Implications of the Crisis for Transition Economies: Vietnam

Prepared for International Conference on the Challenges of Globalization, organized by

the Faculty of Economics, Thammasat University at the Royal Orchid Sheraton Hotel ,

Bangkok,Thailand on October 21-22, 1999.

By Tran Thi Ben, Faculty of Economics, University of Economics-HCM City, Vietnam.

Vietnamese economy is in transition from a centrally planned economy to a market-

oriented one. Since Doi Moi (Economic Reform) Vietnam becomes more and more open

to regional and world market and it has been gotten impacts from the Asian economic

crisis. In the path of transition and integration Vietnamese economy has gained both

achievements and challenges. How does Vietnam keep its sustainable growth and deal

with challenges? The paper is aimed at the mentioned issues.

Some Main Features of the Economic Development in Vietnam

Economic Development in Vietnam can be divided into two periods: before Doi Moi

(1976-1985) and after Doi Moi(1986 to now).

- Before ‘Doi Moi’:

After the reunification of the country in 1975 the economies of the North and South

Vietnam were integrated into one. The model socialist Development was implemented

throughout the country: collectivization in agriculture, emphasis was placed on heavy

industries, strong central control of the entire economy and state sector considered as

engine of growth. It led to sectoral imbalance and inefficiency. Vietnamese economy

faced a great deal of difficulties such as low growth rate at 2,3% in 86, budget deficit,

foreign debt increase at 8,5 million rubles & 1,9 million USD. Vietnam had to import

some basic goods such as rice, cloth, 1,5 million tons of rice and 60 million meters of

cloth per year and the end of 1986 the hyperinflation reached 775 %.

- After ‘Doi moi’:

Encountering enormous difficulties in 1986 Vietnam carried out economic reforms. In

the five- year plan (1986-1990) period, the state carried out three large economic

programs, namely food production program, consumer goods production program and

export commodities program. The main purpose of the reform was to build a new

economic mechanism, a market-based economy in which all economic sectors have been

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encouraged to work and develop effectively and fairly in attempting to exploit all the

available resources more efficiently compared to that in the previous centrally planned

economy.

In agriculture, with Decision 10 (1988) of the Party Central Committee ‘khoan san

pham’ (product contract system) was implemented to households instead of to collective

productive teams. Prices of agricultural products were adjusted to enable farmers to make

profit. The law on land gave the land-use right to farmers up to 15 years( and up to 20

years now). These incentives were given to farmers to encourage them to invest all their

resources in agricultural activities.

In Industry, Regulation 217 of the ministers Committee gave the self-management in

production to state-owned enterprises and no more subsidies from the state for the loss of

state-owned ones. From 1988, the state-owned enterprises did not get the capital for their

activities from the budget but they have to borrow capital from the bank for their

production. Private sector was encouraged to participate in production and business

activities

At the end of 1987, Law on foreign investment was passed to attract inflows of foreign

capital. In 1988, Banking system was rearranged to adapt to new economic situation. The

state bank was separated from commercial operations. It only took the role of supervisor.

Commercial banks were established. Since 1989 the state has gradually liberalized

control on the price mechanism. About foreign trade, export management based on

export quotas were reduced and export activities were given to local authorities, branches

and even some associations of private sector.

The period after ‘Doi moi’ can be divided into two periods: period 1986-1990 and the

1991-1998 one. Under the economic reform, Vietnam has gained impressive

achievements such as high economic growth rate.

Table 1: Annual growth rates of GDP, Agriculture, Industry and Service Sector during

1986-1998 ( percentage)

Year 86 87 88 89 90

GDP Growth 2.3 3.6 6.0 4.7 5.1

Agriculture 2.4 -0.5 3.9 6.8 1.6

Industry & 10.3 9.2 5.3 -2.8 2.9

2

Construction

Service -2.8 5.3 9.1 7.6 10.8

Year 91 92 93 94 95 96 97 98

GDP Growth 6.0 8.6 8.1 8.8 9.5 9.3 8.1 5.8

Agriculture 2.2 7.1 3.8 3.9 4.8 4.4 4.3 2.7

Industry &

Construction

9.1 14.0 13.1 14.0 13.6 14.5 12.6 10 .3

Service 8.3 7.0 9.2 10.2 10.0 9.3 8.3

Source: GSO 1997,1998.

