VIETNAM ECONOMIC TRANSITION IN THE PERSPECTIVES OF PUBLIC
POLICY in THE POST ECONOMIC CRISIS
Ha Huong
Vietnam
artp6075@yahoo.com
Acknowledgement
I would like to express my gratefulness to the Organize Committee of the International
Conference on the Challenges of Globalization (21/10- 22/10/1999), especially Dr.
Patamawadee Suziki, Faculty of Economics, Thammasat University, for their strong
encouragement and great financial assistance so that I can attend the conference in Bangkok Thailand.
Abstract
Since 1986, business sector in Vietnam has enjoyed the "Doi Moi" (renovation) policy, which
was considered a great "leapfrog" in the economic history of Vietnam. Although Doi Moi
policy has gained some achievements and the economic environment has improved, a need for
a fresher economic view and policy approach as well as efficient implementation is a "must"
for the recovery of Vietnam economy.
This paper consists of four parts. The first part will briefly introduce Vietnam economy from
1986 until now. The second part will discus the main characteristics of Vietnam transition
economy. From a command economy, Vietnam has been on the transition stage to an open
economy or more accurate a "half-open" economy with the principle "window closes window opens and closes again". Whenever, new cabinet is elected, new policy directions
have been implemented. SWOT analysis will be employed in this part to examine strengths weaknesses - opportunities and threats of Vietnam current economy. The third part will
concentrate on the tentative lessons for Vietnam from the crisis and globalization movement.
Each country has its own characteristics and socio-political and economic conditions.
Globalization is both a "push and pull" factor in the recovery process of Vietnam economy.
Therefore, experience and lessons as well as globalized elements from other countries should
be selected to be applied in the context of each economy. The last part will wrap up what has
been studied in the paper.
In short, it is not easy for Vietnam economy to recover after the crisis. A combination of
economic policies, political reform and social restructure as well as human resource
development should be employed to tackle current problems. Also, integration into the global
trend and co-operation with other countries in various economic groups (APEC, ASEAN, etc.)
should also be highlighted so that Vietnam can achieve "real" political stability and economic
long-term growth. The author view in this paper is purely for academic purpose, not for any
political or ideological intention.
Note: This is the first draft, please do not cite without the author's permission.
INTRODUCTION
Before 1975, Vietnam was under the control of the former government, which was proAmerica. The economy relied much on foreign aids from America and from agricultural
export. The former government adopted a mixed economy system in which many economic
sectors and privatization were recognized. Although at that time Saigon - the biggest city in
the South - was named "the pearl of Far East" because of its fabulous economy, the economic
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growth was "artificial" and "dependent on foreigners" and did not reflect the economic
strength of the country.
After the 1975 revolution, Vietnam has been unified and command economy was employed as
the main mechanism for the ruling government to run the country. The government was the
main actor in deciding what, how and for whom to produce.
The consequences of the war, the lack of human resource and expertise as well as the lack of
infrastructure made Vietnam economy inefficient and incapable to compete. As a result, the
shortage of food and other basic goods was inevitable. From 1976 - 1979, common people in
Saigon had to have brown bread and noodle imported from USSR instead of rice (the writer's
experience). The economy collapsed with high unemployment rate, low foreign investment
and high foreign debt, inefficient banking and financial system as well as inconsistent
regulations and laws.
However, the government realized the need for a new policy approach to boost up the
economy. Thus, in "The Sixth National Congress of Vietnam's Communist Party, held in
December 1986, an overall economic renovation policy was introduced" (Le, Vietnam News
Online, 1998). This policy had been known as "Doi Moi", which aimed at improving the
standard of living of the people through relaxing macro-economic policy and reducing the
government intervention in the market. In addition, incentive measures had been introduced to
attract foreign direct investment (FDI) that was more than welcomed by business sector.
"Doi Moi" policy had lasted for few years and gained notable achievements, such as the
unemployment rate was reduce, privatization was under consideration, foreign direct
investment increases dramatically.
In The Seventh National Congress of the Vietnam Communist Party in 1991, the state
"reaffirmed its commitment to a multi-sector, market-oriented economy and called for the
introduction of more structural reforms" (Le, Vietnam News Online, 1998).
The six main tasks to achieve the national objectives are presented by Dr. Le in "Vietnam
Economy" (Vietnam Embassy, 1998) as follows:
"(i)
(ii)
(iii)
(iv)
(v)
(vi)
To improve the efficiency and competitiveness of the economy;
To ensure the agricultural and rural development in line with
industrialization and modernization;
To step up the reform of State businesses;
To renovate and make healthy the financial and monetary system;
To combine economic growth with cultural development, to achieve social
justice and progress, to protect the environment; and
To build a democratic, clean, capable and effective administrative system".
