Attachment J.5 _Vietnam Responsible Trade & Growth Assessment.pdf

VIETNAM RESPONSIBLE TRADE AND

GROWTH ASSESSMENT

FINAL REPORT

NOVEMBER 2017

This publication was produced for review by the United States Agency for International

Development. It was prepared by the Vietnam Evaluation, Monitoring and Support Services Project;

Management Systems International, a Tetra Tech Company.

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VIETNAM RESPONSIBLE TRADE AND

GROWTH ASSESSMENT

FINAL REPORT

Contracted under: AID-440-C-14-00003

Vietnam Review, Monitoring and Survey Services

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

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CONTENTS

Acronyms iii

Executive Summary 1

Introduction 3

Highlights of Current Economic Challenges 3

The Middle-Income Trap and Vietnam 5

Assessment Focus Topics 7

Stakeholder Consultations 8

Political Economic Situation: Reform and Resistance 9

Key Findings and Recommendations 10

Trade Facilitation and Policy 11

Entrepreneurship Development and Innovation 18

Value Chain and Industrial Clusters 20

Annex A: Scope of Work - Vietnam Trade and Growth Assessment 26

Annex B: Schedule of Interviews 32

Annex C: Interview Protocols And Questions 35

Annex D: Literature Review - Vietnam Trade and Growth Assessment 42 iii

ACRONYMS

ADB Asian Development Bank

AFD Agence Française de Développement (French Development Agency)

AIIB Asian Infrastructure Investment Bank

AMCHAM American Chamber of Commerce

APEC Asia Pacific Economic Council

ASEAN Association of Southeast Asian Nations

BUILD-IT Building University-Industry Learning and Development through Innovation and Technology

(Project)

CEMA Committee for Ethnic Minority Affairs

CFA Center for Forecasting and Analysis

CIEM Central Institute for Economic Management

COD Cash on Delivery

COP Chief of Party

COR Contracting Officer’s Representative

DOF Department of Finance

DOL Depart of Labor (US)

DONRE Department of Natural Resources and Environment

DOIT Department of Investment and Trade

DOLISA Department of Labor, Invalids, and Social Affairs

DPI Department of Planning and Investment

EMCC Economic Management Competitiveness Credit (Project)

EPS Electronic Payment Systems

EU European Union

EVFTA EU-Vietnam Free Trade Agreement

FDI Foreign Direct Investment

FDIP Financial Digital Inclusion Project

Fintech Financial Technologies

GATF Global Alliance for Trade Facilitation

GBV Gender-Based Violence

GDP Gross Domestic Product

GDVC General Department of Vietnam Customs

GE General Electric

GIG Governance for Inclusive Growth (Program)

GII Global Innovation Index

GSO General Statistics Office

GVC Global Value Chain

GVN Government of Vietnam

HCMC Ho Chi Minh City

HDI Human Development Index

ICT Information and Communication Technology

IFC International Finance Corporation

ILO International Labour Organization

IMF International Monetary Fund

IOM International Organization for Migration

IPR Intellectual Property Rights iv

IT Information Technology

IZ Industrial Zone

MARD Ministry of Agriculture and Rural Development

MFI Microfinance Institution

MIGA Multilateral Investment Guarantee Agency

MOCST Ministry of Culture, Sports and Tourism

MOF Ministry of Finance

MOH Ministry of Health

MOIT Ministry of Industry and Trade

MOJ Ministry of Justice

MOLISA Ministry of Labor, Invalids and Social Affairs

MONRE Ministry of Natural Resources and Environment

MOST Ministry of Science and Technology

MOT Ministry of Transportation

MPI Ministry of Planning and Investment

MSI Management Systems International

MSMEs Micro, small, and medium enterprises

NA National Assembly

NAWG National Association of Wheat Growers (U.S.)

NAM National Association of Manufacturers

NIS National Innovation System

NPL Non-performing Loan

NTFC National Trade Facilitation Committee

NGO Non-governmental organization

OECD Organisation for Economic Co-operation and Development

ONA Office of the National Assembly

OOG Office of the Government

P&G Procter & Gamble

PCI Provincial Competitiveness Index

PPCs Peoples’ Provincial Councils

PPP Public-Private Partnership

PEZA Provincial Economic Zone Authorities

R&D Research and Development

ROO Rules of Origin

SBL State Budget Law

SBV State Bank of Vietnam

SECO State Secretariat of Economic Affairs (Switzerland)

SEDP Socio-Economic Development Plan

SEDS Socio-Economic Development Strategy

SME Small- and Medium-Sized Enterprises

SOE State Owned Enterprise

STAR Support for Trade Acceleration (Project)

TBT Technical Barriers to Trade

TFA Trade Facilitation Agreement (WTO)

TPP Trans-Pacific Partnership

UNAIDS Joint United Nations Programme on HIV/AIDS

UNDP United Nations Development Programme

UNESCO United Nations Educational, Scientific and Cultural Organization

UNFPA United Nations Population Fund

U.S. United States v

USABC US ASEAN Business Council

USAID United States Agency for International Development

USAID/VN United States Agency for International Development/Vietnam

USD United States Dollar

USTR United States Trade Representative

USW U.S. Wheat Associates

VAMC Vietnam Asset Management Company

VASS Vietnam Academy of Social Sciences

VBARD Vietnam Bank for Agriculture and Rural Development

VBSP Vietnam Bank for Social Policies

VCCI Vietnam Chamber of Commerce and Industry

VEMSS Vietnam Evaluation, Monitoring and Support Services (Project)