From a low economic growth rate of 2,3 % in 86, the annual growth rate of Vietnam has

increased to over 9% in both 95 and 96. The average GDP growth rate in 86-90 was

around 4.3%, and in 91-96 period increased dramatically of almost 8% (table 1). It

resulted in increasing per capita income, in US dollar terms, per capita income grew from

barely $100 in 1987 to over $300 in 1996. In 1997 from the effect of Asian crisis the

GDP growth rate declined and fell to 5.8% in 98, it is the lowest growth rate from 90.

The agricultural sector increased at a good rate, from an average growth rate 2.8 % in

86-90 to 4.3 % in 91-98 (Table 1). Food crop share was slightly declining but still

contributed more than 63% in structure of crop's output during 90-98. Industrial crop

share, vegetable and bean one contributed around 20% and 7% and were increasing while

share of fruit crop was around 8% and almost unchanged during that time. Gross output

of paddy in 1988 was 17 million tonnes then over 30 million tonnes in 1998. Coffee

grain in 91 was 102,000 tonnes, reached 218,000 tonnes in 95 then 420,000 tonnes in 97.

About structure of output of livestock, share of domestic animals contributed more than

64% and was increasing. Share of poultry and that of other were 17% and 15%. Pig was

12,2 million heads in 90 and 16,3 million heads in 95 then 18,1 million heads and

buffaloes and cattle were around 7 million heads in 98. Area of water surface for

cultivating aquatic and sea products from 95 to 98 was increasing. In 98 it passed

500,000 hecta (GSO 98).

The industry and construction sector have grown remarkably. In the first period,

industry sector under new mechanism the state stopped all subsidies. Facing difficulties

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industrial and construction sector grew at an average modest growth rate of 5%, then

decreased to 2.8 % in 1989. In the second period, industrial production expanded quickly

and became the main source of economic growth for the entire economy. The high

growth rate in industry, 14% for the period 90-96 (Table 1) has been contributed by

many factors. The first contribution is from crude oil extraction activities in the offshore

oil fields, then construction boom associated with huge inflows of foreign capital and a

boost in tourism since the early 1990s. It also resulted from a large previous investment

into important industries such as mining, electricity, cement, paper, steel. Utilizing fully

capacity of factories and the most important is thanks to mechanism reform. Factories

have their own self management right in their production and business activities.

Gross output of some industrial products such as electricity, steel, cement increased.

Crude oil from 40,000 tonnes in 1986 increased to 7,6 million tonnes in 1990 and 12,5

million tonnes in 98. Service sector also grew with a high growth rate.

Table 2: Structure of Industrial Gross Output by Economic Sector

(at constant 1994 prices)

Unit: percentage

1995 1996 1997 1998

Total 100 100 100 100

1- Domestic sector 74.9 73.3 71 68.2

State owned enterprises 50.3 49.3 48 46.2

Non state enterprises 24.6 24 23.1 22

2- Foreign invested

sector

25 26.7 28.9 31.8

Source: GSO 1998

In industrial sector state owned enterprises have played an important role. It shared over

50% in the structure of industrial gross output (95) but its share is declining (46.2% in

1998). The role of private sector has improved remarkably after economic renovation but

for it contribution there is no more improvement in recent years. Foreign invested sector

has taken part in the industrial sector and it plays an increasingly important role in

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industrial sector. Its contribution is increasing from one fourth (95) to one third (98) in

industrial gross output (Table 2).

Service sector Growth has originated from the liberalization in the economy (late

1980s). Shops, restaurants, traders mushroomed. Tourism development opened the way

for the establishment of hotels and tourist agencies. Vietnam has received more than 1,6

million foreign visitors in 1996 and hopeful to lure 2 million international tourists in the

year 2000. The openness of the economy, the economic improvement in industry,

agriculture, construction and the improvement of banking activities from financial

reforms has backed up the service sector.

Economic structural change: the share of primary sector (Agriculture) has decreased

from 35.5% in 90 to 26.2% in 97, while that of secondary(Industry) and terteary

(services) has increased from 23.9 % to 31.2 % and 38.6% to 42.6% relatively in that

period of time. It is a good tendency for the long-term economic growth of Vietnam.