Overall, the policy approach was right, but the implementation process needs to be more
systematic and efficient given limited resources and lack of human resources as well as lack of
managerial expertise.
VIETNAM TRANSITION ECONOMY - SWOT ANALYSIS
Vietnam transition economy
Currently, Vietnam economy is operating in a so-called "transition stage", which helped
Vietnam to reach 1,200 foreign investment projects with a total investment capital of over
US$16 billion since 1988 to more than US$ 7 billion in 1995 (Le, 1998). Foreign trade has
also increased with over 700 foreign companies from over 40 countries investing in Vietnam
(Sadec Asia Pacific - Online, 1998, Access 9/10/1999).
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According to Dr. Le in "Vietnam Economy" (Vietnam Embassy in USA, 1998), the GDP
growth rate was about 8.2% per annum from 1991 to 1995 and was over 9.5% in 1995. As a
result of many positive factors, exports grew an average of 20% annually from 1990 to 1994.
In 1995, export earnings reached US$ 5.3 billion, more than five times higher than export
earnings in 1988 and 38% higher than in 1994.
Besides encouraging people from different economic components to participate in the
government by accepting of independent candidates in the provincial election (the writer's
remembrance), the government reduces the intervention in the market. However, the
government still controls most of the economic activities, such as banking and financing
sector, and public sector still dominant the economy.
Although privatization has been promoted with the close supervision of the government,
public sector is still given priority in terms of physical infrastructure (offices, resources, and
licenses).
Due to time and information constraints, only three main markets of Vietnam economy in the
transition stage are observed as below:
Table 1: Three main markets
Labour
market
-
-
Capital
market
-
-
Product
market
-
-
Finding a good job depends on "who you know" not "what you can do" in
the public sector; and in the private sector the question should be "which
information you get" and "how you can approach" the relevant persons.
Labour is informal mobility, i.e. there is not free movement of labour
from the rural to urban areas.
There is no incentives for workers in state enterprises
The government assigns individuals to jobs in the rural areas and save
good places in the urban areas for "suitable recipients" under the
patronage-client system (of course in an informal way).
The government owns most of the capital sources through nationalization
of companies and private properties during 1975 - 1986.
The government approved "equitization" since 1992; but so far only five
smaller companies registered in 1993 (Le, 1998)
The central bank determines the savings rate.
The government controls the flow of capital, for example foreign
currency must be deposited in licensed banks. After August 1999,
individuals go overseas can only bring out maximum US$3,000 (from
interviews).
Vietnamese individuals are not qualified to open bank accounts at foreign
banks.
The national government allocates foreign investment. However, some
direct contacts to local government and partners are made informally.
Market is used to distribute goods.
There is shortages of goods in some places and abundant of goods in
other areas, especially agricultural products since high transportation cost
and inefficient allocation of goods.
Weak enforcement of law which increases the rate of violation of patent
and copyrights regulations. Thus, innovations and creativity are not
stimulated.
Source: Ideas from the writer and the format borrowed from Joseph E. Stiglitz (1993), "Economics",
Sanford University, W.W. Norton & Company, Inc. New York.
Through these above characteristics, limited success is obviously. Examining the main causes
of limited failure can help us understand more about the strengths and weaknesses of transition
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economy. Firstly, the system fails to provide adequate incentives to workers to work harder
since their work is not recognized. There is lack of competition and no incentives to stimulate
creativity and innovation. Thus, why must workers contribute more when they cannot get
higher salaries or promotion? Secondly, the planners do not have sufficient information to
allocate resources efficiently. Also, the lack of managerial skills and ability to monitor the
implementation hinder the development process. Most of the company leaders came from
military or farming origins. They may be very good in battles or working in the field, but not
in economic management. Therefore, mal-management is inevitably. Thirdly, high
unemployment rate is not able to avoid. Before the government assigns people to jobs, now
there is a need for employees to be retrained to match the new jobs. Also, they need time move
between jobs, which increase the frictional unemployment rate. Fourthly, managers in state
enterprises know that they have to transfer means of production to someone else so they do not
expand production. Some cases, they abuse their positions and power to accumulate wealth for
themselves before 'retirement". Here, the tragedy of common causes waste of public resources.
Fifthly, inflation rate is high. Wages cannot keep pace with price. In the command economy,
the government subsidizes prices. Now prices are a little bit freed, then an increase in prices is
easily to understand. As a result, the aggregate demand decreases and the standard of living
also declines.
