Linking Economic Growth and Poverty Reduction--Large-Scale Infrastructure

in the Context of Vietnam’s CPRGS--

GRIPS Development Forum

September 25, 2003

Objectives of the Study

• Analyze the role of large-scale infrastructure in economic growth and poverty reduction in the context of Vietnam.

• Focus on trunk infrastructure, benefiting many (or more than one) provinces, in the transport and power sectors.– Core function as economic and industrial

infrastructure.– Largely corresponding to “A” category of PIP.

Background and Process

• Contribute to the current GoV effort on CPRGS expansion.

• Build on the government-donor partnership, including:– MPI, MoT, EVN, provincial authorities, etc.– World Bank, ADB, Japan, UK/DFID, AusAID, et

c.– Consultation of draft Concept Paper with intereste

d parties. Also, distributed at mid-term CG Meeting at Sapa (June 2003).

Topics for Discussion

1. Pro-poor growth?2. Analytical framework for assessing the

role of large-scale infrastructure3. Specific features of Vietnam4. Case analyses -- Linkages among

infrastructure, growth and poverty reduction

5. Implications for future strategic planning and aid partnership in Vietnam

(1) Pro-Poor Growth?

• Broad consensus on the importance of growth in reducing poverty--but, inconclusive on the range of policy measures to attain pro-poor growth.

• Recent discussions, narrowly focused on direct poverty-targeting measures.

• Channels and linkages--many ways to cut poverty, direct and indirect. Strategy should be geared to each country.

Three Channels of Pro-Poor Growth

(1) Direct channel (impacting the poor directly)

--Basic health, education, sanitation, rural roads, etc.

(2) Market channel (growth helps poor via economic link

ages, or “trickle down”)

--Inter-sectoral and inter-regional labor migration (cf. Chinese TVEs)

--Increasing demand (cf. proto-industrialization, multiplier effect)

--Reinvestment (formal, informal and internal financing), etc.

Three Channels (contd.)

(3) Policy channel (supplementing the market channel and guiding the development process toward greater equality)

--Taxes, subsidies

--Fiscal transfer, public investment, infrastructure

--Micro and SME credit and other financial measures

--Proper design of trade and investment policies

--Pro-poor legal framework, etc.

Pro-Poor Infrastructure?

• Basic infrastructure: direct contribution to poverty reduction through the direct channel.

• Large-scale infrastructure: – Contributing to growth and poverty

reduction through the policy channel.

– Serving as a pre-condition for realizing the market channel.

(2) Analytical Framework:Distinct Features

The impacts of large-scale infrastructure:• Broader and complex (beyond the project

site) -- compared to small-scale infrastructure -- through linkages effects

• Need time to emerge fully, also depend on supporting policies and the supply of other infrastructure.

• Large expenditure flows.• Mode of utilization and management matters.

Analytical Framework: Linkage Effects

First-round impacts1. Investment-inducement effect 2. Regional economy activation effect3. Effective demand effect4. Social dimensionSecond-round impacts (broader andmore general)1. Fiscal revenue and multiplier effect

Economic Dimension

Market creation/expansion

・Increased incentives to entry・Opening up new economic opportunities・Improved productivity of existing economic activities

Procurement・Materials・Labor demand

Improved social indicators

Improved infrastructureservices ・Availability・Cost reduction・Time saving・Reliability

Social DimensionImproved access to basicsocial/public serviceswith availability oftransport & power supply

Effective demand of infrastructure construction(& operations)

New investment・FDI・Local investment

Regional economy activation

・Rural ・Urban…via: agriculture,off-farm business,tourism, services,manufacturing etc.

Fiscal channel: Increased

revenues for:・Pro-poor programs・Infrastructure・Recurrent costs etc.

Sustainability

Foreign residents/ travelers’ demand

Private channel(Trickle down)

・Investment・Consumption

Employment creation

Growth

Linkages among Large-Scale Infrastructure, Growth, and Poverty Reduction:Hypothetical Illustration

Poverty Reduction(1st Round Impacts)

Poverty Reduction(Broader Impacts)

Infrastructure Development

Higher Income

Simulation: Poor's Share in Income Increase

0%

20%

40%

60%

80%

100%

0 0.1 0.2 0.3 0.4 0.5 0.6

Poor

50:50

Rich

Initialimpact on

Rich's marginal propensity to consume on poor's goods

Rich’s Consumption Behavior and the Income Multiplier

(3) Specific Features of Vietnam

• Rapid growth has been effective in reducing poverty.– Continued progress in poverty-reducing growth

(VLSS 1993, 1998, 2002).

