Can Foreign Aid Help to Promote Institutional Changes?
An assessment of Poverty Reduction Support Credits in Vietnam 1
Masumi Shimamura
Mitsubishi UFJ Research and Consulting
Yoshio Wada
National Graduate Institute for Policy Studies (GRIPS)
July 2008

Abstract: This paper examines the relationship among foreign aid, conditionality, andinstitutional changes through an assessment of several Poverty Reduction Support Credits in
Vietnam. We find that the Vietnamese government’s political commitment to its accession andcompliance to the WTO has created strong incentives for various institutional changes inproperty rights, investment climate, and public service provision in Vietnam after 2000, which
in turn lead to the second wave of FDI inflow and growth. These institutional reforms have been
institutionalized in the government structure as a mechanism functioning to coordinate various
political and governmental groups.

Foreign aid such as PRSCs themselves has not created astrong incentive for these changes, rather provided guidance and specific menus for suchstrongly country owned institutional reforms.
JEL:
Key words: foreign aid, country ownership, conditionality, institution, economic reform
1. Introduction
The importance of governance and institutions in economic development has received
increasing attention among economists, political scientists, and aid practitioners. One of theprominent advocates of “new institutional economics”, Professor Acemoglu noted in a small bookletof the World Bank,
There is now a growing understanding that economic, political, legal, and social
1

Contact Information: National Graduate Institute for Policy Studies (GRIPS),7-22-1 Roppongi,

Minato-ku, Tokyo,106-8677, Japan,Tel. +81-(0)3-6439-6170,Fax +81-(0)3-6439-6010,e-mail:yo-wada@grips.ac.jp. A part of research was conducted as JBIC ex-post evaluation of PRSCs in
Vietnam. This paper is specifically written for the Seminar on Capacity Development andInstitutional Change in International Development Cooperation, July 17, 18, 2008. We would like tothank Shunji Matsuoka, Ken Togo, Yasuhisa Ojima and Kiyo Kawabuchi for their suggestions andcomments. Views and any remaining errors are our responsibility.

199

“institutions” are essential to the economic success and failure of nations. ….In the context of
economic growth and development, governance refers to essential parts of the broad cluster of
institutions. Particularly important elements of governance, defined as such, would include thepolitical institutions of a society (the process of collective decision-making and the checks onpoliticians, and on politically and economically powerful interest groups), state capacity (thecapability of the state to provide public goods in diverse parts of the country), and regulation of
economic institutions (how the state intervenes in encouraging or discouraging economic activity byvarious different actors).(p.1 in Acemoglu 2008)
If institutions are of such importance, next natural question is how we can change theinstitutions to facilitate development. Aid practitioners are normally optimistic to believe that foreign
aid can promote institutional changes. Some economists were also optimistic for the transplantationof legal, regulatory regime and other institutions (Djankov, Glaeser, La Porta, Lopez-de-Silanes andShleifer, 2003). Acemoglu, however, negatively responded to such optimism stating, “exporting
good economic institutions is as hopeless as exporting democracy,” in the above-mentioned article.
Rodrik (2006) echoed this pessimism to institutional changes by pointing out several findings thateven countries committing to reform stopped short of undertaking the full gamut of institutionalchanges, which were needed to create well-functioning market economies. He stated that theobsession with undertaking comprehensive institutional reform leads to a policy agenda that ishopelessly ambitious and virtually impossible to fulfill. The view expressed by Rajan and
Subramanian (2007) was worse. They showed that countries that receive more aid see a morenegative impact in manufacturing sectors that are more governance-sensitive. They concluded thataid might be particularly associated with weakened governance because aid inflows reduce the needfor governments to tax the governed or enlist their cooperation, which undermines thecompetitiveness of manufacturing sector through Dutch disease effects. Poverty Reduction Support
Credits (PRSCs) were introduced by the World Bank in 2001 to support IDA countries in
implementing their Poverty Reduction Strategy Papers (PRSPs). The main objective of PRSPs wasto assist IDA countries to improve the poverty impact of public policy and expenditures bypromoting more effective changes for reform than those of Structural Adjustment Programs in 1990s.
The PRSC, an approach to development policy lending (DPL), was provided in the form ofpolicy-based, non-project financing, general budget support that is typically annual, withmedium-term timeframe, and based on progress in achieving the objectives of the government’s
PRSP. The PRSP was based on four principles – country ownership, comprehensiveness andlong-term perspective, results orientation, and partnership. The PRSP country governments were
supposed to take strong leadership role to set the policies, programs, and budget in the PRSCs in linewith the principle of country ownership (World Bank 2005). The PRSCs reflect several recent trends
in the international aid architecture: shift from project support, shift from ex-ante conditionality to apartnership based approach, emphasis on country ownership, systems and capacity, shift to200

medium-term reforms, recognition of the predictability of aid, selectivity, focus on development
results, and scaling up (a concise survey is provided by Paul (2006)). PRSP strongly wishes toaddress key cross-cutting issues, especially governance. It seems widely believed among aid
practitioners that country owned PRSCs can promote to improve governance and to facilitate aprocess of political changes that shifts the balance of power among domestic stakeholders (Koeberle
and Stavreski, 2006).
The objective of our paper is to check the relationship among foreign aid, conditionality,
and institutional changes through an assessment of PRSCs in Vietnam. The period coverage of thisassessment is longer than short-term PRSC implementation period because the institutions are
impossible to change in short-term. Since institutional changes are strongly dependent on historicalcontext, we are not able to implement a rigorous “natural experiment” to evaluate the impact of the
PRSCs to institutions. Rather we examined the process of institutional changes and the PRSCs indetail and found that Vietnamese government’s political commitment to its accession andcompliance to the WTO has created strong incentives for various institutional changes in property
rights, investment climate, and public service provision in Vietnam2. The Vietnamese government’s
main driving force for reform is its strong desire to achieve significant status in the international
community, which has been embodied in its WTO accession and compliance, which was achieved inearly 2007.

