Wednesday, 19 June 2013 19:34
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The world economic crisis and its challenges to poverty reduction in Vietnam
Today’s socio-economic context requires us to consider the issue of poverty reduction in an overall model, including sustainable economic growth and social progress and environmental protection. In Vietnam, the world economic crisis has still left severe consequences to its economy, in which the poor remain the most vulnerable group. For the success of poverty reduction in the country according to the UN’s millennium goals, Vietnam has to face much bigger challenges. Overcoming these challenges depends largely on the Vietnamese government’s policy capacity.
An overview of Ho Chi Minh city
Photo: VNA
1. Achievements of the implementation of the poverty reduction strategy in Vietnam and the actual state of poverty in Vietnam
Over its 26 years of national renovation and development of the market economy, Vietnam has increased the per capita income dramatically, from USD289 in 1995 to USD 1,380 in 2011. It is now categorized in the group of middle-income countries (USD 1,000 - 4,000 USD/person/year). Extensive economic growth is considered an important factor contributing to the rapid poverty reduction in Vietnam in the last two decades. Besides, even in the 1990s, the Vietnamese government already set forth policies and the national target program on hunger alleviation and poverty reduction and developed a comprehensive strategy for economic growth and poverty reduction in 1998.
In 2001, Vietnam signed the commitment to implementing UN’s millennium goals, under which to reduce by half the proportion of people with income of below 1 dollar a day and to reduce by half the hunger rate in the period to 2015. In fact, Vietnam has always been assessed as achieving the objectives on schedule.
The Vietnamese government has issued a system of policies, programs and projects on hunger alleviation and poverty reduction. The poverty reduction policies and programs focus on building infrastructure in disadvantaged regions and increasing support for the poor to access essential public services such as education, healthcare, electricity, clean water; giving the poor livelihood support and credits, etc. In recent years, the successful implementation of the strategy of socio-economic development and poverty reduction programs have created the conditions for the poor to have better access to basic social services; the infrastructure in poor districts and communes has been strengthened; the life of the poor improved significantly; the poverty rate fell from 58% in 1993 to 28.9% in 2002 and 9.5% in 2010 (according to the poverty line in 2009) (Figure 1)
However, the results of poverty reduction are not yet sustainable; the rate of households getting out of poverty but earn an income near the poverty line remains large; the percentage of households falling back into poverty each year remains high; the rich-poor gap between regions and population groups is still big; the livelihood of the poor, especially those in the mountainous areas and the highland, and ethnic minority areas faces many difficulties.
Along with economic growth, the number of poor households has been reduced significantly, howerer the rich-poor gap is widening. According to the data from the survey of households living standards in 2010 (1), the rich-poor gap represented by the Gini coefficient in Vietnam is average, compared to other regional countries. However, the gap has increased over the years (the Gini coefficient in 2010 was 0.46 compared with 0.37 in 1996). In 1995, the income gap between the 20% richest and the 20% poorest was 7 times, but in 2006, it was 8.4 times. This rate grew dramatically in the wake of the global economic crisis in 2008-2009 to 9.2 times in 2010. (Figure 2)
While the income gap tends to increasingly widened, the lower income group achieves lower growth income rate and earns less than the other groups. The monthly per capita income growth rate of group 1 between 2002 and 2010 increased by 3.4 times, lower than that of group 4 and group 5 (by 3.9 to 4 times) in the same period. In late 2011, 20% of the population still earned an income below VND 400,000/ month (USD 20) in rural areas and VND 500,000/ month (USD 25) in urban areas. Thus, the average income of households has increased, but the increase is uneven among the groups and tends to widen the rich - poor gap.
In their spending structure, the low-income group spends a high proportion on food and foodstuff, accounting for 65.8% of their total expenditure. This ratio reflects the very low life quality of the poor and that they are easily vulnerable.
This is evidently demonstrated by the differences in the levels of spending on other stuff outside food and foodstuff. The spending gap between the 20% highest-income group and the 20% lowest income group on education is 6 times, (Figure 3), on healthcare, 3.8 times (Figure 4) and on cultural and recreational activities, 123 times. Due to the decreased purchasing power, the poor and the low-income people in urban areas spend most of their income on food and foodstuff and other necessities such as electricity, water, gas, etc., to the extent that they do not have any more to save. This increases the vulnerability of the poor, especially when they are at the risk of illness.
