France occupied all of Vietnam by 1884. Independence was declared after World War II, but the French continued to rule until 1954 when they were defeated by
communist forces under Ho Chi MINH, who took control of the north. US economic and military aid to South Vietnam grew through the 1960s in an attempt to
bolster the government, but US armed forces were withdrawn following a cease-fire agreement in 1973. Two years later North Vietnamese forces overran the
south. Economic reconstruction of the reunited country has proven difficult as aging Communist Party leaders have only grudgingly initiated reforms necessary
for a free market.
Update No: 01
Being viewed internationally as a Asian backwater gradually on the way to
modernity and industrialization, but with almost all economic sectors dragging
behind, leaders of Vietnam’s communist party inevitably put the blame on long
wars of independence, first with France and then the US. Meanwhile, the younger
generation here have no doubts in disagreeing with their parents, the veterans
of those wars, in explaining it on the reluctant, indecisive attitudes of the
party towards pro-market reforms and the acceptance of private property.
Since the late 1980s, the
government were to have initiated a campaign of “Doi Moi” (reform) which was
first adopted at the sixth Party Congress in 1986 but was put on hold, by now
for 15 years. The congress gave a green light to reforms, but which were to be
carried out under the mantra of “socialist orientation”.
However, it is now clear that
the reform programme has failed to meet the early dreams of leaders and the
reasonable expectations of the citizens. Le Kha Phieu, the former party chief just before the current
one, had reassured the population by claiming that socialism would definitely
win, but he himself and his party have never been able to work out a real,
transparent answer to what “socialist orientation” really means, which then
became an excuse for inaction .
The inadequate understanding,
indeed general confusion as to what “socialist orientation” means, has led
to a situation that does not allow the free market decisively to open up and
consequently the reform has failed to meet its projected targets.
The attitude of government to
privatizing public assets well exemplifies the reluctance to change. Most of
large state owned enterprises (SOEs) would remain under government control under
the five-year SOE reform program (2000-2005). For reasons of national security
it is claimed, and “special interests” which can be guessed at, large
enterprises, strategic enterprises, utilities, including public service SOEs,
will remain under full state ownership.
The antipathy among communist
leaders to privatization is because of their intolerance to the perceived
re-creation of capitalism, and it is the party that runs things here.
However, various measures are contemplated aimed at improving efficiency
The effectiveness of
spreading ownership has been low due to capping regulations on shareholdings of
individuals and entities, and to the fact that sales information of
highly-feasible candidate SOEs is limited to some highly placed figures in
society. Knowledge is regarded as power and those who have it want to keep it
Ageing SOE managers, who
usually owe their positions to party promotion, are neither autonomous nor
accountable enough to take effective measures to make their enterprises more
competitive and efficient. They are primarily concerned that their personal
interests and priorities will be taken away after privatization.
A recent government survey
found that around 60 percent of SOEs were not profitable and the debt-to-asset
ratio of a large number of SOE was excessive. A major portion of that falls into
the group of big and strategic SOEs.
This situation has
deteriorated over two years of slow growth, low domestic demand and inadequate
competitiveness. It follows a significant contraction of SOEs over the last ten
years in the number of SOEs (from 12,000 in 1990 to 5,300 today) and in actual
SOE employment (from 2.5 to 1.6 million). Their share of GDP and industrial
output has fallen drastically in the last ten years, mostly due to growth of the
foreign-investment sector but also due to growth of the domestic private sector,
mainly of household enterprises.
Internal reasons for low
profitability of SOEs in Vietnam are partly due to the lowly position of genuine
trade union organizations, but primarily to the dead-hand of party bodies at the
enterprise level. Those party organizations inside enterprises are usually led
by ageing party members whose business sense is non-existent but whose power is
More flexible and market
oriented private enterprises have not been allowed a real level-playing field
with SOEs, even after the newly ratified Enterprise Law is taking effect. The
inequality between the two sectors is well reflected in respect of access to
bank credits. The government’s attitudes towards domestic private investment
are to some extent, still discriminatory in favour of SOEs. Administrative
bodies at government level that have close links and great influence on the
operations of private enterprises, have created many constraints to the free
development of private business.
