The Philippine Online Chronicles

For the longest time, Vietnam was known by the world as the tiny Socialist nation that defeated the world’s superpower, the United States of America, during the bloody Vietnam War in the mid-'70s.

Since then, the country has undergone many changes, particularly in its route towards economic prosperity. Thirty years ago, it vowed to construct a new, socially just society. However, the economic reforms it went through and its opening to market forces in recent years has led Vietnam to be recognized as an emerging economic powerhouse in Southeast Asia.

The changes started when the Communist Party of Vietnam (CPV) introduced “The Renewal” or what is known as Doi Moi, during its 6^th National Congress in 1986. Originally, after the reunification in 1975, the aim was to extend the socialist economy of former North Vietnam to the South; however, this changed when Doi Moi was introduced.

The transition plan was that from a centrally planned system, Vietnam would establish a market economy. For this to happen, a wide range of macroeconomic and structural reforms were implemented to create a dynamic and vibrant economy with several features of a free-market system. The CPV's regulation policies had to be significantly relaxed, prices were freed, public sector spending declined, and restraints were loosened on business activities.

Due to the poverty of the Vietnamese state and the death of the fair-trade arrangement with the Soviet region because of its collapse in the early '90s, the CPV became desperate and came up with state-managed “market mechanisms.” CPV believed that this would invigorate the private sector and foreign investments, which could lead to the building of productive forces as foundation for future socialism. Vietnam had to strengthen its exports and allow foreign capital to come in or else its collapse, economically-speaking, would be inevitable.

These changes in policy were partly brought about by the generational changes in the leadership as some suggested. Participation of the so-called “new blood” in the decision-making process was allowed. The adjustments made including the political, administrative and economic reform programs accelerated the growth of Vietnam, from eight to nine percent per year in the 1990s. These have attracted public and private foreign capital commitments, which was a first in Vietnam’s history.

Apart from the economic reforms already mentioned, the Vietnamese government created other measures for its economy, such as liberalization policies including the creation of incentives for businesses, transition of labor from the State Operated Entities (SOEs) to the newly sanctioned private sector, withdrawal of subsidies to the SOEs, enactment of commercial laws, overhaul of the banking system, and legislation of the Foreign Direct Investment law.

The result of these changes can be seen in annual figures, such as the fall of inflation to less than 10 percent, GDP growth of around 10 percent, and the growth in export volume by 25 percent. Because of these impressive figures, the World Bank ranked Vietnam, same as China, as the best performer among transitional economies.

Among the socialist countries, Vietnam was the only one that dared to walk the very thin line between maintaining a “socialist orientation” and utilizing a market-based “capitalist” economy. For Vietnam, this would mean channeling the produce of the so-called “capitalist” economy towards a “socialist” direction, which therefore helped in minimizing the negative impacts of the market and private sector. This was done via the improvement of the state-owned sector and the renewal of cooperatives.

The daring attempt of the Vietnam government to walk this line required a lot of balancing acts. The economic reforms brought with them the evils of “capitalism” – profit-driven, individualistic and consumerist behavior of society. Despite of this, the attempt was so far successful.

To prove this, Vietnam reached the second-highest economic growth with a current doubled GDP from the 1990s. In addition, the country had a huge drop in poverty, almost triple, from 75 percent in the late 1980s to 28 percent in 2002. This was the most rapid poverty reduction on record. In a report from the World Bank, Vietnam managed to reduce “extreme poverty” from 51 percent in 1990 to 14 percent in 2002.

The products of the economic growth allowed the Poverty Alleviation and Hunger Elimination Program to build health centers, clean water systems, schools and roads in remote areas, deliver free education and healthcare, and provide a large subsidized, collateral-free, low-interest credit amount for the poor. This largely helped them in setting up or improving their small household businesses in handicrafts, farming, and others. More of this was foreseen to be realized through the five-year plan of the government wherein some 7.5 million households would have access to the subsidized credit.

