PRO-POOR POLICY OPTIONS / VIETNAM: THE CASE FOR AGRICULTURAL COOPERATIVE PROMOTION

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1 PRO-POOR POLICY OPTIONS / VIETNAM: THE CASE FOR AGRICULTURAL COOPERATIVE PROMOTION INTRODUCTION This policy brief suggests that a systematic and coordinated national programme promoting agricultural cooperatives is an effective strategy for improving the agricultural sector and lifting farmers out of poverty. In particular, the brief recommends Viet Nam focus on building cooperative and government capacity and ensuring that legal frameworks bolster existing commitments to cooperatives. Policy analysis findings and recommendations from studies conducted under the auspices of a Pro-poor Policy Formulation, Dialogue and Implementation at the Country Level project inform this brief 1. Between 2007 and 2010, the Food and Agriculture Organization Regional Office for Asia and the Pacific (FAO-RAP), with support from the International Fund for Agricultural Development (IFAD), implemented this project in partnership with governmental and non-governmental organizations in eight Asian countries. The project goal was to enhance institutional capacity to conduct policy analysis, formulate and implement pro-poor agricultural and rural development policies. In total, twenty-three policy studies examined issues identified by national level dialogues in all project countries 2. CONTEXT Viet Nam has made remarkable progress in reducing poverty over the past 15 years (Figure 1) (ADB, 2006). Although Viet Nam has met its Millennium Development Goal (MDG) target of halving extreme poverty well before the deadline, poverty reduction rates have begun to slow down. Strong efforts therefore remain necessary to reach the national goal of reducing the proportion of Vietnamese people living below the international poverty line by 40% between 2001 and 2010 (WHO, 2009). Figure 1. National Poverty Rates in Viet Nam ( ) 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 58.10% 37.40% 28.90% 19.50% Ninety percent of poor Vietnamese households live in rural, isolated areas. Many have small or no landholdings and depend on agriculture as a primary 10.00% 0.00% source of income (AusAID, 2002). As such, interventions targeting rural farmers remain a relevant strategy for poverty alleviation in Viet Nam Five background papers, written by Dr. Hoang Van Chinh, Dr. Nguyen Thai Van, Mr. Ha Van Ngac, Mr. Phung Quoc Chi, and Mr. Bui Dac Cuong, informed this brief. Study findings were also utilized to develop a policy proposal on cooperative promotion, authored by Dr. Hoang Van Chinh, Tran Van Long, and Tran Nhu Trang, which has been submitted to the Government of Viet Nam. An English version consolidating the five background studies can be accessed by contacting: INFORMATION. 2 Other policy issues selected for Viet Nam include Public Private Partnership for Irrigation Service and Development and Land Consolidation linked to Labor Transformation.

2 The 2003 Law on Cooperatives and subsequent decrees encourage the development of cooperatives in every economic sector in Viet Nam, as a form of collective economy that expands production, employment and business. On average, each province has four staff dedicated to cooperative management and districts have two. Provincial Departments of Cooperatives deal with daily operations, although each Percentage Land preparation Internal credit Veterinary Electricity Input supply Services Seedlings Plant protection Figure 2. Percentage of cooperatives providing services, 2004 (MARD) cooperative board is ultimately responsible for their group s activities and management. The Ministries of Agricultural and Rural Development, Industry-Commerce, Transport, and Construction, and State Bank of Vietnam provide oversight and policy guidance at the national level. Irrigation In 2007, Viet Nam boasted 8,432 agricultural cooperatives and more than 6.3 million members, meaning that almost 60% of farmers belonged to a cooperative (MARD, 2008). Average agricultural & forestry cooperative revenues were 513 million VND (30,200 USD). Cooperative services (Figure 2) play an important role in Viet Nam s agricultural production investment and development. PROBLEM STATEMENT Although cooperatives are a vibrant force in Viet Nam, a number of internal and external shortcomings have limited their development and therefore opportunities for improving people s lives. These challenges include: Endogenous factors Low management capacity: Under-developed decision-making, implementation organization, and credit management skills threaten cooperative sustainability as well as the development of more profitable endeavours, including marketing services. Human resource capacity is central to this issue; nearly 30% of cooperative managers have completed primary school as their highest level of education, with another 40% having completing the lower secondary school course. A small proportion has completed secondary school or higher education (generally in agriculture or economics). Low competitiveness: currently, the private sector dominates in supplying input and output marketing services. Low profitability: More than three-quarters of cooperatives earn profits around 40 million VND (2,200 USD) before tax, on average. Return-on-assets (ROA) has been around 7%, which is lower than inflation rates (12%) in recent years. Exogenous factors Lack of national framework for action: National policies are not fully harmonized in support of cooperatives. The State Bank of Viet Nam s legislative framework restricts cooperatives democratic governance and limits their flexibility. Policies handicapping cooperative development and implementation must therefore be revised. Rather than expecting cooperatives to deal with obstacles individually and on an ad-hoc basis, government support in the form of a coordinated nation-wide programme to promote agricultural and aquaculture cooperatives is necessary to reach development plan outcomes. 2

