PART III
Policy reform and the transformation of Vietnamese agriculture (Continue)

4. Impacts of policy reforms on economic performance

4.1 Economic growth and structural change

As noted in Table 1, the GDP growth rate has been very encouraging averaging over 7 percent per annum, despite periodic slowdowns due to the Asian crisis from 1998 to 1999 and global recession in 2001. The rate implies a growth in per capita GDP of over 5 percent per annum over a 15-year period. Total export and import turnover has also grown rapidly. Compared to the 1980s, when Viet Nam could be described as a closed economy, by 2003 the turnover was US$44.9 billion (CIEM 2004), or 115 percent of the GDP in that year (World Bank 2004). The Vietnamese economy is therefore now very open.

During the early stage of reforms, from 1988 to 1989, the policies of market liberalization increased agricultural commodity prices, improved farmers' profits and led to high growth in the agricultural sector. From 1991 to 1995, rapid devaluation of the VND, a 50 percent reduction in agricultural tax applied from 1991 to 1992, foreign and domestic market promotion and increasing investment due to the high growth rate of the whole economy further stimulated agricultural growth. Since 1995, despite rather low levels of investment and harsh competition, the agricultural sector has continued to grow rapidly as farmers have adjusted their production structure according to market signals. However, in recent years, the profitability of agricultural production has declined. Relentless changes in agricultural policies are therefore required in order to continue mobilizing farmers' inner force to maintaining a desirable growth rate.

In the industrial sector, by contrast, economic liberalization and currency devaluation created a severe crisis for enterprises that had hitherto depended on state subsidies. The relatively capital-intensive heavy industries had depended on materials imported from the Soviet Bloc and were caught in recession due to increased production costs. For a number of the more labour-intensive light industries, however, the currency devaluations combined with lower capital restructuring costs were highly favourable. In the garment sector, for example, several SEs have gained important export markets. In terms of the investment required to enable them to become internationally competitive, increases in foreign direct investment have been an important factor in reviving the health of the industrial sector, particularly in areas requiring large investments. Once mainly concentrated in joint ventures with SEs aimed at the domestic market, foreign investment has more recently expanded into wholly-owned activities and is gradually becoming more export-oriented. However, as direct public investment has largely been withdrawn from SEs, except in key industries, and they are forced to rely more on their own resources, a rather large number has continued to languish on the margins of profitability.⁷ The foreign-invested and domestic private sectors have consequently overtaken the state sector as the main contributors to industrial growth.

The mushrooming of the service sector, especially in trade, since Doi Moi has been a further important factor in Viet Nam's high growth performance. Like agriculture, this sector is dominated by households and SMEs, which quickly replaced the state trade organizations in improving the circulation of goods and services throughout the economy. It played an important role in offsetting the employment impacts of the crisis in state industry from 1989 to 1990. This was also a sector that received much foreign investment during the early 1990s, particularly in hospitality-related industries and real estate development. Like industry, and unlike agriculture, it also suffered from the bursting of the Asian bubble in 1997. From 1997 to 1998 new foreign investment dropped sharply while existing investors retrenched capital to their home countries caused a downturn in the Vietnamese industrial and service sectors. The sector has recovered quite rapidly since 1999.

Sectoral growth rates from 1986 to 2003 are shown in Figure 7 illustrating the pattern discussed above. In particular it shows the role of agriculture in stabilizing the rate of GDP over the whole period, especially during the downturn of 1998 to 1999 when the agricultural growth rate actually exceeded the national growth rate. Since 1999, however, the agricultural growth rate has shown a tendency to decline (see below). This tendency raises some important issues for the continuing health of Viet Nam's economic performance. Given the current openness of the economy and high reliance on primary commodity exports, any potential stagnation in agriculture poses a threat to sustained economic growth. A healthy domestic market can also be an important factor in insulating an economy from fluctuations in global demand. Continuation of the trend of declining poverty in the countryside should play a significant role here, as it did in the late 1990s.

Source: GSO (2004).

Figure 7. Growth in the main sectors, 1986–2003 (percent per annum)

The patterns of growth shown in Figure 7 produced large short-term changes in the economic structure. Industry's share in the GDP, for example, declined from 28.9 percent in 1986 to 22.7 percent in the crisis period of 1990, before recovering to 28.8 percent in 1995 and reaching nearly 40 percent in 2003. In contrast, agriculture's share increased from 38.1 percent in 1986 to 46.3 percent in 1988, and then declined continuously to approximately 22 percent in 2003. The normal trend in the industrialization and modernization process of developing countries has therefore emerged strongly over the past decade (Figure 8).

Source: GSO(2004).

Figure 8. Sectoral shares in the economy, 1985–2003

However, in terms of linkages to agricultural and rural economic development, the structural changes in industry and services have been less favourable. A high proportion of investment and output has concentrated on meeting rapidly expanding urban demand. Within manufacturing, for example, production of machinery for agriculture and the rural economy accounts for a very minor part and has difficulty competing with imported goods. Electricity, gas and water supply have been among the fastest growing sectors, but remain unable to meet the needs of agriculture. About half of the capacity in this sector is used to supply household needs, which means it still has a limited capacity to serve rural production. The financial services sector has expanded in line with GDP growth, but its performance was hampered by structural problems before 2002, though it has recently shown signs of acceleration. Moreover, transport, storage and communications, which are indispensable to rural development, have tended to grow more slowly than the GDP as a whole while the cost of these services has increased faster (GSO 2005).

In some fast changing areas close to urban centres such as Ho Chi Minh City and Hanoi there has been an increasing shift towards industry and services. Agriculture in these areas has been negatively affected by industrial development and urbanization. The issue of converting agricultural land to urban uses has produced disputes over compensation, given that industrial and residential land has a higher market value than agricultural land. Peripheral urban agriculture has also suffered from problems created by urban drainage and has high levels of pollution.

