% of the total) and the provision of technical assistance (OECD, 2017b). ODA is the aid only for low-income countries and developing economies. According to the classification of the World Bank, low-income economies are defined as those with a GNI per capita of 1025 USD or less; lower middle-income economies are those with a GNI per capita between 1026 USD and 4035 USD; upper middle-income economies are those with a GNI per capita between 4036 USD and 12475 USD (WB, 2017). So, only aid to these countries counts as ODA. By the end of 2015, there are over 150 countries or territories with per capita incomes below USD 12 475 received support from international sponsors. In which, Vietnam, a lower middle-income country with GNI 49 per capita in 2015 of 1990 USD (WB, 2016), ranked as the fifth largest ODA recipient in terms of disbursed ODA, only lower than Afghanistan, India, Ethiopia and Syrian Arab Republic (OECD, 2017a). In Vietnam, after 30 years of the Renovation, the country has made great achievements in economic and social development. Besides inner efforts, the official development assistance from the international community has played a crucial role for helping Vietnam to maintain the stability of the macroeconomic as well as to ensure social security. Accumulated to the end of 2015, with approximately 95 billion USD committed capital, 72 billion USD signed capital and 53 billion USD of disbursed capital; ODA has become an important source for the development of Vietnamese economy (GSO, 2017). Since 2010, Vietnam has become the middle-income country (MIC) with the average GNI per capita in 2010 of 1168 USD (WB, 2016). It has led to an immense change in aid policies for Vietnam. The scope, structure, and conditions of providing ODA for Vietnam have become stricter. Many donors have announced to cut down or stop offering preferential ODA program for Vietnam. England, Norway, Sweden have decided to stop preferential ODA for Vietnam since 2016, followed by the World Bank in 2017 and the Asia Development Bank in 2019 (FIA, 2016). This article aims to analyze the role of ODA in Vietnam in the period 1993-2015, and suggest the roadmap for ODA graduation for Vietnam in terms of the middle-income country. 2. Overview about ODA in Vietnam After a long time as a planned economy, Vietnam was one of the poorest countries worldwide, with GDP per capita in 1990 of fewer than 100 USD (WB, 2012). In the early 1990s, Vietnam experienced serious difficulties: hyperinflation, famine, sharp decline in Soviet aid, and a trade embargo by the western countries. However, between 1990 and 2010, Vietnam‘s economy experienced dramatic growth, with an average GDP growth rate of 7.3% annually, and the income per capita was almost fivefold. Since 2010, Vietnam has entered the MIC group, become a lower middle-income country with GNI per capita in 2010 of nearly 1200 USD (WB, 2016). The rapid expansion of the economy has been accompanied by high level of growth of international trade; large-scale inflows of FDI; and a dramatic reduction in poverty. Vietnam‘s transition from an extremely poor country to a middle-income country in less than 20 years was a successful story worldwide. One of the main reasons for the fairy tale, besides inner efforts, has been the great support from international donors. In 1993, Vietnam restarted relationships with the multilateral sponsors (the Asia Development Bank, the IMF and the World Bank) and bilateral donors, giving it access to large-scale of international aid. Since then, aid from international donors has played an important role for the development of Vietnam‘s economy. ODA has been an important channel of infrastructure, technical assistance and knowledge transfer, as well as a significant source for economic growth, accounting for 12-14% of the total state budget investment (UNDP, 2010). In the period 1993-2000, the total ODA committed, signed and disbursed were 17.68 billion USD, 13.86 billion USD and 8.02 billion USD respectively. The average amount of disbursed fund was around 1 billion USD annually, accounting for only 45.4% 50 of total ODA commitment in the period. In the positive sign, the disbursed rate steadily increased at a high pace, from 24% in 1993 to 75% in 2000. ODA in this period was at a high level of favor, with almost half (49%) of the loans had interest rates lower than 1% annually and a maturity of at least 30 years, of which 10-year grace period. Another third of the loans was with the annual rate of interest between 1% and 2.5% annually (Le Q.H., 2007). In this period, most of ODA funds were invested in transportation (26%), electricity generation and transmission (20.3%) and agriculture (14.9%). The main donors in this period were Japan, the World Bank and the Asia Development Bank, which together comprised for nearly 79% of total committed ODA. However, the average size of an ODA project was small, stood at 13.51 million USD per project. In the period 2001-2010, the total ODA committed, signed and disbursed were 46.64 billion USD, 31.88 billion USD and 21.74 billion USD respectively. The ODA committed and disbursed were 2.65 times and 2.71 times higher compared to 1993-2000 period. The average size of an ODA project was almost two times higher, reached 27.82 million USD per project. Notably, despite the international financial crisis in 2007-2008, the ODA commitment for Vietnam steadily increased over the period and reached the top of 8.0 billion USD in 2009, led Vietnam in the Top 5 recipients of ODA worldwide over the period (OECD, 2017a). Most ODA funds still invested in transportation with a wide range of projects such as Hanoi City Ring Road No. 3 Construction Project (245.27 million USD), sewage treatment facilities for Hue City project (182.48 million USD), North-South Expressway Construction Project Ho Chi Minh - Dau Giay section (145.43 million USD) (JICA, 2013). However, international donors paid more attention to agriculture and regional development with some key projects namely Infrastructure development in small and medium urban area in Central area (53.20 million USD), Rural development for Central area (91.3 million USD), Business development for the poor in Cao Bang and Ben Tre (411.86 million USD), Electricity for rural areas in Vietnam (150 million USD), Transportation for rural areas period III (131.65 million USD). Notably, the level of favor decreased sharply over the period. In detail, the non-refundable ODA comprised for just 7% of total ODA commitment, compared to 20% in 1993-2000 period. Table 1. ODA in Vietnam in the period 1993-2015 Unit: mil. USD Period Committed ODA Signed ODA Disbursed ODA Value per project 1993-2000 17677.5 13866 8017 13.51 2001-2010 46645.5 31886.6 21747 27.82 2011-2015 30988 26716 23625 49.28 Total 95311 7268.6 53389 32.52 Source: General Statistics Office of Vietnam, Statistical database, In the period 2011-2015, Vietnam continued in the Top 5 of ODA recipients worldwide. The ODA committed, signed and disbursed were 30.99 billion USD, 26.72 billion USD and 23.63 billion USD respectively. Notably, the disbursed ODA over the 51 period increased steadily, reached 4.73 billion annually on average, or 88.4% of total signed ODA in the same period. However, ODA loan conditions have become stricter. The non-refundable ODA comprised for 3.6% of total ODA commitment over the period, nearly two times lower compared to 2001-2010 period. With the middle-income status, Vietnam has had to access with new types of loans, instead of concessional ODA. In detail, Vietnam is expected to graduate from World Bank‘s IDA assistance in July 2017, and new ODA from World Bank will come from IBRD, with much less favorable. ADB has decided to stop ADF (Asian Development Fund) for Vietnam after 2019, and Vietnam has to access OCR (Ordinary Capital Resources), with higher interest rate and less of grace period. Regarding to ODA by donors, up to the end of 2015, Vietnam has had a large donor community with 28 bilateral and 23 multilateral donors; Vietnam also has cooperated with 300 Non-governmental organizations, which mainly focused on humanitarian, emergency aid and development assistance projects, with financial aid of around 200 million USD annually (Le, T., et al., 2004) In terms of bilateral aids, Japan is the most important ODA donor for Vietnam. Assistance provided by Japan reached nearly 28.6 billion USD (end of 2015), comprised for 30% of total ODA commitment, followed by France (6%), Germany (4%), Australia (3%) and Denmark (3%). As for grant aid, Japan, Australia and the USA are the Top 3 donors. For technical assistance, Japan, Germany and Australia claim the largest share. In terms of multilateral donors, the World Bank is the most important sponsors with 20.5 billion USD committed for Vietnam (by the end of 2015), comprised for 22% of total ODA commitment, followed by the Asia Development Bank (9%). Notably, several harmonization initiatives have taken place in Vietnam, such as: The Six Bank Group (WB, ADB, JICA, French Development Agency (AFD), German Development Bank (KfW) and Export- Import bank of Korea (KEXIM)), the LMDG Group (Like Minded Donor Group) and the United Nations Development Group (UNDG). These groups aim to establish the legal framework to manage the funds for ODA projects, harmonize the procedures, and improve the aid effectiveness in Vietnam. Figure 2. International