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,

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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