PART III
Policy reform and the transformation of Vietnamese agriculture

Dang Kim Son
Nguyen Ngoc Que
Pham Quang Dieu
Truong Thi Thu Trang
(IPSARD - MARD, Viet Nam)

and

Melanie Beresford
(Macquarie University, Australia)

Abbreviations and acronyms

Executive summary

Viet Nam's reform process began in the early 1980s in response to a series of crises that occurred during the early postwar years. It began as a complex process of interactions between grassroots adaptations to economic difficulties and government efforts to manage the process of change. The success of market-oriented changes together with continued bottlenecks in the planning system, led to the promulgation of Doi Moi (Renovation) in 1986. This was followed by a series of reforms that effectively ended the system of resource allocation through central planning by 1989. Reforms since 1990 have therefore been aimed at adjusting the institutional and regulatory framework in order to ensure that markets can function well.

These reforms have achieved remarkable success. Not only has Viet Nam been one of the world's fastest growing economies in the past 15 years (averaging over 7 percent per annum GDP growth), it has made great strides towards eliminating poverty, achieved national food security and become a major exporter of agricultural commodities.

The major reforms affecting agricultural production in the early phase after 1986 were Resolution 10 of the Politburo (1988), which allocated collective land to individual farm households on a long-term basis, and the price reforms of 1989, which liberalized all prices, including interest rates and the foreign exchange rate. The cooperatives lost the dominant role they had played under central planning and many simply disappeared. By reconnecting farmers with the land, giving them reasonable security of tenure and enabling them to trade at market prices, these reforms ensured that farmers could both achieve an adequate return for their investment and work in farm activities. Together with the low capital requirements of agricultural production, this made it possible for agriculture to take off straight away. Industry, which had been heavily subsidized under central planning, has had to go through a much longer and more difficult transition. Agriculture was able to absorb labour displaced by industrial restructuring and sustain overall growth of the economy until industry recovered.

After 1990 the achievement of macroeconomic stability, closure of the gap between nominal and real exchange rates, liberalization of the foreign trade regime, reform of the banking system and the emergence of a vibrant private enterprise sector further stimulated agricultural production and enabled increased exports. Bank reform and gradual financial consolidation permitted farmers to obtain investment credit to expand their activities.

A particularly important reform was the 1993 Land Law which increased security of tenure and allowed transfer of land-use rights to others. In addition, during the 1990s, tax reform improved the situation of farmers while reform of cooperatives, many of which had survived the transition in one form or another, was aimed at making them more business-oriented and responsive to farmers' needs.

As a result of the reforms, the household is now the main stakeholder in agriculture with almost 14 million households deriving 79 percent of their income from farming. While some diversification of occupations has taken place, this development has been slow. The egalitarian nature of the land reform created a social safety net, guaranteeing livelihoods for the rural population. However, its egalitarian nature has inhibited the development of a land market in many areas and this presents new challenges to the further development of the rural economy. Land fragmentation is generalized and opportunities for consolidation of plots and extension of farm size are limited, while more remunerative off-farm employment opportunities remain insufficient. While output growth has benefited from more intensive use of labour and other inputs, shortage of capital is experienced by 90 percent of households.

Nevertheless, a new stratum of commercial farmers has emerged and a much larger group of prosperous farmers has the capacity to join their ranks. Many middle-level and poor farmers are, however, less likely to make the grade and most will need to leave agriculture in the coming decades. Increasing competition in farming is driving this change.

There were 110 832 registered commercial farms by 2004. While not large by more developed country standards, their land area is, on average, 12 times the national average farm size and they have access to more credit and other resources. Though they are presently concentrated in the southern region, the rest of the country is starting to catch up.

Cooperatives have the potential to play an important role in providing services to farmers, especially those with potential to develop into commercial farming ventures, and the government has made an effort to reform them into more business-oriented entities compared with their previous bureaucratic roles. So far this development has been uneven and while many new start-up cooperatives appear each year, many of them also fail.

Emergence of the private enterprise sector since the reforms has also been an important development. This sector is making rapid gains in terms of both its contribution to output growth and its growing freedom from the restrictions placed on it under central planning. While state enterprises continue to dominate the export of rice, for example, private sector firms are crucial in distribution, processing, packaging and transport of agricultural products. Currently most private enterprises are small and medium enterprises (SMEs) with, as yet, weakly developed expertise and linkages in export markets.

The policy reforms of Doi Moi have therefore had a major impact on the institutional framework governing agriculture, both at the macroeconomic and microeconomic levels. These reforms are clearly the major driving force accounting for Viet Nam's outstanding economic performance in the past two decades. While household-based agriculture and services provided the main contribution to growth from 1988 to 1990, the industrial sector has since recovered and is growing generally at over 10 percent per annum, while agriculture has generally grown at about 4 percent per annum. Only the Asian crisis of 1998 to 1999 has interrupted this pattern. The process of shifting from agricultural dominance to industrial dominance, which is characteristic of the development process, has begun to emerge, especially since the mid-1990s.

Within the rural sector, structural change has proceeded rather more slowly. In particular, the average annual growth rate of agriculture has tended to slow down since 1995, while rural industrialization and diversification have yet to take off. Although the proportion of agricultural workers has diminished, land area per worker is also diminishing, although both continue to increase in absolute terms. Increases in output have come mainly from the application of more land, labour and inputs (especially fertilizer use per hectare, which has trebled in 20 years).

The expansion of fisheries (including aquaculture) has provided the main contribution to rural structural change during the reform period. Its share has expanded from 5.6 to 18 percent of the GDP within the agriculture, forestry and fisheries sectors. Forestry, which has proved less amenable to reform to date, has contributed a rapidly declining proportion (from 13 to 5 percent). There have also been significant regional changes in structure as commercialization proceeds, with the development of specialized regions that (except in the Mekong and Red River deltas) focus less on rice production and more on cash crops, aquaculture and livestock. These zones tend to be more successful where they emerge from market forces rather than government planning.

Not only has agriculture underpinned the growth of the economy during the years of structural adjustment in industry, it has also contributed significantly to Viet Nam's emergence as a major exporter of agricultural commodities, notably rice and coffee. Agricultural goods accounted for 38 percent of exports in 2003, a proportion that has increased steadily since the mid-1990s.