donors in Vietnam in the period 1993-2015 Source: General Statistics Office of Vietnam, Statistical database, Series1, Japan, 30%, 30% Series1, World Bank, 22%, 22% Series1, ADB, 9%, 9% Series1, France , 6%, 6% Series1, Germany, 4%, 4% Series1, Australia , 3%, 3% Series1, Denmark, 3%, 3% Series1, Other, 23%, 23% 52 Regarding to ODA by sectors, transportation was the biggest recipient of ODA over the period, comprised for over 30% of total ODA loans; followed by energy and industry (18.34%), agriculture and poverty reduction (14.48%) and environment and urban development (14.16%). In transportation, ODA has been used for a wide range of infrastructures such as roads, railways, internal waterways, sea ports and airlines. These projects have played a crucial role for helping Vietnam solved the ―bottle-neck‖ of development, paving the way for the new stage of sustainable economic growth in Vietnam. Notably, with the middle-income status, preferential ODA is expected to continue in only some specific sectors namely education, technical assistance, and poverty reduction. However, ODA will be soon no longer available in some key sectors such as infrastructure, energy and industry. This has been the main challenge for Vietnam‘s economic development after ODA graduation. Figure 3. ODA in Vietnam in the period 1993-2015 by sectors Source: General Statistics Office of Vietnam, Statistical database, 3. New features of ODA for Vietnam in the context of middle-income status Vietnam, one of the least developed economies worldwide in the 1980s, has leapfrogged to middle-income status in less than a single generation. Becoming a middle- income country, Vietnam is expected to be less depended on international assistance. In the new context, there are some new features for ODA in Vietnam. First, new ODA commitment has fallen sharply. The downward trend started in 2015, with a remarkable decline in both committed and disbursed ODA, and expected to be continued. Some main donors, both multilateral (WB, ADB) and bilateral donors (England, Sweden, Norway, Belgium, etc.) have announced to cut down or stop offering traditional ODA for Vietnam. It has raised the question about the new resources for Vietnam‘s economic development in the middle-income status. Series1, Agriculture, poverty reduction, 14.48%, 15% Series1, Energy and industry, 18.34%, 18% Transportation 30.07% Series1, Environment and urban development, 14.16%, 14% Series1, Education and training, 4.19%, 4% Series1, Healthcare - Society, 4.36%, 4% Series1, Others (science, technology,), 14.39%, 15% 53 Second, the level of favor has decreased remarkably. In detail, the non-refundable ODA comprised for 20% of total ODA in 1993-2000 period, but covered only 7% and 3.6% in the 2001-2010 and 2011-2015 periods respectively. Since 2010, Vietnam has had to access new types of loans, such as Ordinary Capital Resources (OCR) from ADB and IBRD from WB, Which have lower maturity time, lower grace period, and higher interest rate compared to traditional ODA from Asian Development Fund (ADF) and International Development Association (IDA). Third, the type of cooperation has changed. The relationship between international donors and Vietnam has change from ―assistance‖ to partner relationship, with a higher requirement on aid effectiveness. In the period 1993-2012, the Consultative Group Meeting (CG) was held semi-annually. CG meeting was a platform for discussion between the Vietnamese government and donor agencies on development policies and donor pledges. It served primarily as a platform for mobilizing Official Development Assistance (ODA) resources. This function of the CG was no longer relevant since most development partners established their own bilateral ODA discussions. Therefore, The VDPF (Vietnam Development Partnership Forum) was first introduced in 2013. Since then, VDPF has become an annual event for high-level policy dialogue and a forum to generate commitments among stakeholders towards Vietnam‘s sustainable development and transformation priorities. Fourth, the center role of the government in receiving and distributing ODA has gradually shifted to the straight relations between domestic and international parties. It means that international donors will directly contact and cooperate with Vietnamese partners, such as direct relationships between universities, institutes or research centers, organizations, individuals, localities, etc., of Vietnam and international partners. The movement from government-government relationship to direct cooperation between local and international parties has been a new channel for sponsors‘ community to maintain the development relationship with Vietnam in the middle-income status. Fifth, the role of international non-governmental organizations (INGO) is expected to be increased. In terms of middle-income status, an increasing number of international donors have noticed to cut off ODA program for Vietnam during the next two years. Sweden, England, Belgium, Norway, etc., have decided to stop offering new ODA packages for Vietnam. However, these donors can indirectly support Vietnam through INGO programs. It is expected to be a new channel for poverty reduction, rural development and sustainable economic growth in Vietnam. 