The next problem is privatization. The government allows private sector to participate in the
economic activities. However, a lot of issues need to be discussed and adjusted. Although the
government sells some of the state enterprises, most of them are still retained in the title of
"joint venture". Promotion of competition is far from international standard since public sector
is still received more assistance from the government. One aspect should be mentioned is the
ownership rights. Legitimately, the government recognizes the ownership rights of individuals
and business sector. But in practice, this rights is limited among certain privilege groups, such
as high rank officers, cadres, civil servants and so on.
Finally, bureaucracy and red-tape have deep roots in the administrative system of public
service. The delay in paper work occurs daily. Applying any kind of license need many seals is
common. This causes frustration to the common people and foreign investors whenever they
have to go to government agencies. Together with inconsistent enforcement of law, these
features caused the dramatic cline in foreign direct investment and slows down the speed of
transition.
Stiglitz in "Economics" (1993) discusses two approaches as follows:
"One approach is called 'cold turkey': make the plunge, live through a short
nightmarish period, and then enjoy a future prosperity. Th other approach calls for a
more gradual transition and considers political as well as economic issues."
In the case of Vietnam, a new approach has been adopted, that is "window closes - window
opens and closes again". This depends on the ideology, the policy and the implementation
process of the new cabinet after each election. It means that the government gives the
'opportunity' to business sector by relaxing regulation. When there is some sign of 'gain", the
government will tighten the regulations - the window closes - and the business sector cannot
enjoy the fruit of their work so long. In fact, Vietnam economy is in the transition stage from
the command economy to transition economy.
Diagram 1: Vietnam in transition from Command economy to Transition Economy
Command
Economy
Transition
Stage
Transition
Economy
Mixed
Economy
4
Market
Economy
SWOT Analysis
To understand more about Vietnam current economy in transition, a SWOT analysis is useful
to readers to have a broader view about Strengths - Weaknesses - Opportunities and Analysis
of Vietnam economy.
Strengths
Vietnam has political stability with one ruling party for 24 years (1975 - 1999). The party is
claimed "to be of people and for people". Special efforts of the national leaders to have new
policy approaches and new renovative policies can be seen clearly through every national
congress since 1986 until now.
Another aspect is the introduction of policies aiming at enhancing the competition of the
economy, restructing public sector and encouraging private sector. For example, one of the
measures to reform banking and financial sector is to merge or close the banks, which are not
efficient. At the moment, Vietnam has 50 public listed banks, of which 30 banks have offices
in the urban areas and 20 banks have offices in the rural areas. Among them, 4 banks were
already merged into 2 bigger banks (Do 1999: 10).
Moreover, the determination of the national leaders in consolidating legal system and
enforcement of law can be seen through severe sentences to criminals no matter who they are
and which position they hold. For example, in sensational graft cases as Epco, Tamexco, Minh
Phung, etc…, a series of people in high position were sentenced to death (Cong An, 7/1999).
Weaknesses
Firstly, when new cabinet is elected, new policy and regulations have been enacted and
implemented. Nevertheless, the span life of the policy is not long and the implementation is
conducted so slowly that policy makers can hardly see the fruits of their work. Most of the
time, one regulation has just been enacted and has not been applied throughout, a new
regulation has been introduced. Consequently, regulations are overlapped, which cause
confused and difficult in implementing.
Secondly, although the government has made special effort to restructure the economy, the
policies have not been implemented as tentative. The foundation is not strong enough to carry
big changes. Most of the policies have been continued halfway. It means new objectives, new
instruction and new target groups would be aimed at.
In addition, there is a dilemma between political ideology and economic policy. On one hand, the
government wants to maintain the socialist ideology in which the state has to take care everything for its
people. Here, the principle of "collective interest and collective responsibility" creates a sense of "moral
harzard" and "tragedy of common". Consequently, the limited resources are not utilized fully. Topdown policy approach and centralization has been highlighted. On the other hand, the government wants
to pursue "Doi Moi" policy to restructure the collapsing economy. This policy requires a bottom-up
approach or at least the combination of top-down and bottom-up principles to decentralize making
decision. Thus, the paradox is how to keep the dominant role in political ideology and at the same time
how to be a "new capitalist" in economic activities.
Moreover, the lack of concrete policy for the development of human resources leads to the outflow of
local talents from public sector to private sector as well as from inside to outside Vietnam.
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With regards to banking sector, it still remains largely undeveloped. According to Marketing
Management (Winter 1997, Volume 5, Number 4):
"Ambiguous laws, the lack of a capital market and developed independent auditing
system, a scarcity of skilled staff in the credit arena and a low national savings rate
have all contributed to an inadequate capital base and a shortage of credit.
