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Can countries survive their move to the middle class?

HANOI, Vietnam — In many ways, Vietnam is a success story. Forty years ago on April 30, the fall of Saigon brought the end of the Vietnam War, and with it, an aggressive effort to reunify and repair the country’s jagged pieces. After decades of war, Vietnam had emerged with one of the world’s largest armies but one of its poorest economies with millions of civilians unemployed. But in 2010, after decades of reforms and diplomatic efforts to establish normal relations and trade ties with other countries, Vietnam graduated to “middle-income” status.

This higher ranking has come at a cost. Since its status changed to middle income, the nation of 93 million has seen a draw down of support from international development partners, as they shift their focus to countries in more dire need of basic food, water and security.

Despite Vietnam’s rapid economic development, some of the population — mostly in remote rural areas where people work in the fields and live in dirt-floored homes — still suffers from extreme poverty, disease, and the lack of medical facilities and jobs. About 13 percent of Vietnamese live on less than $1 a day.

The reduction in international aid makes their challenges all the greater.

Vietnam isn’t alone in its growing pains, said Homi Kharas, senior fellow and deputy director for the Brookings Institution’s Global Economy and Development program. “You have more and more middle-income countries now. They are larger economies, but the channels from which they can borrow have gone down. So these countries are stuck.”

Of the United Nations’ 193 member states, 130 are emerging middle-income economies. About 30 are still low-income countries, and another 30 are “donor” countries.

Countries like Vietnam, Pakistan and Nepal are in a difficult position. Despite getting richer, they haven’t yet developed mechanisms to tap into their growing revenues or to bulk up their public service delivery systems. As aid to these countries shrinks, they feel the squeeze, Kharas said.

One of the biggest strains is the immediate need for new infrastructure. When the economy improves, people begin flocking to cities for work, but the high-quality roads and airports aren’t there yet, he said.

The countries that have fared the best, such as the United States, European nations and Japan, have had more time to devote energy toward economic development. “They’ve been at it for over 150 years,” Kharas said. Whereas in Vietnam’s case, he said, it’s only been 40 years since the end of the Vietnam War and that means less time to develop its institutions and services.

Dien Bien Phu Province in northwestern Vietnam is 80 percent ethnic minorities. Photo by Larisa Epatko/PBS NewsHour

Dien Bien Phu Province in northwestern Vietnam is 80 percent ethnic minorities. Photo by Larisa Epatko/PBS NewsHour

Once the middle-income countries do better economically, they are able to raise their own revenues to manage their own development, he said. Morocco, Tunisia and Jordan are examples of countries that have fared well at this. But the Vietnams and Pakistans of the world haven’t reached that level yet.

In the past, rising countries borrowed money from the World Bank and other organizations in anticipation of the tax windfalls, Kharas said. But those institutions have less money to hand out as more and more countries enter the middle-income bracket, he said.

Over the next decade in Africa alone, more than a dozen countries will graduate from low- to middle-income, said Laura Frigenti, vice president for the Global Development Practice at InterAction in Washington, D.C.

A country is considered low income if its gross national income per capita is $1,045 or less. When it exceeds that number, it graduates to middle income.

But “the moment you go beyond that threshold and are technically labeled as middle income, you don’t automatically become Brazil,” Frigenti said.

Angola, for example, has had strong economic reforms but still doesn’t have the capacity to deliver health and education services on the ground, she said. Ethiopia, on the other hand, hasn’t reached the middle-income level yet, but the government is using donor money to strengthen its own delivery mechanisms. “That is the trick. You use the phase in which you are low income and have more support to strengthen your structures so that the moment aid reduces, you have your structure on the ground.”

South Africa is another example of a rocky climb to middle income. After apartheid ended, people thought South Africa would advance quickly, Kharas said. But the country still struggles, largely due to a dearth of jobs for young people, he said.

A daily morning market in Dien Bien Phu Province has a variety of produce. Photo by Larisa Epatko/PBS NewsHour

A daily morning market in Dien Bien Phu Province has a variety of produce. Photo by Larisa Epatko/PBS NewsHour

The income ranking might be a convenient indicator, but it doesn’t paint the full picture, Frigenti said. “If you’ve eaten one full chicken, and I haven’t eaten anything, statistically both of us have had half a chicken.” More indicators are needed to more accurately reflect people’s quality of life, she said.

It’s a conundrum the global community needs to address, while making efforts to continue supporting middle-income countries such as with low-interest loans, Kharas said.

“These countries are struggling (to take over their own health and other costs), and there’s no clear policy in the international system to say this is how we’re going to be able to help you,” he said.

Other types of alliances, such as the BRIC countries — Brazil, Russia, India and China — and regional groups in Asia, are setting up their own development banking systems, rather than waiting for the international community to respond.

But the rising countries don’t just need money, Frigenti said. They also need to put a structure in place to deliver health, education and other services. Otherwise, the poorest people in remote areas will suffer the most.

Vietnam’s transition challenges

Vietnam donor funding

Vietnam’s declining donor funding is most apparent in the area of health, including its HIV/AIDS programs.

At the same time Vietnam moved one notch up in the country rankings, the global financial crisis struck, compounding problems, said Pratibha Mehta, U.N. resident coordinator in Vietnam. The country’s health services have been especially hard hit.

The government has established health centers that offer a range of pregnancy services, HIV treatments and other programs in remote provinces with large minority populations. (Read more about the country’s efforts in rural areas.)

These health centers should help broaden the preventive and treatment programs in a country that tends to be vertical in how it addresses health concerns, said Kristan Schoultz, country director of UNAIDS Vietnam.