Price reforms and increased global integration tended to favour agriculture during the early 1990s, however the terms of trade moved in an adverse direction between 1995 and 2004. This reversal is at least partly the result of success: Viet Nam's increasing supply to the world market has contributed directly to falling world market prices. There is considerable scope, by improving the quality and processing standards of Vietnamese products, to gain further market share - particularly in more demanding Western markets - and continuing to improve the value of agricultural exports.

Analysis of domestic resource costs of Vietnamese agricultural products shows that the country retains a competitive advantage in its major export crops; however some products, such as pork, which are widely produced by Vietnamese farmers, are uncompetitive. New policies, which will either help them to become competitive or shift to imports of those products are warranted.

By 1989, Viet Nam had not only begun to export rice, but had also achieved national level food security. Rice is the most important crop in the country and still accounts for half of the agricultural GDP (excluding forestry and fisheries). However, measurement of total factor productivity (TFP) in rice production shows that the largest gains came during the early reform period (1985–1990). Since then TFP has tended to decline. We surmise that the high level of TFP during the early period resulted not simply from increased inputs of labour, but from the increased intensity with which that labour was applied. In other words the quality of the labour improved dramatically. It appears that these gains are now reaching their limits and future growth in the rice sector will need to come from technological change.

Further, although there have been dramatic improvements in food security, the process has been uneven. Eleven percent of the rural population remains food-poor, compared to less than 2 percent in urban areas. The highest rates of food poverty are in the more remote, mountainous areas, while the largest absolute numbers are in the densely populated north-central coast region.

This pattern is also reflected in the distribution of poverty. Dramatic reduction, from 58 percent in 1993, to 29 percent in 2002, has been accompanied by a widening urban-rural gap and uneven distribution across the country. Income diversification, which presents the best possibilities for many farmers to obtain higher incomes, has proceeded only slowly while, due to the collapse of coffee prices and out-migration, the per capita incomes of some regions actually fell from 1998 to 2002.

At the same time, there has been relatively little change in the proportion of off-farm households in the rural areas. Only in the Red River Delta has both the number and proportion of off-farm households increased rapidly - suggesting that rural diversification there is starting to take off. In the wealthier southern region (Mekong Delta and the southeast) the numbers have declined, suggesting that out-migration to the cities is depleting the countryside of the kind of industries and services that are needed for sustaining rural prosperity.

In conclusion, the report argues that both the Vietnamese economy as a whole and agriculture in particular have demonstrated a remarkable response to the economic reforms introduced from the 1980s onwards. Not only has agriculture grown rapidly, it has also underpinned the success of the rest of the economy. Since the end of the last century, however, a number of new challenges has emerged: While industrial development has taken off, output and productivity in agriculture have begun to decelerate; expansion of off-farm employment opportunities has not kept pace with growth in the rural population and the labour force; poverty reduction is slower in rural than urban areas; pressure on land and other natural resources has increased; agriculture has experienced declining terms of trade for its main export commodities and the main sources of productivity growth in the post-reform period seem to be running out of steam. Now is the time to address these challenges before any new crisis emerges.

The major lessons are:

• Revival of the household sector was a crucial element in the success of the reforms. The growth effect was achieved, not through increased investment, but through institutional reorganization that raised the productivity of labour, reduced the costs of restructuring and enabled necessary macroeconomic adjustments (reduction in the budget deficit) without leading to economic collapse.

• The institutional changes led to a one-time effect of increased intensity in application of labour and inputs. Further growth from these sources appears limited.

• The very process of export success has generated falling world market prices. Given that Viet Nam currently fills a market niche for lower quality products, there is scope to obtain further gains through moving to higher quality products. However, public intervention needs to be more responsive to market cues and move further away from planning and import substitution.

• The technological level of Vietnamese farming remains labour-intensive and there is considerable scope for improvement through use of new technologies. Extension services, particularly those provided by cooperatives, can be enhanced through adoption of practices more closely linked to farmers' market needs.

• The egalitarian land reform provided a crucial safety net for the rural population and aided agricultural growth. If commercial farming is to continue to develop, however, land consolidation and larger farms will be needed. These trends should be offset by policies to develop alternative employment for those who will eventually leave farming.

• As the drift away from agriculture has begun to accelerate, two trends are developing. One is towards rural diversification, the other towards out-migration to the cities. Narrowing of the urban-rural income gap will depend on how policy addresses this issue.

• Poverty eradication proceeds faster in urban areas than in rural areas, due in part to the scarcity of land. To reach optimal farm size, many people will need to move out of agriculture into off-farm employment that is sufficiently remunerative to induce them to give up their farmland altogether.

• Although Viet Nam's institutional reforms have been relatively egalitarian, income inequality has nevertheless risen. Food insecurity persists at rather high levels in some areas where farmers are unable to shift to more productive activities due to lack of resources. Careful targeting of public investment in these areas could have major benefits at relatively low cost.

• The gradualism of Viet Nam's reform process has been one of the factors in its success. However, within this framework, the country now appears to have reached a new turning point in which a renewed focus on rural development and institution building is needed in order to maintain and continue the gains of the past.

1. Introduction

The story of Viet Nam's highly successful transition to a market economy is a complex one of interaction between external shocks, grassroots adaptations and policy initiatives. For a decade after national unification in 1976, the economy passed through a number of crises provoked by overambitious central planning, large reductions in external aid and an unstable external environment (notably the outbreak of war with Democratic Kampuchea and with China). In such a context the process of transition to a market economy began in the late 1970s with central recognition that local experimentation with market-style reforms was useful in overcoming chronic, and sometimes acute, supply shortages. Between 1979 and 1986 the government responded hesitantly, legalizing some reforms, but at the same time attempting to restrict their scope and maintain key elements of central planning.

Gradual marketization during the 1980s was largely successful in generating growth in output. At the same time, however, a two-tier price system had developed in the context of goods scarcity that aggravated inflationary pressures. Goods were increasingly diverted from fixed-price central planning channels to the free market where they could be traded at higher prices. Repeated attempts to equalize planned and market prices proved fruitless as the process of issuing new official prices continually lagged behind the rise in market prices. As early as 1984 Viet Nam was beginning to experience hyperinflation. Amid these tumultuous economic conditions, the Vietnamese Communist Party responded by declaring the need for comprehensive reform, known as Doi Moi (Renovation). The 6^thParty Congress in 1986 laid down the basis for a series of policy changes that were implemented in succeeding years, abolishing central planning and resulting in the market economy that Viet Nam has today.