Government banks have felt pressure from local and central authorities to lend to
troubled state-owned enterprises, creating large troubled loan portfolios. Prior to
1992, banks were required to follow a negative interest rate spread structure" (Access
on-line on 9/10/1999).
Such negative aspects together with the inadequate payment system (personal checks, credit
cards, cash cards, etc.) have made Vietnamese people reluctant to deposit their savings in state
banks. More than 50% of savings is kept as cash (foreign currency) and gold outside the
banking sector (Marketing Management, 1997).
Although the government tries to learn from the past but the corrective process is really
painful because the network and “relationship” ("guang xi") are so deep and wide. It takes a
long time to change the view, the traditional thinking and agricultural habit to adapt with the
industrialized working style. Coming to work late and going back early is commonly
practised in government agency. Wasting too much time on paper work due to lack of
manpower, professionalism as well as facilities is inevitable. The political and economic
environment is not attractive to foreign investors. Repatriation of profit with relative low
"hidden cost" is a challenge to them.
To sum up, I would like to quote some shortcomings of Vietnam economy in Marketing
Management (Winter 1997, Volume 5, Number 4):
"Inconsistent and frequently inexplicable policies that hinder all aspects of the
transition …..
Persistent and expanding trade deficits, which ballooned from $60 million in 1992 to
$2.2 billion dollars in 1996.
Growing overseas debt.
Burgeoning current account deficit, which hit an estimated 15.1% of GDP in 1995.
Stagnating foreign direct investment (FDI) realizations; while approval rates are
soaring, actual realization of the projects is slowing, partly because of the
frustrations presented by bureaucracy.
Inefficiencies of state-owned enterprises, as evidenced by little job creation and the
failure to create value-added exports."
Opportunities
Although, Vietnam has faced too many difficulties and challenges, we cannot deny the
optimistic aspects. First of all, becoming a member of economic groups and international
organizations such as ASEAN, APEC, WORLD BANK, IMF is a progress step for Vietnam to
integrate into the global market. This helps Vietnam to obtain necessary information and to
have her voice articulated in regional and international meetings and discussion. Becoming
member of such organizations also helps Vietnam gain most-favoured-nation (MFN) status as
well as obtain lower tariff for exported goods.
Secondly, signing a bilateral trade agreement with USA on Sunday, July 25, 1999 marked an
important step to achieve a "normal diplomatic relationship" between the two countries (Do,
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Mekong Bulletin, 1999). This will give domestic suppliers more chance to enter US market
with favourable tariffs and other conditions, such as modes of payments.
Finally, the change in ideology and thinking of the authority from blaming external factors
into blaming themselves and try to find out a positive resolution should be considered as a big
opportunity for the recovery of Vietnam economy.
Threats
Last but not least, Vietnam also faces too many threats. Firstly, the serious reduction in the
foreign investment and the aggregate demand was warned by Vietnam Prime Minister on July
30 1999. One of the reasons for the decrease in total demand is that common people do not
have enough money to spend since they are unemployed, especially workers in heavy
industries (steel, coal, miner, cement). In these industries, the supply exceeds the demand so
significantly that the stocks increase very high (Do, Mekong Bulletin, 1999).
Secondly, corruption, graft and patronage-client relationship has been practised for a long time
in Vietnam. Now, they have become "traditions" and hinder the development of the national
economy and other renovation policies. This practice becomes a well-known feature as
"business culture" in Vietnam.
With regards to international relation, the dispute about Spratly island with other claimants Philippines, Malaysia, Brunei and China - which are neighbors and ASEAN members as well
as main trade counterparts may spoilt the diplomatic and trade relationship among these
countries.
Lastly, the lack of competition and a sense of "Kaisu" ("want to be the best" which help
Singapore achieve amazing results) makes Vietnam economy recover more slowly than other
countries.
LESSONS FROM THE REGIONAL ECONOMIC CRISIS AND GLOBALIZATION
According to many economists, close economy is less affected by the economic crisis since
the control of governments and policies to respond to economic shock. As a result, Vietnam
economy has less effected by the crisis in terms of the exchange rate (the exchange rate varied
from VN$13,000 - $14,000 to US$1) and banking and financial system. However, the
economic growth rate has been declined due to the regional economic crisis and the
globalization trend.
Each country has its own characteristics and socio-political and economic conditions.
Globalization is both a "push and pull" factor in the recovery process of Vietnam economy.
