Vietnam’s Institutional Reform Necessary to Unlock Economic Growth: World Bank

Despite Vietnam’s economic transformation over the past 25 years, the country’s institutions have become a hurdle to its aspiration of achieving high-income status by 2045. Vietnam Briefing highlights key insights of 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 in the late 1980s, Vietnam’s economy has observed one of the most successful economic transformations over the past 25 years. However, to escape the middle-income trap, the country’s institutions need to be modernized and updated as per a report titled ‘How Will Vietnam Blossom? Reforming Institutions for Effective Implementation’ by the World Bank (WB). Vietnam’s institutions should be reformed on the basis of the country’s development priorities and second, new and changing development challenges that the country is facing as per WB.

Major challenges to development

The first challenge is that Vietnam has to deal with the repercussions of the pandemic. This challenge is amplified by the global tendency toward deglobalization which further accentuates the country’s vulnerability to external shocks, especially climate change.

The second challenge that the WB states is the uneven regulatory implementation record over the past 35 years. This, consequently, has made Vietnam’s institutions underprepared to address complex development challenges, such as climate change or the support for a higher-income society. Both highlight the need for the country to modernize its current institution model.

Vietnam’s implementation performance

The WB 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 WB report broke the country’s implementation performance down into three determinants: vision, capacity, and motivation, each of which was composed of two sub-components.

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The variations in these scores for each of these six areas will show the uneven implementation of policies when compared with the development priorities. For example, trade openness scored uniformly better for vision, capacity, and motivation than did green growth or infrastructure upgrading.  

The discovery was that while the country effectively implements trade openness, digital transformation, and social inclusion, Vietnam has been lagging behind in other priorities such as green growth, financial inclusion, and infrastructure upgrading.

As per the WB, the successful implementation in areas like trade openness can be attributed to these five institutional reforms:

• Creating a solid institutional anchor that will transform development priorities into concrete actions;
• streamlining administrative processes to increase the effectiveness of government at all levels;
• using market-based instruments to motivate public and private stakeholders;
• enforcing rules and regulations to enhance motivation, trust, and fairness; and
• engaging in participatory processes that will produce greater transparency and accountability.

A suggested development model for Vietnam

The main point of this report is that Vietnam should shift its growth model toward more efficiency, following the successful structural change in countries such as South Korea between the 1980s and 1990s.

The path from low to middle income occurs mainly 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 new and existing assets and resources, including human resources.

Key principles for the country’s growth

Improving efficiency of each category 

Gains should be derived from the entry or development of competitive firms and the exit of non-competitive ones, as this mechanism will ensure the allocation of resources to the most productive and innovative firms.

Indeed, Vietnam has made some effort to change policy following this principle. For example, the government has shifted its approach from attracting high-quality FDI rather than quantity, as demonstrated at the 13th National Party Congress.

Improving physical capital in public investment management

This includes the operation, maintenance, and use of existing public assets properly and effectively. Priority should also be given to the provision of quality infrastructure through partnerships with the private sector and more efficient state-owned enterprises (SOEs).

Vietnam has aimed to work on this principle. For example, according to the Ministry of Finance (MoF) for the 2022 plan, the ministry is expected to remit US$440 million to the local budget from revenue from equitization and divestment that has not been paid to the state previously.

Improving and further investing in human capital

Although Vietnam scores well on basic education, advanced university-level and vocational-technical skills and social protection policies are underdeveloped for a middle-income economy. Further efficiency in human capital can also be achieved by removing barriers for minors while bringing better equality in education and job search.

Regarding healthcare, while Vietnam has almost achieved universal health coverage, the authorities still need to invest more in the quality of health care, considering the country’s rapidly aging population.

Achieving gains in sustainability and resilience

Vietnam is lagging behind many of its peers in green development and sustainability prospects. It also requires a transition toward a low-carbon economy, with many opportunities for more effective natural resources management, stricter pollution control, while preparing for inevitable climate change impact with the cooperation of the country’s private sector in funding and mobilizing the evolution. According to a 2018 World Bank report, countries that manage these natural assets carefully are able to move up the development ladder.

Takeaways

Vietnam’s institutions will have to evolve with more reliance on market mechanisms, rule of law, and through the stronger roles of national and subnational regulatory bodies, the private sector, and the decentralization of several decision processes.

Besides, as the jump from mid-to upper middle income is more demanding than the one from low- to low-middle income, overall implementation performance will have to increase threefold compared to what was achieved between 2010 and 2020 for Vietnam to achieve its development targets.

And in order for the country to step up another development ladder, it is urgent that the country replicate reforms as it did during the Doi Moi reforms in the late 1980s, better its capital, labor, and natural resources and build a clearer institutional anchor in areas that still lag behind in implementation performance like green growth.

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