VZCZCXRO9890
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #1838/01 2990734
ZNR UUUUU ZZH
R 260734Z OCT 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 6578
INFO RUEHHM/AMCONSUL HO CHI MINH 3850
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 04 HANOI 001838 
 
SIPDIS 
 
STATE FOR EAP/MLS AND EEB/CIP 
STATE PASS USTR FOR DBISBEE 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EAID EINV ETRD OTRA EIND KIPR PGOV VM
SUBJECT: VIETNAM'S REGIONAL OVERVIEW: THE TALE OF TWO NORTHWEST 
PROVINCES 
 
REF: HANOI 1817 
 
HANOI 00001838  001.2 OF 004 
 
 
¶1. (U) Summary:  Northwest Vietnam has traditionally been Vietnam's 
poorest region.  Natural topography, a widely-disbursed population, 
poor infrastructure, and, in part, provincial governance practices 
have prevented provinces in this region from keeping apace of 
economic development occurring elsewhere in Vietnam.  Meetings with 
authorities in two of these provinces revealed their strategies to 
increase investment and reduce poverty.  As the officials recognize, 
success in both of these areas is dependent upon improved 
infrastructure development.  Both provinces have developed sound 
strategies, including a focus on growing the region's tourism 
industry and further developing the Kunming-Lao Cai-Hanoi-Haiphong 
Corridor, however, much of the population of Lao Cai and Lai Chau 
Provinces is unlikely to benefit to any great degree from Vietnam's 
overall economic success in the near future.  End summary. 
 
¶2. (U) This is the second in a series of reports (Reftel) on trips 
by Embassy and Consulate General personnel to understand better the 
level of economic development and competitiveness in provinces 
throughout Vietnam.  From October 1-3, members of the Embassy 
economic section traveled to the far Northwest provinces of Lao Cai 
and Lai Chau to discuss with provincial government officials, State 
owned enterprises (SOEs) and private companies the challenges and 
opportunities facing the region. 
 
¶3. (U) Vietnam's Northwest provinces, including Lao Cai and Lai 
Chau, are among Vietnam's poorest.  2006 Vietnam General Statistics 
Office data shows that regional average per capita incomes amounted 
to only 54% of the national average (2006 average regional income 
was $16.60 per month).  Lao Cai and Lai Chau officials reported that 
43% and 51% of people in their provinces, respectively, earn less 
than VND 200,000 (about USD 12) per month - Vietnam's official 
poverty line for rural areas.  The mountainous terrain and 
widely-disbursed populations present significant challenges for 
provincial governments as they implement economic development and 
poverty reduction strategies.  To underscore this point, Lai Chau is 
the least densely populated of Vietnam's 64 provinces, with only 35 
people per square kilometer.  More than 60% of the province's 
population is made up of ethnic minorities, who rely primarily on 
subsistence agriculture for their economic well-being. 
 
¶4. (U) Innovative strategies and sound governance have allowed parts 
of the region to prosper, however.  Lao Cai's provincial capital, 
Lao Cai City, lies along the Kunming-Lao Cai-Hanoi-Haiphong 
corridor, and has benefited greatly from cross-border trade with 
China.  Lao Cai's provincial leadership has taken advantage of the 
city's location by building modern road and waterway (the city 
straddles the Red River) infrastructure and developing its 
international border gate with China.  These moves have helped to 
attract a number of domestic and foreign (primarily Chinese) firms. 
The city's economic success has had a spill-over effect, with Lao 
Cai provincial officials reporting that all 164 of the province's 
communes are connected by roads, despite the geographic challenges. 
Lao Cai has also taken advantage of its geography to boost domestic 
and international tourism, including to the well-known hill station 
of Sapa and Vietnam's highest mountain, Mount Fansipan.  The more 
than 600,000 tourists to the province in 2006 helped to expand the 
burgeoning tourism and ancillary service sectors. 
 
INFRASTRUCTURE CHALLENGES 
------------------------- 
 
¶5. (U) Authorities in both provinces pointed to infrastructure 
development as one of their most costly and difficult challenges. 
Using central government and provincial funds, the Lao Cai and Lai 
Chau leadership have each focused on expanding roads, electricity 
supply and access to clean water for their 585,000 and 340,000 
citizens, respectively.  Lai Chau's situation is particularly acute, 
with one official explaining that it requires 2-3 days to reach the 
province's most remote communities, including a final 50 kilometer 
stretch over mountains which must be traveled on foot or by 
horseback.  The few roadway connections to neighboring provinces are 
in poor shape and make travel and overland trade difficult. 
 