• Growth had raised fiscal revenue, resulting in higher public expenditure on infrastructure, education and health etc. – Increased aid flow (from mid-1990s) also helped

GoV effort.

Revenue

Expenditure

FiscalBalance

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000p

Government Revenue and Expenditureduring 1986-2000

Specific Features of Vietnam

• Existence of social safety net (despite its weaknesses) and re-distributive role of public expenditure. [PER2000]

– Relatively high social indicators by low-income country standards.

• A high proportion of the population is clustered around the poverty line. The poor and non-poor are not static groups. [VDR2000]

• Importance of creating economic “opportunities” and “trickle-down” effects through linkages.

Opportunities vs. VulnerabilityHistogram of per capita expenditures, 1998

Source: VDR 2000

(4) Case Analyses of Linkages

Large-scale infrastructure projects (selected from tho

se recently completed and under operation):

(1) Improvement of National Highway No.5 and the expansion of Hai Phong Port (supported by JBIC and Taiwan, completed in 2000).

(2) Construction of My Thuan Bridge and the improvement of National Highway No.1 (supported by AusAID and World Bank, completed in 1999-2000).

Case Analyses of Linkages

(3) Power supply and regional electrification, particularly by the construction of North-South 500 kv Transmission Line (by GoV, com

pleted in 1994).Complementary analyses:(4) Reproductive health project in Nghe An pr

ovince (supported by JICA, ongoing)

(5) Connectivity study of rural roads, focusing on Lai Chau and Hung Yen provinces (DFID study underway) -- forthcoming.

Case 1: National Highway No.5 (NH5) and Hai Phong Port

• Strengthened the Hanoi-Hai Phong northern transport corridor, serving as arteries for traffic flow of export and import, and domestic products. – NH5: travel time between Ha Noi and Hai Phong halved f

rom 3.5-4 hours to 1.5-2 hours; and

– Hai Phong port: expanded and now equipped with container-specialized port.

• Sharp increase in traffic volume: 1) NH5 -- doubling during 1999-2003; 2) Hai Phong port -- container cargo rising 50% from 2001 to 2002 alone.

Highways and Port Link Two Centers, Attracting

Investment and Diffusing Growth to Rural AreasRed River Delta Region

Northern Transport Corridor Ha Long Bay

Hwy 5

By land & air

Hai PhongHai Phong Port

By water

National & Global Economy

Ha Noi

NH 5 and Hai Phong Port:Linkage Effects

1. Rapid industrial growth and FDI attraction (--investment-inducement effect)

2. Agricultural diversification and off-farm business expansion (--regional economy activation effect)

3. Booming tourism in Ha Long Bay (--regional economy activation effect)

FDI Inflow to the Four Provinces along NH5 (1989-2002)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

mil. US$

0

20

40

60

80

100

120

No. of FDI projects

Registered Capital Number of FDI

Source: JBIC/IDCJ (2003)

FDI Impacts (Example)

• Four major IZs (Thang Long, Nomura-Hai Phong, Noi Bai, Sai Dong B): 98 FDI projects (as of June 2003), two-thirds of which came in or after 2000.

• These industrial FDI firms:– Account for 85% of FDI in the northern IZs, both in num

ber and registered capital. – Employ about 14,000 workers (to be increased further).

• FDI firm perception: – Nearly 90% of firms would not have come without two t

ransport facilities. [JBIC/IDCJ firm survey]

• Hung Yen: Major increase in FDI (15 of 23 projects came in 2002).

0

100

200

300

400

500

600

700

800

900

Liv

esto

ck

Fis

hery

Handic

raft

Com

merc

e

Real

esta

te

Facto

ry

Rem

ittance

Oth

ers

Farm

ing

Unit: mil.VND

1997

2002

Growth and Diversification of Rural Income in Hung Yen and Hai Duong (1997-2002)

Source: Based on the survey on 206 rural households (JBIC/IDCJ 2003).

Unit: thous. pers

0

500

1,000

1,500

2,000

2,5001995

1996

1997

1998

1999

2000

2001

2002

InternationaltouristDomestic tourist

Number of Tourists to Quang Ninh (1995-2002)

Source: Statistical Yearbook of Quang Ninh

Unit: VND. mil

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1995 1999 2000 2001

Turnover of Tourism in Quang Ninh (1995-2001)

Source: Statistical Yearbook of Quang Ninh

Case 2: My Thuan Bridge and National Highway No.1 (NH1)

• Changed the nature and volume of economic linkage between two centers (HCMC and Can Tho), opening up the Mekong Delta.