(See table 3)

Table 3: Share in GDP of main sectors (Percentage)

Year 90 91 92 93 94 95 96 97

Agriculture 31.5 39.5 33.9 29.9 28.7 27.5 27.2 26.2

Industry 23.9 24.8 27.3 28.9 29.6 30.1 30.7 31.2

Services 38.6 35.7 38.8 41.2 41.6 42.4 42.1 42.6

Source: GSO 1997

Besides accelerating growth rate, the reform has contributed in stabilizing the macro

economic environment. Before 1988, exchange rate was greatly overvalued. It led to

large distortion in the structure of prices. Since late 1988 exchange rate was mostly

adjusted through market mechanism, real interest rate was kept positive. Reform in

financial and fiscal policies is efficient in mobilizing personal saving, increasing tax

collection and reducing budget deficit. In early 1989, hyperinflation was defeated. By

implement of high interest rates and a tight state expenditure budget, inflation rate was

brought down from three-digit rate, 774.7 % in 1986 to one-digit rate 5.2% in 93 (table

4).

Table 4: Inflation Rates (1986- 1999)

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1986 1988 1991 1992 1993 1994 1995 1996 1997 1998 Aug.99

Inflation Rate

(%)

775 394 67.5 17.5 5.2 14.4 12.7 4.5 3.6 9.2 0.8

Source: WB 1995, VN Economic Times 98, GSO 98, The Saigon Times weekly, Sep.99

About Foreign trade, under the centrally planned system, Vietnamese state strictly

controlled foreign trade. At that time Soviet Union and Eastern Europe were Vietnam's

main trade partner. All trade transactions were undertaken by state owned enterprises.

After economic reform in 1986, export was considered as a crucial goal. Many new

policies were implemented. The unification and sharp devaluation of the exchange rate in

1989, liberalizing trade by simplifying the system of tariff and non-tariff restriction, all

of these provided incentives to exporters. With the implement of Decree No.57 in 1998

all kinds of firms are allowed to join in foreign trade directly. Such trade liberalization

measures have encouraged the rapid growth of trade.

Table 5: Growth Rate of Foreign Trade (1990-1998) in Percentage

Year Total Export Import

1990 123.5 114.3 107.3

1991 85.8 86.8 84.9

1992 115.7 123.7 108.7

1993 134.9 115.7 154.4

1994 143 135.8 148.5

1995 137.7 134.4 140

1996 135.2 133.2 136.6

1997 112.9 126.6 104

1998 100,4 101.9 99.2

Source:GSO 1998

In 1990, export growth rate reached 23.5%. Then 1991 the rate declined to minus 13.2

due to the decomposition of the Soviet Union and Eastern Europe, the Vietnam's main

trade partners. In the later years, Vietnam searched for new export markets and Vietnam's

trade partners have moved to East Asian markets such as Singapore, Japan, Taiwan,

South Korea. The trade growth rate increased rapidly to over 30% in the years 94,95,96.

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Then the trend was declining from 94 and fell sharply in 97 and 98 due to the impact of

Asian crisis.

Table 6: Main Markets of Vietnam's Export

1995 1996 1997

Export

Value

($m)

Share (%) Export

Value

($m)

Share (%) Export

Value

($m)

Share (%)