VNACCAS-VCIS Vietnam Automated Cargo and Port Consolidated System

VND Vietnam Dong

VNU Vietnam National University

VTFA Vietnam Trade Facilitation Alliance

VWU Vietnam Women’s Union

WB World Bank

WTO World Trade Organization

EXECUTIVE SUMMARY

Assessment Purpose. USAID/Vietnam is conducting this assessment of the current landscape for developing a new “Responsible Trade and Economic Growth” program as part of USAID’s design process of its upcoming programming cycle for the years 2018-2023. The assessment focused on opportunities that are:

● Certain to find strong support from the Government of Vietnam (GVN),

● Likely to achieve significant impacts within five years,

● Representative of USAID’s established reputation and capabilities in Vietnam, and

● Not duplicative of other donor efforts.

Methodology. The assessment team held consultations with over 50 organizations between August 31 and September 15 in four locations: Hanoi, Ho Chi Minh City, and the trade-oriented/manufacturing provinces of and Quang Ninh in the north and Dong Nai in the south. The team held consultations with central and provincial government officials, domestic and international private firms, and the Vietnamese and American Chambers of Commerce (VCCI, AmCham) as well as specific business associations. The team also benefited from meetings with staff from the U.S. Embassy, USAID, USAID-funded projects, the

World Bank, other donors, think tanks and universities. The assessment activity also provided a draft general literature review, providing the team with an analytical framework and identification of key aspects to Vietnam’s trade and growth. The literature review contributed to shaping the consultation questions and also facilitated triangulation of important information. The full Literature Review – Vietnam

Trade and Growth Assessment is included as Annex D of this report, and provides valuable in-depth information, analysis and sources.

Assessment Recommendations. The assessment team’s key findings assess the opportunities for

USAID program support in four interrelated areas. This assessment does not recommend that USAID develop full programs in all of these areas, as that would dilute the focus required for success in the selected area or areas of engagement.

Cross-cutting issues—gender, vulnerable populations, and Vietnam’s trade imbalance with the United

States—are addressed within the recommended programming areas.

The following areas are recommended for USAID programming consideration.

1. Trade Facilitation and Trade Policy. The current progress on ratification of the World

Trade Organization (WTO) Trade Facilitation Agreement (TFA) provides USAID with a timely opportunity to assist the GVN to streamline and modernize its customs systems and regulations, and have a major impact on the transformative trade-led growth that is essential to

Vietnam’s continued economic success. The team collected grounded evidence of the technical needs, required capacity building, and level of interest from the GVN. Also, momentum is already in place; Vietnam’s export-led growth strategy, trade facilitation remains at the core of policies and concerns of both the GVN and the business community. The program would focus on implementation of the TFA, with emphasis on assisting the GVN to meet the requirements of the TFA, particularly as reflected in its compliance report to the WTO. The program should also provide hands-on provincial-level training with customs and border agents on TFA compliance. The program will utilize and expand the existing e-customs system to enhance border cooperation between the Customs Department and the line agencies that regulate and are responsible for implementing many of the border restrictions. The program should also have flexibility to address “beyond the border” trade policy topics such as non-tariff trade barriers and food safety.

2. Digital Economy. USAID has an opportunity to help Vietnam shape its digital economy strategy by supporting the Ministry of Industry and Trade’s (MOIT’s) newly initiated development of a national digital economy policy framework. In this fast-advancing area undergoing rapid changes due to the nature of commerce, Vietnam cannot afford to fall behind its competitors. USAID could foster Public Private Partnerships (PPPs) with U.S.-based industry, universities, and innovation incubators to expand cross-border commercial engagement made possible through a more robust digital economy. The program could also support e-procurement implementation at the central level and in selected provinces. USAID should proceed cautiously on sensitive digital economy issues such as cyber-security, data localization policies, customs treatment (duties) on electronically transmitted content, and digital payments systems.

3. Entrepreneurship Development and Innovation. Private enterprises provide 45 percent of Vietnam’s GDP, and the number small and medium-sized enterprises (SMEs) has doubled in the past five years. The firms are mostly small and few are able to invest in developing the innovations essential to competitiveness and contributing to the continued growth of the national economy. The government’s stated plan for private sector growth is through an expanding emphasis on new technology, and through the 2013 establishment of a US$100 million SME credit support fund. However, these support programs do not reach the ever-increasing numbers of small and micro enterprises. U.S. Government priorities are to support a broad, inclusive and equitable pattern of economic growth, working to remove barriers to SME business success through both policy reforms and strengthened private sector capacity building.

Assistance in this area would also support an ecosystem of innovation through partnerships between universities, research centers, vocational schools, and the business community – with an emphasis on connecting to U.S. global value chains.

4. Value Chain and Industry Clusters. Significant industry clusters exist in locations that benefit from important transport links, access to appropriate types of labor, and from the economies of scale derived from co-locating firms with interrelated products and clients. Much can be done to augment these networks and to expand developing Vietnamese firm participation in the export value chains. The assessment team saw opportunities in Dong Nai, Quang Ninh, and Ho Chi Minh City (HCMC). Building off of the successes of the USAID-sponsored Provincial

Competitiveness Index (PCI), USAID assistance would provide capacity building for select provinces in implementing best practices in supporting private industry, focusing on select strategic industry clusters and industrial zones, and also enhance partnerships with business advocacy groups. This work stream would address constraints to private sector growth and facilitate domestic industry linkages to global value chains. Under this recommendation, there are significant opportunities to address cross-cutting issues of women’s access and economic underrepresentation through curated partnerships with the private sector and international value-chain actors. Entrepreneurship development can be fostered through strengthening the linkages in such value chains and clusters.

