Challenging the Investment Climate Paradigm: governance, investment and poverty reduction in Vietnam

Lead Research Organisation: Institute of Development Studies
Department Name: Research Department

Abstract

Abstracts are not currently available in GtR for all funded research. This is normally because the abstract was not required at the time of proposal submission, but may be because it included sensitive information such as personal details.

Publications

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Hubert Schmitz (Co-Author) (2014) Drivers of Economic Reform in Vietnam's Provinces in Development Policy Review

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Schmitz H (2012) Who Drives Economic Reform in Vietnam's Provinces? in IDS Research Reports

 
Description Vietnam has undergone rapid and far-reaching economic transformation. The decentralisation of certain economic powers from central to provincial government has contributed to this success.

This project asks who drives economic reform in the provinces, exploring the role of business and government and alliances between the two.



Key research findings

• Proactive provincial government working in consultation with the private sector has been critical.

• National enterprises have exerted positive influence on economic reform, as evidenced in Bac Ninh and Dong Thap provinces.

• However the policy process is often hampered by the lack of organisational capacity within the private sector.

• The Provincial Competitiveness Index (PCI) scores which domestic enterprises give to their provincial governments have had a considerable influence on the reform process.

• Central government has retained influence on investment climate reform through promotion decisions which tend to favour reformers.

• Despite decentralisation, the Communist Party has been the key force in managing an increasingly complex political system.

• Party and Government need to combat more forcefully two corrosive practices: the avoidance of tax and the hoarding of land.



Despite decentralisation bringing with it problems of inefficiency and waste, the empowering of provincial governments has been key to Vietnam's success. The PCI provided critical capacity to monitor reform efforts and contributed to multiple learning effects within and across provinces. The PCI has been a useful tool through which the central government can encourage and reward good performance.



Key policy lessons / implications of research

• Allowing provinces to find their own way forward was central to Vietnam's progress in institutional and economic development.

• The research highlights the importance of both formal and informal spaces for communication and dialogue between the private sector and government.

• Public sector failure often arises because the private sector is not sufficiently well organised to work with government in a constructive way.

• Combating tax avoidance and land hoarding should be prioritised by Party, government and the Vietnam Chamber of Commerce and Industry (VCCI).

• Investment decentralisation needs to be accompanied by strong central regulation specifying what provincial governments are permitted to offer investors and what they are not.

• Donors can support the institutionalisation and adoption of monitoring tools and indices such as the PCI in other countries.
Exploitation Route There is a lesson for the private sector in Vietnam and in other countries. The research highlights the importance of both formal and informal spaces for communication and dialogue between the private sector and government. Reform has happened fastest in places where government has had a good understanding of the problems faced by the private sector and has been responsive to their needs. The capacity of government to do the right things depends to a considerable extent on the capacity of the private sector to engage. Governments and donors can support and challenge the private sector to develop such collective capacity but to do so is above all the responsibility of the private sector itself. Business people throughout the world excel in pointing out public sector failures. Few recognise that public sector failure often arises because the private sector is not sufficiently well organised to work with government in a constructive way. The comparison between provinces in Vietnam underlines the importance of developing the organisational capacity of the private sector. This is not a new point. The importance of well-organised business associations has been recognised for a long time in Vietnam and elsewhere. This point, however, needs to be made more forcefully. For government to be effective in improving the investment climate and conducting industrial policy, it requires an effective business sector. Conversely, behind public sector failure is often private sector failure. The findings of the Vietnam study connect in very interesting ways with findings from other research in China, Mexico and Egypt. This body of research questions the dominant approach to fostering private investment by focusing on the national investment climate. See for example, the recent discussion in The Economist (25 May 2013, pages 16-18). Engaging in the policy debate at this high level would however require substantial additional effort.
Sectors Healthcare

URL http://www.ids.ac.uk/project/challenging-the-investment-climate-paradigm-governance-and-growth-in-vietnam