3. Conclusion: Three cross-cutting constraints to sustainable development in Viet Nam

Abstract

The multi-dimensional analysis identifies numerous constraints on development that span the economy, society, government and the environment in Viet Nam. By mapping these constraints to cross-cutting development challenges, three areas of policy with strategic importance emerge. First, Viet Nam needs to develop a more integrated, transparent and sustainable economy. Second, Viet Nam will need to upgrade its capabilities for financing its development. Third, Viet Nam needs to chart a path towards building the government and regulatory capabilities necessary for sustainable development.

    

In summary, the multi-dimensional analysis identifies numerous constraints on development that span the economy, society, government and the environment in Viet Nam (Figure ‎3.1). Mapping these constraints points to three cross-cutting development challenges (Figure ‎3.2) that Viet Nam needs to address to ensure sustainability and continued growth.

Figure ‎3.1. Constraints to sustainable development in Viet Nam

Source: Multi-dimensional constraints analysis in this document.

First, Viet Nam needs to develop a more integrated, transparent and sustainable economy. The current use of natural resources is too inefficient as the high share of emissions, waste and pollution per unit of GDP attests. The same is true for many investments as the low productivity growth and high ICOR in the state sector attest. Despite Viet Nam’s fast growth and transformation, the shares in the economy of the state sector, the FDI sector and the domestic private sector have hardly moved over the last decade. The same is true for the productivity differentials between these sectors. To put Viet Nam’s economic development on a more sustainable path, investments must be channelled to the most productive activities. At the same time, Viet Nam should aim to build on its integration in global value chains to develop activities with higher productivity through upgrading and more integration between foreign and domestic firms.

This requires more transparency and a level playing field for everyone, large and small, private and public, foreign and Vietnamese. For state controlled actors it means heeding the lesson of the most successful countries in the region, namely that success depends on rewarding performance and sanctioning under-performance. For the many private firms in the formal and household business sector it means better access to finance and a more transparent and predictable institutional framework in which to do business. Human capital will moreover be key given the fast pace of global technological change. Primary education in Viet Nam is excellent, but more must be done to ensure the future labour force will have the right skills.

Figure ‎3.2. Three challenges to sustainable development in Viet Nam

Second, Viet Nam will need to upgrade its capabilities for financing its development. The upcoming demographic change towards an older society and the need to move to a model of economic development that is more sustainable and productive, imply enormous needs for investment and expenditure. While Viet Nam’s current fiscal situation is stable, its capabilities of managing expenditure and collecting revenue need to grow. At the macro level, the current expenditure path suggests that the debt ceiling will be reached in four years’ time, with growth staying at its current high level. At the management level, weaknesses in fiscal co-ordination between central and provincial governments and incentives that are not fully aligned with sustainable and inclusive growth must be addressed. On the revenue side, Viet Nam remains far behind what should be possible to mobilise in taxes. This is an issue of the tax structure, as much as of the way taxes are collected and inspected. More fundamentally, raising more taxes requires a social contract that includes taxes as the contribution citizens willingly pay in return for services and participation. Future proofing social protection services, especially health and pensions for the looming shift in needs and expectations vis-à-vis the state will be one crucial element of ensuring such a social contract.

Third, Viet Nam needs to chart a path towards building the government and regulatory capabilities necessary for sustainable development. In all areas of this assessment government management, co-ordination and regulation have come up as constraints. The public payroll is large, but capacity is limited. Gift-giving in return for favours persists and has negative consequences for civil service quality, investment efficiency and the ability of government to regulate, collect and inspect taxes and enforce norms. Many policy areas require better co-ordination between various levels of government. This is the case for health and pensions, but also for urban development and the environment. Mobilising private investment will need transparency and predictability of rules and rights. Predictability and trust in turn require the ability of the state to commit credibly to rules and rights. To this end, checks and balances such as a more independent judiciary, a stronger separation of regulators and managers, and more opportunities for citizens to participate in rule-making and monitoring would be important.