INTRODUCTION

Since the introduction of Doi Moi reforms in the late 1980s, Vietnam has become a remarkable success story of sustained, rapid economic growth and impressive poverty reduction. In less than 25 years, Vietnam moved from being one of the world’s poorest countries to lower middle-income status with a per capita income of US$2,050 in 2016 (World Bank, 2017). It is a celebrated success in terms of poverty reduction. In 1993, half of the population lived on less than US$1.90-a-day (in 2011 purchasing power parity terms). By 2014, the fraction living in extreme poverty by this measure had fallen to less than 3 percent. Equally remarkable is that unlike other fast-growing economies, Vietnam has not experienced major increases in income inequality. Other social indicators also have improved remarkably related to basic services access such as education, healthcare, road infrastructure, electricity, safe water and improved sanitation (World Bank Group and the Ministry of Planning and Investment of

Vietnam 2016).

Vietnam’s economic success notwithstanding, there are concerns about whether the current growth model can sustain past performance. Although GDP continues to grow at high levels, averaging 6.4 percent over the past 20 years, 6.1 percent over the past decade, and 5.9 percent over the past five years, growth rates are slowing (World Bank: World Development Indicators). This slowdown partly reflects cyclical factors and a weaker global economy, but there also are structural constraints that may prevent Vietnam from achieving upper-middle income or rich country status.

Highlights of Current Economic Challenges

Vietnam faces several different economic challenges, which this section highlights for the design context.

SOEs and Competitiveness. One of the major concerns relates to the consensus surrounding state-owned enterprises (SOEs). SOEs are believed to receive preferential access to land, capital, government contracts, and favorable tax treatment and are considered a major drag on the economy; they operate non-transparently, often accumulate bad debts, and enjoy an uneven playing field (World Bank, 2016a;

World Bank 2016b; IMF, 2017). This has led to ongoing efforts by the GVN to equitize these SOEs. The

Organization for Economic Co-operation and Development (OECD) estimates that the number of fully owned SOEs has declined from 12,000 in 1992 down to 1,300 in 2011; more recent press accounts put the current figure at around 700 (OECD 2013; Deal Street Asia, 2017).1 These reform pressures seem to be increasing judging by recent public statements by Government officials and press accounts.2

Moreover, the GVN seems very committed revising its Competition Law to speed up this process after letting earlier reform efforts lie dormant for more than a decade (Hughes, 2017). Some local experts believe this Competition Law will be adopted in 2018, which may be very important as a driver of reform going forward.

Macroeconomic Risk. Macroeconomic risk (namely rising public debt and non-performing loans) remains another concern. Vietnam is currently facing a challenge as its debt-to-GDP ratio continues to grow. The public debt rate was estimated about 60.3 percent of GDP and 64 percent of GDP in 2014

1 These figures appear to be influenced by recent definitional changes by the GVN over how SOEs are measured under the 2015 Law on Enterprises. SOEs are counted today as only those that are 100 percent owned by the

Government.

2 Consider headlines in the Vietnamese press such as “Require the Ministry of Industry and Trade to Accelerate

Divestments and Handle Losses,” (Tienphong, October 30, 2017); “Vietnam’s SOE Sales Gathers Pace” (East Asia

Forum, September 5, 2017; “406 SOEs Under Divestment: Exciting Opportunities for Investors” (VietnamNet, August 27, 2017); “SOEs’ Losses a Source of Public Frustration - Party Chief” (VietnamNet, May 9, 2017).

and 2015, respectively.3 The country’s public debt is approaching ever closer to the self-imposed limit of

65 percent of GDP. The growing debt will impose a steadily increasing burden on the economy, and make it ever harder to cut the budget deficit, which hit 6.5 percent of GDP in 2016, while the government aims to reduce the budget deficit to 3.5 percent of GDP by 2020, according to the Medium-

Term Fiscal Plan 2016–2020. The government is considering several measures to deal with the situation.

In addition, Vietnam has a large unresolved non-performing loans (NPLs) in the banking system.

According to the State Bank of Vietnam (SBV), NPLs in Vietnam in 2016, including bad debts managed by the Vietnam Asset Management Company (VAMC), amounted to Vietnamese Dong (VND) 487 trillion

(USD 21.3 billion). They accounted for 8.8 percent of total outstanding loans, though SBV says it plans to bring the NPL ratio to below 3 percent by 2020. NPLs tend to reduce capital resources for lending, resulting in lower bank profitability, misallocation of capital, and are a drag on economic growth.

Regulatory Environment. The economic regulatory environment is improving in Vietnam, but there is still much room for improvement to increase transparency and property rights protections. Last year, Vietnam rose in the World Bank Doing Business Report from a ranking of 91 the previous year to 82.