One of the most important aspects of structural change is the changing structure of the labour force. From 1999 to 2005 total employment rose by an average of 2.9 percent (compared with a total population growth rate since 1989 of below 2 percent). Unemployment has remained fairly stable in recent years at around 1–2 percent and two-thirds of the unemployed are in the 15–24 age group (World Bank 2005: 85, 94). Taken together with the unemployment data, growth rates in employment by sector show that the capacity of the non-farm sector to absorb labour shed from agriculture has so far remained fairly high (Table 6).

A more detailed breakdown of employment creation shows that the majority of growth in employment has come from the private enterprise sector (defined as any unit that employs waged labour). The share of employment by this sector rose by two-thirds between 1998 and 2004, from 10 to 17 percent, while that of other non-state sectors (non-farm self-employment, foreign invested and farming households) remained stationary or fell (World Bank 2005: 85). The share of public sector employment rose by half over the same period (only 25 percent in the case of SEs), but this sector still only accounts for 8 percent of the total employed workforce. Moreover, employment growth in the domestic private sector comes at a low cost: From 2001 to 2003 about 80 million VND of new investment was associated with each new job in the domestic private sector, compared with about 130 million in the FDI sector and 580 in the SE sector (World Bank 2005: 20).⁸ While the FDI sector has by far the highest productivity growth rate, it employed only 1.3 percent of the workforce in 2004.

Table 6. Annual growth rates in employment by sector, 1999–2004

Source: World Bank (2005), Statistical Appendix, Table 1.3.

Whereas the macroeconomic structure is changing rapidly, the economic structure of the rural areas is changing only slowly. In 2000, the agricultural sector still played a decisive role in the economy, accounting for 68 percent of the rural economy's GDP. Rural industrial development has not shown noticeable progress. Rural services have increased slightly in recent years, but are far from reaching desirable job creation and income-enhancing levels. The Vietnamese countryside is still dominated by farmers. Moreover, as Figure 9 demonstrates, the question of how to sustain agricultural growth into the future is coming sharply into focus.

Sources: GSO (2002–2003) and ADB (2004).

Figure 9. Real agricultural GDP growth rate

The major reason for the increase in total agricultural output in the past 20 years has been increased input usage. Additions to land, labour and fertilizer inputs have been the primary causes and now appear to be reaching their limits for generating more growth.

In 1985, the agricultural labour force was 15.665 million; in 2002, this figure was 25.325 million, a huge increase of 61.7 percent. As can be seen in Figure 10, much of this increase occurred during the restructuring of industry and other urban sectors from 1991 to 1992. Since then, growth of the agricultural labour force has slowed and, in the past five years it has begun to decline. In the meantime, immense population pressure has also extended the area of agricultural land, by 41.3 percent, from 6.75 million ha in 1985 to 9.537 million ha in 2002 (MARD 2004). Despite the extension of cultivated land, the area available per worker fell from 0.43 to 0.37 ha over the same period. Moreover, since output grew considerably faster, extended land area alone cannot account for the change. Given that Viet Nam's rural environment is already under stress from land clearance for agriculture, continued expansion of the land area is also called into question.

Sources: MARD (2004) and FAO (2005).

Figure 10. Agricultural land and labour

Vietnamese farmers' major expenditure on inputs comes from fertilizer, the usage of which also increased from 469 200 tonnes in 1985 to 1 975 200 tonnes in 2002 (a 321 percent increase). Usage per hectare has risen almost three-fold, from 70 to 207 kg, over the same period. Looking at Figure 11, we can see that the increase began following the 1988 to 1989 reform packages, but the most rapid rise came after the 1993 Land Law. More intensive investment in improved soil fertility is clearly related to the reforms enhancing farmers' security of tenure over the land.

Fertilizer use is also closely associated with labour use - because fertilizer is mostly spread by hand in Viet Nam. Thus, increased agricultural output may be more closely associated with increased applications of labour and other inputs than with increasing land area (see Section 4.6).

Source: MARD (2004).

Figure 11. Fertilizer use in Viet Nam and selected Asian countries, 1985–2002

At the same time, the very institutional reforms that have contributed to increased output and yields have some of the constraints on further growth. One consequence of the land reforms has been the sometimes extreme fragmentation of landholdings based on egalitarian distribution of land of varying quality within each locality. Fragmentation makes it impossible to gain economies of scale from modern means of production. In addition, much potentially useful land is wasted on bunds between these tiny fields. At the same time, consolidation of plots raises the thorny issue of who will get the best quality land.

Aside from the fragmentation issue, a survey by MARD in 1997 found that farm income increases along with farm size. Households with a cultivation area of less than 1 ha held, on average 4.3 million VND in investible capital; those with 1 to 3 ha had between 10 and 17 million; and those with over 3 ha had 25 to 30 million (MARD 2004). While this evidence does not take into account regional differences in soil types, it suggests that establishing bigger farms could be beneficial.⁹ For the time being, however, any rapid movement towards land consolidation and increasing farm size would revive the issue of livelihood security - one reason for the policy of limiting farm size to no more than 3 ha in the main deltas. As long as the labour force is stuck in agriculture, economies of scale and modern technology remain impossible.

4.2 Rice productivity growth

Rice is Viet Nam's most important crop. It is not only central to rural livelihoods, it is also deeply embedded in the culture and traditions of the country. In 2003, the production of rice accounted for nearly 50 percent of the agricultural GDP (excluding forestry and fisheries) and it continues to play a significant role in providing food security and employment, alleviating poverty and contributing to foreign exchange earnings.

As noted in Section 4.1, growth in agricultural output has arisen from both extension of the cultivated surface and more intensive use of inputs such as labour and fertilizer. This is also true of the expansion in rice output. But perhaps the most significant development has been the steady growth in yields, which has risen on average by 3.65 percent a year since 1980. In some of the most land-scarce regions, this increase in productivity has been the most important factor in promoting food security. Yields in northern Viet Nam, for example, rose from just 2 tonnes/ha in 1980 to 4.2 tonnes/ha 10 years later. The measurement of total factor productivity (TFP) carried out by ICARD (2004b) throws some light on this development (Table 7).

Table 7. Total factor productivity and its contribution to rice production growth
in Viet Nam, 1985–2000 (percent)

Source: ICARD (2004b).

