FOOD POLICY AND MARKET REFORM IN VIET NAM AND BANGLADESH

During the past decade, the collapse of communism and the economic stagnation in countries with widespread market interventions have convinced many developing-country policymakers of the wisdom of market-oriented development strategies and made market reform a popular buzzword. But how to conduct such reforms under various conditions is not always clear. Over the past several years, IFPRI has applied its expertise in food policy research and analysis to critical issues of agricultural market reform in many developing countries, including Viet Nam and Bangladesh. These two countries present contrasting situations: while Viet Nam is trying to make the transition from a command to a market economy, Bangladesh already has a large-scale private system of production but considerable government intervention in foodgrain markets. IFPRI's research has made substantial contributions to market reforms in both of these countries, and these efforts offer important lessons about how to bring about policy change in developing countries.

The two countries share several characteristics. Both bear the painful burden of pervasive poverty, with roughly the same per capita average income of US$300 per year. The agricultural systems in both countries are shaped by the deltas of some of the mightiest rivers in the world--the Ganges, the Brahmaputra, and the Meghna in Bangladesh, and the Mekong and Red Rivers in Viet Nam. Both countries are densely populated. In Bangladesh, a population of about 120 million lives in an area of about 147,000 square kilometers (68 percent of which is agricultural land), while in Viet Nam about 78 million people live on about 330,000 square kilometers (22 percent of which is agricultural land). In both countries, rice is the dominant crop, with agriculture relying heavily on small-scale peasant farms of about one hectare each.

Despite these similarities, the high rate of growth in agriculture in Viet Nam during the last decade (about 5 percent) differs dramatically from the low rate in Bangladesh (about 2 percent). This contrast can be attributed to several factors.

A more egalitarian distribution of assets, particularly land, in Viet Nam means that the benefits of agricultural growth are more widely distributed in the rural areas, where the majority of the population, and the poor, live. Any initial spurt of growth in agriculture has a greater chance of multiplying, because most of the profits earned by rural households are reinvested in the rural economy. In contrast, Bangladesh has always had a privately owned and operated system of agricultural production. Almost 20 percent of the rural population in Bangladesh is landless, compared with less than 3 percent in Viet Nam. While the poor are spread throughout Bangladesh, they are relatively concentrated in the northern mountains and central highlands in Viet Nam. About 80 percent of agricultural land in Viet Nam is irrigated, compared with only 30 percent in Bangladesh. The rate of literacy is high in Viet Nam (80 percent) and low in Bangladesh (27 percent). Finally, participation of women in the labor force, including the agricultural labor force, is much higher in Viet Nam than in Bangladesh.

Although the two countries have had different agricultural production histories, both are seeking the most efficient ways of ensuring food security for the poor and promoting a healthy rural economy through reform of their agricultural markets.

Rice Market Reforms in Viet Nam
Since it began dismantling its communist structure of agriculture and distribution in 1988, Viet Nam has achieved spectacular success in agricultural production. Agriculture and rice production have grown at about 5 percent per year. By the mid-1990s, however, it became clear that the momentum of growth could not be sustained as long as the domestic market was only partially liberalized and the export market remained a public monopoly. The initial high growth rate for rice production and the low quota for rice exports had already acted as a disincentive for rice producers.

In 1995, the government of Viet Nam and the Asian Development Bank asked IFPRI to undertake an in-depth investigation of rice marketing practices. The research included three main components. First, IFPRI conducted a detailed study of the structure and operation of rice markets. Second, IFPRI identified and analyzed the incentives and constraints to marketing, including the impact of existing interventions and reforms on farmers, processors, traders, exporters, and consumers. Third, IFPRI evaluated the effects of various policy options on national and regional income, production, prices, consumption, and the welfare of different groups (farmers, rural and urban households, and poor, vulnerable groups). In conducting this evaluation, IFPRI developed the Viet Nam Agriculture Spatial Equilibrium Model (VASEM), an important tool used by both IFPRI and the Ministry of Agriculture for analyzing rice policy options.

IFPRI's research contributed to a number of policy changes. Traditionally, the north of Viet Nam has been a food-deficit area. The mountainous areas in the northern and central regions are populated by ethnic minorities with relatively low incomes, and the food security of these people is of enormous concern to the government. To address this critical policy issue, the government historically controlled the supply of rice to the north from the south through public agencies and restricted the movement of grain from south to north. IFPRI's study of domestic markets demonstrated that regional price differences were in excess of transportation and marketing costs and that liberalization of the domestic rice market would substantially reduce the regional price differences. In other words, past policies caused consumers in the north to pay more for rice from the south than they would under a free market system. Internal trade liberalization would strengthen rather than weaken food security in the north. When the government liberalized the domestic trade of rice and paddy and ended public shipments of rice to the north in favor of market shipments, price differences across regions were reduced. IFPRI predicted that the benefits of this measure could be between US$60 and US$100 million per year.