SOEs account for 30% of GDP,
25 percent of total investment, 15 percent of non-agricultural employment and
about 50% of outstanding domestic bank credit.
Directed lending favoring
SOEs has led to a very high rate of non-performing loans. An inappropriate
regulatory and supervisory system, one that did not focus sufficiently on risk
and loan quality permitted has permitted bankers to conduct related-party
lending and high risk lending. Clearly, as can be seen from many other former
command economies in Europe and elsewhere, this is real transitional trouble
stored up for the future for both the banks and the SOE’s.
Current land law does not
provide easy access to land to private enterprises whilst business licensing
restrictions in various sub-sectors are not removed; the formation of domestic
private business associations is not facilitated. All of these are obstacles to progress.
However, despite this, the
reforms so far taken have undeniably made some progress and it is increasingly
apparent that if the government is finally determined to further strengthen its
reforms in a realistic manner and with the right approach, Vietnam will be able
to take off vigorously in the not too distant future.
Improvements in the policy
environment for the domestic private sector in Vietnam over the last two years
appear to be leading to impressive results. Since Enterprise Law became
effective in January 2000, an average of 1,200 new small and medium enterprises
(SMEs) have registered each month. A recent survey finds that 70 percent of
these new registrations are start-ups and are adding genuinely to domestic
investment. Evidence over a two-year period also suggests that private SME
employment has grown at around 30 percent a year and private SME manufacturing
employment, at 35 percent a year. The strongest employment growth was found in
SMEs with more than 100 workers.
Enterprise Law, therefore, is
specifically aimed at facilitating the birth of private businesses which was
very difficult in the past. More actions need to be designed to level the
playing field between SOEs and private enterprises.
There is little doubt that if
the government systematically seeks to improve the climate for domestic private
investment and manages to change it’s treatment towards private enterprise,
employment generation can be huge.
The recently adopted trade reforms, when implemented, will increase
employment, incomes and consumption of all income groups over the medium term.
As the first wave of grudging
reforms has proved inefficient, the government and communist party recently came
to understand that they have no choice except of going for an real open market
economy, otherwise their very existence will be threatened.
In reality, encouraging
progress has been made in respect of structural reforms in 2001. Following the
adoption of the Ten Year Strategy by the Ninth Party Congress in April 2001,
Vietnam reached agreement with the IMF and the World Bank on a multi-year
programme of specific actions concerning banking and SOE reform, trade policy,
improving the climate for private enterprises and public expenditure management.
Implementation of this agreed
programme of actions has so far been good except for SOE reform. Measures in
respect of trade reforms and private sector development are on track.
Quantitative restrictions on imports were removed from seven items instead of
the two that were scheduled originally. Banking reform lagged initially, but now
seems to be largely back on track. Four state owned commercial banks are being
re-structured after a delayed start. The programme to equip them with
international accounting standards is expected to be completed by January 2002.
A number of specific policy
changes such as reduction in personal income tax, movements on interest rate
caps, new procedures for the conversion of foreign investment into joint stock
companies, and the issuance of the Enterprise Law are among ultimate efforts to
speed up reforms.
Now it is the global downturn
that makes the achievement of Vietnam’s goals much more difficult, especially
with the events of September 11 and its aftermath.
There has been a sharp
falling off in demand for Vietnam’s exports. Import demand growth for
Vietnamese products in 2000 stood at 17 percent then down to much less than 1
percent and had been expected to recover at 4.5 percent in 2002. This has been exacerbated by the fact that Vietnam’s key
East Asian trading and investment partners have abruptly entered recession.
Japan’s growth has fallen from 1.5 percent in 2000 to minus 1 percent in 2001
and even more striking, the newly industrialized economies of Singapore, Taiwan,
China and Hong Kong which grew by 8
percent in 2000, will see a contraction of their GDP by 1 percent this year.