This picture is confirmed by Prota and Smith (2004: 15) who also studied TFP growth by region for all types of agriculture, not just rice (Table 8). They found that the Red River Delta and the southeastern regions show relatively little influence of the reforms on TFP, while, in contrast to the rest of the country, TFP growth in the Mekong Delta was negative in the first decade after 1985, but has accelerated since then. The authors argue that “progressive conversion of paddy fields from lower yield rice production to the more remunerative aquaculture is an example of the more efficient crop selection which took place in this area since the late 1990s.”

Table 7 shows that TFP contributed nearly two-thirds of output growth from 1985 to 1990. Normally, TFP is attributed to technology (the residual in growth accounting). However, if technological change were the main factor here, one could expect TFP to be higher in the later decade than during the earliest stage of reform. Such a development could be explained by rising farm incomes making capital available for the introduction of new technologies in seed varieties, machinery and other inputs. While this has clearly taken place to some extent, a more likely explanation is that the residual is the direct impact of institutional reorganization of the late 1980s. Put simply, it means that people worked harder once they gained security of tenure and the right to make their own production and marketing decisions. While the number of labourers increased more slowly, the intensity and productivity of their labour increased dramatically. This picture is again confirmed by Prota and Smith (2004:13): Notwithstanding their impressive growth rates, the mechanization variables had only a limited role in the overall growth, while labour, fertilizer and land showed the highest marginal returns.

Table 8. Change in TFP growth of the agricultural sector by region (percent)

Source: Prota and Smith (2004).

There are, however, physical limitations upon the intensity of labour. It cannot continue to rise indefinitely. Thus the declining TFP growth after 1991 reflects the waning of this once-off impact of the institutional reforms. The tendency for TFP to fall in the later decade (combined with the gradual decline in rates of output growth) is a signal that Vietnamese rice production needs to turn to new technologies in order to maintain the growth of productivity.

4.3 Structural change in agriculture, forestry and fisheries

Viet Nam's fisheries have been the fastest growing rural sector over the past two decades. Two different elements are at work here: On the one hand, there has been rapid development of the fish catching industry, shifting from small-scale coastal fishing to larger-scale deep-sea fishing, and on the other hand, extremely rapid development of aquaculture. The share of the fisheries in the GDP of the extended sector increased from 5.6 percent in 1986 to over 18 percent in 2003. The growth rates shown in Table 9 indicate that the acceleration in growth is very much linked to the reform process: From 1991 to 1995 the growth rate of the sector doubled compared with the previous five years.

Table 9. Average annual growth rates of agriculture, forestry and fisheries

Among the three subsectors, forestry's performance has been the most problematical and, as shown in Table 9, it has undergone large fluctuations in growth, while its longer-term growth rate has been much lower than in either agriculture or fisheries. Forestry policy has been beset by difficulties encountered in relation to resource management and enterprise organization. While fisheries and agriculture were able to switch rapidly to private ownership of land and fishing boats, the concept could less easily be applied to forestry. In agriculture and fisheries the focus has been on exploitation of natural resources; however there is tension in the forestry sector between exploitation and conservation and reforestation. The government has made strenuous efforts both to conserve natural forest and increase the land area under forest while also maintaining employment for those who live and work in forested areas. One method it has used has been to ban the export of raw logs and to encourage higher value-added manufacture of timber products. This policy has shown good results with exports of wooden articles growing by 40 percent per annum from 2000 to 2004: These items have become Viet Nam's third most important manufactured export category (after garments and footwear). Reforestation efforts have also borne some fruit; the area under forest cover reportedly expanded from 26 percent in 1990 to nearly 36 percent in 2002.

Uneven growth among the three sectors of agriculture, forestry and fisheries has thus brought about substantial change in the structure of the rural economy. While agriculture's share declined from 81 percent in 1986, to 77 percent in 2003 and forestry's share fell from 13.5 percent to only 5 percent, that of fisheries and aquaculture has expanded rapidly from 5.5 percent to 18 percent.

Regional changes in the structure of production have also played an important role in the Doi Moi era. Market forces have brought about an increasing tendency towards regional specialization, especially in non-rice cash crop production. The most rapid development for fisheries, for example has been in the Mekong Delta region and southern central coast. Also in the Mekong Delta, areas specializing in rice, fruit and poultry have appeared. Coffee and other perennial crops are concentrated in the Central Highlands; the southeastern region (to the north and east of Ho Chi Minh City) grows rubber, sugar cane, peanuts, cashew nuts and fruit; rice and vegetables are grown extensively in the Red River Delta; tea and timber in the northern highlands; livestock and aquatic products in the central coastal region (Goletti and Minot 1997). Among the major export crops, about 90 percent of rice comes from the Mekong Delta, 80 percent of coffee from the Central Highlands and 85 percent of rubber from the southeastern region.

The process of regional specialization allows the building up of better large-scale infrastructure such as the anti-flood irrigation project for rice production in the Mekong Delta. Commodity production in specialized areas also allows for more effective capital and technology investment and leads to the possibility of contract farming, linking producers to local processors and traders. Specialization also aids in the development of large-scale farming through land concentration. This has already happened in, for example, the Dong Thap Muoi-Long Xuyen Quadrangle, where farmers specializing in rice may cultivate dozens of hectares. In the northern mountains and Central Highlands, there are also commercial farms specializing in perennial crops, such as fruit trees, and cattle raising.

4.4 Structural transformation within agriculture

Within agricultural production, the share of cultivation declined from 80 percent in 1986 to 76 percent in 2002, while that of livestock production increased correspondingly.¹⁰ Despite the government's desire to “make animal husbandry the major subsector”, cultivation remains the dominant one. As people's incomes improved in the 1990s, and patterns of demand for food changed, animal husbandry began to grow rapidly. It has shown a consistent tendency to accelerated growth, achieving an annual average growth rate of 6.7 percent from 1997 to 2002, doubling its growth rate of 1986 to 1990. To become the “major subsector”, however, livestock production still has a long way to go: Its current share in agricultural GDP is about 13 percent. Agricultural services, which are also included in this sector, have grown in line with the sector as a whole, at 3.6 percent a year.