• Critical reduction in travel time between HCMC and Mekong Delta cities.– Time for crossing the Tien River cut from 32 to 5-6 min. – Together with road improvement, travel time between H

CMC to Can Tho reduced from 4.5-5 to 3.5 hours (by one-third).

• Sharp increase in traffic volume between HCMC and Delta cities -- even where NH1 does not pass.

Bridges and Highway Link Two Centers andActivate the Mekong Delta Economy

Ho Chi Minh CityCan Tho12

By waterBy land, water & air

Hwy 1

National & Global Economy

Mekong River Region 1: My Thuan Bridge2: Can Tho Bridge (Planned)

My Thuan Bridge and NH1:Linkage Effects

1. Natural resources-based industrial growth (--investment-inducement effect, cum regional economy activation) :Can To industrialization linked to domestic investment and local economy

2. Tourism development in Can Tho(--regional economy activation effect)

Can Tho

0

1000

2000

3000

4000

5000

6000

1995

1996

1997

1998

1999

2000

Pre

l 2001 

An Giang Kien GiangCan Tho Soc TrangBac Lieu Ca Mau

Industrial Production in West Mekong Delta(at constant 1994 prices)

Source: GSO (2002)

Agriculture Production in West Mekong Delta(at constant 1994 prices)

Agriculture

An Giang

Can Tho

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

1995

1996

1997

1998

1999

2000

An Giang Kien Giang Can Tho

Soc Trang Bac Lieu Ca Mau

Kien Giang

Source: GSO (2002)

Fishery Production in West Mekong Delta(at constant 1994 prices)

Fishery

Kien Giang

Ca Mau

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1995

1996

1997

1998

1999

2000

Pre

l 2001

An Giang Kien GiangCan Tho Soc TrangBac Lieu Ca Mau

Bac Lieu

Source: GSO (2002)

Viet Foods Co. Ltd(a private firm specializing in frozen shrimps, in Can Tho IZ)

Natural Resources-based Industrialization (Example)

• Can Tho: Tra Noc I & II, Hung Phu IZ have about 80 firms (mostly domestic, 20 FDI). One-third of FDI firms came in or after 2000. [Source: CEPIZA]

– Domestic and FDI firms in IZs employ about 13,000 workers, at present.

– They benefit about 10,000 rural households for input procurement etc.

• Other Delta provinces: participating in new economic opportunities, taking advantages of their resource potentials.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

Foreign

Vietnamese

Number of Tourists to Can Tho(person-days)

Source: Statistical Yearbook of Can Tho

0

1

2

3

4

5

6

7

1994

1995

1996

1997

1998

1999

2000

2001

2002

Foreign ($40/day)

Vietnamese ($15/day)

Turnover of Tourism in Can Tho(US$ million)

Source: Statistical Yearbook of Can Tho

Case 3: North-South 500 kv Transmission Line (T/L)

• 1994 - 98: Transferred low-cost, surplus electricity from the north to the south and central region until:– Capacity expansion of thermal power plants, ut

ilizing offshore natural gas (exploited in late 1990s).

• 1999/2000 - present: Provides system stability by shifting electricity between regions.

Before 500KVT/L

Coal

North

Central Region

Diesel

Gas

Coal

South

Hydro

After 500 KV T/L (1994~1998)

Coal

North North

Central Region

Central Region

Diesel

Hydro

SouthSouth

After 500KV T/L(1999/2000~ )

Hydro

Hydro Hydro

Hydro

500KVT/L

500KVT/L

Diesel

Source: Prepared by the study team based on the information from Electricity of Vietnam (EVN).

Electricity Transfer between North, Central, and South

North-South 500 kv T/LImpacts (Examples)

• Overall impact on the economy: sustaining high economic growth and improving livelihoods in the latter half of the 1990s.– Mitigated power shortages in the central region and

the fast-growing south (--real GDP growing at 9.2%, average of 1996-97).

– Supported about 75% of electricity demand in the central region, about 20% of the south (--equal to approx. 40% of industrial demand for electricity).

[Data: based on WB 1998, average of 1996-97]

Annual Growth of Electricity Demand by Region (%)

1992 1993 1994 1995 1996 1997

North 5.4 6.8 12.1 16.0 14.0 12.8

Central 17.2 15.0 25.4 25.6 21.3 19.6

South 6.7 16.6 21.0 23.3 21.1 15.2

Real GDPGrowth

8.7 8.1 8.8 9.5 9.3 8.2

Source: World Bank (1998)

North-South 500 kv T/LImpacts (Examples)

• Improved power supply conditions since around 2000, through network expansion (e.g., substations, 220 kv line) -- Achieved together with subsequent increase in generation capacity (e.g., Phu My, Ba Ria), distribution and transmission.