The Government continues to strive for improvements in the business enabling environment by mandating greater improvements by increasingly stringent targets of its Resolution 19 by the Prime

Minister. USAID’s Provincial Competitiveness Index (PCI) also shows that Vietnam has experienced significant improvements in the business environment at the provincial level as median scores have steadily risen from 2006 to 2016. The most significant improvements have been observed in the areas of entry costs, followed by proactive leadership, labor training, and business support services. System weaknesses still remain in other areas such as transparency, informal charges, transaction costs, land access, policy biases and weak legal institutions.

Labor Productivity. Labor productivity remains an important constraint on economic growth. The chart below shows how labor productivity in the domestic non-state sector has been declining while labor productivity in SOEs has been stagnant.

FIGURE 1: FIRM-LEVEL LABOR PRODUCTIVITY

IN VIETNAM, 2001-20134

Vietnam aspires to have a dynamic and innovative economy to create jobs for its continuing youth demographic bulge, but still lacks in key areas such as a positive innovation ecosystem, education and skills training, and an inadequate research and development

(R&D) system to foster stronger development.

While strong economic growth in recent decades has reduced poverty substantially, the growth has not always been inclusive for vulnerable populations, such as youth, ethnic minorities, and women.

Changing U.S. Trade Policy. This is a time of major change in the U.S. Government’s approach to international trade, especially in this region. Vietnam had been expecting and preparing for its participation in the U.S.-led Trans-Pacific Partnership (TPP). The new U.S. Administration’s decision not to ratify the agreement makes the current period a time for rethinking U.S.-Vietnam trade and related cooperation. As the initial disappointment wears off, there remains an appreciation that the U.S. market is still Vietnam’s largest export market opportunity, and that both countries have an abiding interest in

3 VEPR (2016), Characteristics of Vietnamese public debt, VEPR Policy Discussion Note.

4 Source: World Bank and Vietnam Ministry of Planning and Investment. Vietnam 2035.

maintaining good relations as a balance to the influence of China. Within this framework, however, the new U.S. Administration is emphasizing an “America First” approach to trade relations, and raising the issue of the United States’ negative trade balance with Vietnam.5 USAID’s new “Responsible Trade and

Growth” program must remain sensitive to addressing this changing dynamic relationship and try to capture the trade benefits by Vietnam’s booming growth (Boston Group Vietnam, 2016). Even more important in this tricky context, the USAID program must strongly emphasize its role in assisting the GVN to carry out programs high on Vietnam’s priority list.

The Middle-Income Trap and Vietnam

In recent years, the issue of the “middle-income trap” has emerged as an important policy issue for many developing countries, including Vietnam. Since the middle-income trap debate is an important driver of much of the economic reform efforts in Vietnam and has important implications for its modernization efforts and donor support, this issue is discussed in greater detail here.

FIGURE 2: WHY DO COUNTRIES DIVERGE?6

The middle income trap essentially concerns the situation in which a country attempts to move away from low skill labor jobs but is not becoming competitive in higher skill jobs. The literature has evolved as a special case of the new (endogenous) growth theory and linkages to more open economies with its emphasis on knowledge and human capital accumulation (e.g., Romer, 1986; Edwards, 1998; Dollar and Kraay, 2001). Economists at the World Bank have noted that some predictions from new growth theory did not hold and that economic growth in many developing countries seemed to be stalled, a phenomenon that they coined as

“the middle income trap” (Gill and Kharas, 2015). The middle-income trap literature seeks to diagnose why growth slows as poor countries achieve middle-income status. The definition of the middle-income trap is largely based on diagnoses of why growth slows for most middle-income countries. There is a great deal of debate around this topic. Vietnam’s policy makers have been among the global leaders have expressing deep concerns about their country falling into the middle-income trap.7

Gill and Kharas argued in a ten-year review of their original thesis that there are six key areas that they believe are still important to enhancing economic growth and which have withstood the test of time:

trade and technology; ideas and innovation; finance and risk; cities and livability; cohesion and (guarding against) inequality; and corruption and accountability. After surveying the recent literature, they also recommended adding demography and ageing; entrepreneurship and startups; and external commitment and regionalism (Gill and Kharas, 2015).

5 Expressed strongly by President Trump in his speech at the APEC summit in November, 2017.

6 Ohno, Kenichi. “An Approaching Middle Income Trap – How Vietnam can escape it”. Vietnam Development

Forum, 2014.

7 See the following press examples: “PM Requires the UN to Support Vietnam Avoiding the Middle-Income Trap,”

(Hanoi Times March 8, 2017); “New Report Lays Out Path for Vietnam to Reach Upper-Middle-Income Status in

20 Years” (World Bank press release on Feb. 23, 2016, quoting MPI Minister Bui Quang Vinh).

Is Vietnam caught in the middle income trap? At least a few recent studies have examined this question. A researcher at the Heritage Foundation recently examined whether the ASEAN countries were now in the middle income trap (Wilson, 2014). He used 13 explanatory, political economy variables grouped into six categories:

Macroeconomic factors (credit growth, government size, domestic investment);

Demographics (dependence ratio, urbanization, female participation rate);

Institutions (property rights, regulation);

Trade structure (commodity intensity and the “resource curse”);

Infrastructure (power consumption, internet usage, education); and

Wars and civil conflicts.

Wilson examined each of the variables for Vietnam and found that it is a strong candidate country for the middle-income trap because of a macroeconomic factor (rapid credit growth led to a large bad credit overhang), a demographic factor (Vietnam’s population is rapidly aging, after enjoying a demographic dividend for most of the past twenty years, and will not be able to contribute to growth in the medium to long-term through greater factor utilization), and institutional factors (weak private property rights, poor regulatory structure, and stifling levels of corruption). He notes that

Vietnam’s total factor productivity is declining sharply, which implies a declining efficiency of inputs into the production process.