Notably, the rich - poor gap between regions is even more evident (Figure 5).
According to the statistics, the poverty rate in rural areas is 17.4%, 2.5 times higher than that in urban areas. In addition, the rate of poverty in mountainous areas is very high in comparison with other regions: 39% in the North West, 24% in the North East and 22% in the Central Highlands.
The income gap is also evident from the average per capita income between localities, between agricultural provinces, mountainous provinces, islands and urban centers. The Central Institute for Economic Management (CIEM) cites the data collected by local governments which show that in 2011, the per capita income in Hanoi was USD 1,850, equivalent to VND 37 million/ person/ year; that in Ho Chi Minh City was about USD 3,000; meanwhile the average income in 2011 of the people in remote provinces like Bac Kan was only USD 730, less than USD 450 for Quang Ngai and less than USD 300 for Ha Giang.
The property gap in Vietnam in recent years has been widening faster than the income gap. The fact that few people gained large-scale accumulation of wealth or social resources (particularly land and capital, the right to exploit natural resources, the right to business in some highly profitable sectors, etc.) has led to a much larger number of people losing or having their assets significantly dwindled (for example: farmers lose their farmland). High-income people may earn much bigger income from assets compared to other sources of income, meanwhile the loss of assets may eliminate the long-term source of income of many households. In late 2011, while 20% of the population were living in poverty (with income below USD 2/person/day), the number of people owning assets valued at USD 1 million (about VND 20 billion) or more grew remarkably (in 2011 the figure rose up by 33% compared to 2010)(2). In particular, the above data show that inequality tends to be increasing sharply since the start of the world financial-economic crisis. The impacts of the crisis on poverty in Viet Nam include:
a) The crisis has put many businesses in danger. Most Vietnamese enterprises have been affected by the global economic crisis: not a few big enterprises have been badly hit; and especially many small and medium businesses have been stroked and gone into bankruptcy. Meanwhile, the micro-sized and small enterprises play an important role in job generation and poverty alleviation in Vietnam.
According to the report of CIEM survey published on 21 November 2012 (3), of the nearly 2,500 small and medium-sized enterprises interviewed in 10 provinces and cities such as Hanoi, Ho Chi Minh City, Hai Phong, 60% said that in 2011 they still suffered from the negatively impacts of the global economic crisis. This rate was much higher than the 2009 rate (17%). In the South, in 2011, 71% of businesses met more difficulties, much higher than the 64% rate in 2006.
b) Bad debts of the banking system have increased. The Moody’s International credit rating agency estimated that, in Vietnam, higher interest rates make borrowing more difficult and bad debts at banks tend to increase.
According to Moody’s, the report of Vietnamese banks showed that the irrecoverable loans or capital loss at the end of 2010 increased at a higher rate than in the same period of 2009. This situation got exacerbated in 2011 and 2012. As the economy came into crisis and enterprises’ business activities ran into difficulties, bad debts increased. Meanwhile enterprises were hunger for capital; and production and trading were further declining, affecting economic growth and the livelihood of laborers.
c) Inflation which was latent in the economy outburst again. In the 1996-2003 period, inflation was kept at below 4%, in 1998 it increased to 9.2% due to the impact of the regional crisis. Since 2004, inflation has shown signs of high growth rate, especially in 2008 it rose to 19.89%, in 2010 to 11.75%; and in 2011 to 18.13% (figure 6).
Consequently, prices increased much whereas salaries reduced. Per capita income increases, but in fact due to inflation, net income rose almost negligibly. Compared to 2007, the growth rate of the real per capita income in 2011 was only 1/5 of the nominal income growth rate. For the poor, with the price increase “shock” in 2008, they have become seemingly poorer than they were a few years earlier; the gap between them and high-income groups in spending and quality of life is widening. With no income reserve, in case of happenings such as losing a job or falling ill, their family would get immediately affected and vulnerable.
2. The challenges to poverty reduction in Vietnam
First, the challenge posed by the requirement for shifting our economy from the extensive development model to an intensive one. In recent years, the extensive model focused on the exploitation of cheap resources and labor and relied on foreign investments in export aimed at achieving a quick growth rate. In a backward agricultural country like Vietnam, this model plays a certain role in the “warm-up” phase of the market economy. However, the prolonged implementation of this model will lead to reduced economic efficiency, resource depletion, permanent poverty of a part of the population, the widening rich - poor gap, and many social evils. The intensive model of economic development requires fundamental changes in its direction: quality, productivity, efficiency, and competitiveness should be given top priority. However, Vietnam is facing huge hindrances in term of science and technology potential, effectiveness of social investment, and economic structure as well as industrial, and the quality of human resources.