Despite Vietnam’s “low income” country status (USD430 per capita GDP in 2005) and the huge work needed to be done in improving the lives of its people, the educational and health indicators of Vietnam were already at par with the “middle income” countries such as China, Thailand and the Philippines, and clearly far above those countries with the same status such as Pakistan, Kenya, Tanzania and Bangladesh. An example of a good education indicator was Vietnam’s literacy rate, which was at 94 percent, equivalent to Philippines and Thailand and certainly above that of richer China, Malaysia and Indonesia. On the other hand, in terms of health indicators, Vietnam was able to reduce child mortality to 23 per 10,000 live births and infant mortality to 19, lower than that of the Philippines, Thailand and China.

A peek at Vietnam’s state of economy in the first half of 2010

The label “emerging economic powerhouse” given to Vietnam is not for naught. The number of outputs produced by each sector supports this claim.

For agriculture, there was an increase in the harvest of spring rice by 4.2 percent compared to that of last year with an estimated productivity of 6,380 kg/ha, rising by 180 kg/ha, and the yield of 12.4 million tons. The animal husbandry survey results of January this year showed an increase of three percent (27.3 million) in the country’s porkers. Fowls, on the other hand, rose by 8.3 percent (279.2 million).

For the fishery, the total estimated fishing production increased by five percent (1,824,000 tons). Shrimp production rose by 6.6 percent (165,600 tons). Farm products had increased by 5.2 percent (814,100 tons). Caught products rose by 4.8 percent (1,009,900 tons). Sea-caught items also increased by 5.3 percent (933,800 tons).

General industrial production value (1994 constant prices) rose by 13.6 percent (VND 301.8 trillion). Breakdown of this were as follows: state sector rose by 9.8 percent (central industry increased by 13.3 percent while the local industry decreased by 2.8 percent); while the non-state industry rose by 12.4 percent and the FDI sector by 16.7 percent (petroleum and gas decreased by eight percent while others rose by 20.5 percent)

As for the investments, on the side of the state through its budget, the general realized investment capital was 36.5 percent (VND 45.6 trillion). Capital under the central management was 37.1 percent (VND 13.9 trillion) while the capital under local management was 36.2 percent (VND 31.7 trillion) of the yearly estimate. On the side of foreign direct investments (FDI), 77 percent (USD7.5 billion) of the capital has been estimated through the 360 newly licensed projects. Though the number of FDI projects decreased by 14.7 percent, the amount of the capital rose by 40.1 percent. In the five months of 2010, the realized FDI projects were already growing at 7.1 percent (USD4.5 billion).

A look at the government revenue figures in the beginning of this year showed 38.3 percent of the yearly estimate. Domestic revenues accounted for 38.4 percent, revenues from import-export at 41.4 percent, and revenues from crude oil at 33.3 percent. In the domestic revenues, 41.5 percent came from state-owned enterprises; 33.8 percent came from FDI enterprises (excluding crude oil); 35.8 percent came from non-state industrial, commercial, and service taxes; 37.1 percent came from the taxes imposed on high-income citizens; 38.2 percent came from petroleum fees; and 34.1 percent of the yearly estimate came from other fees.

Government expenditures, on the other hand, were at 33.8 percent of the yearly estimate: 35.8 percent of the spending was used for development and investment; 33.8 percent was spent for economic and social development, national defense and security; and 38.1 percent was for paying off debts and aid.

An increase of 26.9 percent (VND 620.6 trillion) can be seen in the total retailed sales of consumer goods and services in the five months times (at current prices). Breakdown of this increase were as follows: 78.9 percent (VND 489.2 trillion) was from trade business, an increase of 27.5 percent from the 2009 figures; 11 percent (VND 68.4 trillion) was from the hotel and restaurant enterprises with an increase of 23.5 percent; 9.1 percent (VND 56.6 trillion) came from the service sector showing an increase of 25.2 percent; and one percent (VND 6.5 trillion) was from tourism showing an increase of 32.9 percent.