In the cultivation subsector in recent years, policy impacts have led to two development trends in relation to annual industrial crops. Import substitution policy plays an active role in maintaining and expanding the area of some short-term industrial crops that are inputs for processing industries, for example, sugar cane, cotton and tobacco. Other industrial crops, such as peanuts, mulberry, sedge, jute and cassava receive no support and their output fluctuates with changing market conditions. The former group is protected, being a burden on the budget, and has a high domestic price that adversely affects consumers. The latter group is more responsive to market signals and bears higher risks. We provide hereunder a comparison of the development of two of these crops - sugar, which experiences extensive politically motivated government intervention, and cassava, which does not.

Sugar cane and cassava: market driven versus government subsidy

In recent years, output of both cassava and sugar cane has risen rapidly. However, the reasons and outcomes of this growth are different between the two crops. Areas growing cassava and sugar cane are generally similar, mostly hilly and alluvial land. Cassava production receives no support from the government, and is driven by the market. Sugar cane production, on the other hand, has received large subsidies and protection from the government. Cassava production has grown significantly, generating jobs, improving farmers' incomes and contributing to the shift towards agricultural commercialization. By contrast, the livelihoods of cane growers have not improved as rapidly and many sugar refineries are loss-making, rendering state investment in them ineffective.

World demand for cassava has accelerated in recent years, while application of high-yielding varieties in Viet Nam has increased yields by 50 percent. From a low point in 1999, the area under cassava increased rapidly, from below 250 000 ha to 330 000 ha in 2002, while output rose from 2.2 to 4.1 million tonnes, further increasing to 5.5 million tonnes in 2004. Approximately 50 percent of cassava output is used in the production of starch, the remainder as cattle feed. From 1998 to 2003, cassava starch output increased from 130 to 500 000 tonnes, 70 percent of which was exported, mostly to China and Taiwan Province of China.

Cassava output and area in Viet Nam

Since the implementation of the one-million-tonnes-of-sugar programme, sugar cane production has also grown remarkably. From 1995 to 2002, industrially refined sugar output grew by an average of 33.9 percent annually, while hand-produced sugar production remained stable. At the same time, domestic demand for sugar rose at only 10 to 11 percent per year. The overall picture of the industry's development is rather gloomy. Sugar production is uncompetitive in quality, productivity and cost of production. The competitiveness of sugar is limited by subjective causes rather than objective ones: Factories have been wrongly located in relation to the main cane-growing areas, while politically motivated promotion of low-grade cane-growing regions has also contributed to stagnation in sugar cane cultivation.

Sugarcane production and transportation costs in Viet Nam, Thailand and India (US$/tonne)

Sources: ADB (2005) and ICARD (2004a).

4.5 Agricultural exports

Since Doi Moi, agricultural exports have contributed significantly to Viet Nam's overall economic performance. In 1995, exports accounted for 31 percent of agricultural GDP, rising to 35 percent in 2001 and 38 percent in 2003 (MARD 2004). Exported rice accounts for around 20 percent of total rice output annually. The figure for coffee is 95 percent, tea 60 percent and rubber 85 percent. The export value of agriculture, forestry and fishery products increases by an average of 15 percent annually and accounts for about 30 percent of total exports.

Table 10. Volumes of major agricultural exports ('000 tonnes)

Source: Planning Department, MARD (2005).

Table 11. Value of major agricultural exports (million US$)

Source: Planning Department, MARD (2005).

Rice, coffee, rubber, tea, cashew nuts and pepper are Viet Nam's major agricultural exports. Volumes of these goods exported in selected years are shown in Table 10, while values are shown in Table 11. The country is the world's second largest rice exporter and among the largest exporters of coffee. Growth rates in both the volume and value of agricultural exports have been remarkable over the past decade: Rice exports have doubled in volume, rubber exports have more than trebled, coffee exports have quadrupled, and tea and pepper exports have increased five-fold. In value terms, the growth has been less spectacular, particularly for coffee which has suffered from a large drop in the world market price since 1997. Only in the case of cashew nuts has the growth rate in value terms outstripped expansion of export volume.

Price reforms and increased global integration tended to favour agriculture during the early 1990s. As shown in Table 12, the ratio of the price of nitrogenous fertilizer relative to the paddy price tended to fall between 1990 and 2000. For agriculture as a whole, however, the benefits of price liberalization are not altogether clear. Given the importance of agricultural exports in Viet Nam's total export effort, the ratio of the price indices of food and foodstuff exports to raw material imports paints a somewhat different picture, indicating a declining trend in agriculture's terms of trade between 1995 and 2004 (Figure 12). Further, as shown in Figures 13 and 14, the prices of both rice and coffee, currently the two major export crops, have tended to decline since the mid-1990s.

Table 12. Nitrogen (from urea)/paddy price ratio

Source: Government Price Committee (2004).

Source: GSO.

Figure 12. Ratio of food and foodstuff export to raw material import price indices

Note: Generally, rice for domestic use is of better quality than rice for export and rice for export comes mainly from the highest productivity area, the Mekong River Delta. As a result the domestic rice price can be higher than the export price.

Sources: FAO (2005) and MARD (2004).

Figure 13. Rice prices, 1990–2003

Sources: FAO (2005) and MARD (2004).

Figure 14. Coffee prices, 1990–2003

At least in part, these price movements are themselves a consequence of the remarkable success of the economic reforms. Increasing output of both rice and coffee has made Viet Nam a major player in world export markets. The massive increase in supply, particularly of coffee, has contributed directly to falling world market prices. Thus while export volumes have grown, unit values have tended to decline while costs of production remain high.

Improving the quality of agricultural exports has helped to narrow the gap between Vietnamese export prices and those of other countries. When Viet Nam first began exporting rice, the price received was US$80–100 per tonne below that of high quality Thai rice. However, the gap has now declined to US$10–20/tonne. Moreover, while exports of Thai rice are mainly of perfumed rice to developed countries, Vietnamese exports cater to the less-demanding markets in developing countries of Southeast Asia (50 percent), the Middle East and Africa. In the case of coffee, the considerable gap between Viet Nam's export price and the world market price is accounted for by the fact that Viet Nam produces mainly lower-value Robusta coffee rather than the higher value Arabica.