4. Policy implications for Vietnam in the middle-income status After more than 20 years of receiving ODA, Vietnam has become one of the most dynamic countries in South- East Asia, with an average GDP growth rate of about 5.94% in the period 2010-2015 (GSO, 2017). Based on the international practices, the graduation of ODA is inevitable when Vietnam has achieved the middle-income status and high economic growth. In order to effectively utilize ODA funds and access new sources for economic development, the Vietnamese government should concentrate on solving the following issues: 54 First, Vietnam should pay much more attention to speed up the ODA disbursed rate, which has been quite low and negatively affected Vietnam's credibility and development. Vietnam still has significant amounts of undisbursed preferential ODA. Up to the end of 2015, undisbursed preferential ODA for Vietnam is about 21 billion USD. Assuming that about 3 to 4 billion USD is disbursed annually, it will provide ODA flows for the next five or six years. Therefore, it is crucial for Vietnamese government to make the best use of these resources to smoothly transform to a greater share of other resources for economic development beyond traditional ODA. Second, Vietnamese government should create an oversight mechanism for civil society to monitor and supervise ODA projects as well as government agencies. After more than 20 years as a large ODA recipient, Vietnam has experienced some complaints from international sponsors regarding to inefficient use of ODA funds and corruption (Japanese government suspended ODA for Vietnam for six months in 2008 after a prominent corruption case. In 2014, Tokyo halted its ODA to Hanoi regarding to bribery allegations on a railway project funded by Japanese ODA). Therefore, it is crucial for Vietnamese government to set up a new mechanism for ensuring transparency in ODA use. It can be done by an efficiently oversight mechanism for civil society in the battle against corruption, ineffective use of ODA and bribery. Third, the government should build the road map for ODA graduation in Vietnam. As a lower middle-income country, Vietnam has received less ODA but still need a huge financial resource to maintain its economic growth. To be successful, Vietnam need to build plans to reduce ODA loans with short payment period and strict conditions, while attracting other sources for investments such as FDI and private sector. Specifically, Vietnamese government should encourage and support the private sector to approach ODA through the on-lending mechanism or participating in the implementation of ODA projects. Moreover, the PPP (Public Private Partnership) approach should be more encouraged to taking advantage from the huge resources of the private sector. The PPP is a suitable approach to reduce the pressure on government budget as well as create an additional space for the growth of the private sector. Therefore, the combination in PPP, including the ODA utilizing, is considered as an effective solution to maintain the economic growth in the context of upcoming ODA graduation. 5. Conclusions ODA has played an important role for infrastructure construction, poverty reduction, and sustainable development in Vietnam since the reconnection of Vietnam with international sponsors in 1993. However, the role of traditional ODA in Vietnam is expected to decline. Vietnam is looking toward ODA graduation in the next ten or fifteen years. With the new status as a lower middle-income country, several development partners have announced plans to scale down their activities or stop offering traditional ODA for Vietnam within the next 1-3 years. There has been a transformation of Vietnam‘s ODA to a smaller number of traditional development partners, with less grant and higher interest rate. While traditional sources of development assistance are declining, new 55 market-based sources such as IBRD, OCR etc., are emerging. In the new context, Vietnam should speed up the ODA disbursement and improve the transparency of ODA utilizing. 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