The international community is accelerating efforts to reduce poverty in developing countries. The United Nations Millennium Development Goals (MDGs) and the World Bank-supported Poverty Reduction Strategy Paper (PRSP) are now linked as the end and the means and are exerting great influence on the development strategies of poor countries. Since poor countries are highly diverse in socio-economic structure as well as causes of poverty, policy measures and institution building efforts must be tailored to the needs of each country. Despite the great excitement over the lofty goal of poverty reduction, appropriate matching between alternative strategies and individual countries remains very weak. As PRSP enters into the implementation stage, we need to urgently strengthen intellectual inputs in this area to effectively translate the global targets into realistic and concrete actions at the country level.

We propose to classify poor countries by (i) relationship with donors; (ii) presence or absence of a national development strategy and its quality; and (iii) causes of poverty. We will discuss how these differences should be reflected in the formulation and implementation of PRSP, and call for greater flexibility in terms of its contents, modality, and procedures.

We also present the Vietnamese PRSP, driven by strong country ownership and aspiration for rapid growth, as one possible model for a growth-oriented PRSP. Vietnam's PRSP is inspired by the country's unique geographical and historical position, especially the surrounding Asian dynamism as an enabling environment for economic catch-up. However, even without such a regional advantage, trade- and investment-driven growth and poverty reduction can be pursued by individual countries outside East Asia as well.

Economic cooperation should be geared to the circumstances of each recipient country. For poor countries with aspirations and potential for growth like Vietnam, cooperation in the areas of infrastructure development, human resource development, technology transfer and industrial studies are particularly effective.

At the center of this new approach is the Poverty Reduction Strategy Paper (PRSP). The PRSP initiative was launched by the World Bank and the IMF in late 1999 in connection with the Enhanced Heavily Indebted Poor Countries (HIPCs) Initiative. In principle and ideally, the PRSP is (normally) a three-year roadmap for social and economic development of a poor country, produced under strong national ownership and broad partnership among various stakeholders. Initially, only a small number of poor countries seeking for special debt reduction under the original HIPCs initiative were asked to prepare PRSPs. But the scope of PRSP was subsequently enlarged to include all poor countries (namely, all recipients of concessional assistance from the International Development Association (IDA) and the IMF-supported Poverty Reduction and Growth Facility (PRGF)).

The World Bank recently adopted a policy to strengthen the linkage between PRSP and Country Assistance Strategy (CAS), linking poverty reduction efforts with the access to IDA funding. Moreover, the Bank is also urging other donors to adopt PRSP as the vehicle for aid partnership efforts. For poor countries, PRSP is becoming the main tool for budgeting, prioritizing, project selection, evaluation, and donor coordination. Once agreed, PRSP may strongly bind the overall socio-economic policy framework of that country.

There are eighty countries eligible for IDA lending, of which seventy-six currently receive IDA support (financial and/or non-financial). As of June 2002, more than sixty countries are engaged in the PRSP process, including those in the initial stage of formulation. Among them, eighteen countries (of which twelve are from Africa and four from Latin America and the Caribbean) have completed Full-PRSPs and subsequent joint staff assessment by the IMF and the World Bank [World Bank 2002b]. Forty-four countries have prepared Interim-PRSPs, with African countries accounting for more than half. Vietnam became the first East Asian country to complete a Full-PRSP in May 2002. The Boards of the IMF and IDA reviewed it at end-June and early July 2002, respectively.

To assess the PRSP experiences two years after introduction, the IMF and the World Bank undertook a comprehensive review in early 2002. The final review report was presented to the IMF/WB Joint Development Committee in April 2002. The report stresses the validity of the PRSP approach and the important role that the World Bank and the IMF will play in its full-scale implementation. At the same time, the report recognizes that "the PRSP approach requires flexibility so that both the process and the content of poverty reduction strategies can vary across countries in light of national circumstances" [IDA/IMF 2002a].

Moreover, the United Nations Group has linked up with the World Bank in fighting poverty. Following the UN Millennium Summit in September 2000, the UN General Assembly adopted the UN Millennium Development Goals (MDGs) in September 2001. MDGs call for concrete social achievements by 2015, including halving the ratio of people in extreme poverty. After September 11th, the poverty-terrorism nexus was rediscovered and the international community hardened its resolve to address the poverty problem. In the ongoing global enthusiasm over MDGs, the UN International Conference on Financing for Development in Monterrey, Mexico in March 2002 adopted the "Monterrey Consensus" recommending further aid increase, debt reduction, and partnership between developing and developed countries to promote trade and investment for the benefit of developing countries.