In fact, PRSC policy actions (conditionality) have been consistent with WTO

compliance.

Therefore, the PRSCs may well be considered as one of the available tools to support

Vietnam’s WTO compliance.
Rodrik (2003), Rodrik, Subramanian and Trebbi (2004) illustrated the relationship among
the deeper determinants of growth, i.e., geography, integration by trade and institutions in Figure 1.
The question is how the PRSCs in Vietnam influenced or not influenced the two endogenous
variables of integration and institutions. How is the government’s ownership to implement such
reforms? What factors motivated and contributed to the country’s transformation form the socialist
planning type economy to the market based economy? We argue that these institutional reforms havebeen institutionalized in the government’s structure as a mechanism functioning to coordinate
various political and governmental groups in Vietnam. Foreign aid such as the PRSCs themselves
has not created a strong incentive for these changes, rather provided guidance and specific menus forsuch strongly country owned institutional reforms.

2

Our argument for macro reform of Vietnam’s institutions is interestingly consistent with microreform of institutions, land titling reported by Kim (2007). She empirically reported by hedonic
model that looser political institutions and rapid growth of market by integration in Ho Chi Min City
ironically created more incentives for land owners in HCMC to register their land title forestablishing private property rights.
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Figure 1 The deep determinants of income

Sources: Rodrik (2003), Rodrik, Subramaninan and Trebbi (2004)

The remainder of the paper is organized as follows. In Section 2, we briefly summarize the
PRSCs in Vietnam and existing studies of the PRSCs in Vietnam. Section 3 presents our assessmentof the PRSCs. Section 4 concludes.
2. Poverty Reduction Support Credits in Vietnam
The Vietnamese government has promoted a policy of openness toward other countries eversince the adoption of the Doi Moi policy in 1986. The government has been promoting economic
growth and poverty reduction through further development of market economy and integration into
the international economy. Pritchett (2003) expressed that Vietnam’s growth episode until 1997, thetime of Asian crisis, was a basic “escape from poverty” trap transition followed by a “Tarzan of theJungle” series of growth (Figure 2), in which Vietnam had been able to maintain rapid growth bystaying on the series of transition. Vietnam has successfully become a WTO member in January
2007. We argue that this accession to WTO was Vietnam’s another swing to the next vine3. But how
they swung to that vine?

Hill (2000) reported the success of market reform by trade liberalization in Vietnam
before 1997.
3

202

Figure 2 Pritchett’s “Tarzan of the Jungle” economy concept of evolution of output

Source: Pritchett (2003)

The Vietnamese government has formulated the Comprehensive Poverty Reduction and
Growth Strategy (CPRGS) in May 2002, and has been addressing its policy agenda, which includes
state-owned enterprise (SOE) reform, private sector development, financial sector reform, furthertransition to a market economy and integration into the global economy, policy improvements andcapacity enhancement in social sectors such as education and health, and strengthening ofadministrative reform and governance.
As a framework to support the CPRGS, the World Bank has been extending Poverty
Reduction Support Credits (PRSCs) to Vietnam.

The Japanese government had joined thisframework since PRSC3, with concrete policy messages in relation to the “expansion” 4 of the
CPRGS as well as Japan-Vietnam Joint Initiative. 5 The former had close link with policy issues
related with developing large-scale infrastructures, and the latter with issues in improving thebusiness climate in Vietnam. As such, Japanese government and Japan Bank for International
Cooperation or JBIC, a loan aid agency of Japanese Government have attached particular weight to(1) improvement of public financial management through resource allocation mechanisms of
CPRGS, and (2) investment promotion and improvement of business climate. For the succeeding
PRSCs 4 and 5, the Japanese government has added (3) financial sector reform and (4) SOE reform
to Japan’s priority areas.

The Japanese government and JBIC have continued to collaborate

actively, make adjustments in and contribute to the policy dialogue among the Vietnamese
government, the World Bank and other donors.
The objective of the PRSC program was to address the policy challenges articulated in the

4

In response to the proposal made by the Japanese government, the Vietnamese government
has added a new chapter on the role of large-scale infrastructure to the CPRGS.
5 A bilateral initiative to improve Vietnam’s business environment with the aim to strengthen
competitiveness.
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CPRGS and summarized as (1) transition to a market economy, (2) social inclusion andenvironmental sustainability, and (3) building modern governance by supporting various reforms
undertaken by the Vietnamese government, and thereby contribute to poverty reduction andeconomic growth of Vietnam (see Table 1). As for Japan and JBIC, particular emphasis has been
put on the areas of public financial management, development of investment and businessenvironment, and reform of SOEs and financial sector.