While the period of Doi Moi has generally witnessed remarkable success, its early stages were beset by difficulties. The former Soviet Union - Viet Nam's previously reliable aid donor - had begun its own process of economic and political transformation which was to lead to the eventual termination of aid in 1991. Other hitherto important trading partners and sources of technical assistance in Eastern Europe underwent similar upheavals. The United States continued its embargo on trade until 1994 and other Western aid was not resumed until 1992. Moreover, the changes took place in a context of major macroeconomic imbalances - the balance of trade and the state budget were in deficit, inflation did not wholly abate until 1992 and the early restructuring of industry produced a sharp increase in unemployment.¹

The agricultural sector was better positioned than industry to absorb many of these shocks - largely because it relied less heavily on imported inputs and government subsidies. The progressive dismantling of central planning during the 1980s also gave it an early advantage. Some of the major rice-producing provinces had effectively abolished the official price system for agricultural goods as early as the late 1970s and, while urban populations suffered severely from inflation during the 1980s, farmers were somewhat insulated by their ability to retain produce for own-consumption. Nevertheless the overall macroenvironment tended to restrict output growth, especially during the mid-1980s when rapid inflation in input prices led to stagnation in output growth. After 1988, however, when collective farming was effectively abolished and prices began to stabilize, agricultural output growth has been strongly sustained.

Table 1 illustrates some of these points and presents some of the key indicators of Viet Nam's successful performance in recent decades. Although the data are presented as five-year averages and therefore disguise some of the key changes, some important features are nevertheless highlighted:

Table 1. Five-year averages of key economic indicators

n.a.: Not available due to different system of accounting or different price index. Values and rates of growth use 1994 constant prices except for growth rates in agricultural output for 1980–1985 which are in 1982 constant prices.

* 1986–1989.

Source: GSO, Statistical Yearbooks.

• First, the growth rate of agricultural output demonstrates the very positive recovery from the crises of the late 1970s induced by the earliest stage of reform from 1979 to 1981. The high growth rates of the early 1980s were followed by relative stagnation. Per capita cereal production fell slightly, until 1989 when the next round of reforms started.

• Second, the data show how the high GDP growth of 1990 to 2004 has dramatically reduced agriculture's share of the GDP. However, this did not lead to a substantial reduction in agricultural employment until after 2000. Indeed during the initial stages of Doi Moi, the share of agricultural employment actually rose as the agriculture sector absorbed many of the initial impacts of reform - particularly excess labour shed from the state industrial sector.

• Third, the data on exports show the turnaround from food import dependence to food exports. Here, the figure for 1985 to 1989 hides the large net food imports from 1985 to 1988 offset by the large export figure for 1989. At the national level, food security has been achieved since 1989.

Accompanying these changes has been a rapid reduction in poverty since the early 1990s. The first Viet Nam Living Standards Survey (1993) revealed high rates of poverty and food poverty. Subsequent surveys in 1998 and 2003 show a remarkable reduction over just one decade (Table 2). Poverty is, however, an increasingly rural phenomenon. The percentage of the poor living in rural areas increased over the 1993 to 2003 period, making policies to improve rural living standards all the more urgent.

High rates of agricultural output growth in the 1990s can be attributed to a number of factors that will be examined in this paper. Liberalization of the overall policy environment has been important because it has enabled farmers not only to receive prices that cover their real costs (in contrast to central planning prices), but also to obtain needed industrial inputs that were previously in short supply. Liberalization of policies towards agriculture alone (de-collectivization, for example) could not have achieved this result beyond the short term. In particular, increasing integration into the world market economy has been important, enabling farmers to respond to export demand. Indeed agricultural products have been a mainstay of Viet Nam's massively enhanced export performance in recent years.

Table 2. Poverty and food poverty rates, 1993–2003

Sources: GSO and World Bank.

Institutional changes have also been important - some of these have been policy-induced, although many exhibit characteristics of path dependence. In other words, policy intentions are not always evident in the outcomes.

In the rural economy, the advances have been less spectacular than in the urban sector. While the rapid growth of recent years has led to export growth together with overall national food security, there remains a number of food deficit regions in which the transition to higher-paid non-food crops is constrained by poor infrastructure and some restrictive trade policies. Diversification into non-farm activities has emerged rather slowly; much of the non-farm activity that does exist provides incomes that are supplementary to farming (and often unstable) rather than replacing it. While the share of agriculture in the GDP has fallen rapidly, from over 40 percent in the 1980s to 16.6 percent in 2004 (GSO 2005), the primary economic activity of some 60 percent of the labour force remains agricultural. These outcomes place restrictions on the growth of agricultural productivity and growth in the rural areas more generally.

In addition, natural resources have also been overexploited, adversely affecting the ecological balance. Forest resources have been degraded in terms of area as well as quality, together with uncontrolled hunting, land erosion, decreasing underground water, pests and disease. The rapid growth of aquaculture has destroyed valuable mangrove areas, while lack of enforcement of environmental regulations has severely degraded water resources, particularly in peripheral urban areas.

This paper addresses three broad issues in the relationship between policy reforms, economic growth and the prospects for further development of Vietnamese agriculture. First, it discusses the relationship between the Doi Moi policies and the overall growth process, including that of the agricultural sector. Second, it examines the results of Doi Moi for the process of institutional change in agriculture. Third, it assesses the extent to which these changes have benefited agricultural development and draws conclusions concerning further policy changes that are needed.

Section 2 outlines the major policy changes of the Doi Moi era. Section 3 examines the institutional changes that have resulted from Doi Moi and Section 4 discusses the impacts of these two intertwined features (policy and institutional change) on economic performance and structural change. Section 5 contains conclusions and lessons learned.

2. The policy reform process - Doi Moi

2.1 The initial stage: dismantling central planning (1986–1989)

Following the announcement of Doi Moi at the 6^thParty Congress, plans for policy reform were prepared and implementation began during 1987. The first were concerned with reform of the industrial sector, permitting increased autonomy of state enterprise activity (Council of Ministers Decree 188, 1987) and foreign investment (Law on Foreign Investment, 1987). Neither of these had much immediate impact as other conditions were not yet present. Foreign investment, for example, did not really take off until 1992 when, perhaps not coincidentally, Western aid to Viet Nam was resumed.

