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Global Donor Platform for Rural Development

About the Platform Knowledge Piece series
The Global Donor Platform for Rural Development commissioned three comprehensive studies to capture Platform members’ knowledge on key issues affecting the delivery and impact of aid in ARD: PKP 1 PKP 2 PKP 3 Policy coherence for agriculture and rural development Aid to agriculture, rural development and food security – Unpacking aid flows for enhanced effectiveness The strategic role of the private sector in agriculture and rural development

The PKPs are the products of extensive surveys of Platform member head office and field staff, visits to country offices, workshops dedicated to sharing findings and refining messages, and successive rounds of comments on drafts. On the basis of each PKP, separate policy briefs will be published. For more information on the PKPs visit donorplatform.org

This working paper is only available electronically and can be downloaded from the website of the Global Donor Platform for Rural Development at: www.donorplatform.org/resources/publications Secretariat of the Global Donor Platform for Rural Development, Dahlmannstrasse 4, 53113 Bonn, Germany Email: secretariat@donorplatform.org The views expressed herein are those of the authors and do not necessarily represent those of individual Platform members. All rights reserved. Reproduction and dissemination of material in this information product for educational or other non-commercial purposes is authorised, without any prior written permission from the copyright holders, provided the source is fully acknowledged. Reproduction of material in this information product for resale or other commercial purposes is prohibited without written permission of the copyright holders. Applications for such permission should be addressed to: Coordinator, Secretariat of the Global Donor Platform for Rural Development, Dahlmannstrasse 4, 53113 Bonn, Germany, or via email to: secretariat@donorplatform.org. © Global Donor Platform for Rural Development 2011

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Table of Contents
Table of Contents ............................................................................................................................. 1 Executive Summary ......................................................................................................................... 5 Major policy reforms in agriculture and private sector development ......................................... 5 A new role for the Government ....................................................................................................... 6 Responses of the rural economy to the reforms .......................................................................... 7 Rice value chain in the Mekong River Delta .................................................................................. 8 Policy environment for the rice sector ............................................................................................ 8 Rice value chain in the Mekong River Delta .................................................................................. 9 Major challenges of the rice sector............................................................................................... 10 Coffee value chain in the Central Highlands ............................................................................... 11 Policy environment for the coffee value chain .............................................................................. 11 Coffee value chain in the Central Highlands ................................................................................ 13 Major challenges for the coffee sector ......................................................................................... 15 Organic vegetable value chain in the Red River Delta ............................................................... 16 Policy environment for the organic vegetable value chain ........................................................... 16 Organic vegetable value chain in the Red River Delta ................................................................ 16 Major challenges for the organic vegetable value chain .............................................................. 18 Donor support for agriculture and private sector development in Vietnam ............................ 19 Some policy discussions .............................................................................................................. 21 Introduction..................................................................................................................................... 24 The role of the private sector in agriculture and rural development during the economic renovation ....................................................................................................................................... 26 Overview of the doi moi ................................................................................................................. 26 Before the 1980s: centrally planned economy ............................................................................. 27 During the period 1980-88: „fence-breaking‟ measures ............................................................... 27 Since 1989: market-oriented reforms ........................................................................................... 28 Major reforms on agriculture and private sector ........................................................................ 29 De-collectivization, Directive 100 and Resolution 10 ................................................................... 29 Land reforms in rural areas .......................................................................................................... 31 Liberalization of trade in the agriculture sector ............................................................................ 32 Facilitation of private sector in agriculture .................................................................................... 33

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Other agriculture-related policy changes .................................................................................... 34 Access to credit for rural enterprises ............................................................................................ 34 Incentives for investment in agriculture ........................................................................................ 35 Information Communication Technology (ICT) ............................................................................ 35 New role of the State in agriculture and rural development ...................................................... 36 Rural infrastructure development ................................................................................................. 36 Access to public services ............................................................................................................. 37 Provision of other public services ............................................................................................... 38 Agricultural extension services ..................................................................................................... 38 Agriculture research activities ...................................................................................................... 39 Direct support for rural areas ........................................................................................................ 39 Major outcomes of the Doi moi in agriculture and rural development ..................................... 42 Impressive agricultural growth ...................................................................................................... 42 Robust but unstable growth of agriculture export......................................................................... 43 Agriculture and rural employment ................................................................................................ 45 Rural poverty reduction ................................................................................................................ 48 Conclusions .................................................................................................................................... 49 Private Sector Development in Agriculture and Rural Development: The Case of Paddy Rice in the Mekong River Delta ............................................................................................................. 51 Major policy changes in the rice sector ....................................................................................... 51 Access to paddy land and irrigation ............................................................................................. 51 Irrigation system in Mekong River Delta ...................................................................................... 53 Interventions in rice trading .......................................................................................................... 53 Other state interventions in the rice sector ................................................................................... 55 Major outcomes of the rice sector ................................................................................................ 56 Dramatic growth of paddy output and export ............................................................................... 56 Expansion of rice production and poverty reduction .................................................................... 59 Analysis of the Rice Value Chain in the Mekong ........................................................................ 60 Overview of the rice value chain in MRD ..................................................................................... 61 Key actors of the rice value chain ................................................................................................ 61 Rice growers................................................................................................................................. 61 Collectors/Traders ........................................................................................................................ 65 Milling factories/companies .......................................................................................................... 66 Rice exporters .............................................................................................................................. 68 Distributors ................................................................................................................................... 71 Major challenges and policy implications ................................................................................... 72 Key challenges ............................................................................................................................. 72 Some policy implications .............................................................................................................. 73 Export Agriculture Crops: The Case of Coffee Value Chain in the Chain in the Central Highlands ........................................................................................................................................ 74

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Major policy issues in the coffee sector ...................................................................................... 74 „New Economic Zone‟ policy and coffee in the Central Highlands ............................................... 74 Other state interventions in the coffee sector ............................................................................... 75 Technical standards ....................................................................................................................... 75 Trading regulations ........................................................................................................................ 76 Extension services and irrigation in the Central Highlands ...................................................... 76 Major outcomes in the coffee sector ............................................................................................ 77 Robust growth of coffee output and export .................................................................................. 77 Vietnam‟s coffee in the world coffee market ................................................................................ 80 Coffee expansion and poverty reduction in the Central Highlands .............................................. 83 Analysis of the Coffee Value Chain in the Central Highlands ................................................... 85 Overview of the coffee value chain in the Central Highlands ....................................................... 85 Key actors of the coffee value chain in the Central Highlands ................................................. 86 Coffee growers ............................................................................................................................. 86 Traders and collecting agents ...................................................................................................... 91 Coffee manufacturers ................................................................................................................... 93 Coffee exporters ........................................................................................................................... 95 Major challenges and policy implications ................................................................................... 97 Key challenges ............................................................................................................................. 97 Low incentives and pressures toward better quality coffee ......................................................... 97 Other challenges ............................................................................................................................ 98 Some policy implications .............................................................................................................. 99 Private Sector Development in Agriculture and Rural Development: The case of Organic Vegetables..................................................................................................................................... 101 Background of organic vegetables in Vietnam ......................................................................... 101 Vegetables production and food safety ...................................................................................... 101 State roles in the development of organic vegetables ............................................................. 103 Legislation development on safe vegetables ............................................................................. 103 Policies for the development of Safe Agricultural Zones ........................................................ 106 Analysis of Organic Vegetable Value Chain in the Red River Delta ....................................... 107 Overall view of organic vegetable value chain .......................................................................... 107 Key actors of the organic vegetable value chain ...................................................................... 108 Organic vegetable farmers ......................................................................................................... 108 Collectors and organic vegetable companies ............................................................................ 114 Supermarkets and vegetable stores........................................................................................... 118 Major challenges and policy implications ................................................................................. 118

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Key challenges ........................................................................................................................... 119 Some policy implications ............................................................................................................ 120 Donor Support for Private Sector Development, Agriculture and Rural Development in Vietnam .......................................................................................................................................... 121 Overview of donor support for Vietnam .................................................................................... 121 Official development assistance (ODA) flows to Vietnam .......................................................... 121 Allocation of ODA by sectors and regions .................................................................................. 124 Profiles of largest donors in Vietnam ......................................................................................... 125 Donor coordination ..................................................................................................................... 128 Donor strategies and involvement in private sector development; agriculture and rural development: a general discussions ......................................................................................... 130 Private sector, agriculture and rural development in the overall strategy of the Government and donors ......................................................................................................................................... 130 Examples donors interventions in the private sector development ............................................ 131 Samples of donors interventions in agriculture and rural development ..................................... 135 Involvement of donors in the selected value chains ................................................................ 139 Donors and the rice value chain in MRD .................................................................................... 139 Donors in the coffee value chain in the Central Highland .......................................................... 143 Donors in the organic vegetable value chain in RRD................................................................. 147 Some conclusions ........................................................................................................................ 149 Conclusions .................................................................................................................................. 152 References .................................................................................................................................... 154

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Executive Summary
Agriculture and rural development, private sector development during the economic renovation of Vietnam

Major policy reforms in agriculture and private sector development
The economic development in Vietnam after the reunification in 1975 can be characterized by three major periods. Prior to the 1980s, Vietnam‟s economy was essentially a centrally planned economy. Between 1980 and 1988, the failure of the centrally planning system had become revealed. The Government of Vietnam tried to create incentives in agriculture and state-owned enterprises (SOEs) through some microeconomic reforms. These initiatives, adopted from the socalled „fence-breaking‟ and „bottom-up measures‟, had some success in the early 1980s. But the initial measures were not sufficient enough to address the fundamental problem of resource misallocation. The economic recession was so severe that the official launch of the Doi moi (i.e. Renovation) was sometimes referred as a „survival‟ strategy (CPV, 2001). The Doi moi in 1986 and especially the radical market-oriented reforms of 1989 marked a turning point in the history of Vietnam‟s economic history. During the Doi moi, a liberalization process of former distortions to agriculture and unequal treatment toward the private sector has been pursued with a number of important policy changes, which re-defines the role of the Government in agriculture and rural development (ARD) and supporting private sector development (PSD) from a „commanding role‟ into more supportive and guiding role. Among the bottom-up „fence-breaking‟ measures, Directive 100 was arguably the most radical „fence-breaking‟ measure experimented in agriculture in the early 1980s. Accordingly, agricultural lands were redistributed from collectives to peasant households; they were then given a „quota‟ based on land areas used and productivity during the previous years. Peasants were then allowed to keep or sell surpluses on the private markets or to the state trading agencies at some „negotiated prices‟. Directive 100 and other fence-breaking measures were however not sufficient to overcome severe lack of food and foodstuff in the 1980s. To overcome socio-economic crisis, the Sixth National Congress of the Communist Party in 1986 officially introduced the doi moi. In series of subsequent reforms, there were bold policy changes in agriculture and private sector development, including (i) land-use rights for farmers; (ii) liberalization of agricultural trade and prices; (iii) facilitation of private sector development in agriculture; and (iv) other agriculture-related policy changes. Land reforms were started with Resolution 10 (usually referred to as „Khoán 10‟). Farmers were entitled to land-use rights for 15 years for annual crops and 40 years for perennial crops. Cooperatives no longer controlled capital stock, working capital, and other means of production. Farmers gained their autonomy to fully control production decisions. This autonomy was against the fundamental principle of collective agriculture, and as a result, there was a decollectivization wave after Resolution 10. Stemming from that basis, the first Land Law was promulgated in 1993 extending land tenure to 20 years for annual crops and 50 years for perennial crops. More importantly, exchange, transfer, lease, inheritance, and mortgaging of land-use rights were permitted. This created an important background for the development of the land market in rural areas. Trade of agricultural products has been steadily liberalized both domestically and internationally since 1986. During 1987–91, price liberalization was carried out with sequential reform measures to abolish the ration system and the gap between official and market prices. By 1989, prices of

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most good and services were no longer decided by state planners, except for rice, gasoline, and some other essential goods. Price liberalization was accompanied by the opening of markets for both internal and external trade. Foreign trade reform was initiated in 1988 with the promulgation of the first Law on Import and Export Duties. Vietnam relied heavily on quantitative restrictions in the early stage of trade reforms. But these regulations have evolved substantially in the late 1990s. State monopoly in agricultural trading was steadily removed. Licences for enterprises to participate in foreign transactions were removed in the late 1990. Accordingly, all firms are allowed to trade goods directly in the range of goods in their scope of activities registered in their business licences without a foreign trading license. The private sector was not officially recognized under the centrally planning economy and was put under a broadly defined term of „black‟ market or informal sector. This however changed dramatically after the doi moi. The 1992 Constitution lays the most important constitutional background for recognition of the private sector in the economy. This was a resultant consequence of the Communist Party‟s direction to develop a „multi-sectoral economy‟ (i.e. with participation of business entities from different types of ownership). The most important milestone for private sector development was the Enterprise Law of 2000 (and 2005 revised version). Until then, private enterprises had been allowed to operate under a series of approvals and controls by the authorities. The Enterprise Law, by contrast, protected the right of citizens to establish and operate private businesses without unnecessary interventions from government officials. The most important innovation introduced by the Enterprise Law was the simplification of registration procedures with the elimination of over one hundred business licenses. The private sector has enormously responded to this new approach by a sharp increase in the number of new establishments. In parallel to the development of the private sector, rural households responded positively to new opportunities. Land reforms, decollectivization, and liberalization of agricultural trade, millions of peasant households have started their own business at micro scales. In addition to the development of the domestic private sector, the increasing flow of foreign direct investment (FDI) has created an emerging foreign-invested private sector. Attracting FDI was considered in the list of main priorities approved at the 6th National Congress of the Communist Party in 1986. The Law on Foreign Direct Investment was then enacted in 1987. In fact, the FDI sector has steadily replaced the dominant role of the SOE sector in terms of its contribution to economic growth. As of 2007, the foreign private sector contributed nearly 18 percent of GDP, 41 percent of industrial output, and 55 percent of total exports. However, this sector is largely focused in manufacturing activities. Foreign investment in agriculture accounted for less than six percent of the total capital committed and thus direct contributions of the foreign-invested private sector in agriculture and rural development are modest.

A new role for the Government
Given the series of reforms in agriculture, the Government has withdrawn its role from direct interventions but retained an important facilitation role, including development of rural infrastructures, provision of public services, and even some direct support for areas with extremely difficult conditions through a number of programmes and projects (largely for rural poverty reduction). In pursuing this new role, significant improvements were observed in terms of provision of rural infrastructure and public services. Agriculture extension services were also subject to substantial reforms in the recent years. Notably, the National Agricultural Extension Center was transformed from a state management agency in to a public services provider. The recent Decree 02/2010/ND-CP provides many incentives and subsidies when using the extension services, especially on agricultural technical trainings and field demonstrations.

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While the Government has withdrawn from direct interventions in ARD, strong direct support is however retained for poverty reduction in the rural areas. Reforms toward liberalization of agriculture and facilitation of private sector development as described above have resulted in impressive rural economic growth. However, there has been a considerable development gap between the rural and urban areas. Stemming from this gap, the Government and international donors has responded actively to narrow down the urban-rural gaps by a plethora of policies and programmes to support rural economic growth and poverty reduction. These policies and programmes have made significant advancements to the rural economy, especially in terms of rural infrastructures and provision of public services. However, there have been concerns on the overlap of these programmes as well as the approaches adapted. In addition, „hardware‟ investment remains as one of the central focus of these policies and programmes.

Responses of the rural economy to the reforms
The rural economy has responded vigorously to the new opportunities created by the above liberalization process. From an agrarian economy that usually encountered by severe lack of food and based on collective agriculture, Vietnam has become one of the world largest exporters of agricultural products. In the period 1990-2009, the agriculture sector experienced a very high average growth of nearly five percent per annual. This is an exceptionally high growth rate in agriculture compared with other developing countries. Aquaculture has emerged as the most important agriculture export item in recent years. The sector grew at an average rate of nearly ten percent per annual, though the pattern of growth does not look stable over the period. In terms of absolute value, the output level by the end of this period was about 5.5 times higher than in the early 1990s. This robust growth in output has created significant surplus for export. In the period 1995-2009, the export value of agriculture has increased by nearly five times, while the corresponding figures for aquaculture and forestry were three and seven times. Despite of the impressive growth in output and export, the share of agriculture in total GDP, export, and job creation tends to decline over time due to rapid growth of manufacturing and services. There has been a concern on whether agriculture could continue its „traditional‟ role in job creation. Using the VHLSSs suggest an increasing role of the rural nonfarm sector (RNFS) both as an important source of employment and rural household income. In particular, the employment share of the RNFS has increased from 23 percent to 58 percent between 1993 and 2006. The share of the nonfarm income source increased from 32 percent up to nearly 54 percent between the two years. In this regard, the issue of rural development in Vietnam no longer coincides in agriculture. Developing the RNFS is essential for a vibrant rural economy. Growth of the rural economy has resulted in impressive poverty reduction. Using the VHLSS data, the poverty headcount fell from 64.4 to 18.7 percent between 1993 and 2008 in rural areas. However, there has been a large gap in living standards across rural and urban areas, which triggered rural-urban migration. In fact, while the urban population has been grown at 3.8 percent, the corresponding figure of the rural population was only 0.75 percent in the period 1990-2009 – which is considerably lower than the average population growth of the country at 1.4 percent. Some surveys suggest that one fifth of the total population in HCMC are migrants while the corresponding figure in Hanoi is nearly 12 percent. This suggests a significant rural-urban migration flow, though official statistics on rural-urban migration are not available. In many cases, migrants were found to pay higher for public utilities (such as clean water, electricity) than non-migrants and there has been little policy responses to support the migrants in the urban areas. In addition, as most of the migrants were found at the age between 20 to 30 years, the rural population is increasingly ageing.

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Rice value chain in the Mekong River Delta Policy environment for the rice sector
Paddy is certainly at the central of the recent growth in agriculture and rural development. The focus of this study on the Mekong River Delta (MRD) is justified by the dominance of this region in rice production and export as the region accounts for nearly 80% of rice surplus and about a half of rice output of the country. From a situation of a national food deficit with a relatively widespread of hunger, Vietnam has turned into a situation of very large food surplus with only a few „pockets‟ of hunger. Between 1990 and 2010, national paddy production doubled from 19.2 million tons to nearly 40 million tons, while the area of rice land increased modestly, suggesting a significant improvement of rice productivity. The paddy rice output growth is associated with rapid growth of rice export. Most recently, Vietnam rice export reached 6.75 million tons with an export turnover of nearly three billion US$ in 2010. There are several factors that contribute to (or hinder) that vigorous growth of the rice sector. In terms of policy environment, paddy land accounts for nearly 43 percent of total agriculture land. Though Vietnam has now generated very large surplus of rice, many Vietnamese policy-makers remain concerned about long-term food security in the face of uncertain future patterns of climate change and in the context of intensifying competition for available land. As a result, peasant farmers, through are entitled to long term land-use rights, have limited flexibility for cropping in their paddy rice land. Of different types of agriculture land, paddy rice is placed under strict management. The Government has set the target for 3.8 million hectares of protected rice land by 2020 and this is just 0.3 million hectares below the currently cultivated paddy land. However, this objective is quite challenging. Urbanization and industrialization represent an increasing competition for agriculture land with nearly 50 thousand hectares per year of paddy lost for other purposes. Paddy rice land in MRD is subject to further lost due to increasing salinity, inundated floods, and raising sea level. Most notably, there is generally a tendency to convert paddy rice land for other higher value crops. Most small rice farmers are net buyers of rice and their income from selling rice is not sufficient to pay for the cost paid to buy rice for their consumption. From a policy perspective, there is a growing consensus that rice is a relatively low value crop and the „more‟ might not be the „better‟ for the rice value chain in Vietnam. The Government has exerted considerable control on rice export though the pre-dominance of SOEs and government-to-government contracts. Rice export quotas, applied during the 1990s, were mainly allocated to SOEs by a yearly basis. Through this mechanism was removed in 2001, the dominant role of SOEs is still intact as SOEs are still the primary agents in fulfilling the government-to-government contracts, which account for nearly 80 percent of the total rice export. For the remaining, firms are allowed to do their business without interventions. In contrast to rice export, there are almost no effective regulations in the domestic rice market. The only significant intervention to the domestic rice market is to counteract the downward pressure on rice producers at harvest time by imposing „floor prices‟ for paddy and provide interest-free loans for milling/trading companies to purchase and store additional qualities of rice at these times. The stated objective of this floor price policy is to ensure that rice growers earn a net margin of some 30 percent. However, there has been little evidence whether such periodic interventions are achieving this target. In fact, rice companies rarely buy paddy directly from farmers but relying on traders for collecting paddy. There is thus no direct mechanism for them to pay the floor prices to farmers. As a result of this setting, while SOEs are dominant in rice export, the private sector is considered dominant in the domestic rice market. In addition to direct interventions in terms of regulating rice export and floor prices for farmers, the Government also exert certain extent of control through VFA and two general corporations, namely

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Vietnam Food Corporation One (Vinafood 1) and Vietnam Food Corporation One (Vinafood 2), as extended arms. VFA is supposed to be a not-profit and independent professional association which helps to protect the interests for all actors in the rice sector. However, VFA is best described as a policy tool for the government in the rice sector. A number of 118 VFA members effectively account for 80 percent of total rice export and deliver to the government-to-government contracts. In addition, VFA members are also mandated by the authorities to pursue „strategic reserves interventions‟.

Rice value chain in the Mekong River Delta
To provide insights on the rice sector, a fieldtrip to MRD was conducted in this study to find how the private sector and farmers have re-acted to the new opportunities created by the liberalization in agriculture and private sector development. The rice value chain is long and complicated. There are several middle players between rice growers to final producers or exporters, (i) including collectors and traders who buy paddy directly from rice growers (or from smaller collectors); (ii) husking factories, which are either located near production areas or as part of processors‟; (iii) polishing mills and sometimes „middle‟ companies which are described as those who buy husked rice and supply either to exporters or polish husked rice themselves; (iv) Exporters/producers who could either export or distribute to the domestic market; (v) if rice then goes to domestic market, local distributors (supermarkets, traders) also involve as part of the value chain. Some actors of the above were interviewed, and results from the fieldtrip indicate the following findings: In terms of rice farmers, there is around 1.46 million peasant households cultivating rice in MRD (in the total of nearly two million households in the region), producing half of total paddy rice and most of rice export. It was reported that most of rice growers are actually net rice buyers and only those with largest paddy land possession (around less than one fifth of the total) has shared most benefited from the net rice surplus. This could be taken to suggest that most of rice farmers have actually benefited modest from the recent dramatic growth of paddy production and export. In addition, there are a number of issues and problems faced by rice growers revealed from the field survey. Notably, rice growers depend quite heavily on fertilizers and other agro-chemicals, which account for an estimate of between 30 percent and 50 percent of their total cost. A significant proportion of fertilizers and agro-chemicals are actually imported while the remaining is provided by different (usually un-identifiable sources). Many rice farmers have faced problems of fake fertilizers and recent increases in prices of these basic materials. In addition, there are several dozen of seeds cultivated by rice growers. At harvest time, different types of paddy are then mixed in transport barges and the lot delivered to husking or milling factories, containing different varieties with different degree of maturity, size, moisture… As a result, paddy after polishing might be a combination of different varieties with different sizes and hues. While this „mixed bag‟ rice is acceptable to many markets, this is certainly not high quality-oriented. Private traders or collectors represent a key stage of the rice value chain in MRD. There are several thousand collectors/traders operating in MRD with some specialized in rice and others also handling other commodities such as coco, fruits, and other nonfarm products. Strong presence of private traders or collectors in the rice value chain reflects the fragmented structure of rice production in MRD. There are around 1.46 million households cultivating paddy and nearly all of them sell some quantities of paddy. The density of river system and plain of reeds created by the rivers in MRD make many villages quite isolated with markets and transportation costly for small farmers. As a result, rice growers rely almost completely on traders or collectors for selling paddy at farm-gate prices. Seeking for an rough estimate on the average margin charged by traders based on bargaining power with farmers deemed difficult due to the sensitive nature of this issue but discussions with some farmers indicated a suggestive margin of between five to 15 percent. It

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is important to note that storage capacity of traders/collectors is often limited. For most traders, paddy, either dried or wet, bought from farmers are sold directly to millers. Rice milling is implemented in two stages. The first stage involves husking the paddy. The intermediate product is then transported to larger millers for production of white rice, and if for export, polished rice. There is no official statistics available on the number of millers in MRD but there are several thousand of them. Most of millers are of small scales, handling the initial process of husking, while there are few large millers who are involved in the second stage of rice milling process. First-stage milling is done mainly by small husking facilities located near the production areas, while second-state milling is usually implemented by large millers or exporters who invested in milling facilities. Notably, the first-stage paddy millers are found to have very limited storage facilities. Millers usually apply sun-dry for paddy bought from collectors/traders. As a result, estimated a physical loss of 1.7% on an annual basis occurred in this initial husking stage. At the second-stage milling, facilities are on average in lower technical standards compared with those in Thailand, leading to a higher rate of physical loss in the milling process. Rice exporters in the rice value chain are classified into two groups of SOEs and other private sector firms. The former consists of Vinafood 1, Vinafood 2 (and their affiliates), other SOEs (usually located at the center of MRD provinces); while the latter comprises private firms, which are limited liabilities or joint stocks. In recent years, the number of rice exporters is reported at around 200 firms but most of these exporters are however very small or even part-time operators and about half of them export less than 1000 tons a year. Rice export is thus very concentrated on few big players who are usually SOEs. In fact, Vinafood 1, Vinafood 2, and some other SOEs accounted for nearly 80 percent of total rice export. For small or part-time exporters, they are best described as „exporting traders‟ and rarely invest in rice processing facilities. Outside the countries of G2G contract, Vietnam export to more than 100 other countries but less than a dozen of them importing more than 50 thousand tons per year; about two third of these countries actually import less than 10 thousand tons per year. This diversification of small (and occasional) buyers might reflect the fragmented structure of the Vietnam‟s rice export. It also suggests that outside G2G, there is no export strategy for the rice sector of Vietnam. Depending on G2G rice export is probably another reason leading to a persistent position of Vietnam in low quality rice export. As these G2G are of low-quality and low-cost focuses, there is no incentive for large and key players in the sector to swift to quality-oriented rice varieties. The private sector, which is supposed to be more flexible and more motivated for higher quality rice export, is limited in their capacity due to small scales of their operations. Short-term nature of the rice export management in the past had created uncertainty that discourages long-term investment by private sector rice processors and exporters. After rice quota was abolished, the dominant role of SOEs and VFA members in the Vietnam‟s rice export restrict opportunities for the private sector in seeking for long term contractual relationships, and this also represents an obstacle for long term investment by the private sector. In this context, though there are several thousands of millers, processors, and exporters in the rice value chain, it seems that no one has a strong incentives to „break‟ out of such „big volume, low quality‟ position. SOEs are persistently dependent on „public sector spirit‟ trading though G2G; while private sectors are usually of small scales and are not motivated by policy environment for long term investment.

Major challenges of the rice sector
The analysis of the rice value chain represents a number of challenges for the future development of this important sector. Most notably, „Big volume and low quality‟ seems to be the most notable problem of the rice sector. Ever-growing volumes of paddy production and yield are undoubtedly impressive. Based on this success, national food security is ensured; Vietnam is contributing

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increasingly to international food security. Behind this „glamour‟ of quantity, Vietnam tends to position itself in the bottom of international market in terms of quality. While Thailand focuses on parboiled and high quality rice; India and Pakistan specialize in basmati and other fragrant rice; the United States develop premium quality white rice, Vietnam is the world champion of low to medium quality white rice with 25% broken. Taking an example of 2010, while the average FOB price for Thai fragrant rice was $1024 per ton, that of Vietnam‟s leading product – 25% broken rice – was $387. Though there is nothing wrong with this low quality scenario but this represents a waste of opportunity to get value added from production of quality rice. Under the present context, the „more‟ is not necessarily the „better‟. Some policy inconsistencies represent an obstacle for more viable development of the rice sector. Restrictions on the use of paddy land area are an administrative barrier for more productive use of land. It has been a subject of confusion between food security at the national level and food availability or sufficiency at certain locations. Rice shortages observed from time to time in the event of natural disasters or in very remote and difficult areas tend to constitute a political concern on national food security, while these should be considered purely as a problem of distribution of rice surplus. This provides (wrongly) a political will to protect the target of 3.8 million hectares of paddy land. Notably, concessional conditions and focus of the Government on low quality, low value G2G remains without a well justified background (except in the case of Laos Republic or Cuba – Vietnam‟s political alliances). More importantly, relying on VFA and its SOE members represents an uneven treatment to private sector players, who already contributed an important role in supplying for SOEs in delivering these G2G contracts. What is most striking problem is reflected in heavy interventions of the government in export transactions while leaving very sizeable domestic market with few effective actions. If concerns on national food security and welfare of farmers are put in the top of priority list, it is the domestic rice market that should be regulated and monitored rather than the export sector, which can be left to the private sector as experienced in other countries. Unfortunately, to the best of our current understanding, these consistencies could be prevailing for unforeseeable periods and there have not yet had any signals for changes – though policy changes in Vietnam, as suggested by past experienced, could come suddenly. There are many factors that contribute to „subtracting value‟ from the rice value chain. Heavy dependence on imported fertilizers, argo-chemicals and farm equipment represent nearly half of rice production cost. Notably, limited storage capacity at all stages of the value chain exerts considerable physical loss of paddy and its intermediate products. In addition, the fragmented and long structure of the value chain result in several players at intermediate stages while vertical linkages between these chain players are modest. There is little evidence of collective actions for value addition along the chain. Moreover, the „mix bag‟ approach, which could be considered as a product of rooted attitude and seed supply conditions has „knocked in‟ Vietnam in the production of low quality rice. Lack of concerted efforts in switching to higher quality rice varieties, Vietnam continues its is position at the bottom quality ladder. Last but not least, concentration of net rice surplus in some twenty percent of most land well-endowed rice growers implies that producing more rice is actually poverty inducing for small paddy rice growers. In combination of these factors, further expansion of rice production and export could be „value subtracting‟ rather than „value adding‟ as expected.

Coffee value chain in the Central Highlands Policy environment for the coffee value chain
Vietnam‟s coffee sector could be considered as a success story of trade liberalisation in agriculture in Vietnam because it supports heated competition among various players from all economic

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sectors, in which private sector plays important role in the development of the whole value chain. Bold reforms in the late 1980s and beginning of 1990 has really triggered the booming of coffee sector in the Central Highlands. Between 1990 and 2009, the national coffee production increased more than eleven times, with coffee production area climbed by more than four times. Coffee has become one of the most important agriculture products and export of Vietnam and the world leading exporters of Robusta coffee and clearly the most vibrant livelihoods for many rural households in the Central Highlands. The focus on the Central Highlands is justified by the dominance of this region in coffee production and export as the region makes up more than 80% of coffee area and about 90% of total coffee output in Vietnam. In terms of policy environment, there was a policy to facilitate economic development of the Central Highland by promoting New Economic Zones in the region. Accordingly, the ethnic Kinh (as the majority group accounting for nearly 86 percent of the population) and other ethnic minorities in the Northern Uplands were encouraged to migrate to the Central Highlands. This policy was introduced on the perception of good potential land and low population density in the Central Highlands. The objective was to re-allocate a number of around four to five million people to the region in order to develop „new economic zones‟. The policy was ended in the early 1990 but migration flow to the Central Highlands continued. The new wave of migration to the regional is characterized by „spontaneous migration‟. These spontaneous migrants were attracted to the region due to its potential for industrial and perennial crops, abundance of fertile lands, and particularly the expansion of coffee. Notably, the region became much more ethnically diversified. At the time of reunification, there were around 20 indigenous ethnic groups. At present, there are about 40 ethnic minorities groups residing in the Central Highlands. According to the latest Population Census, migrants now account for about 90 percent of the region‟s population. Beside this direct involvement, also taking into account the process of liberalization reforms in agriculture and rural development, there has been little direct intervention of the Government in Vietnam‟s coffee sector since the 1990s. In this regard, it could be arguably stated that the recent thriving growth of coffee production and export has little to do with the government intervention. In such context, Vietnam‟s coffee sector has experienced an impressive growth over the past two decades. In terms of volume, Vietnam‟s coffee output has increased from less than one hundred thousand tons in 1990 to nearly 1.1 million tons in 2009, suggesting a growth of nearly eleven times. During this period, coffee production area rose from 120 thousand hectares to over 540 thousand hectares, implying an expansion of 4.5 times in total land for coffee production. As the growth of output well surpassed that of production area, this difference is attributed to increase in average yield. Indeed, as suggested in figure 3.1, the average yield has increased from 0.77 ton per hectares to nearly 1.94 tons per hectare, meaning a growth of 2.5 times in that period. Given such vigorous growth in output, coffee has become one of the major export items of Vietnam over the past two decades. The export volume in 2010 was nearly five times as higher than that of 1996, meaning an average annual growth rate of more than thirty percent. It is however noted that the majority of Vietnam‟s green bean is exported to the countries that are also the largest exporters of coffee products. This suggests that Vietnam‟s coffee export is of low quality and low value added. Given the boom of the coffee sector in the Central Highlands, it is expected that the coffee sector is associated with significant poverty reduction effects. Indeed, the average poverty headcount in the region has decreased from nearly 70 percent to 24 percent between 1993 and 2008 (using data from the VHLSSs). However, farmers in the region have not shared that benefit equally. In fact, ethnic minorities are left behind overall poverty reduction in the Central Highlands. At the early 1990s, the Central Highlands was the poorest region in the country with more than 93 percent of ethnic minorities living under the poverty line. After nearly two decades, poverty headcount in the region fell down to 67 percent, suggesting a reduction of nearly 26 percentage point. Although the

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magnitude of poverty reduction for ethnic minorities is quite impressive between 1993 and 2008, poverty among ethnic minorities in the Central Highland is far higher than the national average rate of poverty. Compared to other ethnic minorities, the average poverty rate of all ethnic minorities was nearly 50 percent in 2008, suggesting a difference of nearly 20 percentage points. This could be taken to suggest that ethnic minorities have probably not benefited as much as expected from the recent boom in the coffee production in the region.

Coffee value chain in the Central Highlands
To provide insights on the coffee value chain, a fieldtrip was conducted to collect information on the key actors of the coffee value chain in the Central Highlands. It was reported that the coffee value chain in the Central Highlands is quite complicated. There are several middle players between coffee growers to final manufacturers or exporters, (i) including individual collectors or collecting agents who buy cherry beans or green coffee directly from coffee growers; (ii) processors who buy coffee from collectors/collecting agents and then process them before selling to exporters; (iii) Manufacturers who could either export or cater to domestic market; and (iv) exporters who export green coffee to the international market. Some key actors of the chain were interviewed and main findings could be summarized below. There was between 560 thousand to 580 thousand households planting coffee in the Central Highlands in 2003 (implying a number of between 2.6 to 2.8 million people growing coffee in the region). Of the coffee growers, around 90 percent are small landholders with the average land area of one hectare or less. Notably, coffee growers, regardless their production scales, tend to get a very large margin from the sector, reflecting in a very high percentage of FOB price. Estimates suggest that coffee farmers could earn as much as between 80 to 90 percent of the total FOB export price in 2009. However, net income of coffee growers is quite small due to high cost of production. Though growing Robusta is easy but intensive watering and fertilizers required to get high yield. Robusta is grown in most South East Asian countries but returns are generally not high enough to encourage intensive production and irrigation in most countries. The case of Vietnam represents an exception. Usage of water, fertilizers, and other agro-chemicals are intensively applied by the Vietnamese coffee growers. Such intensive production system has produced worldclass yield of coffee. Therefore, the coffee production cost could be as high as 80 percent of the FOB export price. This very high production cost results in low net margin for coffee growers regardless how many percent they could earn from the FOB export price. In addition, this intensive production system exerts other problems of soil degradation, insect-borne diseases. Expansion of coffee production also accelerated deforestation. If these costs are taken into account, the net value from coffee production to growers could be very small. Popularity of small scale production leads to many problems, including quality, application of advanced processing technology as well as weak bargaining power of coffee growers. In terms of quality, there is almost no effective quality control mechanisms for coffee production observed in the Central Highlands except some practices applied by processors or few large scale farmers. Harvesting and processing of Robusta in the Central Highlands is largely pursued by coffee growers themselves due to simplicity of these processes for Robusta. In fact, farmers usually remove all cherry from branches, ripe or unripe, to save the harvesting cost. Processing Robusta is also a simple matter of sun-drying the picked cherry without any further sorting. These harvesting and drying processes have resulted in a number of quality problems as follows. Notably, as all cherry from Robusta branches are removed at the same time, regardless whether the cherry is ripe and unripe, result in different types of cherry according to maturity. The picked cherry are then subject to sun-drying without any further sorting. As coffee growers use all types of drying ground they may have, what produced after sun-drying are coffee bean of different quality; there is also no

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guarantee that the picked cherry is actually dried to the level of moisture required (i.e. 12 percent). In addition, sun-dried cherry are also vulnerable to increasing off-flavour, foreign ingredients. In the coffee value chain in the Central Highlands, there are several thousands of traders (individuals who buy fresh cherry or coffee beans from farmers and sell them to others) and collecting agents (who are contracted by coffee processors or exporters to collect coffee from farmers for their processing). There are no official statistics on the number of traders and collecting agents. Some estimates projected a number of 1500 traders in the Central Highlands and about one thousand of collecting agents working for around 30 trading companies and 40 coffee exporters. These collectors are found with very weak market power. Popularity of ICT applications among coffee growers lends an explanation for this market position of traders and collecting agents. All farmers interviewed reveal that they have used mobile phones to receive information on coffee prices from relatives and friends. Some coffee growers surfed the internet to get the most up-to-date information when discussing with collectors. Interestingly, most coffee growers are registered to SMS message services to receive daily updates of coffee prices in the local and foreign markets. In addition, as there are plenty of traders and collecting agencies, sufficient competition is likely to be in place, which prevents these traders from exercising any significant market influences. What is most striking from the fieldwork is the small margin secured by these traders, which is estimated at around less than one percent of the total farm-gate price. Perhaps the only plausible explanation for existence of such intensive collecting network is the scale of their transactions. Given 90 percent of coffee output was collected by traders and collecting agents, it implies a quantity of approximately 1.2 million tons went through this network. This results in a total net income of 12 million US$ for traders and collecting agents. Regarding coffee processors, there are SOEs, foreign-invested enterprises, and private manufacturers in the coffee sector. While SOEs and foreign-invested companies are usually of medium or large scale, private manufacturers are of small scale. For these small-scaled processors, there might be between two to four hundreds of them, operating at an average processing capacity of less than one tonne of coffee per days. There are few coffee manufacturers of large scale in Vietnam. These manufacturers usually have their own network of collecting agents to ensure sufficient supply for their production of ground and/or instant coffee. The ground or instance coffee products will be then supplied to the domestic market or foreign market. Manufacturers are sometimes export coffee bean but this type of operation is not popular. The coffee sector has also attracted foreign investment from multinationals such as Nestle and Olam International. There are 10 joint-ventures between foreign investors and domestic partners. Results from the fieldtrip suggest that small and medium scale manufacturers have encountered difficulties exerted by competition from foreign-invested manufacturers. In Vietnam‟s coffee sector, exporters buy coffee from different sources, including (i) traders or collecting agents; (ii) directly from coffee growers; and (iii) other trading companies. In most cases, the collected coffee is subject to further processing to dry coffee to the require moisture level, removing foreign ingredients ad contaminants associated with the collected coffee to improve the quality of green beans before packing for export. It is noted that some of the largest coffee exporters are those who specialize in trading business, and coffee export is one of their business lines only. For instance, Intimex is the largest coffee exporter in 2010 (accounting for around ten percent of the total coffee export). In fact, Intimex (formerly SOEs established in 1979) is a complex corporation which operate in an extensive list of business activities, ranging from manufacturing to trading in agriculture, aquaculture, handicrafts, machinery, and other consumer goods. Within spectrum of its export business lines, Intimex exports coffee, peppers, cashew nuts, and many other agriculture products. The dominance of trading companies in coffee export business might be a result of low quality focus, where heavy investments in processing techniques are not required.

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Instead, coffee growers share significant part of processing stages in the coffee value chain. This is probably the background for existence of large trading companies, taking advantages of their foreign market linkages, to diversify to coffee export as an additional product line. This partly explains the concentration of coffee export to the trading partners that are also the largest exporters of finished coffee products.

Major challenges for the coffee sector
There are several challenges underlying the coffee sector of Vietnam. Most notably, it seems that there are no incentives for actors of the value chain to supply higher quality coffee; and thus, Vietnam is most likely to be the world largest exporters of low quality Robusta coffee. While quality of Vietnam‟s coffee is low, many international buyers seem to be happy with the current status of coffee price/quality mix exported from Vietnam. Many international coffee manufacturer, in seeking for lowering the cost (particularly as Arabica is approximately twice the cost of Robusta), are gradually increasing the percentage of Robusta their blends and subsequently developed a range of machines and techniques to wash, steam clean and sort Robusta coffee. Regarding farmers, there are few incentives for them to move forward higher quality. Robusta is an easy and forgiving crop, with simple requirement in initial investment, farm practices, processing, and storage. Yield could be varied by watering and usage of fertilizers and argo-chemicals. This is very important as it give coffee growers a chance to counteract price fluctuations. As far as collectors, manufacturers, and exporters are concerned, there are few incentives for higher quality coffee. For exporters who export green bean to international market, as highlighted above, foreign buyers are willing to accept the current combination of price and quality. There are thus no strong incentives for those exporters to embark in higher quality. The only actors in the coffee value chain that have interest in higher quality are the few manufacturers who produce ground and/or instant coffee for either domestic or foreign market. However, these manufacturers have not been a dominant force driving the development of the whole value chain. Coffee production in the Central Highlands has incurred considerable environmental causes. The Central Highlands have long had some of the richest and most densely forested areas in the country. However, some conservative estimates suggested that there has been between 30 to 40 percent of the forest was cleared for industrial crops over the past two decades in the region. The champion province of coffee production – Dak Lak – lost around a half of its natural forest stock during the expansion of coffee production under the two peak price periods in the 1990s. In addition, coffee plantation has been a major source of soil erosion and fatigue. Many coffee fields were established on poor soil with very steep slopes and high rates of soil erosion, and in areas prone to drought. There are almost no sustainable coffee land management practices that are applied widely in the Central Highlands. Some studies warrant the heavy exploitation of groundwater for irrigation. Overwatering of young coffee trees by coffee growers who rely on groundwater pumps has resulted in dramatic reductions in the water table in the Central Highlands. Fertilizers and agro-chemicals are heavily applied by coffee growers and this represents a potentially significant impact on human health as most of dwellers in the region depend on surface water for their domestic uses. Given this high environment cost of coffee production, further expansion of coffee will have serious environmental degradation effects. Finally and very importantly, it is reported that benefits from the recent coffee expansion has not shared equally among different groups in the Central Highlands. There is convincing evidence that the poor, especially indigenous ethnic minorities have failed to capitalize from the coffee boom for improving their living standards. The majority of coffee growers are Kinh migrants or other ethnic minorities migrated mainly from the Northern Uplands. Unfortunately, breaking poverty data according to migration status is not possible from available data sources. But it could be reasonably postulate that poverty headcount of indigenous ethnic minorities would be substantially

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higher than the average headcount of the region. Referring to figure 3.7, it would imply a very high poverty incidence (i.e. over 70 percent) of indigenous ethnic minorities. In addition to uneven poverty impacts, this has also resulted in social consequences. Many protest and petitions of indigenous ethnic minorities in 2001 and 2004 (as analyzed in section two) are the most serious social impact of the unequal sharing the benefits of the recent coffee expansion in the Central Highlands.

Organic vegetable value chain in the Red River Delta Policy environment for the organic vegetable value chain
Vegetables are among the most popular crops grown by roughly 85% of rural households for both home consumption and selling for an additional source of household income. But organic vegetables are a new crop in Vietnam‟s agriculture sector. Unlike rice in MRD or coffee in the Central Highlands, which are among the most important agriculture products of the country for nearly two decades, organic vegetables are a new product line in Vietnam. Only recently, the concept of organic vegetables has been introduced to high income consumers in urban cities. Increasing concerns on food safety problems has recently become a driving force of vegetables and legumes production in Vietnam, leading to an increasing demand for „safe vegetables‟ (including organic products). Producing organic vegetables represents a swift away from traditional approaches of producing vegetables in rural Vietnam. Handling complicated standards and procedure to get organic vegetables certified are found to be a significant challenge for vegetable farmers. For traders and other vegetables companies, marketing organic vegetables, establishing distribution network, penetrating in supermarkets are among the challenges in the context of low confidence in quality of organic vegetables by customers. In terms of policy environment, in responding to problems of food safety and its potential health and financial losses, there have been several legislative developments related to safe vegetables introduced in recent years. Most of these regulations however concern with food safety standards, which require certain conditions to be adopted if final food products could be considered as satisfactory. In addition to heated concerns on food safety, the preparation of WTO accession was probably another main reason motivating factor behind the formulation of regulations. These key legal documents on food safety (and on safe vegetables in particular) have created a legal framework for the development of safe vegetables in the country. All of the recent legislation however does not relate directly to organic vegetables. The only official documents regarding organic agriculture is the National Standards on producing and processing organic products (10TCVN – 2006) issued MARD in late 2006. This standard describes the requirements for organic vegetables, which are broadly compatible to international standards. However, quality certification and other institutional arrangements for such certification process have not been at the place to facilitate the production of organic vegetables. Apart from the legislation developments, there are no other policies related, neither directly or indirectly, to organic agriculture products.

Organic vegetable value chain in the Red River Delta
To provide details for this analysis, a fieldtrip to some organic vegetable production areas in Hoa Binh and Vinh Phuc – the two provinces nearby Hanoi – was carried out to collect information from organic vegetable farmers, local authorities, and organic vegetables companies. Compared to the rice value chain or coffee value chain reported earlier, the structure of the value chain is relatively simple. In terms of production, there are farmers producing organic vegetables on their own or in the form of joining common interest groups (CIGs). Organic vegetables are then collected by either collectors or some companies that specializes in the chain before being distributed though supermarkets or organic vegetable stores at „normal‟ markets or on the streets. Main findings from the fieldtrip are summarized below.