Second, the challenge posed by the impact of globalization. Besides opportunities, Vietnam is also facing serious challenges from this process, especially direct impacts from hunger and poverty reduction.
The economy is strongly influenced by the fluctuations in the world, such as crisis, rising prices, while its internal strength remains weak. This affects domestic production and prices, making the poor most suffering from price rises.
Globalization also requires cutting and later elimination of state subsidies for agricultural production. Meanwhile, the requirements for improved product quality is becoming stricter. This is a major challenge to farmers in the production conditions where they do not have the advantage of economies of scale. This impact is particularly strong on the poor because their production is often small-sized, fragmented, and lacks the necessary conditions for technological applications to improve the quality.
Third, the environment and climate change challenges. With harsh climatic conditions, Vietnam is one of the countries seriously affected by natural disasters such as storms, floods and droughts. As the World Bank (WB) estimates, 33% of the natural land surface and 76% of Vietnam’s population are prone to natural disasters, while 89% of its GDP is generated by the regions affected by natural disasters. The poor mostly live concentrated in rural areas, and areas prone to natural disasters, yet their capability to cope with natural disasters such as floods and drought is very low.
Fourth, the challenge comes from the management capacity of the government apparatus at all levels. Such a capacity is an important factor exerting impact on poverty reduction. Currently, the capacity of governments at various levels in making socio-economic policies does not yet meet the requirements of reality. A number of the adopted policies have not fully assessed the impact on poverty reduction. The results of the survey by the United Nations Development Program (UNDP) on social security in Vietnam showed that the richest group (20% of the households) receives 40% of the benefits from the social security policies, while the poorest group receives only less than 7%.
The implementation of these policies still shows a bureaucratic character. In macroeconomic management, administration and bureaucracy has led to waste on national scale due to impatience and the will to do everything, without priorities and appropriate steps. The focus on quantity (due to the “irrational pursuit of achievements” and “tenure-long” vision) not only causes great waste, but also many problems and evils, both economically and socially. At local levels of government, bureaucracy is manifested in the application of the poverty reduction policy to the wrong category of beneficiaries, allowing rather well-off people to benefit from.
Corruption and waste not only affect the quality and efficiency of development, but also people’s livelihood directly. Corruption happens in the fields of education, health care, and even in poverty reduction projects; coupled with the negative impact of construction projects, especially those that use a lot of land, it makes the issue of poverty and social stability a more difficult problem to solve.
3. Policy orientations towards overcoming the challenges
The socio-economic reality of our country in recent years shows that we cannot solve the problem of poverty according to the traditional mode of thinking, because this just aims at immediate social stability and separates economic growth from poverty reduction.
A new mode of thinking on poverty reduction policies must be systematic, as it should integrate the issue of poverty in a strategy of shifting to a sustainable development model. The poverty issue should be addressed in 3 intertwined directions: sustainable economic growth (the basic factor for limiting the rise of poverty); social progress (reflected in educational and intellectual standards of the people as the direct conditions for dealing with poverty); environmental protection (which is becoming an important issue directly impacting economic growth and social security).
Therefore, the policy orientations should mainly focus on the following:
First, economic policies should focus on ensuring stability of the economy and improving its efficiency, and gradually turn production and business to in-depth development and modernization with higher technological standards.
To make the economy more dynamic and “endurable” before the impacts from the outside, we need to work out an appropriate financial liberalization roadmap, and set up frameworks for closely regulating and monitoring the flows of foreign direct investments.
For the domestic market, it is necessary to do away with the intrinsic weaknesses of the economy, namely:
- Making the financial environment healthy. Strive to cut down the budget deficit to below 5% of GDP and keeps inflation at one-digit rate, and the public debt at below 50% of GDP. Improve the operating capacity, administration efficiency, and safety of banks and credit institutions, to ensure market principles in banking activities.
