1
Distortions to Agricultural Incentives
inVietnam
Prema-chandra Athukorala, Huong Pham and Vo Tri Thanh
AustralianNationalUniversity
Central Institute of Economic Management, Hanoi
Central Institute of Economic Management, Hanoi
Agricultural Distortions Research Project Working Paper xx, October 2006
This is a product of a research project on Distortions to Agricultural Incentives, under the leadership of Kym Anderson of the World Bank’s Development Research Group. The authors are grateful for helpful comments from workshop participants and for funding from World Bank Trust Funds provided by the governments of Ireland, Japan, the Netherlands (BNPP) and the United Kingdom(DfID).
This Working Paper series is designed to promptly disseminate the findings of work in progress for comment before they are finalized. The views expressed are the authors’ alone and not necessarily those of the World Bank and its Executive Directors, nor the countries they represent, nor of the institutions providing funds for this research project.
1
Distortions to Agricultural Incentives in Vietnam
Prema-chandra Athukorala, Huong Pham and Vo Tri Thanh
Introduction and summary
Since the late 1980sVietnam has made remarkable progress in transition from the former closed command economy to a market economyand in integration into the world economy.With a slow and hesitant start following the announcement of doi moi (renovation) policy in 1986, significant reforms were undertaken in the first half of the 1990s.The reform process lost momentum during 1996-98 perhaps reflecting complacency resulted from the success of the initial reforms and also due to economic uncertainly created by the 1997-98 East Asian financial crisis.There has, however, been a renewed emphasis on completing the unfinished reform agenda since about 1999.The key reform measures so far includewidespread reforms in the agricultural sector, involving a move away from the previous collective regime to a system in which framers have greater freedom in making production decisions and marketing their produce;dismantling quantitative import restrictions on all products except sugar and petroleum products; significant tariff reforms leading to notable reduction in both the level and dispersion of effective rate of protection; initiatives to expose public sector enterprises to greater market discipline; relaxing restrictions on foreign direct investment, particularly in export-oriented projects; and lifting restrictions on private-sectors participation in foreign trade and setting up business ventures by private entities (both individuals and companies). These reform initiatives have been accompanied by sweeping macroeconomic policy reforms, including the unification and realignment of the exchange rate, and relaxation of exchange controls and a firm commitment to fiscal prudence.
The purpose of this paper is to examine the implications of market-oriented policy reforms in Vietnam for intensives to domestic agriculture in the context of changes in the overall structure of incentives for private sector activities in the economy. The analysis is undertaken against the backdrop of an analytical native of agricultural policy evolution and key policy trend dating back to the command economy era.The empirical analysis of agricultural incentives covers five major products – paddy/rice, sugar, pork, rubber and coffee – using data for the period from 1990 (the earliest post-reform year for which the required data are available) to 2004.The five selected products accounted for nearly two-thirds of total agricultural value added in Vietnam during the period under study.In addition to providing inputs to the global modelling exercise of the World Bank multi-county research project, the paper aims to inform the contemporary policy debate on reforming the structure of incentives for domestic agriculture in Vietnamas an integral part of the country’s endeavour to accelerate its economic integration into the world economy.
The paper is in four main parts. The next section presents an overview of growth and structural changes during the post reform era (since the mid-1980s), with emphasis on the relative importance of the agricultural sector, and trends and compositional shifts in agricultural output and trade, the third section provides an overview of the origins, key elements and the progress in achievement of reform commitments, with emphasis of the political economy of policy making. Following this, the analytical core of the paper, examines trends and patterns of incentives to domestic agriculture using a set of incentive indicators based on the methodology developed for the World Bank multi-country study on Distortions to Agricultural Incentives in Developing Countries.The final section summaries the key findings and their policy implications.
Agriculture in the Vietnamese economy
Growth trends
During the era of central planning (from the mid-1950s in the North and after unification (1975) in the South),the Vietnamese economy was not subject to the same level ‘forced’ industrialization’ as the former centrally planned economies in the Soviet block and China.The prolonged military conflict with the North Vietnamese regime and the USAconstrained engineering a industrial transformation beyond setting up industries in line with the priorities of the war economy. Thus, agriculture continued to remain the dominant sector of the economy.During the period 1955-1985 share of agriculture in GDP fluctuated in t he rage of 35 percent to 43 percent without showing any clear trend[1], and by the mid 1980s, over 72 percent of the total labor force was engaged in agricultural pursuits (Riedel 1993, Table 6).
The process of collectivization of agriculture in North Vietnam (the Democratic Republic of Vietnam, DRV) had been completed by the early 1960s.The forced replacement of semi-subsistent pleasant commodity production system by ‘the plan’ ushered in an era of suppressed growth, if not stagnation, in agriculture. During most of the ensuing three decades agricultural output in the North was only barely sufficient to meet domestic consumption requirements.Attempts to replant the collectivised system following the administrative unification of the country in 1976resulted in severe disruption in Agricultural production in the South.Piecemeal reforms implemented during 1979-1980 with a view to relaxing strictures of central planning had only limited impact in containing output contraction.By the mid-1980s large areas of the country experienced near-famine conditions and food shortages resulted in widespread suffering and national food security was a leading preoccupation (Pritchett 2003; White 1985; Riedel and Comer 1997).