Using another approach to the middle-income trap, Felipe (2012) argued several years ago that Vietnam was not yet in the trap, but was at risk of falling in it. Because existing definitions of the middle-income trap focused on diagnoses instead of providing an objective measure, Felipe developed an operational definition to guide Asian Development Bank (ADB) research; he identified countries as caught in the trap if they remain lower-middle income (or upper-middle income) for more than the average number of years that countries occupy these statuses.

Another ADB researcher, VT Tran,8 agreed that Vietnam was not yet trapped, but is at risk if it does not complete needed reforms that would improve factor productivity. These proposed reforms emphasize the importance of developing markets for land, labor, and capital and ensuring equal competition among economic actors for the efficient use of the factors of production. In an earlier paper cited in this report, Tran focused on institutional reforms to support factor productivity including; private ownership of production factors, development of factor markets, corporate governance of SOEs and economic groups, wide participation of stakeholders in policymaking processes, transparency of policy and its implementation, and increasing the quality of bureaucrats and technocrats.

Researchers at the Vietnamese Academy of the Social Sciences (VASS) also offer solutions for Vietnam to escape the middle-income trap. They highlight that local firms are uncompetitive, policies and institutions are weak, and economic growth is dependent on increasing inputs rather than increasing productivity. The most salient challenges, they argue, are infrastructure, creating a more skilled workforce, and macroeconomic stability.

In contrast, another approach to identifying whether Vietnam is in a middle-income trap is provided by

Ohno (2014). Ohno argues that existing definitions of the middle-income trap are statistical and ex-post.

He calls for development of an analytical definition that permits researchers to proactively identify which countries are trapped while they are becoming trapped; not after problems are entrenched. Ohno

8 Tran, V.T. 2013. The Middle Income Trap: Issues for Members of the Association of Southeast Asian Nations.

ADBI Working Paper 421, Asian Development Bank Institute. Tokyo.

proposes that countries are in a trap when they attain an income level that corresponds to their natural competitive advantage but cannot move up in income because their people do not create value. He argues that true development or wealth creation occurs when it is produced by skills, technology, knowledge and innovation. Ohno’s prescription for Vietnam, and other lower-middle income countries, is to emphasize policy. Specifically, he argues that Vietnam should improve its policy to:

Strategically attract foreign investment to encourage technology transfer;

Build the capacity of local enterprises through benchmarking, export promotion, management training, industry-university cooperation, and quality control;

Create policy linkages such as matching local businesses (enterprise promotion) to foreign investors and joint ventures (foreign direct investment [FDI]); and

Improve logistics efficiency through transportation infrastructure and customs.

In summary, it appears that the consensus view is that Vietnam is at a critical point in its development in terms of the middle-income trap. Most researchers conclude that Vietnam is not yet ensnared in the trap, but is at risk and approaching a critical point where it needs to make economic reforms to avoid it.

What is common across these different approaches to the middle-income trap is that all identify inefficiency in factor markets as a critical constraint on Vietnam’s ability to move up the income rankings to upper middle-income status. Although each of the authors highlights somewhat different specific interventions related to this constraint, some common themes emerge:

1. Improving the efficiency of factor markets involves some policy changes, such as greater protection or delineation of property rights and equality in the enforcement of those rights.

2. Firms are not competing on a level playing field for access to factor markets resulting in less efficient firms, such as SOEs and some large private economic groups, having preferential access due to regulatory issues and/or favoritism that may be linked to corruption.

3. Government policy and regulation needs to be reformed to provide local firms with greater support, increased participation in policy making, and developed linkages between foreign and local firms that support learning from each other to increase the ability of local firms to add value and increase their efficiency as they move up the value chain.

Assessment Focus Topics

With this context, this assessment explored several possible areas of support that offered strong potential for robust growth opportunities in the coming years. The assessment mandate is to investigate key strategic options and USAID’s opportunities for the next five years. The scope of work identified four areas of programming interest:

The business enabling environment;

Innovation and entrepreneurial development;

Financial technology and inclusion; and

Competitive value chains and industry clusters.

Additionally, we are concerned with three important cross-cutting issues:

Gender inequality and women’s empowerment;

Vulnerable populations; and

Trade imbalance between Vietnam and U.S.

The USAID/Vietnam Mission is also conducting two other closely related assessments: the governance assessment and the gender analysis.

This Responsible Trade and Growth Assessment is based largely on interviews, academic studies, economic analyses, and site visits. The report also draws on and contributes to the separate Literature Review –

Vietnam Trade and Growth Assessment.

Stakeholder Consultations

USAID, the Vietnam Evaluation, Monitoring and Support Services (VEMSS) Project, and MSI formed a six-person consultation team with expertise in trade, private sector development, economic analysis, a deep understanding of the Vietnamese political and economic situation, and experience with the USAID programming process.9 The assessment team held consultations with a wide array of stakeholders in four locations: Hanoi, Ho Chi Minh City, and the trade oriented/manufacturing provinces of Dong Nai in the south and Quang Ninh in the north. (See Table 1 below for a list of organizations consulted.)

Also see Annex A for the Assessment Scope of Work; Annex B for the detailed list of consultation meetings and persons interviewed; and Annex C for the interview guide/questions.