There is thus considerable scope in the long run for improving the value of Vietnamese exports of both rice and coffee, by entering the market for higher quality varieties and by improving the quality of processing. These developments will require incentives to the private sector to invest in new varieties and technologies as well as better processing facilities in the main coffee and rice-growing areas.

Figure 15 presents a general picture of export destinations of Vietnamese agricultural products. The country currently trades with about 80 countries, some of them representing large markets and long-term partners. While Asia takes the largest share, there has been rapid growth in exports to the European Union and North America in recent years. The European Union is the largest market for coffee, taking over half of all exports. China is the biggest market for Vietnamese cashew nuts and rubber. Taiwan Province of China and Iraq normally each take 37 percent of tea exports. Most pepper goes to ASEAN members.

4.6 Competitiveness of the main agricultural commodities

The competitiveness of various commodities can be evaluated based on a number of indicators such as export volume and value, market share, output, yield, cost of production, export price, postharvest losses and technology. Domestic resource cost (DRC) is a good indicator of comparative advantage, measuring the ratio of value added from domestic, non-traded, output to the foreign exchange earned from domestic production. The numerator of the measure is the sum of value added by domestic activities valued at market or shadow prices, while the denominator is the border price less the value of tradable inputs. A DRC with a value greater than 1 implies that production is inefficient and that foreign exchange would be better saved by importing the product rather than producing the product domestically, while a DRC of less than 1 suggests competitive advantage and efficiency in production¹¹.

Source: General Customs Office (2005).

Figure 15. Export markets for Viet Nam's agricultural exports in 2003

Previous studies (Dang Kim Son 2005; Nguyen Ngoc Que 2003) have shown that Viet Nam is competitive in several agricultural commodities (Table 13). The DRC of rice ranges from 0.42 for improved summer-autumn rice to 0.66 for traditional winter-spring rice. In all cases, Viet Nam thus has a comparative advantage in rice. Coffee yield in Viet Nam is much higher than other countries. In 2004, average coffee yield in Viet Nam was 1.60 tonnes/ha, even 4–5 tonnes/ha in some regions, compared to 0.30–0.35 tonne/ha in Africa, Indonesia and Brazil, and about 0.8 tonne/ha in India. The advantages of cashew production in Viet Nam are reflected clearly by its DRC, averaging 0.3, although in 1999 it was as low as 0.204 due to rapidly rising prices.

In the case of pork, the high cost of animal feed as well as the small scale of production and environmental costs mean that meat production costs are relatively high. Viet Nam does not have a competitive advantage in pork production, as reflected in the high DRC shown in Table 13.

Table 13. Domestic resource cost of some agricultural commodities in Viet Nam in 1997

Based on analysis of DRCs, Dang Kim Son (2005) argues for the export potential of major agricultural commodities shown in Table 14.

Other products that have achieved some export success recently include forestry products, cupflower, and honey. In 2004, the export forestry products exceeded US$1 billion, about 95 percent of which was wooden articles. At present, however, the latter rely heavily on imported timber and other inputs, comprising about 60 percent of their export value. In coming years, however, the forestry sector will receive further support from the government, with reforms in forest allocation due to be released in the near future. Handicrafts are another product of rural Viet Nam that are also beginning to make progress, particularly those from northern Viet Nam's specialized handicraft villages. The market for these goods is potentially large and diversified.

Table 14. Export potential of key agricultural commodities

In terms of regional developments, Prota and Smith (2004: 13–14) examined the comparative advantage of agricultural production between the eight major geographical regions of the country. The invariant error component within a fixed effect model used in their analysis offered an estimation of regional comparative advantages in the agricultural sector. Fixed factors were interpreted as geographical differences across regions such as land quality, rainfall or general labour ability. Only the Red River Delta and the Mekong River Delta show marked comparative advantage in agriculture, while the figures for the southern central coast and southeastern regions showed a small comparative advantage. By contrast, the three mountainous regions and the northern central coast presented major disadvantages in agricultural production. These effects may differ when individual products are taken into account, but the implications are clearly that further development of exports in agricultural products will involve movement of people out of engagement in current agricultural occupations towards more productive ones across a wide swathe of the countryside.

There is insufficient research on the impact of domestic production of key agricultural inputs, such as fertilizer, on the competitiveness of agricultural products. Domestic production of chemical fertilizers has remained fairly steady at about 1.2 tonnes in recent years, providing about one-quarter of the total supply. However, the decision to become self-sufficient in urea production and the construction of two new plants are controversial, perhaps less so if oil and gas prices remain high.

4.7 Food security

In 1988, about 9.3 million people in 21 northern provinces were hungry, and 3.6 million were in a critical situation. In that year, Viet Nam had to import 1 995 000 tonnes of rice. However, food security at the national level was permanently achieved in 1989 immediately following the initial land reform (Figure 16) and net exports have overtaken the net imports of earlier decades (Figure 17).

By 2002, only 11 percent of the population lived below the food poverty line and fewer than 2 percent in urban areas. Regional distribution of food poverty, according to the three Viet Nam Living Standards Surveys (Table 15) shows continuing very high rates in the mountains of the northwest and in the Central Highlands. While these areas are relatively sparsely populated, the largest absolute numbers of the food poor reside in the densely populated north-central coastal region. In all, over half of Viet Nam's provinces (33) still have food poverty rates above 10 percent. It is a testimony to the unevenness of Viet Nam's recent development experience that food poverty is strongest in regions that actually produce food.

Source: GSO(2002).

Figure 16. Food output per capita, 1985–2002 (kg/head)

Source: GSO(2002).

Figure 17. Rice export and import, 1976–2002 ('000 tonnes)

Table 15. Food poverty rate by region (percent)

4.8 Household income and poverty alleviation

With regard to the goal of poverty alleviation more broadly defined, Viet Nam has also achieved international appreciation of its outcome. To many outsiders in the 1980s “Viet Nam was one of the poorest countries in the world and its prospects appeared bleak” (Glewwe et al. 1999). Since Doi Moi, however, the poverty headcount index, based on a poverty line of 2 000 calories per day plus an allowance for other goods, has decreased dramatically, from 75 percent in 1988 to 58 percent in 1993, 37 percent in 1998 and 29 percent in 2002 (Dollar 2002; CIEM 2004).