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Most rural dwellers in Vietnam plant some kinds of „ordinary‟ vegetables either for home consumption or as an income source. However, not too many farmers have embarked in organic vegetables. There are no statistics on the number of organic vegetables farmers. In the district visited during the fieldtrip, it is estimated by farmers that there are between five to ten percent of peasant households have planted organic vegetables. These farmers were trained with organic growing experience, plant life-cycle management by a small ADDA (a Danish NGO)-supported intervention. In addition to technical training, farmers were encourages to formulate common interest groups (CIGs) for organic vegetables, and thus some basic knowledge on CIG management was also structured in the series of training activities. Due to fragmentation of agriculture land in the Red River Delta, it is difficult to formulate contiguous land plots for organic vegetable productions. Therefore, production areas of CIGs are usually small, ranging from a thousand meter squared to a half of hectare. In terms of group operation and management, CIGs generally consist of between 10 to 20 members, who are mainly female, led by a group leader. There is usually a deputy leader and sometimes a secretary to take care of the group‟s financial records and other types of documents. Notably, all the CIG has established an inspection panel, which consists of between three to five members to supervise the compliance of the group members to organic farming regulations and practices In terms of quality, the only certification mechanism to date is the Participatory Guarantee Standards (PGS) introduced by ADDA Organic Project. PGS has been internationally recognized and served thousands of farmers and consumers around the world (IFOAM, 2006). The major objective of PGS implementation is to ensure the farmers‟ compliance with standards and procedures in growing organic vegetables. Complying with the long set of standards and PGS certification process, organic farmers expected higher income from their efforts and it is generally the case. Results from the fieldtrip revealed that farmers could sell their organic vegetables at double prices compared to „ordinary‟ vegetables of the same species. At the CIGs visited, farmers harvest organic vegetables from the net houses (i.e. the production area covered by net) in the early morning. They then process the vegetables as specified by collectors or organic vegetables companies, pack the processed vegetables in plastic bags, which were printed with PSG logo and other information specifications. The packed organic products are then transported from to collectors or agents of organic vegetables companies before being transported to the market of Hanoi. Compared to the market price to consumer, organic farmers earn as much as 50 percent. The shift towards organic vegetable however encounters numerous challenges. Firstly, although almost every farmer before changing to growing organic vegetables got familiar with ordinary vegetables, a great number of them remain inexperienced in organic cultivation. Supply of seedlings is also a problem. Most farmers buy seedlings from local markets and these seedlings could be used also for growing ordinary vegetables. Regarding insects and worms elimination, the majority of farmers express their low skills when catching with hands in most cases, which is timeconsuming and ineffective, preventing them from expanding the production scale. Most notably, market uncertainty represents arguably the most significant obstacle. As organic vegetables are supplied to supermarkets and vegetable stores in the cities, organic farmers rely totally on collectors and organic vegetables companies for marketing their products. Though there is a growing demand for organic vegetables in Hanoi and other major cities of the country, it does not seem that organic vegetables and supermarkets have been successful in marketing for organic vegetables. As consequences, collectors and companies usually change their orders from time to time, depending on their sales in Hanoi. This market uncertainty is well perceived as a key problem that in growing organic vegetables. There are collectors in the organic vegetable value chain but they are found mainly as agent of organic vegetable companies. These collectors usually work with two or three CIGs to ensure

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having enough vegetable varieties instructed by their organic vegetables companies. Collectors usually take order from their companies at late afternoon or in the evening. Organic vegetables farmers will then harvest and process organic vegetables according to the order in the early morning of the following day to supply for collectors at a stall in the village or commune markets. Collectors do some basic quality check and handle to the companies‟ small trucks to transport to Hanoi for supermarkets and vegetable stalls. Some collectors and company representatives suggest that collectors could earn between five to ten percent of the price sold to customers in Hanoi. Perceiving organic vegetables as a potential and emerging business, private sector has started responding to this potential opportunity. There are no official statistics on the number of organic vegetables companies. But discussions with representative from GreenLink, as one of these companies, suggested a number of five organic vegetables companies operating in Hanoi. In addition, the number of organic vegetables companies in HCMC and Lam Dong could be as much as three or four dozens. Of the organic vegetables companies operating in Vietnam now, most of them are trading companies which provides an intermediate role between organic vegetables growers and consumers (directly though their stores or indirectly though supermarkets). There are few companies who also develop their productions areas and all of them located in the South of the country. In addition to the „conventional role‟ of trading companies, many organic vegetables companies have also supported organic farmers in their production activities. Technical support provided by the companies‟ collectors is a popular type of support. In some cases, organic vegetables companies also partly supported the organic vegetables CIGs in investment for facilities such as wells, pumps, and net houses. As most of organic vegetables are trading companies, they have supplied organic vegetables by setting up their own vegetable stores or working as „buying companies‟ for supermarkets. By developing their own stores, organic vegetables company could earn as much as half of the prices sold to the end customers. With a large volume of organic vegetables, this could imply a very good margin and profit for this type of trading business. However, all the companies interviewed reveal that their business are not going as well as expected due to limited, through growing, sale volume of organic vegetables. At this stage, consumers of organic vegetables are mainly among the richest Vietnamese and expatriates who can afford expensive products and most importantly, are concerned about the safety of vegetables sold at street markets. This „high-end‟ market niche is relatively small. For a sustainable development of the organic vegetable supply chain, it is crucial to enhance the awareness of middle-income population on organic vegetables to expand the market beyond the richest population. Increasingly heated concerns on food hygiene and safety in recent years make this expansion feasible. Organic vegetables are sold at supermarkets and stores of organic vegetables companies. In terms of supermarkets, BigC and Hapro are the two supermarkets that supply organic vegetables, while Metro and Intimex are at the planning stage of supplying organic vegetables. Fieldtrip results revealed that the volume of organic vegetables sold at supermarkets is still limited; the largest volume of organic vegetables sold in supermarkets in Hanoi was reported to be between two and four hundred kilogram per day. Given an estimated margin of between 25 to 30 percent and such limited sale volume, no supermarkets considered organic vegetables as a key business line. Organic vegetables companies establish their own stores. Field observations show that a store supplies a volume ranging from 30 to 100 kilogram of organic vegetables per day. Convenient location of stores is an important factor but many consumers order by phone or online for home delivery rather than buying directly from the stores.

Major challenges for the organic vegetable value chain
Growing organic vegetables could be considered as a direction to high value agriculture in the country where „high volume, low value‟ agriculture is prevailing. This is however subject to many

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problems and constraints for the potential and emerging value chain of organic vegetables. Notably, there is a lack of legislation background for organic agriculture products in Vietnam. In responding to increasing concerns on food hygiene and safety, there has been important legislation developments in this area but such improvements are not in the field of organic agriculture products. Apart from the national standard on producing and processing organic products (10TCVN – 2006), there are no other relevant rules and regulations on organic vegetables. This national standard serves more as a guide to farmers rather than a concrete tool for certification. There are no official organic certificates and thus certification processes for organic agriculture products. The PGS certification – a donor-supported process – is currently the only certification process available for organic vegetables. This participatory certification alone is not effective in gaining wide public confidence in the quality of organic vegetables. This is a area where interventions of the state are most needed. In addition, there are considerable constraints that originate from some characteristics of the rural economy. Notably, land allocation represents a constraint, especially in the Red River Delta. Land fragmentation in the rural areas hinders the formulation of contiguous land plots for commercial production of organic vegetables. Given the widespread practice of intensive usages of fertilizers and agro-chemicals in the rural areas, having small plots of organic vegetables nearby the fields of other „ordinary crops) implies a risk of contamination when ensuring certification process. In addition, farmers are usually not aware of growing organic vegetables as a high value agriculture crop. The experience of Dang Xa district and Luong Son district suggested some support initiatives are needed to be in place in order to encourage farmers to engage in growing organic vegetables. At this stage, there is little support of this type and all of them are initiated by donors as experiments in small scales. Some organic vegetables companies interviewed in this study expressed their interests in supporting farmers in this value chain but all of them are of small scales and at the early stages of operations. There has been very little development of the domestic market for organic products in Vietnam despite the fact that there are strong concerns around food safety and food quality, particularly amongst urban consumers. Underdevelopment of the market for organic vegetables is one of the key challenges for the development of the organic vegetables value chain. Results from the value chain analysis conducted in this chapter revealed a pre-matured market for organic vegetables in Hanoi. This result is a surprise given the heated concerns on food hygiene and safety of highincome population in the capital city, the second largest economic cluster of the country, leading to a high potential demand for organic products. Poor public awareness and understanding of organic products could be a key obstacle for developing such potential demand into a commercialized market. While domestic market is still pre-matured, organic vegetables should be aimed to export markets. With exception of few organic farms in Da Lat and places surrounding HCMC exporting their organic vegetables to the European markets, production of organic vegetables in the North is largely to supply for Hanoi market. Experience of Thailand could be considered as a success in exporting organic products and it is possible that Vietnam could learn from its neighbour‟s experience.

Donor support for agriculture and private sector development in Vietnam
The community of donors has been pro-active in supporting the development agenda of Vietnam, in which PSD and ARD are among the key pillars. This willingness has been re-enforced by impressive and inclusive economic growth that put Vietnam among the top performers in the developing world. As a result, there have been a number of several donors, bilateral and multilateral, providing support in a plethora of programmes and projects, either in terms of direct support, or budget support, or trust fund to other multilateral donors or international financial institutions. The complexity in types of support, areas of support, management arrangements, and

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ODA coordination hinder a satisfaction assessment of the donor community‟s support within the scope of this analysis. But there is no doubt that donors, especially few largest donors, have been contributed an important role in the recent development agenda of Vietnam. There is a heavy concentration of ODA to some largest donors for Vietnam, including Japan (though JICA and JBIC), World Bank, ADB, and Germany. These donors account for around 70 percent of the total ODA signed for the country. Clearly, the roles and impacts of the donor community will be largely driven by the strategies and portfolio of these largest donors. In fact, these donors have engaged in most of aspects of the development agenda in Vietnam, from infrastructure development to access to public services, from industry to services and ARD, from policy and institutional framework to enhancing capacity for civil society organizations and citizens. This created a background for other smaller donors (in terms of the scale of financial support) to either enhance the support areas led by the largest donors or find the niche to engage in the development process of Vietnam. According to discussions with the donors interviewed under this study, this setting is recognized and perceived by most of them as the key „coordination‟ setting of ODA in Vietnam, through the role of the series of CG meetings or PGs should not be underestimated. PSD and ARD have been the two important pillars of the development agenda of Vietnam, as stated in CRPGS. Supporting PSD focuses on policy advocacy to create a level playing field for the private sector and this focus is also reflected in a number of initiatives to encourage SOE reforms. The engagement of donors in the process of the Enterprise Law is a good example of how donors have contributed to the legislation development for PSD. In addition, a number of programmes and projects have been introduced to facilitate better access for the private sector, especially rural SMEs, to credit, land allocation, and other support from the authorities, business development services, and human resources. In terms of ARD, the largest donor-funded projects are for rural infrastructures such as rural transport, irrigation, electricity, and other rural infrastructure facilities. In addition, there are several projects of small or medium scales supporting livelihood diversification for rural farmers, enhancing capabilities for rural people, especially for the poor and ethnic minorities. IFAD is among the most active donor in this area with a number of medium-sized projects supporting livelihood diversifications, pro-poor value chains, decentralization to improve living standards of the rural poor and sustainable rural production with a strong market orientation. Given the limited information on budget of these interventions available for this study, it could be argued that while enhancing capabilities and creating an „enabling environment‟ for PSD and ARD are considered, the support to rural infrastructure has taken most of financing of donors for PSD and ARD. Evaluating the impacts of the above involvement by the donor community is however difficult. The main reason is that there is a plethora of programmes and projects supported by the donor community either directly or through budget support. Many programmes and projects have evaluation reports but most of these reports are not available to the public. To provide some further insights on the above general description, this study examines the support of donors to the three agriculture value chains selected for the current study. The results, suggesting relatively limited support of donors, are surprising. The rice sector – being the most important agriculture export of Vietnam – has encountered many challenges. Switching from „high volume and bad quality‟ to high quality and (thus volume) rice export requires radical changes in most stages of the rice value chain and perhaps, redefine the role of the Government in regulating this sector. In this context, donor‟s interventions in the rice sector are very thin and do not seem to respond sufficiently to the challenges. Examining available information on the donor-supported projects in the rice sector, the focus has been placed mainly on post-harvest handling and a set of recent projects that tackle the broad issues of climate change in

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MRD. Given the importance of rice as a livelihood for many poor farmers and in national food security policy, there are rooms for further intervention in the rice sector, especially on policy advocacy to reform the regulations on the sector and facilitation of the switch to higher value added rice export. The coffee value chain in the Central Highlands plays an important role in economic development of the Central Highlands and industrial crops of Vietnam. Being a world second largest coffee exporter, the coffee sector however embodies a number of weaknesses. Most notably, growth of coffee production and export is largely driven by intensive fertilizing and watering on Robusta monoculture cropping to get unusually high yield. This coffee growing pattern is proved to be unsustainable and needs to be changed. In addition, poor farming practices, simple and low technological processing practices have undermined quality of Vietnam‟s coffee export. Given these key challenges for a sustainable development of the coffee sector in Vietnam, there has been however very few interventions of donors (also of the Government) to the coffee value chain in the Central Highlands. DE Foundation, GIZ, and M4P are the few donors in this sector, providing support of small scales. The focus is given to introduce experiments of new farming practices and processing applications. While these interventions could be considered as innovative and successful in their own scope, the wider impact of such interventions depends on whether such experiments could be scaled up. At this stage, there is no background to suggest a level of readiness from all the key stakeholders for scaling up such experiments. Therefore, sustainability of this approach is subject to further consideration and should not be over-stated. The organic vegetable value chain represents an interesting but challenging direction in moving from „high volume but bad quality‟ to high value agriculture. In the lack of legislation background, sufficient technical standards, and certification, some INGOs have experimented small-scale support in order to introduce organic vegetables to farmers in provinces in RRD. Given the increasing concern on food safety, it is surprised that the market for organic food remains unawake in the big cities of Vietnam, where living standards have been improved drastically over the past two decade. Low public awareness, insufficient legal and technical background are among the key constraints. Unfortunately, while donors are calling for the move toward high value agriculture, there has been very little support to this type of initiative. The future of organic vegetable and, more generally of the organic agriculture sector in Vietnam is promising and close involvements of the authorities, private sector, and donors are clearly needed. As interviews suggested, “moving to high value agriculture is challenging. Domestic private sector could be too weak to absorb while small farmer could fail to upgrade their capability to absorb potential benefits from technical assistance by donors. In addition, donors‟ approaches might not be relevant to farmers”. In addition, “there is an increasing recognition of moving to high value agriculture. The question is who will drive this switch? Currently, it is empty. No one there to promote such strategic move in agriculture”. This is probably a test for the increasing commitment of both Government and donors toward high value agriculture in Vietnam.

Some policy discussions
Vietnam has experienced a very interesting and unique transformation over the past two decades. From a peasant economy under the central planning economy with no recognition of private sector and collective agriculture system, the country has moved toward a market economy in just a few years without ending up in disorder and collapse of the state-owned sector as experienced in many other transitional economies. Collective agriculture system was abolished and thus autonomy in economic decision making was returned to individual farmers. The private sector was officially recognized and a number of reform measures were introduced toward a level playing field for the private sector. Investment incentives were also initiated to attract domestic and foreign investment.

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As a result, Vietnam has transformed from a country suffering hunger to one of the world largest exporters of agriculture products. The retreat of the Government from its direct commanding role is arguably one of the most important factors contributing to that striking transformation. At this stage, it does not seem that the Government has retained a role as a driving force of the rural economy and private sector development. Instead, it is found that the Government of Vietnam is moving closer to a role of a government in a free market, pursuing the role as a provider of public goods while retaining some direct interventions in special areas. These direct interventions are usually justified by equity or other political background. Apart from these direct interventions, the rural economy is now driven by individual farmers and private sectors. The case of the coffee sector could be considered as a good example of private sector-driven value chain, where government interventions almost do not exist. Given the Government has „given‟ up most of its direct interventions, it is the private sector and farmers to drive the rural economy. In the rural economy, millions of household businesses and informal micro enterprises currently exist as arguably the most important driving force of the rural economy. Through the currently private sector-led rural economy has exhibited striking growth in production and export, there has been a number of strategic problems. Findings from this study, however, suggest that benefits generated from the growing rural economy have not been distributed equally. In the case of the rice sector, it was reported that most of rice growers are actually net rice buyers and only those with largest paddy land possession (has shared most benefited from the net rice surplus, while the majority of rice farmers in the MRD who are net rice buyers cannot make a living from growing paddy. The case of coffee represents a similar story, around 90 percent of coffee growers are small landholders with coffee planting areas of less than one hectare. Given the heavy reliance on fertilizers, agro-chemicals, and watering, the net income for smallholders could be very thin. Notably, as coffee production is largely under the majority and the migrated ethnic minorities, pushing the indigenous ethnic groups further to less fertile land. This was the cause of recent tensions in the Central Highlands. Another important issue from this private sector-led rural economy is the quality problem. Farmers plant the crops that they are used to; the private sector does its business to the best for its profit; and the rural economy keeps growing „high volume but bad quality‟ products. Rice and coffee are two examples of this „„high volume but bad quality‟ growth. In the case of rice, being the second largest rice exporters, Vietnam‟s rice export is generally lower quality (and thus lower price) compared to these of Thailand or India. In the case of coffee, being the world leading exporter of Robusta, Vietnam is exporting the „mix bag‟ low quality products to „easy‟ international buyers. Being a „high volume but bad quality‟ supplier, Vietnam hardly exerts any influences on international market prices and thus being a price taker in most cases. Is this the private sector to blame for being „high volume but bad quality‟ price taker in international agriculture markets? Answering this complicated question is difficult and clearly goes beyond the scope of the current study. However, it could be argued that overcoming the problem of being a „high volume but bad quality‟ price taker requires concerted efforts. Land reallocation, new seed application, extension services, quality certification, trade promotions etc. are among the issues that need to be tackle for a move toward high value agriculture. In these aspects, the private sector cannot and might not be willing to take a leading role. The failure of the organic vegetable value chain is evident for this argument. Moving from high volume but bad quality‟ toward high value agriculture requires concerted efforts and this process should be led by the Government, at least in the initial periods. This raises an interesting question on how international donors could support Vietnam in such important challenges of the rural economy. The community of donors have been active in

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supporting the country‟s development agenda. Given data available to this study, it seems that donors have strongly focuses on creating and supporting an „enable environment‟ for economic growth and poverty reduction in general and for agriculture, private sector in particular. This study suggests that there has been very little involvement of donors in supporting the strategic move toward high value agriculture in Vietnam. It could be argued that the time for cheap food is ended and the prospect of Vietnam‟s agriculture sector, as well as millions of rural inhabitants depends on whether and how Vietnam could move toward high value agriculture. Unfortunately, this study indicates that either the Government or donors are found silent in this strategic challenge. Notably, this finding is reported in the context that some donors are „packing their bags‟ as Vietnam is approaching the middle-income country status.

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Introduction
The doi moi (i.e. Renovation) process in 1986 and especially the radical market-oriented reforms of 1989 marked a turning point in the history of Vietnam‟s economic history. Success in managing that transition process has put Vietnam into the top two or three performers in the developing world (Glewwe et al. 2004). From a peasant economy under the collective agriculture system, Vietnam has transformed vigorously into one of the world largest exporters of agriculture products. This is associated with a development of a vibrant private sector, which was not officially recognized under the centrally planning mechanism. During this transformation, the Government has withdrawn its direct interventions and pursued its new role as a provider of public goods and a facilitator. Such process has been supported by a diversified community of development donors by a plethora of programmes and projects in most aspects of socio-economic life of the country. As a part of a wider study, this paper presents an analysis of Vietnam. The objective of this study is to improve our understanding on the evolution of the private sector and the rural economy under two important forces. The first force represents the retreat of the Government from a commanding role in the centrally planning economy toward more friendly and supportive role in the new setting of the so-called „market-oriented‟ economy. The second force refers to the support of the donor community for Vietnam‟s development agenda since the early stage of the doi moi process. To provide insights for this analysis, three value chains of agriculture products including rice, coffee, and organic vegetables. The selection of these value chains were made on the basis that these products represents different segments of the agriculture sector. Rice – as the most important food staple of Vietnam – has experienced remarkable growth in production and export. Coffee – as one of the most important industrial crops of the country – has also exhibited impressive growth over the past two decades. Vietnam has established its positions as one of the world leading exporters of rice and coffee. However, these value chains are typical of the „high volume but bad quality‟ strategy of Vietnam‟s agriculture sector. The organic value chain was then selected as a case for moving toward high value agriculture. Given the scope of the current study, the paper relies on secondary sources of data for its main analysis. To supplement this analysis, a fieldtrip to the site of growing the selected products were also made in order to collect further information from key stakeholders of the value chain. Empirical evidence found from the fieldtrip is then used to re-enforce the analysis based on the secondary data. In this regard, empirical evidence collected from the fieldtrip should not be over-stated as it merely represents a snapshot of the selected value chains at the sites visited. The structure of the study could be now outlined. The first chapter provides a review of the major reforms related to agriculture and private sector development. The focus is placed on decollectivization of agriculture collectives, land reforms, trading regulations, and facilitation of private sector development in agriculture. As a result of these reforms, the role of the Government is re-defined to be friendlier to markets and the private sector. Major outcomes of these reforms in terms of agriculture growth, export, employment, and poverty reduction are reported in the final part of this chapter. The three subsequent chapters provides the analysis on the three value chains, including rice in the Mekong River Delta, Coffee in the Central Highlands, and organic vegetables in the Red River Delta. Under each of these chapters, a review of the policy environment related to these products is first highlighted. The focus of these chapters is however put on main findings on the key actors of the value chains. The final chapter provides a review on the involvement of the donor community in supporting Vietnam‟s development agenda, of which agriculture and rural development, private sector development are the two important

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pillars. After reviewing the general support of the donor community, the chapter analyzes some specific interventions of donors in the three value chains selected for this study.

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The role of the private sector in agriculture and rural development during the economic renovation
This chapter provides a background on the economic renovation (which is often referred to as doi moi) with a focus on the reforms on private sector development in agriculture and rural development. The first section describes a overview of the doi moi. Major reforms related to private sector development in agriculture sector are reviewed in the second section. As the Government has withdrawn its direct interventions, the remaining roles of the state, largely in terms of provisions of rural infrastructures and public services, will be discussed in the third section. Major outcomes in terms of how the private sector has responded to such reforms are highlighted in the final section.

Overview of the doi moi
After the reunification in 1975, Vietnam shifted its focus on reconstruction and socio-economic development. The failure of the economic growth followed closely the centrally planned model forced Vietnam to undertake certain reforms in the early 1980s. However, only the doi moi (i.e. Renovation) in 1986 and especially the radical market-oriented reforms of 1989 marked a turning point in the history of Vietnam‟s economic history (World Bank, 1998). Success in managing that transition process has put Vietnam into the top two or three performers in the developing world (Glewwe et al. 2004). The economic development in Vietnam after the reunification in 1975 can be characterized by three major periods (Figure 1.1). Prior to the 1980s, Vietnam‟s economy was essentially a centrally planned economy. Between 1980 and 1988, the failure of the centrally planning system had become revealed. The Government of Vietnam tried to create incentives in agriculture and stateowned enterprises (SOEs) through some microeconomic reforms. These initiatives, adopted from the so-called „fence-breaking‟ and „bottom-up measures‟, had some success in the early 1980s. But the initial measures were not sufficient enough to address the fundamental problem of resource misallocation. The economic recession was so severe that the official launch of the Doi moi was sometimes referred as a „survival‟ strategy (CPV, 2001). From 1989 onwards, the economy has 1 been an economy in transition, striving for industrialization and international integration.

1

The 9 Communist Party Congress (April 2001) confirmed that Vietnam has been building and developing a market economy by socialist orientation.

th

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Figure 0.1 The Main Stages of the Doi Moi in Vietnam

Before the 1980s: Centrally planned economy

During 1980-88: Crisis of centrally planning mechanisms; „fencebreaking‟ initiatives

Since 1989: Market-oriented reforms Up to 1996: Strong market reforms In 1997-99: Asian crisis; Reform slowdown Since 2000: Further commitments to reforms

Source: GDP growth, inflation are from GSO Statistical Yearbook (various years)

Before the 1980s: centrally planned economy
The economy was essentially a centrally planned one at a low development level. Major characteristics of the economy included: (i) state or collective ownership of production means; (ii) the Government administered supply of input and distribution of output; (iii) lack of autonomy for enterprises, absence of factor markets, highly regulated goods and services markets; (iv) and investment biases toward heavy industries, which were overwhelmingly dependent on external sources (CIEM, 2002). Vietnam was relatively autarkic, trading mostly with the former socialist countries. As a result, the economy was heavily distorted in resource allocation with poor incentives and restricted information flows. By the end of the 1970s, the failure of the centrally planned system started to become increasingly apparent. Economic recession was evident and the economy suffered from serious shortage of consumer goods as well as inputs for centrally planned production, and thus pressure for economic management changes increased substantially.

During the period 1980-88: ‘fence-breaking’ measures
The centrally planned economy was steadily modified to respond to depletion of the economy. Some microeconomic reforms were introduced in the early 1980s to recognize „spontaneous‟ and bottom-up measures. „Illicit contracting‟ in agriculture is an example where farmers were not necessary to sell all output to collectives. Instead, they were assigned output targets and as long as these target were completed, the households were free to decide the usage of their remaining output. „Fence breaking‟ in the manufacturing sector is another example where enterprises were allowed to decide on what they were going to do after completing the plans imposed by the authorities and use the revenue from these extra activities to compensate for their workers. These micro-level reforms enhanced voluntary and decentralized interactions between economic agents and created new incentives for producers and farmers in raising outputs during the period 1982-85.

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The economy became more dynamic, and as a result, Vietnam enjoyed a relatively high rate of economic growth in the first half of the 1980s. However, that resultant growth was not sustainable and tended to decline as consequences of macroeconomic imbalances such as excessive demand for consumption goods and large fiscal deficit, and more importantly misallocation of resources. In attempts to reverse the situation, the financial reform changed to new Vietnam Dong notes which were appreciated by ten times implemented in 1985. But this „price-wage-money‟ reform failed as it was introduced without addressing the fundamental problems of resource misallocation and macroeconomic imbalances. As a result, the inflation rate accelerated to several hundred percent (see figure 1.1) and the economy was in crisis in the mid-1980s. This provided an important push for the Doi moi.

Since 1989: market-oriented reforms
The year of 1986 marked the Vietnam Communist Party‟s Sixth Plenum that recognized the existence and the essential role of a multi-ownership economic structure in Vietnam‟s economy. However, significant changes in this direction occurred only sometimes after the approval of the Doi moi. In March of 1989, Vietnam adopted a radical and comprehensive reform package aimed at stabilizing and “opening” the economy, and enhancing freedom of choice for economic units and competition so as to change fundamentally its economic management system. The reform package included:  Almost complete price liberalization with state control retained on some important and strategic goods; Devaluation and unification (i.e. between the official and black markets) of the exchange rates; Increases in nominal interest rates to ensure positive real interests; Substantial reduction in subsidies to the SOE sector, which signaled an end of subsidies and „cheap‟ credit for SOEs, increased the autonomy for SOEs; Agricultural reforms through the replacement of collectives by households as the basic decision-making unit in agricultural production and security of land tenure for farmers; Encouragement of the private sector and promulgation of the Law in Foreign Investment; Removal of domestic trade barriers and diversifying trade relation to other countries rather than only focusing on the (former) socialist countries.

  

 

The economy responded positively to the reforms, which motivated creativeness and entrepreneurship in generating job and income for themselves and their families. Macroeconomic stabilization was successful in conjunction with price liberalization, changes in interest rate and exchange rate policies and at the same time, the relief of the fiscal deficit burden. Inflation was put under control at the start of the 1990s. This economic stabilization laid important background for further reforms to take place during the 1990s. To further strengthen the private sector, the Law on Private Enterprises and Company Law approved in 1991. The private sector, including both domestic private firms and household businesses, became a major source for employment in the economy. Rapid growth in services and construction during the 1990s mainly came from a quick response of private entrepreneurs. Nearly two million newly established household businesses in urban areas helped to enhance the performance of the economy and improve considerably the retail sales and service network (CIEM, 2002).

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Major reforms on agriculture and private sector
During a transformation from a centrally planned economy into a market economy, major reforms in agriculture and rural development and private sector development could be best described as an liberalization process of former distortions to agriculture and rural development and unequal treatment toward the private sector. In this context, there have been a number of important policy changes that directly affect private sector development. In this liberalization process, the role of the Government in agriculture and rural development and private sector development has been changed significantly from a „commanding role‟ into more supportive and guiding role. This section will first review the major policy reforms before discussing the current role of the Government in agriculture and rural development. Vietnam was largely a peasant economy before the doi moi. Under such centrally planned agrarian economy, agricultural production was organized in cooperatives which followed state production plans. Decision on production, harvesting, post-harvesting activities were totally under control of these agricultural collectives. There was no land-use rights granted to individual and private sector was not allowed in rural economic. Trading of agriculture input and output was made by collectives and state-owned trading enterprises using the state-regulated prices. As Vietnam was constantly in shortage of food and foodstuff, there was almost no agriculture export. Importation of agricultural products were carried out though state-to-state agreement, mainly to provide food aid and subsidies for Vietnam. From this starting point, Vietnam has experienced a number of important policy changes; this sub-section will review de-collectivization (with relation to Resolution 100), the land reform (with a specific focus on the Land Law), private sector development legislation, trade and investment reforms.

De-collectivization, Directive 100 and Resolution 10
Inspired by the communist concept of collective ownership, the Government of the North Vietnam started the process of collectivization right after the end of the French colony war that divided the country into a Northern socialist part and Southern democratic regime supported by the United States. As a result, arable lands, claimed by the Government from landlords between 1954 and 1956, were allocated to agricultural collectives. As reported in Peter and Pham (2000), nearly 85 percent of peasant households in the North and 68 percent of total farm land were brought into these cooperatives in two years 1959 and 1960. In the following period 1961-1965, over 90 percent farmer households in the North joined cooperatives. In the South, collectivization was started soon after the re-unification. Land was reclaimed by the state and around half of a million farmers were forced to join collectives. Such collectivization was intensified by the 1975-80 Five Year SocioEconomic Development Plan. Accordingly, the average scale of agricultural collectives (in terms of members) increased by between 200 percent compared to those in this period. Despite the proliferation of cooperatives reflected by rising number of farmers and output scale, initial improvements in output were found to be short-lived. There were no incentives for good performances nor penalties for bad performances. Farmers were rewarded by their contribution in working time and seniority rather than individual productivity. The collective economy held 96 percent of farmland but generated less than 40 percent of the average income for their member households. Stagnation in agricultural production was recorded and average per-capita food output dropped to the lowest level in 1976 while population grew rapidly after the re-unification. Being an agrarian economy but Vietnam faced severe shortage of food and foodstuff in the late 1970s. As a result, there was a large gap between „black‟ market prices and regulated prices for agricultural output. According to Fforde and de Vylder (1996), the free market prices for many products offered at 10 times higher than that of the public sector. As food security was not ensured by domestic production, Vietnam was dependent on food aid from former socialist countries at times. Declining

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agriculture output and increasing shortage of food and foodstuff proved the failure of the collectivization wave. In the early 1980, stemming from such economic difficulties, fence-breaking measures were observed in certain rural locations. The most important fence-breaking experiments in agriculture entailed land allocation to farmers and contracted them with prices above the official levels. „Illicit contracting‟ in agriculture was also introduced. Accordingly, farmers were not necessary to sell all output to collectives. Instead, they were assigned output targets and as long as these targets were completed, the households were free to decide the usage of their remaining output. Variants of these measures were already observed in the 1970s in, for instance, Vinh Phu and Hai Phong – the two provinces in the North. Those measures were however criticized by the Central Communist Party and thus disallowed to duplicate. In the South, in facing with food shortage, HCMC authorities began buying rice from farmers at a price that equaled the free-market level (even though they were five times higher than the official prices. In another fence-breaking measure, HCMC authorities allowed some Chinese traders to buy agricultural and fishery products (Rama, 2008). Perhaps, the most radical „fence-breaking‟ measure was Directive No. 100 of the Communist Party‟s Central Committee, famously known as Contract 100 (i.e. „Khoán 100‟) or output contract, was issued on January, 1981. This represents a first important move away from collective agriculture (Kirk and Nguyen, 2009). Accordingly, agricultural lands were redistributed from collectives to peasant households; the responsibility for production shifted down from cooperatives to peasants‟ households, who were then responsible for the task of growing plants, weeding, applying fertilizer, and harvesting. In terms of output allocation, each peasant household was given a „quota‟ based on land areas used and productivity during the previous three years. Peasants were then allowed to keep or sell surpluses on the private markets or to the state trading agencies at some „negotiated prices‟. Directive 100, together with other bottom-up measures in agriculture exerted important impacts on growth of agricultural output in the mid 1980. However, these fencebreaking measures proved to be short-lived. Despite of early improvements in agricultural output, economic difficulties in the early 1980 were considered to be severe and left little policy options. Fundamental macroeconomic imbalances remained serious due to distortions in allocation of resources for decades. To overcome socio-economic crisis, the Sixth National Congress of the Communist Party in 1986 officially introduced the doi moi. In series of subsequent reforms, there were bold policy changes in agriculture and private sector development, including (i) land-use rights for farmers; (ii) liberalization of agricultural trade and prices; (iii) facilitation of private sector development in agriculture; and (iv) other agriculture-related policy changes. Of these reforms, Resolution 10 (usually referred to as „Khoán 10‟) was arguably the most important reforms in agriculture. Unlike the earlier Directive 100, Resolution 10 represents a radical approach to collective agriculture and initiated the decollectivization. In accordance with Resolution 10, farmers were entitled to land-use rights for 15 years for annual crops and 40 years for perennial crops. Although the terms of land allocation varied across Vietnam, land was allocated on the basis of family size in most instances. Cooperatives no longer controlled capital stock, working capital, and other means of production. Farmers gained their autonomy to fully control production decisions. In the first instance, farmers were allowed to retain 40 percent of total output for their own usage, while the remaining was contributed to collectives. Few months after Resolution 10 became effective, farmers were allowed to decide entirely their output. This autonomy was against the fundamental principle of collectives, and as a result, there was a decollectivization wave after Resolution 10. By the early of 1990s, only a few collectives were left and already transformed to provisions agricultural services such as irrigation, distribution of agricultural inputs (Fforde and Huan, 2001).

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In efforts to renew the model of collectives, the Cooperative Law was promulgated on March 1996 (amended in 2003) creating new legal base for re-organizing and operating cooperatives in the market-oriented economy. As stipulated in the Law, cooperatives can register as independent business entity with its own stamps and bank accounts with the freedom in conducting business transactions as any other legal business entities. This is to encourage business development in rural areas. However, it is not clear how the rural economy has responded to this new model of collectives. After decades of forcing to join collectives, a common sense among peasant households is to do their own business rather than joining new collective models. One advantage of joining new collectives compared to household businesses is that collectives are considered as legal business entities and thus able to issue invoices for their services as long as access to support for development of the formal private sector. However, many households businesses might adopt to register officially as a private firm rather than to join collectives. Therefore, the effect of this new legislation in collectives remains inconclusive.

Land reforms in rural areas
Land reform was reflected in some fence-breaking experiments in agriculture as described above. Directive 100 tackled indirectly the issue of land allocation for peasants. Instead of allocating land to farmers, land was still under control of collectives but farmers were allowed to cultivate in collective land as long as they contributed the volume of output „contracted‟. With Resolution 10, land was for the first time allocated to peasants with land-use rights secured for 15 and 40 years for annual and perennial crops, respectively. Therefore, while land was considered as state or collective ownership, land-use rights were granted for long-term usage for peasant households. From this starting point, the first Land Law was promulgated in 1993 marked the most important process in the land reforms for agriculture and rural development. This 1993 Land Law was built on Resolution 10 by extending land tenure to 20 years for annual crops and 50 years for perennial crops. In the two rice bowls of the country, peasant households were limited to 3 hectares of land per farm for annual crops in the Red River Delta and 5 hectares per farm for annual crops in the Mekong Delta. More importantly, exchange, transfer, lease, inheritance, and mortgaging of landuse rights were permitted for the first time. This created an important background for the development of the land market. To aid this development, a process of issuing land-use right certificates (which is commonly referred to as Red book) began after the Land Law became effective. According to ANZDEC (2000), by the end of 1999, more than 10 million households had received certificates for agricultural land, representing about 87 percent of peasant households and 78 percent of the agricultural land. Land-use right certificates, which guarantee long-term land use rights, became one of the most important physical assets for farmers. Since the promulgation of the Land Law in 1993, the Law has been amended several times in 1998, 2001, and most recently 2003. By such amendments, issues related to different land users (instead of individuals as in Land Law 1993) were added; land pricing, mechanisms to deal with land disputes were introduced; and equal treatment among different land users were strengthened. Nevertheless, there exist limitations in land reforms and development of a well-functioning market for agriculture and rural development in Vietnam. Land fragmentation was the major constraint for commercialized agriculture. To reflect the egalitarian spirit, land was supposed to be allocated on the basis of need (usually indicated by the size of households) and also the ability to farm the land (meaning, the number of household members who can work on the land). Given the large and growing population and high density of population, this resulted in a high level of land fragmentation, which imposed negative effects on production efficiency and land productivity. In addition, land concession for investment projects and other non-agriculture uses have become an increasingly important problem. Pham et al. (2010) showed a rapid rate of land concession for other purposes and as a result the incidence of landless households in the rural areas was on a

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rise by nearly two third between 1992 and 2004. In the latter year, Scoot (2006) reported that 19% of rural households were landless. Among the poorest quintile of households in the Mekong Delta, nearly 40 percent were landless. In addition, agricultural land reclamation process for other economic activities and compensation arrangements are corrupted and non-transparent. This is partly due to a large gap exist between the official land prices regulated by the government and the market prices.

Liberalization of trade in the agriculture sector
Trade of agricultural products has been steadily liberalized both domestically and internationally since 1986. During 1987–91, price liberalization was carried out with sequential reform measures to abolish the ration system and the gap between official and market prices. Accordingly, the ration system which operated through allocation of stamps for most essential consumer goods based on household sizes, professional careers, and positions was removed. This laid the most important background for using market prices in transactions. Accordingly, the large gap between official (distorted) prices and „black‟ market prices were narrowed. By 1989, prices of most good and services were no longer decided by state planners, except for rice, gasoline, and some other essential goods. Price liberalization was accompanied by the opening of markets for both internal and external trade. In 1987, internal control posts were abolished, accelerating trade between regions, between SOEs and private sectors, as well as between urban and rural sectors (Kirk and Nguyen, 2009). Foreign trade reform was initiated in 1988 with the promulgation of the first Law on Import and Export Duties, which become effective in Jan 1988. Vietnam‟s trade regime in the pre-transition shared some common features with these of other transitional economies in Europe, including (i) foreign trade was monopolized by state corporations; (ii) the uses of tariffs and other non-tariff tools were very limited as foreign trade was distorted by the planning systems; and (iii) trade relations were mostly with other countries in the Council for Mutual Economic Assistance (CMEA). Before the 1990s, 13 state-owned foreign trading corporations effectively controlled Vietnam‟s exports and imports. In terms of agriculture, Vietnam hardly exported any significant amount of agricultural products due to the shortage of food and foodstuff in the domestic market. After tariff reforms, the government then concurrently ceased its exclusive control of foreign trade through state trading agencies and import–export licenses. To bolster the competitive position of the economy, the official exchange rate was sharply devalued and brought to near equality with the free market rate (Sepehri and Akram-Lodhi 2002). Regarding direct quantitative restrictions on imports and import licensing, Vietnam relied heavily on quantitative restrictions in the early stage of trade reforms. For agricultural products, export of rice and import of fertilizers were subject to close control and monitor by the Ministry of Trade (known currently as the Ministry of Trade and Industry – MoTI). However, these regulations have evolved substantially in the late 1990s. Since 2000, QRs on imports have been substantially liberalized. Currently, QRs remain on two items including sugar and petroleum products. Together with removal of quantitative restrictions, some export promotion initiatives were also introduced. In 1998, export subsidies were first implemented and in addition, an Export Reward Fund (ERF) was established. It provided financial support and interest-subsidised loans to enterprises exporting fruits and vegetables as well as meat products. In 1999, the ERF together with the Price Stabilization Fund was transformed into the Export Support Fund (ESF). Its purposes were to subsidize agricultural exportable products when their international prices decline or losses are incurred due to low competiveness and reward innovative exporters. State monopoly in agricultural trading was steadily removed. From the number of 13 state corporations that were designed to foreign trade mainly with former socialist countries, firms from

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different types of ownership (see below) were allowed to participate in foreign trade transactions conditional to having foreign trade licences. Prior to August 1998, the foreign trading licensing mechanism acted both as a certification that the enterprise was competent to trade and as a specification of the commodities that the enterprise was entitled to import or export. The pre-1998 system distinguished between production enterprises and specialized trading enterprises. Production enterprises were licensed to import and export goods that related to their production activities specified in the business registration certificate. For trading enterprises (which were required to meet additional conditions regarding personnel and working capital), the license identified certain categories of goods that they were eligible to trade (MUTRAP, 2002). Decree No. 57/1998/ND-CP issued in July 1998 represents a radical change in the trading regime. Accordingly, all firms are allowed to trade goods directly in the range of goods in their scope of activities registered in their business licences without a foreign trading license. In addition, the system of designating enterprises to export rice and import fertilizers ceased in May 2001 by Decision No.46/2001/QD-TTg, which partly liberalize conditions for new entrants in these activities.

Facilitation of private sector in agriculture
Private sector was not officially recognized under the centrally planning economy before the doi moi. Instead, private-led economic activities were put under a broadly defined term of „black‟ market or informal sector. As only state and collective ownership were recognized, the economy was formally driven by SOEs and collectives. However, the private sector activities in Vietnam did exist in one way or the others, especially in the South – where the private sector was relatively buoyant before the re-unification. The 1992 Constitution lays the most important constitutional background for recognition of the private sector in the economy. This was a resultant consequence of the Communist Party‟s direction to develop a „multi-sectoral economy‟ (i.e. with participation of business entities from different types of ownership). Development of private sector was put in the reform agenda of the Party at its 6th National Congress in 1986 (CPV, 1986). Based on this political and constitutional background, household businesses and private business entities were recognized as two important economic sectors, which are legally recognized as state-owned sector. The most important milestone for private sector development was the Enterprise Law of 2000 (and 2005 revised version), which was a formal combination of the previous Company Law and Private Enterprise Law. This represented a radical change in approach toward the private sector. Until then, private enterprises had been allowed to operate under a series of approvals and controls by the authorities. The Enterprise Law, by contrast, protected the right of citizens to establish and operate private businesses without unnecessary interventions from government officials (see CIEM-UNDP, 2005). The most important innovation introduced by the Enterprise Law was the simplification of registration procedures with the elimination of over one hundred business licenses. The private sector has enormously responded to this new approach by a sharp increase in the number of new establishments. World Bank (2005) reveals a number of nearly 15,000 new private enterprises registered in 2000, and around 38,000 in 2004. In parallel to the development of the private sector, rural households responded positively to new opportunities. Land reforms, decollectivization, and liberalization of agricultural trade, many peasant households have started their own business at micro scales. Assessing exactly how many household businesses there are in operation is not straightforward. GSO (2008) published a number of nearly 3.7 million non-farm businesses operating in rural Vietnam, creating around 6.6 million jobs. Wim Vijverberg (2005) shows a big gap when estimating the number of household businesses from different survey instruments. For instance, the VHLSS 2004 could be used to derive the number of around 9.3 million non-farm enterprises ran by households. After exploring

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different measurement issues and applied the some inclusion conditions to classify household businesses, the total number of household enterprises to 6.1 million. Regardless how the number of household businesses is identified, GSO statistics (GSO Statistical Yearbook 2008) shows that the household business sector accounted for nearly 29 percent of GDP, creating around 35 million jobs in 2007 (out of the total employment of 38.6 million jobs in the non-state domestic sector, and 44.2 million jobs nationwide). World Bank (2005) using the VLSSs and VHLSSs in the period 1998-2004 suggested that household businesses were becoming gradually more „professional‟. The number of operating days per month, and months per year, has increased. The percentage of enterprises with a fixed location has increased as well. Also, the share of loss-making household businesses was 0.3 percent in 2004 compared to 4.8 percent in 2002, and 8.2 percent in 1998. The two most popular industries are “commerce” and “processing and manufacturing”. The former accounts for more than 40 percent of all household businesses; the latter represents about one quarter. In addition to the development of the domestic private sector, the increasing flow of foreign direct investment (FDI) has created an emerging foreign-invested private sector. Attracting FDI was considered in the list of main priorities approved at the 6th National Congress of the Communist Party in 1986. The Law on Foreign Direct Investment was then enacted in 1987. In the total of 25.4 percent of the total investment as percentage of GDP over the past decades, FDI shared more than one fifth (that is 5.4%), and almost equivalent to the investment share of 5.9% from the stage budget (including also significant portion of ODA) (MUTRAP, 2002). In fact, the FDI sector has steadily replaced the dominant role of the SOE sector in terms of its contribution to economic growth. As of 2007, the foreign private sector contributed nearly 18 percent of GDP, 41 percent of industrial output, and 55 percent of total exports (GSO Statistical Yearbook 1996, 2008). However, this sector is largely focused in manufacturing activities. Foreign investment in agriculture accounted for less than six percent of the total capital committed and thus direct contributions of the foreign-invested private sector in agriculture and rural development are modest.

Other agriculture-related policy changes Access to credit for rural enterprises
The above reforms in agriculture and rural economy of Vietnam resulted in a rising demand for credit by the rural population of around 12 million peasants‟ households. The banking system was subject to important reforms in the early 1990s with the establishment of a two-tier banking. Commercial banking services were taken away from the State Bank of Vietnam in the previous mono-banking model. State-owned commercial banks were then established to provide financial services while the State Bank of Vietnam pursued its traditional central bank functions. Formal rural credit, which was not available under the centrally planning economy, started to form during the 1990s. Like other developing countries in the early stages of development, Vietnam‟s rural credit market is highly fragmented with both formal and informal financial institutions. The formal credit sector in rural areas is dominated by two government banks: The Vietnam Bank for Agriculture and Rural Development (VBARD) and, to a lesser extent, the Vietnam Bank for Social Policy (VBSP). These banks offer loans at varying terms. The VBARD offers individual loans to borrowers. With the exception of small loans, the VBARD demands collateral for all individual loans (just as commercial banks). It serves both the poor and the better-off. VBARD branches are located in every district in across Vietnam. As opposed, the VBSP has a strict poverty focus. It collaborates with mass-based organizations such as the Vietnam Women‟s Union or the Vietnam Farmer‟s Association to reach out to the commune level. It provides loans based on group lending schemes.

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Despite these credit institutions, the informal sector in Vietnam coexists with the formal sector. The informal sector consists of (i) private lending by unrelated individuals and friends charging interest, and (ii) lending from families, relatives and friends carrying zero interest. Moneylender, interlinked credit transactions between seller and trader as well as networks of family and friends are still an important source of credit. However, the share of informal credit has been steadily declining over the last two decades. According to Barslund and Tarp (2006), the importance of the informal sector, in terms of loan amounts, declined from 21 percent in 1999 to 17 percent in 2002. One possible explanation is the issuance of LUCs, as a result of land reforms, added to the formalization of household credit. LUCs served as collateral and helped asset-poor households gain access to formal credit sources.

Incentives for investment in agriculture
Promoting investment has been considered as an important priority since the doi moi. Accordingly, the Law on Foreign Direct Investment was first enacted in 1987. Few years later, the Law on Domestic Investment was promulgated to encourage domestic investment. Under these laws and under-law regulations, investment in agriculture is generally encouraged but little concrete measures were actually in place to facilitate new investment, both foreign and domestic, in agriculture or rural areas. Until recently, some important incentives for investment in agriculture were introduced. With the new Decree 61/2010/ND-CP, investors in agriculture or in rural areas are subject to several incentives. In terms of land allocation, the procedure for land reclamation for investment activities is simplified; investors are exempt or subject to 70 percent reduction of landuse fees. More importantly, investors are subsidized by between 50 to 100 percent of cost for training rural labour force employed; 50 to 100% cost of advertising and marketing campaign; 30 to 50 percent of cost for hiring consultants for business development services; 30 to 50 percent of cost for research and development activities. In addition, investors in agriculture or rural areas are also subject to subsidies of transportation cost, which is up to 50 percent in most cases. This Decree represents a bold policy change toward investment promotion in agriculture and rural development, through it is probably too early to evaluate whether this important policy change would exert expected impacts on encouraging investment.

