Viet Nam: Poverty Assessment and Strategy

Poverty reduction has been a central goal of the Vietnamese government since unification and was a driving force behind the economic reforms initiated in 1989. While recent growth performance and future prospects are good, Viet Nam remains a very low-income country with a per capita GDP of less than $200. With a relatively equitable distribution of resources, poverty is widespread throughout the country. The challenge for the 1990s lies in taking advantage of Viet Nam's substantial growth potential while at the same time ensuring widespread participation in the benefits of development.

This poverty profile is based on the 1993 Viet Nam Livings Standard Survey (VLSS) , the first nationally representative household survey conducted by the government with technical assistance from the World Bank. The report sets new poverty lines for Viet Nam based on a benchmark per capita calorie requirement of 2,100 calories per day (taking into account geographic price variations in the cost of the same food basket) as well as an allotment for non-food essential items. Comparing this poverty line with the distribution of per capita expenditure from the VLSS, about 51 percent of the Vietnamese population is classified as poor. Half of the poor, 25 percent of the population, are food-poor in the sense that they cannot meet their daily basic calorie requirement even if they were to devote all of their consumption to the basic food basket.

Poverty is much higher in rural than urban areas. The incidence of rural poverty averages 57 percent—twice as high as the 27 percent poverty incidence found in urban areas. Ninety percent of all of the poor are concentrated in rural areas, and 76 percent of the poor are farmers. Among farmers, those who have less diversified economic activities both on and off the farm are poorer than others. There is also considerable variation among regions. The highest incidence of poverty (71 percent) is found in the North Central Coast, while the lowest rate (33 percent) is found in the Southeast where the economy is dominated by Ho Chi Minh City. Despite regional disparities, the overwhelmingly striking feature of the poverty profile is the consistently high levels of poverty throughout all rural areas of the country, even those generally considered to be better-off. Government policies to reduce poverty must focus primarily on rural areas.

Ethnic minorities represent 15 percent of the Vietnamese population and, with the exception of the Chinese, they have a higher incidence of poverty than the national average -- ranging from 66 percent among the Tay to 100 percent of the H'mong. Female-headed households are not poorer than the national average. Poor households tend to be slightly larger than average, as well as younger, with more children under the age of 15 and fewer elderly over the age of 60.

Viet Nam has achieved a remarkably high level of literacy, with an average of 88 percent of adults older than 15 being literate. This implies that there is a high degree of literacy among the poor. The literacy gap that remains is not very large, with literacy ranging from 79 percent among the poorest 20 percent of the population to 94 percent among the richest. Malnutrition is very high in Viet Nam, especially among the poor. The prevalence of stunting among two to three year old children reached nearly 70 percent in the poorest quintile, more than twice as high as among the richest 20 percent. The fertility rate is also considerably higher among the poorest quintile where on average women have 4.9 children compared to 1.8 in the richest quintile.

Incentive and Regulatory Framework

Viet Nam has been carrying out an ambitious adjustment and reform program ("Doi Moi") since 1989 and is making a steady transition to a market economy. The country has achieved notable success with its reform program. Initial structural reforms included the decollectivization of agriculture, price liberalization, unification and the devaluation of the exchange rate, and the hardening of the budget constraint for state enterprises. At the same time, the fiscal deficit that was the root cause of inflation was reduced through a combination of tax reform, the elimination of subsidies, and expenditure restraint. Other reforms addressed the financial sector, state enterprises, and foreign trade. Real GDP growth has averaged 8 percent a year, and at the same time inflation was reduced from 400 percent in 1988 to 5.2 percent in 1993. The success of these economic reforms was particularly evident in the agricultural sector where the country was transformed very quickly from a rice importer to a major rice exporter. The role of private trade and production in agriculture swelled, which more than offset the contraction in the state sector.

Viet Nam's transition experience is different from that of other former command economies as well as from that of countries undergoing radical structural adjustment programs in that it resulted in rapid growth and poverty reduction. There are several reasons for this, including: the relative importance of agriculture rather than industry; an adequate compensation package offered to retrenched workers; a quickly growing private sector; social services delivered outside state enterprises. As a result of these factors, the social costs of adjustment in Viet Nam were much milder than experienced elsewhere.

While the initial economic reforms benefited the poor quite quickly and directly, the next stage of reforms is more indirect. Viet Nam is moving from the relatively easy price liberalization measures to more difficult structural reforms such as restructuring state-owned banks, privatizing public firms, and streamlining the trade regime.

Projections indicate that sustaining the average growth rate of 8 percent for the rest of the decade -- with regional growth patterns unchanged -- will have a powerful effect on the magnitude of poverty, lowering the overall incidence of poverty to 29 percent by the year 2000. Since there is considerable variation in growth rates among regions, poverty will be reduced much more quickly in the some areas than others. If all regions were to grow at the same rate of 8 percent per year, the overall incidence of poverty would decline more quickly to 23 percent by the year 2000. These projections highlight the need to supplement broad macroeconomic polices with targeted efforts to promote rural development in Viet Nam's poorer and slower growing regions.

Public Expenditure

Much of the success of the government's structural adjustment program since 1989 was due to prudent fiscal management, which had important implications for the level and sectoral allocation of public expenditures, including the sectors most directly related to poverty alleviation. In real per capita terms, capital spending was reduced by 60 percent between 1990-91, while current spending declined by 20 percent. A notable feature of the fiscal adjustment was that social sector spending was protected relative to other sectors, so that its share of discretionary government expenditure actually increased. Government expenditure began to recover in 1992, and by 1993, both capital and current expenditures had been more than fully restored to pre-adjustment levels. Assessing the sectoral impact of these fiscal developments is, however, complicated by a lack of transparency in the government's budget classifications.