As for the general export turnover in the early five months of 2010, there was a growth of 12.6 percent (an estimate of USD25.8 billion). On the other hand, the general import turnover rose by 29.8 percent (an estimate of USD31.2 billion). This brought about a trade deficit of an estimated USD5.4 billion or 20.8 percent of the export turnover.

With this kind of performance, the Vietnam government aims for a 7 to 7.5 percent GDP growth in 2011. To make sure this happens, budget estimates for next year must ensure that revenues will be over 23 percent of GDP, including those from fees (over 21 percent of GDP) and taxes. From domestic sources, the government anticipates an increased revenue (not including crude oil and land use fees) of 17 to 19 percent as against the 2010 figures, and export revenue with a seven to nine percent increase.

In connection to the 2011 aim, the government directed ministries and central agencies to review, amend or repeal ineffective and outdated policies. It also suggested new and necessary policies for the 2011 to 2015 period, which will be the basis for the restructuring and improving of budget spending effectiveness in their respective fields of operation.

While the world is slowly recovering from the global economic crisis, developing countries like Vietnam should still be on the lookout for risks on exports, private remittances and FDI, and of course for the ever-recurring inflation. Another challenge, according to Shogo Ishii of the Asia and Pacific Department of the International Monetary Fund (IMF), will be the outlook for balance of payments. Despite the challenges, the prediction is quite positive because of the belief in the ability of Vietnam to narrow the current account deficit to 7.5 percent of GDP.

Still the greater risk, according to Ishii, is the re-emergence of macroeconomic instability similar to that of 2008. However, the predictions are not as gloomy as those in 2009.

Moreover, Ishii suggested that the cap on lending rates should be removed and that fiscal policy be implemented flexibly to address macroeconomic concerns.

For the year 2010, Vietnam foresees a 6.5% percent growth in GDP.

Vietnam’s membership in the WTO

After the United States of America lifted the embargo and opened up ties with Vietnam, the next thing it did was to enter the World Trade Organization (WTO) in 2007.

The government had very high expectations for its WTO membership. After three years, the Central Institute for Economic Management (CIEM) released a sobering report on the results of its three-year membership.

After its entry, Vietnam experienced heavy foreign capital inflows, however, it was not directed to the priority areas. Most of them were channeled to real estate development projects.

Membership in the WTO somewhat helped Vietnam increased its exports. The exports rose by 21.3 percent in 2007 and 29.5 percent in 2008. Because of the 2009 global financial crisis, the export rate fell by nine percent, not as sharp as those of Vietnam’s trading partners.

For 2008 and 2009, the import-export turnover was USD150 billion annually (160 percent of GDP). This meant that Vietnam’s economy has been "open" to two-way trade since its membership in WTO.

There may be some increase in the exports of Vietnam but the expansion cannot be considered as a major “breakthrough” since the rate of growth was only about 2.5 percent over the pre-WTO period. Vietnam, compared to China when it joined the WTO in 2001, almost tripled its export rate from 10 percent to nearly 29 percent yearly (2002 to 2007).

With its WTO membership, Vietnam anticipated the benefits mostly for its agricultural exports. Unfortunately, for the past three years, though there may have been some increases in the export of farm, forest and fishery products, the increases were actually lower than the overall rate of export growth.

Despite its WTO commitments of 10 percent state investment in agriculture, the government only implemented eight percent of agricultural value. FDI and Official development assistance (ODA) to the farm and fisheries sector have also been dropping. Instead of boosting these sectors, Vietnam’s WTO membership had caused the suffering of the agriculture and rural areas.

According to the report, the reasons for these unpleasant economic results were policy shortcomings made by the government.

Although strong inflows of FDI can increase capital and resources, it posed problems for Vietnam. In its effort to increase FDI, cities and provinces have rushed to establish export processing and industrial zones while ignoring the possible negative impacts on the socio-economic conditions in the localities and on the environment.