3 Government official conceptions and capacity: Low government official awareness of cooperatives and skills to strategically lead and manage cooperatives. CURRENT STATUS OF SELECTED COOPERATIVE OPERATIONS Capacity building and training National and province-level training institutions and agricultural universities provide formal skills and knowledge training through short courses as well as informal coaching. The Ministry of Agriculture and Rural Development and Cooperative Alliance for Vietnam training schools pilot courses to mentor management officers. Commune and provincial cooperative officers can enrol in one- to two-week-long cooperative management trainings. One-year trainings on business legislation and professional administration skills are also offered to cooperative management boards. Province-level trainings are organized in accordance with development plans, although budgets are limited and sometimes unevenly distributed. Internal savings & credit A small percentage of all agricultural cooperatives in Viet Nam currently offer credit services (Figure 3). These services partially fill a gap in the financial market by providing poor farmers short-term seasonal loans for investment in commodity production and intensification, at competitive interest rates lower than private lenders 3. Smaller loans often do not require collateral. Figure 3. Status of cooperative internal credit services operation by region, 2007 Nation-wide Total Central Highlands Region Mekong River Delta Region North East Region North West Region North Central Region Red River Delta Region Cooperative loan funds range from 170 million to 2 billion VND, with South Central Region individual loans ranging from 500,000 to 45 million VND. In Tuyen Quan District, about 50% of cooperative members on average were borrowing from cooperative loan schemes. About 30% of cooperatives have deposit-taking activities, with monthly interest rates that are about % higher than commercial bank rates. A national initiative is working to promote and extend cooperative credit services nationwide by Marketing services South East Region As of 2006, only 10% of cooperatives nation-wide offered marketing services and 7% of members utilized marketing services for food commodities. Yet successes with marketing contracts, trade marking and value adding to foods through processing suggest a number of innovative practices and lessons learned for scale-up. Marketing contracts have benefited Phuc Ninh sugar cane cooperative and cow milk production-marketing cooperative members 3 In the first half of 2008, cooperative interest rates ranged from 1.0 to 1.35% per month, which was % per month lower than commercial bank loan interest and significantly lower than private money lenders rates of %. 4 Project for collective economy development in agriculture period of

4 in Vinh Phuc province and Ho Chi Minh City by guaranteeing farmers a market and providing production material in advance. In addition, since the introduction of the Hoa Loc sweet mango trademark in 2007, the cooperative has expanded its domestic and foreign market share and increased prices by 60% (40,000 VND/kg versus 25,000 VND/kg). 4

5 POLICY OPTIONS Strengthening cooperative and state management officers capacity and ensuring that legal frameworks bolster existing commitments to cooperatives are suggested as a means to improve cooperative operations and innovation, as well as their ability to respond to domestic and global market demand. In addition, a broader programme encouraging the development and promotion of cooperatives is suggested. These strategies are closely linked to Government Decree No. 88/2005/ND-CP, which aims to train cooperative officers and members, establish funds for cooperative development, and provide preferential treatment on development loans, among others. Specific strategies include: 1. Improving the legal framework for cooperative services Ensure that the legal framework for cooperative credit activities is balanced, practicable, open, safe and provides room for growth. Steps should be taken to remove existing constraints to cooperative growth and to further facilitate association of credit-providing cooperatives into clubs, networks, and cooperative unions. Revise or amend an inter-ministerial circular to lower restrictions and encourage cooperative member savings as part of cooperative credit activities. The State Bank of Vietnam should coordinate with relevant bodies to provide training and support implementation. Encourage policies focused on market development and a legal framework that favors market promotion for new products, including processed and trade-marked crops. Policies encouraging cooperative marketing partnerships (federations) and signature of contracts with buyers can also assist in this area. 2. Strengthen cooperative management capacity Raise awareness of legislation and build necessary skills so that cooperatives can be an effective bridge between farmers and markets. Cooperatives can then prepare a master plan for training of their cadres. Provide all cooperative members with general trainings and awareness building regarding cooperative laws, values and policies, as well as member rights and obligations. Basic information can be transmitted through simple, easy-tounderstand training materials, as well as mass media campaigns. Facilitate longer duration (2 to 3 week) and full time skill-based management training, and continued supervision, to enable cooperative managers and officers to assimilate learning through practice. In addition to general content, training will address issues and skills particular to each position. 3. Strengthen organizational structure for state management of cooperatives Upgrade central and local level officials capacity by providing practical needsbased training, administered by qualified trainers. The College of Management for Agriculture and Rural Development, in coordination with the Department of Cooperatives and Rural Development, will plan for training and fostering of cooperative management officers and cooperative state management officers. 5

6 Improve budgetary support to training, especially longer-duration programs required to build capacity. 4. Operationalize the above recommendations through a project promoting agricultural cooperatives between 2010 and 2020 Support to short and long-term training for cooperative managers and officers. Also develop Training of Trainers (TOT) in which a central level of trainers trains provincial staff on cooperative governing policies and legislation, project planning & management, finance and service management organization. Training will produce 2 trainers per province, for a total of 133 trainers. Support to infrastructure development by provision of funds for 1) building and renovating cooperative offices, and 2) facilities for materials supply and processing and support to market development. Also support irrigation and electricity infrastructure construction and enable cooperatives to claim subsidies through the policy on irrigation fee remittance (Decree No. 115). Develop several integrated multi-function cooperative business models which emphasize material supply, production consumption, internal credit, and associated machinery use. CONCLUSIONS While Viet Nam has made impressive progress on reducing poverty in recent years, persistent pockets remain, especially among rural farmers. Agricultural cooperatives have a rich history of serving farmers and providing agricultural services. Although cooperative development and promotion has enjoyed the support of the Vietnamese Government, a number of both internal and external obstacles limit the progress and optimization of opportunities that cooperatives present, especially in terms of credit service and marketing service provision. Viet Nam can take the following steps to remedy these challenges: Improve the legal framework for cooperative services Strengthen cooperative management capacity Strengthen organizational structure for state management of cooperatives Operationalize the above recommendations through a project promoting agricultural cooperatives between 2010 and REFERENCES: Asian Development Bank, Vietnam Poverty Assessment. Accessed on: Centre for International Economics, Vietnam poverty analysis. (Prepared for the Australian Agency for International Development). Accessed on: Ministry of Agricultural Development - Government of Viet Nam, Internal Report. 6

7 World Health Organization- Western Pacific Region, Vietnam Millennium Development Goals. Accessed on: 7