Given the mid-decade stagnation in agricultural growth, one of the first major steps aimed to meet the demand for agricultural reform. On 5 April 1988, the Politburo promulgated Resolution 10 on reforming the management of the agricultural economy. This resolution had a profound impact on agricultural and rural development in Viet Nam as it allocated long-term (15 year) contracts on land to individual farm households and permitted farmers to make all decisions relating to investment, production and marketing of output from their plots. Cooperatives were limited to the roles of trading (mainly inputs) and providing services (irrigation, plant protection, extension) to farmers. Many cooperatives simply disappeared in the wake of this measure.

This important reform measure extended farmers' land-use rights compared with an earlier 1981 measure that had contracted land for only three years and had still required farmers to meet output contracts to supply the state trading system.² It not only recognized the significance for farmers of more secure tenure over the land, it also eliminated the two-tier price system in agriculture once and for all, essentially by eliminating the system of compulsory state procurement of output. At this stage, however, while land-use rights were allocated to households with a 15-year security of tenure and tacit renewal, there was no formal possibility to trade such rights.

A key feature of this reform, one that persists today, was its egalitarian nature.³ The land was distributed according to the number of family members in order to ensure that each household had enough land to meet its subsistence requirements. A further egalitarian feature was that land of different qualities was allocated to each household, meaning that, depending on the geographical features of the area, households could be farming as many as 15 different plots of land scattered throughout their village. A clear aim of the reform was to avoid conflicts over land distribution during the break up of collective fields and, although some tensions did arise, the aim was generally achieved.

The next major reform package involved liberalization of prices in March 1989. At this point, the government freed up not only the prices of goods (with a handful of exceptions in the case of state monopolies such as the post office and railways), but also interest rates and the foreign exchange rate. Interest rates became positive for the first time, encouraging an increase in savings deposits, and helping to bring down inflation. The exchange rate regime switched to one in which the rate is permitted to float within a band determined by the State Bank of Viet Nam. Apart from a brief reversion to negative real interest rates in 1990 (and an associated inflation spike), these policies have remained in place ever since.

These initial reforms, particularly the agricultural and price reforms, had a remarkable effect. In the first instance, there was a disgorging of hoards of goods that had been kept as a hedge against inflation. Official data on rice output showed a sharp increase, much of which is accounted for by increased supply to the market rather than increased production. In 1989 the Mekong River Delta region exported 1.5 million tonnes of rice, yet the country, which had been a net importer of rice for two decades previously, still improved its food self-sufficiency. Per capita availability of rice rose to 300 kg, a level that had not been seen since the late 1950s. Elimination of the dual price system was therefore crucial in eliminating inflation both by increasing the supply of goods and soaking up excess liquidity.

Price reform also eliminated direct subsidies to state enterprises (SEs). In the ensuing two years many SEs closed their doors or were merged with others. The SE sector as a whole shed about 750 000 workers, mainly women. Since many SE workers already had second jobs, as their state salaries provided an insufficient living, the impact on unemployment was fortunately not too great. Most people were able to find work in the household sector - often using their industrial skills to set up microenterprises. Unemployment did rise dramatically among urban youth, however; that is, among those who would previously have been absorbed into the state sector after leaving school. In this restructuring centrally managed enterprises suffered less than local ones, the former continuing to have access to cheap credit and protection from competition.

The forced restructuring of SEs from 1989 to 1991 as a result of the price reform did have an impact on the distribution of income between urban and rural areas (Beresford 2003). The closure of large numbers of local SEs as well as small industrial cooperatives forced many people into the even smaller-scale household sector. While income levels in this sector were higher following the break up of cooperatives, the sector was characterized by low productivity that contrasted with much higher productivity in the remaining SEs. Moreover, the restructuring reduced government revenues so that the resulting cuts in expenditure were felt mainly in the rural economy. The income gap between urban and rural areas widened sharply.

2.2 Phase two - building market institutions (1990 to present)

Looked at purely in terms of the allocation of resources, it is possible to argue that the transition from central planning to a market economy was complete. By that time, resources were essentially being allocated by the market mechanism. In terms of developing a market economy, however, many key institutions were still lacking.

State monopolies, although becoming more market-oriented, continued to prevail in many areas, notably foreign trade and finance. Doi Moi policies were also shaped with the clear intention of maintaining a commanding role in the economy for SEs.

An early reform in this area was the formation of a two-tiered banking system in May 1990. The State Bank of Viet Nam was transformed into a central bank and lost a number of its departments which were re-created as autonomous state-owned commercial banks (SOCBs) - the Viet Nam Agricultural Bank (now VBARD or the Viet Nam Bank for Agriculture and Rural Development), the Bank for Investment and Development, the Foreign Trade Bank (VIETCOMBANK) and Viet Nam Industrial and Commercial Bank. In subsequent years financial institutions have become even more diversified: The system now includes SOCBs, joint stock banks, joint venture banks, subsidiaries of foreign banks, credit cooperatives, people's credit funds and other financial companies. In 1997, the ordinances were upgraded into laws to match the demand of diverse financial activities. In 1999 a savings insurance institution was founded to protect owners of saving accounts, and therefore banks, from risk.

VBARD is the main formal institution charged with lending to the agriculture sector. In its early years it was heavily criticized for its focus on lending to SEs which, at the time, were seen as less risky and more likely to be bailed out by the state. More recently it has increased its portfolio of agricultural loans. In 1998, in response to charges that VBARD mainly favoured wealthier farmers, the Bank for the Poor (BP) was established as a quasi-independent arm. BP was not very successful as it was restricted in the type of loans it could offer, and therefore often failed to meet the actual demands for credit by the poor, and its interest rates were too low to be commercially viable. It therefore continued to depend on subsidies from VBARD (Smith 2004). Both institutions suffered throughout the 1990s from inability to mobilize deposits due to interest rate policy and difficulties in obtaining collateral (although land-use rights can now be mortgaged, banks are unwilling to accept them).

In 2002, as part of an IMF-sponsored restructuring programme, the State Bank finally liberalized VND lending rates of credit institutions. In 2003, a Social Policy Bank was established based on the former BP, but drawing its capital from a wider base. Furthermore, in order to improve the competitiveness of the banking sector, legal capital of state-owned commercial banks was increased and weak joint stock banks were merged.

In domestic trade, once the official pricing system disappeared, state-owned trading companies were forced to shift to the market mechanism. State price fixing is now restricted to certain key goods and services such as petroleum, electricity and some transport and communications services. Competition from the private sector has been permitted in all but these strategic areas and, since the early 1990s, the private and household sectors have in fact dominated in this sector.