Total 5448,9 100 7255,9 100 9185,0 100

Asia 3945 72.39 5254 72.41 6017,1 65.5

Japan 1461 26.8 1546,4 21.31 1675,4 18.2

Singapore 689,8 12.7 1290 17.77 1215,9 13.2

Taiwan 439,4 8 539,9 7.4 814,5 8.9

China 361 6 340,2 4.7 474,1 5.2

Hongkong 256,7 4.7 311,2 4.2 430,7 4.7

S. Korea 235,3 4.3 558,3 7.6 417 4.6

Thailand 101,3 2 107,4 1.4 235,3 2.6

Europe 982,8 18 1172,1 16.2 2207,6 24

Russia 80,8 1.5 84,7 1.2 124,6 1.4

United Kingdom 74,6 1.4 125,1 1.7 265,2 2.9

Germany 218 4 228 3.1 411,4 4.5

Netherlands 79,7 1.5 147,4 2 266,8 2.9

France 169,1 3.1 145 2 238,1 2.6

Switzerland 61,8 1.1 151,8 2 331,9 3.6

America 238.3 4.4 299.5 4.1 426.1 4.6

USA 169,7 3.1 204,2 2.8 291,5 3.2

Australia and

Ocean

56.9 1 72.9 1 254.9 2.7

Australia 55,3 1 64,8 1 230,4 2.5

Source: GSO 1998

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About the markets of Vietnam's export: After the collapse of the former Soviet Union,

the main previous export partner of Vietnam, Vietnam diversified its export markets. Up

to 1997, the predominant export market of Vietnam is Asian countries. Its proportion was

over 65% while that of Europe was 24%. The other markets such as American one

(4.6%), Australian and Ocean one (2.7%), the share of these markets is increasing but it

is still modest compared to the potential of these markets. Currently, top ten export

markets of Vietnam are the neibouring Asian-Pacific countries: the top is Japanese

market (18.2%) then Singapore one (13.2%), Taiwan (8.9%), China (5.2%), Hongkong

(4.7%) and S.Korea (4.6%). Due to mainly relying on the Asian markets so Vietnam

Export got impacts from recent Asian economic crisis.

Table 7: Vietnam's Export Structure 1990-1997 (Percentage)

1990 1991 1992 1993 1994 1995 1996 1997

Primary Products

(0-4)

88.7 83.8 73.7 65.4 62.4 65.1 63.3 63.3

Manufacture (5-

8)

10.4 16.2 26 34.2 37.1 34.6 36.4 36.7

Chemicals (5) 0.3 0.2 0.6 0.5 0.4 0.5 0.4 na

Resource based

(6)

5.0 5.0 5.7 6.2 6.2 6.4 7.1 na

Machinery

&Transport (7)

Equipment

0.4 0.3 0.7 2.0 1.3 1.4 1.5 na

Miscellaneous (8) 4.7 10.6 19.0 25.5 29.2 31.2 31.7 na

Textiles &

Garment

- 9.6 9.9 10.7 13.2 15.6 15.9 16.5

Footwear 0.7 0.6 0.8 2.2 2.8 5.4 7.3 10.6

Unclassified 0.9 0.1 0.7 0.5 0.5 0.3 0.3 0

US$ million 1,282 1,650 2,227 3,130 4,187 5,449 7,255 9,185

Source: For 90-96: from Athukorala 1998, for 1998: Statistical Yearbook 1998.

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Primary product still contributes a large share in structure of export (over 60%) although

manufacture product share is increasing in the structure of export (from 10.4 % in 1990

and reached 36.7 in 97). Some key exportable as follow: Petroleum exports rose

remarkably from 1,514 thousand tonnes (199,124 thousand US )in 1989 to 9,638

thousand tonnes (US$1.3 billion) in 97. Rice export has continually increased and

Vietnam shifted from rice imported country to rice exported one (in 1989 rice export

reached 1,4 million tonnes and in 1998 reached 3,8 million tons) and became the second

largest exporter of rice in the world. Export of footwear, textiles and clothing contributed

significantly to total export value. Its share was from 10.2% in 91 to 27.1% in 97 then

decreased to 25.2% in 98. Export share of marine product, rubber, coffee and some light

manufactured goods have also expanded rapidly.

Import growth rate was 7.3% in 1990, then declining to minus15.1 in 1991 after the

decomposition of the Soviet Union and Eastern Europe. Then the rate increased again, up

to 54.4% in 93. Import increased due to industrial development during that period it

needed more material, equipment for the input of industrial development. Then it was

slightly declined in 1994. Due to the economic shrink from the impact of Asian crisis, it

fell to 4% in 97 and to minus 0.8% in 98

Foreign Direct Investment (FDI): Since Vietnam introduced its foreign direct

investment in 1987, foreign direct investment has increasingly flowed into the country.

Table 8: Foreign Direct Investment Inflow in Vietnam (1988-1998)

Year No. Of

Projects

Registered

Capital

(US$mil.)