Information Communication Technology (ICT)
ICT in the rural areas before the doi moi was characterized by very few analogue fixed lines, the system of public loudspeakers installed in most villages, and rural post offices usually located in commune or district centers. The stage monopoly in provision of ICT was steadily removed in the 1990s. In 1993, entry of new service providers rather than the sole player Vietnam Post and Telecommunication (VNPT) was allowed and this paved the way for an emerge of a very competitive and vibrant sector in Vietnam few years later. In the mid 1990s, there were new services providers such as Vietnam Military Telecom Company (Viettel), Saigon Postal and Communication (SGPT), Vietnam Shipping Telecom Company (VST), and Vietnam Electric Telecom Company (ETIC) and a number of joint ventures between VNPT and foreign investors. Since then, the ICT market has experienced a rapid development with new entrants and new services offered almost every month (VNCI, 2005). Provision of ICT in rural areas has been at priority in the late 1990s. With recognition of the importance of ICT in narrowing the gap between urban and rural areas, raising rural public awareness, and diffusion of technology, a number of important improvements in legal framework and incentives were made to create favorable conditions for extensive ICT application in rural areas. The Ordinance on Post and Telecommunications 2002 accentuated preferences to investment in post and telecommunications in rural, remote and mountainous areas. Most recently, a strategy to develop ICT in the rural areas from in the period 2011-2020 has been approved by the promulgation of Decision 119/2011/QD-TTg in January 2011. The Strategy specifies ambitious

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objectives. For instance, 100% communes are equipped with cultural post offices which could offer most basic services; 100% communes are interconnected by wide bandwidth connection; 100% of the territory area is covered by broadcasting, television of central stations; 100% commune authorities are internet connected; phone lines, both fixed and mobile, and internet coverage in the rural areas are about 40 percent of the national average. To achieve this objective, a budget of US$1.2 billion is specified from the State budget. VNPT and Vietnam Postal Services Corporation are also assigned with leading roles in implementing this Strategy. As a result, the ratio of people living in rural areas having access to ICT services has always been on the rise and Vietnam has successfully maintained its leading position in the region in terms of ICT growth in the rural areas in recent years. According to the Census on rural areas, agriculture and aquaculture, 85.5% of the total 7,757 communes have already accessed to cultural post offices. The proportion of rural households having telephone rocketed to 80.2% in 2008 and 105.6 % in 2010 from just only 11.7% in 2004. Similarly, the percentage of peasant households with computers went up by roughly six times, from 1.3% in 2002 to 7.5% in 2010. In summary, reforms related to agriculture and private sector development have been at the central of the doi moi in Vietnam over the past two decades. From a agrarian economy with prevalence of collective agriculture without recognition of private sector, Vietnam has experienced radical reforms to liberalize agriculture and encourage private sector development. These reforms are best described as freeing the stream kept in a machine for decades. Results are thus astonishing. From a system where all economic decisions were decided by collectives and state planners, farmers were given a complete autonomy within few years in decision making on their own. From a system where collectives were dominant and private economic activities existed only in black or informal market, Vietnam has witness a development of vibrant private sector in agriculture and rural areas. An important question arises from this context is that: given such radical and important reforms, what is the role left for the Government of Vietnam in rural areas and agricultural development? This will be reviewed in the next section.

New role of the State in agriculture and rural development
Withdrawing from direct interventions in agriculture and rural development, the Government of Vietnam has however retained important facilitation role, including development of rural infrastructures, provision of public services, and even some direct support for areas with extremely difficult conditions through a number of programmes and projects (largely for poverty reduction and promotion of livelihood diversifications). This new role of the Government is the subject of this section.

Rural infrastructure development
Provision of rural infrastructure remains a key role of the state in the area of agriculture and rural development in Vietnam. Infrastructure was recognized in the early stages of the doi moi as a key development challenge. As a result, investment in infrastructure has been at the central of the reform agenda of the Government and this is also the areas of active involvement by the community of donors. Annual investments rates in the order of 9 to 10 percent of GDP led to significant increases in paved roads, telephone lines, and power supply (World Bank, 2006). There is also enormous progress in access to infrastructure at local levels, even in mountainous and remote areas. To provide a better indication for the current level of access to rural infrastructures, Table 0.1 Access to rural infrastructure at village level in rural Vietnam, presents the percentage of villages which have access to major some infrastructure facilities calculated from the series of the Vietnam household living standard surveys (VHLSSs). Results suggest that rural areas have become increasingly accessible over time. As of 2006, 91 percent of rural villages had road passing through

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the village that car could travel. For the remaining villages, distance to the nearest road (i.e. in other villages or communes) was only 4.3 kilometers. With improvements in road access, coverage of public transport was also improved in rural areas. In fact, more than a half of rural villages were found to have access to public transport facilities. The incidences of villages having post office and daily market were also improved significantly. In particular, access to post office has rocked from 30 percent to nearly 87 percent between 1998 and 2006.

Table 0.1 Access to rural infrastructure at village level in rural Vietnam

Car road in the village (%)

Distance to the nearest car road (km)

Public transport in the village (%)

Distance to the nearest public transport (km)

Post office in the village (%)

Daily market in the village (%)

1998, using VLSS 1997/98 2004, using VHLSS 2004 2006, using VHLSS 2006

87.2

4.9

57.7

6.0

30.3

54.6

88.1

4.6

49.0

5.0

82.7

62.2

92.1

4.3

52.0

5.2

86.8

63.6

Source: calculations from the VLSS 1997/98, VHLSS 2004, and VHLSS 2006 Notes: (i) it is desirable to provide information at the early stage of the Doi moi but information on most of the village-level variables in this table are not available in the VLSS 1992/93; (ii) figures reported in this table are calculated at the village level and thus are different from previous studies reporting access to infrastructure at the commune level such as VASS (2007), World Bank (2004).

Access to public services
As a legacy of the centrally planning economy, the levels of access to education and services in rural Vietnam are relatively high compared to other poor countries at the similar stages of development. Experiences in many transitional economies suggested that the transition to a market economy might exert negative impacts on the provision of public services such as education and healthcare due to the cut of funding and, thus, the pressure for these public services facilities to sustain under decreasing subsidies from the stage budgets. However, this does not seem to be the case in Vietnam. Using the data available from the VHLSSs, the incidence of communes having access to different 2 types of schools and medical facilities are given in table 1.2. In terms of healthcare facilities, nearly all rural communes have commune health centers by the late 1990s and this level was maintained in the later years. Most notably, there is a sharp improvement in commune-level access to primary and lower secondary schools in the period 1998-2006 and most of those changes occurred between 1998 and 2004. At the start of the period, 72 percent of commune had primary schools in 1998. After five years, almost all communes had primary schools. Improvement in commune-level

2

For the information on access to healthcare and education, information on village-level access is not available from VHLSSs (as reflected in table 1.1) and this analysis is thus based on the commune level access.

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access to education is more striking for lower secondary schools. While only one third of rural communes had lower secondary schools in 1998, more than 94 percent of rural communes were found having lower secondary schools in 2004 and 2006. Access to upper secondary schools however is still limited. Up to 2006, only 16 percent of rural communes had upper secondary schools. For this educational level, the most common access in the rural areas is to upper secondary schools managed by the district authorities for children in the rural communes belonging to the district.

Table 0.2.2 Access to public services: medical facilities and schools in rural Vietnam Lower secondary school (%)

Commune health center (%) 1998, using VLSS 1997/98 98.7 2004, using VHLSS 2004 2006, using VHLSS 2006 99.3 98.4

Dist/prov health /hospital or center (%)

Primary school (%)

Upper secondary school (%)

7.7 3.0 2.9

71.8 99.8 99.9

32.9 94.1 94.8

8.3 14.0 16.0

Source: calculations from the VLSS 1997/98, VHLSS 2004, and VHLSS 2006

Notes: Provincial or district hospitals or centers are usually of large scale, unable to offer a wide range of healthcare services, while commune healthcare centers are often small and able to provide consultation and medicine for some basic diseases. For serious diseases, patients are introduced by commune healthcare centers to district healthcare centers or provincial hospital.

Provision of other public services Agricultural extension services
To provide support in terms of technical knowledge and skills for framers, the Department of Agricultural and Forestry Extension was established under the Ministry of Agriculture and Rural Development (MARD) in 1993. This is a stage agency responsible for providing agricultural extension services for farmers. Under the Department, there is provincial divisions at the Department of Agricultural and Rural Development (DARD) and district-level extension centers at every district. The agricultural extension services network offer various services, including technical trainings, field demonstration workshops, on-site consultation, provision of market information in most agricultural, forestry, and aquaculture activities. However, being a state-owned network, the system of agricultural extension mainly serves as a policy arm to achieve the objectives of the authorities in agricultural growth and rural development. Accordingly, services are not demanddriven but subject to different policies and programmes in agriculture and rural development. Relying heavily on the state budget, the deepening of extension services in the rural areas is relatively weak, and the system cannot provide sufficient services to meet huge demand of more than eleven peasant households in Vietnam.

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Decree 02/2010/ND-CP in January 2011 on the extension services represents an important policy reform in many different aspects. First, the Decree transformed the Department Agricultural and Forestry Extension into National Agricultural Extension Center, which is now a public service provider rather than a state management agency. Under this new institutional background, the Center provides extension services according to contracts with services users. This represents a radical change in approach of services provision. Instead of supply-driven services, the Center is now expected to provide demand-driven services for services users. In addition, the extension network is also expanded to commune and village levels. Second, in addition to the National Center for Agricultural and Forestry Extension, other services providers were allowed and encouraged to offer extension services. This represents a pressure to unblock the state monopoly in extension services for farmers. Most importantly, Decree 02/2010/ND-CP provides many incentives and subsidies when using the extension services. For technical trainings as an example, smallholding farmers and the rural poor are subsidized 100% of the cost to cover training materials, travelling, and accommodation; business farms or rural enterprises are supported 100% of the cost for materials and 50% for travelling and accommodation. For field demonstration workshops, the participants residing at poor communes and districts (according to the list approved by the Prime Minister) are subsidized with 100% of the cost for seedlings and other direct inputs (fertilizers, chemicals, animal feed etc.). Participants in other rural communes are supported 100% of the cost for seedling and a considerable percentage of other input costs (varying from 30 to 50 percent, depending on locations and activities). Though it is too early to evaluate how this Decree will contribute to improve the coverage and quality of extension services, this is clearly an important progress in the state provision of extension services in the rural areas.

Agriculture research activities
Agricultural research is largely pursued by Government‟s research institutes and some research initiatives of state-owned enterprises; involvement of private sector in agricultural research and development (R&D) is very modest. As of 2003, there were 43 agencies operated in agricultural R&D and most of them were supervised by MARD. The 28 agencies with an agricultural R&D mandate under MARD accounted for more than 70 percent of Vietnam‟s agricultural research staff in 2003, others were managed by several ministries; and only one was private-owned research institute (Stads and Nguyen, 2006). The Strategy for Socio-Economic Development for the Period 2001–2010 placed a high priority for agricultural and rural development, and emphasized the crucial importance of investments in agricultural research. The strategy also stated that improvements in these areas were viewed as the impetus to reduce poverty, achieve high rural economic growth. However, little efforts and improvements were observed in this area. According to Stads and Nguyen (2006) average expenditures remain rather low compared with most Southeast Asian (ASEAN) countries. In addition, most of agricultural research institutes have encountered the lack of qualified research capacity. Consequently, agriculture R&D has not contributed significantly to agricultural growth in the rural Vietnam.

Direct support for rural areas
Reforms toward liberalization of agriculture and facilitation of private sector development as described above have resulted in impressive rural economic growth (as below). However, there has been a considerable development gap between the rural and urban areas. As the latest country report on Millennium Development Goals, the rural areas tend to lag behind the urban counterpart in every MDGs. Although the MDG No. 1 (i.e. reduction of poverty and hunger) has been achieved ahead of time in the rural areas, there remains a marked difference in the ratio of poor households between rural-urban areas. As of 2008, the incidence of poverty in the rural areas is 18.7% while the corresponding figure for the urban areas is roughly 3.3%. The gap is more

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pronounced for hunger (as expressed by food poverty headcount). While 3.2% of urban households live below the food poverty line, the prevalence rate of rural dwellers was 31.2%. Notably, concerning the aspects of healthcare, indicators of children and mother health in MDGs No.4 and 5 in rural areas are significantly lower than urban areas. Figure 1.2 below illustrates the difference between rural-urban areas for a number of main criteria. To facilitate visual comparison, statistics for urban areas is used as the base, while corresponding figures for rural areas is calculated accordingly. In general, the difference between rural-urban areas in access to education is not remarkable. However, there remains a large gap in indicators related to maternal health and child mortality between rural-urban areas. Also, the distance between poor groups and food poverty between rural-urban areas is noticeable. Since nearly 62% of Vietnam‟s population lives in rural areas, the difference between rural-urban areas in realizing MDGs means that the results of these Goals for nearly 2/3 of Vietnam‟s population living in rural areas are lower than the 1/3 living in urban areas.

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Figure 1.2. Urban-rural gaps in achieving MDGs, 2008

Source: IRC (2010) based on VHLSS 2008

Stemming from this gap, the Government and international donors has responded actively to narrow down the urban-rural gaps by a plethora of policies and programmes to support rural economic growth and poverty reduction. Jones et al. (2009) in a report for UNDP Vietnam found a number of 41 poverty reduction oriented projects and policies either with a direct poverty reduction focus or a strong poverty reduction impact. These poverty reduction policies and projects are dominated both financially and in implementation by three large projects and national targeted programmes: (i) the Socio-economic Programme for Extremely Difficult Communes in Ethnic Minority and Mountainous Areas 2006 to 2010 (P135-II) (ii) the National Target Programme for Poverty Reduction 2006 to 2010 (NTP-PR) and (iii) the newly approved Resolution 30a on Rapid and Sustainable Poverty Reduction Programme for the 62 Poorest Districts (Resolution 30a) led by the Ministry of Labour, Invalids and Social Affairs (MoLISA). Components and subcomponents of these three projects account for over 40 percent of all interventions and cover a broad range of needs from education and health to access to land and production support. Other large national target programmes also cross over into poverty reduction though with a more sector specific approach such as the national target programme for Rural Water and Sanitation (RWSS), the national target programme for Education for All (EFA) and several regionally orientated programmes. There are also numerous regional or small-scale sector specific programmes and policies such as those for education, subsidized fuel or support to smaller ethnic minority groups. These policies and programmes have made significant advancements to the rural economy, especially in terms of rural infrastructures and provision of public services (as reflected in table 1.1 and 1.2). However, there have been concerns on the overlap of these programmes as well as the approaches adapted by these poverty reduction programmes toward poverty reduction. Jones et al (2009) reviewing the most important policies and programmes for poverty reduction suggested a serious overlap, especially in terms of design and coordination among different „owners‟ of these policies and programmes. Pham (2011) provided a review of the key approaches toward poverty reduction adapted by these programmes and suggested a over-reliance on „hardware‟ investment and a focus to ensure access levels to rural infrastructures and services rather than „quality‟ of

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these facilities. As rural poverty become more persistent in „pocket of poverty‟, future efforts for rural poverty reduction will be more expensive and difficult than those in the past two decades. There is thus a need for changing the coordination and approaches of this direct intervention for agriculture and rural development.

Major outcomes of the Doi moi in agriculture and rural development
Analysis in the previous sections has reviewed major reforms in agriculture and private sector development. In that reform process, the Government has withdrawn its direct interventions and provided peasant households, rural enterprises with complete autonomy in doing their own businesses. As a result, the Government role is re-defined to be closer to the role of a provider of public goods and services. One question arises from this context is that how the rural economy and private sector in the rural areas has responded to this „retreat‟ of government interventions. Details of these responses will be analyzed in subsequent chapters when considering performances of rural private sector in the selected agricultural value chains. This section will focus on major outcomes in terms of agricultural growth and rural poverty reduction.

Impressive agricultural growth
Figure 1.3a below reports the growth of agriculture and aquaculture output and growth in the period 1990-2009 using the official statistics of the General Statistics Office (GSO). In this period, the agriculture sector experienced a very high average growth of nearly five percent per annual. This is an exceptionally high growth rate in agriculture compared with other developing countries. Though the pace of growth is not stable over time, reflecting partly uncertainty in international market prices and weather conditions, the absolute value of agricultural output tends to increase monotonically over time. After two decade, the agricultural output given in 1994 constant prices increased by nearly 280 percent. Figure 1.3a. Output and growth rate of agriculture

Source: compiled from GSO Statistical Yearbooks 2009, 2008, 2000, and 1996.

Impressive growth is observed in aquaculture, which is currently one of the most important export sectors of Vietnam. Figure 1.3b reports the aquaculture output (given in 1994 constant prices) and annual growth rate. During the period 1990-2009, the sector grew at an average rate of nearly ten percent per annual, though the pattern of growth does not look stable over the period. In terms of absolute value, the output level by the end of this period was about 5.5 times higher than in the early 1990s. Together with the data reported in figure 1.3a, this evident for an astonishing growth of

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the rural economy during the transition from the centrally planning economy constantly encountered by shortage of food into one of the world largest exporters of agricultural products. Figure 1.3b. Output and growth rate of aquaculture

Source: compiled from GSO Statistical Yearbooks 2009, 2008, 2000, and 1996.

Robust but unstable growth of agriculture export
Few years after the launch of the doi moi, Vietnam has turned from a country that encountered serious lack of food into one of the word leading exporters of agricultural products. Figure 1.4a below suggests a continuous growth of exports in agriculture, aquaculture, and forestry, especially since the end of the 1990s. In the period 1995-2009, the export value of agriculture has increased by nearly five times, while the corresponding figures for aquaculture and forestry were three and seven times. Despite of rapid growth in export values, the growth pattern seems to be very instable over time (figure 1.4b). In the case of aquaculture, for instance, growth rates in this period varied between minus six percent to 52% (while the period average rate was 15%). External conditions lend an explanation for such unstable pattern. Through the exports of these products have increased over time with robust average growth (of around 14 percent per annual), the relative important of these products in the total export tends to decrease over time. In the start year of the period 1995-2009, the total agriculture export accounted for nearly a half of the total export. At the end of the same period, the agriculture export contributed to less than one third of the total export of the country (figure 1.4c). This is largely attributed to rapid growth of the manufacturing export in this period (see Dao et al. 2010).

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Figure 1.4a. Export of agriculture output, 1995-2009 (million $)

Source: compiled from GSO Statistical Yearbooks 2009, 2008, 2000, and 1996.

Figure 1.4b. Unstable export growth, 1995-2009

Source: compiled from GSO Statistical Yearbooks 2009, 2008, 2000, and 1996.

Figure 1.4b. Structure of export, 1995-2009 (million $)

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Source: compiled from GSO Statistical Yearbooks 2009, 2008, 2000, and 1996.

Agriculture and rural employment
While the share of agriculture in total GDP and export tends to decline over time due to rapid growth of manufacturing and services, agriculture remains the major force of employment creation. Taking into account the young and fast growing labour force (which experienced a number of nearly 1.5 million new entrants to the labour force every year), agriculture is considered as a major destination of employment. However, the relative important of agriculture in job creation has steadily decreased in the period 1990-2007. There has been a concern on whether agriculture could continues a major role in job creation. In figure 1.5a, the number of jobs in agriculture has been stagnated at around 24 million (i.e. 65 percent of the total employment) for years before decreased slightly by some hundred thousand jobs in recent years. Instead, the rural nonfarm sector has become increasingly important in the rural economy. Pham et al. (2009) using the VHLSSs suggest an increasing role of the RNFS both as an important source of employment and rural household income. According to the study, the employment share of the RNFS has increased from 23 percent to 58 percent between the initial and terminal years. The share of the nonfarm income source (i.e. wage and self-employment) increased from 32 percent in 1993 up to nearly 54 percent in 2006. With an average share of 44 percent during the period 1993-2006, the share of nonfarm income in Vietnam is as high as those reported in Africa and Latin America, and higher than the average level of the other Asian countries (e.g. China, India, Philippines, and Pakistan). There are no statistics available on how many percent of the employment in manufacturing and services (as in figure 1.5a) should be attributed to the RNFS. But taking the figures on the relative importance of the RNFS, it could be taken to suggest that though agriculture has performed a decreasing role in job creation for rural dwellers, the RNFS has been more important in terms of employment and hence income for peasant households.

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Figure 1.5a. Agriculture and job creation, 1990-2007

Source: compiled from GSO Statistical Yearbooks 2008, 2000, and 1996. Notes: data on 2008 and 2009 are also available. But these data were adjusted using the latest Population and Housing Census 2009, and thus not really compatible with the figures in the previous years.

Figure 1.5b. Agriculture and job creation, 1990-2007

Source: compiled from GSO Statistical Yearbooks 2008, 2000, and 1996. Notes: see figure 1.5b

While the rural economy, with an emerging RNFS, has been able to absorb most of the new entrants to the rural labour market, migration to urban areas, especially big cities has become increasingly a trend in rural Vietnam. Figure 1.6 below represents the population growth in the rural and urban areas in comparison with the country average. While Vietnam exhibits a steady decline in population growth, there is two contradicting trend in growth of rural and urban population. While the urban population has been grown at 3.8 percent, the corresponding figure of the rural population was only 0.75 percent in the period 1990-2009 – which is considerably lower than the

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average population growth of the country at 1.4 percent. Given such pronounced differences between the population growths in rural and urban areas, it is reasonable to postulate a significant rural-urban migration flow, which could be an important factor underlying such population dynamics.

Figure 1.6 Population growth in Vietnam, 1990-2009

Source: compiled from GSO Statistical Yearbooks 2008, 2000, and 1996

At this stage, there are no official statistics on migration except some estimates based on different survey databases. Using the recent urban poverty survey by UNDP Vietnam, IRC (2010) has reported that one fifth of the total population in HCMC are migrants while the corresponding figure in Hanoi is nearly 12 percent. Of these migrants, 64 percent are manual workers or workers with low technical skills. Cu Chi Loi (2008) using different data sources, including the Population Censuses and the VHLSSs suggested that HCMC, Hanoi, and other big cities including Hai Phong, Da Nang were the most attractive destinations for migrants. Coxhead and Phan (2006) using data from the Population Census 1989, 1999, and other mid-term Censuses in 1984 and 1994 to calculate the rate of internal migration. According to the study, between 1984 and 1989 about 2.8 million people, or 4.4% of the population over five years of age, moved between districts. Between 1994 and 1999, migration increased significantly: nearly 4.5 million people, or 6.5% of the population over five years of age, changed their place of residence. At this stage, the latest Population Census 2009 has not been published yet. But given Vietnam has continued to register its robust economic growth after 2000, it could be taken to suggest an increasing flow of ruralurban migrants. Increasing migration represents a choice for rural young labour force out of agriculture. However, there are several concerns about migration. Notably, access of migrants to public services is generally low compared to the non-migrants (Yoko et al. 2010). Household registration system (or „ho khau‟), which requires residents to have permanent or semi-permanent registration when accessing public services, is still in place. In many cases, migrants were found to pay higher for public utilities (such as clean water, electricity) than non-migrants and there has been little policy responses to support the migrants in the urban areas (Desingkar et al. 2006). In addition, the rural population is increasingly ageing as most of the young migrated. As suggested by Cu Chi Loi

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(2008) and IRC (2010), most of the migrants were found at the age between 20 to 30 years. The problem of ageing rural population represents a considerable obstacle for high value agriculture.

Rural poverty reduction
The vigorous transformation of the rural economy has resulted in rapid rural poverty reduction. Given the autonomy to pursue their own economic decisions, peasant households and entrepreneurs have responded actively to new opportunities created by the reforms in agriculture and private sector development. The robust growth of agriculture output and export (as above) has moved millions of rural people out of poverty. Using the data available from the VHLSSs in the period 1992-2008, figure 1.7a reports poverty headcount indicators separately for the rural and urban areas, for ethnic minorities. It is noted that though robust poverty reduction over the past two decades is observed for all groups of population, there is a considerable difference in poverty reduction between rural and urban areas, between the majority and ethnic minorities. Between 1993 and 2008, the urban poverty rate fell from 25 to nearly 3.3 percent, while the corresponding 3 figures for the rural areas are from 64.4 to 18.7 percent. Through the poverty headcount in the rural areas remains high compared to that of the urban areas, Figure 1.7a suggests that poverty reduction has been faster among rural households than urban dwellers. In addition, it is also noted that the pace of rural poverty reduction tends to slow down in recent years with a reduction of less than two percentage points between 2006 and 2008 – which is considerably lower compared to the earlier years.

Table 1.7a Poverty reduction, 1993-2008

Source: based on VHLSSs, 1992-2008.

3

The poverty rate as used in this report is the proportion of the population whose average per capita expenditure is below the poverty line. The food poverty line is calculated on the basis of a minimum energy daily intake of 2100 K.cl per capita. This line has been adopted by the General Statistics Office of Vietnam (GSO) and widely used over the world. The food poverty lines adopted in 1993, 1998, 2002, 2004, 2006 and 2008 were 750, 1287, 1382, 1500, 1915 and 2607 thousand Vietnam Dong/capita/year respectively. The general poverty rate is calculated based on the general poverty line adopted by the GSO. The general poverty rates in 1993, 1998, 2002, 2004, 2006 and 2008 were 1160, 1790, 1917, 2077, 2560, and 3358 thousand Vietnam Dong/capita/year respectively.

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Ethnic minorities account for a special population group in the rural areas. Vietnam is very ethnically diverse countries with 54 ethnic groups. As the majority (i.e. „Kinh‟ ethnic group) accounted for nearly 86 percent of the population, the 53 ethnic minorities account for the remaining 14 percent. Usually residing in the remote and mountainous areas, ethnic minorities tend to lag behind the majority and much less able to take advantages from the new opportunities created by the recent rural transformation. Figure 1.7b represents the incidence of poverty between the majority and ethnic minorities. In 2008, nearly 50 percent of ethnic minorities lived under the poverty line while the corresponding figure for the majority is only nine percent. What is most worrying is that the share of ethnic minorities in the poor population has monotonically increased over time. As shown by the round dots in the secondary vertical axis of Figure 1.7b, only 18 percent of the poor were ethnic minority-headed households in the early 1990s; the corresponding figure for 1998 was 29 percent, for 2004 was 39 percent, and most recently 56% in 2008. Accounting for around 14.5 percent of the population, ethnic minorities now constitute more than a half of the poor population. Given this, poverty will be a particular phenomenon of ethnic minorities in the future.

Table 1.7b Poverty reduction for ethnic minorities, 1993-2008

Source: based on VHLSSs, 1992-2008.

Conclusions
Following the fence-breaking initiatives in the late of 1970 and early 1980s, major reforms have been made to liberalize agriculture and private sector development. Land reforms, decollectivization wave, Directive 10 and Resolution giving individual peasant households autonomy in their economic decision, liberalization of trade and investment in agriculture, formal recognition and promotion of private sector are among the reforms that have re-shaped the rural economy of Vietnam. Within two decades since the first „fence-breaking‟ measures, Vietnam has almost completed its reform toward a liberalized and market-oriented rural economy. It is important to note that after these reforms were introduced to liberalize agriculture and private sector development, the Government has remained its key function in agriculture and rural development as a provider of rural infrastructure, public services, and some other types of support

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without any strong and direct interventions in the agriculture sector. From an agrarian economy that usually encountered by severe lack of food and based on collective agriculture, Vietnam has become one of the world largest exporters of agricultural products. Robust growth of agricultural output and export has lead to significant improvements in living standards in the rural areas. Peasant households, household businesses and domestic private sector enterprises are the key contributors to such vigorous transformation of the rural Vietnam. Analysis in this chapter also warrants some concerns related to agriculture and rural development as well as private sector development – which will be further elaborated in subsequent chapters. Notably, Vietnam has registered a very high growth rate of agriculture output and export. However, this growth was found to be very unstable over time. In addition, though growth in agriculture is robust, other sectors including manufacturing and services, which are largely located in the urban areas, tend to contribute an increasingly important role in economic growth. Therefore, the relative importance of agriculture in terms of shares of output or employment tends to decrease across time. Together with the marked gap in living standards between the rural and urban areas, these provide important incentives for rural-urban migration in Vietnam, leaving the rural economy with an ageing population.

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Private Sector Development in Agriculture and Rural Development: The Case of Paddy Rice in the Mekong River Delta
Agricultural reforms as described in chapter one has fuelled a robust growth of agricultural output and export during the last two decades. Paddy is certainly at the central of this growth. From a situation of a national food deficit with a relatively widespread of hunger, Vietnam has turned into a situation of very large food surplus with only a few „pockets‟ of hunger. Between 1990 and 2010, national paddy production doubled from 19.2 million tons to nearly 40 million tons, while the area of rice land increased modestly, suggesting a significant improvement of rice productivity. Paddy rice output growth is associated with rapid growth of rice export. Most recently, Vietnam rice export reached 6.75 million tons with an export turnover of nearly three billion US$ in 2010. Given the importance of rice in agriculture and rural development in Vietnam, this chapter will investigate the rice sector with a focus on Mekong River Delta – as the major rice bowl of Vietnam. The focus on MRD is justified by the dominance of this region in rice production and export as the region accounts for nearly 80% of rice surplus and about a half of rice output of the country. The next section will review some major changes in policies related to paddy rice. How paddy rice farmers and other stakeholders (such as traders, millers, exporters etc.) has generally responded to such policies changes will be described in the second section. A focus of this chapter is placed on the third section, which provides a narrative on the rice value chain based on the fieldtrip to one MRD province. In this section, results from the fieldtrip will be used to describe how different actors in the rice value chain pursue their businesses and interact to the value of the whole chain.

Major policy changes in the rice sector Access to paddy land and irrigation
Paddy rice land Land reforms were an important part of the doi moi in the rural areas. The Directive 10 and Resolution 100 (and the Land Law in later stage) have granted farmers with agricultural land for their own production. According to official statistics, paddy rice land accounted for nearly 43 percent of the total agriculture land in 2009, which is estimated at nearly 9.6 million hectares (GSO, 4 2011). Of different types of agriculture land, paddy rice is placed under relatively strict management. The Land Law (article 74 in the 2003 Amended Law) sets restrictions on conversion from paddy rice land to other purposes. Though Vietnam has now generated very large surplus of rice, many Vietnamese policy-makers remain concerned about long-term food security in the face of uncertain future patterns of climate change and in the context of intensifying competition for available land, including between agricultural, industrial and urban uses. As a result, peasant farmers, through are entitled to long term land-use rights, have limited flexibility for cropping in their

4

According to GSO statistics, agriculture land consists of (i) annual crop land; and (ii) perennial land. The former is further divided according to different type of crops.

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paddy rice land. There are a number of issues that complicates the use pattern of paddy rice land in the coming years, including: First, urbanization and industrialization represent an increasing competition for agriculture land. The recent Socio-Economic Development Strategies sets a vision for Vietnam to be „modern industrial society‟ by 2020. This will require creating physical space for industrial parks and other industrial sites, either in the outskirts of urban areas, or, in the case of some agro-industrial subsectors, within rural areas themselves. Urbanization process has taken place as fast as recent economic growth. Figure 1.6 in chapter one has suggested a very high rate of urban population growth while that of the rural population has decreased over time. This also requires having physical space for urban living areas and other facilities. According to MARD statistics, already between 2000 and 2007, some 366,000 hectares of paddy rice land were converted for nonagricultural purposes, suggesting a decrease of nearly 50 thousand hectares per year. Of these 366,000 hectares of paddy rice land converted, the Mekong River Delta accounted for nearly 205 thousand hectares (i.e. 71 percent). Second, climate change represents another important threat to paddy rice land area. While Vietnam is recognized as one of the most vulnerable country to climate change, MDR is considered as the most vulnerable in Vietnam and Southeast Asia (Yusuf and Francisco, 2009). Paddy rice land in the main rice bowl of Vietnam is subject to further lost due to increasing salinity, inundated floods, and raising sea level. In flood season, the region flood inundates nearly two million hectares, lasting between three to five months. According to Hoang (2011), the inundated area in agriculture could reach nearly 2.1 million hectares in 2020, which accounts for 53 percent of the natural area of Mekong River Delta. The study also suggested the lost of paddy rice land in the MRD could be between 10 to 20 percent by 2020 due to raising the sea level, in which the Long Xuyen „Quadrangle‟ would be the most vulnerable area because this region is often deeply flooded 5 in flooding season. Notably, there is generally a tendency to convert paddy rice land for other (expected) higher value crops. There is no doubt that growth of rice output and export is very significant but there is a growing consensus that rice is a relatively low value crop and the „more‟ might not be the „better‟ for the rice value chain in Vietnam. Estimates from IPSARP using data from rice growers in MRD suggest that most of MDR‟s 1.46 million farmers in the region are actually the net buyer of rice. As a result, their income from selling rice is not sufficient to pay for the cost paid to buy rice for their consumption. A recent report by the World Bank suggested that rice is only an important source of household income for rice growers in MRD if they have more than three hectares of paddy rice land. These growers, accounting for less than 18 percent of the total farmers in MRD, contribute around two third of the total rice surplus and earn 67 percent of their income from paddy rice (World Bank, 2011). In fact, most of rice growers in MRD possess less than two hectares of paddy rice land and their paddy rice production contribute less than 24 percent of the total household income. As a result, there is a pressure for most of rice growers in MRD to diversify out of rice production to seek for higher value crops or non-farm employment opportunities. As suggested by Pham et al. (2009), the RNFS has played an increasingly important role in the rural Vietnam as a major source of employment and income. Under this context, the Government has set the target for 3.8 million hectares of protected rice land by 2020 and this is just 0.3 million hectares below the currently cultivated paddy land. This

5

Long Xuyen Quadrangle includes four provinces of Kien Giang, An Giang, Can Tho, and Cau Mau. According to Hoang (2011), the lost of paddy rice land in these provinces could be between four to 21 percent due to salinity and raising the sea level by the year 2020. This quadrangle accounts for about a half of total paddy output in MRD and usually referred to as “core rice belt”.

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constitutes about 40 percent of total agricultural land in the country. This is clearly an ambitious target given the current rate of paddy land conversion and increasing competition for available land between different uses (as above). More importantly, this signals a continuation of the current strict paddy land management policy.

Irrigation system in Mekong River Delta
Access to irrigation is essential to paddy rice and thus irrigation is an important part of Vietnam‟s agriculture policies. Given the importance of MRD in rice production of Vietnam, important policies to develop the irrigation system for the region has been introduced. Before the doi moi, irrigation system was an important priority agriculture and rural development. With the „rice everywhere‟ policy after the re-unification, irrigation system in MRD was developed with small canals. This irrigation development was however poorly designed and led to serious pollution from the acid sulfate soils into the canal systems. In attempts to provide sufficient irrigation coverage for MRD, the experience of using large pumping stations in Red River Delta was brought into MRD. This development deemed ineffective due to differences between these two delta areas and as a result large pumping stations were soon abandoned after putting into operation. Since the launch of the doi moi, irrigation development for MRD has been placed on four areas, including the Long Xuyen Quadrangle, Ca Mau Peninsula, plain of reeds between Tien river and Hau river, and plain of reeds on the left of Tien river bank. As these four zones are different in their own characteristics, irrigation investment is directed differently for the four zones. By a rough estimate, MRD currently has an extensive network of canals comprising 7,000 km of main canals, 4,000 km of secondary canals supplying on-farm systems, and more than 20,000 km of protection dikes (Chu et al. 2010). This reflects a large investment from the state budget for irrigation development in the region. Together with the abundant water resources in the region due to high level of rain and river basins, this irrigation system deems to be sufficient for paddy rice in MRD. Irrigation in MRD (also in other regions) is now managed under the system of irrigation and drainage management companies (IDMCs) and water management groups (WMGs). IDMCs are generally under the provincial authorities to operate and maintain main water supply canals. Irrigation services at the commune level are managed by agricultural cooperatives through WMGs. WMGs administer water distribution to farmers and maintain the infrastructure attached to the main supply canal. They also collect fees for the irrigation and drainage services on behalf of IDMCs. In most cases, irrigation fees are determined by the provincial government and are related to the seasonal average crop yields (Harris, 2006). Irrigation fees vary from time to time and from one region to the others. According to the latest Decree 115/2008/ND-CP, irrigation fees for paddy rice land in MRD are between 732 thousand to 1.055 million VND per hectares. However, the Decree also sets extensive exemption for irrigation fees to support agriculture, including exemption for all agriculture land that are titled, and exemption for all types of land held by the poor or rural households residing in extremely difficult communes (more or less 2,000 thousand communes are recognized as extremely difficult communes and the list approved by the PM varies from time to time).

Interventions in rice trading
The rice sector appears to be heavily intervened by the Government with the pre-dominance of SOEs and government-to-government contracts. However, such interventions are mainly related to rice export. Given the robust growth in rice surplus in the early 1990s, rice export became one of the most important export items. Before 2001, rice export was subject to quota set annually by the Prime Minister. According to this mechanism, quotas from January to August were allocated for SOEs for export from January to August based on capacities and past export performances. Until September, supplemented quotas for the remaining months would be allocated based on the

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situation of production, food security consideration, and accumulated export output. This mechanism represents a very short-term approach of export management, which created uncertainty for SOEs in planning their business and investment. More importantly, private sector was not allowed to export rice. Since 2001, quotas have been removed and firms of all sectors are entitled to export rice if rice exporting is among their registered business activities (Decision 46/2001/QD-TTg). Rice exporter take place in two forms. Government-to-government export contracts account for nearly 80 percent of the total rice export. For these contracts, which are usually at concessional terms, MoIT though Vietnam Food Association (VFA) appoint VFA members to deliver. Such allocation is largely similar to quota allocation in the past. For other export contracts, firms are allowed to do their business without interventions. However, as government-to-government contracts account for the majority of rice export, this liberalization of rice export to private sector deemed to be modest. In addition, rice export tariff was introduced during the price spike in 2008 due to concerns on world food crisis and national food security. Accordingly, tariff will be applied when FOB export price excess the level of US$ 600 per ton. Most recently, in preparation for the opening of rice market for foreigners in 2011 according to Vietnam‟s commitments to WTO, Decree 109/2010/ND-CP was introduced with the purpose of „consolidating‟ the capacity and competitiveness of domestic rice exporters. The Decree requires every rice exporter to get a Certificate for rice export with the minimum storage facility of 5000 tons paddy; a husking mill with the productivity of 10 tons paddy/hour. The effectiveness of this latest regulation is however controversial. On the one hand, some argued that the Decree is creating positive changes as it requires exporters with limited finance and low storage and processing capacity to either expand their investment or join with other large exporters as services providers. On the other hand, this Decree represent a market entry for both domestic and foreign-invested new firms. More importantly, the requirement of having storage facility and mill of such scale clearly drive out small and medium players in rice export business. Technically, husking mills in MRD usually located in production areas while large milling facilities are located in cities or port areas. This further complicates the requirement for rice exporters to meet the regulation for the Certificates. According to VFA, until July 2011, only seven big exporters have been issued the Certificate. As the Decree will come into effect this October 2011, most of the current rice exporters will have to hold their contracts without the Certificates. As a result, rice exporters, including VFA members, have requested the revision or delay of this Decree. The Decree is thus considered as a good political will to consolidate overall capacity of rice exporters but deemed to be unrealistic. In the domestic rice market, there is however little interventions of the Government. Perhaps, the only significant intervention to the domestic rice market is to counteract the downward pressure on rice producers at harvest time by imposing „floor prices‟ for paddy and provide interest-free loans for milling/trading companies to purchase and store additional qualities of rice at these times. The stated objective of this floor price policy is to ensure that rice growers earn a net margin of some 30 percent (Decree 109/2010/ND-CP). However, there has been little evidence whether such periodic interventions are achieving this target. In fact, rice companies rarely buy paddy directly from farmers. Rice in MRD is produced by more than 1.46 million peasant households and transportation represents an obstacle for direct purchase at large quantities. Therefore, most of large firms rely on intensive network of private traders, small millers, and other small companies to collect paddy. There is thus no direct mechanism for them to pay the floor prices to farmers. Most of traders in the sector do not believe that these measures have had much impact on prevailing prices (see below). As regulations on domestic rice market are modest and do not create advantages for SOEs, private sector is dominant the market. According to VFA, SOEs constitutes about 15 percent of the

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domestic rice sales in the Northern region and around 10 percent in the Southern region. The remaining amount is under control of the private sector traders and processors. At this stage, there is very little understanding on the structure of this domestic market. As of 2010, in the total rice output of nearly 40 million tons, only 17.5 percent was exported. Even after deducting a significant portion of the remaining as paddy retained by rice farmers for their own consumption, this could be taken to suggest a very large domestic rice market for the private sector, which is left essentially unregulated. This is clearly in opposite to experiences of other countries, Thailand for example, where the authorities usually regulate the domestic rice market to ensure food security and available of food in the country while leave rice export business for the private sector. What are political economy for Vietnam to do the opposite to its neighbors remains unclear. There could be a historical reason when rice surplus became available in the early 1990s, which coincided with the start of trade liberalization in the country. As a result, SOEs pursued the rice exporting role automatically and their dominant role in rice export was thus „granted‟.

Other state interventions in the rice sector
In addition to direct interventions in terms of regulating rice export and floor prices for farmers, the Government also exert certain extent of control through VFA and two general corporations, namely Vietnam Food Corporation One (Vinafood 1) and Vietnam Food Corporation One (Vinafood 2), as extended arms. VFA is supposed to be a not-profit and independent professional association which helps to protect the interests for all actors in the rice sector. However, VFA is best described as a policy tool for the government in the rice sector. A number of 118 VFA members effectively account for 80 percent of total rice export and deliver to the government-to-government contracts. In addition, VFA members are also mandated by the authorities to pursue „strategic reserves interventions‟. Since the Decree 109/2010/ND-CP came into effect, VFA members were assigned to implement the floor price policy. Accordingly, a reference rice price will be weekly informed by VFA though its website and official documents to all members and this reference price serves as the basis for calculating a margin of 30 percent for rice growers. Two most powerful members of VFA are Vinafood 1 and Vinafood 2 as the two largest SOEs in the rice sector. The chairman of Vinafood 1 is also the VFA chairman. As a result, these two corporations and its affiliates effectively dominate most of the VFA interventions. Providing extension services for paddy rice is one of the main activities pursued by the agriculture extension network, which is recently put under the National Agriculture Extension Centre - NAEC (see chapter one for more details). In addition to the typical support to farmers as described in chapter one, there has been campaigns in rice sector. Notably, NAEC in collaboration with International Rice Research Institute (IRRI) introduced the integrated crop management (ICM) in the form of Three Reductions and Three Gains (i.e. ‘ba giảm, ba tăng’) in 2003 to encourage farmers to use less seed, less fertilizer, and less agro-chemicals, and in the process, achieve higher productivity, higher quality, and more economic efficiency. Adoptions of this approach is uneven. According to NAEC (2010), around 41% of farmers in MRD have adopted this campaign. Progress has varied among locations and the „three reductions‟ categories. Most notably, important progress made in reducing seed volumes and increasing the use of certified seed. Progress in reducing fertilizers and agro-chemicals was reported to be less significant. According to Gregory et al. (2010), the average fertilizer used for rice was at 207kg/ha, which is considerably higher than most of the other countries such as India, Bangladesh, Pakistan, and Indonesia. Stemming from this programme, another campaign of „Five Reduction, One Must‟ in 2009. The five reductions including the former three reductions in the previous programme, plus the reduction in irrigation water usage and reduction in post-harvest lost. The „one must‟ is certified seed. To encourage farmers in adopting this programme, different technical and financial models have now been demonstrated in MRD. It is however too early for any evaluation of this new rice extension programme.

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Rice research in Vietnam is concentrated in Cuu Long Delta Rice Research Institute (CLRRI) and considered in the list of priorities for research activities by MARD. CLRRI has worked closely and under the support of IRRI. Since the introduction of the first semi-dwarf rice variety (i.e. IR8) in 1968, a total of 89 breeding lines have been released in Vietnam. It is estimated that 70% of the rice area in Vietnam is grown with IRRI varieties (IRRI 2010). Recently, CLRRI has worked on marker-assisted breeding to develop varieties with enhanced tolerance of salinity and submergence to prepare for the negative impacts by climate change in the Delta. CLRRI has been productive in introducing new varieties. In 2010, four new varieties have been certified by MARD and introduced to mass production; 14 new ones have been introduced for trial production and are expected to be certified next year (CLRRI, 2010).

Major outcomes of the rice sector Dramatic growth of paddy output and export
Agriculture reforms together with subsequent advances in the development and spread of improved rice varieties and investment in rural infrastructures, especially rural road and irrigation, helped spur a dramatic growth of rice output and productivity. Figure 1.2 reports paddy output, rice sown area, and average yield in the period 1990-2010. It is noted that the national rice output has doubled during that period from 19.2 million tons to nearly 40 million tons. In the 1990s, such dramatic growth was achieved with relatively rapid growth of rice sown area, from six million hectares up to the largest area of 7.7 million hectares. In the second half of the period under consideration, the rice sown area decreased steadily to the lowest level of 7.2 million hectares before getting to the stable level of between 7.4 and 7.5 million hectares. It should be noted that the designated paddy land remain relatively stable at the level of around 4.2 million hectares in this whole period. Therefore, the dramatic growth of rice output is attributed to rice intensifying (as reflected in the increase in the sown area) and average yield. Between 1990 and 2010, average paddy yield grew from 3.2 tons/ha to nearly 5.2 tons/ha. Figure 2.1 suggests that the paces of growth in both output, yield, and sown area tend to be stable over the past few years. Since 2008, there has been no significant changes in these indicators.

Figure 2.1 Paddy rice output and sown areas, 1990-2010

Source: compiled from GSO Statistical Yearbooks 2009, 2008, 2000, and 1996 (for data from 1990-2008), and IPSARD for data in 2009 and 2010

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MDR contributes an important role in such dramatic growth. As shown in Figure 2.2, MRD accounted for nearly a half of total sown area and 52 percent of total paddy output. This represents the key role of MRD as the main „rice bowl‟ in the country. In terms of absolute terms, MRD accounted for approximately two-thirds of the total expansion of paddy output. Notably, the bulk of the MRD paddy rice output has been exported. For instance, between 2000 and 2009, Vietnam rice export volume increased from 3.48 million tons to nearly six million tons. This increase matches the growth in MRD rice production over that period from 10.8 million tons to 13.3 million tons. Given this dominance of MRD in the total rice export, some argued that this region has contributed to food security internationally over the past decade (World Bank, 2011).