As a result, overall export
earnings growth was 7 percent in 2001 (to around $15 billion) down from 25
percent growth in 2000. This is due more to price than volume declines .
Manufacturing earnings rose by only 1 percent in 2001 compared to 16 percent the
previous year, due to collapse in exports of footwear, electronics and
computers. Oil export earnings declined by as much as 20 percent.
The sharp declines in
commodity prices have hurt poor farmers in a 80% agricultural country badly.
Among the poorest 40 percent of the population, nearly half are net price
sellers and others are sellers of other commodities. If Vietnam wishes to open
its economy further, it will become even more vulnerable to fluctuations in
world commodity prices.
Overall, due to the fact that
public expenditures have not kept pace, the budget deficit is expected to be
lower than was planned. Noticeably, macroeconomic performance stability in 2001
continues to be maintained and is close to expectations, in spite of a
substantially worse external environment.
Growth is lower than
originally projected, but Vietnam is still expected to have the second highest
growth rate among the larger economies in the region both in 2001 and the next.
Retail sales and industrial production point to continued growth in real GDP,
with economic activity driven by domestic demand, including a pick up in private
investment following improved business sentiment.
With a slight easing of
imports this year and a modest improvement in foreign investment , the external
balance remains favorable.
The country recorded GDP
growth of 7 percent in 2001, total investment growth of 16 percent and a
budget revenue increase of 7.4 percent.
To move forward, the
government is hurrying up its agenda for the next twelve months to build
competitiveness by reducing costs for exporters and enhancing options for
The chance for Vietnam in the
middle of the current global economic and political uncertainty is that it
forces foreign investors to rethink their global portfolios. A recent survey
shows that Vietnam is perceived as the “safest” productive country in Asia
which is valuable, but not definitive.
The supply of world foreign
investment is estimated to fall by 40 percent in 2001, the sharpest decline in
three decades. However, the year 2000 saw some important progress in this
respect. Three large energy related investments – the three biggest private
foreign investments in Vietnam ever - have finally been signed, indicating that
Vietnam is open for large scale investment.
To cope with the falling
trend, actions have now been adopted to try to make Vietnam an attractive place
for investment. This has resulted in a significant number of new investments and
expansions of existing operations. Nonetheless, Vietnam has a distance to travel
before it can be regarded as a premier investment location. This is not because
of any inherent lack of competitiveness, because Vietnam can become highly
competitive and increasingly it is improving its policy environment. It is
because of Vietnam’s reputation for slow decision-making and for insufficient
transparency, in other words the interface of the ruling communist party with
the realities of a market economy.
The ratification of US
bilateral Trade Agreement in September 2001 lowering US tariffs on Vietnamese
manufactured exports presents a great opportunity. Though import demand will
remain weak in the US in the near term, Vietnam could generate growth in its
exports to that market, if it prepares expeditiously and targets its products
Recent estimates of the
impact of WTO accession on China’s import demand suggest that there will be
important opportunities for Vietnam to export certain products. Whether Vietnam
is successful in realizing these opportunities will depend on its efforts to
penetrate the Chinese market and on the speed of reforms that Vietnam undertakes
as part of its own WTO accession process.
Donors and international assistance organizations
estimate that to fulfill the “second phase” reform, Vietnam will require
disbursements of about $2.7 billion in 2002. Slightly more than half of this
inflow should come from ODA, based on higher disbursements from the existing
stock of un-disbursed project aid. And the rest comes from FDI and external
loans. FDI and commercial inflows are estimated to increase to $1.2 billion in
2002 (both equity and loans) given the large projects in the energy sector that
were recently approved. The World Bank, IMF and Growth Facility are expected to
disburse a total amount of $270 million in 2002 for the purpose of poverty
reduction only. Disbursement from the UK, Sweden, Denmark and the Netherlands
who have recently approved co-financing of the first poverty reduction support
credit and from program, loans of Asia Development Bank (ADB) are also expected.
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