Growth Rate

Rate (%)

Implemente

d Capital

(US$ mil.)

Impl. Cap./

Reg. Cap.

(%)

1988 37 371.8 49 13

1989 68 582.5 56.6 130 22.3

1990 108 839.0 44 220 26.2

1991 151 1322.3 57.5 221 16.7

1992 197 2165.0 63.7 398 18.3

1993 269 2900.0 33.9 1106 38.1

1994 343 3765.6 29.8 1952 51.8

1995 370 6530.8 73.4 2652 40.6

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1996 325 8497.3 30.1 2371 27.9

1997 345 4649.1 -45.3 2800 62.7

1998 275 3897.4 -16.1 n.a n.a

1988-98 2488 35520.9

Source: Statistical Yearbook 1998, Vietnam Economic News No. 3,4,5 of 1998

Generally, FDI in Vietnam grew in three different periods, from 1988 to 1990; from

1991 to 1995; and from 1996 until recently.

In the first period of 1988-1990, it is initial step. FDI flowed into Vietnam in modest

amount. Only 37 foreign projects were licensed in 1988 registered at US$371.8 million.

It reached 68 projects and US$ 582.5 in 1989 and was 108 projects and US$ 839 million

in 1990. From 56.6% in 89 the growth rate of FDI declined to 44% in 90. In this period

of time, the predominant fields of FDI were oil and gas exploration and exploitation,

hotels and restaurants. FDI in agriculture, forestry, fishery, transport and communication

was low.

The second period (1991-95) recorded a significant growth of FDI. FDI increased

steadily in term of registered and implemented capital. In this period of time many

events happened favoring investment environment of Vietnam. Cambodian settlement,

Vietnam-China normalization, Singapore lifted its investment ban on Vietnam in 1991,

diplomat relation re-establishment with South Korea in 1992 encouraging Korean

investment. The removal of US embargo in 1994, Vietnam joining ASEAN in 1995 these

events completely ended the era of international isolation and Vietnam began integrating

into the world economy.

Compared to the first period, in 1991 registered capital reached 1322.3 million, the

growth rate of FDI rose sharply to 57.5% then 63.7%, 33.9%, 29.8%, and 73.4% in

1992, 1993, 1994, and 1995 respectively. The implemented ratio was 16.7%, 18.3%,

38.1%, 51.8% and 40.6% in that sequence of years. The low ratio of implemented capital

related to the characteristics of FDI. It is 2-3 years lag of project implementation. There

were difficulties in project implementation and a large share of dissolved investment. It

led to the average growth rate of FDI was over 50% and the average implemented ratio

of FDI was 33% in the period of time. It can be said that the high growth rate of FDI

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was due to the strong economic growth and the stability of the macro economic

environment in that period of time. It can be seen as a positive sign that foreign investors

felt confident on the country's economic outlook..

The third period (1996-1998), since 1996, FDI inflow has declined. Registered capital

continued to increase in 1996 by 30%. It included two mega-land projects with a

registered capital of US$3,108 of which one was dissolved in 98 and the other

suspended. In the case these projects were excluded, registered capital decreased by 16%

in 1996, by 45.3% in 1997 and by 16.1% in 1998. The Asian financial crisis strongly

affected capital flows to Vietnam and FDI in Vietnam declined quickly in 97-98 was.

From the impacts of Asian financial crisis foreign investors have faced financial

difficulties, many had to revoke their investments abroad, and many were not able to

invest more overseas. Vietnam suffered seriously from the FDI withdrawal as the country

has relied heavily on Asian investors.