In 1995, Viet Nam imposed an export quota of 2 million tons of rice. The conventional wisdom was that higher exports would endanger the food security of the country in general and of the poor in particular. According to IFPRI research, Viet Nam had the potential to export close to 5 million tons of rice. Because land distribution is relatively uniform in Viet Nam, most farmers, including most of the poor, are surplus rice producers and would benefit from an increase in the rice price. (Some poor farmers in the mountains are the exception.) In effect, the quota system served as a tax of about 25 percent on domestic producers and a rent for state-owned enterprises equivalent to about US$130 million per year. In 1997 the government raised the rice export quota to 3.5 million tons and in 1998 to 4 million tons. These decisions added about US$200 million to national income and contributed to a mild reduction in rural poverty. IFPRI estimated the benefit of removing the quota completely to be between US$250 and US$350 million per year; at the same time poverty was predicted to fall by about 3 percent in rural areas.

IFPRI research also found that the rice marketing system in Viet Nam was underdeveloped. A few large state enterprises had access to capital and trade, while a multitude of small and medium-sized private enterprises had only limited access to credit and world markets. In 1997 and 1998, therefore, the government greatly increased the opportunities for private enterprises of various kinds to export rice. The number of rice exporters increased from about 15 in 1995 to more than 30 in 1997. The provinces with surplus rice in the Mekong River Delta are now playing a more important and autonomous role than in the past, when one company had a virtual monopoly in rice exports. Although the government still sends confusing signals about private participation in rice trade, recent policy statements augur well (it is almost a certainty that at least some private companies will be allowed to export in 1998). In 1997, paddy prices did not decline as they had in previous years. The link between higher rice exports, higher paddy prices, and a healthier rural economy is now widely recognized.

The IFPRI study also documented that market information was scarce for both the private and the public sectors, with high costs in missed opportunities and inappropriate decisions. In November 1997 the government established an agricultural market monitoring unit within the Ministry of Agriculture. Currently, the system traces domestic, border, and international prices for about 10 agricultural commodities, using national and international databases and electronic sources.

Finally, in Viet Nam, the task of training people to perform market analysis was paramount. IFPRI trained about 20 people in survey techniques, data entry, data processing, regression analysis, time series analysis, and computer graphics. It also trained about 20 people from various ministries, government agencies, and organizations in food and agricultural policy analysis. It took senior policy advisers to Thailand so that they could learn from the experiences of the world's leading rice-exporting country, and it presented its agricultural policy model, VASEM, to a large number of Vietnamese institutions. These capacity-building activities will be a lasting legacy of IFPRI's work in Viet Nam.

Although agriculture in Viet Nam has made enormous strides, the country still faces important policy challenges that will require further policy analysis. First, Viet Nam must develop competitive markets, particularly export markets for agricultural products. Second, it must diversify into high-value agricultural products (such as vegetables, fruits, and livestock products) and rural industrial goods (such as processed meat, starch, and juices). Finally, it must define new roles for the government, such as monitoring market development, correcting problems as they appear, and facilitating the emergence of institutions and infrastructure that will support sustainable growth.

Food Policy Reform in Bangladesh
Public intervention in the foodgrain markets of Bangladesh started during the great Bengal Famine of 1944, at the height of World War II, and went through various modifications in the following decades. By the late 1980s, public involvement in food markets included rationing schemes to distribute foodgrains to all urban consumers and the rural poor; a food-for-work program for the un- and underemployed; a vulnerable group development program for destitutes; a public stock of foodgrains through which grain was bought and sold to stabilize prices; a public monopoly on imports; and a host of regulatory measures to facilitate these interventions.

From 1989 to 1994, IFPRI collaborated with the Bangladesh Institute of Development Studies and the Ministry of Food on a project designed to measure the effects of these programs. Bangladesh asked the collaborators to suggest alternatives or modifications; to determine how much foodgrain the public procurement program should buy, stock, and distribute, and at what price; to measure the budgetary and economic costs of interventions; and to assess the nature of private markets and their relations with public marketing. In addition, the project studied the comparative advantage of various crops in order to formulate policies for diversification that would enhance long-term food security in rural Bangladesh. To strengthen the country's own capacity for food policy analysis, project leaders developed a food policy planning and monitoring unit in the government by training employees, involving them in research, and installing a program of computerized food policy information.

The evaluation of the rural rationing scheme revealed that the cost to the government was very high and that 70 percent of the program's foodgrain was not reaching the target population. The government abolished rural rationing, saving an estimated US$60 million per year.

To extend help to the rural poor, the government wanted an alternative to the rural rationing scheme. Thus a food-for-education (FFE) scheme was devised to fill the gap. Because the poor tended to depend on their children to earn additional income, they often did not send them to school. The FFE scheme provided income to poor households in exchange for sending their children to school and helped pull the poor children out of poverty by developing their capacity to participate in gainful economic activities.