¶6. (SBU) Comparatively, Lao Cai has done better at addressing the 
infrastructure challenge, and even had perhaps the country's only 
eight-lane highway leading out of its capital.  New construction and 
industrial development was evident on both sides of the new roadway. 
 One provincial official, however, expressed frustration that the 
central government had not matched Lao Cai's infrastructure 
development efforts.  He pointed to delays in completion of the 
planned Lao Cai-Hanoi highway upgrade, which is expected to further 
boost trade along this corridor.  On other essential services, the 
provincial government reported that by the end of 2007, 82% of Lao 
Cai's population will be connected to the national electricity grid, 
 
HANOI 00001838  002.2 OF 004 
 
 
and 70% will have access to clean water.  Lai Chau officials could 
not provide specific data, but indicated that these figures were 
lower in their province. 
 
SMALL-SCALE AGRICULTURE: BIG EMPLOYER, BIGGER CHALLENGES 
-------------------- ----------------------------------- 
 
¶7. (U) Much of the population of both provinces is employed in 
small-scale or subsistence agriculture.  Most products are not 
developed on a scale to support significant exports, with several 
exceptions - Lao Cai ships some vegetables and flowers to other 
parts of the country and Lai Chai exports some tea (mostly 
unprocessed) and black cardamom.  Officials in both provinces noted 
that small plot sizes, insufficient and outdated processing 
facilities and low levels of planting technology hamper the 
development potential of this sector. 
 
¶8. (U) A representative from the Lao Cai Department of Agriculture 
and Rural Development expressed concern that following Vietnam's 
accession to the World Trade Organization (WTO), the "backward 
techniques" employed by local farmers will make it difficult for 
them to compete with agricultural producers from other countries. 
Attracting more technical knowledge and modern processing equipment 
to the region is therefore a priority for both provincial 
governments.  The Chairwoman of the Lai Chau Farmers Association 
reported that her members are concerned about competing in the 
post-WTO market-driven environment.  The Association is now 
concentrating on ways to increase efficiency and productivity among 
its members.  The quality of agricultural goods will also be a 
challenge, she said, citing the refusal at the border of several 
recent shipments of agricultural products destined for China. 
 
HIGH HOPES FOR TOURISM 
---------------------- 
 
¶9. (U) Given the challenges cited above, Lao Cai and Lai Chau are 
hoping to develop their tourism industries in order to keep apace 
with economic development in other parts of the country.  Lao Cai in 
particular has emphasized tourism as the lynchpin for its 
development - touting its natural landscape and ethnic minority 
villages as key attractions.  Officials reported that between 2001 
and 2006, this sector has grown 17.5% per year on average and 
forecast continued growth of 10% per year through 2010 in the 
provincial economic development plan.  Driven by tourism, services 
make up nearly 40% of Lao Cai's GDP.  Provincial authorities are now 
encouraging businesses to develop the niche market of eco-tourism, 
with several eco-friendly resorts already operating.  The director 
of the State-owned Lao Cai Tourism Company was optimistic about the 
future of tourism in the province, but is concerned that attracting 
enough qualified manpower to support continued growth will be 
difficult.  His company is exploring the possibility of developing a 
tourism trade school in the province, thereby reducing the need to 
attract qualified candidates from Hanoi and other cities. 
 
¶10. (U) Lai Chau has looked to neighboring Lao Cai as an example of 
the potential in the tourism sector.  With similar topography and 
the same draw of ethnic minority villages, the province seems 
determined to follow Lao Cai's lead.  Poor infrastructure, however, 
is hampering those plans.  Lai Chau does not have the benefit of a 
rail line connecting it to large urban centers, and the roads into 
the province are in disrepair.  To address these issues, the 
province is exploring the possibility of widening the road 
connecting it to Lao Cai, and has the longer-term ambition to build 
an airport and a rail line by 2020.  Provincial officials were 
unable to describe how they intend to draw additional tourists in 
the near term. 
 
INDUSTRIAL DEVELOPMENT ALSO DESIRED 
----------------------------------- 
 
¶11. (U) The second pillar of the two provinces' development 
strategies is industrial development.  The industrial sector 
provides 30% of GDP in both provinces, but leaders would like to see 
that number increase.  Lao Cai and Lai Chau possess significant 
natural and mineral resources, and seek to capitalize on this fact. 
We visited with a state-owned apatite (a mineral used in fertilizer) 
mining company in Lao Cai.  Already the largest employer in the 
province with over 3,000 workers, the company's director expects 
demand for the product to continue to rise as Vietnam's exports of 
rice and other agricultural products continue to grow.  In Lai Chai, 
black rock, which is popular for use as roofing in countries such as 
Australia and China, is a key export.  Both provinces also hope to 
attract investors in sectors such as waste treatment, large-scale 
agricultural production and hydro-electric power.  The owner of a 
medium-sized private construction company in Lai Chau reported that 
the company has approval to build nine hydroelectric plants, but is 
 
HANOI 00001838  003.2 OF 004 
 
 
facing the challenge of accessing modern technology and financial 
sources. 
 