About the forms of FDI, previously, most of FDI in Vietnam has come to joint venture

with state-owned enterprises (SOEs). Up to now it still occupies a big share, 49.1 % in

total projects licensed and 66.1% in total registered capital. It is due to advantages of

SOEs. Only SOEs allowed to contribute land use rights in joint ventures. Some SOEs in

industries under trade protection, it is destination of investors aiming at capturing the

local market or benefits from the influences of SOEs on governmental decisions. The

form of wholly foreign invested enterprise is currently in increasing tendency. Its share

in total projects licensed in 96 was 18.6%, then 27.9% and 18% in 97 and 98. Up to 1998

its share in total projects licensed was 45.2% and 23.6% in total registered capital. There

are many reasons for the decline of FDI in Joint-venture form. Besides some positive

contribution, FDI in joint-venture form faces some constraints. Capital contribution

capacity from Vietnamese partner is small, mostly by land use right. Foreign partners

raise the price of inputs and lower the price of output to avoid tax but Vietnamese

partners cannot check the matter. Foreign partners spending a lot for advertisement and

lowering their product price in competition, it leads to loss for a long period of time and

Vietnamese partners cannot endure. The dissimilar ideas, disagreement between two

partners leads many joint ventures to termination or shifting to wholly foreign invested

enterprises. Decision 51 issued in March 99 allows foreign investors to invest their

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investments into fields that are only offered for joint-venture form previously such as

telecommunication, tourism, entertainment, cement, steel production (Investment times,

9/1999.)

Table 9: Foreign Direct Investment(1988-1998), by kind of economic activities.

No. Of Projects Registered Capital

(mil. USD)

Share (%)

Total 2488 35520.9 100

Agriculture, forestry

& fishery

352 1614.9 4.5

Industry 1208 13418.2 37.7

of which oil and gas

industry

43 2969 8.4

Construction 258 4394.2 12.4

Hotel, Tourism 194 4664.1 13.1

Transport,

Communication

134 3280.1 9.2

Finance & Banking 28 193.1 0.5

Other 317 7956.3 22.4

Source: GSO 1998

Up to 1998, the largest share of 37.7% came to manufacturing then 13.1% to hotels,

restaurants, office buildings, commercial and entertainment centers; the third one was of

construction with 12.4%. The left was transport and communication with 9.2%. It means

that a half of total commitment capital came to non-trade sectors ( construction, hotel and

tourist, transport and communication, services). A proportion of 12.9% flew to primary

sector including agriculture forestry, fishing, mining and oil exploration. Only 4.5% FDI

was really in agriculture, forestry and fishery, the sector Vietnam has highly competitive

advantages.

Table 10: Foreign Direct Investment(1988-1998) by regions

No. Of Projects Registered Capital

(mil. USD)

Share (%)

12

Whole Country 2453 33856.8 100

Red River Delta 575 10170.6 30

in which : Ha Noi 394 7516.5 22.2

Hai Phong 95 1467.4 4.3

North East 109 1521.5 4.5

in which Quang

Ninh

43 856.6 2.5

North West 8 52.1 0.1

North Central Coast 41 833.1 2.4

South Central Coast 135 2658 7.8

in which Da Nang

& Quang Nam

69 1012.1 3

Quang Ngai 6 1312.4 3.8

Central High Lands 8 57.8 0.17

North East South 1434 17744.4 52.4

in which HCM City 786 9540.7 28.1

Binh Phuoc & Binh

Duong

204 1393.1 4.1

Dong Nai 269 3374.6 10

Ba Ria & Vung Tau 91 2269.9 6.7

Mekong River Delta 143 819.3 2.4

Source: GSO 1998

About regional distribution of FDI, during 1988-98, 62.8% of FDI came to the southern

region and 37.2% to the North. FDI concentrated on a limited number of cities such as

HCM City, Dong Nai, Binh Phuoc and Binh Duong, Ba ria & Vung Tau, Hanoi, Hai

phong. Except in 1998 with the approval of a US$1.3 billion oil refinery project to Dung

Quat and a US$706 million resort project to Dalat has changed the trend. The uneven

distribution among regions and within a region was due to the infrastructure disparity

among regions. FDI were concentrated on regions with good insftrastructure.

Table 11: Foreign Direct Investment(1988-1998) by Counterparts (Top Ten)

13

No. Of Projects Registered Capital

(mil.USD)

Share (%)

Total 2488 35520.9

Singapore 221 5713.1 16

Taiwan 427 4415.9 12.4

Hongkong 289 3570.9 10

Japan 256 3299.1 9.2

S. Korea 236 2973.7 8.3

France 136 1832.8 5.1

British Virgin

Inslands

76 1710.7 4.8

Russia 60 1498.4 4.2

USA 91 1189.7 3.3

United Kingdom 33 1160.7 3.2

Source: GSO 1998

About the country origin of FDI, the main FDI sources are from East Asian and ASEAN

countries. The five largest investors are Singapore, Taiwan, Japan , Hongkong and

Korea. They accounted for about 60% of registered capital. Western investors'

investments are still modest. Major investments of European countries are from France,

UK, the Netherlands and Switzerland. Their investments concentrated on capturing the

local market. The share of USA is modest compared to its potential.