A similar evaluation of urban rationing (locally known as statutory rationing) revealed that the leakage of foodgrain away from the target population was even higher in urban areas, about 92 percent. The government ultimately suspended this program.

Public procurement and the open market sale of foodgrains, ostensibly for price stabilization, were also examined from a number of angles, including timing, quantities to be procured and sold, prices at public transactions, modes of operation, and their impact. This research showed that procurement through competitive bidding (locally called open tendering), instead of purchase from rice mills through bilateral negotiations, would save the government around US$25 million annually and have a greater impact on price support. The pricing of foodgrains in procurement and open-market sales was shown to be most efficient when prices were set with some relation to market prices. These procurement operations have also been modified as a result of IFPRI's research.

Foodgrain markets, the study revealed, are reasonably competitive, and processing and marketing facilities are progressively being developed. The marketed surplus of rice is now about 50 percent of production, compared with about 12 percent in the mid-1960s. The government has suspended the licensing of traders, the antihoarding law, movement restrictions on foodgrain, and restrictions on credit to traders. Reforms are expected to contribute to more competition and market development. The government has also reduced the target public stock from 2 million to 0.8 million tons. For the first time, import trade in foodgrains has opened up to the private sector. Another study on the cost of the entire public foodgrain distribution system demonstrated that this cost was quite high (about 12 percent of public expenditure for development) and cut into funds that could have been used to develop infrastructure or conduct agricultural research in Bangladesh.

The research on agricultural diversification motivated the World Bank to mount a mission to explore the possibility of accelerating agricultural growth through diversification. The government and donors are still pursuing this possibility.

The period covered by IFPRI's project in Bangladesh, a time of extensive reform of food policies, was also a period when domestic production of foodgrains grew faster than it had since 1970. Whether Bangladesh can sustain and build upon these reforms will depend primarily on how it manages the food and agricultural system in periods of serious shocks and how rapidly the overall economy and the income of the poor grow in coming years.

Lessons for Market Reform
Policy change occurs when conflicts regarding the change are resolved. Different political systems have differing capabilities for resolving such conflicts. It may seem that Viet Nam, with the greater control offered by a communist political system, was in a stronger position than a democratic Bangladesh to carry out the drastic measures necessary for effective reform. To a certain extent this has been the case and is reflected in Viet Nam's transition from a command economy to a market-oriented system. However, Vietnam has not yet fully freed up its higher tiers of marketing. The suspicion that full liberalization will erode the foundation of its political system has made the government cautious. But the forces favoring change have been unleashed, and a retreat is unlikely even though the process will move slowly. Bangladesh, on the other hand, has a pluralistic set of political forces, and progress in liberalization in good economic times may be partially reversed in bad times. To influence policy, research-based information must take into consideration this political configuration.

Whether a country is a net importer or an exporter of foodgrains and whether its foodgrain production is growing fast or slowly make significant differences in the ability of the political system to make policy changes. Thus, Viet Nam, a major rice exporter with sustained agricultural growth, has been making gradual but consistent changes since the initial commitment to market reforms in 1996. Bangladesh made substantial changes when rice production was growing quickly, but a few years of stagnant production created nervousness and allowed the forces arrayed against change to gain ground. Although a reversal is unlikely, owing to donor pressure and the commitment of some policymakers, further progress toward a competitive market may have to wait for another round of rapid growth in production.

Irrespective of political differences, a country initiating reforms must develop a market monitoring institution that can trace bottlenecks and identify emerging problems in order to solve them as soon as they occur. In the absence of such an institutional mechanism, small problems can grow into bigger issues that threaten the success of the reform process.

In most societies, policy change implies some losers and some gainers, and making the gainers aware of how they may benefit can counter the pressure against change that may arise from potential losers. Also, wasteful policies often endure simply because of the hidden nature of the outcome of such policies. Transparency of information can evoke a powerful process of change. In Bangladesh, for example, although it was interaction with policymakers and others that actually led to policy change, research helped create a favorable environment for change by revealing a hidden system of waste and rent-seeking.

Finally, an approach to strengthening capacity for food policy analysis must take into consideration the institutional differences among countries. Viet Nam has numerous institutions for policy research but lacks experience with and knowledge about market economics, which has hampered the usefulness of these institutions. In contrast, Bangladesh has many trained analysts but few institutions to conduct food policy analysis. Therefore, it has been eminently sensible for the two countries to take different approaches to their capacity-building efforts.

Raisuddin Ahmed is director and Francesco Goletti is a research fellow of the Mrakets and Structural Studies Division at IFPRI.

Photo credit: Philippe Berry

IFPRI 1997 Annual Report Essay: Financing Science for Global Food Security