TABLE 1: SUMMARY OF STAKEHOLDER CONSULTATIONS

Central Government Officials – Hanoi

Office of the Prime Minister, Economic Advisory Group Ministry of Planning and Investment (MPI)

Office of Government (OOG) Ministry of Natural Resources and Environment

(MONRE)

Ministry of Industry and Trade (MOIT) / Legal and

Multilateral Trade Policy Departments

Ministry of Science and Technology (MOST)

Vietnam Environment Administration

Ministry of Finance (MOF)/ General Department of

Customs

State Bank of Vietnam (SBV)/ Strategy Institute

Government Officials – Ho Chi Minh City

Department of Finance Departments of Planning and Investment

Departments of Industry and Trade Department of Labor, Invalids and Social Affairs

Investment Promotion Agency (IPA)

Business Associations In HCMC

Vietnam Chamber of Commerce and Industry (Hanoi, HCMC)

Logistics Association (HCMC)

Legal Services Association (HCMC) Real Estate Association of HCMC (HCMC)

Association of Mechanical Enterprises (HCMC) Vietnam Fruit and Vegetables Association (HCMC)

Aquaculture Association (HCMC)

Quang Ninh Province

Department of Trade and Industry (DOIT) Post Authority

Provincial Economic Zone Authorities (PEZA) Investment and Trade Promotion Centre

Dept. of Natural Resources and Environment (DONRE) Investment Promotion Agency (IPA)

Department of Planning and Investment (DPI) Customs Agency

Dong Nai Province

9 Richard Huntington, Team Leader (MSI-US); Kofi Owusu-Boakye, (USAID Asia Bureau), Senior Economic

Advisor and APEC Affairs Officer; Linh Hoang Vu, Economist; Nhat Nguyen, Economist; Binh Nguyen (Cabi), (USAID Vietnam Mission), Program Management Specialist; Hoang Tran Vu, MSI VEMSS Chief of Party.

Department of Planning and Investment Division of Environmental Protection, Department of

Natural Resources and Environment

Department of Industry and Trade Department of Planning and Investment

Dong Nai Industrial Zones Authority Department of Industry and Trade

Private Companies

General Electric (GE) Procter & Gamble Vietnam (P&G)

Cai Lan Port joint venture Local enterprises in Quang Ninh and HCMC

Baker and McKenzie T & M Forwarding Company, (HCMC)

CMU Logistics and Transportation Co. LTD Hoang Phat Fruit Co., LTD

America Indochina Management LTD Entrepreneurs Participating in Meetings with Business

Association and Chamber of Commerce

Academic Institutions, Think Tanks, Embassies, USAID Projects, and Business Chambers

World Bank (WB) International Finance Corporation (IFC)

American Chamber of Commerce (Amcham) Vietnam Trade Facilitation Alliance

US ASEAN Business Council (USABC) Central Institute of Economic Management (CIEM)

Vietnam Academy of Social Sciences (VASS), Center for

Forecasting and Analysis

Vietnam National University (VNU)

Governance for Inclusive Growth (GIG) Project US Embassy, Econ Group

Political Economic Situation: Reform and Resistance

This assessment comes at a time of important changes pertaining to trade and growth in Vietnam. All evidence indicates that the Vietnamese top leadership of the Government and the Communist Party fully understand the situation and are on record for the systematic introduction of a long list of necessary reforms. Recent important examples include: Decree No. 56/2009/ND-CP (on SME credit funds); the

SME Promotion Law 2017; and the Socio-Economic Development Plan (SEDP) 2016-2020 (Vietnam

2035, Ministry of Planning & Investment and the World Bank. 2016). However, there is considerable resistance to change among the cadres lower down. Since the start of the famous Doi Moi

(“Renovation”) reforms of the late 1980’s, a whole new class of officials has developed who have been leading the process that has created Vietnam’s amazing economic progress. One senior Vietnamese analyst stated that, “An ensconced set of civil servants is comfortable within the system they helped to create, and proud of what has been accomplished.” Additionally, there is a new group of well-connected business interests who have little interest in further change. There are also those who benefit through various levels and types of corruption. And, as one of our key informants put it, “There are also many who simply fear they will not survive in a more competitive system because they lack the necessary skill sets.”

Donor interviewees often suggested to our team that the government is strong on establishing reform policies, and when there is an internal imperative to execute, they can achieve remarkable results.

However, there was an equally strong impression that the market liberalization reforms that are required to further modernize Vietnam’s economy and to avoid the middle-income trap may not be a shared imperative across the various line ministries tasked with executing the reform mandate. It appears that appetite for continued economic reform in Vietnam may be strongest at the top of the government, with varying degrees of buy-in as you work your way down the administrative structures.

As one interviewee noted, “In most countries the pressures for reform usually arise from lower levels of the bureaucracy and are resisted by those in power at the top. Vietnam is the reverse.”

Nevertheless, some independent Vietnamese experts stressed that donors should not underestimate the government’s seriousness regarding its proposed reforms. A more vibrant and expanding private sector is the government’s most important medium-term political goal. The government recognizes that

Vietnam’s economic success requires continued growth, and that continued growth requires a more vibrant private sector. Some stress that the government and Party appreciate that its own governing mandate may be weakened should Vietnam’s economy stagnate.10

The challenge for a USAID program is to maintain the support from the reform-minded higher levels of the central government while simultaneously engaging successfully with implementation-level actors in the provinces, line ministries, business associations, and private sector. One cannot count on a single

“champion” or assume that strong high-level support will automatically yield the actions needed to carry out a program in the allotted project timeframe. A structure of program “ownership” needs to be built with a range of Vietnamese actors, at different levels, with somewhat divergent interests.