Interestingly, Dollar (2002) compared Viet Nam's poverty reduction with that of China and India. While both China and India experienced increasing inequality, Viet Nam maintained a relatively low Gini coefficient (0.35) between the first two national living standard surveys in 1992 and 1998. While Viet Nam's rate of poverty reduction has been similar to that of China, the latter has had a higher growth rate (Dollar 2002). In some ways, Viet Nam's poverty reduction has been even more impressive: Using a poverty line of US$1 per day at PPP, only 13.4 percent of Viet Nam's population lives below it, compared to 14.6 percent in the Philippines, 16.1 percent in China and 34.7 percent in India.¹²

Again, however, poverty reduction has not been even. The size of the rural-urban gap in Viet Nam is reflected in Figure 18 showing average rural and urban household income and expenditure at the time of the three surveys. While the gap widened noticeably between the first two surveys, there appears to have been little change between the second and third.

Source: GSO(2002).

Figure 18. Urban and rural expenditure and income, 1993–2002

Within the rural areas, agriculture remains the most important source of income (Figures 4 and 5). The slow pace of rural diversification and development shows up particularly in the ethnic minority dominated areas of the Central Highlands, northeast and northwest, where, in 2001, the share of agriculture in total income of households was 97, 82 and 74 percent respectively. In the Central Highlands, households had the most rapid growth in incomes from 1993 to 1998, when coffee production was expanding, followed by negative growth from 1998 to 2002 as coffee prices collapsed (Table 16). The two northern mountain regions, however, experienced growth in average per capita incomes over both periods. In-migration of poor households might also have contributed to negative growth rates in per capita expenditure in the Central Highlands and in the southeastern region near Ho Chi Minh City from 1998 to 2002.

Table 16. Changes in per capita incomes for rural households

Source: Fan and Rao (2003).

In terms of the national poverty line, regional differences are also apparent. In 2002, as Table 17 shows, poverty rates were particularly high in the northwestern highlands, the northern central coast and the Central Highlands. The final column also shows that these are the regions in which poverty has declined very slowly compared to other areas of the country. It is worth re-iterating here that, as with food poverty, the north-central coastal region contains the largest absolute number of poor people. It would be a useful exercise to calculate the poverty gap and poverty severity indices, but at the time of writing we lack the necessary data.

Table 17. Poverty rates of regions

A noteworthy feature of Viet Nam's poverty reduction over the past decade is that the biggest gains were made from 1993 to 1990 and the rate of reduction has slowed down, despite continued high growth rates of the national economy.¹³ A clear implication of this fact is that new ways to accelerate poverty reduction in the rural areas will need to be found. Moreover, one of the major themes running through this research is that the kind of measures needed to stimulate renewed growth in agriculture will involve an increase in the rate of people leaving the sector. Regions that have a high percentage of non-farm waged labour also tend to have higher rates of poverty reduction - the Red River and the southeastern region have 35 percent and 45 percent respectively of households reporting their main source of income as waged labour (World Bank 2005: 25). Incomes of households involved in non-farm activities are, according to Nguyen (2005), often 2 to 5 times higher than those of farm households.

It is important to note, however, that not all waged labour is poverty reducing. In the southeastern region, for example, nearly 20 percent of those in the lowest income quintile, depend on non-farm waged employment as their main source of income and the story is similar in the Red River Delta (World Bank 2005: 25–6). Non-farm waged employment is often seasonal casual work, frequently at a considerable distance from home, and reflects the relatively high levels of underemployment in agriculture. While this type of employment can produce more income than farming, it is generally an income that is too low and unstable for people to consider abandoning farming altogether. Women are more likely to be engaged in this type of waged labour than men.

Table 18 shows that there has been relatively little change in the proportion of off-farm households. In fact the annual rate of increase over the period was only 1.8 percent. However, increases, both absolutely and relatively, have occurred in the northern highlands, the Red River Delta and the north-central coastal region. Other areas have experienced declining numbers, although in the south-central coastal area the proportion has remained fairly stable. The Red River Delta has shown the sharpest increase in both numbers and share of off-farm households, indicating rural diversification is proceeding quite quickly, though from a very low base. A possible reason for this development is a recent upsurge in the growth of traditional manufacturing villages in the area, somewhat akin to the earlier emergence of township and village enterprises in China. In the Mekong Delta and the southeastern region, on the other hand, a possible reason for the decline in off-farm households is out-migration to urban areas. In contrast to the northern case, this would indicate a sharpening of the urban-rural divide, with rural areas becoming more specialized in agriculture.

Table 18. Number of off-farm households and ratio of off-farm households to total rural households

Source: MARD (2004).

Government attention, and that of donors, has also been drawn to the development of off-farm employment opportunities in the rural areas. An early attempt was a decision by the Prime Minister in 1992, but in more recent times there have been two further initiatives, a Decree in November 2000 and a further one in June 2004 aiming to provide incentives for the development of off-farm production and services. A number of donors have also begun programmes targeting such activities.

Nevertheless, opportunities remain limited. Generally speaking, the better educated and more skilled sections of the population and those who have access to social networks beyond the village are those who are able to leave farming on a permanent basis. They tend to come from the more prosperous strata - precisely the group that could contribute most to the rapid development of the rural economy. Meanwhile, the poor, who by definition lack many of these resources, remain in the village. Within this group, women, ethnic minorities and disabled persons are particularly disadvantaged. An evaluation of some credit projects for poor women, carried out in the 1990s, found that the outcomes would have been more effective if the women had been able simultaneously to take advantage of vocational training, to develop their technical and management skills. As is suggested by the data in Table 18, the preferred option of many of those who are able to leave farming is to move to the cities. In the medium term, given the lower growth rate and income levels in agriculture, the gap between urban and rural incomes is likely to continue to widen.