In foreign trade the central state monopoly was partially broken in 1980, when provincial trading companies were permitted. In the early 1990s, however, SEs were permitted to engage directly in foreign trade and subsequently this right was extended to private firms. Export quotas were retained for 12 major commodities, including rice, and, until 1998, only SEs could access these quotas. By 1999, however, only 4 percent of rice exports was exported by private enterprises. Rice export quotas were dismantled in 2000, and fertilizer trade was also liberalized, although the government continues to restrict rice exports when the domestic price rises (ADB 2000; MARD 2004). Viet Nam also entered numerous international agreements, including most notably ASEAN and AFTA, APEC and a bilateral trade agreement with the United States in the 1990s. Recently the government has put much effort into negotiating entry to the WTO. Such agreements have compelled the country to eliminate export subsidies, improve hygiene and quality standards, respect intellectual property rights and reduce tariffs - all of which have assisted the process of structural change.

Further reforms to the SE sector were initiated in 1992 through a plan to equitize all except strategic enterprises. In practice, equitization - or partial privatization - proceeded very slowly and has been characterized by insider buyouts together with state retention of a controlling interest in the firm. Part of the reason for the slow rate of equitization was the fact that under the Company and Enterprise Laws (both 1990) private enterprises were accorded a less privileged status. In particular, SEs enjoyed rent-free access to land, whereas equitized companies were subjected to the same conditions as private firms - finding suitable industrial land was difficult, rents were high and business registration procedures were long and cumbersome. No stock market was established until 2000 and credit was more difficult to obtain for private companies (and access to foreign bank loans was not permitted).

The restructuring of SEs has continued since 1989. The total number was reduced, through merger and dissolution, from 12 297 in 1989 to 5 134 in 2002. It is expected that the number will decrease to around 2 000 in 2006.

A new Enterprise Law, passed in January 2000 eliminated many of the formal distinctions between state and private enterprises. At the same time, the government abrogated 145 kinds of licences that had hampered business. These measures resulted in a rapid increase in private enterprise registrations (Figure 1). Most are small in terms of both labour and capital, averaging about a dozen employees. (www.sme.com.vn 2005).

Source: www.sme.com.vn 2005.

Figure 1. Growth in registered enterprises, 1992–2004

Source: Statistical Year Books.

Figure 2. Inflation rate, 1991–2002

Macroeconomic policy has also undergone substantial changes during Doi Moi. Early initiatives during the 1990s focused very much on maintaining control over inflation, particularly through eliminating the very large budget deficits that characterized the 1980s. Borrowing from the State Bank ceased and budget deficits are normally financed by foreign aid, together with modest borrowing from the public. The government's success in controlling inflation is demonstrated in Figure 2.

The nominal exchange rate has better reflected the real relation between domestic and foreign currencies. Figure 3 shows the large gap between the real and nominal exchange rates before 1995. However, since 1995, the State Bank's improved capacity in exchange rate management has brought the two exchange rates into close alignment.

In recent years, the major threat to macroeconomic balance has come from the high current account deficit due to Viet Nam's high demand for imports combined with heavy reliance on primary commodity exports that are subject to large price fluctuations. The dangers inherent in this situation are, however, mitigated by a rather low level of external debt and lack of openness to volatile short-term financial flows.

Sources: USDA (2004) (real exchange rate) and ADB (2004) (nominal exchange rate).

Figure 3. Real and nominal exchange rates

2.3 Reforms specifically related to agriculture

As noted above, the early reforms such as Resolution 10 and trade liberalization had encouraged agricultural production, boosted trade and narrowed the gap between international and domestic prices of agricultural inputs and outputs. Further reforms in the 1990s have consolidated these gains, particularly in the years before 2000.

Nineteen ninety-three saw the passage through the National Assembly of the Land Law. Building on the initial distribution of land in 1988, the new law envisaged the issue of legal titles to land-use rights, thereby enabling transfers - whether through inheritance, rental agreements, gift or sale. An important intention of the law was to create gender equity in land tenure with the names of both husband and wife appearing on the land-use right certificate (known colloquially as the Red Book). In practice, however, the improved security of tenure that was intended has not worked evenly. In the northern delta, for example, where village land has traditionally been periodically redistributed among village men and women move to their husbands' villages, wives' names have often been left off the certificate. Moreover, land markets have failed to develop strongly. The egalitarian spirit of the law can also be undermined where wealthier individuals who have left the village for employment reasons can maintain their registration as residents and rent their land out to farmers. Depending on the crop produced, rents can amount to as much as 40 percent of farm output value and this can be a factor inhibiting new investment by farmers as well as reintroducing social stratification.

The Land Law was amended in 2001, chiefly to permit foreign investors to acquire land-use rights and in an attempt to promote land consolidation in agriculture. Generally speaking, however, difficulties in developing a land market have persisted (particularly in the north) while numerous local conflicts have arisen over the transfer of increasingly scarce agricultural land for industrial and residential purposes.

Also in 1993, the government promulgated a range of decrees aimed at improving investment and technological innovation and at institutional reform. Decree 13/CP on March 2, 1993 concerned the development of extension services to farmers; Decree 14/CP concerned credit for extended agricultural and rural development; Decree 12/CP concerned reform of state-owned agricultural enterprise management. Under the last decree, state-owned farm workers could receive a rice plot, garden and house for a flat rental rate, while processing units were given a flat tax rate on revenue. The objectives of these three decrees were to increase production efficiency by enhancing investment in new technology and to improve cost-effectiveness. In the same year, the agricultural tax rate was reduced by half.

In March 1996, the Law on Cooperatives was approved by the National Assembly, clarifying the role of cooperatives as providers of services to households and establishing a legal framework for cooperatives within a multisectoral commercial economy. By 2000, the total number of cooperatives had more than halved compared with 1996. Nearly 70 percent of the remainder had restructured in conformity with the new law and transformed into service providers to farmers, and 52 percent of them had been issued a business licence. During the ensuing four years, the number of cooperatives rose by 26 percent to 8 090, of which 95 percent was classified as agricultural and the rest as fisheries. The fastest growth rates in cooperative numbers were in the Mekong River Delta and some mountainous provinces in the northeast.

Today cooperatives work chiefly in irrigation, plant protection, extension services and seed and input supplies. Only a minor proportion (19–15 percent) is engaged in soil preparation, credit provision and marketing of output.

