Download Paving The Way to a Better Vietnam: The Promise

Policy and Percentages: Two Perspectives on the
Vietnamese Economy
Policy:
Paving The Way to a Better Vietnam: The Promise of Doi Moi
SEPE, Brian
Percentages:
From Revolution to Reform: Prospects for the Future Economic
Growth of Vietnam Based on Analysis of Recent Trends
THORKELSON, Gregory
Presented to Professors:
Mary Kupiec Cayton
Richard D. Erlich
Allan M. Winkler
For the satisfaction of the Vietnam Capstone for History and English, Spring 2003
Paving The Way to a Better Vietnam: The Promise of Doi Moi
- Brian Sepe -
Introduction
With the defeat of the French at Dien Bien Phu in 1954, the country of Vietnam
was divided between North and South at the Geneva Conference. The Republic of
Vietnam and the Democratic Republic of Vietnam emerged from the conference differing
politically and economically.
In the North, a main emphasis was put on socialist transformation in all sectors.
This strategy was based upon similar systems implemented by the Soviet Union and
China. The arrangement put a great emphasis on state-controlled agriculture, and a
collectivization of peasants. In the industrial sector, the few large corporations turned
control over to the state. Due to a high level of investment, particularly in developing
industries such as metal, mechanical engineering, fertilizer production and mineral
extraction, industrialization vastly improved. Despite these increased kevels of output,
people of the North remained poor and impoverished. Capitalism ruled in the South,
providing room for private industries to grow. This was especially true in the
manufacturing sector.1Despite the differences between the two regions, both relied
heavily on foreign aid. The North received economic aid from China and the Soviet
Union, while the South relied on American investment2. After Saigon fell in 1975, the
country was again unified, this time under the policies of North Vietnam. Under the new
planned economy, the large manufacturers of South Vietnam were to be joined with the
1
Peter Wolff, Vietnam-The Incomplete Transformation.: (Portland, OR: Frank Cass Publishing 1999), 17.
Peter Boothroyd, Pham Xuan Nam Socioeconomic Revolution in Vietnam (Ottawa, ON: International
Research Development Centre, 2000) , 64-65.
2
predominantly agricultural-based North in a balanced economy. A plan to be a fully
unified economy by the year 1980 was the ultimate goal of the communist party. The
economy however, did not meet these lofty expectations. Chinese investment stopped in
1978 with western investment coming to a halt a year later. Outside Investments
dwindled because of failed crop productions and renewed Vietnamese military conflicts
with Cambodia and China. The U.S. embargo isolated Vietnam from international trade
leaving the current economic policies unable to sustain growth. Due to lack of efficient
production and limited government cash flows, The Socialist Republic of Vietnam was
forced to renovate its economic policy. This reformation period, known as doi moi,
gradually moved Vietnam from a centrally planned to a market economy. The current
state of Vietnam today is a hybrid of the two economic systems. As a result of the Asian
Financial Crisis in 1997 and decreased foreign investment coupled with corruption and
lack of stability, obstacles continue to deter Vietnam’s quest in achieving a balanced
stable economy.
Doi Moi
Since the introduction of Doi Moi by the sixth party congress in 1986, Vietnam
has endured remarkable economic growth. This has been possible mainly due to
stringent economic reforms. First, it is crucial to understand that the origin of these
changes came from a growing majority of younger members of the party congress that
had never experienced the revolutionary ideology and had witnessed the consequences of
a socially planned economy. In the mid 1980’s, wages were substantially low with an
overwhelming 80 percent of the labor force in the agricultural sector.3 With much
resistance from the previously capitalist South, the effort to fully implement a centrally
planned economy failed to produce sound economic results.
The Foreign Investment Law, passed in 1987 and implemented the following
year, completely liberalized former socialist policies.
•
100 percent foreign ownership of businesses in Vietnam as well as
•
foreign repatriations (meaning foreigners were permitted to conduct
business in-country and send profits home ), and
•
tax breaks and investment for technology, consumer goods, and
processing of raw materials.4
By 1996, this had culminated in $8.5 billion USD in project commitments and comprised
approximately one-third of Vietnam’s total investment effort.5
In March 1988, Resolution 10 was passed, furthering the development of reform
in Vietnam. This resolution abolished collectivization of agriculture and paved the way
for agricultural growth. The government distributed land to households who in turn were
given full authority in production and investment. With the abolition of government
contracts, goods could now be sold at market prices to the public as well the state. These
reforms were further broadened in 1992 when land-use rights were extended. Farmers
could now hold onto land for up to 75 years. Liberalization of agriculture produced
3
Melanie Beresford, Dang Phong, ed., Economic Transition in Vietnam (Northampton, Ma: Edward Elgar
Publishing, 2000) , 128.
