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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 and competitiveness.

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 that way.

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 absolute. 

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 private investors.

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 carefully.

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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