DFID to throw weight behind two big CG issues

2 June 2008

At the upcoming Consultative Group (CG) meeting, the UK plans to address key issues, including high inflation.  Vietnam Investment Review's Binh Chau talks with Keith MacKiggan, acting head of the UK's Department for International Development (DFID) in Hanoi, to gain insight on these issues.

As far as I know, DFID plans to discuss the impacts of high inflation and soaring food prices on the poor in the upcoming CG meeting. Could you clarify the gravity of the issue?

High inflation and food prices are common topics of discussion these days. Food prices have risen at a rate of over 30 per cent by March. The food price hikes may benefit the majority of the poor in rural areas, as they are food producers. However, the hikes negatively affect the urban poor, who still must subsist on a very low income despite having to pay more for food.

An analysis by Linh Vu and Paul Glewwe of the University of Minnesota shows how food and rice price increases stand to impact on different groups of people in Vietnam under different scenarios. Their analysis suggests that the urban poor and the near-poor populations are especially vulnerable. Based on an assessment of producers and consumers of rice, they suggest that a 10 per cent increase in food prices could lead to a reduction in welfare for as much as 92 per cent of urban households and 54 per cent of rural households.

In this situation, what are the key measures that the government should take to help and protect these people?

I want to raise social protection. As the economy opens up, there will be ups and downs, winners and losers. Some people will lose jobs, be less able to access basic necessities. There will be more dynamism and more unrest around the poverty line. Social protection could provide support to the poor and vulnerable in difficult times like these. Therefore, the issue of soaring food prices is highly relevant to an equitable and stable society.

The government has already made progress in strengthening social protection measures, including the voluntary pension programme for farmers. Steps have also been taken in other informal sectors by supporting the poor's participation in the programme and helping them access healthcare by increasing the insurance premiums paid.

But particularly due to the impact of soaring food prices on the poor in urban areas, the government needs to further strengthen its social protection system. It can do more, for example, by ensuring the state budget covers payment for the poor through the voluntary pension programme in the case of no other source of support. Or the government could introduce a single insurance number for each poor person to use so they can access the benefits of the social insurance programme. The current system is no longer suitable to a dynamic economy with more mobile people.

Regarding the expansion of state-owned enterprises (SOEs) beyond their core businesses, what are the risks if they continue this way?

The conglomerate strategy can be successful in many countries in the region. First of all, I want to distinguish between two different types of expansion. The first is the expansion into financial services and speculation activities and the other is expansion elsewhere. The first one carries particular risks. There are serious concerns over SOEs and economic groups, many of which are investing in sectors such as real estate, banking, insurance and securities. Several joint-stock banks have been created recently with large stakes held by these economic groups. These banks also mobilise deposits from the public. They are the main source of financing for large SOE projects in the same economic groups.

The concern if the commercial viability of the loans, which have been made between subsidiaries and parent companies. With limited human resources to handle credit, weak institutions attempting to ensure good corporate governance and lending occurring within groups, serious risks to the financial health of the country are at play.

And what are your recommendations for the government to help prevent this?

I think the government needs to take concrete actions to rein in SOE expansion beyond core areas. It should help ensure investment and economic revival, while not contributing to higher inflation. Secondly, it should help maintain the confidence of investors and donors. I understand that the Ministry of Finance is revising legal documents regulating the operation of SOEs.

We very much encourage the government to pass the regulations quickly and enforce them strictly.

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