- Continuing to restructure the state-owned enterprise sector in order to improve its efficiency. Facilitate the development of the private economic sector into the mainstay of the economy; create an environment for fair and smooth competition for private enterprises, because the private sector contributes significantly in the generation of jobs in general and for the poor in particular. Encourage enterprises to improve their technology and equip themselves with new technology to produce quality products in order to expand the market and improve the credit of Vietnamese goods.
- Improving the efficiency of public investment; push up investment in the agricultural sector and rural development; transfer some investment resources from inefficient sectors to agricultural and rural development to enhance economic efficiency and improve the livelihood of the poor.
Second, it is necessary to renovate the organizational model and management institution of the State. The model of State organization and the current management institution, after all, are also a product of the old growth model. When an economic growth model becomes outdated mean while the old modes of organization and management are still maintained, this will cause many more serious economic and social problems. Objectively, the model of sustainable development requires and defines the mode of organization and the management institution of the State- it should be a Rule of socialist State of the people in accordance with the socialist-oriented market economy in Vietnam. According to this model, it is necessary to reform the organization and mode of operation of state administration, and build a streamlined and reasonably
structured state apparatus. The main contents are as follows:
- The Government will improve policy planning, institutional development and capacity enhancement in the supervision of the organization of the implementation of policies and laws, ensuring macro-economic stability, and creating a legal environment conducive to social and economic activities.
- Improving the organization of the ministries in the direction that a ministry will undertake multi-sector management; at the same time strive to streamline the internal structure of each ministry. Well organize the local government at various levels; speed up the decentralization and delegate greater autonomy to local governments.
- Concentrating on building an economic institutional system commensurate with the market law in order to regulate and facilitate the development of economic entities of all types.
- Carrying out institutional reform of the organization and operation of state administrative bodies on the principle of giving them greater autonomy linked to their greater accountability in their performance of official duties in order to quickly and effectively meet the needs of the people.
- Strengthening the capacity of the authorities of various levels so that they can effectively implement the adopted policies. In particular, it is necessary to control and strictly deal with frauds and corruption in the funding for poverty reduction.
Third, pay attention to developing and implementing policies to exert direct impacts on poverty reduction.
Focus on policies to build rural infrastructure, particularly in poor communes. Implement on a large-scale rural transport infrastructure projects as a prerequisite for economic growth and generation of jobs for the people.
- Promulgating policies to encourage forms of linkage of science and technology with production, especially in agriculture and rural areas.
- Developing forms of universal vocational education for poor people in rural and mountainous areas in order to improve their capacity, and their awareness of the need to overcome poverty by themselves.
Strengthen the social security system in order to reduce the impact of the systematic risks of the economy as well as of households and individuals. Especially, social security policies must focus on poor groups.
Attach importance to the development of services in agriculture and rural areas such as irrigation and agricultural encouragement in order to improve agricultural productivity, thereby increasing the income of rural people. In particular, boost credit expansion in rural areas to help the poor obtain capital for production and trade and get out of poverty.
Create favorable conditions for ethnic minority people to get better access to social services, social and economic infrastructure, job and income opportunities; at the same time minimize language barrier and develop education to improve the quality of human resources, facilitate the ethnic people’s participation in, and benefit from the process of economic growth.
Fourth, the policies on education and health - as basic public services - should be focused on the poor in the context when Vietnam is shifting from state subsidized services to users-pay services. The gap further widening between the rich and the poor in the use of essential services will require the State to allocate an adequate part of the budget to support the poor through direct forms of assistance to the users. The State should rebalance the financial resources to reduce to a greater extent hospital fees and tuition fees for the poor on a larger scale; increase credits to poor students at low interest rates.
Fifth, investment in economic development must be properly calculated to avoid damaging the environment. Perfect the policy on environmental protection and apply environmentally friendly technologies. The State should use a reasonable budget on environmental protection to ensure the balance of the living environment. Also, the State should only approve investment projects, especially foreign invested ones, if they adopt the sustainable development model. Close evaluation should be done on manufacturing, construction, and poverty reduction projects before implementation, in order to ensure their direction towards sustainable development.
Assoc. Prof., Dr. LE CHI MAI
Institute of Administration
Further reading:
(1)General Statistical Department: Survey of Living Standards of Households, 2010
(2)Central Institute for Economic Management (CIEM), Reducing the Gap in Income, 2011.
(3)CIEM: Characteristics of the Business Environment in Vietnam – Results of the Survey of Small and Medium-sized Enterprises in 2011, 2012.
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