Figure 2.2 Rice sown area and output in MRD

Source: compiled from GSO Statistical Yearbooks 2009, 2008, 2000

Given this significant growth in paddy output, the Vietnamese however tend to consume decreasingly less rice. Over the past two decades, the share of rice in dietary energy supply has decreased from nearly 73 percent to less than 57 percent. Data from FAO statistics suggested that per capita rice consumption in Vietnam is approximately 135 kilograms while the corresponding figures of Myanmar, Philippines, Indonesia, and China are respectively 160, 128, 104, and 95 kilograms. Rice in average household expenditure was also declining steadily from 17 percent in 1996 to below eight percent in 2010 (using GSO‟s staff calculations). This reflects an astonishing progress in food security in Vietnam. As a result, the expanded rice production has been exported. Figure 2.3 below exhibits rapid growth of rice export in the period 1990-2010. In terms of volume, rice export volume increased more than five-fold from 1.37 million tons in 1989 to 6.75 million tons in 2010. The rice export value also grew significantly from nearly 300 thousand US$ up to nearly three million US$ in that period. This put Vietnam to the second largest rice exporter in the world, after Thailand.

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Figure 2.3 Vietnam rice export, 1990-2010

Source: compiled from GSO Statistical Yearbooks 2009, 2008, 2000, and 1996 (for data from 1990-2008), and IPSARD for data in 2009 and 2010

Although Vietnam has become a world leading rice exporter, Vietnam is always a price taker in the international rice market. Compared to Thailand as the world largest rice exporter, the export price of the Vietnam rice is lower by between 10 to 30 percent. Figure 2.4 plots the FOB export prices of 5% broken rice of Vietnam and Thailand in recent months. This reflects a lower quality of Vietnam rice export. In addition, Vietnam has exported rice in 5% broken and 25% broken, while Thailand has exported a variety of rice. This represents poor competiveness of the Vietnam‟s rice export. As a result, Vietnam has recently imported rice of high quality from other countries. Recent statistics revealed that Vietnam has imported around half million tons of high quality rice for the domestic market in big cities as the domestic value is not sufficient quality-oriented. In addition, the net foreign exchange earnings from rice export would be considerably lower if taking into account the heavy use of imported fertilizers and agro-chemicals, imported farm equipments and processing equipments. According to some estimates, between 40 to 50 percent of the cost of exported rice are associated with imported materials (IPSARD, 2011). Taking these into account, contribution of rice export to export growth are clearly less impressive as suggested in figure 2.3. In this regard, the Vietnam‟s rice export is sometimes referred as to „thriving export at the bottom‟ or „more is not always better‟. Further discussions on these issues will be discussed in the subsequent sections.

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Figure 2.4 FOB prices in Vietnam and Thailand

Source: compiled from statistics of ERS, USDA

Expansion of rice production and poverty reduction
Given the thriving growth of paddy output and export and the popularity of rice production amongst farmers, it is expected that such expansion of rice production and yield should have brought in considerable improvements in living standards of rice growers. Figure 2.5 suggests such important impact of the growth of rice sector. Using the data from VHLSSs available for Vietnam, poverty incidence in MRD was declining over time from 47 percent in the early 1990s to 12.3 percent in 2008. Compared to the rural poverty reduction, MRD experienced lower poverty headcounts. Given the number of 1.46 million households residing in MRD grow rice to different scales, it could be taken to suggest a poverty reduction impact of the growth in rice production.

Figure 2.5 Poverty reduction in Mekong River Delta, 1993-2008

Source: Based on the VHLSSs, 1993-2008

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However, there could be a number of factors contributing to rural poverty reduction in MRD. Separating the effect of rice production on these improvements of living standards is a challenge. In a recent study of IPSARD for the World Bank, despite the very impressive expansion of rice production and export, benefits to the MRD farmers are found to be modest. Using the data from VHLSS 2008, the share of MRD rice growers in agriculture land and net rice surplus is reported in table 2.1, where rice growers are classified according to quintiles of agriculture land possession. Figures suggest that the twenty percent of rice growers with largest agriculture land (i.e. average of 2.74 hectares) accounted for nearly 64 percent of total net rice surplus in MRD. While rice growers in the lowest to the medium quintiles (i.e. two third of total MRD rice growers) hold less than 0.8 hectare per capita and accounted for only 16 percent of the total net rice surplus. This suggests that the majority of MRD rice growers have actually benefited very modest from the recent growth in paddy production and export. For these smallholder rice growers, earning a livelihood from rice production is not possible. Instead, they have to rely on other crops and non-farm activities for earning income. Given this, the poverty reduction impact of rice production expansion is actually very modest for most of MRD rice growers and could be much less impressive as suggested by figure 2.5.

Table 2.1 Share of net rice surplus by MRD rice growers, 2008 Average agri land (ha) Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Rural average 0.18 0.48 0.81 1.28 2.74 1.10 Share of net rice surplus (%) 1.7 5.4 9.0 20.1 63.8 100.0

Source: World Bank (2011) based on VHLSS 2008

Analysis of the Rice Value Chain in the Mekong
The above two sections provides analysis on some policies changes in the rice sector and major outcomes in terms of growth in rice production, rice export, and its potential impact on rural poverty reduction. To provide a detail evidence and diagnostics of the rice sector in MRD with a particular focus on key players in the rice value chain, a fieldtrip to one of the Long Xuyen Quadrangle province – Can Tho – was made. The fieldtrip was designed to collect information on how key players in the rice value chain have re-reacted to new context of agriculture and rural development 6 and shared the growth of rice production and export.

6

The fieldtrip was implemented from 14 June to 20 June, 2011 to Can Tho province. The fieldtrip was supported by Center for Agricultural Policies (CAP) as part of IPSARD, Department of Agriculture and Rural Development (DARD) of Can Tho, and the Mekong Chamber for Commerce and Industry. Details of the meetings and discussions with relevant stakeholders are given in Annex 2.1 of the Appendix.

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Overview of the rice value chain in MRD
Based on the fieldtrip results, the overall map of the rice value chain could be described in the figure 2.6 below. It is firstly noted that the rice value chain is long and complicated. There are several middle players between rice growers to final producers or exporters, (i) including collectors and traders who buy paddy directly from rice growers (or from smaller collectors); (ii) husking factories, which are either located near production areas or as part of processors‟; (iii) polishing mills and sometimes „middle‟ companies which are described as those who buy husked rice and supply either to exporters or polish husked rice themselves; (iv) Exporters/producers who could either export or distribute to the domestic market; (v) if rice then goes to domestic market, local distributors (supermarkets, traders) also involve as part of the value chain. Details of these key actors, based on the fieldtrip, are described in the next sub-section.

Table 2.6 Overall map of the rice value chain Institutional Support structure Ministry of Agriculture and Rural Development (MARD) Institute of Policy and Strategy for Agriculture and Rural Development (IPSARP) Mekong River Delta Research Institute (Cantho), MARD Mekong Delta Development Research Institute, Cantho Ministry of Industry and University Trade (MOIT) Vietnam Food Association (VFA) Vinafood 1, Vinafood 2 (Vietnam National Food Corporation ) imported Rice from Thailan, Japan…

Input providers

2 million HHs Rice Farmers 2 million ha in MRD Yield: 7 tons/ha Traders/collectors Land: 0.5 ha/HH Husking factories

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-

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Polishing Mills Middle Companies 200 Exporters Producers/Exporters Volume: 6.75 million tons Value: 2.9 billion $ Distributors Export market

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-

-

Local Market

Source: Rice value chain fieldtrip in Can Tho, Mekong River Delta

Key actors of the rice value chain Rice growers
As mentioned in the above analysis, there is around 1.46 million peasant households cultivating rice in MRD (in the total of nearly two million households in the region), producing half of total

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paddy rice and most of rice export. Behind these figures, it was reported that most of rice growers are actually net rice buyers and only those with largest paddy land possession has shared most benefited from the net rice surplus (see table 2.1). A recent survey commissioned by the World Bank revealed details of yields and profits earned by rice growers. Figures suggest that winterspring rice exhibits the highest yield and profit for rice growers. These of summer-winter rice are considerably lower due to flood inundation and other unfavorable conditions. Taking overall year average, it is suggested that some evidence of economics of scale are observed for the rice growers who possess between two to three hectares of paddy land. In fact, most of rice growers in MRD hold less than one hectares (figures in table 2.1 shows that two third of MRD rice farmers have an average of 0.8 hectare in 2008). This lends additional evidence that most of rice farmers have actually benefited modest from the recent dramatic growth of paddy production and export.

Table 2.2 Paddy yield and profit of MRD rice growers (yield: tons/ha; profit: 1000VND/kg) Land Size <1 ha 1-2 2-3 >3 Total Winter-Spring Yield 5.02 6.70 7.34 6.74 5.80 Profit 1.82 1.93 1.98 1.68 1.84 Summer-Autumn Yield 4.67 5.12 5.61 5.14 4.90 Profit 0.31 0.79 1.59 0.90 0.57 5.14 1.99 Autumn-Winter Yield 5.10 5.52 Profit 1.95 2.31 Whole Year Yield 4.93 5.88 6.47 5.99 5.30 Profit 1.33 1.45 1.78 1.31 1.38

Source: World Bank (2011) based on MDI Farmer Survey, 2009-2010

In addition, there are a number of issues and problems faced by rice growers revealed from the field survey. First, there is a high cost of materials and the majority of these materials are actually imported. Fertilizers and agro-chemicals are used intensively by rice growers. As reported by Gregory et al. (2010), the average fertilizer used for rice was at 207kg/ha in comparison with 154, 130, 123, and 115 in India, Bangladesh, Pakistan, and Indonesia, respectively. This represents an unusually use of fertilizers by rice farmers in Vietnam. Discussions with farmers in Can Tho suggest that the cost of fertilizers and agro-chemicals could be between 30 percent and 50 percent of their total cost. A significant proportion of fertilizers and agro-chemicals are actually imported while the remaining is provided by different (usually un-identifiable sources). As suggested by many rice farmers, they have faced problems of fake fertilizers and increases in prices (see box 2.1). Box 2.1 Over reliance on fertilizers and agro-chemicals Nguyen Thi De, Thoi Xuyen, Thoi Dong, Co Do District: “I use various types of fertilizers and agro-chemicals. I don‟t really care about the origins of such fertilizers as well as their brand names… I don‟t know, I just buy what the sellers give me.” Nguyen Phuoc Sang, Thoi Xuyen, Thoi Dong, Co Do: “Input prices keep going up, especially fertilizers and agro-chemicals, while paddy price increases slightly, therefore

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my real income is not very satisfactory” Phan Thien Khanh, Thoi Dong, Thoi Xuyen, Co Do: “One of the biggest problem is fake fertilizers, fake insecticides. We have to spend a lot of money buying insecticide and fertilizers. This cost could be nearly a half of our cost. However they doesn‟t help. When the paddy is infected with insect-borne diseases, we really don‟t know what insecticide to use. We just come to the distribution agents in my village and ask for some cure… We have tried many different types of insecticides but they don‟t work.. Plus, paddy prices keep fluctuating.”
Source: Rice value chain fieldtrip in Can Tho, Mekong River Delta

Second, the use of seeds represents a problem for many rice farmers. Experiences from the fieldtrip suggest that there are several dozen of seeds cultivated by rice growers in MRD. This figure does not take into account the seeds that were self retained by farmers. As estimated by IPSARP (2011), farmer own saved seeds accounted for between 35 to 45 percent of total seeds cultivated. CLRRI appears to be the major source of certified seeds however the supply capacity is far from sufficient. Most of surveyed farmers have difficulties in finding certified seeds. As a result, they have to rely on many sources available to purchase seeds and end up with using different types of seeds at the same time. Individual farmers may thus grow a wide range of qualities on their own fields. This „mixed bag‟ represents a problem as it might exert considerable negative impact on quality. At harvest time, different types of paddy are then mixed in transport barges and the lot delivered to husking or milling factories, containing different varieties with different degree of maturity, size, moisture… As a result, paddy after polishing might be a combination of different varieties with different sizes and hues. While this „mixed bag‟ rice is acceptable to many markets, this is certainly not high quality-oriented. Box 2.2 Several seeds cultivated on the same paddy fields Nguyen Van Thang, Thoi Dong commune, Co Do District: “we use different seed varieties in different crop because supply is not enough for farmer in this region. We know Cuu Long Rice Research Institute in Cantho and Binh Duc Company in An Giang province could sell breeder seeds but never go there to buy. We just base on our experiences in choosing seeds.” Dang Van Duong, Dinh Mon, Thoi Lai District: “We know that breeder seed is better than certified seed or other types, the matter is that it‟s much more expensive and I want to cut costs as input prices keep increasing. Therefore, I rely on seeds available to us ” Phan Thien Khanh, Dinh Mon, Thoi Lai District: “I use IR50404 for all three crops because this seed‟s maturity period is very short and it can endure many types of insects…I understand that rice created from this seed is very dry and not delicious but the traders themselves never ask for higher quality rice.” Nguyen Thi De, Thoi Dong commune, Co Do District: “I often buy seeds in my village. I rely on our experience and neighboors to choose seeds.” Nguyen Thi Hinh, Thang Loi seedling company, Tan Thanh, Thoi Lai District: “IR50404 is widely used by many farmers because this is a very short-time variety with very high output. Farmers often go for output rather than rice quality.” Nguyen Thi Nhan, Hung Phat seedling company, Tan Thanh, Thoi Lai District, Cantho: “IR50404 is favorite seed of many farmers because it is very short-time variety; farmers can grow 3 crops

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per year. This variety is not very delicious but farmers only care about output and quantity.”
Source: Rice value chain fieldtrip in Can Tho, Mekong River Delta

Beside these two major issues, the farmers interviewed shared many other difficulties they have encountered. Distribution of seeds and fertilizers were reported to be difficult for many rice growers. As rice growers are scattered widely in different villages where transportation is costly due to underdeveloped infrastructures or isolated locations. Many traders take advantages from such conditions, provide seeds and other materials almost at farm gates at higher prices compared to those sold in, for instance, district markets. It was found that many rice growers, especially the poor and/or small rice landholders rely on these private traders as main supply of seeds, fertilizers, and other materials. Examples on a variant of „forward‟ contract where rice growers get seeds, fertilizers from traders in exchange for commitment to sell back the harvested output at fixed prices – which are usually below the market prices by between 15 to 30 percent. Some farmers also „borrow‟ seeds and fertilizers from private traders with an informal interest rates, which were reported at about two to three percent/month. These add up to their high cost, leaving them a very thin margin from rice production (see box 2.3). Box 2.3 Other difficulties facing by rice growers Higher input costs due to reliance on local suppliers Pham Van Dung, Thoi Xuyen, Thoi Dong, Co Do District: “At the early stage of the season, I often get the input from the input providers without paying cash. After the harvest, I will repay the debts. The interest rate is about three percent per month” Nguyen Van Bien, Thoi Xuyen, Thoi Dong, Co Do District: “Lacking money to buy inputs, I have to buy inputs from local shops at higher price at early stage of the season then I have to sell paddy as soon as possible to repay debts in harvest season” No bargaining power when negotiating with traders Nguyen Van Thang, Thoi Dong, Co Do District: “We have no other choice but sell paddy to traders. Traders often take advantages of their bargaining power and offer low prices. We really need some kind of agreement with enterprises to guarantee our production” Ageing rice growers in MRD Nguyen Van Thang, Thoi Dong, Co Do District: I think that labour shortage is really a concern when almost all young generations are working in industrial zones or big cities. Plus, I need money for purchasing a reaper, a seeder. At present I have to hire many labours in harvest season and rent equipment from others” Pham Van Hoa, Thoi Don, Co Do District: “In recent years, the youth in my village often migrate to big cities or industrial zones in surrounding areas to get a job as a worker. They don‟t want to stay at home working in fields all day. We are really in need of parttime labor in harvest season…you know, labor costs in harvest season are very high because at that time every household need contemporary labours ” Dang Van Duong, Dinh Mon, Thoi Lai District: “I have to hire paddy harvester and other equipment in harvest season. Besides, labour shortage is also a problem.”
Source: Rice value chain fieldtrip in Can Tho, Mekong River Delta

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In addition, most of rice grower sell paddy to collectors and/or private traders at farm-gate prices. Transportation cost could be a factor leading to the reliance of rice farmers on traders who could afford transportation vehicle and have market information to sell paddy. Relying on private traders is certainly costly. The farmers interviewed suggested that there could be a gap of about five to ten percent between their farm-gate prices and the prices they knew at some district markets. In addition, depending on private traders represents a quality risk given rice farmers do not have any storage facilities to keep paddy between harvest and selling points. Notably, the issue of ageing rural labour force (discussed in chapter one) is evident from interviewing rice farmers. Many of them revealed shortage of labour in their villages due to migration of young labour to industrial zones in the region and in the Southeast (see box 2.3).

Collectors/Traders
Private traders or collectors represent a key stage of the rice value chain in MRD. Traders could be linked to a long history of development when Vietnam was a big rice exporter under French Colonial time. Rice trading at that time was one of the biggest trading activities in Mekong River Delta and Saigon (currently known as Ho Chi Minh City). After the re-unification, most of private traders had to change their livelihood because private sector was not legalized. After many reforms in agriculture and rural development, traders became popular again in the region. Some of most better-off rice farmers became traders after accumulating considerable surplus from rice production and were attracted by potential profitability of trading in the rice sector. There are several thousand collectors/traders operating in MRD with some specialized in rice and others also handling other commodities such as coco, fruits, and other nonfarm products. Strong presence of private traders or collectors in the rice value chain reflects the fragmented structure of rice production in MRD. There are around 1.46 million households cultivating paddy and nearly all of them sell some quantities of paddy. The density of river system and plain of reeds created by the rivers in MRD make many villages quite isolated with markets and transportation costly for small farmers. As a result, rice growers rely almost completely on traders or collectors for selling paddy at farm-gate prices. Observations from the fieldtrip suggest that traders use sampans, boats with low tonnage (from around 10 tons to 100 tons) and come to every single farmer to collect dried or wet paddy. Some traders sell their collected paddy to husking or milling factories – these are simple and usually small traders. Other traders, which are usually medium or large, do the husking activity, which is usually taken place in the form of simple husking machine to peel away paddy layer before selling husked rice to polishing millers. Vo (2010) estimated that traders or collectors buy nearly 95 percent of rice from framers in MRD. Traders were however difficult to meet at the fieldtrip due to their mobility, therefore few traders were interviewed for this analysis. From the information available, it could be suggested that many traders are very entrepreneurial and well adaptive to changes in the policy environment. Traders usually develop a network with partners including husking factories, miller, and middle companies to diversify their client base. This was perceived by the traders interviewed as a coping strategy to uncertainty created by changing price conditions and policy environment. Before rice export quota was abolished, the short-term nature of such management mechanism created a risk for key players in the rice value chain to expand their investment in facilities. Developing a network with other players of the chain of different scales and stages of the chain was a reasonable risk diversification strategy. Due to their close link to rice growers (i.e. supply side) and market conditions, many traders have invested to husking facilities to become more vertically integrated in the rice value chain (see box 2.4).

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Box 2.4 Traders could be very entrepreneurial Dao Bich Lieu, a trader, Dinh Mon commune, Thoi Lai District: “In the past, I owned a small husking mill. After that when market demands changed and there were higher requirements for husked rice and finished rice for export, I have invested a lot in new equipments. Three years ago I decided to switch to be trader because I expected higher income. At present, I am working as a trader and also manage my own husking mill… My income increased significantly after changing into a trader”. Nguyen Thi Tuyen, a trader, Dinh Mon commune, Thoi Lai District: “I think the opening of rice market in 2011 is really a big opportunity as foreign companies still need traders, I think. I am confident that I can adapt to market changes, no worry about that.”
Source: Rice value chain fieldtrip in Can Tho, Mekong River Delta

Seeking for a rough estimate on the average margin charged by traders based on bargaining power with farmers was deemed difficult due to the sensitive nature of this issue. Discussions with some farmers indicated a suggestive margin of between five to 15 percent. This is considerably higher than the figure obtained from interviewing the traders. Accordingly, a profit of 2,000 VND was suggested for every basket of 20 kilograms. At the time of the fieldtrip, this represents a margin of about three percent. Our estimates using the information on paddy rice prices at farm gate and at district market suggested a margin of eight percent. This is quite reasonable figure between those revealed by farmers and traders themselves. Interestingly, the recent thriving growth of ICT, especially mobile phone, was found to be a positive factor in improving the bargaining power for rice farmers in transactions with traders. Observations from the fieldtrip show that most rural households have at least one mobile phone. Rice farmers use their cell phones to ask their relatives and friends for rice prices when negotiating with traders. This creates a pressure on traders in taking advantages of transportation capacity. Many farmers revealed that there are usually more than one rice traders to come to their villages and as a result, farmers may have choices when selling their rice output at farm-gate prices. It is important to note that storage capacity of traders/collectors is often limited. For small traders, paddy, either dried or wet, bought from farmers are sold directly to millers and storage during transportation is taken place in terms of storing on the floor of their sampans, boats, or other vehicles. For larger traders who also invested in husking facilities, their storage capacity is improved. However, given most of traders serve as an intermediate force between rice growers and millers, exporters, or distributors, few traders are willing to invest in large storage facilities. As a result, damages to paddy during transportation were revealed by traders though no precise estimates were available from the fieldtrip.

Milling factories/companies
Rice milling is implemented in two stages. The first stage involves husking the paddy. The intermediate product is then transported to larger millers for production of white rice, and if for export, polished rice. There is no official statistics available on the number of millers in MRD but there are several thousand of them. Most of millers are of small scales, handling the initial process of husking, while there are few large millers who are involved in the second stage of rice milling process. First-stage milling is done mainly by small husking facilities located near the production areas, while second-state milling is usually implemented by large millers or exporters who invested in milling facilities. In the initial-stage husking, husking factories could be either millers who buy paddy from collectors/traders or facilities owned by collectors and traders. Husking process involves the

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peeling the layer from paddy grains. Input for husking could be wet paddy or sun-dried paddy by farmers. Husking millers make money by changing paddy to husked rice and sell all the output to larger millers for finishing (or other traders as middle companies before being transported to larger millers). In this regard, husking is purely a raw processing process; husking millers play the intermediate role between paddy collectors/traders to larger millers who produce the polished or unpolished white rice. Observations from the fieldtrip suggest that there are husking millers in every commune in MRD. Many of them are rice traders (at the same time) or used to be traders. The scale of 50 ton/day appears to be the most popular for this initial-stage milling. Discussions with two millers suggested that the selection of such scale is mainly driven by availability of husking machines supplied in the market. In addition, the capacity of 50 ton/day was considered suitable for their management capacity. It is important to note that the first-stage paddy millers are found to have very limited storage facilities. Observations from the fieldtrip suggested that millers usually apply sun-dry for paddy bought from collectors/traders. Before it is milled, paddy tends to be left outside, or some forms of shading or roofing were observed at places but these are in poor condition. Limited storage capacity is partly the reason why they do not buy paddy directly from rice growers and why the capacity of 50 ton/day is considered suitable. Due to limited storage and out-of-date husking technologies, World Bank (2011) estimated a physical loss of 1.7% on an annual basis occurred in this initial husking stage. Taking into account the paddy output of MRD in 2010, this equals to about 350 thousand tons per year in absolute terms. In the second stage milling, millers are usually of large scales compared to those in the initial stage milling. Of these second-stage millers, there are three types, including (i) independent millers who buy husked rice from husking factories or paddy from collectors/traders for milling process; (ii) millers that are parts of exporters or producers. For the former, their unpolished white rice is sold to other wholesalers to distribute to the domestic market while polished rice is sold to exporters. For the latter, their output goes directly to ports for export under contracts signed by mother companies. In practice, most second-stage millers are located near big rivers – as a major transportation in the region. Interviews with DARD officials and Song Hau Food Company who own large millers revealed a considerable improvement of milling technologies in recent years. In addition to supply sources could come from Japan, Thailand, China, many made-in-Vietnam assemblies are also available. General evaluation of the respondents suggested that milling facilities are on average in lower technical standards compared with those in Thailand, leading to a higher rate of physical loss in the milling process. There are no official estimates on the number of second-stage millers. Experts in the field suggest a few hundreds. Of these rough estimated number, a minority of theme features with modernized operations. Almost all rice supply to domestic market and export are milled in these second-stage millers. Estimating an average capacity of the second-milling stage in MRD is difficult due to diversify of players in this stage. Results from the fieldtrip revealed a scale of between 200 to 400 tons/day. The milling yield or recovery rate rage between 60 to 80 percent depending on the quality of rice milled. Discussions with the representative from Mekong Chamber of Industry and Commerce revealed that this rate is reasonable compared with many other countries but lower than the reported milling yields in, for instance, Thailand and Malaysia. Interviews with officials and business persons during the fieldtrip suggested that there are few integrated millers who might benefit most from rice processing. These processors usually buy husked rice from the first-stage milling and store husked rice in their own storage facilities. When having good market opportunities, husked rice is milled in their own milling or other millers on a contract basis before being transported to export ports. It was discussed that these big players might constitute a speculative force, in which they pour the working capital to buy husked rice at

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the harvesting time and then take advantages from price fluctuations. The speculative effect of these large processors is also acknowledged by traders who used „ghost market‟ to refer to the speculative attacks exerted by some players (see box 2.5). Though this finding should be best considered as indicative rather than conclusive, this warrants further analysis of speculative behaviour in the rice market. Box 2.5 Speculative attacks by some big players and the resultant “ghost market” Dao Bich Lieu, a trader, Dinh Mon commune, Thoi Lai: “I call it a “ghost market”. Paddy prices fluctuate dramatically; I myself and other traders cannot forecast the trend. For instance, after Tet th holiday (2011), on January, 30 it was around from 5,500 VND/kg to 5,700 VND/kg. Only 5 days later, it was 6,200 VND/kg… I was very confused and reluctant at that time but I still decided to buy some quantities. At the end of February, the price was about 5,200 VND/kg but raised th. suddenly to 5,500 VND/kg or even 6,000 VND/kg on February, 10 . I myself cannot explain the reason for such price fluctuations, we believe that efforts made by some large companies to fix prices in their benefits.” “…the behavior of private companies is very different from that of stated-owned companies. There are time when all stated-owned companies stop buying but private companies are still eager and willing to buy in large amount. I think this is because they want to speculate this „ghost market‟…”
Source: Rice value chain fieldtrip in Can Tho, Mekong River Delta

Rice exporters
Rice exporters in the rice value chain are classified into two groups of SOEs and other private sector firms. The former consists of Vinafood 1, Vinafood 2 (and their affiliates), other SOEs (usually located at the center of MRD provinces); while the latter comprises private firms, which are limited liabilities or joint stocks. In recent years, the number of rice exporters is reported at around 200 firms. As reported in World Bank (2011), most of these exporters are however very small or even part-time operators and about half of them export less than 1000 tons a year. Rice export is thus very concentrated on few big players who are usually SOEs. In fact, Vinafood 1, Vinafood 2, and some other SOEs accounted for nearly 80 percent of total rice export. For small or part-time exporters, they are best described as „exporting traders‟ and rarely invest in rice processing facilities. When export contract is signed, these small exporting traders buy polished rice from millers or even other traders to deliver the contract. Though being big in number of establishments, these small exporters, supplying niche markets, play a insignificant role in Vietnam‟s rice export growth. Rice export is thus dominated by a number of dozen exporters. In fact, the two state corporations (Vinafood 1 and Vinafood 2) account for nearly a half of total export, leaving the remaining half for few other big exporters. Government-to-government (G2G) contracts account for the bulk of rice export by these large rice exporters. Statistics from VFA revealed that these G2G transactions accounted for nearly a half of total rice export in the recent three years. The process of G2G transactions could be described as a „semi-administrative‟ process. After G2G contracts are negotiated, the deal is then divided up among Vinafood 1, Vinafood 2, and other VFA members. As described in earlier, this allocation is supposed to be based on the firm capacity and past performances. Discussions with experts in the field however revealed that there are considerable costs for participating to deliver G2G deals. Notably, the G2G-implementing rice exporters do not mill all that rice quantity by themselves. It is projected that no less than a half of total G2G transaction by these companies are actually rice milled by private companies. This partly

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undermines the dominant role of SOEs in rice export but such G2G transaction remains essentially a „semi-administrative‟ process of allocating the deal within a small circle of SOEs and VFA members and considered as restrictive for private sector. It is also important to note that G2G transactions involve some overseas public agencies who would then distribute the rice to people on a concessional basis. In this aspect, quality does not represent a major concern but minimizing cost could be most important. The nature of G2G with some degree of political and diplomat negotiation also constitutes to pricing decision. As a result, G2G export prices could be artificially lower compared to the commercial level. Of the G2G transactions, Vietnam‟s rice export has gone primarily to the countries whose rice trade is controlled by their government. The Philippines is the largest importer of the Vietnam‟s G2G rice export. GSO (2010) revealed that the Philippines accounted for nearly 38 percent of the total rice trade volume and 40 percent of the trade value. The remaining half of rice export is commercial trade with more than 100 countries. Of these importing countries, there are around a dozen who import more than 50 thousand tons per year on commercial basis. Most of other countries import very small amount of between few hundreds to few thousand tons (GSO, 2010). According to VFA, about two thirds of its members exported at the level of nearly 10,000 tons/year. This diversification of small (and occasional) buyers might reflect the fragmented structure of the Vietnam‟s rice export. The existence of many small or even parttime exporters who mainly seek for short-term (which could be on and off) opportunities lends an explanation for such diversified rice trading partners. Compared to state-owned rice exporters, private exporters are more flexible and, as having little chance to deliver for G2G contracts, more motivated to be competitive and quality-oriented. Discussions with leaders of Song Hau Food Company and Song Hau Farm were evident for this flexibility of private sector rice exporters (see box 2.5).

Box 2.5 SOE rice exporters, through having privileges, are subject to several 'socio-political' objectives Duong Quoc Toan, Vice Deputy, Song Hau Food Company, Tra Noc Industrial Zone, Cantho: “We are well aware that the main duty of being a SOE in the rice market is to ensure household food security rather than going for profits. Household food security is regarded as a political task is always prioritized and focused... The government can decide to stop exporting at any time to ensure food security... Mr. chairman of VFA, keeps reminding us about how to ensure income for farmers. He even insists on severe penalty for leaders of companies who make farmers complain too much.... After 2008 Food Crisis, my company has been instructed to build up our own outlet chains to supply rice to end-customer in domestic market for the purpose of stabilising domestic prices... Our task is also shown through “strategic reserves interventions” by the state. When the government decided to reserve a large amount of rice, VFA will allocate the target for Vinafood 1 and Vinafood 2 and their affiliates. Because Song Hau Food Company is a dependant subsidiary of Vinafood 2, we must comply with all the assigned targets.” Duong Minh Hoang, An Hoa Rice Retail supervisor, Ninh Kieu District, Cantho (a subsidiary of Vinafood 2): “...We are now offering about 15 types of rice produced by Song Hau Food Company, our price is often 500 VND or 100 VND lower than that of the market price. The purpose is to stabilise domestic price... At present, Song Hau Food Company has four outlets like this in Cantho. We are trying to scatter the outlet chains in many different areas to help stabilise rice prices... The prices are also fixed by the company, my job is just to expand the customer base to increase the sales. My income is around 2,5 million VND per month, which is

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much lower than that of an individual retailers, I think...”
Source: Rice value chain fieldtrip in Can Tho, Mekong River Delta

As reported in Figure 2.1 and 2.3, Vietnam has experienced a thriving rice export growth. One big concern rose from this growth is the modest extent that the poor and small rice landholders have actually benefited from this growth (as in section 2.2). Another big concern that became more pronounced from the fieldtrip is the concentration of Vietnam rice export to low quality segments. The „mixed bag‟ approach elaborated earlier is an important reason leading to such low quality. In addition, the long and fragmented nature of the rice value chain complicates quality assurance efforts. As described above, there are several intermediate players between rice growers and rice exporters. Linkages, either backward or forward, among players at different stages are very weak, if any. In most cases, traders, millers, and exporters are quite dependent from one to another. There are several hundred specialised husking or polishing plants which provide processing services at some margins. Given such weak vertical integration of the rice value chain, ensuring quality of the final product for export, which requires certain coordination along the chain, represents a very big challenge. Depending on G2G rice export is probably another reason leading to a persistent position of Vietnam in low quality rice export. As these G2G are of low-quality and low-cost focuses, there is no incentive for large and key players in the sector to swift to quality-oriented rice varieties. The private sector, which is supposed to be more flexible and more motivated for higher quality rice export, is limited in their capacity due to small scales of their operations. Short-term nature of the rice export management in the past had created uncertainty that discourages long-term investment by private sector rice processors and exporters. After rice quota was abolished, the dominant role of SOEs and VFA members in the Vietnam‟s rice export restrict opportunities for the private sector in seeking for long term contractual relationships, and this also represents an obstacle for long term investment by the private sector. In this context, though there are several thousands of millers, processors, and exporters in the rice value chain, it seems that no one has a strong incentives to „break‟ out of such „big volume, low quality‟ position. SOEs are persistently dependent on „public sector spirit‟ trading though G2G; while private sectors are usually of small scales and are not motivated by policy environment for long term investment. In this context, farmers keep their habit of cultivating several seeds of low quality and short period; husking and polishing millers are „satisfactory‟ with their processing fees, traders are „pleased‟ with their safe position, being unaffected by price fluctuations. This ends up with a vicious cycle of low and mixed quality seeds, low quality processing, low quality market-oriented in the rice value chain. Box 2.6 Vicious cycle in producing low quality rice Representative from Song Hau Farm, Can Tho: “Foreign importers don‟t care about rice quality so farmers never prefer high quality varieties because production costs for such high quality seeds are much higher. Plus, high quality varieties often take more time to grow up. In addition, traders never care about which seeds are used, they often mix many types of rice before selling it to exporters. Therefore, I believe that the issue of low quality exported rice arises from importers themselves. If we want to improve rice quality in Vietnam, there should be market pull from international importers” …“we really don‟t have a real commercial market when we depend so much on G2G agreements. In addition, branding is almost ignored because Vietnamese rice is packaged into 50-kg bags and exported to a third country, our brand names are not shown one the bags” Director, Song Hau Food Company, Tra Noc Industrial Zone, Cantho: “The issue of low quality is

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mainly because farmers use many different varieties. IR50404, a low-quality seed is widely used because of its short maturity period. Almost all farmers are small land holders who use different rice seeds. Besides, traders often mix many types of rice, we hence cannot control the quality of exported rice”
Source: Rice value chain fieldtrip in Can Tho, Mekong River Delta

Distributors
Distributors in the value chain figure 2.1 serve the domestic market. At this stage, our understanding on the rice domestic market is relatively limited compared with that of the rice export market. According to an estimate from IPSARD (2010), in the total output of nearly 40 million tons of paddy in 2010, rice available is about 21 million tons (after subtracting the volume of seeds, physical loss, and feed). Subtracting from this rice available the estimate for national reserves (of around 900 tons) and inventories, there was about 11.6 million tons for domestic consumption and 6.8 million tons for export. It suggests a very sizeable domestic market for rice. As discussed in section 2.1, while state interventions in rice exports are restrictive, there are almost no interventions in the domestic rice market, except the floor price policy (on which there has been doubt of its effectiveness and who shared benefits from such floor price interventions). At present, the domestic rice market is shared by supermarkets, outlet chains of SOEs and other private sector processors (usually at small scales), and widespread network of individual retailers. At the wholesale level, white rice is supplied to the retailers from traders, millers (either first or second stages), food companies and exporters (who also pursue transactions in the domestic market). There are no consistent estimates on who has driven this wholesale segment of rice distribution. However, it is generally understood that private sector, in opposite to rice export, might contribute more significant role than SOEs and VFA members. Restrictive „entry barriers‟ in export transactions could be a reason while the private sector is (forced to be) more active in the domestic rice market, especially those of small scales. Discussions with experts in the fields suggest that the private sector could constitute up to 70 percent of the domestic market volume, though further statistics are not available for confirming this dominance of private sector. At the retailing level, individual traders are observed in almost every streets and lanes of Vietnam. These several thousand hundreds of individual retailers dominate the domestic rice market with different varieties from popular white rice to some localized rice of different quality. Individual retailers are household businesses who are populated in traditional markets of all levels or in areas of highly dense population. They buy rice from several suppliers to diversify their offerings to customers. Results from the fieldtrip revealed that a small scale retailer in urban area could sell about 15 tons per month while medium sized ones can sell up to 30 tons at a margin of between one to two million VND per tonne. Discussion with a trader in Can Tho city suggested that rice retailing could be very profitable and this attracted all of her family members (eight members) to focus on their retailing outlets. In addition to sales at their shops, the trader‟s family also processes order over phones and provide home delivery services. There is also a growing segment of retailing though supermarket chains, both foreign owned such as Metro Cash and Carry, Big C and domestic owned Hapro, Intimex, Coopmark. These supermarkets have become increasingly important retailers for urban dwellers, especially in big cities. Different from the mass of individual retailers, supermarkets usually specialize in high quality rice and the bulk of rice distributed by supermarkets are imported from Thailand (for parboiled rice and high quality white rice), India (for basmati and other fragrant rice varieties), and even Japan for some fragrant rice varieties. Encouraged by forecasts of potential retail market in Vietnam, these supermarkets are at their expansion of coverage. In addition, new entrants are exploring

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opportunities to enter the retail market, including Wall Mart, Tesco, and Carefour, to name a few. This could be taken to suggest a more important role of supermarkets in the rice retailing subsector in the future.

Major challenges and policy implications
The analysis, either at sectoral level or based on the value chain analysis, has provided a mixed picture of the rice sector in Vietnam. While contributions of thriving growth of paddy output and export to national food security are undoubted, there are several weaknesses underlying such vigorous growth of the rice sector. This final section presents some key challenges and suggests policy options for in the coming years.

Key challenges
There are several challenges underlying the rice sector in Vietnam, and particularly in the Mekong River Delta. Stemming from the above analysis, the following key challenges are highlighted. First, „Big volume and low quality‟ seems to be the most notable problem of the rice sector. Evergrowing volumes of paddy production and yield are undoubtedly impressive. Based on this success, national food security is ensured; Vietnam is contributing increasingly to international food security. Behind this „glamour‟ of quantity, Vietnam tends to position itself in the bottom of international market in terms of quality. While Thailand focuses on parboiled and high quality rice; India and Pakistan specialize in basmati and other fragrant rice; the United States develop premium quality white rice, Vietnam is the world champion of low to medium quality white rice with 25% broken. Taking an example of 2010, while the average FOB price for Thai fragrant rice was $1024 per ton, that of Vietnam‟s leading product – 25% broken rice – was $387. Though there is nothing wrong with this low quality scenario in a growth perspective, this represents a waste of opportunity to get value added from production of quality rice. Under the present context, the „more‟ is not necessarily the „better‟. Second, some policy inconsistencies represent an obstacle for more viable development of the rice sector. Restriction on the use of paddy land area is an administrative barrier for more productive use of land. It has been a source of confusion between food security at the national level and food availability or sufficiency at certain locations. Rice shortages observed from time to time in the event of natural disasters or in very remote and difficult areas tend to constitute a political concern on national food security, while these should be considered purely as a problem of distribution of rice surplus. This provides (wrongly) a political will to protect the target of 3.8 million hectares of paddy land. Notably, concessional conditions and focus of the Government on low quality, low value G2G remains without a well justified background (except in the case of Laos Republic or Cuba – Vietnam‟s political alliances). More importantly, relying on VFA and its SOE members represents an uneven treatment to private sector players, who already contributed an important role in supplying for SOEs in delivering these G2G contracts. What is most striking problem is reflected in heavy interventions of the government in export transactions while leaving very sizeable domestic market with few effective actions. If concerns on national food security and welfare of farmers are put in the top of priority list, it is the domestic rice market that should be regulated and monitored rather than the export sector, which can be left to the private sector as experienced in other countries. Unfortunately, to the best of our current understanding, these consistencies could be prevailing for unforeseeable periods and there have not yet had any signals for changes – though policy changes in Vietnam, as suggested by past experienced, could come suddenly. Third, there are many factors that contribute to „subtracting value‟ from the rice value chain. Heavy dependence on imported fertilizers, argo-chemical (which are most intensively applied) and farm equipment represent nearly half of rice production cost. Notably, limited storage capacity at all

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stages of the value chain exerts considerable physical loss of paddy and its intermediate products. In addition, the fragmented and long structure of the value chain result in several players at intermediate stages while vertical linkages between these chain players are modest. There is little evidence of collective actions for value addition along the chain. Moreover, the „mix bag‟ approach, which could be considered as a product of rooted attitude and seed supply conditions has „knocked in‟ Vietnam in the production of low quality rice. Lack of concerted efforts in switching to higher quality rice varieties, Vietnam continues in its position at the bottom quality ladder. Last but not least, concentration of net rice surplus in some twenty percent of most land well-endowed rice growers implies that producing more rice is actually poverty inducing for small paddy rice growers. In combination of these factors, further expansion of rice production and export could be „value subtracting‟ rather than „value adding‟ as expected.

Some policy implications
Stemming from the analysis and major challenges, the following policy implications are suggested for further consideration. First, the role of the Government in general and SOEs in particular in the rice sector should be rerevisited and re-defined. This certainly requires a high level of political commitment given the (historically) sensitive nature of rice production, which is too easily linked to national food security. Following this direction, radical reforms should be considered to restructure the allocation mechanism of G2G transactions away from picking SOEs and other VFA members as the primary delivers of rice export. In pursuing this direction, it is necessary to re-defined VFA‟s functioning into a professional and independent association rather than an extended arm of policy tools for state interventions. Price stabilizing role – as a traditional role of strategic reserves – should be returned from VFA and its SOE members to State Reserves as there is no theoretical and empirical background why SOEs could pursue such role more effectively than State Reserves. In addition, the target of 3.8 million hectares for designated paddy land should be re-considered with a clear distinction between food security, which is no longer a problem for Vietnam, and food insufficiency in some „pockets‟ of poverty or certain locations due to natural disasters. Second, there is an area of potential roles for donors to play. Most importantly, unblocking policy consistencies should be considered as the key in re-enforcing „enabling environment‟ for agriculture and rural development in general and for more productive growth of the rice sector in particular. In addition, promoting the swift to high quality rice should be considered as a focus in continuing interventions of donors in terms of their supported programmes and projects. The current focus of many donors on the pro-poor value chain approach is probably relevant to the current situation. But targeting must be very well designed in order to direct resources to most potential areas of MRD. In fact, a number of about 30 districts located in Long Xuyen Quadrangle accounted for nearly a half of the region‟s rice output and a majority of its large net rice surplus growers. This concentration represents a enormous opportunity for value addition and further efforts in rice value chain development should be placed in this „core rice belt‟. Third, it is reasonable to argue that the era for cheap food is over and Vietnam has sufficient potential for high value agriculture. There have been recently policies and supports in that direction but these need to be rooted in rice growers. Switching to high value rice variety is however costly and clearly unaffordable for the poor and small rice growers. In this regard, Vietnamese rice growers needs most the support from their government and its donors. The new „Tam Nong‟ – New Rural Development NTP Programme represents an opportunity for a bold movement toward high value agriculture. This should be the focus of the government and donors in the coming years.

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Export Agriculture Crops: The Case of Coffee Value Chain in the Chain in the Central Highlands
Vietnam‟s coffee sector could be considered as a success story of trade liberalisation in agriculture in Vietnam because it supports heated competition among various players from all economic sectors, in which private sector plays important role in the development of the whole value chain. Bold reforms in the late 1980s and beginning of 1990 has really triggered the booming of coffee sector in the Central Highlands. Between 1990 and 2009, the national coffee production increased more than eleven times, with coffee production area climbed by more than four times. Coffee has become one of the most important agriculture products and export of Vietnam and the world leading exporters of Robusta coffee and clearly the most vibrant livelihoods for many rural households in the Central Highlands. Given the importance of coffee in Vietnam‟s agriculture sector, this chapter will investigate the coffee sector with a focus on the coffee value chain in the Central Highlands – as the largest coffee growing region in Vietnam. The focus on the Central Highlands is justified by the dominance of this region in coffee production and export as the region makes up more than 80% of coffee area and about 90% of total coffee output in Vietnam. The next section will review major policy issues related to coffee production and export. How coffee growers and other stakeholders (such as collectors, processors, exporters etc.) and private sector have generally responded to new opportunities induced by these policy changes will be described in the second section. This chapter will focus on the third section which provides a comprehensive picture of the coffee value chain based on the fieldtrip to Dak Lak. In this section, results from the fieldtrip will be used to describe how different actors in the chain run their businesses and interact to the remaining actors.

Major policy issues in the coffee sector ‘New Economic Zone’ policy and coffee in the Central Highlands
Coffee was introduced to Vietnam in 1857 and was first planted in Ha Nam, Quang Binh and Kon Tum provinces. At the beginning of the 20th century, coffee bushes were planted in large scales by French plantation owners at Phu Quy – Nghe An and later at Dak Lak and Lam Dong. In the 1960s and 1970s coffee was planted in some state-owned farms or collectives in the Northern provinces, but its expansion in this region failed because of insect damages to the Arabica and unsuitable natural conditions for the Robusta. At the re-unification in 1975, Vietnam had more than 13,000 hectares planted with coffee, producing around 6,000 tons per year (Nhan et al, 2007). In the 1980s, there was a policy to facilitate economic development of the Central Highland by promoting New Economic Zones in the region. Accordingly, the ethnic Kinh (as the majority group accounting for nearly 86 percent of the population) and other ethnic minorities in the Northern Uplands were encouraged to migrate to the Central Highlands. This policy was officially endorsed th by the Communist Party‟s 4 National Congress and then featured in the Second Five Year SocioEconomic Development Plan 1976-1980. This policy was introduced on the perception of good potential land and low population density in the Central Highlands. The objective was to re-allocate a number of around four to five million people to the region in order to develop „new economic zones‟. There is no official statistics on the number of migrants under this policy. In a self-declared conservative estimate, MOLISA suggested a number of 320 thousand migrants to the Central

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Highlands in the period 1984-1989, mainly to the so-called „new economic zones‟. However, this is far below from the actual level. For instance, according to statistics of Dak Lak province, the Kinh population in the Central Highlands rose from few hundred thousand to about two millions between the re-unification and the mid of 1990s. Under this policy, migrants to the Central Highlands were subject to several incentives, which range from land allocation, access to public services, and other material supports for re-settlement. This New Economic Zone policy was not successful in realizing expected contribution of migrants to economic growth of the Central Highlands and the region was among the poorest in the country. The policy was thus ended in the early 1990 but migration flow to the Central Highlands continued. The new wave of migration to the regional is characterized by „spontaneous migration‟ (which is used to imply „free‟ migration without policy incentives) mainly by the ethnic minorities in the Northern Uplands. These spontaneous migrants were attracted to the region due to its potential for industrial and perennial crops, abundance of fertile lands, and particularly the expansion of coffee. As a result, population in the Central Highlands increased rapidly from nearly one million in the late 1970 to around five millions in 2005. Notably, the region became much more ethnically diversified. At the time of re-unification, there were around 20 indigenous ethnic groups. At present, there are about 40 ethnic minorities groups residing in the Central Highlands. According to the latest Population Census, migrants now account for about 90 percent of the region‟s population. Though the issues of how migrants have shaped the recent economic development in the Central Highlands is a controversial theme, it is certainly that migrants represents a dominant force in the recent growth of coffee (and other industrial crops) in the Central Highlands.