In this way, MDGs have been set up as the development goal and PRSP is promoted as the procedural framework. World Bank economists estimate that an additional US$40-70 billion--or doubling the global ODA-- is required annually to achieve MDGs"Devarajan et al. 2002".

While most of the Japanese aid officials and experts endorse the basic principles of PRSP, including national ownership and aid partnership, they express concern about its uniformity of approach, shortage of strategic contents, and increased budgetary and human resource burden on both donors and recipients. While the advocates of PRSP readily admit the crucial linkage between economic growth and poverty reduction at the general level, they tend to focus exclusively on pro-poor measures (e.g., education, health, environment, gender, rural infrastructure, etc.) in actual implementation. Serious discussion on the generation of economic growth is desperately lacking.

Shigeru Ishikawa, Professor Emeritus at Hitotsubashi University and leading figure in Japanese development economics, regards PRSP as "the World Bank's new aid policy which essentially shifts the goal from 'growth promotion' to 'poverty reduction'." He further notes that it is "a highly deficient proposal when viewed as a system of action plans to be properly supported by fiscal resources." Ishikawa argues that, for poverty reduction efforts to be truly effective, it is necessary to deeply analyze the causes of poverty in each developing country and to design an appropriate mix of (i) measures directly targeting the poor; and (ii) support for broad-based growth, in which increased savings are channeled through the fiscal and financial systems to address specific needs including poverty reduction [Ishikawa 2002].

The first determinant is the relationship between the developing country and its donors. This affects the degree to which the developing country can maintain ownership vis-a-vis donors, as well as the scope of PRSP's influence on the overall policy framework of that country. Three specific points are given:

• The existence or absence of direct linkage between PRSP and debt relief: For many poor countries in Sub Saharan Africa and Latin America, the preparation of a PRSP is the precondition for obtaining debt relief under the Enhanced HIPC Initiative. Equally for donors, it is an important tool for aid resource management and evaluation of development impact. By contrast, in the case of poor countries in East Asia including Vietnam, debt forgiveness is not intended. For them, PRSP is primarily motivated by the country's desire to access IDA and PRGF financing (which is less acute than the need for debt forgiveness). PRSPs in such countries are produced with less urgency and more concern for national ownership than in the case of the former group. [Figure: Countries in PRSP Process by Region and HIPC Status]

• Aid dependency and donor composition: Vietnam's aid dependency is lower than the average of Sub Saharan African or Latin American countries. Naturally, a higher aid dependency is associated with a stronger pressure from the donor group¹. Moreover, the development strategy can also be affected by the views of the largest donor(s). In Sub Saharan Africa, prominent donors are the World Bank (IDA) and Europeans, while in Latin America and the Caribbean, the World Bank (IDA) and the Inter-American Development Bank (IDB) are of primary importance. In East Asia, principal donors are Japan, the World Bank, and the Asian Development Bank (ADB). [Figures: Aid Dependency, Donor Composition]

• The relationship between donor composition and aid modality: Donor composition also affects the proportions of loans and grants, which in turn have a bearing on aid modality discussion. Vietnam receives about two-thirds of ODA in the form of concessional loans while 70 percent of ODA to Sub Saharan Africa is in the form of grants. The corresponding ratios for Latin America and the Caribbean are somewhere between the above two groups. These differences must be taken into account in determining the desirability of harmonization of aid modality. [Figure: ODA Composition Grants vs. Loans]

Does a developing country have its own development plan? If so, to what extent does it effectively govern budget allocation and investment programs? This greatly affects how PRSP, imported from without, is treated domestically. This issue is closely related to the strength of country ownership as well as "the extent to which the PRSP is integrated within existing decision-making processes" as mentioned in the PRSP review of the World Bank and the IMF. Although the relationship between the existing development plans and PRSP is complex and highly specific to each country, we present the following two prototypes for simplicity of argument. [Figure: Two Types of PRSP, see below]

• PRSP as a supplementary document

In Vietnam, the core planning documents defining the national vision are the "Strategy for Socio-Economic Development in the Period 2001-2010" (the so-called Ten-Year Strategy) and the "Seventh Five-Year Plan for Socio-Economic Development 2001-2005" (the so-called Five-Year Plan). These were reviewed by the Communist Party and concerned ministries and approved by the Party Congress. They tower above numerous other official documents in terms of legitimacy and accountability. All sector plans, public investment plans, and annual budget allocation are guided by them. Under this framework, the role of PRSP is at best supplementary as one of the "other" documents. From the Vietnamese viewpoint, PRSP is never intended to dictate overall budget allocation. Certainly, PRSP can reinforce the existing development plans with special attention to poverty reduction in a cross-cutting manner and the participatory process. However, it is not expected to become an overarching document by replacing the existing core documents.

