VIETNAM ECONOMIC TRANSITION IN THE PERSPECTIVES OF PUBLIC POLICY in THE
POST ECONOMIC CRISIS
Ha Huong
Vietnam
[email protected]
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 pro-America. 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
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) To improve the efficiency and competitiveness of the economy;
(ii) To ensure the agricultural and rural development in line
with industrialization and modernization;
(iii) To step up the reform of State businesses;
(iv) To renovate and make healthy the financial and monetary system;
(v) To combine economic growth with cultural development, to achieve
social justice and progress, to protect the environment; and
(vi) 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).
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 "Finding a good job depends on "who you know" not "what "
"market "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). "
"Capital"The government owns most of the capital sources through"
"market "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. "
"Product"Market is used to distribute goods. "
"market "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 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 Transition Transition Mixed
Market
Economy Stage Economy Economy
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. Top-down 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.
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, 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 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
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 1999,
http://unix.ama.org/atama/pubs/mm/mm5/mm5-4/4b.htm (Access date 9/10/1999).
Marketing Management, Winter 1997, Volume 5, Number 4 (Access date
9/10/1999) http://www.sadec.com/Profile/Pages/Viet08.htm, Access day:
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