Vietnam: Temporary Resilience

1998

Dr Adam Fforde

The Vietnamese economy's remarkable resilience in the face of major cyclical and conjunctural pressures may only be temporary. The government's development policy stance favours the State sector, which remains largely unreformed and overdue for severe retrenchments. Policy debates are characterised by two main themes: First, unresolved conflicts and disputes about overall development policy. More 'liberal' and open-minded groups push for greater freedoms for the private sector and a heightened role for competition. Their position has been strengthened by the economic slowdown and rural unrest. 'Conservative' factions, however, see no political advantage in further concessions. With no great reason to move fast on any front, domestic political arguments point towards further 'muddling through'. Second, the 'theatre' required to convince potential lenders and investors of the advisability of putting funds into Vietnam. Whilst the IMF remains deeply sceptical, in part due to the failure of the Vietnamese to implement previously agreed reforms, others, such as the World Bank, with its desire to increase lending, and companies keen to assist in the establishment of a stock exchange tend to require policy positive statements. Inward FDI has tended to be in the higher capital intensive sectors, so that employment generation and light manufactures exports were by early this year well below what could have been achieved. Vietnam's business environment is increasingly seen, by both Vietnamese and foreign companies, as one of high transactions costs and 'complexities'. Vietnam's overall competitive position vis-a-vis its competitors is the most worrying issue. High transactions costs, both direct and indirect, combined with the high exchange rate to reduce expected profits and this is now having a severe effect upon two important aspects of the current development strategy: First, inward direct investment is slowing, both in terms of sign-ups and disbursements; and second, there has been a sharp fall in the perceived value of Vietnam as a source of manufactured exports. Despite this, however, the Vietnamese economy is not yet in crisis. The balance of payments improved in 1997 compared with 1996 - but is now deteriorating again as exports slow and industrial growth falls off. Rural incomes growth, however, remains rather robust. Most importantly, domestic confidence in the currency remains high. There is a small but definite chance that the Vietnamese economy will fall into a state of real crisis, marked by severe pressures on the banks as interest rate increases are limited by the inability to harden the budget constraint facing state businesses, so that the population starts to withdraw funds and invest in gold and dollars. More likely is that the economy will prove resilient, as in the past. This will permit the government to avoid major political rethinking and to continue its state sector-focussed development policy.

WATCHPOINT: While reform is postponed in Vietnam, international lenders and investors await the opening of the stock exchange and the change it may bring.

 

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