Intergovernmental Fiscal Relations and Poverty Alleviation in Viet Nam

Abstract

Key issues of intergovernmental fiscal relations arise in all three aspects of Viet Nam's poverty alleviation strategy: Broad-based growth, human resource development, and safety nets. Spending and revenue decisions need to be more decentralized to ensure that pro-poor expenditures (such as local infrastructure, health care, and education) reflect the preferences, needs, and fiscal abilities of different localities. The central government can ensure a minimum social safety net throughout the country by designing intergovernmental transfers accordingly. A successful poverty alleviation strategy has four distinct elements: (1) identifying who the poor are, where they are located, and what they do, (2) analyzing why they are poor, (3) developing policies to improve their standards of living (usually aimed at accelerating economic growth and improving their income-earning opportunities), and (4) supplementing income-improving policies with direct safety net policies to increase the poor's short-term consumption entitlements. The precise mixture of capacity-improving investments and safety net policies appropriate for any country will depend on the country's income level, the extent and nature of its poverty problem, and many other factors. The strategy chosen must be implemented effectively. Spending and revenue decisions need to be more decentralized to ensure that the poverty alleviation policies adopted reflect the preferences, needs, and fiscal abilities of different regions of the country. The nature of that decentralization depends on the country. Pro-poor services throughout Viet Nam are underfunded. This problem is particularly acute in the poorer areas. Improvements in the system of intergovernmental finances could help ensure that each level of government, even in the poorer provinces, is adequately funded - and provided with sufficient expenditure and revenue raising autonomy - to support local investments and their operation and maintenance. Since poor provinces are less able to mobilize additional local revenues to support services, well-designed intergovernmental transfers are particularly important. Provinces must play a greater role both in raising revenues and in allocating expenditures, with incentives built in to ensure that they do so responsibly and efficiently. Local governments must - if they are to be held accountable for their actions - have some responsibility for determining local tax rates. This will allow them to vary rates to collect more revenues to finance higher levels of public services if they so choose, and at the same time allow the central government to design its transfers in such a way as to ensure that local fiscal efforts are not discouraged by the receipt of such transfers. Richer provinces will tend to collect greater revenues. When transfers are needed to finance local spending in poorer areas, they should provide incentives for local revenue mobilization and allow for some degree of equalization. Services deemed of national importance (for example, a minimum level of education, health care, and social relief) can be promoted by designing specific-purpose transfers. These services must be identified and varying matching requirements established for different provinces depending on such factors as their own revenue base and the cost of providing services in that province. This paper - a product of the Country Operations Division, East Asia and Pacific, Country Department I - is part of a larger effort in the department to develop a comprehensive poverty alleviation strategy for Viet Nam. This paper was prepared as a background document for the Viet Nam Poverty Assessment and Strategy Report 13442VN, January 1995.