TRADE OPPORTUNITIES ON THE BORDER 
--------------------------------- 
 
¶12. (U) Lao Cai, with its 203 kilometer long border with China, and 
Lai Chau with its 273 kilometer long border, have both seen 
increased cross-border trade.  Much of what Vietnam imports across 
the borders in these provinces is raw materials and industrial 
inputs such as steel, fertilizer and equipment, according to the 
General Director of Lao Cai's International Border Gate.  Vietnamese 
exports through Lao Cai and Lai Chau are primarily agricultural 
products such as tea, coffee and cashews.  Officials in both 
provinces report that the increase in trade has resulted in moderate 
growth in the number of companies offering trade-related services. 
In 2006, cross border trade in Lai Chau was $45 million, but 
provincial officials aim to double that figure by 2010.  The Lao Cai 
Border Gate General Director quoted cross-border growth rates of 
12-15 percent per year over the past three years. 
 
¶13. (U) Along with these opportunities, the long borders also 
present challenges to the provincial authorities.  One key issue has 
been controlling the spread of diseases, particularly by preventing 
the smuggling of poultry.  At the Lao Cai Border Gate, officials 
demonstrated their quarantine system and reported that close 
cooperation with their Chinese counterparts has resulted in a 
significant reduction in the number of smuggling cases.  Lao Cai and 
Lai Chau officials claimed that there are few problems with 
smuggling counterfeit or illicit products across the borders in this 
region, as the topography here makes it unattractive for potential 
smugglers. 
 
PROVINCIAL GOVERNANCE AND ATTRACTING INVESTMENT 
--------------------------------------------- -- 
 
¶14. (U) Despite sharing many similarities, the two provinces differ 
significantly in their performance in the 2006 Provincial 
Competitiveness Index (PCI).  Lao Cai, with a composite score of 
64.11, ranked number 6 out of 64 provinces in terms of having a 
favorable business and investment climate.  It scored particularly 
well in the areas of transparency and SOE Bias (meaning that there 
are few SOEs and a stronger competitive environment).  On the other 
hand, Lai Chau ranked dead last among the 64 provinces, with a 
composite score of 36.76.  Authorities in both provinces were aware 
of the PCI and their relative scores.  Lao Cai officials explained 
that they have made good governance a priority in attracting 
investment in an effort to build up the trade corridor connecting 
Hanoi and Haiphong with Southern China.  Lai Chau officials, when 
asked, were unable to explain the reasons for their low ranking. 
They recognize that they scored poorly in the transparency and 
informal charges categories, and noted that they have made it a goal 
to improve those scores.  They pointed to the provincial website as 
one avenue for improving access to information, though noted that 
the website should be updated more frequently. 
 
¶15. (U) In addition to the perception that its investment and 
business climate is Vietnam's worst, Lai Chau does not have the 
benefit of lying on a highly-developed trade corridor, as Lao Cai 
does.  While many firms choose to locate themselves along the 
Kunming-Lao Cai-Hanoi-Haiphong corridor for ready transport of their 
goods, Lai Chau is even more remote and presents logistical 
challenges for firms to get their products to other markets.  For 
these reasons, Lai Chau officials recognize that they will continue 
to face difficulties in attracting investment and businesses to the 
province until both its governance and infrastructure development 
improve. 
 
COMMENT 
------- 
 
¶16. (SBU) Provinces in Vietnam's far Northwest will continue to face 
significant challenges in keeping up with the rapid economic 
development occurring elsewhere in Vietnam.  In the growing 
disparity between the "haves" and the "have-nots" in Vietnam, much 
of this region stands to fall into the latter category.  Apart from 
those living along the highly-developed trade corridor running 
through Lao Cai Province, the mountainous terrain and poor 
infrastructure mean that much of the population of Lao Cai and Lai 
Chai Provinces will have few opportunities to benefit from Vietnam's 
overall economic success.  Leaders in both provinces recognize the 
challenges they are facing and appear committed to finding ways to 
overcome those obstacles.  Due to natural advantages and sound 
governance, however, Lao Cai has done a relatively better job of 
fostering economic development.  There are no easy solutions to the 
difficulties facing this region, and economic growth here will 
 
HANOI 00001838  004.2 OF 004 
 
 
require concerted efforts by local and national authorities - 
including through significant investment in infrastructure 
development. 
 
MICHALAK