4
Gerald Tan, ASEAN Economic Development and Cooperation, Sec. ed. (Singapore: Times Academic
Press, 2000) , 139.
5
Garry Rodan, Kevin Hewison, Richard Robison, ed., The Political Economy of Southeast Asia:Conflicts,
Crises and Change (South Melbourne, Australia: Oxford University Press, 1997) , 217
quick, impressive results. Vietnam is now the world’s third largest importer of rice,
when it previously had been a net importer.6
Another aspect of the Vietnamese economic infrastructure in dire need of
renovation was the banking system. Up until 1988, one lone bank controlled the money
supply throughout the country. This central bank was the sole financier of the national
budget while simultaneously funding state-run enterprises. The introduction of a twotiered banking system called for a central bank and state-owned commercial banks whose
main function would be to lend money to qualifying firms of that commercial sector.7
This would allow the main central bank more time to focus on balancing the budget and
controlling interest rates. Under this transformation, Vietnam posted positive real interest
rates for the first time in March 1989.8
Economic growth soared in the early nineties. The privatization of firms and the
relinquished power from the state provided the foundation for this dramatic growth.
Foreign investment resumed and Vietnam progressed into a global trading country.
Foreign investment reflects an abundance of cheap labor with the prospect of a higher
average rate of return for the investor. Inexpensive labor costs are ideally what attracted
foreign firms to invest in Vietnam. The country that supplies the labor, (in this case,
Vietnam) stands to gain a higher rate of employment and wage rate, which produces a
higher cash flow back into the economy. Consequentially, the high levels of foreign
investment have ignited growth.
6
Garry Rodan, 218.
Peter Wolff, Vietnam-The Incomplete Transformation (Portland, Or.: Frank Cass Publishers, 1999) , 4345.
8
Peter Wolff, 47.
7
In 1995, Vietnam joined The Association of Southeast Asian Nations (ASEAN),
becoming the first communist member. Originating in 1967, ASEAN’s main goal was to
initiate trade within its membership nations with minimal restrictions.9 ASEAN
membership currently consists of the following ten nations: Brunei Darussalam,
Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, and Vietnam.
Vietnam also committed itself to contributing to the ASEAN Asian Free Trade
Area, (AFTA) and signed a bi-lateral trade agreement with the United States in 2000.10
The main goals of AFTA are to:
•
increase trade between ASEAN countries by removing regional trade
barriers,
•
Reducing tariffs on all commodities to 0-5 percent for all ASEAN
countries, yet maintaining current tariffs with the rest of the world, and
•
Increase competitiveness between developing ASEAN countries.11
One particular problem facing Vietnam is the certain prospect of competition
from neighboring countries. As of publication of this document, Vietnam continues to
lag behind in areas of manufacturing. The lack of adequate machinery and training
leaves Vietnam at a slight disadvantage.12
In Vietnam, my classmates and I marveled at the abundance of cell phones. “That
girl has a nicer phone than I do,” I heard one of my classmates say. Because of the Asian
Free Trade Area (AFTA) incorporated by the ASEAN countries, it appears cell phones
9
Melanie Beresford, Dang Phong, 137.
Melanie Beresford, Dang Phong, 124.
11
Jose L. Tongzon, The Economies of Southeast Asia, Second Edition (Cheltenham, UK: Edward Elgar
Publishing Limited, 2002) , 184-86.
12
Jose L. Tongzon, 188.
10
manufactured in Asia can be purchased in other Asian countries with minimal taxation.
Additionally, Vietnam has a much smaller land area than does the United States, meaning
less cell towers to be constructed.