The assessment examines the incidence of the benefits of public expenditures for health care and education. It finds that only one-third of the education budget is spent on the well-targeted primary education program (22 percent of the subsidy for primary education is spent on the poorest 20 percent of the population.) However, half of the education budget is spent on higher-level programs that are not well targeted—the richest quintile captures 50 percent of the subsidy for senior secondary schools and 67 percent of the subsidy for post-secondary schooling. The poorest quintile benefits from only 11 percent of all education subsidies, while the richest quintile captures 38 percent. Similarly with health care, the poor tend to use the commune-level health center more than other groups do, yet only about 5 percent of the health budget is allocated to primary health services, and most of the budget is directed to hospitals, where the wealthier people go. Overall, the poorest quintile receives only 11 percent of all health subsidies, while the richest quintile captures nearly 30 percent. Out-of-pocket expenditures for public health care and education are significant. The report recommends better targeting of public spending to reduce barriers to the utilization of primary and lower secondary schools and commune health centers and district hospitals that are used by the poor, as well as improving the quality of services.

The issue of intergovernmental fiscal relations is examined in detail in the assessment. The impact of public expenditures on poverty alleviation depends not only on how much is spent on pro-poor sectors but also on where it is spent -- to what extent are these expenditures directed to those regions and provinces with large concentrations of poverty and fewer local resources -- and how well it is spent -- to what extent are policies implemented so that the benefits accrue to the intended groups? Local governments are responsible for many of the important poverty-related expenditure programs, including irrigation, agricultural extension, rural roads, primary education, and basic health services, and spend about one-third of the overall government budget. Yet their autonomy in adjusting the allocation of expenditures or raising additional revenues is limited. As a result, important pro-poor services are underfunded in rural Viet Nam.

The assessment examines existing arrangements for expenditure and tax assignment, as well as the design of intergovernmental transfers. It recommends building on the existing system of intergovernmental finances while making adjustments in the following areas: (i) devolving some independent revenue-raising authority to local governments; (ii) creating a more adequate method for resolving vertical and horizontal imbalance through revenue-sharing arrangements and general purpose grants; (iii) identifying activities of national importance for which specific purpose transfers should be made and determining the matching requirements that should be established for different provinces; and (d) providing adequate stability in intergovernmental fiscal arrangements.

Safety Net

Viet Nam has a large program of social transfers financed by budgetary expenditures on pensions and social relief amounting to 10 per cent of the budget, nearly as much as is spent on education and health combined. Overall, these expenditures are not well-targeted towards the poor. More than 80 percent of the budget is spent on social security (pensions and disability payments) for government workers. The poorest quintile benefits from only 7 percent of all these expenditures on pension and disability payments. In contrast, nearly 40 percent of government expenditures on social transfers is captured by the richest quintile.

Social safety net expenditures need to be better targeted towards the poor in rural areas where they can play an important role in promoting rural development by providing insurance against failure and encouraging people to take greater risks. Government expenditures on social relief for those who are not protected by the formal social security program appear to be well-designed but are very low, accounting for less than 10 percent of budget spending on social transfers, and reach only a small proportion of the poor. Reallocating budget expenditures from pensions to social relief would strengthen the poverty alleviation impact of social spending.

Poverty Strategy

Viet Nam's strategy for reducing poverty includes the three key elements of broad-based growth, human resource development, and social safety nets. The vast majority of Viet Nam's population, its labor force, and its poor are located in rural areas where livelihoods continue to be primarily linked to small-scale agriculture. Rural development, broadly conceived, is going to be critical for growth, raising living standards, and reducing poverty. The government can play a key role in helping to promote broad-based growth by continuing to deepen reforms and by ensuring an incentive framework that encourages the development of exports, of agricultural products as well as those of labor-intensive industries.

Reducing poverty in rural Viet Nam will require both higher incomes from agricultural production and diversification to non-farm activities. With 900 people already on each square kilometer of agricultural land and 1 million young people entering the labor force each year, off-farm opportunities need to expand. The government can promote farm and off-farm linkages by investing in rural areas (infrastructure, agricultural research and extension, and human capital), improving the delivery of rural financial services, and increasing the efficiency of local public expenditures by reforming intergovernmental finances.

Human resource development will require better targeting of social services as well as improvements in the quality of services. By providing these services throughout all parts of the country, labor will be mobile and, in some cases, will move to areas with higher potential. Viet Nam should pursue its stated objective of making the formal sector pension program self-financing and should allocate more budget resources to social welfare relief for the very vulnerable.

Statistical System

The government has taken important steps towards increasing its capacity to collect and analyze poverty-related data on a regular basis. The government conducted its first Viet Nam Living Standards Survey in 1993 and a much larger household survey, the Poverty Monitoring Survey, to monitor living standards in 1994. The report recommends implementing on a regular basis a new household survey that integrates the sectoral breadth of the Living Standards Survey and the regional depth of the Poverty Monitoring Survey in a two-part core and module design. The implementation of a survey designed along these lines would need to be supported by: (i) strengthening institutional linkages between the Government Statistics Office, as the technical agency responsible for the quality of data production, and its client policymakers in the State Planning Committee and the relevant line agencies, (ii) improvements in the timeliness of turnaround from the surveys, and (iii) continuing improvements, through training and hands-on experience in the analytical skills of policymakers and researchers in Viet Nam.