Is Vietnam Ready to Modernize Its Institutions?

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After engendering one of the world's most successful economic transformations of the past 25 years, Vietnamese institutions must be modernized according to the latest Socio-Economic Development Strategy (SEDS) adopted by the Party Congress in February 2021. They have become a major impediment to the nation's aspiration to reach high-income by 2045. This is acknowledged at the highest levels: Prime Minister Pham Minh Chinh in April 2022 highlighted that only seven out of the 111 national, sectoral, regional, or provincial master plans had been approved since the adoption of the Law on Planning in late 2017. His call to revamp the country's planning system is in line with the historical experience of Korea, which undertook major institutional reforms when it reached the same stage of economic development as Vietnam today.

The critical role of adapting institutions in development has been well documented by renowned scholars, including Douglass North, whose work on the role of institutions earned him the Nobel Prize in Economics in 2003. Yet even if the economic literature and Vietnamese policymakers agree, the concrete scope and breadth of the institutional reforms needed for a country like Vietnam to escape the middle-income trap is less clear.

In the World Bank Group's Vietnam Systematic Country Diagnostic (SCD) Update, "How Will Vietnam Blossom? Reforming Institutions for Effective Implementation", we propose a concrete approach for institutional reforms using a simple, but intuitive methodological framework. The starting point is that institutions should be designed in a way that ensures the most effective and efficient implementation of the country's development priorities. They should also be adapted to accommodate for new and complex development challenges that emerge in the fast-changing domestic and international contexts. Unfortunately, Vietnam's implementation record - defined as the difference between aspirations and implementation - has been uneven over the past decade. While effective in implementing trade openness, digital transformation, and social inclusion, Vietnam has lagged implementing other priorities such as green growth, financial inclusion, and infrastructure upgrading. In addition, because the jump from mid- to upper-middle income is harder than the one from low- to low-middle income, overall implementation performance will have to increase threefold compared to what was achieved between 2010 and 2020 for Vietnam to achieve its development aspirations.

To assess Vietnam's implementation performance, we broke it down into three determinants: vision, capacity, and motivation, each of which was composed of two sub-components. The variations in these scores for each of these six metrics give a clear picture of the uneven implementation of policies associated with development priorities (Figure 1). For example, trade openness scored uniformly better for vision, capacity, and motivation than did green growth or infrastructure upgrading.

Figure 1: Driving the implementation performance

Source: Vietnam SCD update, WBG 2021

Why has the government been able to develop strong vision, capacity, and motivation for the trade priority and social inclusion agendas, but not for others? Like the doctor who has discovered the symptom of an illness, there was still the need for us to identify the underlying cause.

The discovery was that the highest scores in the determinants of implementation have been systematically associated with the following five institutional reforms: creating a solid institutional anchor that will transform development priorities into concrete actions; streamlining administrative processes to increase the effectiveness of government at all levels; using market-based instruments to motivate public and private stakeholders; enforcing rules and regulations to enhance motivation, trust, and fairness; and engaging in participatory processes that will produce greater transparency and accountability. Conversely, in the absence of these reforms, institutions have generally failed to support efficient implementation of the country 's development priorities.

Together, these five institutional reforms constituted the platform for the Vietnam's highly successful transition during the 1990s and 2000s from being one of the most closed to being one of the most open economies in the world. Concretely, the government established a solid institutional anchor by creating the National Steering Committee for International Economic Integration, while strengthening the Ministry of Industry and Trade. Complex administrative processes and procedures were streamlined with special regimes for strategic investors and by delegating approval processes to the provinces as well as by creating a single window for customs procedures. Market forces were enhanced by reducing barriers to entry and lowering external tariffs, including through multilateral and bilateral trade agreements. The compliance by exporters and foreign direct investors with local regulations was strictly monitored, while participatory processes were introduced through open data and consultations with key stakeholders both local and foreign.

Our message is that adaptive institutions that can respond to new and increasingly complex development priorities hold the key to Vietnam's future development success. Today, for example, green growth suffers from an absence of a clear institutional anchor; several parallel strategies and plans, which may not be in full alignment; and unclear relationships between central and local government. Market signals are also confusing as subsidized natural resource prices encourage irresponsible behavior, while laws and regulations are not always enforced. Together, these shortcomings are undermining decision-making and implementation of the country's green agendas.

The country will need to replicate the amplitude of the reforms that were implemented during the Doi Moi reforms in the late 1980s and the successful implementation of trade openness over the past two decades. Hopefully, the institutional platform that we propose in the SCD Update will help Vietnam move in that direction sooner rather than later.