Table 1PRSC reform areas
Pillars

Reform areas(1) Transition to a Market Economy

Trade integration, SOE reform, financial sector reform,
private sector development, infrastructure(2)

SocialInclusionandEducation, health, social protection, land and forests, water,

Environmental Sustainability

environment, gender(3) Building Modern Governance

Planning process, public financial management, financial
accountability, legal development, public administration
reform, anti-corruption, information availability

Five assessments of the PRSCs in Vietnam by different donor agencies have been implemented.
a) Quality at Entry Panel (for PRSC 2) by the World Bankb) Joint Donor Evaluation (by PRSC 4) by OECD DACc) Implementation Completion and Results Report (for PRSC1-5) by the World Bankd) Mokoro Report (after PRSC 5) by DfID of UKe) Currently on-going initiative by Independent Evaluation Group of the World Bank (by PRCS 6)
We utilized all the reports for our assessments even there were considerable varieties ofconclusions within these assessments. Of the above, “b) Joint Donor Evaluation” was conductedunder the initiative of the OECD DAC as part of its Joint Evaluation of General Budget Support
covering 7 countries6 including Vietnam. This independent evaluation was based on consultations
with the World Bank, relevant donors and key government counterparts. Our assessment has taken
advantage of the evaluation methodology of this Joint Donor Evaluation.

Figure 3 provides an

overview of the Enhanced Evaluation Framework (EEF) that the Joint Donor Evaluation has
specially developed to carry out its evaluation (Joint Donor Evaluation Report (2006)).

6

Burkina Faso, Malawi, Mozambique, Nicaragua, Rwanda, Uganda and Vietnam
204

Figure 3 Causality Map for the Enhanced Evaluation Framework for Joint Donor
Evaluation

Source: Joint Donor
Evaluation Report (2006)
Some of the key features of the EEF are: adoption of the five standard evaluation criteria of theOECD DAC, creation of a logical framework depicting the possible sequence of effects of General
Budget Support (GBS), allowing them to be systematically tested, incorporation of “Level 0” in the
logical framework, showing the entry conditions (i.e. the circumstances in which GBS is introduced)
for GBS, conceiving three main types of effect – flow-of-funds effects, institutional effects andpolicy effects – in GBS, and paying particular attention to monitoring and feedback effects at alllevels of the framework.
“c) Implementation Completion and Results Report of PRSC1-5” by the World Bank (Report
No: ICR0000483, June 29, 2007) and series of its Program Documents have also been fully utilized
for our assessment. The report noted that outcomes of all of the PRSC operations in Vietnams wererated “satisfactory” and the PRSC process has contributed substantially to the capacity of thegovernment to conduct cross-sectoral policy dialogue, resulting that the government has become
more receptive to sharing policy drafts at an early stage and eliciting feedback from relevant
stakeholders (World Bank 2007).
Although the coverage of the PRSCs in Vietnam is very broad, we would concentrate ouranalysis for the coverage areas of Japan and JBIC, public financial management, development ofinvestment and business environment, and reform of SOEs and financial sector, since the objectiveof our analysis is to find a relationship between foreign aid and institutional changes with a205particular emphasis on trade relationship in the next section.

3. An assessment of the PRSCs in Vietnam
Figure 4 shows the PRSC logical framework focusing on Japan/JBIC’s priorities of the PRSC
reform areas. We apply the OECD DAC’s five evaluation criteria utilizing the logical framework
which consists of following items:
Inputsandactivities:

PRSC

funding,

policydialogues,

conditionality,

technical

assistance/capacity building, donor coordination.
Outputs: Among the PRSC reform areas, JBIC ex-post evaluation has focused on the following
five areas: public financial management, planning process, private sector development, SOE reform,
financial sector reform (Refer to Table 5 for the Operation and Effect Indicators in respective reformareas that JBIC has identified during the preparation for PRSC3, 4 and 5.)
Outcomes: Three pillars of the PRSC – (1) Transition to a Market Economy, (2) Social
Inclusion and Environmental Sustainability, (3) Building Modern GovernanceImpact: Vietnam’s poverty reduction and economic growth

Figure 4

PRSC Logical Framework (focusing on the JBIC priorities of the PRSC reformareas)

Relevance: Strong Ownership
The first criteria we apply for our assessment is the relevance of the programs. We evaluate that
PRSC has been highly relevant with Vietnam’s national policies from the time of commitment upto

206

The PRSC aims to support the CPRGS and the government’s reform programs.

now.

Due

attention should be paid that PRSC policy actions are in line with its WTO compliance, which
implies that the Vietnamese government, with its strong political commitment and determination, hasbeen utilizing another framework (i.e. aid instrument) to push forward its reform process.
The implementation of State Owned Enterprises (SOEs) reform and financial sector reformgave supporting evidences for such relationship. In the process of transition to market economy,these two sectors have often created major impediments to reform since these two sectors haveplayed a key mechanism during the socialist economy era and have closely related with the interestsof line ministries. The government’s reform initiatives to integrate with the world economy haveendeavored to block vested interests and such strong resisting force. Even so, there still remain
problems such as existence of many non-performing SOEs and slow implementation of financial
sector reform. Table 2 shows that decreasing but many non-performing SOEs are still in operation
because of such inertia. The Implementation Completion and Results Report of the World Bank
confirmed the relationship.
Integration with the world economy is being used as a mechanism to “lock-in” the reforms, andgradually create the incentive for changes in areas where the inertia is stronger. Accordingly, as
WTO accession neared the final stage, a much broader approach to reform in the banking sector was
finally adopted, and a new approach to SOE emerged (p.30, World Bank (2007))
As such, we would consider that PRSC itself has not created incentive for reform but it has
provided the government with relevant milestones and guidance to achieve the country’s
development vision and goals. Such strong motivation has come from within the government itself,
not something being imposed from donors or other outside parties.

Table 2

SOE performance in 2005

SOEs

LimitedPublicLiability

service

Joint stock

Total

Share (%)

Category A

619

56

254

281

1,210

44

Category B

750

50

125

155

1,080

40

Category C

353

8

19

58

438

16

1,722

114

398

494

2,728

100

Total

Source: Vietnamese Government

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PRSC has flexibly evolved over time in light of Vietnam’s changing development needs andpriority.