This new effort to encourage formation of rural cooperatives represents a dramatic transformation from the central planning period in which cooperatives essentially functioned as a form of local government. However, the movement towards re-forming a cooperative system in agriculture has been highly unstable; in some areas relatively few cooperatives have survived for longer than a year. Moreover, among those considered successful, the majority is very small, with an average capital of about one billion VND (US$63 000).

Tax reform has been another method through which the government has attempted to provide greater incentives to the agriculture sector. During the 1990s, agricultural tax provided the main source of tax revenue to the state budget from the rural sector. However, the government's tight budget constraints under the impact of macroeconomic reform, meant that rural services such as health and education have, despite an increase in overall spending, suffered from underfunding. Localities have been forced to supplement budgetary expenditures by levying fees for provision of these services and the latter constitute by far the heaviest form of taxation on the rural population.⁴ While agricultural tax formed a declining proportion of government revenue, this decline reflected agriculture's declining share of the GDP and in fact the relative burden of this tax on the farmers increased overtime. Table 3 shows how the relative tax burden increased steadily over the 1990s. In 1991 it was well below agriculture's contribution to the GDP, but for most years after that it was higher.

Reform of the taxation system since 2000 has involved a phasing out of the agricultural tax. By 2003 the agricultural tax raised only 1.3 percent of tax revenue and 0.1 percent of total government revenue (World Bank 2004). With agriculture's share of the GDP in that year standing at 17.34 percent, the relative tax burden, as measured in Table 3, had fallen to 7.5 percent.

Alongside the reduction in the relative burden of agricultural tax on farmers, the state has also reduced its share of investment in the sector. Between 2000 and 2004, the share of investment in agriculture, forestry and fisheries fell from 12.2 percent to 8.7 percent of total state investment. Public investment in agriculture therefore declined at a slightly faster rate than agriculture's share of the GDP. Offsetting this decline, credit available to farmers increased rapidly, quadrupling in the second half of the 1990s. Thus, while the state's retreat from the agriculture sector has assisted in improving productivity, it has also shifted the risks onto the shoulders of farmers.

Table 3. Relative agricultural tax burden in Viet Nam (percent)

Source: Barker et al. (2004).

In general, Doi Moi has achieved a great deal: Production, investment and marketing decisions have been transferred to farmers and other production units, macroeconomic reforms have stabilized inflation and assisted Viet Nam's growing world market integration. While trade liberalization and price reform initially generated a crisis for the heavily subsidized industrial sector, agriculture and the services sector - both relying on a newly revived household economy - were able to absorb the shocks and sustain both GDP and employment growth. By the end of the last century, industry and services were ready to replace agriculture as the main source of economic growth - as is the normal pattern in a developing economy. However, as we shall see, the widening gap between urban and rural incomes warrants continued attention to reform of the agricultural sector in order to maximize its growth potential and to achieve more development of the rural economy generally.

3. The impact of institutional change

Major stakeholders in agricultural production in recent years are households, commercial farms⁵, state-owned enterprises, private enterprises and cooperatives. In the context of policy and market changes, there are profound transformations in the role and development of these stakeholders. While, in the central planning period, cooperatives and state-owned enterprises dominated agricultural production and rural livelihoods, the household sector always remained active. Indeed it is reported that in northern Viet Nam during the 1970s, household plots allocated on 5 percent of cooperative land accounted for 60 to 70 percent of farmers' incomes. The reform process and partition of cooperative lands saw household farms become the main stakeholders in rural areas. State enterprises and cooperatives have subsequently begun adjusting to the new situation. Most recently, commercial farms and private enterprises have begun to play a role.

3.1 The household sector

Economic reforms undertaken since 1981 have steadily consolidated the status of the household as the main stakeholder in the agricultural economy. Over the two decades since Doi Moi was promulgated, this sector has been the mainstay of the agricultural economy, growing at a steady rate and employing a large proportion of new entrants to the workforce each year. Indeed, the ability of household-based farming to absorb labour has been a major factor in curtailing the growth of urban unemployment to around 5 percent since the mid-1990s.

In the late 1980s, 73 percent of the 10.6 million households in rural areas worked in agriculture. By 2001, however, the situation had changed dramatically. Of the 13.9 million households in rural areas, only 53 percent derived their main income from agriculture and a much greater diversification of the rural economy had taken place (Figure 4). This diversification should not, however, be overestimated. Many households continue in agricultural production because it provides a more stable and secure income source than other activities, even though the latter might produce the majority of their income. In other words, non-farm and off-farm employment opportunities in the rural areas remain underdeveloped. Future reforms will need to address this issue of increasing diversity within the rural economy.

Source: FAO(2005).

Figure 4. Main income sources of rural households

Looking at the data in a different way, we can see more clearly the actual meaning of diversification in the rural areas. Table 4 indicates that there has been an overall rise in the number of different occupations per household from 4 to 4.67 between 1993 and 2002. However, the average number of working age adults per household remains at about 2.5. These figures imply that, on average, every adult has almost two sources of income.

Table 4. Rural income diversification by regions in 1993,1998 and 2002

Source: Minot and Epprecht (2003).

Rather than looking at the main source of income, as in Figure 4 above, it is therefore worth looking at data on all sources of incomes of rural households (Figure 5). From these data we can see that in the early 2000s, 79 percent of rural incomes continued to be derived from agriculture, forestry and fisheries. Eleven percent came from services (the majority from petty trade), 6 percent from industry and construction and 4 percent from other sources. The actual level of diversification out of agriculture into off-farm employment therefore remains rather low. This is especially the case for rural women who have few opportunities for gainful employment outside agriculture. They tend to lack mobility on account of child care duties and they also tend to be less well educated and less connected to social networks extending beyond the village that could assist them in finding off-farm jobs.

Figure 5. Income sources of households in 2001

According to the 2001 rural census, average agricultural land per household was around 0.46 ha, considerably below the figure for other regional countries. Furthermore, land area per household is decreasing due to industrialization, urbanization and other non-agricultural uses. There is little scope for extension into new areas without causing environmental degradation. Land fragmentation is generalized. On average, each household has four plots of land and some have as many as 15 plots. Some households, especially in the Mekong River Delta, the southeast and Central Highlands, have been able to accumulate and consolidate their landholdings, partly through reclaiming virgin soil, and partly through transferring land between households. However, the scope for such developments is limited in the more densely populated areas. While land consolidation is favoured by the government in order to promote more technology-intensive production, the potential for conflicts over different qualities of land is high and the issue needs to be treated with caution.