Therefore, experience and lessons as well as globalized elements from other countries should
be selected to be applied in the context of each. Four lessons for Vietnam are presented as
follows:
Lesson 1: Complementary versus Competition
Although Vietnam has shown effort to integrate to the global market, Vietnam economy does
not have enough competitive strength. The "sandwich" situation of new member in the
economic integration should be addressed here. On one hand, Vietnam has to join the ASEAN
and APEC to gain favourable tariff and other conditions. On the other hand, Vietnam has to
open the door for foreign investors. Domestic producers who lack of capital, expertise and
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competition cannot cope up with the sudden changes. As a result, domestic products are
replaced by cheap imported goods.
Generally speaking, economic groups can only be complimentary when Vietnam can keep
pace with regional changes in science and technology, social and institutional structures as
well as political reform.
However, economic groups will increase competition among members because of different
levels of economic development and loose cooperation. This may cause trade and investment
diversion in Vietnam and trade and investment creation in other member countries.
Lesson 2: Nationalism versus Globalization
Since globalization is not evenly distributed due to different level of technological
development, different level economic development, different objectives, each country should
choose a proper pace and proper paths to reach its goals.
"Each country should globalize and liberalize commensurate with the reforms of its
regulatory institutions, level of development, and evolving of safety nets. One pace
(usually rapid) of globalization is not appropriate for all countries. Policies and
practices of International institutions need to recognize this." (Mukul, 1999)
This means a comprehensive master plan for national development, which includes policy
reform, socials and institutional changes, should be employed in the recovery process rather
than rely on only one instrument. In addition, each country has its own comparative
advantages and its own socio-political and economic conditions. Thus, experience and lessons
for each country should be different. Integration to global trend can only be achieved when a
country knows its strengths and shortcomings to set a proper speed and equip with adequate
instruments, such as laws, regulations, fiscal and monetary policies, etc. to enter the
globalization battle. In addition, the country has to prepare to respond to economic and social
shocks.
Lesson 3: Human Resource Development versus Technological Development
Vietnam is seriously lacking of human resources. Local talents have not been employed and
promoted properly due to parochialism and meritocracy. Consequently, many students study
overseas and later do not want to go back since they cannot find relevant jobs, which they can
apply, what they learn. Also, the shortage of capable managers causes mal-management of
public fund, wasting of public resources.
Lesson 4: Tradition versus Modernization
As SM Lee Kwan Yieu said that Confucian value has to be preserved even when the society
reaches its highest development stage, since Confucianism helps Asian countries to become
Asian dragons in the 1900s (before the economic crisis). It also helps Korea to recover faster
than other countries in the region (Lee, Straits Times 10/1999). Some of the main principles of
Confucianism can be listed as hard working, high savings, sacrifice to day for future
generation, or in other words “ present pain for future gain”.
However, we also have to discuss some negative aspects, which are out-up-date in the
globalization context. For example, the respect for old age and experienced people rather than
for young and enthusiastic people will hinder the creative and innovative process, which is
necessary in the modernization. Obviously, age and experience is important to work; however
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to avoid a monotonous and stereotype thinking and views, we need some “breakthrough”. In
the case of Vietnam, not only age but also traditional view and practice of “patronage – client”
hinder the “Doi Moi” process. In addition, individualism and short-term gain occupy most of
the daily activities of Vietnamese people.
Overall, tradition and modernization should be combined in a harmony manner to achieve
social stability, which will contribute to the recovery of Vietnam economy.
CONCLUSION
Although Vietnam economy seems pessimistic at least in the next three years, the government
shows their special efforts to re-flat the economy. Trying to grasp the opportunity in taping
major financial source for its reform has been placed in government agenda with high priority.
In addition, concentration on human resource development should also be conducted
concurrently with other reforming tasks.
REFERENCES
Do Thong Minh (1999), Viet Nam News, Mekong Bulletin, Vol. 51, Tokyo, Japan.
Le Dang Doanh (1998), Vietnam Economy, Vietnam Embassy in the United States of
America, http://www.vietnamembassy-usa.org/981122.htm (Access date 9/10/1999).
Lost Opportunities, Viet Nam Economic News, VET, issue 63, May
http://unix.ama.org/atama/pubs/mm/mm5/mm5-4/4b.htm (Access date 9/10/1999).
1999,
Marketing Management, Winter 1997, Volume 5, Number 4 (Access date 9/10/1999)
http://www.sadec.com/Profile/Pages/Viet08.htm, Access day: 9/10/1999, SADEC on-line
Mukul G. Asher (4/1999), The East Asian Economic Crisis and the Prospects for Recovery,
Economics Faculty, National University of Singapore.
Joseph E. Stiglitz (1993), Economics, Stanford University, W.W. Norton & Company, USA.
Cong An newspapers, June and July 1999.
Tuoi Tre newspapers, June and July 1999.
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