• PRSP as a primary document

This is the case where PRSP co-exists with the national development strategy, but where the newly-introduced PRSP exerts a stronger influence than the existing plans over the budgetary and legal framework. Tanzania has its own long-term development vision ("Vision 2025") and poverty eradication strategy ("National Poverty Eradication Strategy 2010 (NPES)"). In reality, however, these documents are merely symbolic and have little impact on the actual budget and policies. Uganda also has its own vision document ("Vision 2025") and poverty reduction strategy ("Poverty Eradication Action Plan (PEAP)"). The Ugandan PEAP has evolved into PRSP, unlike the Tanzanian NPES which did not. Regardless of this difference, in both countries, PRSP plays a decisive role as a planning and aid coordination document dictating sector plans. PRSP is also linked to the Medium-Term Expenditure Framework (MTEF) which is a rolling, three-year expenditure plan that guides all public expenditures (including investment and recurrent budgets, as well as aid money). Moreover, Uganda's PRSP refers to the desirability of certain aid modality, including budget support and sector-wide approach. Tanzania's PRSP has no reference to aid modality, but this matter is dealt with separately in the Tanzania Assistance Strategy (TAS).

It is conceivable that the latter type ("PRSP as a primary document") may further evolve into the third variation, which can be called "PRSP as an exclusive document." This is the case where PRSP is formerly installed as the national development strategy itself or, for some reasons, the national strategy has ceased to exist and PRSP is treated effectively as the core planning document. Here, PRSP has exclusive authority to govern overall policy, sector plans and budgetary allocation. Such a case may emerge, particularly if the next planning cycles of PRSP and national development strategy coincide. The Bolivian PRSP offers an interesting case because, on paper, it belongs to the third variation but, in reality, it should rather be classified as the second variation (even a weak one at that) .

In the first type, the role of PRSP is confined to complementing and reinforcing the existing national development strategy and sector plans, by offering in-depth poverty analyses, a cross-cutting approach to poverty reduction and broadening the participatory process. In this case, the most desirable and practical involvement for donors would be to respect and support the existing policy configuration rather than denying or replacing it. Areas of assistance do not have to be constrained by PRSP; donors should be encouraged to support high priority areas in the country's overall development regardless of PRSP.

By contrast, in the latter types, the operational procedures of the budget, sector plans and receiving aid are all governed by PRSP. In this case, donors should fully utilize PRSP and related systems, and build local capacity in strategic planning and budget management around PRSP.

Although the goal of poverty reduction is shared globally, aspects of poverty differ from country to country. The common goal must be achieved by various means that fit the reality of each country. Poverty situations vary even within a country, depending on age, gender, family, occupation, region, social strata, and so on. As noted above [Ishikawa 2002], deep insight into the country-specific causes of poverty is crucial if we are to succeed in reducing poverty.

If poverty is caused by insufficient delivery of social services, major efforts should be directed to its improvement. If poverty results mainly from the pro-rich bias in the fiscal system or a deep-rooted ethnic discrimination, political initiative is required to address these problems. If economic crises or uncontrolled globalization is producing new poverty, relevant policies should be reconsidered. But if the primary cause of poverty is low productivity and an underdeveloped market economy, resources must be mobilized to build infrastructure, upgrade technology and create industries. In this connection, to cope with generalized poverty associated with underdevelopment, the recent UNCTAD report recommends measures to enhance productive capacities, such as the promotion of rapid and sustained economic growth and the establishment of dynamic investment-export nexus [UNCTAD 2002].

Different causes call for different responses. Without correct matching between diagnosis and prescription in each country's specific context, even a big increase in aid money is unlikely to yield results. Furthermore, although many official documents declare that poverty reduction and economic growth are positively related, details of this relationship have rarely been spelled out in the country-specific context. This is precisely the knowledge that is lacking in the PRSP process so far.