Agricultural productivity has risen substantially during the Doi Moi period. Average output of cereals per hectare from 1990 to 1994 was 3.2 tonnes (paddy equivalent), rising to 3.8 tonnes in 1995 to 1998 and 4.4 tonnes in 2000 to 2004. Most of these increases can be accounted for by more intensive use of labour, particularly in the application of chemical fertilizers (which has quadrupled since the late 1980s) and the widespread use of integrated pest management (IPM) systems. Mechanization, although on the increase, remains at a low level compared with other countries in the region. Between 1989 and 2002, for example, the number of small (12 hp) tractors increased almost nine-fold, yet the number of all types of tractors per hundred households, according to the 2001 rural census, was still only 1.8. Water pumps for irrigation are the most common type of machinery in use in Viet Nam, yet in 2001 there were only 28 per hundred households. The use of high-yielding varieties is also spreading. More than 35 percent of the total rice area is cultivated with these varieties (Viet Nam News 2005), much of this accounted for by the Mekong Delta, where about 80 percent of the area planted to rice uses modern varieties.

Shortage of capital is a major reason why investments in new technologies, while increasing rapidly, have so far shown limited application. Around 90 percent of households have a demand for extra capital. While poor households need loans to meet daily necessities or occasional large expenditures, richer households need bigger, longer-term loans for investment purposes. Bank loans, on the other hand, have usually been short-term and only available to the better off. The government has adjusted credit policy for households several times by, for example, increasing the non-collateral credit limit from 10 million to 30 million VND per household. However, banks are reluctant to take risks and access to formal credit remains limited for many households.

Despite such obstacles, there is no doubt that many households have switched from self-sufficient to commercial production. Forty percent of all households are involved in some degree of commercial production and 90 percent in the Mekong River Delta. As a result, a small percentage of household farms has been able to make the transition to wholly commercial farming (see this Section, below).

Part of this development is that social stratification has become a more prominent feature of the Vietnamese countryside than it was in the era of so-called “shared poverty” under central planning. Three groups of farmers can be identified:

• A commercially oriented group (an estimated 30 percent of households) including households with good organization skill, technology, quick adaptation to market changes, relatively large capital and output;

• A less commercially oriented group (about 55 percent), including many farming-only households who currently lack sufficient capital and access to markets to develop further;

• A group of poor households (about 15 percent) who have insufficient land or are landless.

While the first group has the potential to develop rapidly in scale and join the emerging class of commercial farmers, the second is more vulnerable to adverse shocks and more likely, ultimately, to join the growing army of rural-urban emigrants taking up non-farming occupations. Investment in education of children can be a means for families in this group to make the transition to more remunerative jobs. A large proportion of them remains, however, below the national poverty line. For the third group, short-term improvements might be found in poverty alleviation and job creation programmes, but many are already on the move, seeking seasonal casual labour in the cities as well as in agriculture. Women in this group are particularly vulnerable because, when they have young children, it is difficult for them to find alternative employment.

Increasing competitiveness of agricultural production is one of the factors driving this stratification of households. Price volatility, particularly downward pressure on prices and a proliferation of intermediaries in supply and marketing chains has disadvantaged more vulnerable farmers. In addition, an underdeveloped rural infrastructure limits rural inhabitants' access to information about markets and technology, education and health services, putting farmers in more remote areas at a disadvantage.

Development of the household economy in agriculture has, therefore, played an extremely important role in Viet Nam's emerging market economy, sustaining growth and employment during the crucial transition years. Only in the last five years have we been able to see any significant tendency for agricultural employment to diminish and this has largely been achieved without increasing unemployment in urban areas. While poverty among these farming households has diminished rapidly over the past decade, agriculture has also fallen behind relative to the urban sector. In 2003, while urban poverty had fallen to a quarter of its 1993 level, rural poverty was still over half its previous level (Table 2). Among ethnic minority households in remote and mountainous areas, the level of poverty remained at 80 percent of its 1993 level. The proportion of the country's poor living in rural areas has risen. Renewed efforts to develop the rural economy are therefore important if Viet Nam's positive experience to date is to continue.

3.2 Commercial farms

The rapid expansion of agriculture based on privatization of land-use rights has led to the emergence of a group of farms that have grown beyond household self-sufficiency and taken on much more of the character of a profit-oriented business. A reform in the late 1990s recognized the existence of and need to promote this type of farming in Viet Nam. Commercial farms were thus defined as those belonging to households that have control over a large land area, use hired labour and have invested capital in expanding production. By 2000, according to GSO (2005), there were 57 067 such farms, a number which had almost doubled to 110 832 by 2004 largely due to the issuing of new criteria for registration in 2002. The majority of these farms is in the Mekong River Delta, the most commercialized agricultural area of the country. However, the trend to establish commercial farms has spread to the rest of the country, reducing the Mekong Delta's share from 56 percent in 2000 to 50 percent in 2004.

Commercial farms are both specialized and diverse in production. In hilly and mountainous areas, they are involved in forestation, forest protection, exploitation of forestry products, or agroforestry activities (forestry combined with fruit trees, industrial crops and animal husbandry). Farms in coastal areas focus on aquacultural raising/catching and processing. In the lowlands, they tend to be more diverse, engaging in a range of cultivation, animal husbandry, fish breeding, handicraft and rural services.

The commercial farms could be described as small and medium enterprises (SMEs) rather than large ones. At the rural census conducted in October, 2001, commercial farms had a labour force of 368 650, approximately six per farm. Slightly more than half the labour force comprised hired labour, but the majority of these were only seasonally employed. Members of the owner's family take charge of more sophisticated work, such as driving machines, choosing seeds and technologies, while hired labour is used for the more unskilled work. Figure 6 shows the structure of the commercial farm labour force.

Figure 6. Labour structure of commercial farms

The capital structure of commercial farms is similarly small. Besides government support in developing infrastructure and providing loans through projects/programmes, most rely heavily on farm owners' capital. As of 2003, the total investment in farms was 10 803 billion VND (excluding land value), of which 68 percent was owners' capital, 25 percent bank loans and 7 percent other sources. Average capital per farm stood at 125 million VND (about US$8 360).