Other state interventions in the coffee sector
The „New Economic Zone‟ policy was perhaps the most direct and influential interventions of the Government, which was introduced before the boom of coffee production and export. The policy was controversial and does not seem to be successful as expected but did create some important forces for the thriving growth of coffee production in the 1990s, especially in terms of human resources. Beside this direct involvement, also taking into account the process of liberalization reforms in agriculture and rural development, there have been little direct interventions of the Government in Vietnam‟s coffee sector since the 1990s. In this regard, it could be arguably stated that the recent thriving growth of coffee production and export has little to do with the government interventions (this is subject to further discussions in subsequent sections). This sub-section briefly mentions some policies that are related to coffee production and export in the Central Highlands.

Technical standards
In realizing the potential of coffee production and export, the government has provided a number of technical standards applied for coffee products. The first set of technical standards was TCVN 4334: 1986, which provides norms and technical specification for coffee products in Vietnam. In addition to this TCVN 4334:1986, there have been several additional standards for the sector, namely TCVN 4193: 1993; ISO 3509:1989; TCVN 4807:1989; and TCVN 4807:1989. These sets of standards provide technical guidance for different stakeholders in processing procedures, refine classification and technical specification for different coffee products (and intermediate products). With the latest set of technical standards, TCVN 4193: 2005, technical standards for Vietnam‟s coffee is fully compatible to international practices. Having technical standards available and application of these standards are however not necessarily associated with one another. Despite of these standards, not many coffee grower and processors have applied these set of technical guidance. Applying such standards is costly as its requires all the stakeholders in the coffee value chain to invest in upgrading their technology, physical facilities, and more importantly, changes in attitude toward coffee production. As a result,

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though more than 36 regulations on standards and quality control have been produced or revised since 1986, Vietnam remains exporting low quality coffee at low (or lowest) prices when comparing to other major competitors such as Brazil, Columbia. This remains a major problem and challenge for future development of coffee production (and it will be subject to further discussion in subsequent sections of this chapter).

Trading regulations
There are almost no regulations on trading in coffee products except normal regulations on foreign trade transactions, which are subject to trade reforms described earlier in chapter one. Perhaps, the most significant policy change related to trade regulations is Decree 23/2007/ND-CP, which codifies a new framework for purchasing goods by foreign-invested enterprises. Accordingly, foreign-invested enterprises were allowed to purchase goods produced in Vietnam for direct export. This new legislation applies for all sectors, including coffee. Results from the fieldtrip (see details in section 4.3) suggested that this legislation has had a considerable effect on the coffee sector and there have been new entrants in coffee export who are foreign-invested companies operating in Vietnam. In a more recent move, under the direction of MARD and MoIT, Ban Me Thuot Coffee Exchange Center (BCEC) was established in December 2008 with the ambition to create a new coffee exchange floor for Vietnam‟s robusta coffee – which is the largest in the world market in terms of volume. The stated objective is to provide a concentrated and transparent trading floor, connecting coffee growers, traders, processors, and exporters in Vietnam and, more ambitiously in the world. BCEC is put under the direct management of Dak Lak DARD with some designated staff sent from DARD to manage this trading floor. This move is however considered as a political will without well justified background. Coffee transactions in international markets are dealt in trading floors Singapore, London, New York and there is little evidence to convince that those large volume traders would come to BCEC to do their business. In addition, managing a trading floor is clearly so complicated for professional traders, say nothing of some state officials sent from a provincial DARD. As a result, those BCEC was formulated in 2008, there has been little progress observed and there is no evidence suggesting a good prospect for this trading floor.

Extension services and irrigation in the Central Highlands
While rice production in MRD is subject to a number of extension services under several big programmes such as „Three Reductions, Three Gains‟, „Five Reductions, one Must‟ (see chapter two), coffee plantation in the Central Highlands has not received much extension services. As suggested by Marsh, A. (2007), most of coffee farmers have copied plantation techniques developed by stated-owned farms over the last 10 to 15 years and been subject to limited extension services, which were largely focused on boosting yield and monoculture cropping. Farm diversification and risk management are not appeared in the limited services provided by the extension network and there are almost no extension efforts in terms of storage, processing cherry bean after harvested. In fact, growing Robusta coffee is relatively simple and farmers could easily learn from one another over a short period of time. However, processing cherry bean and storage require certain level of technical knowledge and skills. At present, access of coffee growers to such knowledge and skills are very limited. While state-administered extension services are poor and limited for coffee growers in the Central Highlands, there have been interesting examples of extension services provided by coffee producers, research institutes, and professional associations in recent years. For instance, VinaCafe has recruited a number of own extension officers for their own operations. The Western Highlands Agriculture and Forestry Science Institute (WASI) have developed a number of services that could be quite easily bought by coffee growers. More recently, Vietnam Coffee and Cocoa

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Association (VICOFA) has set up its own extension agency called Vicopex with a responsibility to coordinate extension activities among different agencies to ensure better coverage and more effective services. These initiatives are at the early stages and it is not clear how coffee growers perceive these new extension services available. Water is an essential input for the growing of Robusta because it requires a huge amount of water during its blooming period. A study in Dak Lak province estimated that for every hectare of Robusta coffee grown, the annual water amount required was between 1,500 m3 to 3,000 m3. (D‟Haeze et al. 2004). Moreover, the three-shift watering practice requires an effective irrigation system to ensure high yields. Although the basaltic soils in the Central Highlands have provided this region with large stores of underground water which are replenished annually by the monsoon rains, unusual rain falls every year create severe droughts in dry season. As revealed by that study, there are three main sources for watering coffee in the Central Highlands, including (i) man-made ponds and reservoirs (20.8 percent); (ii) natural rivers, lakes and streams (28.5 percent), and (iii) ground water (56.6 percent). This suggests a relatively low role of reservoirs, which were built under the state investment, in watering for coffee production in the region. Terrain complexity in the Central Highlands represents a constraint for efforts to develop large scaled irrigation schemes. In addition, coffee growers have exhibited a pro-active role in finding other water sources to water their coffee plantation areas. Ground water from drilled wells is the most important water source for growing coffee in the Central Highlands. This heavy dependence on ground water as a main watering source represents a risk for coffee production growth in the future given the increasing concerns on lowering capacity of groundwater storages in the region.

Major outcomes in the coffee sector
As described above, given the steady withdrawal of the Government from direct involvement in agriculture and rural development in recent years, there is a thin framework of policies and state interventions in the development of the coffee sector in Vietnam. The thriving growth of coffee production and export over the past two decade is thus best considered as a „spontaneous‟ process in which farmers and private sector have responded in a pro-active manner to new opportunities created by such „retreat‟ of state interventions and potential of the Central Highlands. This section will focus on some major outcomes of such growth process with a focus on growth of coffee output and export, position of Vietnam‟s coffee in the international coffee market, and potential impacts of such growth on poverty reduction in the Central Highlands.

Robust growth of coffee output and export
Figure 3.1 reports growth of coffee output, yield, and production areas in the period 1990-2009. In terms of volume, Vietnam‟s coffee output has increased from less than one hundred thousand tons in 1990 to nearly 1.1 million tons in 2009, suggesting a growth of nearly eleven times. During this period, coffee production area rose from 120 thousand hectares to over 540 thousand hectares, implying an expansion of 4.5 times in total land for coffee production. As the growth of output well surpassed that of production area, this difference is attributed to increase in average yield. Indeed, as suggested in figure 3.1, the average yield has increased from 0.77 ton per hectares to nearly 1.94 tons per hectare, meaning a growth of 2.5 times in that period. Figure 3.1 also suggest two stages of coffee production growth, which are quite different from one to another. During the 1990s, there was a very sharp increase in both coffee production areas and output. However, coffee growing area has been stagnated around the level of between 500 to 550 thousand hectares since 2000. This might reflect two issues. First, competition in the use of fertile land in the Central Highlands for other industrial crops such as cashew nut, pepper, and rubber, which are also key items of agriculture export. Second, sharp increase in coffee production area in

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the 1990s is probably attributed to expansion of coffee growing from unused land but land abundance in the region has decreased over time.

Figure 3.1 Coffee production in Vietnam, 1990-2009

Source: Compiled from GSO and VICOFA statistics

Both Robusta and Arabica coffees are grown in Vietnam but Robusta accounts for nearly 85 percent of total production areas and more than 90 percent of total coffee output in 2007. Table 3.1 shows that Robusta is mainly grown in provinces in the Central Highlands while Arabica plantation is scattered around the country with some limited growing areas in the Northern Uplands such as Son La, Lai Chau, Yen Bai or in the Central Coast such as Thanh Hoa, Nghe An, Quang Tri, and Thua Thien Hue. Arabica coffee is planted in a number of different provinces but in small areas compared to Robusta coffee concentrated in few provinces in the Central Highlands. As suggested by Figure 3.2, as Robusta is considered of lower value than Arabica, prices of Robusta in international marketplaces are always lower than those of Arabica.

Table 3.1 Coffee production in Vietnam, 2009 Types of coffee and location Robusta growing area (ha) Dak Lak Lam Dong Gia Lai Kon Tum Dong Nai Production areas 480,000 234,000 100,000 75,000 11,000 60,000

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Arabica growing area (ha) Son La Lai Chau Yen Bai Thanh Hoa Nghe An Quang Tri Thua Thien Hue Dak Lak Gia Lai Lam Dong Unspecified or miscellaneous Total
Source: compiled from VICOFA statistics

26,500 3,500 500 700 4,100 3,000 3,500 500 2,200 500 8,000 32,000 538,000

Figure 3.2 Robusta coffee prices vs. Arabica coffee prices, 1998-2011

Source: compiled from ICO statistics

Given such vigorous growth in output, coffee has become one of the major export items of Vietnam over the past two decades. The export volume in 2010 was nearly five times as higher than that of 1996, meaning an average annual growth rate of more than thirty percent (see Figure 3.3). The

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growth pattern of volume export does not match that of export value due to fluctuation of coffee prices in international marketplaces. For instance, the volume of coffee export had increased rapidly between 1998 and 2001, which could be linked to price spikes in the mid 1990s that induced rapid growth of coffee production area. However, as coffee price was sharply declined in the end of 1990s, the coffee export value in that period had significantly decreased. The period from 2005 to 2008 represents an opposite example. Between these years, the export value had grown much faster than the export volume because of high coffee prices in international marketplaces.

Figure 3.3 Vietnam‟s coffee export, 1996-2010

Source: compiled from VICOFA statistics

Vietnam’s coffee in the world coffee market
Given the robust growth of coffee production and export, Vietnam has become one of the leading th producers and exporters in the world coffee market. Its ranking has climbed from the 16 in 1990 rd nd with the world market share of 0.4% to the 3 in 1997, and the 2 in 2000. Since 2000, Vietnam nd has remained as the 2 largest coffee exporter (after Brazil), contributing for nearly 14.7 percent of nd the total world coffee export volume. Despite of being at the 2 position in the world coffee market, there is a large gap between Vietnam and the market champion Brazil in export volume and market share. As suggested in Figure 3.4, the coffee export volume from Brazil was nearly 2 million tons in 201o, which is more than two times as many as that from Vietnam (about 850 thousand tons). More importantly, while 90 percent of Vietnam‟s coffee export is Robusta, Brazil exporters focus on Arabica as their main product.

Table 3.2 Top ten coffee exporter, 1997-2010 Rankin g 1 2 3 4 1997 Country Brazil Colombia Vietnam Indonesia 2000 Country Brazil Vietnam Colombia Côte d'Ivoire 2010 Country Brazil Vietnam Colombia Indonesia

Share (%) 21.40% 13.91% 7.87% 7.33%

Share (%) 20.12% 12.97% 10.25% 6.82%

Share (%) 34.14% 14.70% 8.08% 5.67%

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India Peru Guatemala Honduras Ethiopia Uganda 4.54% 3.94% 3.58% 3.46% 3.44% 2.75%

5 6 7 8 9 10

Côte d'Ivoire Mexico Guatemala Uganda El Salvador India

6.00% 5.74% 5.41% 4.46% 3.53% 3.36%

Indonesia Mexico Guatemala India Honduras El Salvador

5.98% 5.92% 5.42% 4.72% 3.21% 2.83%

Source: compiled from ICO statistics.

Figure 3.4 Coffee export volume of Vietnam and Brazil, 1990-2010

Source: compiled from ICO Statistics

With respect to prices paid to coffee growers, it is drawn from the Figure 3.5 that during the period 1990-2005, farm-gate prices of Brazilian Arabica were more than 1.5 times as high as that of Vietnamese Robusta coffee. When comparing prices of Robusta, it is noted that prices for Vietnamese Robusta were always lower that for Brazilian Robusta since 1994, the peak of world coffee price in the 1990. Given competitive nature of the world coffee market, this gap is most likely to be attributed to difference in quality of Robusta coffee planted in Vietnam and that of its latest competitor.

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Figure 3.5 Prices paid to coffee growers in Vietnam and Brazil, 1990-2010

Source: compiled from ICO Statistics Notes: Robusta prices of Vietnam since 2005 were not recorded by ICO

Unlike the rice sector, the gap between Vietnam‟s FOB rice export price and the price of its competitors is considerable due to low quality of Vietnam‟s rice export. In the coffee sector, the FOB price of Robusta export is essentially in line with the price traded in the London stock exchange (though there are some large divergences in short periods). On average, the price in London exchange is slightly higher than the FOB price applied at Sai Gon Port (between two to four hundred kilometres from the coffee production areas in the Central Highlands‟ provinces) and this gap is largely attributed to freight cost. A major reason is that Vietnam is currently the world largest Robusta coffee exporter, while its major competitors tend to focus more on better quality Arabica.

Figure 3.6 Vietnam‟s FOB export price and London exchange prices

Source: AgroInfor, IPSARD, Ministry of Agriculture and Rural Development

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In terms of export destination, table 3.3 show that Germany, the US, Italy and Belgium are the main importers of Vietnamese green coffee. However, it should be noted that these importing countries are among the largest finished coffee products in the world. This suggests that green coffee exported from Vietnam is treated as raw materials for coffee processing in these countries. In this context, Vietnam is located at the upstream and low value-added stages of the world coffee value chain.

Table 3.3 Top ten importers of Vietnam green coffee, 2010 Volume (1000 ton) Germany United States Italy Belgium Spain United Kingdom France Total 136 106 86 88 74 35 24 1060 Share (%) 12.84% 10.04% 8.16% 8.35% 6.96% 3.32% 2.30% Value (mil. US$) 274 211 171 168 148 69 47 2111 Share (%) 12.97% 9.98% 8.11% 7.96% 7.03% 3.28% 2.25%

Source: compiled from Statistics of VICOFA and General Department of Vietnam Customs

Coffee expansion and poverty reduction in the Central Highlands
Given the boom of the coffee sector in the Central Highlands, it is expected that the coffee sector is associated with significant poverty reduction effects. Indeed, the average poverty headcount in the region has decreased from nearly 70 percent to 24 percent between 1993 and 2008 (using data from the VHLSSs in the period 1993-2008). As shown by Figure 3.7, poverty reduction in the Central Highlands reflects quite closely the pace of poverty reduction in rural Vietnam. The year 2002 represents an exception of 2002. Between 1998 and 2002, poverty rate in the Central Highlands remain at around 52 percent while poverty incidence in the rural areas declined by nearly ten percentage points. This could be related to the collapse of coffee price in the international market. After two price peaks in 1993-94 and 1998-99, coffee price was collapsed from nearly 4500$/ton at some peak time in the 1990s to around 450$/ton in 2001-2002. Part of this price collapse was induced by rapid expansion of Robusta coffee from Vietnam, which was from nowhere to the world largest Robusta exporter. As investment was made during the peak time of 1998-99, a large number of coffee growers suffered from such historically low prices in 20012002, forcing a number of coffee growers into poverty.

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Figure 3.7 Poverty reduction in the Central Highlands, 1993-2008

Source: based on the VHLSSs, 1993-2008

While contribution of the coffee sector in poverty reduction in the Central Highlands is undoubted, farmers in the region have not shared that benefit equally. Figure 3.7 suggests that ethnic minorities are left behind overall poverty reduction in the Central Highlands. At the early 1990s, the Central Highlands was the poorest region in the country with more than 93 percent of ethnic minorities living under the poverty line. After nearly two decade, poverty headcount in the region fell down to 67 percent, suggesting a reduction of nearly 26 percentage point. Although the magnitude of poverty reduction for ethnic minorities is quite impressive between 1993 and 2008, poverty among ethnic minorities in the Central Highland is far higher than the national average rate of poverty. Compared to other ethnic minorities, the average poverty rate of all ethnic minorities was nearly 50 percent in 2008, suggesting a difference of nearly 20 percentage points between the average poverty rate of ethnic minorities in the country and ethnic minorities in the Central Highlands. This could be taken to suggest that ethnic minorities have probably not benefited as much as expected from the recent boom in the coffee production in the region. A question arose from this context is who has been the major beneficiary of the coffee production growth in the Central Highlands? This question will be answered in more details in the subsequent section, analyzing the coffee value chain in the region. At this stage, it could be argued that migrant coffee growers are amongst those who have most benefited from the recent expansion of coffee. As mentioned earlier, the Central Highlands was the destination of two waves of migration after the re-unification. During the first wave of migration under „New Economic Zone‟ policy, flows of migrants were largely employed by state-owned farms, which were the results of nationalization of coffee and rubber plantations and development of collective agriculture model after the Vietnam War in the South. According to rough estimates by WASI, at the end of the 1980s, state-owned farmed occupied around 70 percent of the arable land in the region. Along the course of decollectivization in the late 1980s, most of the state-own farms dissolved and redistributed land to their employees – who were largely migrants. This development has caused a considerable loss of landholding by indigenous ethnic minorities in the Central Highlands.

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The second wage of spontaneous migration was encouraged by expansion of coffee production in the Central Highlands and the price peaks in the 1990s. According to Do (1998), a survey conducted by the government found that less than four percent of spontaneous migrants to the regions were allocated land by the authorities. Instead, 47 percent of migrants purchased land privately from ethnic minorities and 46 percent acquired land by clearing „unclaimed‟ forest land – which was usually considered by indigenous ethnic minorities as their common land areas. There has been several examples of indigenous ethnic minorities transferred their hectares of land to migrant Kinh shelters for a bag of rice, bicycles or some household assets and duped to sign papers to transfer their lands. As a result, fertile basaltic land are accumulated by the migrants, while indigenous ethnic minorities were pushed further to forest land with less potential for growing coffee and other industrial crops. This lost of land to migrants was so serious as it triggered many protest and petitions of indigenous ethnic minorities in claiming back their land. The year of 2001 and 2004 experienced some largescaled demonstrations in the Central Highlands, leading to tension at times between the authorities and demonstrators. Until now, this remains a very politically sensitive issue in the Central Highlands and very few official statistics or discussions were featured in domestic media or research achieves. In one report made Writenet (2006), these protests were participated by between 10 thousands to several dozen thousand people in the Central Highlands. In addition to land loss to migrants, indigenous ethnic minorities also protested against the policies that were perceived by themselves as oppressed freedom of religions. The tension sometimes got so severe that the authorities restricted and even banned purchasing of lands from ethnic minorities in the region. In this context, the coffee growth in the Central Highlands over the past two decades has had some serious social and political consequences (in addition to impacts on agriculture growth). Coffee expansion, together with growth of other industrial crops, was at the central of economic growth and poverty reduction in the region but it seems that the benefits of such growth has been poorly shared by some marginalized groups, especially the indigenous ethnic minorities.

Analysis of the Coffee Value Chain in the Central Highlands
Given the thriving growth of coffee production and export described earlier, this section provides insights on that growth by reviewing the coffee value chain in the Central Highlands based primarily on results from the fieldtrip to Dak Lak – the province with largest volume of coffee production in the region. The fieldtrip was designed to collect information on how key players in the coffee value chain have responded to new opportunities induced by the doi moi with a focus on private sector 7 development along the chain analysis.

Overview of the coffee value chain in the Central Highlands
Based on the fieldtrip results, the overall map of the coffee value chain could be described in the figure 3.8 below. It is initially noted that the coffee value chain in the Central Highlands is quite complicated. There are several middle players between coffee growers to final manufacturers or exporters, (i) including individual collectors or collecting agents who buy cherry beans or green coffee directly from coffee growers; (ii) processors who buy coffee from collectors/collecting agents and then process them before selling to exporters; (iii) Manufacturers who could either export or cater to domestic market; and (iv) exporters who export green coffee to the international market.

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The fieldtrip was implemented from 06 June to 12 June, 2011 to Dak Lak province. The fieldtrip was supported by Center for Agricultural Policies (CAP) as part of IPSARD, Department of Agriculture and Rural Development (DARD), Provincial Committee for Ethnic Minorities (PCEM). Details of the relevant stakeholders participated in the meetings and focus group discussions are given in Annex 3.1 of the Appendix.

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Figure 3.8 Coffee value chain in the Central Highlands

Institutional support Ministry of Agriculture and Rural Development (MARD) The national agroforestry-fisheries quality assurance Department (NAFIQAD) Department of Processing and Trade for Agro-forestryFisheries Products and Salt Production Ministry of Industry and Trade (MOIT) WASI Association of Cocoa and Coffee of Vietnam (VICOFA) Vietnam Superintendence and Inspection JSC. (VinaControl)

Coffee Farmers

Collectors

-

Collecting agents

-

-

Manufacturers

Green coffee Exporters

-

-

Local Vietnam National Coffee Market Corporation (Vinacafe)

Export market for finished coffee

Export market for green beans

Source: Coffee value chain fieldtrip in Dak Lak, Central Highlands

Key actors of the coffee value chain in the Central Highlands Coffee growers
Compared to Arabica coffee, Robusta is generally considered of lower quality. This reflects in the export price, being approximately half of Arabica. Robusta does not have the fine and delicate flavors of Arabica and tends toward more harsh flavours. Robusta also tends to have twice the caffeine of Arabica. For these reasons, Robusta is normally used in the cheaper blends for less discerning markets and for instant coffees. However, Robusta is a flexible and forgiving crop with yield varying according to water, fertilizers, and other farm management practices. Robusta is also more robust than Arabica in disease problems and usually bring higher yields. More importantly, Robusta is very simple to process, easy to store and transport, and almost non-perishable. For that reason, Robusta is usually perceived to be attractive for small coffee growers (Marsh, 2007) and Vietnam is not an exception.

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According to GSO (2003), there were around 561,000 peasant households or 2.6 million people planting coffee in the Central Highlands in 2003. Since then, there has been no official update on the number of coffee growers in the region, except some estimates in research reports. For instance IPSARP (2010) projected a number of around 580,000 coffee growing families in the region. This seems reasonable given the modest increase in the coffee production areas between these two years. Of the coffee growers, around 90 percent are small landholders with the average land area of one hectare or less (ISARP, 2010). Notably, coffee growers, regardless their production scales, tend to get a very large margin from the sector, reflecting in a very high percentage of FOB price. Huynh (2010) reported results from a survey in Dak Lak, suggesting that the ratio between the farm-gate price and FOB export price is about 90 percent in this province in 2009. Details of that survey are re-produced in Table 3.4 below. This figure is in the same range as that projected in IPSARD (2010). Results from our fieldtrip to Dak Lak suggested a margin of between 75 to 90 percent, which is essentially similar to the level reported in the previous studies. As more than 90 percent of the coffee output is exported, this high margin received by coffee grower compared to the FOB export price is really significant.

Table 3.4 Cost and benefit analysis for coffee growers in Dak Lak, 2009 Code Total average production costs (million VND/ton) Farm-gate price in Dak Lak (million VND/ton) Net unit margin (million VND/ton) FOB price (million VND/ton) Farm-gate price/FOB price Production costs/farm-gate price
Source: Huynh (2010)

Value or ratio

(1) (2) (3) (4) (2)/(4) (1)/(2)

21,989 25,000 3,011 27,783 89.9 % 87.9%

It is important to note that though coffee growers get as high as 90 percent of FOB export price, their net income is quite small due to high cost of production. Though growing Robusta is easy but intensive watering and fertilizers required to get high yield. Robusta is grown in most South East Asian countries but returns are generally not high enough to encourage intensive production and irrigation in most countries. The case of Vietnam represents an exception. The coffee sector of the country takes the view that although Robusta is of lower quality (and thus lower value) compared to Arabica, it could be profitable if grown intensively. Therefore, usage of water, fertilizers, and other agro-chemicals are intensively applied by the Vietnamese coffee growers. Such intensive production system has produced world-class yield of coffee. As of 2009, the average yield of coffee was approximately 1.9 tons per hectare (see figure 3.1), but many coffee farmers actually recorded the yield of more than three tons per hectare (see box 3.1) – a considerably higher than yield in other countries in the region (Robusta yields in Indonesia, Laos, and Thailand was, as reported in Marsh (2007), 0.5, 0.4, and 0.8 tons per hectare, respectively).

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Box 3.1: Coffee Yield fluctuates based on natural conditions and the use of fertilizers Tran Chi Thanh, Eatu Village, DakLak: “In good years, for example in 2008, the average yield could be up to seven tons per hectare in my field. However, in bad season the yield could be as low as 1.5 tons/ha due to severe coffee diseases” Tran Thi Ngoc Lan, Eatu Village, Daklak: “… four tons/ha in favorable year could be reached in this areas. On average, my coffee yield varies slightly from time to time but the average is around 3.5 tons/ha. However, in 2001 the yield was terribly low at around 0.8 tons/ha because at that time the coffee price was too low, I hence decided to reduce fertilizers costs. Otherwise, the more I produced the more I lost from such investment” Tran Quoc Khan, Cum Ga Village, Daklak: “In good years, the yield was from three to four tons/ha. On average, my family can produce around 2.5 to three tons/ha. In 2001, when the prices went down sharply, I did not use fertilizers as much as I used in previous years, as a result, the yield at that time was around one ton/ha.”
Source: Coffee value chain fieldtrip in Dak Lak, Central Highlands

However, such exceptionally high yield is the result of intensive watering, fertilizers, and other agrochemicals. A survey by Tran and D‟Haeze (2005) in the Central Highlands revealed that one household used on average 1140 kg of fertilizers per ton of green been produced. The main fertilizer types were NPK and manure with the highest application proportion of 26 percent and 33 percent, respectively; while SA, urea, thermo-phosphate, KCl accounted for about eight percent each. As suggested in Table 3.4, the coffee production cost in Dak Lak could be as high as 88 percent of the FOB export price in 2009. This very high production cost results in low net margin for coffee growers regardless how many percent they could earn from the FOB export price. In addition, this intensive production system exerts other problems of soil degradation, insect-borne diseases. Expansion of coffee production also accelerated deforestation. If these costs are taken into account, the net value from coffee production to growers could be very small. In this regard, the coffee sector in the Central Highland is very much the same as the rice sector in MRD described in chapter two. Popularity of small scale production leads to many problems, including quality, application of advanced processing technology as well as weak bargaining power of coffee growers. In terms of quality, there is almost no effective quality control mechanisms for coffee production observed in the Central Highlands except some practices applied by processors or few large scale farmers. This happens when coffee was grown by a number of around two and a half million coffee growers, and most of them possess less than one hectare for coffee plantation. While most farmers interviewed understood the disadvantage of Robusta in terms of quality, being an easy and forgiving crop is among the most important reason for embracing Robusta coffee. Though production cost is very high due to heavy dependence on fertilizers, agro-chemical, and irrigation, farmers tend to be pleased with the growth and their farm practices given the high margin earned compared to the FOB export price. Comparing FOB price and price traded in London exchange, there is a gap of about 100$ per tons, and this gap is largely due to freight cost. Therefore, there is no incentives for small holder coffee grower to engage in more sophisticated farm practices or processing techniques and facilities to improve quality. Results from the fieldtrip reported in Box 3.2 lend some evidence for this argument. Box 3.2: Many factors affecting quality of Robusta coffee in the Central Highlands Tran Chi Thanh, Eatu Village: “When I started coffee growing in this province, I had no choices,

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just followed what my relatives suggested and available at that time. As I got experiences in the field, I know that our coffee is not of high quality. But investing in higher quality coffee is costly. For my households and my neighbours, prices are far more important. If prices are good, we could sell our coffee at high prices and it is the most important thing for us” Phan Viet Dung, Hoa Thuan Village: “I knew from friends and officials that Arabica is of higher quality but it is more difficult to grow Arabica. So we all produce Robusta. I found it very easy, farming techniques are simple, costs of fertilizers and pumping water could be changed in order to counteract prices fluctuations. When prices are high, I use more fertilizers, water more. I‟m not aware of any quality assurance policies or requirements. I always sell all of my output for traders” Luong Van Phu, Cum Ga Village: “Since I‟ve grown coffee, I‟ve changes the way I do because it is not necessary. Our income depends on prices, not depends on quality. So if prices are not as low as in 2001, I‟m happy with my income and I think it is also the same for many of my friends in this villages”
Source: Coffee value chain fieldtrip in Dak Lak, Central Highlands

Harvesting and processing of Robusta in the Central Highlands is largely pursued by coffee growers themselves due to simplicity of these processes for Robusta. In fact, harvesting Robusta is usually done using a strip-pick approach where all cherry on a branch is removed when the majority are ripe rather than the preferred method for Arabica, which is the picking of each ripe cherry. In fact, farmers usually remove all cherry from branches, ripe or unripe, to save the harvesting cost. Processing Robusta is also a simple matter of sun-drying the picked cherry without any further sorting. Ideally, drying is done on concrete patios, but many farmers in the Central Highlands use a range of surfaces that are available, even the bare ground. Mechanic drying or wet processing technologies are rare in the region and owned by few large producers. Results from the fieldtrip suggested that this simple harvesting and drying practices contributed at least 80 percent of the total coffee output in the Central Highlands. IPSARD (2010) reported every higher rate of the total coffee output produced by that simple practice. These harvesting and drying processes have resulted in a number of quality problems as follows. Notably, as all cherry from Robusta branches are removed at the same time, regardless whether cherry is ripe and unripe, result in different types of cherry according to maturity. The picked cherry are then subject to sun-drying without any further sorting. As coffee growers use all types of drying ground they may have, what produced after sun-drying are coffee bean of different quality. Taking moisture as a key quality requirement, it is expected that cherry are dried to 12 percent, the coffee can be hulled to produce green bean or stored as dried cherry. However, given the simple sundrying practices, there is no guarantee that the picked cherry is actually dried to that level of moisture. Sun-dried cherry are also vulnerable to increasing off-flavour, foreign ingredients. In addition, as no effective sorting mechanisms are applied at this stage, the percentage of black and/or broken beans is difficult to control. Due to simple drying facility and limited storage capacity, quality of dried coffee beans can be easily affected by bad weather conditions. Coffee year in Vietnam starts in October and harvests in September in the following year. This harvest time coincides with the rainy seasons in the Central Highlands, which usually last from May to October with rain frequency and rainfall intensifying by the end of that season. Sun-dried cherry could be badly affected under such weather conditions. According to some farmers interviewed, this represents a reason why many coffee growers tend to rush their harvesting at the end of the reason. It was found that most of coffee growers were well aware that unripe cherries could create low quality coffee beans and that a proper harvesting method would include three picking shifts to

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ensure that only ripe coffee cherries are picked off. However, they have little choice but cutting off all coffee disregard of its maturity to avoid bad weather conditions (see Box 3.3). A survey in Gia Lai, Dak Lak, Dak Nong and Lam Dong conducted by IPSARD (2010) revealed that approximately a half of coffee growers had the rate of ripe coffee out of collected coffee cherries under 50%; only 12.5% of households had the rate from 50% to 70%. This is also re-affirmed by results from our fieldtrip to Dak Lak, where an average of ripe coffee cherry was found in between 40 to 60 percent. Box 3.3 Weather conditions and coffee yield Tran Chi Thanh, Eatu village: “Weather conditions are a big problem for us. Over the past few years, we suffered from more serious floods in the rainy season and floods in the dry season. Drought can have bad impacts on growing of our coffee if it occurs at the flowering time. It is unfortunate that heavy rains usually happen at the harvest time. This makes it very difficult” Nguyen Anh, Hoa Thuan village: “Every year of the recent time, drought is a serious problem. Watering is very important for our coffee. Under drought, we are unable to water sufficiently and this seriously affect the productivity” Phan Viet Dung, Hoa Thuan village: “I think weather changes are putting us under high risks. Coffee yield in recent years has decreased due to hoar-frost, and droughts” Tran Thi Ngoc Lan, Eatu village: “In 2010 it rained during the blooming period, causing a lot of losses for us. I think weather has become more and more difficult for growing coffee in our village”
Source: Coffee value chain fieldtrip in Dak Lak, Central Highlands

In terms of selling coffee, either cherry or coffee beans, coffee growers rely on the intensive network of traders and collectors. Results from the fieldtrip suggested that merely ten percent of coffee product was sold directly from coffee growers to collecting agents at districts or directly to coffee exporters, the remaining 90 percent was collected by individual collectors and collecting agents at villages or communes. Given the dominance of these intermediaries in selling coffee output, it is expected that coffee growers at very low bargaining position and could be at disadvantages when trading with collectors. However, results from the fieldtrip revealed the opposite. All farmers interviewed reveal that they have used mobile phones to receive information on coffee prices from relatives and friends. Some coffee growers surfed internet to get most update information when discussing with collectors (see Box 3.4). Interestingly, all coffee growers are registered to SMS message services provided by Y5Cafe, which is a non-profit project run by a group of your IT engineers to provide information for coffee growers. By sending a registration text message to Y5Cafe, coffee growers then receive daily update of coffee prices in the local and 8 foreign markets. Such development of ICT among coffee growers prevents traders or collecting agents from exerting trading conditions on their interests. As a result, it is found from the fieldtrip that most traders and collecting agents were operating at a margin of around 10$ per ton of collected coffee. Compared to the figure reported in table 3.4, this suggests a very small margin of merely 0.7 percent.

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By sending GIACAFE to 8188, coffee growers will receive daily update on coffee prices for spot transactions in Dak Lak, Lam Dong, Gia Lai, Dak Nong (as domestic market), and New York, London (as foreign markets). The cost for this message is only 5 cent, and information will be updated at 7:00AM everyday.

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Box 3.4 ICT and farm-gate prices of coffee in the Central Highlands Tran Thi Ngoc Lan, Eatu village: “I often watch coffee prices on TV every day. I also use my mobile phone to receive information sent by SMS (i.e. Y5Cafe). Based on these price references, I then call to some collectors to choose who will buy at the highest price.” Nguyen Van Nam, Hoa Thuan village: “When I need to sell my coffee, I call to the collecting agents. They will give their buying price. I repeat that process to have quoted prices by many collectors. After that, I compare the prices from different buyers to make my decision. I‟m flexible in selecting collecting agents as there are many of them” Luong Van Phu, Cum Ga village: “I often watch TV and surf internet to get information about coffee price in the world to see why the price is going up or down. If I need to sell coffee, I call to the collecting agents to ask their buying prices. I will then compare their offers and the information I got from different sources. Mobile phones are very useful. All of our family members have mobile phones, which are very cheap now”
Source: Coffee value chain fieldtrip in Dak Lak, Central Highlands

Traders and collecting agents
In the coffee value chain in the Central Highlands, there are several thousands of traders and collecting agents. In this report, traders refer to individuals who buy fresh cherry or coffee beans from farmers and sell them to bigger collecting agents of coffee processors/exporters or directly to these companies. Collecting agents refer to the agents contracted by coffee processors or exporters to collect coffee from farmers for their processing before exporting. Regardless being traders or collecting agents, these actors usually come to buy cherry or coffee beans directly from coffee growers or small processors. In addition to this major source, collecting agents also buy from traders to supply for their mother companies. There are no official statistics on the number of traders and collecting agents due to small scale and spreading of this network in the Central Highlands. Results from the fieldtrip suggest that there are at least a dozen of collecting agents and several dozen of traders in each commune visited. Based on this, the number of traders and collecting agents could be as much as several thousands in the region. IPSARD (2010) projected a number of 1500 traders in the Central Highlands and about one thousand of collecting agents working for around 30 trading companies and 40 coffee exporters. Evidence reported earlier suggests that traders and collecting agents have little market power as it is usually observed in trading transaction between farmers (especially the poor and ethnic minorities) to traders. Popularity of ICT applications among coffee growers lends an explanation for this market position of traders and collecting agents. In addition, as there are plenty of traders and collecting agencies, sufficient competition is likely to be in place, which prevents these traders from exercising any significant market influences. What is most striking from the fieldwork is the small margin secured by these traders. With a reported earning level of $10 per tonne, representing only less than one percent of the total farm-gate price, collecting cherry or coffee beans from coffee growers do not seems to be profitable for traders and collecting agents. Perhaps the only plausible explanation for existence of such intensive collecting network is the scale of their transactions. Given 90 percent of coffee output was collected by traders and collecting agents, it implies a quantity of approximately 1.2 million tons went through this network. This results in a total net income of 12 million US$ for traders and collecting agents – which is a significant amount of money. In addition, it should be noted that traders and collecting agents do not add any considerable value added to the whole chain. These traders and collecting agents collect cherry or coffee bean from farmers and supply directly to processors, exporters without any processing

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activities. Therefore, a margin of around one percent could be understandable. In fact, these traders and collecting agents‟ households earn their living from different activities and collecting coffee from farmers is one of their diversification. Given this, traders and collecting agents accept to continue their collecting business, knowing the low margin they could earn from that activity. In addition to the „collecting role‟, traders and collecting agents also perform a role of „quality examiners‟. As reported earlier, given the simple harvesting and drying techniques applied by coffee growers, fresh cherry and coffee beans were found to be at different quality. Therefore, coffee quality collected from farmers could vary from one to another, from time to time. Under such circumstances, traders and collecting agents explicitly taking the role of „quality examiners‟ to specify the quality of each purchase. However, this „examination‟ process is largely arbitrary and based on observations of these collectors rather than using quality test equipment. Discussions with farmers revealed that key factors determining quality of coffee such as moisture, percentage of black beans, percentage of broken beans, existence of foreign ingredients are decided by traders or collecting agencies based on their own experiences, visual observations, or physical examination. Outcome of this „examination process‟ will affect on the transaction price (see Box 3.5 for results from the fieldtrip). However, it does not seem that traders and collecting agents have exercised this quality assessment role at expenses of coffee growers. Box 3.5: Traders and collecting agents as „quality examiners‟ Truong Thanh Tam, Eatu village: “I don't know the humidity of my coffee beans after drying. I totally depend on the collectors. I don‟t understand how they determine moisture level of coffee beans. Quality is also a matter of black and broken beans. But we usually discuss this issue by visual observations.” Vo Van Thanh, Hoa Thuan village: “I don‟t know how to test my coffee. Collectors and agents test themselves. In most cases, I‟m not sure how they check the quality but I don‟t see equipments. When quality is said ok, the price I get is very similar to what I‟ve got from my mobile phone. But when quality is bad, traders or collectors usually ask me for a discount, either in price or in quantity.” Nguyen Anh, Hoa Thuan village: “Collecting agents or traders are responsible for quality check. I don‟t care much about coffee quality. I know that my coffee quality varies from time to time but I have little control on that process. Weather conditions are important, insects and diseases are also important for quality”
Source: Coffee value chain fieldtrip in Dak Lak, Central Highlands

Fieldtrip observations also suggested some forms of credit relationship between farmers and collecting agents. Some trader agents provide farmers with inputs to ensure that the farmers will not sell coffee to other traders. The provision of such inputs is regarded a loan and repayment will be made at the harvest stage. These loans are usually provided mainly based on oral agreements and the trust between the two sides. In many cases, traders and collecting agents give loans to coffee growers for fertilizers, agro-chemicals, and costs to invest in irrigation at some interest rates, which are usually higher than the level offered by banks in the same location (i.e. VBARD in most cases). At the time of the fieldtrip, interest rate found for such loans were around two percent per month. Given this high interest rate, many farmers understood that they could sell their coffee at higher prices if they could store their coffee after the peak of harvesting season. However, taking into account high interest rates, many farmers sell their coffee right after harvesting; some farmers even consider harvesting sooner than possible (which will result in more unripe cherry) in order to pay less interest (see Box 3.6 below).

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Box 3.6 Traders and collecting agents as informal credit sources Tran Thi Ngoc Lan, Eatu village: “I got a loan from VBARD to invest on my family coffee farm. The interest rate is about two percent per month, very high! With this rate, I can't store coffee beans to wait for better price. After the harvest season, I must sell coffee because I need money for my living expenses and to repay my loans from VBARD” Nguyen Anh, Hoa Thuan village: “I need money to repay the debt I owned to the collecting agents. I used that borrowed money to buy fertilizers and agro-chemicals. These ingredients are important for coffee so I have to borrow to buy these inputs, knowing that interest rate is very high. In fact, the interest rate agreed was two percent per month. That „s why I„m going to sell coffee early this year because the interest rate is too high.” Truong Thanh Tam, Eatu village: “The main reason I have to sell coffee quickly is that I need money to spend and to pay back the loans to agents. As the interest is very high, I cannot wait after the peak of harvesting season for better prices. If I don‟t have to pay high interested, I would store coffee for about few months after all other villagers already harvested. From my experiences, I would receive higher prices if I could do that. But I can‟t.”
Source: Coffee value chain fieldtrip in Dak Lak, Central Highlands

Coffee manufacturers
After coffee is collected by traders and collecting agents, the collected coffee will go to one of the two actors, including (i) processors or manufacturers; and (ii) exporters. This sub-section will consider the former, while the latter will be subject to the final sub-section of this coffee value chain analysis. Coffee manufacturers are of different scales and business models. There are SOEs, foreign-invested enterprises, and private manufacturers in the coffee sector. While SOEs and foreign-invested companies are usually of medium or large scale, private manufacturers are of small scale (Trung Nguyen Café is an exception). Regarding private small-scaled manufacturers, these processors operate in many different ways. In the simplest form, small processors buy fresh cherry or coffee beans from farmers or traders to conduct their own processing. Some processors then supply coffee bean to exporters; other producers supply ground coffee to domestic market, especially for coffee shops that could be seen in most of streets and lanes in towns. Due to small scale of their operation, there is very little information on these small processors. A survey conducted by IPSARD in 2009 suggested that there might be between two to four hundreds of these small processors, operating at an average processing capacity of less than one tonne of coffee per days. Thu Ha café located in Pleiku city is an example of small processor in the Central Highlands. This is a household business that processed coffee by some generations since the 1960s. The processor buys coffee from a small circle of familiar traders and process coffee according to their family-generated techniques. With the aim of supplying for domestic market, different ingredients are added to the processed coffee. At the time of interview, Thu Ha café run two coffee shops in Pleiku city, where around one three to five hundreds of customers come every day for drinking coffee. Many of them also buy ground and instant coffee with Thu Ha café self-made trademark (which is not registered yet). Discussions with some coffee customers of Thu Ha café suggested that Thu Ha café is perceived among the best quality in Gia Lai province. As estimated by the owner, Thu Ha café supplies around a half of hundred kilogram of finished coffee every day (which requires around 170 kg of coffee bean for processing per day). There are few coffee manufacturers of large scale in Vietnam. These manufacturers usually have their own network of collecting agents to ensure sufficient supply for their production of ground

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and/or instant coffee. The ground or instance coffee products will be then supplied to the domestic market or foreign market. Manufacturers are sometimes export coffee bean but this type of operation is not popular. According to VICOFA, there are only four manufacturers, including VinaCafe Bien Hoa, Trung Nguyen, Nestlé Vietnam, and Olam Vietnam (as part of Olam International) produce instant coffee. In the domestic market, both ground and instant coffee produced by large manufacturers exhibited promising growth. However, exporting ground or instant coffee to foreign market remains a challenge. Trung Nguyen and Vinacafe seem to be the most popular names and have ambitious branding strategies. The two companies, especially Trung Nguyen has spend considerable efforts to promote Vietnam‟s finished coffee products to international market and Trung Nguyen has been quite successful in doing so. However, most of other manufacturers have struggled to find a position for their ground and instant coffee outside Vietnam. Branding would be a problem for Vietnam‟s coffee sector in the future when Vietnam wants to shift towards high valued agricultural products. As Vietnam has grown to the position of the second largest coffee exporter and the leading exporter in Robusta coffee, the coffee sector has attracted foreign investment from multinationals such as Nestle and Olam International. In the total of eighty VICOFA members, there are 10 jointventures between foreign investors and domestic partners. Results from the fieldtrip suggest that small and medium scale manufacturers have encountered difficulties exerted by competition from foreign-invested manufacturers in the sector. As reported in box 3.7, some companies complained about their foreign-invested counterparts. It is likely to be reactions of firms that are not „ready‟ to face direct competition and thus find it more difficult to operate under increasing foreign competition force. However, it will be good for the coffee sector as these small manufacturers must either grow and improved their competitiveness or avoid direct competition by focusing on niche markets. Either of these two scenarios could be considered as positive factors for the development of the coffee sector in the future.

Box 3.7 Foreign companies vs. domestic companies Nam Nguyet Company, Dak Lak: “In recent years, we had to compete with foreign companies while our capital is limited and exchange rate keeps fluctuating. It seems that foreign-invested companies have more advantages and we have found it increasingly difficult to compete with them.” VinaCafe Buon Me Thuot, Dak Lak: “At present, foreign companies can benefit from low interest rate for loans given in US$… In some cases, I think foreign buyers have tried to manipulate the coffee industry. At times, they offer higher prices to farmers than domestic enterprises. I‟m not sure if they did that with a purpose to drive some domestic firms out of the sector. But it is clear that competition became more complicated and we need to take a very attention to moves of foreign firms.” Dak Man Company, Dak Lak: “having sufficient working capital has been a big problem to many Vietnamese enterprises, especially at present when the interest rate is too high. In Dak Man, we have to try different ways to ensure sufficient working capital for running the business. I think foreign companies are at advantage compared to us in terms of mobilizing sufficient funding for their activities.”
Source: Coffee value chain fieldtrip in Dak Lak, Central Highlands

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Coffee exporters
Coffee exporters in this sub-section refers to exporters of coffee bean (ground and instant coffee export is discussed with coffee manufacturers above). In Vietnam‟s coffee sector, exporters buy coffee from different sources, including (i) traders or collecting agents; (ii) directly from coffee growers; and (iii) other trading companies. In most cases, the collected coffee is subject to further processing to dry coffee to the require moisture level, removing foreign ingredients ad contaminants associated with the collected coffee to improve the quality of green beans before packing for export. In some cases, exporters manage their own plantation areas and invest in processing technology for better quality. As revealed by officials at Dak Lak DARD, around one third out of nearly 100 coffee manufacturers have invested in wet-processing lines to improve grades of coffee for export. In general, Vietnam‟s coffee export is generally of low quality. At present, coffee beans exported from these exporters are in two main grades. Grade 1 is allowed to have two percent of black and broken beans, while Grade 2 is allowed to associate with five percent of black and broken beans. Results from the fieldtrip suggest that Grade 1 contributes about 30 to 40 percent of total export, while the remaining is Grade 2. It is noted that some of the largest coffee exporters are those who specialize in trading business, and coffee export is one of their business lines only. Using data from VICOFA, Intimex is the largest coffee exporter in 2010 (accounting for around ten percent of the total coffee export). In fact, Intimex (formerly SOEs established in 1979) is a complex corporation which operate in an extensive list of business activities, ranging from manufacturing to trading (both domestic market and export) in agriculture, aquaculture, handicrafts, machinery, and other consumer goods. Within spectrum of its export business lines, Intimex exports coffee, peppers, cashew nuts, and many other agriculture products. The case of Dak Lak Sept 02 Export and Import Company represents a similar case. The company, contributing about seven percent of the total coffee export, also diversifies to a wide spectrum of business lines. The dominance of trading companies in coffee export business might be a result of low quality focus, where heavy investments in processing techniques are not required. Instead, coffee growers share significant part of processing stages in the coffee value chain. This is probably the background for existence of large trading companies, taking advantages of their foreign market linkages, to diversify to coffee export as an additional product line. This partly explains the concentration of coffee export to the trading partners that are also the largest exporters of finished coffee products. Similar to the analysis of coffee manufacturers, competition amongst coffee exporters has been intensified, especially with foreign-invested enterprises such as Nestle, Olam International, Louis Dreyfus Commodities, Neumann Gruppe, Noble Resources, Mercon Coffee Corporation, Steinweg Warehousing, Coffee24Seven Limited. According to discussions with owners of coffee exporters in Dak Lak, foreign companies have recently bought up to 40 percent of total coffee output in the Central Highlands, the remaining 60 percent is collected by domestic manufacturers and exporters. Increasing competition from foreign-invested companies was considered by the authorities as a threat to domestic interest. As a result, Circular 09/2007/TT-BTM restricts that these foreigninvested companies are only allowed to buy coffee beans from domestic collecting agents or companies. In fact, as revealed by exporters interviewed, foreign-invested companies have not been compliant with the Circular, developed their own collecting agents. This was strongly protested by VICOFA members, who filed an official document to the authorities for such violations. This reflects an inconsistency in the policy framework as the Circular reflects a discrimination against foreign-invested companies. As it goes against the non-discrimination principle of WTO, this Circular would be removed sooner or later. Domestic companies should be prepared for such removal rather than complaining about increasing foreign competition.