5. Conclusions and lessons learned

5.1 Challenges in the new stage of development

Both the Vietnamese economy as a whole and agriculture in particular have demonstrated a remarkable response to the economic reforms of the 1980s and afterwards. The link between reform and growth in the extended agriculture sector (including forestry and fisheries) shows up very clearly in all the data that we have examined in this paper. Agriculture and fisheries surged ahead immediately following implementation of the reforms, while the forestry sector, so far the least amenable to reform, tended to stagnate. Not only has agriculture grown rapidly, it has also underpinned the success of the rest of the economy, providing the main source of growth and employment creation during the years of industrial downturn.

Since the end of the last century, however, a number of new challenges for the rural economy have appeared. While other sectors continue to develop rapidly and the pattern of structural change, characteristic of developing economies - the shift from agricultural to industrial dominance - has appeared, output and productivity growth in agriculture have begun to slow. At the same time, expansion of off-farm employment opportunities has not kept pace with the growth of the rural population and labour force. The high concentration of economic growth in urban areas has slowed the rate of poverty reduction in the countryside, widening the urban-rural gap and encouraging out-migration of precisely that section of the rural population that could contribute most to rural development.

We have seen also, that the sheer pace of economic development has created material challenges for the rural sector. Demand for natural resources has accelerated, leading to degradation and long-term social costs in some areas. Rapid industrialization and urbanization has placed pressure on clean water resources, farming and forest land (including mangroves), leading to rapid price changes and tensions over compensation to farmers. Both public and private costs of boosting agricultural production are likely to increase in future.

At the same time increasing world market integration has produced further challenges. Viet Nam entered this market as a low cost producer, using low levels of technology and capital and scarce land resources, relative to labour. Despite high levels of competition for its agricultural exports in world markets, it has succeeded in becoming a major exporter of goods such as coffee, rice and aquatic products. The quality of exported goods has improved. However, the sudden emergence of Viet Nam as a large-scale exporter of certain agricultural products (notably rice and coffee) has also led to reduced world market prices, squeezing profit margins for farmers and others involved in this trade. Despite increased international pressure towards global free trade in the 1990s, Western protection levels on agricultural commodities have scarcely fallen, while technical barriers to entry have often increased. Rising domestic demand for increasingly diverse food consumption leads to growth of food imports and places competitive pressure on domestic production that has hitherto formed an important part of Vietnamese farmers' livelihoods. The example of pork cited in Section 4.6 is a case in point.

In any country, the success of economic reforms can induce complacency among policy-makers. A kind of stop-go policy environment can emerge in which, when things are going well, the pace of reform slows, only to increase when a new crisis or bottleneck emerges. The story of the Vietnamese reform process also contains this element: From 1979 to 1981 reforms were stepped up in the face of numerous crises in the late 1970s; from 1988 to 1990 the pace was again increased following the hyperinflation of the mid-1980s; from 1999 to 2001 another phase of reform helped to create the conditions for recovery from the slowdown induced by the Asian crisis and reduced levels of foreign investment. While government plans have also paid more attention to the challenges faced by the rural economy in recent years, the evidence of this paper suggests that more urgent attention is needed. There is an opportunity to address these challenges before any crisis emerges.

5.2 Nine lessons from Viet Nam's reform experience

Bearing these new challenges in mind, what are the lessons learned from Viet Nam's experience that could be used as a guide, not only for further policy reforms, but for other countries undergoing a similar process of liberalization?

1. The revival of the household sector of the economy seems to have been a crucial development. As inefficient and heavily subsidized industrial and service sector enterprises were dissolved and restructured, they shed large amounts of labour that was fairly rapidly absorbed by the household sector (not only in agriculture, but also in service provision). While to some extent this reversion to household production created a sort of “de-modernization” process, it simultaneously raised the productivity of labour so that disposable incomes rose across the board. Moreover, the growth effect was achieved not through increased investment, but through institutional reorganization - thereby reducing the costs of restructuring and enabling necessary macroeconomic adjustments such as reducing the previously large budget deficit. In capital-scarce countries, considerable gains can be made through such institutional change in the early stages of reform.

2. The increase in labour productivity achieved via institutional change generates a one-time effect. We showed, in Sections 4.1 and 4.2, that increased intensity of farming practices, especially from 1985 to 1990 produced the largest increases in agricultural productivity. While extensive development of land inputs accounted for some of the growth, land area per farmer diminished and yields per hectare increased. The major causes of productivity growth were increased application of fertilizer and more intense application of labour. Since 1990, however, the contribution of TFP to growth in agriculture has diminished suggesting that at current levels of technology the limits to growth via further application of land, labour and fertilizer have been reached.

3. Under the impact of reforms, Viet Nam has become a major supplier of agricultural commodities, particularly rice and coffee, to the world market. Notably, however, export success has been linked to market-driven development of these crops: As we showed in the case of sugar, government intervention in the form of planned specialization zones has negative effects on productivity and competitiveness. The very process of succeeding has, on the other hand, generated falling world market prices, squeezing the profitability of farm, processing and distribution activities within the coffee and rice value chains. Given that Viet Nam currently fills a market niche for lower quality products, there are opportunities to obtain further gains through moving into higher quality products. Improved technologies in both farming and downstream activities are needed if the growth in export markets is to be maintained. Public intervention needs to take its cue from the market, assisting farmers to gain access to the information and resources needed to take advantage of these opportunities and stabilize their incomes.

4. The technological level of Vietnamese farming remains highly labour-intensive. High-yielding varieties account for only 35 percent of the cultivated area and use of machinery, although growing rapidly, remains low in many areas. There is thus considerable scope for the application of new technologies in agriculture. Viet Nam already has a quite well-developed scientific research infrastructure, although it has been starved of funds in the postreform period and needs reviving. However, extension services to farmers are not well-developed. We noted in Section 3.3 that the cooperatives, which are largely responsible for extension services, frequently have a bureaucratic approach and are not well-adapted to meet farmers' demands. Continued reform of cooperatives, to make them more business-oriented, as well as encouragement of the private sector in this field would appear to be essential to achieve better diffusion of new technologies to the agricultural sector. Technology diffusion needs to be seen less as a top-down transfer and more as an economic process involving responses to real market demand, in which diffusion agents work closely with farmers to get the technology mix right. A corollary of a more demand-driven approach to agricultural extension is that the research effort itself should be more closely adapted to the diverse needs of localities.