The response of agriculture to market-oriented policy reforms initiated in the late 1980s was swift and remarkable.Between 1988 and 1992, GDP increased by 26 percent.Over a third of this increase came directly from agriculture.In addition, rapid agricultural growth also contributed to expansion in non-agricultural rural services, input supply and food processing industries.During the ensuing years, growth tuned out to be board based, with industry and services growing at much faster rates compared to agriculture.The growth rate of agriculture continued to remain impressive (in the range of 3.5 percent to 5.0 percent), compared to both Vietnam’s own pre-crisis experienceand the average performance of other low-income countries and transition economies.Despite notable structural change over the past one-and-a-half decades, agriculture still hasa significant weight in the Vietnamese economy, contributing to 23 percent of GDP and absorbing nearly 70 percent of the total laborforce of the nation (Figure 1). Four fifths of the households in the lowest income quartile are occupied in agriculture, and almost three-fifths of the incomes of household in that income bracket are generated by agricultural activities (compared to less than one fourth for the highest income quartile).
Impressive agricultural growth, in particular the surge of paddy production, played a key role in winning political support for further reforms by ensuring national food security, a source of much political anxiety in the 1980s.Agricultural growth was also at the heart of Vietnam’s success in rapid reduction in rural poverty. Growth of rural income also helped economic transition by ameliorating pressure for rural to urban migration, despite a widening gap between urban and rural incomes.Unlike China, in Vietnam internal migration has so far been as much from one rural area to another as from countryside to the city.This has limited the pressure for heavy expenditure on urban development (Van Arkadie and Mallon 2003, Minot and Golettei 2000).
Production of major commodities
Paddy/rice was the prime mover of agricultural growth in the immediate post-reform period. From the mid-1990s there has been notable diversification of agricultural production into other food crops (maize, peanuts, soybean), cash crops (in particular rubber, coffee, and tea, cashews, pepper, cinnamon), fruits and vegetables, and marine and aquacultureproducts (shrimps, fish, cuttlefish and crab), and animal husbandry (pork and chicken). In agricultural cash crops, such as coffee, cashews and pepper, Vietnam moved from negligible production to become a major player in world markets. The initial production expansion of some cash crops (particularly rubber) reflected return from state farm investment in the 1980s, but growth of agricultural production during the post reform era came predominantly from private smallholder production.
Rice, the staple food of the country which account for three-quarters of the caloric intake of the population, is by far the dominant product in Vietnamese agriculture.In 2004, paddy accounted 56.6 percent of total cultivated land and 35.7 percent of total agricultural output in the country (Tables 1 and 2; Figure 2).The Red River Delta and the Mekong River Delta in the south together account for more than two thirds of national paddy production (with the former accounting for more than half of the total national production), but paddy is also the prime food crop grown widely in all other parts of the country. Paddy production increasedpersistently from 6043 tons in 1990 to 7445 tons in 2004, at an annual compound growth rate of 6.5 percent. This impressive growth largely came from an improvement in yield per acre while the acreage under cultivation remained virtually unchanged (Appendix Table A-1).Paddy yield increased from 3.2 tons/ha in 1990 to 4.8 in 2004.
Coffee, rubber and sugar cane are the three most important cash crops in Vietnam.In 2004 coffee accounted for 3.8 percent of agricultural output, with sugar cane and rubber respectively accounting for 3.4 percent and 2.3 percent.Coffee and rubber production is largely for export markets while the sugar industry predominantly produces to meet domestic demand.Coffee and sugar are predominantly small-holder crops.Rubber is mainly produced in state-owned farms owned by the general Rubber Corporation (an SOE at the national level) or by SOEs at the provincial level.Cultivated area, production and yield of both rubber and coffee have recorded impressive growth over the past one-and-a-half decades (Table A-1).By Contrast, the yield of sugarcane production has remained stagnant and output has shown considerable year to year fluctuations around a mild upward trend.The area under sugarcane cultivation has declined in recent years as a result of switch of farmers to other crops, mostly to coffee subsidiary food crops.Despite its relatively poor performance (or because of it!), sugarcane production remains the most assisted agricultural activity in Vietnam (see below). In 1995, the government launched a ‘one-million-ton’ sugar program, aimed at achieving self-sufficiency in sugar by 2000 and creating employment in the rural economy (Nguyen et al. 2006).The other cash crops which have recorded impressive growth during the post-reform era include cashew, ground nuts, tea and pepper.Vietnam is the biggest producer of pepper, the third biggest producer of cashew nuts, fifth largest producer of tea and the tenth largest producer of ground nuts in the world.However the combined share of these products in total agricultural GDP of the country still remains small (less than 3 percent).