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Recent increasing competition among exporters has caused a heated competition among collecting agents, working for different exporters, in collecting coffee beans (either cherry or green beans) from farmers, especially under price spikes. As coffee output has been relatively stable in recent years, collecting agents tend to offer coffee growers with some incentives in exchange for commitments to sell coffee to them. This results in a number of contracts between coffee farmers and coffee manufacturers/exporters (either directly or through their collecting agents). In addition, there are also competition between manufacturers/exporters to buy from traders and collecting agents. Results from the fieldtrip suggest a very high rate of collecting contract breach between these actors. In many cases, collectors were attracted by better orders and tried break the contracts signed with their clients. It is also found that farmers at times broke their contracts with the previous collectors to supply coffee to those who could offer more attractive prices and conditions (see Box 3.8). This high incidence of contract breach is a serious problem that undermines cooperation and mutual trust among key actors of the coffee value chain. If this problem prolongs, this will be very difficult to encourage any collective action and collaboration between actors along the chain. Box 3.5 High rate of contract breaches Chairman/CEO, VinaCafe BMT: “One of the shortcomings of the Vietnam coffee industry is that collectors/collecting agents often breach their signed contracts with manufacturers or exporters. In their turn, farmers usually break contracts signed with collectors. This represent a very negative factor as this create uncertainty in supply conditions of the sector. More importantly, can you trust your partners if they keep breaking the contracts? This is not good for long-term development of the sector. In other words, short-term benefits were perceived by many people more important than long term development. This is truly a pity.” Sales Manager, DakMan Company: “A recent problem encountered the coffee sector today is the high rate of contract breach. In the past, we often signed future contracts and offered an advance of around 80% to 90% of the contract values to our collectors or farmers. We did that because we could trust them. However, things have changed… Many of our collectors broke their commitments with us over the past two or three years. This resulted in a problem with us as we cannot ensure sufficient and stable supply. Therefore, my company no longer advance any credit to collectors.”
Source: Coffee value chain fieldtrip in Dak Lak, Central Highlands

Finally, it is important to examine why many exporters, manufacturers, collectors in the coffee value chain could operate their business within a narrow margin of 10 percent of the FOB price at HCMC Port. Results from the fieldtrip suggest that traders and collecting agents account for less than one percent of this total ten percent, implying that coffee manufacturers, exporters share the rest of nine percent of the FOB export price. It should be noted that as more than 90 percent of the total coffee output is exported, earnings from export is the primary income for these actors in their coffee business line. This raises a question on how several hundreds of coffee manufacturers and exporters could operate on such thin margins. World Bank (2004) suggested several possible explanations. Notably, there are few very entry barriers to participate in most stages of the coffee value chain. With exception of the only constraint against the foreign-invested firms in collecting coffee (as reflected in Circular 09/2007/TT-BTM), the coffee sector could be considered as „free entry‟. Second, coffee trading volume is sufficient large for manufacturers and exporters to earn considerable income from their coffee business line. A rough estimates using the coffee export value in 2010 results in a value of around $160 million for the margin shared by coffee manufacturers and exporters. As part of the coffee processing is

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already carried out by coffee growers, this value is quite significant for the manufacturers and exporters, who add little value added to the whole chain by their simple processing techniques. Results from the fieldtrip suggest that the coffee sector is very competitive and efficient. All the representatives of manufacturers and exporters reveal increasing competition pressure, either domestic or foreign-invested. This lends another explanation for the thin margin shared by manufacturers and exporters. In addition, as suggested earlier, some largest coffee exporters have embarked in coffee export as only one of many different business lines they operate. As a result, coffee export is part of their diversification strategy rather than their core business. In this context, those exporters are likely to find such nine percent margin of the FOB export price acceptable. It is also noted that coffee manufacturers and exporters encounter little risk. Price fluctuations in the international market do not exert important impacts on their activities as they will then buy coffee beans at the prices that counteract price fluctuations. This is possible because coffee growers could vary the usage of fertilizers and watering to „ride‟ on price fluctuations for Robusta. Given this low risk, it is understandable that manufacturers and exporters should receive low premium.

Major challenges and policy implications
Behind the impressive growth of coffee production and export, there are several weaknesses underlying such vigorous growth of the coffee sector. This final section presents some key challenges and suggests policy options for in the coming years.

Key challenges
There are several challenges underlying the coffee sector of Vietnam. Based on the analysis in the previous section, the following challenges are outlined.

Low incentives and pressures toward better quality coffee
Most notably, it seems that there are no incentives for actors of the value chain to supply higher quality coffee; and thus, Vietnam is most likely to be the world largest exporters of low quality Robusta coffee. This could be linked to many different reasons. First, Vietnam‟s Robusta export is of low quality (as highlighted above). However, as suggested by Marsh (2007), many international buyers seem to be happy with the current status of coffee price/quality mix exported from Vietnam. Apart from having large percentages of black and broken beans, there are few parameters that might need improvements from Vietnam‟s Robusta export. Many international coffee manufacturer, in seeking for lowering the cost (particularly as Arabica is approximately twice the cost of Robusta), are gradually increasing the percentage of Robusta their blends and subsequently developed a range of machines and techniques to wash, steam clean and sort Robusta coffee. Given this trend, Robusta export from Vietnam is widely accepted by these manufacturers at the current price/quality combination. Therefore, from international demand side, there are very few incentives for higher quality of green bean export from Vietnam. Second, from domestic supply side, farmers have few incentives and are not ready to move forward higher quality. Results from the fieldtrip suggest that most coffee growers understood that Robusta is generally of low quality (as mentioned earlier) but they do not want to move to Arabica for many different reasons. Notably, Robusta is an easy and forgiving crop, with simple requirement in initial investment, farm practices, processing, and storage. Yield could be varied by watering and usage of fertilizers and argo-chemicals. This is very important as it give coffee growers a chance to counteract price fluctuations by varying their input intensity for Robusta without any significant impacts on growth of Robusta trees. More importantly, coffee growers have benefited nearly 90 percent of total FOB price for their effort. Even after taking into account high cost of fertilizers and watering, this represents probably one of the most profitable cash crops that

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farmers, especially small land holders, could do. Therefore, there is almost no incentive for coffee growers to move forward higher quality coffee. Third, as far as collectors, manufacturers, and exporters are concerned, there are few incentives for higher quality coffee. From the standpoint of traders and collecting agents, as these intermediate agents operate on the gap between the price of collected cherry or green bean and the supply price to manufacturers, exporters (or commissions if collecting agents are official agents of a manufacturer/exporter), trader and collecting agents are not at the position to have any considerable impact on quality. For exporters who export green bean to international market, as highlighted above, foreign buyers are willing to accept the current combination of price and quality. There is thus no strong incentive for those exporters to embark in higher quality. The only actors in the coffee value chain that have interest in higher quality are few manufacturers who produce ground and/or instant coffee for either domestic or foreign market. Trung Nguyen represents a good example of spending efforts in supplying high quality coffee. However, these manufacturers have not been a dominant force driving the development of the whole value chain. Under such circumstances, incentives and pressure to move forward higher quality coffee are not present in Vietnam‟s coffee sector. It is arguably reasonable to suggest that Vietnam will continue its position as a „high volume, low quality‟ coffee producer in many years to come.

Other challenges
Issues related to quality control have been discussed when describing various actors along the coffee value chain. The structure of the coffee sector in Vietnam makes it difficult for quality control. With around 560,000 households engaged in coffee plantation and the majority of them are of small scale (less than one hectare), it is very difficult to apply any consistent quality control practices. Due to simplicity of drying and processing fresh cherry, most coffee growers also pursue coffee processing and this further complicates quality assurance. Sun-drying on diversified types of natural grounds under the rainy reason affects quality of green beans quite considerably. With exception of the manufacturers, who process ground and instant coffee, there is little incentive for other actors to engage in more expensive and complicated quality control practices. As a result, quality control is very difficult in this sector. More importantly, coffee production in the Central Highlands has incurred considerable environmental causes. The Central Highlands have long had some of the richest and most densely forested areas in the country. When other areas of Vietnam became rapidly deforested, the Central Highlands remained fairly richly stocked. Before the coffee booming, the forest coverage was among highest in the Central Highlands compared to other region. However, some conservative estimates suggested that there has been between 30 to 40 percent of the forest was cleared for industrial crops over the past two decades in the region. The champion province of coffee production – Dak Lak – lost around a half of its natural forest stock during the expansion of coffee production under the two peak price periods in the 1990s (estimated by representative from Dak Lak DARD). In addition, coffee plantation has been a major source of soil erosion and fatigue. Many coffee fields were established on poor soil with very steep slopes and high rates of soil erosion, and in areas prone to drought. There are almost no sustainable coffee land management practices that are applied widely in the Central Highlands. D‟Haeze et al. (2003) provides a warrant to heavy exploitation of groundwater for irrigation. Accordingly, about 40 per cent of coffee production areas is irrigated by groundwater (requiring about 66 million cubic metres during the dry season in the spring). Overwatering of young coffee trees by coffee growers who rely on groundwater pumps has resulted in dramatic reductions in the water table in the Central Highlands. Fertilizers and agro-chemicals are heavily applied by coffee growers and this represents a potentially significant impact on human health as most of dwellers in the region depend on surface

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water for their domestic uses. Given this high environment cost of coffee production, further expansion of coffee will have serious environmental degradation effects. Finally and very importantly, it is reported that benefits from the recent coffee expansion has not shared equally among different groups in the Central Highlands. There is convincing evidence that the poor, especially indigenous ethnic minorities have failed to capitalize from the coffee boom for improving their living standards. The majority of coffee growers are Kinh migrants or other ethnic minorities migrated mainly from the Northern Uplands. Unfortunately, breaking poverty data according to migration status is not possible from available data sources. But it could be reasonably postulate that poverty headcount of indigenous ethnic minorities would be substantially higher than the average headcount of the region. Referring to figure 3.7, it would imply a very high poverty incidence (i.e. over 70 percent) of indigenous ethnic minorities. In addition to uneven poverty impacts, this has also resulted in social consequences. Many protest and petitions of indigenous ethnic minorities in 2001 and 2004 (as analyzed in section two) are the most serious social impact of the unequal sharing the benefits of the recent coffee expansion in the Central Highlands.

Some policy implications
What are the policy options for the coffee sector of Vietnam and particularly in the Central Highlands is an important question. This final sub-section provides some policy implications from the above context. First, unlike the rice sector, the coffee sector as a major crop of Vietnam‟s agriculture during the doi moi has subject to very little interventions from the Government over the past two decades. The „New Economic Zones‟ policy and establishment of state-owned farms in the Central Highlands before the reform created some important conditions for the latter boom in coffee production and export in the 1990s. But after these policies were removed, the development of the coffee sector is largely led by the private sector and coffee farmers. In reflection of the „spontaneous‟ migration flow, this development of the coffee sector could also be considered as a „spontaneous‟ development in the sense that this has taken place without any significant policies from the Government. As a result, there has been more than a half of coffee farmers in the Central Highlands and several actors, which are primarily private sector, along the coffee value chain. However, this „spontaneous‟ process is not with problems. Being the world champion in Robusta coffee export, Vietnam mainly exports low quality green beans to foreign coffee roasters. Comparing to Arabica, Vietnam‟s coffee export is about half price; comparing to Brazil‟s Robusta, Vietnam‟s Robusta export is also at lower price. In addition, the growth of coffee production has been fuelled by very intensive farming practices with substantial uses of fertilizers, agro-chemicals, and watering levels. This growth pattern has had its environmental consequences and might not be sustainable in a near future. More importantly, such „spontaneous‟ growth has left many marginalized groups behind, especially the poor and the indigenous ethnic minorities. Though highlighting these problems does not necessarily mean that government interventions are necessary. However, this could be taken to suggest a more „balanced‟ approach between government interventions and private sector‟s initiatives. Second, the problem of indigenous ethnic minorities have been left behind in the recent growth of the coffee sector in the Central Highlands needs special attention. Tensions in 2001 and 2004 should be considered as the „last drops to the full cup‟. Since then, there have been several measures introduced to restore political and social stability in the Central Highlands. In a decisive move, transactions of lands from indigenous ethnic minorities to Kinh and other migrants are officially banned. But this seems to be too late given most of the fertile land was already distributed during the coffee booms in the 1990s. In addition, there are also a number of policies and

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programmes to support economic development of the Central Highlands. Chapter one provided a general review of these policies and programmes. While many large programmes have the focus on poverty reduction in general, given the concentration of poverty in the Central Highlands and the Northern Uplands, these two regions have benefited most from these poverty reduction programmes. Despite of impressive poverty reduction in the Central Highlands in recent years, the incidence of poverty among ethnic minorities is still very high (figure 3.7). Therefore, the reasons underlying such tensions have not gone away. The Kinh and other ethnic minority migrants are still at the position of occupying most of the fertile basaltic land for industrial crops, and thus benefit most from the most important natural resources of the region. In other words, the „heat‟ of this problem is still there and might be triggered when things getting worse. Third, coffee plantation practices needs to be changed substantially. While it is acknowledged that Robusta is of lower quality and thus lower value compared to Arabica, given the characteristics of Robusta, growing Robusta is likely to be profitable if high yield could be secured. At present, Vietnam‟s Robusta production is reliant on relatively cheap farm inputs of chemical fertilizer, labour and water. Rising costs of the first two key inputs are a concern. Regarding watering, over exploitation of groundwater cannot be continued in the medium or long run. Therefore, improving the efficiency of the use of fertilizer, labour and water will be the key for future coffee plantation. In addition, coffee plantation in the Central Highlands is largely monoculture crop. Very few examples of farm diversification are observed in the region. This is re-affirmed by results from the fieldtrip as well as the earlier studies on the coffee sector (see, for instance, IPSARD, 2010; Writenet, 2006). Farm diversification should be considered as an option for farmers, but this is not always easy to achieve as there are often no clear profitable options and the costs of changing crops are high. In this context, appropriate farm diversification strategies, such as rubber, cashews, pepper or annual crops such as corn, cassava or cotton etc. would be an appropriate direction. All of these issues call for more effective and wider coverage of extension services for coffee plantation in the Central Highlands.

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Private Sector Development in Agriculture and Rural Development: The case of Organic Vegetables
This chapter examines the issues of agriculture and rural development and private sector development in the field of organic vegetables – which is a newly emerging crop in Vietnam. Unlike rice in MRD or coffee in the Central Highlands, which are among the most important agriculture products of the country for nearly two decade, organic vegetables are a new product line in Vietnam. Only recently, the concept of organic vegetables has become familiar to high income consumers in urban cities. Given the recent increases in income of urban dwellers, there is a large potential for organic vegetables. However, producing organic vegetables represents a swift away from traditional approaches of producing vegetables in rural Vietnam. Handling complicated standards and procedure to get organic vegetables certified are found to be a significant challenge for vegetable farmers. For traders and other vegetables companies, marketing organic vegetables, establishing distribution network, penetrating in supermarkets are among the challenges in the context of low confidence in quality of organic vegetables by customers. The case of organic vegetable is selected as thematic chapter of this study for different reasons. First, this value chain represents a solution for the movement of Vietnam‟s agriculture from „high volume but low quality‟ to high quality (and hence more value added) products. Second, the value chain shows several difficulties from most stakeholders, ranging from vegetable growers to companies, from the government to donors, concerned in such strategic movement. Under such circumstance, drawing lessons and experiences from this organic vegetable value chain is expected to produce interesting implications for the desirable (and necessary) swift to high value agriculture in Vietnam.

Background of organic vegetables in Vietnam Vegetables production and food safety
Vegetables are among the most popular crops grown by roughly 85% of rural households for both home consumption and selling for an additional source of household income (Johnson et al., 2008). As one of many different crops during the vigorous rural transformation in Vietnam, vegetables have become more commercialized, though most of farmers grow some vegetables for their own consumption. During the period 1990-2009, output of vegetables and legumes grew at rate of 3.8 percent per annum. Figure 4.1 reports the output of vegetables and legumes and their share in total output of crops (which consists of cereal, vegetables and legumes, fruits, and industrial crops in GSO statistics). During this period, output values of vegetables and legumes have increased steadily from $420 million to more than $600 million. As the agriculture output has increased sharply at the same time (see chapter one), the share of vegetables and legumes tends to be stable at an average of 7.5 percent. As of 2006, the area of vegetables and legumes production (excluding those cultivated in residential garden) was nearly 850 thousand hectares, producing about 10 million tons of output (VietTrade, 2008).

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Figure 4.1 Output of vegetables and legumes, 1990-2009

Source: compiled from GSO Statistical Yearbooks 2009, 2008, 2000, and 1996 Notes: 2009 data is estimated figures.

Vegetables and legumes are both for domestic consumption and export. With regard to domestic market, Vietnam is among countries with highest consumption volume. According to Johnson et al. (2008), the daily vegetable consumption per capita in Vietnam ranges from 274g to 310g, which almost doubles the ASEAN average level. Given the large and growing population of Vietnam, the domestic market will be an important driving force for growth of vegetables production. In addition, potential for vegetables export is perceived to very promising (VietTrade, 2008). Using GSO statistics between 2006 and 2009, around half of total vegetables and legumes output is exported, valued between $300 million to $450 million. Similar to paddy, vegetables and legumes growers in Vietnam apply intensive fertilizers, pesticides, and other agro-chemicals. This practice usually leave high level of chemical residues on vegetables sold to the market, leading to serious health concerns among consumers. For instance, a week before the New Year 2011, Vietnam's Administration for Food Safety and Hygiene Department, as part of the Ministry of Health, sent 2,000 inspection teams nationwide to inspect food safety and detected 13,000 food safety violations within three days. High residues of pesticides, nitrate, and heavy metals on vegetables, applications of restricted (even forbidden) chemicals on foods supplied at restaurants, hotels are most common violations found. According to WHO Country Office in Hanoi, The human costs of food-borne diseases, lost production from diseases and related markets losses surpass US$ 1 billion per year (i.e. 2 per cent of Viet Nam 9 GDP). Serious food poisoning cases covered in headlines of newspapers almost every day. Increasing concerns on food safety problems has recently become a driving force of vegetables and legumes production in Vietnam, leading to an increasing demand for „safe vegetables‟. Responding to these new opportunities, rural dwellers residing in the surrounding urban areas have adopted safe vegetables for higher value. In the North, farmers in the semi-rural districts located in the outskirt of Hanoi such as Dong Anh, Gia Lam, Thanh Tri, Soc Son and other places in the

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As an example, a simple search in Google with the key work of „food poisoning in Vietnam‟ (written in Vietnamese) provided 1.2 million results in 0.25 second.

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provinces nearby (such as Gia Thuy, Vu Thu of Thai Binh; Luong Son, Kim Boi of Hoa Binh; Thuy Nguyen, Kien An of Hai Phong; Vinh Yen of Vinh Phuc) started the production of safe vegetables in recent years. In the South, farmers in many rural or semi-rural areas surrounding Ho Chi Minh City have also adopted safe vegetables as one of their key crops. Production of safe vegetables in the South has experienced a thriving growth in some provinces, especially Da Lat city, Duc Trong district, and Don Duong district of Lam Dong province, which supplied approximately a half of total safe vegetables output for Ho Chi Minh City. At this stage, statistics on safe vegetables are extremely patchy. DARD of Hanoi and Ho Chi Minh City – the two major domestic markets for safe vegetables – provided some rough figures on areas and volume of production. For instance, DARD HCMC estimated areas of around 30 thousand hectares supplying around 200-300 thousand tons per year for HCMC market in 2010. In the case of Hanoi, the sales of safe vegetables were projected at around 150-200 thousand tons in the same year. As a special product line of „safe vegetables‟, „organic vegetables‟ have been recently adopted in Vietnam to supply for consumers in main cities of the country – where individual income has grown faster than the national average. This movement is a step forward to high value agriculture but it is too early to examine whether such movement has been successful. From the perspective of farmers, organic vegetables are best described as an experiment to diversify toward a high value crop. From the perspective of consumers, concerns on food safety has created an increasing demand for safe (and organic) vegetables but developing consumer awareness of and confidence on quality remains a challenge. From the perspective of the authorities, promoting safe (and organic) vegetables is a necessity in responding to pressure for ensuring food safety. As far as donors concerned, many of them are interested in promoting safe (and organic) vegetables as a demonstration for moving toward high value agriculture. Therefore, it seems that there are necessary and favourable conditions for a thriving of safe (and organic) vegetables production at this early stage.

State roles in the development of organic vegetables Legislation development on safe vegetables
In responding to problems of food safety and its potential health and financial losses, there has been several legislative developments related to safe vegetables introduced in recent years. Most of these regulations however concern with food safety standards, which require certain conditions to be adopted if final food products could be considered as satisfactory. In practice, food safety regulations became the focus of intense regulatory activities starting in 2003 with the Food Hygiene and Safety Ordinance. In addition to heated concerns on food safety, the preparation of WTO accession was probably another main reason motivating factor behind the formulation of regulations. This is also reflected in the Socio-Economic Development Plan 2006-2010) which states as one of its objective of “to reduce the incidence of diseases, improve the health and life expectancy of the population by providing high quality health care services” and that of “ensuring chemical and disease-free food to comply with WHO requirements” (MPI, 2006). Major regulations 10 related to safe vegetables could be briefly summarized below.  Ordinance 12/2003/PL-UBTVQH11 of the Steering Committee of the National Assembly on hygiene and safety of foodstuffs, which were then followed by Decree 163/2004/ND-CP of the Government which codifies the principles stated in Ordinance 12. These are probably the most important legislation on safe vegetables.

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See Goletti and Nguyen (2008) in a report for ADB and MARD for a comprehensive list of regulations on food safety in Vietnam

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Decree No.163/2004/ND-CP on the Implementation of Ordinance on Food Hygiene and Safety clarifies more specific conditions to establish food hygiene and standards, and the responsibilities of the key state agencies in the management of food safety. It indicates consumers‟ rights and responsibilities, the procedures to check hygiene and safety of imported and exported products, and the procedures to establish basic conditions for assuring safety in production and marketing of foods with high risk of contamination. Decision 43/2006/QG-TTg of the Prime Minister on the approval of the National Action Plan for ensuring food hygiene and safety toward 2010. This Decision provided several actions to ensure the compliances with hygiene and safety standards of food and foodstuffs. The Decision also encourages adaptation of international practices and guidelines on food safety such as Hazard Analysis Critical Control Point (HACCP), Good Laboratory Practices (GLP), ISO/IEC 17025 etc. Decision No 106/2007/QD-BNN on Safe Vegetable Production and Trading Management covers all vegetables including leafy vegetables, stem, root, flower, fruit and seed types, seedlings, and food fungus. “Safe” means vegetables which are produced, harvested, and processed according to Good Agricultural Practices (GAP). GAP are developed and approved by MARD and competent authorities at the provincial and centrally-controlled cities. Decision 379/2008/QD-BNN-KHCN on Vietnam good agriculture practice (VIETGAP) of fresh and safe vegetables and fruits is the most directly relevant regulation on safe vegetables. This VIETGAP mirrors ASEAN GAP, and other international good agriculture practices such as EUROPGAP, GLOBALGAP. According to the Decision, VIETGAP is a voluntary set of standards for producers of vegetables and fruits in Vietnam. In addition to DARDs as primary certifying agencies for VIETGAP, a number of different institutions are allowed to provide certification services for VIETGAP applicants. Decision No. 107/2008/QD-TTg on “Some policies to support the production and trading of safe vegetables, fruits, and tea products up to 2015” sets the objective of 100 percent of vegetables, fruits, and tea meet the requirement of VIETGAP. In order to reach this very ambitious objective, the Decision provides a number of support, including preferences in land allocation for production of safe vegetables; supporting the transfer and trade-off agriculture land in order to create concentrated areas for safe vegetable production; and using the allocated budget for extension activities to promote the development of safe vegetables. Directive No 06/2007/CT-TTg on the Implementation of Urgent Methods to Assure Food Hygiene and Safety marks a crucial turning point in the development of food safety regulations. The Directive recognizes that food safety is an urgent matter. It clearly mentions several problems that are occurring which are not adequately addressed by the current regulations such as toxic chemicals contamination of vegetables and fruits; non-compliant use of chemicals and additives in food processing and storage; un-controlled food and food service in markets; and fake, sub-standard, and illegal imported foods. In responding to these problems, a number of measures is introduced and line ministries are requested to act immediately to the heated concerns on food safety.

These key legal documents on food safety (and on safe vegetables in particular) have created a legal framework for the development of safe vegetables in the country. A completed list of the current legislation on food safe is given in table 4.1 below.

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Table 4.1 Recent legislation on food safety of Vietnam
No. 1 2 Description Ordinance on the Plant Protection and Quarantine Decree on the Regulation on Plant Protection, the Regulation on Plant Quarantine and the Regulation on Plant Quarantine, and the Regulation on Management of Plant Protection Drugs Decree on Plant Quarantine Ordinance on Food Hygiene and Safety Decree on the Implementation of Ordinance on Food Hygiene and Safety Decision on the Approval of National Action Plan on the Assurance of Food Safety to 2010 Directive on the Implementation of Urgent Methods to Assure Food Hygiene and Safety Decision on Regulations on Safe Tea Production, Processing, and Certification Management Decision on Safe Vegetable Production and Trading Management Decision on Food Safety Directive on Declaring 2008 to be the Year of Quality and Safety Decision on Good Practices for the Production of Fresh Fruit and Vegetables Decision on Good Practices for the Production of Tea Decision on Establishing the National Agriforestry and Fisheries Quality Assurance Department (NAFIQAD) Decree on Labeling of Goods Law on Standards and Technical Specifications Decree on Detailed Implementation of several Articles of Law on Standards and Technical Specifications Decree on administrative fine in plant protection and quarantine Law on Inspection Decree on Organization and Operation of Inspection in Agriculture and Rural Development Circular on guiding mandate duties, organization and personnel of inspection in agricultural and rural development and inspection of agencies under MARD Decree on administrative fine in plant protection and quarantine Decree on stipulating systems of food safety management, inspection and testing Decision on several policies to support production, processing and consuming development of safe vegetable, fruit and tea up to year of 2015 Decision on issuing regulations on VIETGAP certification for vegetable, fruit and tea Issuing Body National Assembly Standing Committee Government No. 36/2001/PLUBTVQH10 58/2002/ND- CP

3 4 5 6 7 8

Government Standing Committee of the National Assembly Government Prime Minister Prime Minister MARD

02/2007/ND-CP 12/2003/PLUBTVQH11 163/2004/ND-CP 43/2006/QD-TTg 06/2007/CT- TTg 43/2007/QD- BNN

9 10 11 12 13 14 15 16 17 18 19 20 21

MARD Ministry of Health MARD MARD MARD MARD Government National Assembly Government Government National Assembly Government MARD

106/2007/QD- BNN 57/QD-BYT 56/CT-BNN- KHCN 379/QĐ-BNN- KHCN 1121/QĐ-BNN-KHCN 29/2008/QD-BTS 89/2006/ND-CP 68/2006/QH11 127/2007/NĐ- CP 26/2003/NĐ-CP 22/2004/QH11 153/2005/NĐ- CP 73/2006/TT- BNN

22 23 24

Government Government Prime Minister

26/2003/NĐ-CP 79/2008/NĐ- CP 107/2008/QĐ- TTg

25

MARD

84/2008/QĐ- BNN

This legislation however does not relate directly to organic vegetables. The only official documents regarding organic agriculture is the National Standards on producing and processing organic products (10TCVN – 2006) issued by the Ministry of Agriculture and Rural Development in late 2006. This standard describes the requirements for organic vegetables, which are broadly

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compatible to international standards. Accordingly, organic agriculture is defined similar to UN (2008) as a production system based on an agro-ecosystem management approach that utilizes both traditional and scientific knowledge. The standards also reflect the definition of International Federation of Organic Agriculture Movements (IFOAM), which considers production of organic agriculture as a process that sustains the health of soils, ecosystems and people. It relies on ecological processes, biodiversity and cycles adapted to local conditions, rather than the use of inputs with adverse effects. At present, public understanding of organic vegetables is very poor. Results from the fieldtrip suggest many different understanding of organic vegetables. In the simplest form, organic vegetables are understood as vegetables produced using chemical-free practices. In addition, most people understood that if fertilizers could be used for organic vegetables, these must be „organic‟ fertilizers such as manure from plants or livestock. For some experienced organic vegetable farmers, organic vegetables were considered as those residues of nitrate (NO3), heavy metals, pesticides as well as harmful microorganisms not exceeding the thresholds specified by the authorities. In most cases, organic vegetable production is regarded as an eco-friendly crop which exerts little negative effects on farmers‟ and consumers‟ health as well as the environment.

Policies for the development of Safe Agricultural Zones
Though the legislation framework on food hygiene and safety has been developed recently, some initiatives to develop safe vegetables were introduced during the 1990s. According to Ho and Dao (2006), the Government launched a first programme for safe production of vegetables in the socalled „Safe Vegetable Zones‟ in 1999. Major components of the program included the development of vegetables distributed through „safe vegetables shops‟ and control mechanism on pesticide residues. In spite of these and other initiatives, safe production zones have occupied just a small proportion of total cultivated area. Pilots of safe vegetable production have occurred in 54 provinces but very few provinces have established significant areas for production of safe vegetables. As of 2008, in the Red River Delta only 6,320 ha of safe production area have been declared safe by provincial DARDs. The planned safe vegetable production areas are 13,216 hectares which represents only 13 percent of the total vegetable cultivated area in the region (almost 100,000 hectares). A study by Coletti and Nguyen (2008) highlighted that infrastructure for safe production zones is often poor. Unsafe water for irrigating vegetables is common and sources from river, lakes, and pools (60 percent of the total), wells (29 percent), and waste water (11 percent) are not adequately controlled for safety. Almost all vegetable production zones are not tested and about 12 percent of vegetable production occurs near industrial zones, main roads and hospitals. Planning of safe production zones is a complex task and requires much more than political will. As a result of decollectivization (see chapter one), agricultural land has been allocated to farmers who are mostly smallholders and usually have fragmented landholdings. To establish contiguous land plots of land which could be declared safe production area requires coordination among farmers (with support from authorities) and the establishment of specific rules. For example, if excessive pesticide or chemical application is carried out in one plot, another contiguous plot is affected even though the contiguous plot might follow good practices. Currently the DARDs are responsible for declaring a zone safe for agricultural production. There are not yet regulations on how to plan and declare an agricultural zone safe for agricultural production. In addition, establishment of a safe production zone requires a public commitment by the local farming communities and business communities that they will not engage in unsafe practices. Therefore, some codes of conducts needs to be developed and adhered to by the communities. This issue was not considered in the policy to development safe vegetable zones.

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Analysis of Organic Vegetable Value Chain in the Red River Delta
This section will focus on the organic vegetable value chain. Raised as a response to increasing concerns on food hygiene and safety and recent legislation development, this new agriculture supply chain has faced with a number of difficulties in struggling for a viable future. This result is striking given the recent attentions to safe vegetables either from consumers or the authorities. To provide details for this analysis, a fieldtrip to some organic vegetable production areas in Hoa Binh and Vinh Phuc – the two provinces nearby Hanoi – was carried out to collect information from 11 organic vegetable farmers, local authorities, and organic vegetables companies.

Overall view of organic vegetable value chain
Based on the fieldtrip results, the overall map of the value chain for organic vegetables could be described in the figure 4.2 below. It is first noted that the structure of the value chain is relatively simple compared to those of the rice sector in MRD (chapter two) or coffee sector in the Central Highlands (chapter three). In terms of institutional support, due to the complexity of food hygiene and safety, there is a large number of line ministries involved (mostly in the development of legislation framework as listed above). In terms of production, there are farmers producing organic vegetables on their own or in the form of joining common interest groups (CIGs). Organic vegetables are then collected by either collectors or some companies that specializes in the chain before being distributed though supermarkets or organic vegetable stores at „normal‟ markets or on the streets. Details of these actors will be discussed in subsequent sub-sections.

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The fieldtrip was between May 29 to June 04, 2011 to Dang Xa district in Vinh Phuc province and Luong Son district in Hoa Binh province. These are the two districts that supply most of organic vegetables for the Hanoi market. The fieldtrip is supported by staff from GreenLink and AgroVietLink as the two first pioneer companies who have been involved in the sector in recent years.

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Table 4.2 Overall map of the organic vegetable value chain Institutional support  Ministry of Agriculture and Rural Development Minstry of Health Ministry of Science and Tech. Ministry of Trade and Industry Farmer Union, Women Union Fruit and Vegetable Research Institute (FAVRI); Southern Fruit Research Institute (SOFRI); Organic vegetables companies Collectors/traders Organic vegetables farmers and CIGs

 

Supermarket chains

Organic vegetable stores

Consumers

Agriculture universities in Hanoi, Hue, HCMC; and Agriculture faculties in Key Universities the organic vegetable value chain actors of of Tay Nguyen, Thai Nguyen, OrganicTho. Can vegetable farmers Most rural dwellers in Vietnam plant some kinds of „ordinary‟ vegetables either for home consumption or as an income source. However, not too many farmers have embarked in organic vegetables. There has been very little information on this new crop in the current literature, and thus the current understanding on its evolvement is very limited. In most general terms, there are three types of organic vegetables farmers, including traditional organic farmers, reformed organic farmers and certified organic farmers. Group one comprises traditional farmers who have never utilized any kinds of agrochemicals. The group continues farming in traditional cultivation ways using composting and crop rotations. This farmer group is mostly found in remote and mountainous areas where access to pesticides and chemical fertilizers is limited because of long distance to markets or inputs‟ high costs rather than their health or environment concerns. Outputs are usually for domestic consumption or bartered within the community. This first group is not the subject of this analysis.
Source: Organic vegetables value chain fieldtrip to Hoa Binh and Vinh Phuc

The second group of organic vegetables producers in Vietnam includes farmers who used to utilize chemical fertilizers and pesticides but have changed their farming methods on acknowledging the harmful effects these agrochemicals causing to human health and their living environment. The awareness shift might be the result from perceived increasing demand for safe and quality foods, government initiatives on integrated pest management or training sessions organized by NGOs to encourage participating farmers to reduce or eliminate the use of agrochemicals in the field. However, lack of certification remains the most significant obstacle for the growth of this second group and it is likely that this group will be further reformed to the third group (as below) if

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incentives for growing organic vegetables and getting the products certified are perceived as an important source of income. This type of organic vegetables farmer will be mentioned in this analysis as one of the main focus. The third group – certified organic vegetable farmers – is the true „organic‟ farmers who have already certified or been in the process of being certified. Certified organic farming is a recent phenomenon in Vietnam despite the fact that the country has been a world leading producer in many agricultural products. At this stage, VIETGAP is the only agriculture good practices standards in Vietnam. However, VIETGAP has not specified certification for organic products. In terms of organic vegetables, the National Standards on producing and processing organic products (10TCVN – 2006) issued by MARD in 2006 specifies technical standards for organic products but does not provides details on certification mechanism and more importantly, this national standard is not well understood and thus recognized by stakeholders in the value chain of organic vegetables. Discussions with farmers and company owners during the fieldtrip suggested that they were not aware of the existence of these national standards. To date, the only certification mechanism is the Participatory Guarantee Standards (PGS). PGS has been internationally recognized and served thousands of farmers and consumers around the world (IFOAM, 2006). The major objective of PGS implementation is to ensure the farmers‟ compliance with standards and procedures in growing organic vegetables. PGS is based on IFOAM‟s recognized basic standards on organic practice and also include several social justice norms. PGSs are also closely associated to the national standards introduced in 2006 (10TC VN 602 – 2006). In the districts visited in the fieldtrip, PSG was introduced and supported by Agricultural Development Demark Asia (ADDA) – a Danish NGO in Vietnam. This group of certified farmers of organic vegetables is still small, albeit growing quickly. This group will be the primary focus of this chapter. Box 4.1 ADDA and the project “Development of a framework for organic production and marketing in Vietnam” Agricultural Development Denmark Asia (ADDA) is a Danish NGO that was established in 1994 with the aim to improve living conditions for the rural population through supporting sustainable agriculture. It is now implementing a number of development projects in Vietnam and Cambodia, among which is an organic project in Northern Vietnam, which is called “Development of a framework for organic production and marketing in Vietnam”. The project is initially planned for the period 2004 – 2010 (phase 1), it has however received an extension for two years ,ending in 2012 (phase 2). The focus of the project is to support capacity-building for farmers in organic farming and certification with the expectation that this will trigger demand from consumers for organic products. A farmer field school approach is used for training farmers who after completing courses return to their locality and disseminate what they have learned to other farmers in their community. Classes sponsored by ADDA were organized weekly at villages in cooperation with the local Farmer Union and open to all farmers who are interested in. At the end of each training session, organic farmer groups would be formed and begin cultivating organic vegetables. An internal quality control system where farmers in the same group cross-supervise farming practices of other people is developed. To develop the certification process, ADDA adapt the Participatory Guarantee Standards (PGS), which has been internationally recognized and served thousands of farmers and consumers around the world (IFOAM, 2006). The major objective of PGS implementation is to ensure the farmers‟ compliance with standards and procedures in growing organic vegetables. PGS is based on IFOAM‟s recognized basic standards on organic practice and also include several social justice norms. PGSs are specific to communities, geographical areas and markets and in

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Vietnam, PGS standards are closely associated to the 22 national standards introduced in 2006 (10TC VN 602 – 2006). The PGS Manual is developed to provide practical guidance and procedures for certification of organic products buy individual farmers as well as groups of farmers. The pilot phase of the project involves 117 farmers in six provinces across Northern Vietnam (approximately 20 farmers in each province) with a number of different commodities, such as vegetables in Bac Ninh, Vinh Phuc and Lao Cai Provinces; oranges in Tuyen Quang Province; litchis in Bac Giang Province and fish in Hai Phong Province. Based on this pilot, much training was then expanded. By the end of the first phase, 141 training classes on organic vegetables have been organized with the participation of around 4,200 farmers. More than 80 organic farmer groups were established for growing organic vegetables in these provinces. Besides capacity-building activities and certification, the project also supports promotional campaigns at domestic supermarkets to draw attention and raise the awareness of the community about organic vegetables. A marketing campaign was carried out from in 2010 at two BigC stores in Hanoi. The sales during the campaign and two weeks after the campaign were recorded with the following results (i) vegetables were sold out every day; (ii) average sales increased by nearly 50 percent per day during the in-store campaign; (iii) consumers can distinguish between safe vegetables and organic vegetables when they are willing to pay more for organic vegetables than safe vegetables.
Source: ADDA websites, ADDA internal reports, and discussions with ADDA representatives

There are no statistics on the number of organic vegetables farmers. In the district visited during the fieldtrip, it is estimated by farmers that there are between five to ten percent of peasant households have planted organic vegetables. But this figure cannot be generalized given the districts visited are amongst few areas of producing organic vegetables to supply mainly for Hanoi markets. In the districts of Luong Son in Hoa Binh and Dang Xa in Vinh Phuc, the estimated areas of organic vegetable production are about 15 hectares, producing nearly two tons of organic vegetable products a day. This represents around three to five percent of the total agriculture land in these two districts. Ho and Dao (2006) surveyed districts in the outskirt of Hanoi, including Dong Anh, Gia Lam, Thanh Tri, Tu Liem, and Soc Son. In these districts, the areas for safe vegetable production were reported at around 800 hectares, planting three crops per year. Of these areas, around ten to twenty percent are for organic vegetables and fruits. The 2006 IFOAM report on trends in world organic agriculture list Vietnam as having 1,022 farms with an area of 6,475 ha of land certified or in transition (Willer and Yussefi, 2006). These farms represent only 0.07 percent of the total agricultural area of Vietnam. However, the report is based on the data surveyed in 2001 and thus seriously underestimated the actual production area of organic vegetables. Discussions with ADDA representative suggested that there could be at least 6000 thousand hectares that were not included in the above figure at that time. The current estimated production area of organic vegetables is about 20,000 hectares. As information on organic vegetables is very limited, results from the fieldtrip will be used to describe characteristics of farmers producing organic vegetables. In Luong Son district of Hoa Binh and Dang Xa district of Vinh Phuc, organic vegetables farmers are the beneficiary of ADDA project (see Box 4.1 for more details). Some of them were trained with organic growing experience, plant life-cycle management and also teaching skills (i.e. in terms of train-the-trainer type). One focus of this training was on PSG certification process. These farmers then introduced the knowledge and skills to other farmers at their villages. These training activities were jointly supported by ADDA and local Farmer Union. In addition to technical training, farmers were encourages to formulate

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common interest groups (CIGs) for organic vegetables, and thus some basic knowledge on CIG management was also structured in the series of training activities. Discussions with the organic farmers in the fields shows that farmers highly appreciated the knowledge and skills delivered by these trainings. These were perceived as the very important background for them to embark on production of organic vegetables (see Box 4.2 below). Box 4.2 How and why do farmers switch to growing organic vegetables? Nguyen Huong Hoi, farmer in Dang Xa, Vinh Phuc: “ADDA held training sessions in collaboration with the Commune Farmers Union. We did not have to pay to attend those classes and even had a chance to visit Hoa Binh and Hanoi for getting the field experiences and talking with organic vegetables there on growing this new crop. After finishing the training, we formulated a CIGs of 16 members in our village and started growing organic vegetables. At the same time, we also grow „ordinary‟ types. We need further time to evaluate if organic vegetables could generate good level of income as we expected”. Hoang The Minh, head of organic vegetable CIG in Luong Son, Hoa Binh: “Organic vegetables are new for us. Knowledge we got from the training support by ADDA was interesting. The company Agro Vietlink approached to convince us on promising income that could be generated from growing organic vegetables. So we decided to form a group of 18 members and started growing organic vegetables. After several months practicing the organic farming, we can easily recognize that our health has improved significantly. We used to suffer headache, respiratory diseases and sight-related problems while using pesticides in growing ordinary vegetables. Besides, the land also seems to be better without agro-chemicals. The new way helps protect our health and our village environment”.
Source: Organic vegetables value chain fieldtrip in Hoa Binh and Vinh Phuc

As a result from these training initiatives, there are ten CIGs were established in different communes of Luong Son, and 12 CIGs were formed in Dang Xa. Production areas of CIGs are usually small, ranging from a thousand meter squared to a half of hectare. This is because of the population density in the Red River Delta as the most populated region of the country. While the 2 average population density is 232 persons per one km , that of the Red River Delta is 1,173 people 2 per one km . Therefore, agriculture land in the Red River Delta is highly fragmented, making it difficult to formulate contiguous land plots for organic vegetable productions. Discussions with many CIG members revealed that the process of accumulating contiguous land plots for organic vegetables deemed to be difficult. In fact, their individual land plots are usually of few hundred meter squared and scattered in the village area. In order to formulate a suitable production for organic vegetable, they were engaged in negotiations with other villagers who were not in their CIGs and such negotiation process was reported to be a time consuming and complicated. In this aspect, many of the legal documents reviewed above, which set priorities in land allocation for production of safe vegetables, are ineffective. The reason is that the preferences in land allocation can be applied for allocation of new or re-claimed land while much agriculture land was already allocated for farmers for very long time. In this case, this is up to negotiation among farmers to exchange or transfer their land rather than any policy initiatives. Facing this difficulty, no CIGs were found to produce in the area of more than two hectares. In terms of group operation and management, CIGs generally consist of between 10 to 20 members, who are mainly female, led by a group leader (the most respected person in the group). In addition to group leader, there is usually a deputy leader and sometimes a secretary to take care of the group‟s financial records and other types of documents. Notably, all the CIG has established

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an inspection panel, which consists of between three to five members to supervise the compliance of the group members to organic farming regulations and practices as specified in PSG. The PSG certification process involves organic farmers, organic CIGs, inter-group inspection, and coordinator board. Inter-group inspection panels are participated by representatives from CIGs (usually group leaders), farmers themselves, representatives of civil society organizations such as Farmer Union, Women Union, local NGOs, and other stakeholders. PSG coordinator board consists of five members, who are representatives from all key stakeholders in the chain and usually chaired by someone from the most active organizations in supporting the supply chain. In the case of Luong Son and Dang Xa, the coordinator board is chaired by the ADDA project officer (see ADDA, 2009 for more details). Given these actors, the PGS certification process works in the following ways. In the first stage, individual organic farmers or CIGs follows the number of 22 national organic standards as defined by PGS Manual. This compliance is first checked internally by the inspection panel of each CIGs. The inspectors visit the production sites to observe the whole process from seedling to using pest control methods and harvesting. These internal inspectors are responsible for supervising their own groups as well as conduct cross-check with other groups in the same village or commune. Apart from internal inspectors, inter-group inspectors from the inter-group inspection are in charge of supervising the production procedures of the farmer groups within their locality. After this quality assurance process completed, final results are then reported to inter-group inspections for consideration. Provided that the outcomes are approved by the inter-group inspections, they will be transferred to the coordinator board. The board will then make final decisions about whether the farmer groups are certified with PSG. PGS certificate is awarded to the whole group and to each member and takes effective for a year. In the certificate, there are details about the group with its ID number, the group location and total growing area, time of awarding PGS, along with member names and IDs. The organic vegetables products will then be stamped with the PGS details. Once PSG is certified, this quality assurance process is repeated annually to re-evaluate the compliance of the certified farmers or CIGs to the organic standards (see ADDA, 2009 for more details). In the case of the two districts visited, all the current organic vegetable CIGs are certified except one group in Vinh Phuc, whose PGS certification was withdrawn due to the use of unsafe water. Discussions with farmers suggested that the certification process is actually more simplified than it looks and there is a PGS Manual developed by ADDA, which makes the process easier for their compliance. Complying with the long set of standards and PGS certification process, organic farmers expected higher income from their efforts and it is generally the case. Results from the fieldtrip revealed that farmers could sell their organic vegetables at double prices compared to „ordinary‟ vegetables of the same species. For instance, „ordinary‟ water morning glory – as a very popular vegetable in the North – is usually sold at 25 cent per kilogram, while organic water morning glory is sold at between 50 to 60 cent $ per kilogram to collectors or organic vegetable companies. At the CIGs visited, farmers harvest organic vegetables from the net houses (i.e. the production area covered by net) in the early morning. They then process the vegetables as specified by collectors or organic vegetables companies, pack the processed vegetables in plastic bags, which were printed with PSG logo and other information specifications. The packed organic products are then transported from to collectors or agents of organic vegetables companies – which usually located in stalls at the village center or commune center. Compared to the market price to consumer, organic farmers earn as much as 50 percent. This could be considered as a low margin given the organic vegetable products are sold to collectors or companies in conditions that are ready to be supplied to the end consumers. Therefore, another 50 percent of the total price is actually spent for transporting and marketing these organic vegetables by organic vegetables companies (this is subject to further discussions below).

