Vietnam: Reform or Else
Dr Binh Tran-Nam
Vietnam has achieved remarkable successes since the emergence of its 'market economy' in 1989. At the macro level, these include the highest real GDP growth rate among the 40 poorest countries in the world (and second highest in Asia, after China), consistently low inflation and budget deficit, an average 32% annual growth in external trade and a doubling of national investment rate. Vietnam's robust growth in the last decade is primarily due to its growing openness and can be characterised as led by foreign direct investment (FDI).
But it is clear that the first rapid-growth phase of Vietnam's economic reform is over. The Vietnamese leadership is now facing its greatest challenges since 1986. These problems are both internal and external, encompassing the full socio-economic-political-environmental spectrum. They include:
- a growing current account deficit (worsened by the Asian currency devaluation) and increased reliance on non-concessional loans;
- a steep decline in FDI which had begun well before the current regional crisis;
- the contraction of many Asian economies on which Vietnam depends for most of its trade and FDI; - the poor performance of state owned enterprises (SOEs) and the banking sector;
- lack of infrastructure (both physical and social);
- social unrest and calls for greater political freedom and accountability; and
- natural disasters.
Recently major donors urged the Vietnamese government to accelerate its reform in the banking, trade and State-owned enterprise (SOE) sectors. These routine prescriptions fail to recognise the extent and timing of Vietnam's dilemma. For example, the rapid privatisation of SOEs at a time of domestic and regional slowdown is quite contrary to Keynesian wisdom. Such a policy will generate tremendous short-term adjustment costs, particularly through increased unemployment and urban poverty, which cannot be overcome by outside financial assistance alone, and may therefore threaten Vietnam's stability. (At the same time, the government must seriously consider abandoning its version of South Korea's chaebol strategy.)
Vietnam has so far suffered from the 'Asian contagion' mostly through falling exports to Asia, and declines in FDI from Asia. When trade is liberalised and the financial market further developed, Vietnam risks losing control of its economy unless the government can maintain relatively stable macroeconomic conditions. In this sense, Vietnam needs monitoring to ensure that a high proportion of its imports is composed of capital equipment and management skills, rather than final consumption.
The Vietnamese leadership must bear in mind the very long-term nature of Vietnam's catching-up problem. Focusing on aggregate growth, the government can only ignore distribution issues at its own peril. Vietnam must attempt to formulate and implement a long-term growth strategy aiming for slower growth and faster human development in the early stage. Such a policy requires a far greater amount of resources devoted to education and training, and the development of a competent and honest bureaucracy.
WATCHPOINT: If the pace of reform is forced as a result of the current problems facing Vietnam, they will be blessings in disguise.
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