Livestock production has increased rapidly since the early 1990s, accounting for about 14 percentof agricultural value added by 2000 (IAPP 2001, as quoted in Nguyen and Grote 2004).Pork is by far the most important livestock product (60 percent) followed by chicken (15 percent) and beef (8 percent).The share of pork in agricultural value added increased from 6.4 percent during 1990-94 to 10 percent during 2000-04 (Table 1).Currently over 90 percent of pork production is consumed domestically, but exports (predominantly to China) have begun to increase rapidly in recent years.
Agricultural exports
Primary products accounted for nearly a half of non-oil merchandise exports from Vietnam in the mid-1980s. This share increased further in early years of the post-reform period as the first positive response to reforms came from agricultural products, mostly rice.In 1998 Vietnam became self sufficient in rice and then a net exporter. By 1999, rice exports peaked at 4.5 million tons, making Vietnam the thirds largest rice exporter in the world (after the US and Thailand).Over time the composition of agricultural exports has become increasingly diversified, with rubber, coffee, meat and fish products recording impressive growth.From about the late 1990s, manufacturing exportshave grown faster, resulting in a notable shift in the export composition away from primary products.However, agricultural products still accounted for over a third of total non-oil merchandise exports by 2004 (Table 3).[2]
Until about the mid-1990s, both rapid volume expansion and favorable price trends contributed to growth in export earning from agricultural products (Figure 3). From then on, prices continued to decline, with the rate of decline intensifying in more recent years. Rapid volume expansion continued to compensate for decline in prices until about 1998 to generate mild, but positive growth in export earnings. However, export earnings from agricultural products have continuously declined over the past five years or so, reflecting mostly declining prices.
The reform process: from plan to market
Reform process: an overview
Under the collective system of agriculture instituted in the South in the early 1960s,cooperatives were the key link between agricultural households and the national economic plan.As the prime institution in replacing ‘the market’ by ‘the plan’, the agricultural cooperative was responsible for organizing deployment of the agricultural labor force, producing in accordance with plans approved by the central authorities, selling the surplus production to the state at state controlled prices, and implementing obligatory procurement quotas introduced from time to time for sales to the state of a mummer of essential commodities (White 1981).
Following the defeat of the government of the Republic of Vietnam (South Vietnam) in 1975 and the formal administrative reunification of the economy in 1976, replacing ‘the market’ by ‘the plan’ in the South presented a formidable challenge. In the period immediately following reunification the approach to bringing Southern agriculture under the collective system was fairly cautious.However, the rapid growth of private trade, combined with concerns about political resistance to socialist transformation in the southern farmers and the business community (dominated by ethnic Chinese) led to attempts to accelerate the process.The Second Party Plenum in July 1977 set ambitious targets to speed collectivization of individual agricultural households.Farmer’s resistance to the introduction of the collective system, coupled with the state of uncertainty about the future direction of reforms, resulted in decline in agricultural output.Consequently the process of collectivization in the South was slowed or even reversed, and agreements were reached on the need to decentralize decision making and to provide improved incentives for increased production though private (household) initiatives (Duiker 1989;Fford and de Vylder 1996;Naughton 1996).
The reforms introduced during 1979-80 included institution of ‘production contracts’ under which cooperatives subcontracted land to households and allowed households greater latitude in production decision making.Under this new system, which was similar to the ‘household responsibility system’ in China, households were allowed to keep, or to sell on the free market any surplus above a stipulated amount to be delivered to cooperatives under the contract. In effect, the role of cooperatives was limited to a subsidiary role of allocating land, supplying inputs, and providing technical assistance (Woodside 1989).
These reforms did have an immediate salutary effect; total agricultural production (at current price) recorded a five-fold increase between 1979-80 and 1981-82 (from 2 billion Dong to over 11billion Dong).[3]But rather than responding to improved production by deepening reforms, as did China, Vietnam back paddled from the reform process for most of the rest of the decade.The emergence in the early 1980s of severe macroeconomic imbalances, reflected in high and rising inflation, undermined the reform movement not only it was interpreted a symptom of the failure of reforms, but also because it reduced the real wages of civil servants, creating dissatisfaction in their ranks.Thus influence of the ‘hardliners’ in the CPV gained strength by the mid-1980s, intensifying the pressure to force collectivization of agriculture in the south (Riedel and Comer 1997).
By the mid-1980s, the economy was stagnating amidst hyperinflation and a chronic balance of payments situation.Furthermore, it was clear by 1988 that Soviet aid would soon decline.In the face of these problems, a more concerted push toward reform was announced at the Sixth Congress of the Communist Party of Vietnam in December 1986 (CPV 1994). The implementation of this program of reform, referred to as doi moi, did not, however, really gain momentum until the collapse of the Soviet Union which virtually put an end to Soviet aid.Massive contraction in agricultural output in 1988 which brought in near-famine conditions in many parts of the country also played a role is ameliorating resistance to reform.The focus of early reform was largely on unshackling agriculture. The reform process largely ignored the private sector outside of agriculture. The process of establishing the institutions needed to support private sector activity outside of agriculture began in unrest only from about early 1990s.