PRSC1 has taken over the features of Structural Adjustment Credits under the Washington

Consensus type of conditionalities, and the focus of its conditionality was mainly macroeconomic,
structural reforms.7 PRSC2 has broadened its coverage to social agenda and crosscutting issues,
such as governance, reflecting a multidimensional nature of poverty.

PRSC3 and subsequent

PRSCs have given greater consideration towards the linkage between economic growth and poverty
reduction.

The “expanded” CPRGS, with additional chapter on the role of large-scale

infrastructures has become the base document for PRSC 3, 4 and 5.
PRSC has effectively functioned as a tool for donor assistance, respecting the government’s
ownership and facilitating alignment with the government policy.

The backward-looking 8

operation of the PRSC process has facilitated the Vietnamese government and relevant donors toconstantly monitor and evaluate reform program in a partnership approach. The PRSCs have beenfunctioning as one-stop base for policy dialogue, and playing a significant role as a “coat hanger” byformulating important framework for reform in coordination with relevant stakeholders.
One of the major focuses in relevance is the country “ownership” of the program and reform
policies. There is a wide variety of definitions of “ownership” in aid relationships. Since donors canadvise and support, but cannot buy, economic reforms, PRSCs and Development Policy Loans aredesigned to respect the recipient commitment and ownership of reform of the program and policies.
Ohno and Ohno (2007) elaborate the concept of ownership in the context of assistance to Vietnam.
They argue that the self-help effort principle of Japanese ODA brings in two distinct dimensions ofownership, namely management of donors and management of policy ideas. Vietnam is often cited
as a model country of strong ownership to manage donors.
Our definition of ownership here is close to the one proposed by Buiter (2007). Country
ownership of the reform programs and policies implies that the programs and policies are supportedby the people who own the country9. Reflecting the opinions of the people to the program andpolicies obviously requires strong and effective institutions to coordinate conflicting interests among

7

PRSC1 was originally designed as a SAC II. In the course of the preparation of the SAC II,PRSC was introduced as a new lending instrument to support implementation of Vietnam’s
poverty reduction strategy – Vietnam was finalizing an Interim Poverty Reduction Strategy
Paper (I-PRSP), at the same time, it completed the ten-year Socioeconomic Development
Strategy Document in early 2001. The World Bank decided to support the implementation of
the I-PRSP reform program with a PRSC, rather than the SAC II. (World Bank, PRSC1 ICR,
June 27 2003)
8 While Structural Adjustment Credits have taken traditional multitranche operations withforward-looking approach, which relied on promises for future actions to justify disbursements,
under the PRSC operation, each single-tranche loan under a programmatic approach is approved
following actual performance – that is, on the basis of already completed actions – and thus
contributes to systematic policy implementation. (World Bank 2005)
9 In Vietnam the Communist Party forms the core of such ownership. We do not intend toreveal the core ownership mechanism of reform policy in this paper.
208

many stakeholders. Vietnamese government has paid considerable efforts to coordinate to own the
program and policies for achieving their goal, WTO accession. We investigate this institution for
coordination in the next criteria.

Efficacy: Coordination
PRSC funding has covered substantial additional expenditures for the government’s respective
reform areas.

Table 3 shows that significant increase in expenditures in the areas of social safety

net, health care funds and education budget has taken place. This implies that PRSC funds havegiven priority consideration in support of pro-poor policy agenda to mitigate the budget burden to
the Vietnamese government. 10

Table 3PRSC funding: cost of reforms(US$ million; estimated)
SOCB Recapitalization

2002

2003

2004

2005

2006

307

292

101

0

0

Social safety net

2

34

83

178

104

Health care funds

0

33

46

48

91

Education budget

0

46

160

362

537

309

405

389

587

731

Total

Source: World Bank
While issues related with approval of law, which some policy actions require, is beyond theauthority of the Vietnamese government (the executive branch), by and large, outputs have been
produced effectively under a certain degree of time pressure based on the PRSC cycle.

The

Vietnamese government (the executive branch) plays a very important role in the process of
formulation of legal documents (both laws and under-law documents), however, it is the National
Assembly that gives approval to most laws. As such, delays could happen occasionally, and part of
the reasons for the slow reform in the financial sector has been pointed out on this account.
From the transaction cost perspective, effective coordination mechanisms among relevantorganizations have been established (within Vietnamese government, among relevant donors, andwithin Japanese relevant organizations).

The Vietnamese government has effectively accumulated

experiences in the PRSC process so far.

Figures 5, 6, 7, and 8 in appendix illustrate thecoordination mechanisms within the Vietnamese government.

The National Steering Committee(NSC), headed by the First Deputy Prime Minister as a Chairman, was established in 2002. The

The benefit of the PRSC from donor perspective is: “Each donor can acquire comprehensive
information about Vietnam’s reform initiatives with minimum financing through the PRSC
framework. Hence, the rate of return of PRSC would be infinite so long as reform initiatives
are moving forward.”
10209

NSC has the authority over the CPRGS implementation and the entire PRSC policy decisions at thehighest level. The State Bank of Vietnam (SBV) is the agency responsible for preparation andimplementation of the PRSC.
The PRSC Program Coordination Unit (PCU), in particular, has effectively played the role ofthe one-stop base for policy dialogue and coordination within the government and with the donors.
In light of the increasing workload and the importance of the PRSC initiatives, the PCU – a full time
coordination unit – was set up under the International Cooperation Department of the SBV since
PRSC3 to exclusively take charge of every matter related with the PRSC operations. As mentioned
above, PRSC has evolved over time and expanded its coverage to wider range of the economy andsociety. The administrative costs of the PCU (including salaries for the personnel) have been
covered by the assistance from donors.
While transaction costs have increased as growing number donors participate, they have been
kept within a manageable level. The process for choosing policy actions and benchmarks has
become complicated due to the different areas of priority and interest for each donor. The World
Bank, as a focal donor, has incurred most of the burden concerning coordination among donors andwith the Vietnamese government. The fact that both the government and the donors working
together in a harmonized manner throughout the process have greatly contributed to improve
efficiency.