After President Clinton’s removal of the trade embargo with Vietnam, several,
quality goods flooded into Vietnam’s market. During our visit to Vietnam this past
March, American commodities such as Coca-Cola® soft drinks and Marlboro® cigarettes
were sold at numerous stands, stores and restaurants.. In every city we visited, numerous
curb-side shops posted Kodak® film signs; in Saigon, Kentucky Fried Chicken and
Baskin Robbins have both opened franchises. In 2002, with the approval of the United
States Bi-lateral Trade Agreement (USBLTA) a diplomatic relationship between these
two former enemies was formed.
While touring Vietnam in March 2003, Tony Nong, part owner of Ann’s Tours
located in Saigon shared with my classmates and I his personal life story. After the fall
of Saigon, Tony and Tim left Vietnam for America and in the process, lost contact with
their mother for sixteen years. Upon reuniting with their mother, the two brothers
returned to their native country and founded Ann’s Tours, a privately owned company
specializing in trip packages to Southeast Asia In our discussion with Tony, he spoke
optimistically about the current state of Vietnam and its future progress towards a freemarket economy. Their story is one of perseverance, dedication and love, and is a clear
example of Vietnam’s transformed economy. Tony said that, “Vietnam still has a long
way to go, but now that many Vietnamese have experienced benefits of a free-market
economy, the government has no choice but to push forward.”13 Economic growth has
slowed in recent years, however, due in large part to the Asian Financial Crisis.
The Asian Financial Crisis
Southeast Asia was violently shaken by economic crisis in July 1997. This fiasco
had an enormous impact on the economic growth of Vietnam. The crisis originated in
Thailand beginning with the floating of the baht by the Thai Government. This means
that the purchasing power of the baht was incorrectly valued when its rate was fixed.
When allowed to float, market forces drove the value of the baht down. The propping up
of the baht by the Thai government resulted in a near diminution of its foreign reserves.14
With uncertainties surrounding the Thai economy, foreign confidence from surrounding
nations declined. Because of Thailand’s direct involvement with other ASEAN nations,
the crisis quickly spread. In economics, this is known as the “bandwagon effect.” In
further explaining this theory, money managers are compensated in direct relation to how
their peers perform. This induces money managers to make similar decisions, which in
this case was withdrawn investment. Due to this decreased level of confidence by
foreign investors, Vietnam and other countries suffered substantially slowed economic
growth.15 Consumption levels dramatically decreased, as did foreign levels investment.
Since then, growth has resumed, although not at the pace it once had. Experts are
inclined to suggest Vietnam still possesses the ability to emerge as a dominant industrial
nation, although many factors including urbanization and education must develop
accordingly.
13
Tony Nong, Discussion with author, 14 March 2003
Jose L. Tongzon, 155-57
15
Gerald Tan, 209-210.
14
Urbanization
In the decade following Unification, urbanization decreased due to the migration
of people to rural areas. This was caused by the new centralized government’s reeducation policy, destroyed cities, and lack of employment opportunities. The old-style
socialist model threatened social development. From 1980, rapid urban development
expanded, but the state’s urban management committee lacked experience and
knowledge to deal with the situation. The main cities in Vietnam that incurred
substantial growth were Hanoi, Ho Chi Minh City, Da Nang, and Hai Phong. An
estimated 60 percent of revenue was created in urban settings, with the people living in
cities consuming about half of the expenditures of the state despite the fact that 70
percent of the labor force resided in rural areas. Gross Domestic Product (GDP) for
HCM city was 12.5 percent in 1993 while the rest of the country accounted for only 8
percent GDP. This magnifies the importance the industrial sector played throughout the
transformation. Currently, as a percentage of GDP, industrial value is increasing, while
the agricultural contribution is decreasing in importance.
In 1996, HCM city included nearly one million unregistered people traveling
great distances from rural areas and distant provinces. Many workers remained
unregistered, and without any form of social security, owing to the strict criteria for
registration and residency. School health care facilities and administrators are required to
register with the government. This further exacerbates the disparity between urban
dwellers and their rural counterparts.16
16
Jennie I. Litvack, Dennis A. Rondinelli, Market Reform in Vietnam (Westport, CT: Quorum Books,
1999) , 130.
Because of a lack of specific knowledge on urban planning, the government
unwillingly relinquished power to rectify inadequate housing situations. In 1988, the
government permitted national and local construction companies to build houses using
capital provided by themselves, the state or the purchaser of the home. Because the level
of capital provided by the state was insufficient, companies sought private investors to
purchase homes with their own money. This opened the door for a market-oriented
model of house construction to take place, despite obstacles created by government
controls.