5. Although the initial stages of reform involved an egalitarian land reform that provided a crucial safety net for the rural population, the limitations to continuing down this road are now starting to appear. Land fragmentation and land shortage are important issues for most Vietnamese farmers. At the same time, the success of market-oriented reforms has begun to produce a new stratum of profit-oriented commercial farmers. The latter is characterized by its above-average farm size and better access to resources such as credit and more advanced technologies. This is a development that needs to be encouraged. As it is an option that will not be available to many farm households, however, it is very important that the trend towards land consolidation and large farm size represented by commercial farms is offset by policies to develop alternative employment options for those who will eventually leave farming altogether.

6. Since the mid-1990s the drift away from agriculture has begun to accelerate. In the southern part of the country this move is apparently accompanied by growth in out-migration to the cities, while in the Red River Delta it has been accompanied by greater rural diversification. More research needs to be carried out on the employment status of rural-urban migrants to see whether Viet Nam is managing to avoid the problems, experienced earlier in many of its Southeast Asian neighbours, of too-rapid growth of mega-cities with overstrained urban infrastructure and sprawling slums full of unemployed and underemployed workers. In addition, too great a division between urban and rural societies increases relative rural poverty insofar as the kinds of infrastructure and social, cultural and economic services available to urban residents are not available to their rural counterparts. Diversification within the rural economy would seem to be a preferable option.

7. Poverty eradication proceeds faster in urban areas and in the increase of off-farm activities than in the countryside and in farming. Average farm sizes in Viet Nam are clearly well below the optimal size, even for small-scale household farms, as is shown by the emergence of prosperous commercial farms whose average size is 12 times greater than the national average. While some of this difference can be accounted for by differences in cropping patterns and soil characteristics, there remains plenty of scope for raising agricultural prosperity by making more land available to farmers who have the resources and skills to survive in an increasingly competitive environment. Any increase in farm size will need, however, to be offset by provision of alternative employment that is sufficiently well-remunerated to induce people to give up their farmland altogether. Such employment is far more likely to be generated by domestic private enterprises than by any other sector.

8. Although the nature of Viet Nam's institutional reform has enabled the maintenance of a relatively equal distribution of income, inequality has nonetheless risen. It is most pronounced between urban and rural areas, though differences within the rural areas are also marked. Food insecurity persists at rather high levels in the two highland regions (north and central) and in the north-central coastal region, while it is almost non-existent in the cities. People living in the former areas could potentially improve their situation by switching from food production to more remunerative cash crops or non-farm work and buying food elsewhere. However, they currently lack the resources to be able to do so. This situation partly results from the pattern of infrastructure development over the reform period which has tended to favour long distance and transport, storage and communications requirements over local development, and the urban sector over the rural. It results partly from poor education and health facilities and lack of access to sources of market information and knowledge about how to take advantage of entrepreneurial opportunities. The poor usually also lack access to the social networks through which they could learn about such opportunities. Careful targeting of public investment in these areas could have major benefits at a relatively low cost.

Finally, gradualism was successful as a reform strategy. Viet Nam's reform experience has been long and cautiously implemented. It has proceeded in a way that, although producing considerable confusion and suffering in the mid-1980s, ultimately created the right conditions for a booming market economy and rapid rates of poverty reduction. Initiating agricultural reform both sustained economic growth through difficult industrial restructuring and provided the population with an important source of employment and income security. However, since the transformation of agricultural institutions was largely achieved from 1981 to 1993, reforms have tended to focus on other sectors. The very rapid growth of recent years has led to new problems, outlined in Section 5.1, that require more urgent attention. The country now appears to have reached a new turning point: A renewed focus on rural development and institution building and a new emphasis on technological changes in agriculture are needed in order to maintain and continue the gains of the past.

Appendix

A.1 Summary of major policies and events

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⁷ From 1995 to 1997 investment by the non-state sector (including FDI) amounted to an annual average of 53.2 percent of the total investment effort. FDI fell, however, during and after the Asian crisis. While domestic private investment slightly increased its share from 1998 to 2002, the government supplied the majority of investment (57 percent on average). Only 16 percent of state investment was carried out by the SEs themselves over the eight-year period, the proportion of investment funds supplied from bank credit (chiefly short-term loans to cover working capital) rose from 20 to 30 percent, while the majority of public investment was in infrastructure and other developments (Beresford 2006).

⁸ Some of the differences are accounted for by the nature of production in the larger SEs (e.g. electricity generation is highly capital-intensive). TFP growth rates in the domestic private and SE sectors are not noticeably different World Bank (2005: 24).

⁹ Under Vietnamese conditions of highly labour-intensive production, however, the expansion of farm size needs to be carefully considered. Evidence from other countries shows that optimal farm size depends largely on the need to be able to sustain the productivity of labour at a given level of technology. In labour-intensive production systems, the use of waged labour - whose income does not depend on its productivity - on a large area can reduce labour productivity due to supervision constraints.

¹⁰ In Viet Nam, agriculture (meaning crop cultivation) and livestock production are included together within the agriculture sector. The reason for this inclusion is the close connection between the two. There are few farms that do not combine these two activities and outputs from both have historically been used as inputs for the other.

¹¹ Formally, the DRC of commodity i is defined as , where j=1…kare traded inputs, j=k+1…n are domestic resources and/or non-traded inputs, p* is the shadow price of domestic resources and non-traded inputs, p_i^b is the border price of traded output calculated at the shadow exchange rate and p_j^b is the border price of the traded input at the shadow exchange rate.

¹² World Bank, Vietnam development report 2002: Poverty, Hanoi, 2004.

¹³ The authors are aware of a recent study using VLSS data which concluded that poverty reduction had improved from 1998 to 2002. However, the study has not yet been published.