“The issue of sustainability is on the minds of the United Nations, government and civil society,” Schoultz said. “We’re concerned about what will happen if donors continue to withdraw. We need to take these next two years to really set up the country to cover HIV-prevention needs in key populations” or it might lose the gains it made.

At-risk populations include female sex workers, men who have sex with men, injected drug users and their sexual partners.

After Vietnam was ranked middle income, all condom donations stopped, said Duong Van Dat, sexual reproductive health team leader at the United Nations Population Fund. Without any standards for how condoms were manufactured, the Ministry of Health had to scramble to ensure the condoms coming from other sources, such as China, were high-quality, he said. “It’s not just government approval but implementation (of new regulations), too.”

Ca Thi Binh is a mother of two who has HIV. Photo by Larisa Epatko/PBS NewsHour

Ca Thi Binh is a mother of two who has HIV. Photo by Larisa Epatko/PBS NewsHour

Ca Thi Binh, a 22-year-old farmer, is living with HIV. She and her husband, who also is HIV-positive, live in the rural Muong Ang District in northwestern Vietnam.

Ca learned that she had the virus when she was tested before giving birth to her first child. Her husband, a contract construction worker who often travels away from home for jobs, also tested positive. Their children, ages 2 and six months, so far have not.

Her commune has a new health clinic, equipped with HIV testing and treatment services through a pilot program that started in August 2012 — one that Vietnam hopes to expand if it has the money. She receives her antiretroviral drug treatment through this center.

Education campaigns have helped increase people’s understanding of HIV in the village, she said, but some people still look down on her. “I feel ashamed, even though I did nothing wrong. [But] people who understand me provide a lot of support.” (Read about how a group in Vietnam is trying to battle the stigma.)

Much of Vietnam’s funding for HIV programs comes from the Geneva-based Global Fund to Fight AIDS, Tuberculosis and Malaria — an organization that mobilizes funds to support programs run by local experts — and the U.S. President’s Emergency Plan for AIDS Relief, or PEPFAR. Funds are allocated for several years at a time, with the current cycle ending in 2017.

The Global Fund’s current allocation for HIV programs in Vietnam for 2014-2017 is $77 million, and many Vietnamese officials are concerned the funding will dry up after that cycle ends. Olivier Cavey, senior fund portfolio manager at the Global Fund, said the organization hasn’t yet determined what the funding will be after 2017 — a lot of it depends on how much money is in the pot for the next allocation. But he said he is confident that Vietnam will continue to be eligible for funding beyond 2017, just maybe not as much.

Some countries in the region have transitioned completely from the Global Fund, including China last year and Thailand come 2017.

The Global Fund already has started laying the groundwork for Vietnam’s transition, such as removing its supplements of salaries to make sure the staff that is employed in Vietnam’s HIV program is on the government payroll, said Cavey.

In Vietnam, about 90,000 people receive antiretroviral drugs, which also are paid for mostly through donor funds. The Global Fund is negotiating with the Vietnamese government to fund at least one-third of all antiretroviral treatments by the end of 2017, he said.

A woman rests as her husband keeps her company in the HIV/AIDS ward at the provincial hospital in Dien Bien Phu City in northwestern Vietnam on Jan. 13, 2015. Photo by Larisa Epatko/PBS NewsHour

A woman rests as her husband keeps her company in the HIV/AIDS ward at the provincial hospital in Dien Bien Phu City in northwestern Vietnam on Jan. 13, 2015. Photo by Larisa Epatko/PBS NewsHour

Another area of shrinking funds is Vietnam’s methadone centers, which target one of the highest-risk populations for HIV: injected-drug users. Users arrive at the center in the morning and get a liquid dose of methadone. They have to say “hello” or smile to show they drank it rather than saving it to sell later.

Currently, the Global Fund provides the methadone. When that funding runs dry, the Vietnamese government will have to take charge, said Dr. Houng Xuan Chien, director of the Dien Bien HIV/AIDS Prevention Center, which houses one of the methadone clinics. “Funding has already been cut significantly,” he said. “So for example, we don’t have enough funds to cover a security guard.”

The Vietnamese government already has started procuring some methadone with domestic funding, said the Global Fund’s Cavey.

Vietnam has taken other steps toward self-sufficiency. Last year, for the first time, the government included antiretroviral drugs in its list of essential medicines, which means starting as soon as this year, those drugs will be reimbursable under the national health insurance scheme.

Weaning countries off HIV funding is more complicated than for other diseases, such as tuberculosis, which can be cured with up to two years of treatment, said Cavey. HIV is a life-long condition, and there should be no interruptions in the life-saving antiretroviral treatments, he added.

What comes next?

A monument in Dien Bien Phu Province in northwestern Vietnam marks the French defeat in the First Indochina War in 1954. Photo by Larisa Epatko/PBS NewsHour

A monument in Dien Bien Phu Province in northwestern Vietnam marks the French defeat in the First Indochina War in 1954. Photo by Larisa Epatko/PBS NewsHour

Vietnam has pledged to end AIDS by 2030, in addition to reaching other national health goals, but officials are bracing for the inevitable withdrawal of donor funds. Provincial government leader, Pham Xuan Koi, vice chairman of the Dien Bien People’s Committee, recently told a group of visiting reporters that even though Vietnam is now recognized as a middle-income country, it still is on the low end of the scale.

Pham said his government’s budget can only offset so much as funding declines, which makes it harder to meet certain health-related goals, such as bringing down HIV prevalence in his region to the national average.

“If international support is phased out gradually, we can adjust our budget allocation to compensate,” said Pham through an interpreter. Otherwise, he said, those targets just won’t be met.

This report was produced from a trip to Vietnam arranged by the United Nations Foundation.