Vietnam: Economic Reform Is A Long-Term Game


Dr Binh Tran-Nam

As the slowdown of the domestic economy worsens, the Vietnamese Government has continually reiterated its commitment to economic reform under mounting pressure from the international investment community and donor organisations. While economic reform is vital to Vietnam, it is also clear, since the early 1990s, that the process of reform has not been systematic or orderly, nor has it been in harmony with other socio-politico objectives. The Asian crisis provides a good opportunity for the government to rethink its economic development strategy.

Until recently, the Vietnamese Government, not surprisingly, has expressed a preference for the fast-growth models of Singapore and South Korea, particularly the conglomerate (tong cong ty) strategy. This ignores the fact that many of the ingredients in these success formulae were missing and are still missing in Vietnam today. As Vietnam's reform is lagging behind that of China by as much as 10 years, the Chinese experience is far more relevant and valuable to Vietnam. This is a view that Vietnamese leaders have reluctantly but increasingly come to accept.

Economic catch-up is a very long-term game for Vietnam and growth strategies must be devised accordingly. It is not useful to stipulate an ambitious growth rate in the face of a difficult external climate. Since economic growth in Vietnam has been primarily FDI-led, Vietnam will find it very difficult to achieve the current target of 6 per cent growth rate (reduced from an earlier, over-optimistic target of 9 per cent) for 1998. Its growth rate is likely to be between 4%-5% for both 1998 and 1999, and will not pick up until 2000.

In the meantime, it is important for Vietnam to build a proper foundation that will foster long-term growth. Creating market opportunities without a proper legal and administrative framework is not productive. Simplified, consistent and more transparent legal and business rules alone do not help much if there isn't any competent and reasonably honest public servant to administer the system. Fragmentation of economic policy planning and implementation by regional authorities will also harm long term growth.

What is needed most in Vietnam now is the centralisation of a long-term economic development program in the hands of capable public servants. This calls for a reform strategy that involves slower economic growth in the early stages and a greater emphasis on human resource development, especially the development of an efficient administration system.

The regional crisis coupled with cyclical downturn will continue to impact negatively on the Vietnamese economy in 1999. Since its economic growth has been primarily FDI led, Vietnam will find it very difficult to achieve the target of 5-6 per cent growth for 1999. Its real GDP growth rate is likely to be between 3 and 4 per cent for that year, and will not accelerate until 2000. Thanks to several recent trade agreements with the EU, the sectors that are likely to contribute most to growth will be the primary and low-tech manufacturing industries including marine products, food processing, textile and garments. At the same time, tourism, services and property construction will experience a relative contraction.

Foreign investment will continue to slide in the first half of 1999 and will not pick up until the end of the year. As economic ties between the US and Vietnam are fully normalised under the Clinton administration, the US will play an increasingly important role as a foreign investor and trade partner. Similarly, it seems reasonable to expect the EU to increase its share of foreign investment in Vietnam in 1999 and thereafter. Given the stated priorities of both the government and aid donors, it is likely that a significant proportion of new investment will be channelled into agriculture and rural infrastructure. There will be gradual but slight improvements in Vietnam's trade deficit in 1999. This means there will be pressure for the local currency (ng) to depreciate further, in addition to the 20 per cent depreciation against the US dollar in 1998.

Unemployment will be one of Vietnam's greatest challenges in 1999. The decline in foreign investment and slower export growth will see continuing layoffs in foreign-invested firms. A recent decree requiring such firms to find local workers via the state-run Employment Service Organisation will only exacerbate the problem. The planned privatisation of state-owned enterprises will add further to urban unemployment problems. The average unemployment rate in 1999 is projected at about 12-15 per cent. Inflation will not be a serious problem for Vietnam in 1999.

While the depreciation of the ng means the costs of some imported inputs have risen, the slackening in aggregate demand, especially in land and housing, means that there is no real pressure on prices to rise.

The three most important areas of reform in Vietnam in 1999 will be new legal and administrative rules, the banking sector and state-owned enterprises. More consistent, transparent and stable rules will be implemented to attract new capital inflow. Banks will be required to be more transparent and accountable, and a small number of non-performing banks will cease to operate. Throughout 1999, the dismantling of the state-owned enterprises will accelerate. These reforms will parallel similar Chinese experiences.

WATCHPOINT: Look out for more legal and administrative reform measures to be adopted in the months to come.


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