Lastly, the report claimed that the nation’s competitive capability remained low. Deficiencies were seen in the institutional capability and technology, infrastructure, and labor force at the national level. On the other hand, at the enterprise level, many firms have not successfully taken advantage of the opportunities brought about by Vietnam’s WTO membership such as tariff reduction or openness of the export market to help boost exports and expand their businesses. The report said that this was a result of a lack of information of the enterprises.

“Capitalist growth for a socialist direction”

The success of Vietnam’s daring attempt however, cannot be solely attributed to markets and private sectors. Doi Moi is not entirely about these economic reforms. It is also because of the state sector’s conscious effort to maintain the “socialist orientation” through its contribution to GDP, which rose from 33 percent in 1990 to 40 percent in 2005. Its share in investment rose from 42 percent in 1992 to 58 percent in 2001. State budget, on the other hand, increased from 14 percent to 22 percent of GDP. As for the share of GDP of the domestic “private sector,” which is 35 percent, only four to five percent came from the so-called capitalists. Most of the shares were actually from small urban and rural “household sector,” including the millions of peasants largely constituting the Vietnamese population.

While it is true that Vietnam’s decision to operate in a market economy made state-owned enterprises commercially-oriented and corrupt, it is false to claim that its economy is purely market-based, independent of social control. The reality in Vietnam is that its state-owned businesses actually pay higher taxes than private firms, while the state-sector garment workers are paid 30 percent more than their counterparts in private and foreign firms. Vietnam’s annual Workers’ Congress decides collectively on an overall enterprise plan and mass organizations and trade unions are represented on management boards. Moreover, under the 1998 Grassroots Democracy decree, workers' rights and responsibilities to discuss decisions and monitor finances are given premium. This gives workers the right to oppose those they perceived as destructive economic reforms, such as the “equitization” plan of the World Bank, which the latter complained about.

In addition, the implementation of an egalitarian land distribution became a fundamental aspect in Vietnam’s success. Although sad stories of landlessness in the Central Highlands and Mekong Delta are increasing at levels also found in capitalist neighboring countries, Vietnam was able to provide a form of social security. This was done through land leasing for a length of 20 years. A cap is also placed on the size of land holdings. Continued emphasis on food security is being implemented combined with diversification so that the food sector’s exposure to market volatility is maintained at the minimum level.

While Vietnam is gradually submerging itself into the muddy “capitalist” economy, the strong “mass organizations,” which was a revolutionary inheritance, keep the people protected. The farmer’s, women’s, veteran’s and youth unions promote solidarity and mobilize funds for poorer members. Particularly, the Women’s Union gives information and health education and free services to women down to the village level. The Youth Union, on the other hand, mobilizes thousands of volunteers to work in poor rural areas. Even the Vietnamese People’s Army organizes large-scale free education and health programs in far flung areas.

Although the attempts of the Vietnamese government are by far successful, the challenges to the “socialist orientation” within the global capitalism remain. Day by day, it has become more difficult to explain to the poor people of Vietnam why their government cannot afford free healthcare and education while the continuous increase of the number of expensive cars driving on the highways and luxurious houses being built on prime real estate is evident.

Despite the enormous success in opening up its economy, Vietnam still remains in the “low income” bracket. Though there were noteworthy advances in food production, 19 percent of the population remains malnourished. Access to improved water sources is available to only 73 percent of the population. It can be noted however that this is a great 20 percent leap from 1998. The “market economy” also brought about rising inequalities, which are evident in the increase of street children, prostitutes, drug addicts and petty crimes. Rapid growth also brought the destruction of natural resources. Apart from these, market economy also prevents women’s equality in familiar ways, including the increasing cases of domestic violence. Ethnic minorities may be benefiting from free healthcare and education; however, their health and education indicators remain significantly low.

Vietnam may be seen today by the international financial community as the emerging economic powerhouse following the steps of China. However, this will not matter to the people if a majority of them are deprived of the fruits of Vietnam’s economic growth. At most, the growth will just remain  figures and only a figment of the people’s imagination.