The government has strengthened its ownership and become more active in the PRSC

process as it accumulated experiences.
Coordination within the Japanese relevant organizations has been taken place with full
utilization of the ODA Task Force at the field level (Embassy, JBIC, JICA and JETRO). In addition
to a close communication between the field side and the Tokyo side, coordination has been takenplace among the relevant Ministries and JBIC/JICA headquarters in Tokyo.
The fact that Vietnam has been implementing PRSC constantly every year has shown thatworkable PRSC process has been progressing in Vietnam (see Table 4). In the cases of othercountries in Asia, transaction costs are likely to be huge for constant implementation of the PRSC.
In fact, Vietnam has been considered as a role model from other country for PRSC good practice.
Missions from the Laotian government have visited Vietnam twice to learn Vietnam’s PRSC
experiences.

210

Table 4

PRSCs in International Perspective (for Asian countries)

RegionCountry

FY01

East Asia

Cambodia

FY02

FY03

FY04

FY05

South Asia

FY07
1

Lao PDR
Vietnam

FY06

1 (I)

1 (II)

2

Nepal

3

1

2

3

4

5

6

1

1 [+]

1

Pakistan
Sri Lanka

1

2
Source: World Bank materials

Effectiveness: Integration
While progress has been slower in financial sector reform, in general, reform process has been
moving forward as expected.

In the case of financial sector reform, there are challenges in securingcoherence among legal documents, which can be considered as part of the reasons for delay. 11
Table 5 summarizes the progress of development outcomes for PRSC3, 4 and 5.

The

information in the column of status was drawn from the Implementation Completion and Results
Report (World Bank 2007).

Table 5 Progress towards development outcomes
Indicators
Baseline (2003)
Target (2006)
Publicfinancial U: Unsatisfactory
Improve from U
management:(Limited progress)
Operation
andmaintenance costs are
fully
taken
into
account

Planning process:
Substantially
improved integrationofthePublicInvestment Program(PIP) with budget
Privatesectordevelopment:
A level playing fieldsecured with same
regulations for all

S: Satisfactory
Maintainor(Expansion of CPRGS to improve from S
infrastructure)

U: Unsatisfactory(Limited progress)

Improve from U

11

StatusSatisfactory:
Ban on public investment
projects
without
properfunding.
Medium Term Expenditure
Frameworks (MTEFs) better
integrate capital and recurrent
expenditure in four sectors12
Satisfactory:
Improved criteria to prepare,appraise and implement
public investment projects
leading to better selection andmore transparent funding
Satisfactory:
New land Law improves
access to land
Corporate tax unified.

A major breakthrough in this reform area was the success of Vietcombank’s initial public
offering (IPO). Ironically the situation of stock market in Vietnam worsen after the IPO by the
sub-prime shock from international market.
12 Four sectors refer to: education, agriculture and rural development, health, and transport.
211

firms
SOE reform:
PS: Partially Satisfactory Maintainor
There are about 2,100 (decreased from 5,334 improve from PS
SOEs
SOEs in 2001 to 4,361
SOEs in 2003)
Financialsectorreform:SBV
focusedonsupervisionandregulation

U: Unsatisfactory
Improve form U(Conflicting
SBV
responsibilities as owner
and regulator)

Satisfactory:
About 2,000 SOEs. Large
SOEs being transformed.
SOE shares sold throughauctions.
Partially Satisfactory:
Banking reform roadmap
approved to remove conflicts
and
focus
SBV
on
supervision.

The important issue concerning effectiveness is how to secure adequate enforcement on the
ground, after the framework for reform (e.g., legal documents) has been established. The PRSC
can facilitate reform process by setting appropriate milestones and policy measures such as
implementation guidelines. 13

However, limitations exist as the PRSC cannot be considered apanacea for every reform (see “Functional sustainability” of PRSC mechanism).
In relation to Japan-Vietnam Joint Initiative to improve business climate, although it is difficult
to trace the attribution, the increase in investment (in total and from Japan, respectively) has
coincided with the PRSC assistance period (see Figures 9 and 10). It should be noted that theincreasing investment trend started around 2000, when Vietnam has decided to strengthen tradeintegration with the aim to become a WTO member. In fact, WTO accession was one of theconditions in the US-Vietnam Bilateral Trade Agreement, which was concluded in July 2000. As
such, the direction of Vietnam’s reform initiatives has been set at the time.

In fact, PRSC policy

actions have been consistent with WTO compliance, and the PRSCs may well be considered as oneof the available tools to support Vietnam’s WTO accession.

Accordingly, Vietnam has increased its

attractiveness as a destination for investment, since potential investors may have perceived theinvestment risks to come down.
One of the breakthrough achievements, pointed out by Japanese investors in Vietnam, was the“elimination of unanimous or consensus rule” under the new Enterprise Law. Many Japanese
investors have recognized this restrictive investment rule as a serious bottleneck.