In terms of land area, farms tended to be large by Vietnamese standards. In 2002 their total area was 373 200 ha, an average of 6 ha per farm, but in 2003, under the new criteria the average area fell to 5.7 ha. The largest proportion (37 percent) specialized in annual crops, followed by perennial crops (26 percent), forestry (19 percent) and fisheries (18 percent). Table 5 illustrates the sources of land used by commercial farms: Except for fisheries, about three-quarters come from land allocated to households during the 1988 land reform. For annual crops, the next largest source is land transferred by others or contracted to households by the local authority or cooperative; for perennial crops it is land contracted by state farms and for fisheries it is overwhelmingly land contracted by the local authority.

Table 5. Land sources of commercial farms

Source: Nguyen (2002).

According to the 2001 census, average output value per farm was 91 million VND giving a net income of 32.3 million (about US$6 000 and 2 100 respectively). By 2003, average output had risen to 98 million VND, ranging from 120 to 150 million VND per farm in fisheries to 25 to 30 million VND in forestry.

Despite their SME status to date, the emergence of commercial (profit-oriented) farming is a significant development for Viet Nam. There are, however, some constraints on the further development of this sector. Notably, in a land-scarce country, there are restrictions on the scale of land use, despite an already impressive reclamation of unused land (Table 5). Moreover, according to the GSO, commercial farms do not have long-term use rights over 19.3 percent of the surface area that they are using. This situation reduces their incentive to invest in expanding production. Other difficulties experienced by commercial farmers include lack of capital (68.9 percent), difficulties in marketing output (57.5 percent) and lack of technical training (92.5 percent) and knowledge about technologies (42.5 percent). There remains considerable scope for intensification and increased productivity through, for example, mechanization and introduction of new biotechnologies. Improved credit access, assistance with marketing and more effective extension services would likely aid the future development of this sector.

3.3 Cooperatives

From 1955 to 1980, cooperatives were the major stakeholder in agricultural production in the North. In the South, cooperative groups were established after 1975. By 1988, cooperatives controlled all inputs for production and managed production, circulation and distribution.

The reform of cooperatives after 1988 has been comprehensive, covering management, distribution and ownership. While at first the transformation was spontaneous and uneven, their legal status under the 1996 Cooperative Law has transformed them, from a government instrument implementing socio-economic and cultural activities at the local level, into an economic institution based on voluntary membership and wide acceptance by farmers.

During the reform process, many cooperatives that could not adapt to new management mechanisms were dissolved or transformed to other forms, for example collaborating groups. The most rapid rate of dissolution was in the South, where they had never really taken hold. Others have gone through a period of confusion, often dividing into smaller cooperatives and reducing their range of activities and services. They are required to survive upon member contributions, based on the land area of each household, yet 90 percent of cooperatives reportedly remain weak or non-functional. Members' belief and interest in cooperatives declines proportionately.

Problems faced by cooperatives stem from unclear incentives for households to join, persistent echoes of the old-style cooperatives, a bureaucratic approach and resulting lack of skill in organizing market-oriented activities. Often they are still focused on rice production rather than assisting agricultural diversification. Some are still considered instruments for solving social issues. In general, it is likely that the establishment of cooperatives has not always been rooted in farmers' demand.

The reform of agricultural cooperatives represents one of the clearest cases in which path dependence inhibits the implementation of market-oriented reforms. Cooperatives have the potential to play an important role in the rural economy, as they do in many other countries. If they work effectively, they can improve farmers' access to key market information as well as help to increase farmers' bargaining power in a highly competitive environment. In Viet Nam, however, cooperatives have many associations with the past system of central planning (many are still located within the local administration headquarters and are practically indistinguishable from them). This history accounts for the unstable nature of many new cooperatives and it will take time for them to develop a genuine economic orientation based on farmers' needs.

3.4 Private enterprises

Investment of private enterprises accounts for 27 percent of the total social investment in Viet Nam, a marginally higher share than that of SEs (26 percent). By 2002, domestic private enterprises contributed to around 48.5 percent of the total export value. They have also been the driving force in penetrating new markets, developing new products and expanding relations with partners all over the world. In the agricultural sector, private enterprises take part in production, processing, distribution and export. Many high-value added commodities have been produced by the private sector. The sector has contributed to accelerating the circulation of agricultural products, linking rural, national and international markets.

At present, private enterprises play an important role in processing and distributing agroforestry and aquacultural products domestically. They have a secondary role in direct exports, but are heavily involved in collecting, processing, packaging and transporting commodities to ports of departure. For the most part, the state-owned Food Corporations handle the export contracts. It could be said that private enterprises stand behind the Food Corporations in enabling Viet Nam to export growing quantities of agricultural commodities. Private enterprises are also a bridge between farmers and overseas markets, though their role cannot yet be expressed in statistics.

Generally speaking, private enterprises are newcomers compared with other stakeholders in agricultural production and trade. More than 90 percent are SMEs. Approximately two-thirds of newly registered enterprises lack capital, management experience and access to market outlets. They face high costs relative to SEs for infrastructure (land and utilities), credit and administrative fees. The shortage of enterprise support services also creates operational difficulties. State enterprises, on the other hand, can utilize better contacts to obtain credit⁶ and, in case of losses, their loan repayments can be restructured, extended or even exempted. Thus, while the growth in the number of private enterprises accelerates, they tend to be poorly positioned in competition with the SEs.

Furthermore, in light of their small size, the international business environment creates extra challenges for the private sector. Tariff, non-tariff and technical barriers have put pressure on infant Vietnamese enterprises which usually lack market information and marketing capacity, especially in comparison with international partners and the more experienced SEs.

¹ Budget deficits during the 1980s ranged from 25 to 45 percent of expenditure; export coverage of imports improved dramatically, however, during the early reforms before the deficit widened again in the late 1980s. Inflation peaked at 775 percent per annum in 1986.

² Decree No. 100 of the Party Secretariat.

³ This egalitarian nature applied principally to the lowland, rice-growing areas inhabited by a large majority of the rural population. In the uplands - the main cash crop areas - land distribution was determined by “capacity to manage” and other criteria.

⁴ These levies are highly regressive and impact particularly on families with large numbers of school-age children, indicating the need for more comprehensive reforms in the taxation system.

⁵ Commercial farm is the usual English translation of the Vietnamese trang trai, private farms which operate on a larger scale of production and use more hired labour than household farms.

⁶ In many cases state-owned enterprises could borrow money from banks without collateral since they had the capacity to design a business plan and support from government officers.