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Earning double gross income compared to growing „ordinary‟ vegetables, growing organic vegetables incur a different cost structure compared to that of ordinary vegetables. Organic vegetables growers invest in net houses to minimize the penetration of insects and negative effects of direct exposure to high heat and heavy rain. Investing in such facilities could be costly but it helps to cut down the cost for fertilizers and other agro-chemicals are usually required for ordinary vegetables. Discussions with the organic farmers revealed that the cost for investing in net houses could be as much as cost for fertilizers and agro-chemicals in about four to six crops (i.e. between a year or a year and a half). Therefore, this investment is actually less expensive than the cost of fertilizers for ordinary vegetables. Taking this into account, growing organic vegetables are more profitable given the double prices for organic vegetables earned by farmers. However, results from the fieldtrip suggested that farmers are sometimes unable to sell all of their mature organic vegetables to collectors and/or organic vegetables companies. In this case, they would sell the vegetables in local markets. As villagers in the area are not willing to pay higher for organic vegetables, organic farmers might have to sell at the prices similar to ordinary vegetables. The shift towards organic vegetable however encounters numerous challenges. Firstly, although almost every farmer before changing to growing organic vegetables got familiar with ordinary vegetables, a great number of them remain inexperienced in organic cultivation. A noticeably high number of farmers still use water from public canals with high risks of contamination instead of building separate wells. For instance, farmers in one organic vegetable CIG in Dang Xa district of Vinh Phuc still utilized water sources nearby a factory‟s waste processing system. This was the main reason why the PGS certification was withdrawn from that CIG. Supply of seedlings is also a problem. Most farmers buy seedlings from local markets and these seedlings could be used also for growing ordinary vegetables (see Box 4.3 for more details). Regarding insects and worms elimination, the majority of farmers express their low skills when catching with hands in most cases, which is time-consuming and ineffective, preventing them from expanding the production scale. Results from the fieldtrip also revealed the lack of processing and packing place for organic vegetables. In the fields visited, farmers usually process and pack the harvested vegetables inside the net house or at open places nearby. This processing and packaging practice was reported to cause damages to the quality and appearance of the final products. Box 4.3 Major difficulties of organic vegetables farmers Focus groups discussion in Luong Son, Hoa Binh: “We need to swap land plots to create a contiguous land plot for organic vegetables production of the group. However, there was almost no arable land left in the village, and it is not easy to persuade other villagers to swap lands with us. As a result, our group is growing organic vegetables in areas of less than one hectare. At this scale, income from organic vegetables cannot be a main source of income for us” “Irrigation is a problem. We cannot use water from the common irrigation system for organic vegetables because of high risk of contamination, which violates a key principle of organic quality. Instead, we have to build hand-dug wells for watering our organic vegetables. At the moment, both of our two wells are located outside the net house, which cause us a lot of difficulties as we need to walk a long distance from the production site to the wells.” “With regard to breeds, we still use the similar types of seedlings to ordinary vegetables. We usually buy these seedlings from village or commune markets as we don‟t know where to buy better seedlings. Sometimes, we faced problems as our seedlings bought in the village cannot grow in our production land. These seedlings might be not suitable for organic farming practices.”

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“We‟ve grown ordinary vegetables for ages. Transferring to organic vegetables is not easy for us. Most of us are lack of sufficient understandings and skills to grow organic vegetables. I know other villagers who considered this organic farming. They asked me sometimes. But they have not grown any organic vegetables because they found it difficult to change their attitude.” “This type of farming is more time-consuming. Unlike the previous methods in which pesticides are allowed, we have to use hands to catch insects. So we have to spend more time on the field compared to the time taken for ordinary vegetables. That is why most members of our groups are women.” Focus groups discussion in Dang Xa, Vinh Phuc: “We try to follow all the requirements for quality certification but it is not easy for us. In our group, there is little choice for irrigation because of the factory located near the field. We know that using water from the common irrigation canals might not be „safe‟ as required by the standards but this is the only source available. However, we do not have choices except carrying out water from out wells – which are far from our net house. So our certification was withdrawn. We still keep growing but at smaller scale because we have not figured out what we are going to do next” “We know that the irrigation system is contaminated by the factory wastes but do not know how to treat this problem. Some authorities collected to water samples and told us that they would bring them for a test. But after that, we heard nothing from them. We are now thinking of investing in a drilled well for watering our vegetables but it is quite expensive to do that. So we are now facing the risk of withdrawing certification but we don‟t know what to do in this situation.”
Source: Organic vegetables value chain fieldtrip in Hoa Binh and Vinh Phuc

Among the difficulties faced organic vegetables farmers, market uncertainty represents arguably the most significant obstacle. As organic vegetables are supplied to supermarkets and vegetable stores in the cities, organic farmers rely totally on collectors and organic vegetables companies for marketing their products. Though there is a growing demand for organic vegetables in Hanoi and other major cities of the country, it does not seem that organic vegetables and supermarkets have been successful in marketing for organic vegetables (see below). Discussions with farmers show that collectors and companies usually change their orders from time to time, depending on their sales in Hanoi. For mature organic vegetables that are not bought by collectors or organic vegetables companies, farmers do not have choices but selling their vegetables in local markets at the prices applied for ordinary vegetables. This market uncertainty is well perceived by the farmers interviewed during the fieldtrip as a key problem that in growing organic vegetables. The subsequent sub-sections will provide further discussions on this constraint.

Collectors and organic vegetable companies
Having collectors of organic vegetables in this group of actors does not look appropriate. However, most of collectors are working, either on permanent or part-time basis, for organic vegetables companies. Some collectors are also the members of organic vegetable production groups. In the areas of field survey, all collectors are signed contract with organic vegetables companies either for a salary or for commission compensation. Therefore, these collectors could be considered as part of these companies in the value chain analysis. Collectors of organic vegetables usually work with two or three CIGs to ensure having enough vegetable varieties instructed by organic vegetables companies. As revealed from the fieldtrip, these collectors usually take order from their companies at late afternoon or in the evening and inform organic farmers on quantity and varieties of organic vegetables to be ordered for the next

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day. Organic vegetables farmers will then harvest and process organic vegetables according to the order in the early morning of the following day to supply for collectors at a stall in the village or commune markets. Collectors do some basic quality check and handle to the companies‟ small trucks to transport to Hanoi for supermarkets and vegetable stalls at between 8:00 to 9:00AM. In both Luong Son and Dang Xa districts visited, collectors are found to be knowledgeable in growing organic vegetables and PGS certification process. In some cases, collectors are also active members of organic vegetables CIGs. Discussions with some collectors and company representatives suggest that collectors could earn between five to ten percent of the price sold to customers in Hanoi. Perceiving organic vegetables as a potential and emerging business, private sector has started responding to this potential opportunity. There are no official statistics on the number of organic vegetables companies. But discussions with representative from GreenLink, as one of them, suggested a number of five organic vegetables companies operating in Hanoi (and GreenLink is one of them) in 2009. At the time of interview, there is ten organic vegetables companies in Hanoi and the number of organic vegetables companies in HCMC and Lam Dong could be as much as 12 three or four dozens. Of the organic vegetables companies operating in Vietnam now, most of them are trading companies which provides an intermediate role between organic vegetables growers and consumers (directly though their stores or indirectly though supermarkets). There are few companies who also develop their productions areas and all of them located in the South of the country. The case of Organik Dalat Farm represents an interesting development experience of an organic vegetables company that participate in most stages of the supply chain (see Box 4.4) Box 4.4. Case studies: Organik Dalat Farm In 2005, Mr Nguyen Ba Hung, a PhD holder, purchased 15 hectares of land on an old coffee plantation in Dalat which is famous for cool climate and has been an important vegetable production point supplying to southern provinces. The farm has started cultivating organic vegetables on four hectares since 2006. The farm is equipped with double door system and sealed net house to avoid insects and minimize the impacts of harmful external factors. Within the net house, he installed pheromone baits to trap any insects. Hung employed 35 workers, 15 of who directly get involved in production while the 17 remaining employers took charge of processing and marketing stages. A modern packing system is built allowing vegetables to maintain its freshness and good appearance after being harvested (Simmons and Scott, 2008). His farm became the first Vietnamese farm having products which are awarded EurepGAP certificate and thus, can be exported to European markets. Organik Dalat is also in the process of obtaining German certification called Naturland. Apart from exports, the farm concentrates heavily on domestic markets where its major partners include five-star hotel, restaurants, international cruise ships and large catering companies. This model is considered to be the most successful organic vegetable player in Vietnam organic sector. Recently, by late 2010, ASIMCO, a northern private company has followed the Organik Dalat strategies in backward integration and purchased an area of 2.2 with a fifty-year leasehold in Luong Son, Hoa Binh (Veerapa and Tran, 2010) and hired workers to produce organic

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The first company, Hanoi Organics, in the organic vegetables value chain was started in 1999. Hanoi Organics was the only trader in organic vegetables and the company maintained its sole position until 2004 when the ADDA began. Hanoi Organics used to be awarded certificate (Organic Agricultural Certification Thailand) from external foreign control agency in Thailand. Although the certificate lapsed in 2004 due to some financial problems (Moustier et al., 2006), Hanoi Organics is still regarded as a pioneer and active organization in Hanoi organic trading.

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vegetables on their farm. By this way, ASIMCO can control the whole procedures to guarantee that their workers strictly observe organic standards and properly manage the post-harvesting practices. However, given the limited agricultural land in Vietnam, such large-scale organic farm is of limited relevance and unfeasible to most farmers, especially because of huge initial investment in building net-house and other supporting facilities.
Source: based on Simmons and Scott (2008); Veerapa and Tran (2010)

In addition to the „conventional role‟ of trading companies, many organic vegetables companies have also supported organic farmers in their production activities. Technical support provided by the companies‟ collectors is a popular type of support. GreenLink represents an example. The company has their collectors spent visits to the production area of the CIGs every day to advise farmers on technical issues and inspecting their compliance with organic standards. In some cases, organic vegetables companies also partly supported the organic vegetables CIGs in investment for facilities such as wells, pumps, and net houses. Organic vegetables companies and their collectors buy from organic vegetables CIGs by signing period contract. This contractual arrangement is useful to encourage farmers in their investment for organic vegetables. It is also good for organic vegetables companies as they could secure a stable supply. Unfortunately, this does not seem to be the case. It was reported during the fieldtrip that although companies signed contract to buy all outputs produced by a group at negotiated prices they are sometimes unable to deliver on that commitment due to unstable sales. In these cases, farmers have to take their vegetables to market and sell at similar prices to ordinary vegetables. While only few companies are found to pay compensation, the others would try to seek for farmers‟ sympathy and do not compensate for their losses (see box 4.5 for more details). This uncertainty represents a serious obstacle for the development of the organic vegetable supply chain. As it will be argued in this chapter, expanding the market for organic vegetables will be crucial for its sustainable development in coming years.

Box 4.5 Contractual arrangements between farmers and companies Hoang Thi Nguyet, Luong Son, Hoa Binh: “Although our group signed annual contracts with the company in Hanoi (Greenlink) and the contract clearly states that the company would buy all the certified outputs, the company sometimes are unable to do that. The most frequent reason is due to unstable sales in Hanoi. In such cases, I often keep final products for domestic use or bring to „wet‟ markets and sell at normal prices. If the volume is too high I have to use as livestock‟ feeds or even compost for next crops.” Hoang Van A, head of farmer group, Luong Son, Hoa Binh: “We do not ask for compensation because we know that the company also faces many difficulties, especially during first stage. We need to share the burden with them.” Do Thanh Huyen, Greenlink store at 216 Thuy Khue, Hanoi: “We, as other players in the market, cannot predict exactly the fluctuations in consumers‟ demands. Therefore, we can only sell what our customers are interested in. And customers‟ taste changes all the time; sales are not always stables, making it impossible for us to comply with conditions in our contracts.” Tu Tuyet Nhung, ADDA Organic Project Coordinator: “Sudden changes in demand leading to an

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excess in output supply is not the sole phenomenon in organic farming. It widely occurs in agricultural production in general. During the ADDA organic project, participating companies sometimes compensate for farmers but not all of them can afford it.”
Source: Organic vegetables value chain fieldtrip in Hoa Binh and Vinh Phuc

As most of organic vegetables are trading companies, they have supplied organic vegetables by setting up their own vegetable stores or working as „buying companies‟ for supermarkets. By developing their own stores, an organic vegetable company could earn the remaining 45 to 47 percent of the prices sold to the end customers. With a large volume of organic vegetables, this could imply a very good margin and profit for this type of trading business. However, all the companies interviewed reveal that their businesses are not going as well as expected for many reasons. First, the sale volume is still limited, through growing. The case of AgroVietLink could be taken as an example. The company currently supplies on average two hundreds kilograms of organic vegetable of between 15 to 20 varieties per day though its stores. Subtracting the cost paid to farmers and collectors, this derives in a gross income of between 1.5 to three million VND (or equivalent to between 80 to 150 US$ per day) while the cost of running stores and other overhead costs are significant. Discussions also suggested that many other organic vegetables companies in Hanoi, including AVN and GreenLink, operate in the same range of output per day. Given this limited sales volume, it is difficult for these companies to sustain and develop their businesses on a profitable basis. At this stage, consumers of organic vegetables are mainly among the richest Vietnamese and expatriates who can afford expensive products and most importantly, are concerned about the safety of vegetables sold at street markets. Those consumers are frequent customers of one of the ten organic vegetable companies and many of them often purchase vegetables via phone or place order online. This „high-end‟ market niche is relatively small (estimated at less than 10 percent of urban dwellers in Hanoi). This explains why the potential market has remained at the early stages, resulting in low sales level reported. For a sustainable development of the organic vegetable supply chain, it is crucial to enhance the awareness of middle-income population on organic vegetables to expand the market beyond the richest population. Increasingly heated concerns on food hygiene and safety in recent years make this expansion feasible. In fact, there have been several legislation developments on food hygiene and safety and food standards. But it is a surprise that these concerns have not been transmitted into sizable market for organic vegetables. This could be linked to low awareness of organic vegetables. A recent survey published by a market research company - Fresh Studio – revealed that 98 percent of the respondents reported their interests in buying organic vegetables; 86 percent of them were willing to pay for organic vegetables at double prices compared to prices of ordinary vegetables. However, their understanding on organic vegetables is rather limited. Some interviews with consumers taken while visiting vegetable stores and supermarkets are evident for this low awareness (see Box 4.6).

Box 4.6 Low awareness of organic vegetables Ms Le Ngoc Anh, regular consumer at street markets, Hanoi: “Is it a new type of safe vegetables? I have no idea about it. What is defined as “organic” here? I know safe vegetables and I usually buy vegetables at stores that sell safe vegetables. From my experiences, safe vegetables appear less attractive than ordinary vegetables as production of safe vegetables use less fertilizers and agro-chemicals.”

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Ms Nguyen thi Thuy Hong, customer of Hapro supermarket, Hanoi: “I guess they (farmers) still use pesticides but at a permitted amount or maybe they use safe agrochemicals (when growing organic vegetables). I see their prices are significantly higher compared to „normal‟ vegetables. But I‟m not sure how reliable the certificates are. I‟ve seen some stamp of certificates but I do not understand the meaning and it is not possible for me to evaluate its quality. So I don‟t know if I should trust given food poisoning cases appeared almost every day. As I doubt the quality, I find it not very reasonable to pay such high prices.” Mr Nguyen Hoang Ha, customer of AVN organic vegetable shop, Hanoi: “My family have been using vegetables from this shop for a couple of years and I can now easily differentiate between unsafe vegetables and organic vegetables. In terms of quality, I do not know about certification but I trust the seller here.”
Source: Organic vegetables value chain fieldtrip (when visiting vegetable stores in Hanoi)

Supermarkets and vegetable stores
Organic vegetables are sold at supermarkets and stores of organic vegetables companies. In terms of supermarkets, BigC and Hapro are the two supermarkets that supply organic vegetables, while Metro and Intimex are at the planning stage of supplying organic vegetables. BigC have opened two of the largest supermarket in Hanoi and many others in Vietnam. Hapro is a Vietnamese supermarket chain, which originally a state-owned trading companies that supplied most of food and foodstuff for Hanoi before the doi moi. Developing from its intensive network of department stores, Hapro has developed dozens of supermarkets and numerous convenience stores in Hanoi and other provinces. Discussions with some organic vegetables companies revealed that the volume of organic vegetables sold at supermarkets is still limited. According to sales persons of a Hapro supermarket, volume of organic vegetables sold in Hapro supermarkets in Hanoi is between two and four hundred kilogram of organic vegetables per day. This might account from 20 to 30 percent of the organic vegetables supplied to Hanoi consumers. Observations from BigC and Hapro show that the prices of organic vegetables sold in the supermarkets are similar to those quoted in stores operated by organic vegetables companies. However, it is not clear to understand the margin earned by supermarkets given prices supplied to supermarkets from the organic vegetables companies are not revealed from the interviews conducted. But this margin should be around 15 to 25 percent of the prices sold to consumers (given the margin earned by organic vegetables growers is about 50 percent already). Organic vegetables companies establish their own stores. Field observations show that a store supplies a volume ranging from 30 to 100 kilogram of organic vegetables per day. Convenient location of stores is an important factor but many consumers order by phone or online for home delivery rather than buying directly from the stores. This phone or online orders are most relevant for loyal consumers, which account for the majority of these stores‟ customer bases. Notably, there are leaflets, brochures, DVDs, and other documents which explain characteristics of organic vegetables, certification and quality, benefits from consuming organic vegetables. These marketing documents are generally well designed and distributed free of charge. However, the effectiveness of these marketing documents is constrained by the fact that many consumers are frequent customers and they usually order online or over the phone for home delivery. These documents could be best used for potential customers and thus should be better distributed differently rather than displaying at stores.

Major challenges and policy implications
Growing organic vegetables could be considered as a direction to high value agriculture in the country where „high volume, low value‟ agriculture is prevailing. The above analysis however

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suggests many problems and constraints for the potential and emerging value chain of organic vegetables. This final section will highlight some key challenges and policy implications.

Key challenges
There are a number of challenges that hinder the development of the organic vegetables value chain in coming years. This chapter focuses on the followings. First, there is a lack of legislation background for organic agriculture products in Vietnam. In responding to increasing concerns on food hygiene and safety, there has been important legislation developments in this area but such improvements are not in the field of organic agriculture products. Apart from the national standard on producing and processing organic products (10TCVN – 2006), there are no other relevant rules and regulations on organic vegetables. This national standard serves more as a guide to farmers rather than a concrete tool for certification. There are no official organic certificates and thus certification processes for organic agriculture products. The PGS certification – a donor-supported process – is currently the only certification process available for organic vegetables. This participatory certification alone is not effective in gaining wide public confidence in the quality of organic vegetables. This is a area where interventions of the state are most needed. Second, there are considerable constraints that originate from some characteristics of the rural economy. Notably, land allocation represents a constraint, especially in the Red River Delta. Land fragmentation in the rural areas hinders the formulation of contiguous land plots for commercial production of organic vegetables. Given the widespread practice of intensive usages of fertilizers and agro-chemicals in the rural areas, having small plots of organic vegetables nearby the fields of other „ordinary crops) implies a risk of contamination when ensuring certification process. In addition, farmers are usually not aware of growing organic vegetables as a high value agriculture crop. The experience of Dang Xa district and Luong Son district suggested some support initiatives are needed to be in place in order to encourage farmers to engage in growing organic vegetables. At this stage, there are little support of this types and all of them are initiated by donors as experiments in small scales. Some organic vegetables companies interviewed in this study expressed their interests in supporting farmers in this value chain but all of them are of small scales and at the early stages of operations. Third, There has been very little development of the domestic market for organic products in Vietnam despite the fact that there are strong concerns around food safety and food quality, particularly amongst urban consumers. Underdevelopment of the market for organic vegetables is one of the key challenges for the development of the organic vegetables value chain. Results from the value chain analysis conducted in this chapter revealed a pre-matured market for organic vegetables in Hanoi. This result is a surprise given the heated concerns on food hygiene and safety of high-income population in the capital city, the second largest economic cluster of the country, leading to a high potential demand for organic products. Poor public awareness and understanding of organic products could be a key obstacle for developing such potential demand into a commercialized market. While domestic market is still pre-matured, organic vegetables should be aimed to export markets. With exception of few organic farms in Da Lat and places surrounding HCMC exporting their organic vegetables to the European markets, production of organic vegetables in the North is largely to supply for Hanoi market. Experience of Thailand could be considered as a success in exporting organic products and it is possible that Vietnam could learn from its neighbour‟s experience.

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Some policy implications
What are the policy options for the organic vegetable sector of Vietnam and particularly in the Red River Delta is an important question. This final sub-section provides some policy implications from the above context. First, „organic agriculture products‟ should be considered as an important items in the current institutional framework for food hygiene and safety in general and safe vegetable production in particular. Given the production of safe vegetables have been encouraged since the late 1990s, it is a surprise when organic vegetables are not explicitly considered in these efforts. In the process of enhancing the institutional framework for organic vegetables, it is crucial to develop national standards for organic agriculture products and a functioning certification process to verify the quality of and compliance to these standards. To gain the public trust on quality of organic vegetables, a donor-supported PGS is useful but clearly insufficient. This requires a more „official‟ set of national standards and certification process. In addition, food safety campaigns with a focus on organic agriculture products are important to provide better understanding of the public on organic products. This will be an important contributing factor to the development of a commercial domestic market for organic vegetables. Future development in the organic sector is likely to be driven by production for export. Some „national marketing‟ efforts are also needed by the network of trade and investment promotion centers and Vietnam‟s embassies to support penetration of organic vegetables in foreign market. Second, there is a big room for donors to provide support for the development of high quality agriculture, including organic products. The ADDA organic project, albeit small in scales, represents a success in terms of encouraging a significant number of farmers to grow organic vegetables and monitoring a certification process in the absence of official standards and certification for organic products in Vietnam. A number of other donors have also embarked in different initiatives for high quality agriculture (usually at small scales), which could be expanded to encompass organic products. More importantly, as developing this high quality agriculture drop requires a new source of knowledge and practices that have not been exercised in the rural Vietnam, donors will be at the best position to support by bringing their experiences from other countries to support Vietnamese farmers in growing organic vegetables. Third, most of farmers in rural Vietnam have not actually surpassed the requirements for safe vegetable production, especially given the popular practices of intensive usages of fertilizers and agro-chemicals and limited awareness of good safety. Growing organic agriculture products requires major changes in attitudes and the current popular farming practices. As a result, campaigns aimed at enhancing understanding of farmers on organic agriculture product should be pursued while growing techniques should be a part of extension services available to farmers. In the lowlands of Vietnam, where farm sizes are often small and the fields controlled by an individual farmer may be spread around in several locations, it will be a significant challenge to prevent crosscontamination from irrigation water and spray drift from neighboring fields. Setting up groups of farmers to work together on organic production and supporting the negotiation among farmers to formulate contiguous land plots for growing organic vegetables at medium or large scales is a plausible direction. These group certification systems can also help to reduce the costs of certification for individual farmers. The model of CIGs is now popular in Vietnam under many different programmes and projects. This model, as suggested by the field survey, is reported to work well for growing organic vegetables in the sites visited.

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Donor Support for Private Sector Development, Agriculture and Rural Development in Vietnam
Previous chapters of this study has highlighted a „retreat‟ process of state‟s direct interventions in the areas of private sector development, agriculture and rural development during the doi moi. Three agriculture value chains were selected to provide further insights on the evolution of rural economy development and the role of the government and the private sector in that evolution process. This chapter will place a special focus on the role of donors in this context. Vietnam has become one of the most popular host countries for multilateral and bilateral aid donors during the past decades. This is remarkable considering that Vietnam still claimed as a socialist state and that most donors have a relatively short history of development cooperation in the country. Aside from its good performance in poverty reduction and economic growth, Vietnam is popular because it is perceived as a “good” aid recipient. In fact, Vietnam is often identified as the “best practice” example when it comes to aid management and government ownership of the development agenda. While the supporting role of donors in the development process of Vietnam is undoubted, it is however not straightforward to evaluate the impacts of donors in supporting the country‟s development efforts. It is also not easy to review the involvements of donors in supporting private sector and rural development. The main reason is that there is a plethora of programmes and projects supported by the donor community either directly or through budget support. Many programmes and projects have evaluation reports but most of these reports are not available to the public. A thorough search of the website of major donors listed in this chapter (see below) resulted in a very limited number of programme/project evaluation reports. In this context, this chapter will review interventions of the donor community in PSD and ARD by providing a general description of interventions of most popular donors in these two areas of focus. In addition, more insights will be reported by examining interventions of donors in the three value chains analyzed in the previous chapters. Interviews with donors in Vietnam, including World Bank, IFAD, IFC, M4P, Prosperity Initiative, Helvetas, SNV, and ADDA, were conducted to support the analysis. The first section provides an overview on involvements of the donor community in Vietnam over the past two decades. The second section focuses on the interventions of donors made in the three value chains selected. Some conclusions are provided in the final section of the chapter.

Overview of donor support for Vietnam Official development assistance (ODA) flows to Vietnam
Official development assistance (ODA) for Vietnam from countries outside the former socialist block was resumed after the Consultative Group (CG) meeting in Paris, November 1993. This marked the complete resumption of the development cooperation relationship between Vietnam and the international donor community. At the present, according to MPI statistics, there are some 13 51 donors including 28 bilateral and 23 multilateral, which consists of international financial

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Bilateral donors include Ireland, Britain, Austria, Poland, Belgium, Canada, Kuwait, Denmark, Germany, Netherlands, South Korea, Hungary, Italy, Luxembourg, the United States of America, Norway, Japan, New

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institutions and international and inter-governmental organizations , are implementing regular ODA program in Vietnam. The donor community reviews the development progress and ODA coordination supporting such progress annually at CG meetings (and also recently mid-term CG meetings). This series of CG meetings is the most important dialogue between the Government and donors (see below). As one of the key output, donors walk out from these meetings with their commitments for the next year. According to MPI statistics, the international donors community has committed a total ODA of nearly $54.3 billion in the period 1993-2009 and the committed value has increased over time for the whole period (see Table 5.1). Of this committed ODA value, nearly 75 percent was concluded after negotiations between the Government and donors. Notably, while international donors have been generous in providing ODA, the absorption capacity is relatively limited. During the period 1993-2009, the average disbursement rate, as percentage of disbursement over total commitment was only 45.5 percent. In this 17 year duration, only five year exhibited disbursement rates of more than 50 percent (see Box 5.1 for the case of the World Bank-funded projects). This low disbursement rate, which is beyond the scope of this chapter, could be taken to suggest an opportunity missed for Vietnam in re-enforcing its development process, especially while lack of funding is considered as a key development bottleneck in all official strategic documents such as the recent Socio-Economic Development Plans. It is also noted that only 16 percent of the total values of the ODA project signed, suggesting that ODA for Vietnam is relatively low concessional. Taking out the grant value from the total concluded ODA, it would means that this source of financing contributed roughly $ 35 million in public debt.

Table 5.1 ODA flows in Vietnam, 1993-2009 Total commitment 1,861 1,959 2,312 2,431 2,377 Conclusion $ mil. 817 2,598 1,444 1,597 1,686 % 43.9 132.6 62.4 65.7 70.9 Disbursement $ mil. 413 725 737 900 1,000 % 22.2 37.0 31.9 37.0 42.1 Grant $ mil. 145 449 348 230 254 % 17.7 17.3 24.1 14.4 15.1

Year

1993 1994 1995 1996 1997

New Zealand, Australia, Finland, France, the Czech Republic, Spain, Thailand, Sweden, Switzerland, China and Singapore. 14 These international financial institutions consist of the World Bank Group (WB), the International Monetary Fund (IMF), the Asian Development Bank (ADB), the Nordic Investment Bank (NIB), the Nordic Development Fun (NDF), the OPEC Fund for International Development (OFID or OPEC formerly), and the Kuwait Fund. 15 This group includes the European Commission (EC), the United Nations High Commissioner for Refugees (UNHCR), the United Nations Fund for Population Activities (UNFPA), the United Nations Industrial Development Organization (UNIDO), the United Nations Development Programme (UNDP), the Joint United Nations Programme on HIV/AIDS (UNAIDS), the United Nations Office on Drugs and Crime (UNODC), the United Nations Capital Development Fund (UNCDF), the Global Environment Facility (GEF), the United Nations Children's Fund (UNICEF), the International Fund for Agricultural Development (IFAD), the United Nations Education, Science and Culture Organization (UNESCO), the International Labour Organization (ILO), the United Nations Food and Agriculture Organization (FAO), and the World Health Organization (WHO).

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236 263 236 264 248 325 414 513 545 657 776 1,131 7,034 9.7 17.4 13.3 10.9 13.7 18.2 16.0 19.6 18.2 17.1 17.9 18.4 16.6

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total

2,192 2,146 2,401 2,399 2,462 2,839 3,441 3,748 4,446 5,427 5,915 8,064 56,417

2,444 1,507 1,773 2,433 1,814 1,786 2,595 2,610 2,989 3,832 4,331 6,131 42,387

111.5 70.2 73.9 101.4 73.7 62.9 75.4 69.6 67.2 70.6 73.2 76.0 75.1

1,242 1,350 1,650 1,500 1,528 1,422 1,650 1,787 1,785 2,176 2,253 4,105 26,223

56.7 62.9 68.7 62.5 62.1 50.1 48.0 47.7 40.2 40.1 38.1 50.9 46.5

Source: Ministry of Planning and Investment

Box 5.1 Low disbursement rate of the World Bank-funded projects At present, in Viet Nam, there are 53 programs and projects funded by WB (including 46 loan projects, 07 grand projects from GEF, CFC and other trust funds through WB with total value of approximately US$ 6,443 billion. WB portfolio classified by sector as following: Energy (22%), urban development (20%), transport (20%), agriculture and rural development (14%), education (6%), healthcare (6%), administrative reform (6%), telecommunication (1%) and other sectors (2%). Of the total US$ 6,443 billion committed, 4,257 billion has not been disbursed yet (accounting for 66% of total commitment). The disbursement seems to be highest in the areas of industries (mostly in energy sector), transport, agricultural and rural development, and state bank of Vietnam (for supporting banking reforms). In these areas, the disbursement rates are higher than 40 percent. All other ministries have had the disbursement rates of less than 30 percent. In overall, the disbursement rate of WB funded loan projects in Viet Nam is lower than regional disbursement rate on average. In the WB loan portfolio there are 04 problematic projects with serious difficulties, including: Telecommunication technical development project, Hanoi urban transport, Healthcare support to the poor and custom modernization project (closed). The proportion of problematic projects over the WB loan portfolio is 8% in Viet Nam, lower than the average figure of 13% in the Asian Pacific region.
Source: MPI‟s ODA Bulletin No. 36, 05/2011

The above trend in ODA flows for Vietnam would be changed in the next few years as Vietnam has been approaching the middle income country (MIC) status. Interviews with donors suggest that

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“many donors are now consolidating their strategies to the new context of Vietnam being a MIC” (IFC representative). “Some donors have packed their bags. In the context of MIC, there would be a „retreat‟ of donors supporting the new development agenda of Vietnam” (WB representative). In this context, the next few years will experience many donors changing their strategies and the future of ODA flow for Vietnam is subject to radical changes in the near future.

Allocation of ODA by sectors and regions
In terms of ODA implementation, data on the allocation of ODA according to broadly defined sectors are given in Table 5.2. Accordingly, ODA projects are categorized into five broad sectors. The first sector, namely agriculture, irrigation, forestry, and fisheries combined with rural 16 development and poverty reduction, accounts for 16 percent of the total ODA signed value. The second sector – energy and industry – accounts for 23 percent of the total ODA signed. This is largely the support of donors for electricity supply to meet the increasing energy demand for economic growth. Transportation has been one of the major destinations for ODA with 25.6 percent of the total ODA signed for the development of transportation system. The proportion of ODA for public services (healthcare, education), environment, science and technology has absorbed from the total ODA signed as much as transportation.

Table 5.2 Share of the ODA projects by sectors, 1993-2007
Total values of ODA projects (mil $) Agriculture, irrigation, forestry, and fisheries combined with rural development and poverty Reduction Industry and energy Transportation, post and telecommunication, Urban water supply and drainage Health, training and education, environment, science and technology, and others (including institutional development, capacity building...) Total
Source: Ministry of Planning and Investment

Share (%) 15.9 22.9 25.6 9.5 25.9

5,130 7,376 8,223 3,064 8,316 32,109

100%

In terms of spatial distribution of ODA, it is surprise to find that the poorest regions of the countries have received the least. Table 5.3 shows that the Central Highlands – being the second poorest region after the Northern Uplands has been the destination for only 3.5 percent of the total ODA signed in the period 1993-2007. The poorest region, also the region of heavy concentration of ethnic minorities, has received only 6.4 percent. The Mekong River Delta – as the rice bowl and aquaculture – has absorbed 7.5 percent. The other regions, including Red River Delta (with Hanoi), Southeast (with HCMC), and Central Coast account for more than ten percent of the total ODA signed in the period. However, there is a large proportion of ODA has been distributed for interregion interventions (nearly 29 percent) and a significant ration of ODA that cannot be categorized into regions due to its wide scope of support.

16

It is desirable to report the allocation ODA according to a finer classification but this is constraints by data availability disclosed from Ministry of Planning and Investment.

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Table 5.3 Share of the ODA projects by regions, 1993-2007
Total values of ODA projects (mil $) Share (%)

Red River Delta Northern Uplands North and South Central Coast Central Highlands Southeast Mekong River Delta Inter-regions Cannot be categories according to regions Total
Source: Ministry of Planning and Investment

3,501 2,064 3,278 1,132 3,996 2,395 9,211 6,532 32,109

10.9 6.4 10.2 3.5 12.4 7.5 28.7 20.3 100

Profiles of largest donors in Vietnam
To provide some general views of the donors‟ profiles supporting Vietnam, Table 5.4 reports the ranking of the ten largest donors using the data from Ministry of Planning and Investment on the currently active ODA projects. Japan (JICA and JBIC), the World Bank, ADB, and Germany‟s KFW are the largest donors for Vietnam. Japan ranks at the largest donor with the total support valued at $13,330 million (taking together both the projects funded though JBIC and JICA). The average value of the JICA or JBIC-funded projects is also largest at around $272 million per project. This could be explained by the focus on these projects on transportation and energy sector in Vietnam. The World Bank ranks the second with the total support valued at $7,785 million on the number of 76 on-going projects. Germany KFW and ADB ranked at the fourth and fifth respectively with their th total support of $3,874 million and $3,691 million. France is ranked at the 6 position with the currently on-going value of over one billion US$. It is important to note that ODA flow in Vietnam is highly concentrated on these organizations. The value of the on-going ODA projects funded by these institutions is up to $29,656 million, accounting for 70 percent of the total ODA signed for Vietnam during the period 1993-2009. Apart from these five largest donors, other donors in the Top Ten have had their on-going projects ranging from $51 million to $257.6 million. Regarding the areas of focus, most of the largest donors supporting Vietnam have adapted for a wide scope of different focus areas. FAO and IFAD represent the two exceptions with their interventions largely concentrated on agriculture and rural development.

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4

Table 5.4 Top 10 largest Donors in Vietnam, up to March 2011 No . Donor Year of operatio n in 1 Vietnam 1995 Number of active Projects
2

Total Value ($ mil. )
3

Area of focus

1.

JBIC (Japan)

20

8,255*

Energy and Natural Resources ( oil, natural gas, coal, nonferrous metal, electricity..) Environment (environment protection, global warming, energy-saving technologies) International Business Development (Improving investment climate, Bringing advanced technologies of Japanese SMEs to the world) Catalyzing international finance Knowledge Assistance Infrastructure development Urban Environment Energy and the Environment Natural Resources Management Policy and Institutional Capacity Trans-boundary Issues Education Health Water Resources/Disaster Management Governance Transportation Natural Resources and Energy Agricultural and Rural

171,706,31 5 VND mil.

  2. WB 1993 76 7,785   

3.

JICA (Japan)

1992

29

5,076*

 

105,590,50 0 VND mil.

   

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Development    Urban/ Regional Development Environment Management Citizen participation (e.g. training) Education and Training Transportation infrastructure Sustainable forestry SME development HIV/AIDS Environment and sanitation Climate Change Disaster Risk Management Environment Gender and Development Governance Poverty Reduction Private Sector Development Regional Cooperation and Integration Social Development Social Protection Urban Development Environment (water and waste treatment) Information Communication Technology Transportation (Railway) Agricultural Development Poverty Reduction

4.

KFW (Germany)

17

3,874

     

5.

ADB

1993

53

3,691

       

   6 FRANCE 18 1,031* 21,436,803 VND mil. 

 7. IFAD 1991 11 257  

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   Education and Training Human Health Environment (Water treatment, Waste treatment) Information Communication Technology

8.

NETHERLAND S

12

187* 3,895,290 VND mil.

9.

CHINA

2

160* 3,334,243 VND mil.

10

BELGIUM

95* 1,983,362 VND mil.

 

Poverty Reduction Environment (Waste treatment) Rural Development Public administrative reform Private sector support Textile sector support

   

Sources: 1: Year of starting operation in Vietnam compiled from data on http://oda.mpi.gov.vn 2 : Data for World Bank, IFAD, FAO, and UNDP: from the official websites of these organizations; Data on ADB, JICA, JBIC, AusAID, KFW, and AFD are compiled from http://nmt.mpi.gov.vn/ 3: Areas of focus: websites of the donors Notes: * these figures are originally given in VND and converted into US$ using the exchange rate of 1USD=20,800 VND; ** JICA and JBIC are both the ODA arms of the Japanese Government but separated due to areas of focuses of these two organizations.

Donor coordination
With increasing importance of ODA to the socio-economic development in Vietnam, legal framework on management and coordination of ODA has been developed with the first legislation development reflected in Decree 20/1994/NĐ-CP. The degree states clearly that “…The utilization and mobilization of ODA must base on five-year socio-economic development plans and annual development plans as well as ODA demands…” (Article 6). The Decree also set areas of priority for ODA mobilization, giving guidance for donors as well as line agencies in ODA negotiations. Since then, regulations on ODA management and utilization have been revised and amended several times in 1997, 2001, and most recently 2006 (with the promulgation of Decree 87/1997/NĐ-CP, 17/2001/NĐ-CP and 131/2006/NĐ-CP). By such amendments, issues related to responsibilities of line ministries, such as MPI, MoF, SBV, etc. and a standardized procedure for ODA utilization, are added. One of the breakthroughs in principles for working with donors is the Paris Declaration on Aid Effectiveness released in March 2005, which gave out guiding principles or “code of conduct” for behaviors and actions by governments and donors in ODA-related issues. Commitments in the Paris Declaration after that was localized and concretized in Hanoi Core Statement, which integrates ODA into mainstream planning process of Five Year Socio Economic Development Plan. Under Alignment Section, the compatibility between Vietnam‟s SEDP and donors‟ interventions is re-affirmed and shown, a set of indicators and targets are also developed to manage the commitments in a resulted-based basis. The Alignment section “Donors align with Vietnam's

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strategies and commit to use strengthened country systems”, the following principles are agreed stated between the Government and the donor community: “[…] Donors base their support on the Government of Vietnam‟s SEDP and related national, regional and provincial, and sectoral plans (Indicator 2). Donors base dialogue on the poverty reduction and growth agenda articulated in the SEDP. The Government of Vietnam and donors establish mutually agreed frameworks that provide reliable assessments of country systems, procedures and their performance. Donors use country systems and procedures to the maximum extent possible. Where use of country systems is not feasible, donors establish additional safeguards and measures in ways that strengthen country systems and procedures (Indicator 5, 6 and 8). Donors avoid creating parallel structures (PMUs) for day-to-day management and implementation of aid financed projects and programmes (Indicator 3). Donors phase out paid incentives for government officials administering aid financed activities and do not establish incentives in future activities […]”
Source: Hanoi Core Statement, p1-2

As efforts to operationalize and coordinate ODA supports, there are two important coordination mechanisms developed, including the series of Consultative Group (CG) meetings and Partnership Groups. Consultative Group (CG) Meetings for Vietnam are an innovative discussion to encourage dialogue between the Government and representatives from bilateral and multilateral donors. In addition to the official CG meeting with full participation of all donors, mid-year CG meeting is also organized in around May or June in recent years. The CG meetings are co-chaired by Minister of Planning and Investment and Country Director of the World Bank in Vietnam, providing a forum for discussions between the Government of Vietnam and its development partners. In such dialogues, the Government summarizes the development progress in the last year and key issues facing the coming year, while donors usually presents their experiences to reflect the issues raised by the Government. One important outcome of this series of CG meetings is the total ODA commitment for Vietnam every year. In addition to the CG meetings, Partnership Groups (PG) provide another coordination mechanism. PGs consist of the Government agencies donor representatives, international and local civil society organizations working in some particular areas. According to Partnership Report 2010 by Aid Effectiveness Forum and the World Bank Vietnam, Partnership Groups are recognized as good working mechanism for active and effective working interactions between participants. NGOs and private sectors are increasingly involving with PGs as active members or active observers. The report also revealed that 16 out of 24 PGs are supporting government agencies in providing guidance to donors to channel ODA funding to areas of priorities. Seven out of these 16 PGs are providing support in sector capacity building in planning, M&E, reporting and information management (AEF and WB, 2010).

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Donor strategies and involvement in private sector development; agriculture and rural development: a general discussions Private sector, agriculture and rural development in the overall strategy of the Government and donors
It is not easy to describe the involvement of the donor community in specific areas of private sector development (PSD), and agriculture and rural development (ARD) given the diversity of donors supporting Vietnam over the past twenty years. The Comprehensive Poverty Reduction and Growth Strategy (CPRGS) represents a good starting point as this is a process of intensive consultation between the Government and the donor community (though the Poverty Task Force which consists of members from multilateral, bilateral donors and international NGO communities in Vietnam) in economic growth and poverty reduction for the period 2001-2010. The CRPGS states that “[…] The Government of Vietnam takes poverty reduction as a cutting-through objective in the process of country socio-economic development […] Therefore, poverty reduction is considered as integrated part of the National, Sectoral and Provincial 10-Year Socio-Economic Development Strategy (2001-2010), Five-Year Socio-Economic Development Plan (2001-2005) and Annual Socio-Economic Development Plan […] CPRGS is a document that elaborates all general objectives, institutional arrangements, policies and solutions of the 10-Year Strategy and Five-Year Plan into detailed specific action plans […]” (SPV, 2003, p. iii). Given this significance, CPRGS serves as the comprehensive framework for support of the donor community for Vietnam. There is recently a discussion on developing another strategic document of the same significance and this is actually an on-going process between the Government and the donor community (MPI, 2011). According to CRPGS, the issues of PSD is mentioned under the Part III for „Creating a Legal Environment that supports Fair and Competitive Businesses‟ with the overall objective of “[…] to create a fair and level playing field for all enterprises, a gradual move towards establishing an integrated legal system with consistent policies and mechanisms to regulate all types of enterprises, based on the notion that the State respects and ensures the right of each citizen and each enterprise to have the freedom to conduct business in accordance with the law, is required […]” (SRV, 2003, p. 47). In addition, continuing the SOE reforms toward more transparent and profitable sector is considered as an important part of creating a level playing field for the private sector. Various directions to support the development of small and medium-size enterprises, farms and various types of enterprises in the private sector are stated including land uses, access to credit, tax exemption, and market information. In addition, the CPRGS also re-affirms the recognition and support for long-term development of household business sector, new types of collectives in agriculture as a integral part of the private sector. Foreign direct investment is also encouraged by various measures including, for instance, reviewing on a regular basis legal writings issued by central ministries and provinces related to foreign investment; continuing to upgrade infrastructure (roads, bridges, seaports, airports, telecommunication systems, power stations, etc) to attract FDI; implementation of the roadmap for harmonizing taxation regimes, and other types of fees; opening more sectors to foreign investment etc. In terms of ARD, given more than 70 percent of the population living in the rural areas and nearly 90 percent of the poor currently residing in the rural areas, agricultural and rural development is a crucial component of CPRGS. Accordingly, the Strategy states that: “[…] As the area of cultivation land is limited and the traditional agricultural product market is thin, to achieve high growth and achieve fast poverty reduction, it is necessary to simultaneously implement the following measures: (i) develop science and technology; (ii) facilitate structural change in the rural economy; (iii) build up new institutions that involve the active participation of

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farmers in production, processing and marketing; (iv) increase investments in agriculture, particularly in rural infrastructure; (v) develop human resources; (vi) reform policies on land, business environment, finance, investment and credit in order to make investment more pro-poor; (vii) implement administration reforms; (viii) strengthen international cooperation. These measures aim to achieve a number of objectives including increasing productivity and reducing production costs, increasing the competitiveness of agricultural products in domestic and international markets, diversifying agricultural, forestry and fishery production, improving processing capability in order to raise product quality and better meet domestic and export demand, creating more jobs and raising rural incomes by developing rural industry, services and other off-farm activities […]”
Source: Comprehensive Poverty Reduction and Economic Growth Strategy, p. 87

Being a key strategic document for the country‟s development path and involvement of the donor community supporting that path and given CPRGS has expired in 2010, there has been no evaluation on the implementation of the Strategy. And evaluation such comprehensive strategy is far beyond the scope of the current study. In a rare report on CPRGS conducted under the supervision of MARD and SDC (2005), some constraints in implementing CRGGS in the rural sector are highlighted. Notably, “[…] there is a widespread confusion about the CPRGS among a broad range of officials at MARD. Most of MARD departments and other line agencies (e.g. MOLISA) share a general feeling of confusion about the content, purpose, and implications of the CPRGS. In spite of wide consultations to produce the CPRGS document, there is no clarity about the key issue of the relation between the CPRGS strategy, the 10-year socioeconomic plan, the 5year plan, and various strategies promulgated by the government […]” (p. 3). In addition, the report also suggested other constraints, including (i) weaknesses in policy formulation; (iii) weaknesses in planning; and (iv) weaknesses in monitoring and evaluation (M&E).