While

enforcement issues still remain, there are big expectations on the side of the investors for
improvement in a real sense.
We argue that the effectiveness of the PRSCs largely depends upon the Vietnam’s own
commitment to push forward for further integration into the global economy. Outside resources andideas which do not conflict much with domestic interests are appropriated, while a particular set ofreforms which were expected to generate a severe conflict between foreign and domestic interests
such as SOE reform and financial sector reform delayed. It was because the Vietnamese government13

For example, a number of decrees provide guidelines for implementing the new Enterprise
Law and Investment Law.
212

consists of a highly decentralized, fragmented and sometimes incoherent set of state institutions(Painter 2005). To cope with wide range of issues for reforms, the Vietnamese government used
foreign aid as a coordination tool, created an internal coordination mechanism as a counterpart offoreign aid which functioned to integrate various set of state institutions.

To state more concretely

as an example, the Vietnamese government may well have utilized the PRSCs to legitimatize reform
process to domestic stakeholders by showing that donors are also in support, and to facilitate reform
process.

The government has been also conscious about the external audiences. By showing the

PRSC process has been moving forward, the government has intended to provide potential foreign
investors a sense that Vietnam has been truly committed to reform.
its attractiveness as a destination for investment.

In fact, Vietnam has increased

Hence, we can see that the Vietnamese

government has been managing the entire reform process with strong ownership, and using foreign
aid as its integral part. In this sense, foreign aid did not create strong incentive for reform. Rather itworked as an outside tool creating coordination mechanism for domestic interests.

Figure 9(mil. US$)

Total
IMP

Increase in investment in PRSC period
10000

1000

9000

900

8000

800

7000

700

6000

600

5000

500

4000

400

3000

300

2000

200

1000

100

Total No.

01988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total

147

364

512

1147 1926 2615 3721 6524 8497 4737 3658 1567 2013 2529 1376 1900 2200 4268 9200

IMP

0

0

0

428

575

1118 2241 2792 2914 3215 2369 2535 2413 2450 2591 2650 3850 3300 4200

Total No.

17

40

59

130

193

261

340

367

325

417

228

308

374

518

697

752

723

922

914

Source: JICA expert

213

0Figure 10(mil. US$)

Increase in investment in PRSC period
1200

160

Record-high number (146)

140

1000

120
800
100
Total
Total No.

600

80
60

400

40
200
20
0

0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total

83

2

13

221

76

333 1130 591

657

108

62

81

163

102

100

224

437 1058

Total No.

5

4

9

11

15

27

65

12

14

25

40

48

53

61

107

47

54

146

Source: JICA expert
With regarding effectiveness on the part of Japan’s aid practitioners, PRSC has lead toformulate and implement concrete projects and programs to support reform process on the ground bystrengthening capacity and facilitating institution building, which in turn provides further toolkit ofreforms for various state institutions.
Table 6 shows some specific examples of cases that policy dialogue under the PRSC framework
has let to generate opportunities for project/program formulation. Supporting policy reform under
the PRSC framework and supporting individual projects/programs will have reinforcing impact witheach other.

PRSC policy dialogue has lead to implementation of concrete projects and programs to

support reform process on the ground.

214

Table 6 Availableness to generate opportunities for project/program formulation
Policy measures taken up at
JICA projects/programs
JBIC projects/programs
the PRSC policy dialogue(examples)
Issuesforenhancing Preparation of a technical A study underway for thetransparency of Development cooperation project underway preparation of action plans toAssistance Fund (DAF)
for SBV capacity building
strengthen risk management
system of the Vietnam
Development Bank
Traffic safety issues
Development
study
on Northern Vietnam National
National Road Traffic Safety Roads
Traffic
SafetyMaster Plan underway
Improvement
Project
underway
Adoption of regulations for Development study on Master Small-Scale
Pro-Poor
master and regional plans
Plan for the Improvement of Infrastructure Development
Rural Living Conditions in Project (III） to be preparedNorth Western Mountainous for implementation
Region underway
Preparation of pilot MTEF for Support provided through Transport Partnership grouptransport sector
activities (Co-chairs: MOT and JBIC)
Impact: Opportunities for growth and poverty reduction
Figure 11 shows the conceptual diagram on the linkages between outcomes and impacts.
Outcomes are the three pillars of the PRSC: (1) Transition to a Market Economy, (2) Social
Inclusion and Environmental Sustainability, (3) Building Modern Governance. The diagram was
drawn from the causality map in the Joint Donor Evaluation report.

215

Figure 11

Outcome-Impact linkages (conceptual diagram)
Macro environment
favorable to private
investment
andgrowthBuilding
ModernGovernanceMore conducive
growth-enhancing
environment

Appropriate private
sectorregulatory
policies

Social Inclusion
andEnvironmental
Sustainability

Transition to aMarketEconomyMoreresources
flowing to service
delivery agencies

Incomepoverty
reduction

Non-income poverty
reduction

Appropriate sector
policies
address
market failures

More and more
responsive/pro-pooraccountable
service delivery

Improvedadministrationofjustice and respectfor human rights,
andpeople’s
confidence
ingovernment

Empowerment
andsocialinclusion of poor
peopleGrowth impact
Vietnam has made remarkable achievements in economic growth and firm accomplishments inpoverty reduction. And such records have been consistent with the increasing trend of investment
to Vietnam.

The Vietnamese economy has continued to develop in a robust manner, exceeding 7

percent GDP growth per year from 2002 to 2004, and over 8 percent growth since 2005.

Foreign

Direct Investment (FDI) inflows, boosted by Vietnam’s accession to the WTO, have surged (seeFigure 12).