KEY FINDINGS AND RECOMMENDATIONS

The assessment team’s key findings stress and assess the opportunities for USAID program support in four interrelated areas. Each of the proposed programs meets the requirements of: (1) finding strong support from the GVN (See Table 2 below); (2) a likelihood of significant impacts within five years, (3) reflecting USAID’s established reputation and capabilities in Vietnam, and (4) being programs that could work in concert with other existing or planned donor programs. This assessment does not recommend that USAID develop full programs in all of these areas, as that would lose the focus required for success in the selected area or areas of engagement.

TABLE 2: TABLE OF GVN COMMITMENT AND CHAMPIONS

Work Stream GVN Commitment Internal GVN Champion(s)

Trade Facilitation and Trade Policy High and Urgent OOG/MoF/Customs

HCMC; Quang Ninh PPCs

Digital Economy Rising and Open OOG/MoIT

Industrial Cluster Value Chain

Support

Rising and Open OOG, MPI, PPCs

Entrepreneurship Development and

Innovation

High at the Provincial Level

Central Level Conflicting

HCMC/Quang Ninh PPCs

Transformational Issues: Competition

Law and Procurement Reform

Possible Renewed Interest (subject to confirmation)

OOG (?), MoIT, MPI

10 Hayton, Bill. Rising Dragon. Yale University Press, 2010.

Trade Facilitation and Policy

Definition and Problem Statement

At nearly 180 percent, Vietnam has one of the highest trade-to-GDP ratios and has become one of the most open economies in the world. However, border procedures are a particular issue for Vietnam in improving its trade competitiveness. Health and other special services, in addition to customs proper, appear to be the source of long delays—and thus costs—for traders. About 30 to 35 percent of import-export goods (over 100,000 goods) are subject to specialized inspections, such as for detecting fake drugs that may cause harm. Border inefficiencies, complex customs rules and other trade barriers make it harder for businesses of all sizes to trade internationally, hurting SMEs the most.

Principal Constraints

Despite its reliance on trade to drive its economic growth, Vietnam’s trade rules, import taxes, regulations, and transportation and warehousing logistics still provide unacceptable problems, uncertainties, and delays, as was clearly demonstrated in government reports such as Vietnam 2035 by the World Bank and MPI. In particular, Vietnam ranks well below key competitors Malaysia and Thailand on every indicator in the World Bank Index functions related to trade logistics performance (See Table

3 below). This performance gap translates into longer delays and increased costs.

TABLE 3: LOGISTICS PERFORMANCE INDEX RANKINGS

Rankings Customs Infrastructure International shipments

Logistics quality and competence

Tracking and tracing

Timelines

Malaysia 38 23 22 35 29 36

Thailand 36 30 39 38 33 29

Vietnam 61 60 47 56 53 65

Source: World Bank Logistics Performance Index

Although Vietnam has implemented, with Japanese assistance, the Vietnam Automated Cargo and Port

Consolidated System (VNACCAS-VCIS) e-customs platform, the system is only operative for the

Customs Department. One challenge is that the other key actors, such as the ministries of finance, agriculture, and health, are not linked to the e-commerce system. This disconnect among the key ministerial actors is a major contributing factor to the long delays in customs clearance. Related to this is the incomplete implementation of the Vietnam National Single Window, which is meant to provide interconnectivity among ASEAN trade partners. There are also unresolved issues between the US and

Vietnam including technical barriers to trade, intellectual property rights, and food safety.

Opportunities for USAID Programming

An important opportunity for USAID assistance is the recently ratified WTO Trade Facilitation

Agreement (TFA). This is an ambitious endeavor designed to improve trade efficiency worldwide, encouraging economic growth by cutting red tape at borders, increasing transparency and taking advantage of new technologies. The TFA came into force for all WTO member states once two-thirds

(110) WTO members, including Vietnam, ratified the agreement on 27 February 2017. Since then, USAID’s Governance for Inclusive Growth (GIG) project has played a role at several key steps along the way, assisting during 2015 in the preparations for ratification, and holding a 3-day workshop jointly with the World Bank, on the eve of ratification, producing an Action Plan to implement categories B and C of the agreement.11 The next step is to provide hands-on professional implementation assistance.

The TFA requires that each participating country develop and apply rules, definitions, and systems designed to open up, simplify, and make transparent the customs requirements. The TFA requires that all WTO member countries address and improve systems such as:

• Publication of information relating to trade rules and procedures

• Prior consultation on amendments to trade rules and procedures

• Standards on advance rulings ensuring internal cooperation among agencies

• Rules to allow movement of imported goods from the border to an internal customs office

• Reducing complexity of import/export/transit formalities and documentation

• Standards on procedures relating to appeals and review

• Transparency, impartiality and non-discrimination at the border crossing

• Rules on fees and charges relating to exports/imports release and clearance of goods

• Rules encouraging freedom of transit

• International cooperation between customs

• Consultation on trade facilitation reforms

• Special assistance for developing least developed economies

Research by the World Economic Forum calculated that wide TFA implementation could trigger a 60 to 80 percent increase in cross-border SME sales in some economies.12 It is predicted that the implementation of the TFA will have a greater impact on international trade than the elimination of all the world’s remaining tariffs. It is expected to reduce average trade costs by up to 15 percent, with developing countries benefiting even more. Additionally, TFA implementation will have a strong development impact on growth and SME integration. It will increase transparency, and provide services such as advance rulings, pre-arrival processing, and reduction of trade barriers.