Examples donors interventions in the private sector development
Following the strategic directions set by CPRGS, there have been a number of donors supporting the process of private sector development in the country. Table 5.5 below provides samples of donors‟ projects with direct focus on PSD. It is noted that according to the strategy documents of the organization listed, most of donors have adopted a wide and comprehensive support approach to PSD. Regarding the details of some projects listed, it shows that donors have supported PSD by many different focuses, ranging from legal and policy reforms to specific interventions such as access to finance, technical assistance, and other factors that could contribute to PSD. Many of the projects listed are also aimed at promoting SOE reforms as a way to create a more level playing field for the private sector. Due to the lack of evaluation and information on the implementation of these projects, it is not possible to evaluate these interventions. While all the donors interviewed revealed their recognition of donor-supported projects for PSD, there are many concerns. For instance, “most donors have very little experiences in working with private sector. When engaging with private sector, many donors have to choose between a „quick win‟ (for instance by supporting lead firms) or engagement with the marginalized groups” (Helvetas representative). The context of Vietnam being a MIC calls for a further focus on PSD would be needed. As SNV representative suggested, “awareness of involving private sector in development initiatives in the MIC context needs to be enhanced. A mixed support type could be possible with part of the support delivered by donors and other parts by private sector”.

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A m ou nt

Table 5.5 Some samples of donor interventions to PSD D o n o r s A D B Strategies in PSD/Areas of focus Major projects/Initiatives

Loans with focus on Developing an enabling policy environment for private sector and SMEs; Enhancing SME‟s access to finance; Improving SME‟s access to land by completing the legal framework for land; Enhancing SME‟s access to international markets through enhancing SME‟s access to industrial technical standards. Public administration, SOE reforms Source: Vietnam: Country Strategy and Programme Mid Term Review, 2007- 2010

SOE Reform and Corporate Governance Facilitation Program SOE Reform and Corporate Governance Facilitation Program Second Small and MediumSized Enterprises Development Program – Sub-program I SME Development Program Loan – Sub-program II

130 $ mil.

630 $ mil.

40 $ mil.

20 $ mil.

CIDA

In area of PSD, CIDA focus on  Support for legal and policy reforms needed for market-driven growth. Strengthening rural SMEs Enhancing skills for employment by improving access to and management of the technical and vocational education system.

Developing Entrepreneurship Legal Reform Assistance Rural Enterprise Expansion SME Development in Soc Trang Province

2.8 $ mil.

  

4.9 $ mil. 5.3 $ mil. 10 $ mil.

 

Source: Vietnam: CIDA Report 20092010 EC In 2007-2013, EC-Viet Nam cooperation program consists of: SME Development Fund (Phase II) 0.9 € mil.

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9 € mil.

Strengthening micro credit institutions in Viet Nam (and Cambodia); Working on private sector development with line ministries to implement WTO commitments in trade promotion, business associations; Providing technical assistance to SMEs; Economic reforms (especially in tax and finance)

(ended in 2008) Private Sector Support Programme Facilitating economic reforms in Vietnam

11 € mil.

Source: Report on SME and PSD by ASMED in May 2010 for CG Meeting IFC IFC‟s advisory services in Vietnam works with all levels of government and the private sector to create opportunity for local businesses – especially micro, small, and medium – to grow quickly, innovate, and raise standards. Source: IFC website IFC Advisory Services  Improving the Investment Climate (IC) Increasing private sector access to financial services (ATF) Improving competitiveness and productivity of firms (Corporate Advice) Improving environmental and social sustainability in private firms (ESS) Increasing private sector access to infrastructure (ATI) 3 € mil. n.a

ITALY

n.a

"SME Cluster Development" Project  Survey to select cluster of support Technical support in selected clusters to upgrade the capacity and competitiveness of local SMEs and to strengthen local industry associations. Establishment of win-win

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business partnerships among Vietnamese and Italian enterprises

UNIDO

Focus areas in supporting PSD during 2009-2011 consist of:  Technical Assistance to Business Registration Reform SME development in selected sectors; Corporate-social responsibility (CSR) as a business strategy for enhancing competitive advantage of SMEs in textile and garments, leather and footwear and electronics industries. UN Joint Programme on Green Production and Trade (in collaboration with FAO, ILO, ITC, and UNCTAD) on strengthening handicrafts value chains in four Northern provinces,

Assistance to private SMEs

2.1 $ mil.

Assistance to establish the national and Provincial SME support Infrastructure

1.1 $ mil.

Assistance to establish the national and Provincial SME support Infrastructure

1.1 $ mil.

Source: Report on SME and PSD by ASMED in May 2010 for CG Meeting
Source: as stated in the details and websites of the organizations listed.

Donors supporting PSD have been active in the SME Promotion and Private Sector Development Partnership Group (SMEPG). This SMEPG represents a common coordination and policy dialogue forum for donors and the government agencies. SMEPG is established initially by MPI, Embassy of Japan and UNIDO, and has been active since 1999. It is permanently co-chaired by Enterprise Development Agency/MPI, which also undertakes the secretariat functions. This SMEPG includes representatives from multilateral and bi-lateral donors as well as INGOs, including Belgium (Wallonie region), Canada, Denmark, Finland, France (AFD), Germany (GTZ, KFW), Italy, Japan (JICA, JBIC), the Netherlands (SNV), Norway, Sweden, Switzerland (SDC), and the United States (USAID), Asian Development Bank (ADB), The European Commission (EC), The International Finance Corporation (IFC), International Labour Organization (ILO),United Nations Development Programme (UNDP) and United Nations Industrial Development Organization (UNIDO). SMEPG meets every six months and may meet more often, upon call of co-chairs. According to ASMED (2010) for CG Meeting in Vietnam, SMEPG has contributed considerably in alignment of donor assistance, particularly on SME development, along the priorities and actions

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identified in the SME Development Plan 2006-2010, which were incorporated into the Socioeconomic Development Plan 2006-2010.

Samples of donors interventions in agriculture and rural development
As CPRGS provides a strong emphasis on ARD, the donor community in Vietnam has shown strong commitments on supporting ARD. ARD in Vietnam is receiving enormous support from a wide range of donors and NGOs ranging from bilateral donors, multilateral donors to INGOs. Major bilateral donors include Australia, the Netherlands, Sweden, Switzerland, Denmark, Japan and Germany. Key multilateral donors and international financial institutions consist of the Work Bank, JICA, JBIC, KfW, ADB, EC, UNDP and IFAD. In addition, INGOs are mainly supporting ARD through their interventions at provincial level and district level. A few of big NGOs also engage in policy dialogue including SNV, WWF, CARE, Oxfam UK. It is unfortunate that there are no systematic statistics on ODA projects in agriculture, which hinder a thorough analysis of how donors have been involved in supporting ARD. Instead, table 5.6 provides some samples of donors‟ intervention in ARD. As revealed from the strategies of the donors listed and the focuses in their recent projects, donors‟ interventions in ARD covers a wide spectrum of issues, ranging from supporting an „enabling environment‟ for ARD to specific and sectoral interventions such as irrigation, rural transport, resources management, agriculture extension services, innovations and collaborations in ARD, market information, safety and standards. There are also a number of interventions on cross-cutting issues such as climate change adaptation, governance, empowerment of the marginalized groups, including the poor, women, ethnic minorities. Helvetas representative suggested that “all donors have some supports for rural infrastructure. Large donors focus on large loans for rural infrastructures, small donors and INGOs focus on small scale, mostly at village level, infrastructure with participation of the community”. In addition, “donors and INGOs could be either direct investors in ARD or supporter of a more enabling environment for agriculture and rural sector”.

Table 5.6 Some samples of donor interventions to agriculture and rural development Donors Strategies in ARD/Areas of focus  Rural infrastructure development Integrated water management with strong focus on institutional issues and water resources infrastructure. Interventions to mitigate negative impacts of Climate Change
Source: Vietnam: Country Strategy and

Major projects/Initiatives

Amount

ADB

Forests for Livelihood Improvement in the Central Highlands Sustainable Rural Infrastructure Development Project in Northern Mountain Provinces Sustainable Rural Infrastructure Development Project in Northern Mountain Provinces

8 $ mil.

82 $ mil.

26 $ mil.

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800 $ mil.

Northern Chu and Southern Ma Rivers Irrigation System Agriculture Science and Technology Central Region Water Resources Integrated Rural Development Sector Project in the Central Provinces Quality and Safety Enhancement of Agriculture Products and Biogas Development Project

30 $ mil. 74.3 $ mil. 90 $ mil.

95 $ mil.

CIDA

Food security (improving food safety, quality, production, harvesting techniques via training and technical assistance for farmers and governmental agencies) Sustainable Economic Growth (support for legal and policy reforms, strengthening rural SMEs and enhancing skills for rural populations through vocational trainings)

Vietnam Agriculture Sector Competitiveness Agriculture Market Information Systems Food and Agriculture Products Quality Tra Vinh Improved Livelihoods Project

3.3 $ mil.

2.4 $ mil. 18 $ mil. 9.9 $ mil.

Source: Vietnam: CIDA Report 2009-2010

FAO

N.A

Pesticide Risk Reduction in the South East Asia Regional Fisheries Livelihoods Programme for Southeast Asia Intra-African

2.6 $ mil.

8.5 $ mil.

2.3 $

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mil.

Training and Dissemination of Technical know-how for Sustainable Agriculture and Rural Development with Africa-ASEAN Country Cooperation within the Framework of South-south Cooperation
Source: Field Programme Management Information System of FAO

IFAD

IFAD‟s comparative advantage will lie in maintaining a mandate that is tightly focused on innovative methods for poverty reduction and agricultural and rural development; forming strong partnerships with the provinces; ensuring flexible project design and implementation promoting government ownership; and providing feedback to policy from its loans and grants. Furthermore, IFAD must make sure that its investments take account of climate change scenarios and contribute to adaptation measures.

Agriculture, Farmers and Rural Areas Support Project in Gia Lai, Ninh Thuan and Tuyen Quang Provinces Developing Business with the Rural Poor Programme Decentralized Programme for Rural Poverty Reduction in Ha Giang and Quang Binh Provinces Programme for Improving Market Participation of the Poor in Ha Tinh and Tra Vinh Provinces Pro-Poor Partnerships for Agro-forestry Development Project Project for the Economic Empowerment of Ethnic Minorities in Poor Communes of Dak Nong

65.4 $ mil.

50.5 $

mil.

38.8 $

mil.

37.7 $ mil.

25.3 $ mil.

Source: Country Strategic Opportunities Paper (COSOP), 2008, IFAD

23.8 $ mil.

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161.4 $ mil.

WB

WB strategy is built upon 04 pillars, through which ARD is supported.  Pillar 1: Improving the Business Environment Pillar 2: Strengthening Social Inclusion Pillar 3: Strengthening Natural Resources and Environmental Management Pillar 4: Improving Governance

VN - Mekong Delta Water Management for Rural Development Second Northern Mountains Poverty Reduction Project Vietnam Livestock Competitiveness and Food Safety VN - Agriculture Competitiveness Project Water Resources Assistance Project Forest Sector Development Project Budget support for the National Target Program 135 Phase 2 Collaboration for Agriculture and Rural Development (CARD) Program North Vam Nao Water Control Project Implementation Support Program to Program 135 in Quang Ngai Province
Agriculture Sector Programme Support (ASPS) 2000-2007, phase I Agriculture and Rural Development Sector Programme Support (ASPS) 2007-2012, phase II

143.4 $ mil.

63.62 $

mil.

50.2 $ mil.

Source: Vietnam-Country Partnership Strategy, 2007, the World Bank.

39.2 $ mil. 14.6 $

mil.
45 $ mil.

AusAID

AusAID aims to “reduce poverty and achieve sustainable development”. Three core areas are:  Human resource development Economic integration Environmental sustainability.

20 $ mil.

 

19.5 $ mil. 9.9 $ mil.

Source: Australia Development Cooperation Strategy 2003-2007

DANIDA

Reduction of rural poverty, especially among the ethnic minorities, through sustainable agricultural and rural development focusing on the upland

n.a

Source: Agriculture and Rural Development Sector Programme Support, ARD SPS 2007 – 2012, Source: as stated in the details and websites of the organizations listed.

In terms of support coordination, there is a partnership group working closely on ARD in Vietnam, namely the International Support Group (ISG). ISG was founded in 1997 with initial focus on

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forestry. At present, it is aimed at general coordination, harmonization, and better dialogue on development issues and approaches in the field of ARD at the ministry level. It is funded via a Trust Fund, which is provided by the Government of Vietnam (MARD) and a core donors group consisting of Australia, Netherlands, Sweden and Switzerland. ISG is also joined by other bilateral donors such as Demark, Japan, Germany, and multi-lateral donors such as World Bank, IFAD, UNDP, ADB, and representatives from INGOs. ISG is a forum and partnership institution where Governmental authorities, donors, NGOs can meet for discussion of priorities, policies, strategies and experience sharing in ARD. This partnership was reviewed by Rydder et al. (2008). Overall, the study finds that the MARD partnerships have emerged as relevant instruments for ODA coordination, enhancement of aid effectiveness and wider (sub-) sector coordination. However, study also reveals that a range of programmatic, operational and institutional issues needs to be addressed to enhance partnership performance and efficiency, ownership of partnership constituencies and hence partnership viability. Particularly, the partnerships have not yet contributed significantly to mainstreaming of national level aid effectiveness, administrative reform and decentralization efforts in the sectoral context and at local levels. In addition, it is also suggested that the partnerships have only to a limited extent succeeded in engaging critical provincial and non-state institutions. In the context of Vietnam being a MIC, some active donors in supporting ARD in Vietnam has also at the stage of restructuring their strategies. AusAID has already informed their new strategy in which agriculture and rural development is excluded in the list of three pillar of its strategy. The recent new NTP on New Rural Development approved in June 2010 represents the latest policy of the Government to ARD. According to IFC representative, “There is an emphasis on promoting PSD in the context of the NTP for new rural development but the question is how?”. It seems that this question is under debate among many donors and new strategies of donors in support ARD will be re-shaped in next coming years.

Involvement of donors in the selected value chains
Given the plethora of donors‟ policies and programmes in the areas of PSD and ARD, it is not easy to provide a satisfactory assessment of their support. The above sections have provided a narrative of donors‟ involvements in the areas of PSD and ARD. This section provides further insights on the involvement of donors in PSD and ARD by focusing on their support in the three value chains reviewed in this study.

Donors and the rice value chain in MRD
There are many donor interventions in Mekong River Delta in supporting ARD with focuses on many activities in agriculture and aquaculture. However, the number of donors who directly support the rice sector is rather limited. The two major donors in the rice sector are DANIDA and ADB (see table 5.7). DANIDA has been consistently involved in supporting the rice sector in terms of post harvest and rice processing activities of the rice value chain. The first project named “Post Harvest and Rice Processing Development” was to improve the processing technology and reduce postharvest losses in three provinces of Thai Binh in the North and Can Tho, Soc Trang in the Mekong River Delta. After the completion, DANIDA continued its support on post harvest and processing activities as a component under a broader intervention of the Agriculture Sector Support Programme, which cost approximately $ 90 million (it is not clear how many percentage of this total cost is for post harvesting and processing activities in the rice value chain). The results of the component are rather encouraging with large coverage (15 provinces) and increased drying capacity for rice processors (see Box 5.2 for more details). After these direct interventions in the rice sector, DANIDA placed more focus on poverty reduction for ethnic minorities in the Northern provinces.

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ADB have supported the rice value chain in Vietnam by focusing on activities in the chain in order to minimize pre- and after-harvest losses. Different from DANIDA, ADB adopted a cross-country approach, providing support to Vietnam and some other countries in the region such as Thailand, Indonesia, the Philippines, India, China, Bangladesh, Pakistan, Cambodia. With relatively small funding, spreading across wide geographical areas, ADB‟s support is largely for capacity building and policy research activities.

Table 5.7 Donor interventions in the rice value chain in MRD Donors Name of the project Post Harvest and Rice Processing Development Project Time Amoun t N.A Target area Thai Binh Can Tho Soc Trang 2000-2007 450 DKK mil. (approx . 90 $ mil.) 15 provinces

DANIDA

1997-2002

Post Harvest Handling Component of the Agricultural Sector Programme Support
Source: Component Completion Report, No. 104.Vie.805.3, 2007, DANIDA.

ADB in Vietnam in partnership with Agriculture Engineering and Postharvest Institute

Improving Poor Farmer‟s Livelihoods Through Postharvest Technology

2003

0.94 $ mil.

Vietnam Cambodi a

ADB in Cambodia in partnership with Cambodian Agricultural Research and Development Institute ADB in partnershi p with

Source: Grant No. CAM/VIET 37666

Addressin g the Preand

Jan201 0 – Dec

2 $ mil.

Cambodi a

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China Philippine s Thailand Vietnam

IRRI

Postharve st Challenge s of the Rice Supply Chain

2011

Source: Technical Assistance Report, Project No. 43188, 2009, ADB

ADB in partnership with IRRI (component 1) ADB in partnership with IFPRI (component 2)

Component 1: Bringing about Sustainable Rice Production in Asia by Reducing Preventable Preand Postharvest Losses;

Oct 2008-Oct 2010

3 $ mil.

Component 1: Cambodia, PRC, Indonesia, and Viet Nam.

Component 2: Improving Agricultural Policies for Ensuring Food Security

Component 2: Bangladesh, PRC, India, Indonesia, Pakistan, and Viet Nam.

Source: Regional Technical Assistance Report, Project Number: 40692, 2008, ADB Source: see details in the table.

Box 5.2 DANIDA and Post Harvest interventions DANIDA has been support ARD in Vietnam for many years. One of its initial intervention in rice sector in Vietnam is a post harvest project called “Post Harvest and Rice Processing Development” (1997-2002) with the target areas in three provinces including Thai Binh, Can Tho and Soc Trang. The project aimed to support the promotion of flat-bed dryers, research and extension, and investments in modern rice processing plants in the target areas. After the success of this project, DANIDA continued its support for ARD in Vietnam by the Agricultural Sector Programme Support (ASPS) during 2000-2007, which costs DKK 450 million. The Programme is designed with 06 components, among which is Post Harvest Handling component focuses on reducing post-harvest losses at village and household level via improving

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farmers' access to low-cost threshing, drying and storage services and enabling them to selfmanage threshing, drying and storage operations. The support‟ main activities include research, training, farm demonstrations, mass media campaigns, and training courses for farmers and extension staffs and other target groups. The other components, namely Seed, Integrated Pest Management (IPM), Small Livestock, Research, Credit, and Capacity Building are also designed to support the post-harvest activities of the beneficiary households. Particularly, Credit component help target farmers get access to easier credit through use of a Loan Guarantee Fund a risk-sharing mechanism with 50% donation from ASPS and 50% from VBARD. The Post Harvest Handling component covered thirteen provinces in Mekong River Delta (MRD) and two upland provinces in the North, Son La and Ha Giang. In total, more than 110,000 farmers, service providers, extension staff, bank staff etc. have been trained or attended field demonstrations. During 2003-2007, 11,000 post-harvest equipment pieces have been added or upgraded and resulted in increased storage capacity in the North and drying capacity in the MRD of 23 percent (wet season) and led to 1-2% reduction of post-harvest losses.
Source: Component Completion Report, No. 104.Vie.805.3, 2007, DANIDA.

In addition to direct interventions in the rice sector as examples of DANIDA and ADB, many donors (GTZ, AusAID, CIDA, ADB etc.) have recently supported climate change adaptation in response to the government‟s Target Programme to Respond to Climate Change. A strong focus of these climate change adaptation interventions focuses on MRD as the most vulnerable region to climate change in Vietnam. The main activities of such initiatives are much diversified from awarenessraising campaigns by Finland-funded program to initiatives supporting biodiversity in some vulnerable areas (for instance AusAID-funded programme in Kien Giang Province). Research to assess the impact of climate change on MRD and provide adaptation strategies for stakeholders such as the ADB-AusAID research project in 2009 or CIDA-supported research activities under the Program to Respond to Climate Change in Vietnam. Climate change adaptation strategies are emphasized in the World Bank‟s Economics of Adaptation to Climate Change Project, while initiatives by UNDP in relation to mainstreaming climate change issues in socioeconomic development planning; and initiatives by the Danish and Dutch governments to develop climate change adaptation plans for a series of coastal provinces, including many in MRD. It is expected that these climate change interventions will provide awareness and introducing adaptation strategies for farmers in MRD, including rice growers. As these initiatives are mainly at the implementation stages, information on its impacts is still limited. It should be noted that the above involvements of donors in the rice value chain have not responded well to the challenges faced the rice sector as highlighted in chapter two of this study. Most importantly, there are problems with the function of the whole chain. As suggested by a World Bank staff, “the whole system is not designed to ensure that farmers could make money., just to ensure food security. 30% margin policy cannot work as large producers do not buy from farmers, they rely on traders and other smaller private producers”. Clearly, some radical changes in the regulations of the rice sector, redefining the role of the state in the sector, moving from „high volume but low quality‟ to high value rice varieties for export should be the focuses. Some donors have been active in unblocking some of these constraints by providing interventions that are based on a pro-poor value chain approach. “Many donors want to support pro-poor value chains in agriculture. However, most of them are not very successful in introducing practices and tools in order to apply this approach for pro-poor growth” (SNV representative). In this regard, there has been little involvement of donors in the rice sector.

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Donors in the coffee value chain in the Central Highland
Despite of the potential of the Central Highlands in many industrial crops and concentration of the poor, the ethnic minorities in the region, donor interventions in this region are less intensive compared to the Northern Uplands or Mekong River Delta. In the coffee sector, there are few donors involved in supporting the coffee value chain – as one of the most important export item of Vietnam. These include DE Foundation, GTZ and M4P. DE Foundation is the major donor in supporting sustainable development of the coffee sector not only in Vietnam but also in many other coffee-growing countries around the world including Columbia, Brazil, Honduras, Cameron, Peru and Uganda. GTZ is even more successful in creating a “code of conducts” for the entire coffee industry in the world with financial support from German Federal Ministry for Economic Cooperation and Development (BMZ), the Swiss State Secretariat for Economic Affairs (SECO), the Flemish International Cooperation Agency (FICA), the German and the European Coffee Federation. M4P has recently provided its support for the introduction of „wet processing‟ technique to coffee processors. Precise information on the total budget of these projects are not available, these projects are classified by the donors as small scale interventions. Table 5.7 below summarizes information on the interventions of DE Foundation and GIZ in the coffee rice sector. The projects focuses on sustainable coffee farming practices, improvements in quality, establishment of farmer groups and producer groups, enhancing capability of coffee growers and producers. The projects have engaged the participation of many different stakeholders along the coffee value chain. These two donors also collaborated in their interventions to the coffee sector. For instance, the project for Arabica coffee in Tan Lan, Quang Tri province is financially supported by GTZ but received considerable technical assistance from DE Foundation. Given the challenges exposed to the coffee value chain players as reported in chapter 3, these projects have responded well to some key challenges in terms of improving farming practices and quality of coffee planted in the Central Highlands.

Table 5.8 Donor interventions in the coffee value chain in the Central Highlands Project information DE FOUNDATION
Objectives

Main activities/outcomes  Until 2010, 2,400 farms in 3 cooperatives, 9,600 people. Additional 6,000 farms reached through training, 24,000 people First new-styled cooperative established and in operation Bulk buying of fertilizers by farmers at lower prices Discussions with local banks to provide credit to farmers Training is developed as

Project: Enhancing the competitive position of coffee production in the Central Highlands of Vietnam Duration: 201012 Target areas: Dak Lak, Gia Lai and Lam Dong

Establish one farmer organization per selected province to provide services to its member, Improve coffee quality, promote sustainable production and increase the coffee sector competitiveness Raise awareness of all players via campaigns and a Farmer-to- Farmer trainings on Good Agricultural Practices (GAP) and

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a service package to be sold by the cooperative  800 farmers are keeping field book records

province 

Entrepreneurial skills Promote and disseminate lessons learnt for scaling up

DE FOUNDATION

Establish stable producer organizations Improve the agricultural and processing practices of producers. UTZ Certification*

800 farms and 4,000 people are involved Production cost reduced by 28% in 2008 vs. 2007 Processing techniques improved 103% Return on Investment (ROI) in 2008 103% Return on Investment (ROI) for 2008, 153% ROI in 2009 for farmers 564 farmers UTZ certified

 Project: Quality and Sustainability Improvement of Robusta Production and Trade in Gia Lai, Vietnam, Duration: 200709 Target areas: Chu Se District, Gia Lai Province

DE FOUNDATION

Improve coffee cultivation practices Develop an organization that supports producers by providing technical advices.

150 farms, 1,000 people reached More efficient use of fertilizers & pesticides Improvement of production and productivity whilst less use of fertilizers Production costs reduced by 31% Gross margin at farm level tripled Enormous reduction of waste Producers are UTZ

  Project name: Farmer Field Schools as training methodology for better crop management in Tan Lam Commune, Duration: 200106 Target areas: Tan Lam Commune, Khe

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Certified

Sanh District, Quang Tri GTZ  

Project: Quality enhancement and environmental improvement in the coffeegrowing industry Duration: 200210 Target areas: All coffee growing countries

Greater sustainability for the entire coffee sector through creation of a “Common Code for the Coffee Community (4C)” that applies globally.

93 members in 4C around the world More than 14,000 farmers now produce coffee in line with 4C standards on some 153,000 hectares, amounting to some 274,000 tons of coffee a year – a good four percent of global production.

Source: website of DE Foundation and GIZ Notes: *UTZ Certification is a certification program for agricultural products launched in 2002 which claims to be the world largest coffee certifier.

Box 5.3 below represents an interesting intervention by DE Foundation and its partners in supporting the coffee sector. Though this is a small intervention, the output of that project is to create a coffee „cooperative‟ Lam Vien, which focuses on supporting their members in negotiations for inputs and selling outputs. Collective negotiations help to consolidate the bargaining power of the cooperative members in the transactions and thus expect to provide more benefit for the coffee growers. This is an experiment of a farmer‟s organization without any interventions from the authorities working together on voluntary basis and for their mutual benefits. What matters for this type of intervention is the possibility of scaling up the model. At this stage, it is not clear whether the project has secured any political commitment to support this approach to a wider scale. Box 5.3 A new model for coffee production in Vietnam In 2010, DE Foundation joined with the Rabobank Foundation and the Dutch Ministry of Agriculture, Nature and Food Quality (currently named Ministry of Economic Affairs, Agriculture and Innovation) to implement a challenging project with a strong focus on organizational development for coffee farmers in Vietnam. The project named “Enhancing the competitive position of coffee production in the Central Highlands of Vietnam” is created with the ambition to gather coffee growers to capitalize on economies of scales, reducing costs and improving income for farmers. One of its intermediate outcomes is the establishment of Lam Vien coffee, the first New Style coffee cooperative in Vietnam. Under this project, Lam Vien Coffee Cooperative was established in September 2010 by 237 founding members who grow coffee on 426 hectares in Di Linh, Lam Dong province. Though there have been a great deal of cooperatives in Vietnam since the 1950s, so-called "new style"

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cooperative emerged only during the last few years. The big difference with previously established cooperatives is that "new style" cooperatives can be initiated by non-state actors and be run with a minimum of government interference. As a farmers' organization, Lam Vien will support its members not only by collectively buying inputs, but also by marketing coffee in bulk to large buyers. Selling larger volumes is expected to maximize profit margins for members. To ensure its viability, the Lam Vien cooperative operates on the seven principles of the International Cooperative Alliance that are commonly understood to be hallmarks of successful cooperatives. During the official inauguration of the cooperative, Mr Doan Trieu Nhan, who has been active for 60 years in the Vietnamese coffee sector and is often described as the „father‟ of Vietnamese coffee said: "This is really emotional for me to see the establishment of Lam Vien, the first coffee cooperative in the country. Such a coffee farmers' organization is an ideal model to improve farmers' access to technical assistance and market access, thus creating a better position for Vietnamese coffee farmer in the market” Mr. Nguyen Van Tu, Director of the Department of Rural Development Lam Dong said "Many of the existing cooperatives could provide up to 80% of the required inputs for their members, but none could provide the marketing of outputs. We really hope that Lam Vien can set a good example of supporting sales, because sales are crucial to all farmers."
Source: DE Foundation website

Box 5.4 represents an intervention initiated by both donor and a private sector company to tackle one of the problems facing the coffee sector: sun-dried processing practice. As documented in chapter 3, coffee growers in the Central Highlands apply sun-drying practices and this is founded as bad quality-decreasing practice. As an experiment to new practice, the first coffee wetprocessing station in Vietnam was established with the support from VCF under the M4P project (managed by ADB and funded by DFID). By applying new sorting, washing and drying practices, the green bean produced is of better quality. Notably, procedures are also applied to comply with the Fair Trade certification requirements and as a result, the green beans produced are Fair Trade certified. At the expected output of 350 tons by the end of 2011, this is a small station. “Lead firm approach is not ideal but the model promises impacts and sustainability. The key is to build up working contract systems between lead firms and small holders” (IFC representative). In this regard, promoting such contract system is essential for the success of this model. However, by this intervention, the donor and its private partner has introduced a new and important practice for coffee processing and it could contribute significantly to quality of coffee. What is important in the coming years is how to scale up this experiment to other coffee growers. Though some technical assistance could be useful in sharing experiences and helping the authorities to promote this approach, the state, private sector, and coffee farmers will have to take their responsibilities in adopting this innovative practice. Box 5.4 Wet-processing station for small-sized coffee growers in Vietnam In May 2011, the first smallholder-owned and operated coffee washing station in Vietnam was launched by UK's Department for International Development (DFID) in Ban Ma Thuat, Dak Lak. This coffee project is one of the 11 projects supported by the Vietnam Challenge Fund (VCF), a component of Making Markets Work Better for the Poor, Phase 2 (M4P2), which is managed by ADB and funded by DFID. Launched in late 2009, the Vietnam Challenge Fund provides cofinancing grants to innovative business projects that seek to catalyze systemic changes doing

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agri-business in Vietnam, so as to raise the incomes of the country‟s rural poor. The project is implemented by Dak Man Vietnam in collaboration with a coffee-growing cooperative in the Ea Kiet commune of Dak Lak province. This innovative facility is the first wetprocessing station for small-sized coffee growers and outputs of this process can get international Fair Trade Certificates, helping increase the farm-gate prices of coffee. The facility aims to produce 350 tons of Fair Trade-certified semi-washed coffee by the end of 2011. This project promises to play a leading role in the development of a significant new market segment for high valued Vietnamese coffee in the international market. "The important thing is that Vietnam's coffee farmers can get the full benefits from the coffee they produce. At this DFID-funded project, farmers are adding more values to the beans they grow through sorting, washing and drying, and consequently improving the livelihoods of their families. I hope that this project would serve as a case study for experience-sharing to other coffee growers in Vietnam," said Mr. Alan Duncan, Minister of State for International Development, the UK. “We view this as an important breakthrough for the coffee sector in Vietnam. Our hope is that this project will open a new niche market for Vietnamese coffee in the international market,” said Mr. Jonathan Clark, Managing Director of Dak Man project “and that this project is a win-win situation as both our company and the coffee growers can benefit from the project.” “We are extremely excited by this project. - said Buddhika Samarasinghe, Team Leader of M4P2 - For a relatively modest amount of money, VCF is helping to catalyze a major change in the way coffee is processed and traded in Vietnam. If the project becomes successful in the future, it would be replicated in many other areas of the country, and thus have a significant impact on the rural poor”.
Source: M4P Website

Donors in the organic vegetable value chain in RRD
There has been very little involvement of donors in supporting the development of organic vegetables. ADDA organic project as described in chapter your represents a small scale intervention of INGO in the value chain. Another example is the case of organic tea in Ha Giang supported by SNV and Vietnam Challenge Fund (VCF). The case of ADDA organic project represents an interesting example of donor support for high value agriculture. By providing training for farmers, the project has enhanced „capability‟ for farmers to move from „ordinary‟ vegetables as „normal‟ products to a high value product. Starting from the „zero‟ situation, the ADDA organic has encountered a number of difficulties. First, there are no effective regulations on organic products in the set of recent legislation developments on food hygiene and safety (with the exception of the basic national standards on producing and processing organic products, 10TCVN – 2006). Second, and to some extent as a result of the lack of standards on organic products, public awareness and understanding of organic products are inadequate. Third, farmers have been used with their farming practices and it is not easy to switch to more complicated requirements and procedures of producing organic products. Given the performance of the organic vegetables CIG visited during the fieldtrip, it could be reasonable to argue that the ADDA organic project has been quite successful as a first experiment in initiating the start of organic vegetables productions in its target provinces. The future of organic vegetables depends on many other factors that cannot be tackled within a small project like the ADDA organic vegetables.

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Apart from the ADDA organic project, there is another intervention in the area of organic agriculture product in a northern province of Ha Giang. This is the case of Hung Cuong Company (HCTC), which is supported by VCF and SNV to develop organic tea in the province. HCTC is a well-know tea producers in Vietnam and has invested in the clean production process and acquired ISO 9001: 2000; HACCP for their products – which are mainly for export markets. With technical support from SNV, HCTC has recently been granted under VCF to embark on the first organic tea project in Vietnam. Similar to the ADDA organic project, HCTC has provided training for farmers, supported the development of organic tea CIGs, and facilitate the certification process as required by a certifier from Thailand. Given its long tradition of exporting clean tea products to European and East Asian markets, HCTC is aiming at exporting their new organic tea products to these markets (see below). It is however too early to assess the progress of the HCTC organic tea project but some implications on developing high value organic products could still be drawn. Notably, given an experienced and export-oriented tea producer, switching to high value organic tea is only realized under a support initiative from outside, both financially and technically. It implies that initial support from donors or government will be necessary to facilitate the development of organic agriculture products in the early stages. Box 5.5 Organic tea project of HCTC supported by SNV and VCF Hung Cuong Company (HCTC) has been established for 10 years with major lines of production and trade in general trading; collecting, purchasing, processing agricultural products for exports (all kinds of tea) and hotels, restaurants. Their main products include Black tea, Yellow tea, Scented tea, tea bag, Pu-erh tea, Ginger, Turmeric. These products are produced from the ancient Shan Tuyet trees grown naturally in the mountainous areas at the height of 1.500 m over sea level surface. These products have good package, good endoplasm, clean, pure and safe to use. These products have been exported to many countries, for instance, India, Taiwan, Japan, America, Canada, Denmark, Portugal, Germany and Great Britain. Currently, the Company has developed 5 tea processing factories which are located in the largest supply areas in Ha Giang provinces. The Company applies the clean production process using no pesticide. The Company‟s production process and tea products have been certified in accordance with ISO 9001: 2000; HACCP, recreating jobs for around 1000 farmers and 300 full time workers. In a latest business development, HCTC with the support from SNV has been granted the support under Vietnam Challenge Fund in 2010 to start the new business line of organic tea. The processing facility is located in Cao Bo factory. Under this new business plan, SNV is working closely with HCTC to carry out the project approved by VCF. Under the organic tea project, 11 organic tea grower CIGs were established in 11 villages of Cao Bo commune with participation of 643 farmers. These farmers were trained with the techniques and requirements of growing and collecting organic tea while heads/vice heads of the groups were trained on group management, quality control. A number of 600 thousand organic tea seedlings have been distributed to farmers for growing organic tea according to the techniques trained. Information on tea farm plots are recorded by farmers according to the standardized guidelines from HCTC. At the same time, HCTC have signed contracts with these groups to ensure that their tea leaves are bought at the agreed prices and required quality. HCTC has worked with a certifier from Thailand to provide further technical support and supervision to ensure that the tea harvested will meet the certification process for organic tea. HCTC focuses on this organic tea project as a breakthrough in their product portfolio and aims at the export market for its new organic products.
Source: HCTC website, internal report of SNV on the progress of HCTC

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As suggested in chapter 4, key constraints for the development of the organic vegetable value chain are highlighted as the lack of sufficient legal background related to standards and certification for organic products, fragmentation of agriculture land and existing farming practices, and untapped market demand for organic products due to low public awareness of organic agriculture. In this context, supporting the development of organic vegetable in particular and of organic agriculture products requires interventions from the authorities and from many other donors. The donor community could be a good position to enhance capability for farmers to switch to high value organic agriculture products.

Some conclusions
Facing a constraint on data availability on the donors‟ support to PSD and ARD, this chapter provides a snapshot, on the basis of the information available, on how the donor community has involved in supporting PSD and ARD in Vietnam. Stemming from this analysis, the following conclusions could be drawn. First, the community of donors has been pro-active in supporting the development agenda of Vietnam, in which PSD and ARD are among the key pillars. This willingness has been re-enforced by impressive and inclusive economic growth that put Vietnam among the top performers in the developing world. As a result, there have been a number of several donors, bilateral and multilateral, providing support in a plethora of programmes and projects, either in terms of direct support, or budget support, or trust fund to other multilateral donors or international financial institutions. The complexity in types of support, areas of support, management arrangements, and ODA coordination hinder a satisfaction assessment of the donor community‟s support within the scope of this analysis. But there is no doubt that donors, especially few largest donors, have been contributed an important role in the recent development agenda of Vietnam. Second, there is a heavy concentration of ODA to some largest donors for Vietnam, including Japan (though JICA and JBIC), World Bank, ADB, and Germany. These donors account for around 70 percent of the total ODA signed for the country. Clearly, the roles and impacts of the donor community will be largely driven by the strategies and portfolio of these largest donors. In fact, these donors have engaged in most of aspects of the development agenda in Vietnam, from infrastructure development to access to public services, from industry to services and ARD, from policy and institutional framework to enhancing capacity for civil society organizations and citizens. This created a background for other smaller donors (in terms of the scale of financial support) to either enhance the support areas led by the largest donors or find the niche to engage in the development process of Vietnam. According to discussions with the donors interviewed under this study, this setting is recognized and perceived by most of them as the key „coordination‟ setting of ODA in Vietnam, through the role of the series of CG meetings or PGs should not be underestimated. Third, PSD and ARD have been the two important pillars of the development agenda of Vietnam, as stated in CRPGS. Supporting PSD focuses on policy advocacy to create a level playing field for the private sector and this focus is also reflected in a number of initiatives to encourage SOE reforms. The engagement of donors in the process of the Enterprise Law is a good example of how donors have contributed to the legislation development for PSD. In addition, a number of programmes and projects have been introduced to facilitate better access for the private sector, especially rural SMEs, to credit, land allocation, and other support from the authorities, business development services, and human resources. In terms of ARD, the largest donor-funded projects are for rural infrastructures such as rural transport, irrigation, electricity, and other rural infrastructure facilities. In addition, there are several projects of small or medium scales supporting livelihood diversification for rural farmers, enhancing capabilities for rural people, especially for the

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poor and ethnic minorities. IFAD is among the most active donor in this area with a number of medium-sized projects supporting livelihood diversifications, pro-poor value chains, decentralization to improve living standards of the rural poor and sustainable rural production with a strong market orientation. Given the limited information on budget of these interventions available for this study, it could be argued that while enhancing capabilities and creating an „enabling environment‟ for PSD and ARD are considered, the support to rural infrastructure has taken most of financing of donors for PSD and ARD. Fourth, the rice sector – being the most important agriculture export of Vietnam – has encountered many challenges. Switching from „high volume and bad quality‟ to high quality and (thus volume) rice export requires radical changes in most stages of the rice value chain and perhaps, redefine the role of the Government in regulating this sector. In this context, donor‟s interventions in the rice sector are very thin and do not seem to respond sufficiently to the challenges. Examining available information on the donor-supported projects in the rice sector, the focus has been placed mainly on post-harvest handling and a set of recent projects that tackle the broad issues of climate change in MRD. Given the importance of rice as a livelihood for many poor farmers and in national food security policy, there are rooms for further intervention in the rice sector, especially on policy advocacy to reform the regulations on the sector and facilitation of the switch to higher value added rice export. Fifth, the coffee value chain in the Central Highlands plays an important role in economic development of the Central Highlands and industrial crops of Vietnam. Being a world second largest coffee exporter, the coffee sector however embodies a number of weaknesses. Most notably, growth of coffee production and export is largely driven by intensive fertilizing and watering on Robusta monoculture cropping to get unusually high yield. This coffee growing pattern is proved to be unsustainable and needs to be changed. In addition, poor farming practices, simple and low technological processing practices have undermined quality of Vietnam‟s coffee export. Given these key challenges for a sustainable development of the coffee sector in Vietnam, there has been however very few interventions of donors (also of the Government) to the coffee value chain in the Central Highlands. DE Foundation, GIZ, and M4P are the few donors in this sector, providing support of small scales. The focus is given to introduce experiments of new farming practices and processing applications. While these interventions could be considered as innovative and successful in their own scope, the wider impact of such interventions depends on whether such experiments could be scaled up. At this stage, there is no background to suggest a level of readiness from all the key stakeholders for scaling up such experiments. Therefore, sustainability of this approach is subject to further consideration and should not be over-stated. Sixth, the organic vegetable value chain represents an interesting but challenging direction in moving from „high volume but bad quality‟ to high value agriculture. In the lack of legislation background, sufficient technical standards, and certification, some INGOs have experimented small-scale support in order to introduce organic vegetables to farmers in provinces in RRD. Given the increasing concern on food safety, it is surprised that the market for organic food remains unawake in the big cities of Vietnam, where living standards have been improved drastically over the past two decade. Low public awareness and insufficient legal and technical background are among the key constraints. Unfortunately, while donors are calling for the move toward high value agriculture, there has been very little support to this type of initiative. The future of organic vegetable and, more generally of the organic agriculture sector in Vietnam is promising and close involvements of the authorities, private sector, and donors are clearly needed. “Moving to high value agriculture is challenging. Domestic private sector could be too weak to absorb while small farmer could fail to upgrade their capability to absorb potential benefits from technical assistance by donors. In addition, donors‟ approaches might not be relevant to farmers” (World Bank

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representative). In addition, “there is an increasing recognition of moving to high value agriculture. The question is who will drive this switch? Currently, it is empty. No one there to promote such strategic move in agriculture”. This is probably a test for the increasing commitment toward high value agriculture in Vietnam.

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Conclusions
Vietnam has experienced a very interesting and unique transformation over the past two decades. From a peasant economy under the central planning economy with no recognition of private sector and collective agriculture system, the country has moved toward a market economy in just a few years without ending up in disorder and collapse of the state-owned sector as experienced in many other transitional economies. Collective agriculture system was abolished and thus autonomy in economic decision making was returned to individual farmers. The private sector was officially recognized and a number of reform measures were introduced toward a level playing field for the private sector. State monopoly in trade was also removed and participation of the private sector in trade transactions, either domestic or foreign, was encouraged. Investment incentives were also initiated to attract domestic and foreign investment. As a result, Vietnam has transformed from a country suffering hunger to one of the world largest exporters of agriculture products. The private sector started from „zero‟ to a dominant position, especially in terms of job creation. As the rural economy growing, poverty reduction has been impressive with millions of the poor was lifted out of hunger and poverty. The retreat of the Government from its direct commanding role is arguably one of the most important factors contributing to that striking transformation. Reviewing the reform measures and the current role of the Government suggest that after the retreat, it does not seem that the Government has retained a role as a driving force of the rural economy and private sector development. Instead, it is found that the Government of Vietnam is moving closer to a role of a government in a free market, pursuing the role as a provider of public goods while retaining some direct interventions in special areas. These direct interventions are usually justified by equity or other political background. For instance, the Government has been active in several programmes and projects which aim at rural poverty reduction and narrowing the urban-rural gaps in living standards. In the case of the rice sector, concern on food security – which is historically a severe problem – is probably the main reason underlying direct interventions of the Government in the rice sector. Apart from these direct interventions, the rural economy is now driven by individual farmers and private sectors. The case of coffee sector could be considered as a good example of private sector-driven value chain, where government interventions almost do not exist. Given the Government has „given‟ up most of its direct interventions, it is the private sector and farmers to drive the rural economy. The recognition of the private sector development in the 1992 Constitution and a series of legislation reforms with the cornerstone of the Enterprise Law have freed the private sector to take new opportunities. Foreign investment is also attracted to formulate a growing foreign-invested sector. In fact, this foreign-invested private sector has steadily replaced the role of SOEs as the leading sector in industrial growth and export. In the rural economy, millions of household businesses and informal micro enterprises currently exist as arguably the most important driving force of the rural economy. Findings from this study however suggest that benefits generated from the growing rural economy have not been distributed equally. In the case of the rice sector, it was reported that most of rice growers are actually net rice buyers and only those with largest paddy land possession (around less than one fifth of the total) has shared most benefited from the net rice surplus, while the majority of rice farmers in the MRD who are net rice buyers cannot make a living from growing paddy. The case of coffee represents a similar story, around 90 percent of coffee growers are small landholders with coffee planting areas of less than one hectare. Given the heavy reliance on fertilizers, agro-chemicals, and watering, the net income for smallholders could be very thin through their farm-gate prices were found at around 90 percent of the total FOB price – which is exceptionally high compared to any other agriculture crops. Notably, there is evidence to suggest that coffee growth has been quite costly in terms of

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environment and other social aspects. As coffee production is largely under the majority and the migrated ethnic minorities, pushing the indigenous ethnic groups further to less fertile land. This was the causes of recent tensions in the Central Highlands. Another important issue from this private sector-led rural economy is the quality problem. Farmers plant the crops that they are used to; the private sector does its business to the best for its profit; and the rural economy keeps growing „high volume but bad quality‟ products. Rice and coffee are two examples of this „„high volume but bad quality‟ growth. In the case of rice, being the second largest rice exporters, Vietnam‟s rice export is generally lower quality (and thus lower price) compared to these of Thailand or India. In the case of coffee, being the world leading exporter of Robusta and second leading exporter of green bean in general, Vietnam is exporting the „mix bag‟ low quality products to „easy‟ international buyers. Being a „high volume but bad quality‟ supplier, Vietnam hardly exerts any influences on international market prices and thus being a price taker in most cases. Is this the private sector to blame for being „high volume but bad quality‟ price taker in international agriculture markets? Answering this complicated question is difficult and clearly goes beyond the scope of the current study. However, it could be argued that overcoming the problem of being a „high volume but bad quality‟ price taker requires concerted efforts and this process should be led by the Government in the first instance. Land reallocation, new seed application, extension services, quality certification, trade promotions etc. are among the issues that need to be tackle for a move toward high value agriculture. In these aspects, the private sector cannot and might not be willing to take a leading role. The failure of the organic vegetable value chain is evident for this argument. Producing organic vegetables is considered as a move toward high value agriculture. Despite of having untapped potential market, efforts of farmers and some private companies seems to be „a drop in the ocean‟. Developing this value chain requires much more than the current initiatives and efforts of the current actors in the chain. This raises an interesting question on how international donors could support Vietnam in such important challenges of the rural economy. The community of donors have been active in supporting the country‟s development agenda. Reviewing their support is however complicated due to data availability. Given data available to this study, it seems that donors have strongly focuses on creating and supporting an „enable environment‟ for economic growth and poverty reduction in general and for agriculture, private sector in particular. Evaluating this focus is very difficult due to the complexity and variety of support, and data constraints. One „indirect‟ way to provide further insights for this study is to see how donors have responded to the challenges embodied in the value chains selected. The findings are striking in the sense that there has been very little involvement of donors in supporting the strategic move toward high value agriculture in Vietnam. It could be argued that the time for cheap food is ended and the prospect of Vietnam‟s agriculture sector, as well as millions of rural inhabitants depends on whether and how Vietnam could move toward high value agriculture. Unfortunately, this study indicates that either the Government or donors are found silent in this strategic challenge.

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References
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Prepared by: Platform Secretariat Published by: Global Donor Platform for Rural Development Godesberger Allee 119, 53175, Bonn, Germany Study conducted by: Overseas Development Institute, London Authors: Pham Thai Hung, Le Thi Quynh Nga, Do Thu Trang Photo credits: www.123rf.com/haak Date of publication: December 2011

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