216

Figure 12

Key economic indicators

Poverty impacts and governances
Positive changes are also seen in the social development with the rate of poverty headcountreduced to 19.5 percent in 2004 (see Figure 13). Vietnam has already achieved four of the ten main
MDG targets set for 2015, and likely to achieve five more targets ahead of time (see Figure 14).
Vietnam’s role in the international arena has been improved, and Vietnam has become an economy
with enormous prospects for development and an attractive destination for foreign investors. (MPI,
World Bank) .
For the impacts on governance, we can assess the two representative indicators for governance,
Polity IV and Worldwide Governance Indicators by Kaufman and Kraay. Authority trends from
Polity IV do not have any significant changes in governance because there was no change in the
structure of government in the program period. KK index shows a slight improvement in governance,
especially in the areas of government effectiveness and rule of law (Figure 15 and 16).

217

Figure 13

Trends in poverty

Figure 14

Progress towards the Millennium Development Goals

218

Figure 15 Polity IV Authority trends for Vietnam

Figure 16 Worldwide Governance Indicators for Vietnam

219

220

Sustainability: Can they find another vine for “Tarzan” economy?
While PRSC mechanism itself may come to an end with Vietnam’s graduation from the IDA
eligible status (most probably after 2011), in order for the effectiveness of PRSC outputs andoutcomes to continue in medium and long term, “functional sustainability” of PRSC mechanism
becomes a critical factor.
“Function” referred here could be understood as accumulated experiences, knowledge, skills
etc., which have been fostered through the past PRSC initiatives by relevant parties. Such function
is highly valuable not only for the future PRSC operations per se, but also for the Vietnamese
government’s overall policy making and reform initiatives in a forward looking manner. The
Vietnamese government has translated such function into their daily work – through enhancing
communication and coordination mechanisms, and strengthening channels for policy dialogue within
the government as well as with donors and investors. Through the PRSC process, the donor side has
also strengthened coordination and channels for policy dialogue with the Vietnamese government.
“Sustainability” here refers to whether or not, and to what extent the abovementioned functions
would be retained and utilized later on, even without PRSC after Vietnam graduates from IDA.
Configuration of donor support corresponding to the post-PRSC mechanism, if any, may change, andthe SBV may no longer play the role as a focal point within the government after 2011. In fact, theVietnamese government may choose some other agencies as focal point to carry over and utilize
such accumulated functions.

In this sense, “function” and “organization” should be distinguishedclearly here – it is the function that needs to be retained and enhanced, not a particular organization
itself (e.g., SBV).
Despite the number of donors participating in the (post-)PRSC mechanism may increase in the
future, PRSC “function” should continue to be institutionalized and workable, keeping transaction
costs for coordination within a manageable level.

Figure 17 shows the total disbursement by

operation and the number of co-financiers. As new rounds of the PRSC proceed, disbursement
amount and the number of co-financiers have also increased. The fact that Vietnam can continue
new rounds of the PRSC constantly has shown that these increasing transaction costs for221coordination have been managed effectively. Hence, the bases for “functional sustainability” of
PRSC mechanism can be considered existent.
Figure 17 Total Disbursement by Operation and Number of Co-financiers
400

13
12
WB

350

WB
11
10

300

WB
8
WB
7

200
6
150

5
WB

WB

Number of donors

Millions of dollars

9
250

4
WB

100

3
2

50

1
0

0
PRSC 1 (I) PRSC 1 (II)PRSC 2PRSC 3

Number of donors

WB

PRSC 4PRSC 5PRSC 6

Millions of dollars

Source： World Bank
Through the PRSC experiences, the government has learned how to manage changes to theeconomy and society. As Vietnam is rapidly undergoing transition to a market economy, effective
changes in institutions becomes highly critical.

Vietnam is facing a new challenge, and PRSC

function should be developed in order for the Vietnamese government to quickly and adequately
respond to changing environment in the international market, which Vietnam is more and more
exposed to. Post-PRSC needs to address market participants in the international financial market(i.e., external stakeholders), in addition to the existing FDI investors, who have been one of thetarget audience in the past PRSCs. In fact, true policy stance/fiscal stance needs to be signaled tosuch external stakeholders in order for the Vietnamese government to effectively manage
expectations about the economy14.
As Vietnam will have more options for funding sources to cover the country’s development
needs (especially after 2011), whether the Vietnamese government would still be interested inborrowing from donors in softer terms or rather opt to procure funds from other sources in harderterms would become a question to be noted. The Vietnamese government would give carefulconsideration to various conditions to decide on the most desirable option – transaction costs fordonor coordination could be one of the items that the government would examine. Such being thecase, donors may start to consider the strategies for working with middle income country.
The effectiveness of the PRSC outputs and outcomes will be sustained only when they arecomplemented by appropriate capacity development. As mentioned earlier, the PRSC can not be

Recent problems of high inflation and surge in current account imbalance seem toindicate the deficiencies of the existing institutions.
14222

considered a panacea for every reform. Because PRSC policy actions are the essence of the mostimportant milestones for reform, limitation exists in dealing with step-by-step capacity improvementon the ground – and it is the role of the capacity development to do the job.

Therefore, the PRSC

needs to be complemented by capacity development for institution building to make real changes.
They should go together to exert synergetic effects. Change is driven by political objectives,
long-term, and needs constant (re-) negotiations between actors. Such capacity development should
support stronger budgeting and planning by facilitation of processes, offering long-term advice to
key actors, and supply of technical expertise on demand.
In view of Vietnam’s further economic integration, technical assistance should address theneeds of market participants in the international financial market.