With only 25 percent of its population living in cities, Vietnam is still well behind
the average for the East Asian Pacific region at 37 percent.17 This is attributable in large
part to the high correlation between increasing per capita GDP and high rates of
urbanization. Thus, urbanization is likely to continue increasing in line of Vietnam’s
growing GDP per capita.18
Education
Building on a traditional respect for education and with heavy public subsidies,
Vietnam turned a largely uneducated, illiterate population repressed by French
colonialization into a regional leader in education and literacy. To be sure, the
percentage of the population age fifteen and older that is illiterate is a mere 6 percent
versus the 14 percent average for the East Asia & Pacific region.19 Furthermore, the trend
17
http:///www.worldbank.com.htm (5 April 2003) .
Colin Barlow ed., Institutions and Economic Change in Southeast Asia (Cheltenham, UK: Edward
Elgar,1999) ,122-23.
19
http://[email protected] (5 April 2003.)
18
in recent years is toward continuing the reduction in illiteracy rates.20 Though
tremendous progress has been made in education, the situation is not uniformly positive
throughout the country. Even as women, men, and minority groups are relatively equal
from a literacy perspective on the whole, vast disparities still exist in Vietnam. In much
of the mountainous Northern region, for example, women have much lower literacy rates
than their male counterparts. While ethnic minority groups account for 13 percent of
Vietnam’s population, only 4 percent are represented in the student population.21
Currently The World Bank is implementing numerous programs in order to
strengthen primary education. Increased training is being facilitated to the main
publishing company in charge of writing all textbooks. In addition, training is being
provided for all teaching aids involved in primary education. These current projects fall
in line with education reforms of the past ten years calling for a higher emphasis put
towards primary education. Vietnam’s future economic development depends heavily on
increased training and education.
Overall, the topics discussed have loosely outlined doi moi and specific aspects of
the socio-economic structure crucial to facilitating growth in Vietnam. In the past fifteen
years, Vietnam has undergone remarkable change in the economic sector. Growth has
increased in the industrial sector thanks in large part to foreign investment and the
privatization of many firms. Vietnam’s involvement in ASEAN and the USBLTA has
further laid blueprints for future economic development. The Asian financial crisis in
1997 temporarily slowed growth in 1998 and 1999, but it gradually is recovering. Still,
many obstacles face Vietnam as it marches towards a free-market economy. With the
20
21
Colin Barlow, 143.
Jennie I. Litvack Dennis A. Rondinelli, 110.,
current economy neither central nor market based, the prediction of where the economy is
headed remains unclear. Although mitigating factors such as the Asian financial crisis
prevented its unfettered implementation, the policies of doi moi have successfully
positioned Vietnam to more effectively exploit future growth opportunities.
References
Adams F. Gerald, and William E. James ed. Public Policies in East Asian Development:
Facing New Challenges. Westport, CT: Praeger Publishers, 1999
Barlow, Colin ed. Institutions and Economic Change in Southeast Asia. Cheltenham,
UK: Edward Elgar Ltd, 1999.
Beresford, Melanie, Dang Phong. Economic Transition in Vietnam. Northampton, MA:
Edward Elgar Publishing Ltd., 2000.
Boothroyd, Peter, Pham Xuan Nam. Socioeconomic Renovation in Vietnam. Ottawa,
ON: International research Development Centre, 2000.
Litvack, Jennie I. Dennis A. Rondinelli. Marlet Reform in Vietnam. Westport, CT:
Quorum Books, 1999.
Nong, Tony. Discussion with Author, 14 March 2003.
Rodan, Garry, Kevin Hewison, and Richard Robison. The Political Economy of SouthWast Asia. South Melbourne, Australia: Oxford University Press, 1997.
Tan, Gerald. ASEAN Economic Developments and Cooperation: Second Edition.
Singapore: Times Academic Press, 2000.
Tongzon, Jose L. The Economies of South-East Asia: Second Edition. Cheltenham, UK:
Edward Elgar Publishing Ltd., 2002.
Wolff, Peter Vietnam-The Incomplete Transformation. Portland, OR: Frank Cass
Publishing 1999.
http://www.worldbank.com 5, April 2003.
http://[email protected] 5, April 2003.