In light of the three criteria presented above, Vietnam's experience with PRSP (renamed to the Comprehensive Poverty Reduction and Growth Strategy, or CPRGS) is noteworthy in the following senses: (i) the country's relatively low aid dependency; (ii) the existence of a national development strategy embodied in the two core documents; and (iii) strong concern for social equity and the possession of policy tools to offset social problems arising from economic growth (although their efficiency must be improved, as many donors point out). These features in turn strongly influence the contents of Vietnam's CPRGS. It was compiled under the strong ownership of the Vietnamese government as a document subordinate to the core documents which embraced a growth-oriented development vision.

However, donors are divided over the role of CPRGS in policy planning and resource mobilization. Several donors (e.g., the World Bank, UK, Denmark) hold the view that CPRGS should be treated as the core document, suggesting that the public investment plan and donor support be aligned to CPRGS. CPRGS has been finalized without resolving this matter. Ishikawa also reports a critical remark by a high-ranking Vietnamese official, expressing strong reservations about making poverty reduction an exclusive national goal [Ishikawa 2002].

It is true that not all poor countries are like Vietnam. But at the same time, Vietnam is not the only poor country which aspires to growth-based poverty reduction. The majority of the poor countries in East Asia do not intend to avail themselves of debt relief, and they do have development plans to guide their budgets. In Sub Saharan Africa, too, many countries have national development plans. Vietnam's CPRGS should be studied as one of the possible models for other countries or regions.

We may even ask a more fundamental question. Is it really necessary to require all poor countries--including those equipped with planning capacities above a certain minimum level--to formulate PRSPs as standard documents? For these countries, it is important to: (i) assess the capacity and institutional arrangements of the existing system; (ii) ask if some elements of a potential PRSP can enhance the existing system; and (iii) decide whether a formal PRSP is useful or the same effects can be realized through partial modification of the existing system and without a PRSP.

The world has seen the polarization of developing countries in the last half-century: one group which succeeded in poverty reduction through sustained growth, and another group which did not. The majority of East Asian countries belong to the first group. Viewed from a long perspective and as a regional phenomenon, there is no denying that East Asia has made impressive strides in income levels, economic equity and social indicators despite frequent wars, crises and stagnation .

East Asian development was realized by the staggered participation in the dynamic production network created by private firms via trade and investment. One by one, countries in different stages of development joined this regional network by each becoming a link in the international division of labor with clear order and structure. For East Asia's latecomers, economic development is a process of constant upgrading of industrial capability from low-tech to high-tech under competitive pressure from as well as complementary relations with its neighbors. Through this complex relationship of rivalry and cooperation, structural shifts have occurred which continuously passed industries from one country to another. No other developing region has formed such dynamic interdependence as in East Asia².

East Asia as a region provides a powerful model and an enabling environment in which latecomers are constantly challenged to catch up with the region's more advanced economies. This broader context of regional dynamism has rarely been analyzed in the World Bank's existing studies [World Bank 1993, 2000a]. Evaluation of policies pursued by individual countries is hardly enough to understand the sources of sustained growth in this region.

For the Japanese economy, East Asia is the most important developing region. For East Asia, too, Japan has been a particularly important country as the largest donor, the principal partner in trade and investment, and the chief architect of the East Asian production network. East Asian dynamism has also been supported by trade and investment relationship with the EU and the US, as well as the extensive business network of Taiwan, Hong Kong, and overseas Chinese.

As the dominant ODA provider in East Asia, Japan has mobilized its extensive tools for economic cooperation mainly to spur and complement the market-based economic linkage. The majority of Japan's ODA projects placed high priority on assisting the self-help efforts of the East Asian developing countries to attain a suitable status in the region's production network and, through it, catch up with the forerunners and improve living standards. Japan's ODA in infrastructure, human resource development and industrial cooperation has greatly contributed to reinforcing East Asia's dynamism by removing bottlenecks and creating new private trade and investment.

In its policy aspiration and growth mechanism, Vietnam is a typical East Asian developing country. With a per capita GDP of US$390 in 2000 (World Bank data), it ranks as one of the poorest countries in the world. Despite its location at the heart of East Asia, years of wars and central planning had left Vietnam far behind its ASEAN neighbors in economic performance. Domestic enterprises desperately lack competitiveness, and its market economy is severely underdeveloped.