Accordingly, the level ofchallenge is expected to increase as new round of the PRSC proceeds.
Evaluating from the continuity of Japan/JBIC’s participation in the PRSC framework, a Japanese
investor noted an important point, in relation to Japan-Vietnam Joint Initiative, that establishing therule of the game is not the end in itself, but how to ensure its effectiveness is the issue. Japanese
investors are eager to see practical gain from the initiatives.
By the same token, preparation of policy actions is not the end in itself in the PRSC initiatives.
Actual institutional reform and capacity building at the field are indispensable to achieve real reform.
Therefore, JBIC/JICA should provide appropriate technical assistance so as to secure enforcement
for real changes and to strengthen PRSC effectiveness and sustainability.

4. Conclusion
Were the PRSCs in Vietnam efficient and effective aid for Vietnamese Economy? Ourassessment clearly confirms the success of the PRSCs in Vietnam. The PRSCs in Vietnam wereindeed the most successful case of the PRSCs in the world. Our analysis suggests that the key tosuccess were strong ownership of the Vietnamese government, its strong commitment to WTO
accession and process beyond, and coordination institutions that have enabled to implement thereform process effectively. The PRSCs have indeed supported these key factors and contributed tofacilitate the country’s overall reform process.. The Vietnamese economy has continued to growstrongly, exceeding 7 percent GDP growth per year from 2002 to 2004, and over 8 percent growthsince 2005. Positive changes are also seen in the social development with the rate of poverty
headcount reduced to 19.5 percent in 2004. While progress has been slower in financial sector
reform, in general, reform process has been moving forward as expected. With respect to theinitiatives to improve business climate, the increase in investment has coincided with the PRSC
assistance period. Furthermore, the PRSC has lead to formulate and implement concrete projects andprograms to support reform process on the ground by strengthening capacity and facilitating
institution building. As for the transaction costs required, effective coordination mechanisms among
relevant organizations have been established (within Vietnamese government, and among relevant223donors).

While transaction costs have increased as growing number donors participate, they havebeen kept within a manageable level.
Then, did the PRSCs create incentives for institutional reform in Vietnam? Generally
our assessment is very conservative. Vietnam’s strong commitment and ownership of reform
program and policies are fundamentally based on the motivation of integration to the global
economy. WTO accession provided a great push toward market economy. The PRSCs and technicalassistance from donors can be mutually enforced through various stages of policy action. Technicalassistance can bring about policy agenda that has been identified on the ground to the PRSC policy
dialogue.

Concurrently, technical assistance can enforce specific actions that have been addressed

during the policy dialogue in the PRSC framework.
The sustainability of reform mechanism in Vietnam after 2011 poses a very difficult issue. The
experience of China offers a good example of the change in policy space after accession to WTO.
Heilman (2008) reported the range of policy experimentation in China substantially narrowed after
its accession to WTO membership. Although the context of Vietnam is somewhat different from thatof China, these two economies share the some characteristics in common. To cope with the rapidlychanging international economic environment, the PRSCs have functioned to effectively
communicate with various donors and other development partners. In light of the evolution of the
PRSC mechanism and policy agenda (e.g., coverage has become comprehensive – frommacroeconomic, structural reforms to a broader reform agenda), the Vietnamese government clearlyneeds some institutional mechanism for policy coordination and enforcement to continue on its
reform process under the post-PRSC framework. It will be a real challenge to the Vietnamese
economy after 2011 when the role of foreign aid is anticipated to be much narrower.
End.

224

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227

APPENDIX

Figure 5

Coordination institutions within the Vietnamese government
The National Steering Committee for PRSCs

Chairman
1st Deputy Prime Minister

Vice-Chairman
SBV Deputy Governor
Mr. Phung Khac Ke

NSC Member
Vice Ministerof MOF

NSC Member
Vice Ministerof MPI

NSC Member
Vice Ministerof G. Inspectorate

NSC Members
Vice Ministerof other Ministries/
G. Agencies* The National Steering Committee for the implementation of the CPRGS and the PRSCs wasestablished in 2002. The member Vice Minister is appointed by the respective Minister.

Figure 6

The Secretariat for PRSCs
Head
Director ofInternational Cooperation Dpt.
SBV

MemberDirector ofExternal Finance Dpt.
MOF

Member
Deputy Director ofExternal Economic Dpt.
MPI

228

Members
Directors/Deputy
Directors ofLead Departments
Concerned
Ministries/Agencies

Figure 7

The Ministerial-level Management
The State Bank of Vietnam
as Lead Agency

Lead Department
Int’l Cooperation Dept.

The PRSC Program
Coordination Unit

MOF

MPI

Other concerned
Ministries/Agencies

Lead Department

Lead Department

Lead Department

Specific Dept.

Specific Dept.

Specific Dept.

Specific Dept.

Specific Dept.

Specific Dept.

* The PRSCs Program Coordination Unit was only established since PRSC 3, but has shown valuable
contribution to supporting the broadly concerned ministries in the preparation, implementation and monitoring of
the operations and to the coordination between the Government and the World Bank & other donors.

229

Figure 8

SBV’s participation in THE PRSCSs
SBV as a Concerned Agency
headed by a Deputy Governor
Focal Department- International Cooperation Dpt.

Strategy Dpt.

Supervision Dept.

Monetary Dept.



Issuance of banking reform roadmap
Equitization process of SOCBs
Strengthening the fuctions of SBV departments



Adoption of loan classification & provisioningin line with international practices
Adoption of credit manuals for SOCBs
Issuance of Regulations for micro-financeinstitutions(Sources of all the diagrams SBV PCU)

230





Banks & Non-banks
Credit Institutions Dept.

Adoption of Basel Core
Principles
Strengthened supervision
to banking sector
Provision ofbanking sector

dataof