– Firms (HCMC and its vicinity): cheaper and more reliable power supply, after connecting with the EVN network.

• Greater access to electricity in rural areas:– Supporting the rural electrification program (1997- ).

Expansion of Electricity Network

South

0

400

800

1200

1600

1990 1995 1999Year

0

1000

2000

3000

Extension of 220kv trz(km)

Capacity of Sub-station for 220 kv(MVA)

Capacity of S

ub-station for 220kv (M

VA

)

Ext

ensi

on o

f 220

kV tr

z(k

m)

Source: EVN

47.0

68.7

22.0

83.780.0* 82.1

0.010.020.030.040.050.060.070.080.090.0

North South

1993 1998 2002

Households Using Electricity as Source of Lighting by Region

Source: World Bank (1997), GSO (2000), GSO (2003) based on VLSS2002

Note: The 1998-2002 decrease in the north is attributed to changes in regional division.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1997-1998

2002

Others

Gas, Oil,KerosenelampsBatterylamp

Electricity

Source of Lighting among the Lowest-Income Group

Source: GSO (2000), GSO (2003) based on VLSS2002

(4)-4. Road Network and User Access to Social Services

• Experience of the JICA-supported Reproductive Health (RH) Project in Nghe An province (ongoing, 1997- ): regional service delivery program based on community participation, covering all 469 communes in the province.

• Findings of our field visit (June 2003):– Importance of the strengthened function of road ne

twork (i.e., with improved trunk roads) in enhancing physical access, quality, and IEC of service delivery programs.

Complementary Nature of Different Levels of Roads.

• Trunk roads and inter-commune roads: – Important for the productivity of service providers

(e.g., health workers at provincial MCH/FP, DHC, CHC, and project staff), facilitating communication and knowledge sharing and establishing a monitoring system, etc.

• Inter-commune roads and inter-hamlet roads:– Essential for both users and service providers to

ensure physical access to core health services (at CHC) and information, and treat emergency cases (at DHC).

Road Network and Project Activities(Perspective from RH Service Providers)

Inter-hamlet roads(by 2 wheel, on foot, boat)

Hamlet CHCCommune

DHCDistrict

Inter-commual roads(by 2 wheel, on foot, boat)

Access to medical serviceContraceptive Method

Pre-natal Check-ups

Delivery Attendance

Obstetric Complications Attendance

Access to information

Consultation to Health Worker

Participation to IEC Seminar

Road Network and User Access to RH Service

Source: Elaborated by the study team, based on the field survey in June 2003.

(4)-5. Synthesis

In Vietnam, trunk infrastructure in transport andpower has helped:1. Creation of sources of growth.2. Spreading of linkages between growth

centers and their surrounding rural areas.• Broad impacts: both direct and indirect.• Structural change in regional (and even national)

economy.• Initial impacts: not necessarily on the poorest group

(except for social service delivery)—but, “virtuous cycle” emerging with increased purchasing power.

Synthesis

• Importance of complementary policies and interventions.– NH5 and port: other trunk roads (NH1, 10, 18), fe

eder roads.– NH1 and bridge: proposed Can Tho bridge?– Electrification: central & local governments, priv

ate sector, and communes (in generation, distribution, and transmission)

– RH: social service delivery and infrastructure.– FDI policy, education, agriculture extension, etc.

Synthesis

• Potentially negative externalities:

1. Road safety.

2. Resettlement and land acquisition: Time-consuming and delaying construction work.-- but, the experiences also show that if properly handled, affected families could enjoy benefits of infrastructure development.

• Importance of capacity building for social and environmental monitoring.

(5) Future Strategic Planning and Aid Partnership

Large-scale infrastructure as an integral part of overall development strategy.• Importance of a shared vision toward equitable

growth, macroeconomic stability, and environmental stability.

• Need to pay attention to complementarities: with policies, institutional aspects, and other investments, etc.

• Need to strengthen the link between large-scale infrastructure investments and strategic planning.

Future Strategic Planning andAid Partnership

• Need for capacity building in investment planning, sector policy, selection criteria, financing, O&M, regulatory framework etc.

• Aid partnership to support GoV’s effort, with each partner playing a complementary role based on its strength(s).– “Best mix” of policies, measures, aid programs

and projects—under a shared vision and strategies.

Shared Development Vision Strategies and Policies for Promoting Growth

and Poverty Reduction

Measures/

Objectives

Large-scale Infrastructure

Rural roads

Human capital

Targeted interven-

tions

Capacity building

Growth Creation

X X X

Growth

DiffusionX X X X

Direct poverty reduction

X X X X