Vietnam's political system and public administration have been relatively stable. While there remain a large number of unsolved problems including inefficiency, corruption and institutional rigidity, the government machinery certainly exists to assume the responsibility for economic policy making and implementation.

In 1986, Vietnam launched a domestic economic reform called "Doi Moi." Around 1992, it initiated a vigorous process of international integration vis-a-vis the Western countries and international organizations. The country restored diplomatic relation with the US and joined ASEAN in 1995, joined APEC in 1998 and signed a US bilateral trade agreement in 2001. Negotiations for WTO accession are continuing. Within a relatively short period of ten years, the Vietnamese economy has come to be deeply integrated into the global economy through trade, investment and aid. The synergy of domestic liberalization and external opening provided the engine for high economic growth, which has averaged at 7 to 8 percent per year.

During 1991-2000, the average inflow of foreign direct investment (FDI) into Vietnam amounted to 5.4 percent of GNP. This level far exceeds the average of lower-middle income countries (0.9 percent of GNP), and it is even higher than those in some high-performing middle-income countries such as Chile (3.5 percent) and Malaysia (3.2 percent) [World Bank/ADB/UNDP 2000]. While many transition countries make strenuous efforts to attract FDI, very few succeed in activating FDI as an engine of growth shortly after the initiation of international integration. In this regard, Vietnam is a rare exception. The country also underwent a process of dramatic social transformation. By the end of the 1990s, Vietnam had already achieved the principal goal of MDGs, namely halving the ratio of people in extreme poverty between 1990 and 2015.

The Ten-Year Strategy and the Five-Year Plan embrace the goal of Industrialization and Modernization by the year 2020. These documents attest to Vietnam's aspiration to catch up, promote FDI and industrial development, and participate in East Asia's production network.

Vietnam has long accorded high priority to social equity. Although the problem of quality and efficiency remains, the country has a vast network of social service delivery down to the village level. When compared with other countries at the similar level of income, Vietnam's social achievements are far superior, as seen by the adult literacy rate of 93 percent and the infant and child (under five) mortality rate of 42 per 1,000 live births [1998 data, World Bank 2000b]. The data also suggest that public social expenditures are more equally distributed than household expenditures, playing an important re-distributive role (for example, the poorest quintile receives 26 percent of primary education expenditures [World Bank et al. 2000]). Moreover, the Vietnamese government has the tradition of implementing poverty reduction programs targeted at ethnic minority groups in the mountainous areas and poor families in remote areas.

To cut poverty further, it is necessary to improve the existing policy and institutions. But additionally and more importantly, the best way to reduce poverty under Vietnam's circumstances is to enhance the productivity and competitiveness of the entire economy and provide job and income opportunities to the population.

Vietnam became the first CDF pilot country in East Asia in 1999. This led to the establishment of more than twenty partnership groups, including the Poverty Working Group/Poverty Task Force (PWG/PTF), charged with cross-cutting poverty agenda, as well as other sector-specific thematic groups covering wide-ranging issues. The PWG/PTF assisted the government with analytical studies and process building such as poverty assessment, the development of monitoring indicators (particularly localizing the International Development Targets (IDTs) to create the "Vietnam Development Targets (VDTs)"), and the organization of a series of regional workshops (including NGO-organized consultations).

Vietnam completed a Full-PRSP ahead of other East Asian countries. The Ministry of Planning and Investment (MPI), in coordination with other ministries, played a central role in the preparation of PRSP. Efforts were also made to broaden the participatory process. After the completion of Interim-PRSP (March 2000), the Vietnamese government renamed PRSP to the Comprehensive Poverty Reduction and Growth Strategy (CPRGS), adding the terms "comprehensive" and "growth." The final CPRGS was approved by the Prime Minister in May 2002.

The Vietnamese government regards CPRGS as an action plan that translates the Ten-Year Strategy, the Five-Year Plan and sector policies into concrete measures. The economic goals and budget allocation are simply copied from the Ten-Year Strategy and the Five-Year Plan. However, to complement these plan and strategy with a strong accent on growth, CPRGS emphasizes the "quality" of growth and proposes ways to minimize income and regional disparities, cut poverty and achieve social equity in the process of rapid growth. The ownership and the participatory approach assumed by the Vietnamese government were very highly noted by the international community. Vietnam's CDF and PRSP experience has thus become "good practice."