Vietnam will need assistance with several elements of TFA implementation. One is the issue of TFA interagency coordination. Although the external WTO negotiations were completed almost a year ago, the team found that provincial level officials in Vietnam are generally unaware of the TFA. It is certainly not on their immediate radar. There are notable policy implementation gaps between central and provincial bodies. TFA policy rests with the central government, namely the General Department of

Vietnam Customs (GDVC). However, there remains limited understanding of TFA requirements at provincial customs departments. To date there is uneven dissemination and minimal implementation of

TFA best practices. In particular, there has been a limited rollout of the customs IT system to border agencies. There naturally is bureaucratic resistance from border agencies and the line ministries that require bewildering sets of special permits. Some of these agencies include those controlling the quality of medicines being imported from China and other countries. TFA implementation will streamline permits and reduce rent-seeking incentives and corruption.

Government Leadership

11 Category A specifies the provisions the member will implement at the time the agreement enters into force.

Category B includes the provisions to be implemented following the agreement ratification. Category C includes more challenging provisions to be implemented later, on schedules to be determined.

12 World Economic Forum and Global Alliance for Trade Facilitation. “Enabling Trade Facilitation: A Modelling

Exercise”. Global Enabling Trade Report, 2016.

The establishment of a national steering committee on trade facilitation is mandated by the TFA, and

Vietnam has complied by establishing its National Steering Committee on ASEAN Single Window, National Single Window and Trade Facilitation, referred to as the National Trade Facilitation

Committee (NTFC) and led by Deputy Prime Minister Vuong Dinh Hue and representatives from most line ministries. This is a positive sign, but the structure of the committee is not as strong as the TFA requires. The assessment team did not find evidence of substantial activities yet carried out by the committee. Although the Vietnam Chamber of Commerce and Industry (VCCI) is on the committee, there is no actual private sector participation or membership as stressed by the TFA requirements. The government commitment to TFA is also signaled by its timely ratification of the agreement, by frequent mention of the TFA in the press, and by the passage of Resolution 19 to improve the business environment and national competitiveness. For the GVN, the TFA provides a necessary step in maintaining, sustaining, and growing the national trade-based economy. Key GVN champions include the

OOG, MOIT, GDVC, the Global Alliance for Trade Facilitation (GATF), and some of the People's’

Provincial Councils (PPCs).

US Interest and Reputation

Supporting the implementation of TFA builds on USAID’s brand and reputation in Vietnam in this area, in particular its well-regarded Support for Trade Acceleration (STAR) Project’s work enabling WTO accession, and recent policy-level work on TFA by USAID’s GIG Project.

Cross-Cutting Issues

● Empowering women and vulnerable persons. Simpler, less corrupt, and more transparent customs procedures will make it easier for less empowered and less connected persons to enter the trade arena. USAID may wish to support programs to deliver information and assistance to women entrepreneurs regarding the new opportunities resulting from trade facilitation accomplishments.

● US-Vietnam trade imbalance. The TFA holds out the hope of establishing a more level playing field for potential expansion of US exports to Vietnam. US firms are not likely to expand their trade to Vietnam if they must continue to wrestle with the current panoply of rules, barriers, and regulations.

Donor Engagement

Donor engagement includes the World Bank’s efforts to establish a Trade Facilitation Trust Fund, the

Government of Japan’s efforts at customs modernization and the e-commerce system, and support from the European Union (EU) as part of the EU-Vietnam Free Trade Agreement (EVFTA) (though the ratification process is still uncertain).

Conclusions

TFA implementation is universally recognized as a priority for the GVN. The emphasis continues to be overwhelmingly on customs and border bottlenecks caused by certain agencies. Policy dissemination, training and on-the-job mentoring to both private sector and border agencies will be critical to

Vietnam’s continued trade competitiveness.

We make a strong recommendation for a flexible Trade Facilitation Work Stream that provides policy implementation and hands-on capacity building support at both the central government and select provinces. We recommend a flexible approach to the “beyond the border” issues including technical barriers to trade (TBT) and intellectual property rights (IPR).

Illustrative USAID Activities

USAID could support efforts to facilitate the access of SMEs to free trade agreements and regional trade agreements by simplifying and streamlining Vietnam’s rules of origin (ROOs), procedural and documentary requirements, and harnessing IT to ease documentation and procedures. This program would help the GVN with public communications on trade procedures and requirements.

USAID would work with Vietnam’s National Trade Facilitation Committee (NTFC), which was recently established to meet an important WTO/TFA requirement. USAID’s particular emphasis would be to assist the NTFC to broaden meaningful private sector participation and/or membership. A USAID activity would also assist in developing transparent systems that should weaken bureaucratic resistance to TFA reforms.

The program would support line ministry customs modernization efforts through the comprehensive rollout of e-customs systems to all border agencies (MOIT, MOT, MOH, MARD, MOST), and finalize a truly inter-connected National Single Window.

Digital Economy

Vietnam needs to move…