Current economic situation in Vietnam after the Asian crisis

July 1997 financial crisis occurred in Thailand then has spread to Philippines,

Singapore, Indonesia, Malaysia, South Korea. How and what are the impacts of the crisis

on the Vietnamese economy?

Up to the eight months of 1999, despite a number of initiatives, the Vietnamese

economy continues to face formidable challenges. One of which is a low inflation rate at

0.8%, the lowest in 15 years that has badly affected credit activities, production and

business. Industrial production rate was at 10,4%, of which the state-owned sector

increased by 4.5%, the non-state area up 7.6% and foreign invested businesses up

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19.9%. Invested capital for basic construction only met 49.9% of the year target.

Exports amounted to US$7.203 billion up nearly 15% from the same period last year,

making up 75% of the year's target. Exports of major commodities such as garments,

footwear, seafood, crude oil, computers, electronics and rubber increased 10%-33%

compared with the same period of last year. Exports of other products also increased

significantly such as handicraft, black pepper, vegetables and fruit. Import value was

US$7,925 billion down 5.7%. Import of cars, motorbikes, equipment, machinery,

medicines shrank drastically but import for production such as steel, fertilizers, petrol,

chemicals, plastic material and material for leather, garment and textile sectors continued

raising. Generally, trade deficit in the first eight months was US$92 million, a significant

decline from US$1,639 million for the same period last year. Although the export

quantity increased, Vietnamese export products now face fierce competition and lower

export prices. It leads to the export earning decreased compared to the quantity growth.

Foreign direct investment flowed into Vietnam to a lesser extent. According to the

Ministry of Planning and Investment (MPI) there were 157 projects granted licenses with

a total capital of US$871.2 million. It accounted for 89.7% of the projects and 51.7% of

registered capital compared to that of the same period last year. The reasons for the

slowdown due to 60% of FDI coming from Asian countries, one quarter of which is from

ASEAN, where the financial crisis first occurred and continues to affect their national

economy. Facing financial difficulties, many multinational corporations have stopped or

reduced capital injections into their Vietnam-based subsidiaries. FDI projects account for

a large share of trade turnover (21.5%). From 22% in 91-95, FDI increases its

contribution to the total investments of Vietnam to over 30% in 97. Foreign invested

enterprises' share in industrial production was 31.8% in 98 up to 35.2% in first half of

99 (GSO 98).

A recent survey of the Ministry of Labor, invalids and social affairs showed that

national-wide unemployment rose to 6.6% of the labor force in 98. The labor force

grows by 1.1 million persons every year. FDI in declining tendency, and there are many

lay-offs from foreign invested enterprises currently. It makes unemployment solving

more difficult.

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Number of international tourists came to Vietnam in 98 declined 10% compared with the

previous year, falling to 1,5 million and may continue to drop this year. Hotels in HCM

city have been facing great difficulty with continuos drop in occupancy. Although the

room renting price was lowered from 30% to 50%, the average occupancy rate of hotels

in HCM city is around 35% at present, and travel businesses suffered a considerable

decline in customers. The reason for the slump is drastic drop in tourist arrivals from

Asian countries, which has made up 70% of the total tourists to Vietnam. Another reason

was due to the drop in FDI. It resulted in a fall in the number of foreign entrepreneurs

coming to Vietnam.

Besides negative impacts Vietnam still gains positive impact. Due to outdated technology

and equipment, products made in Vietnam are unable to compete with those of

neighboring nations not only in the world market but also in the local market.

Technology updating becomes a real need. With the regional economic crisis, machines

and equipment become cheaper it lets Vietnamese entrepreneurs to invest and update

their factories most efficiently, such as the case of factories of plastics and textiles.

It can be said that compared to other countries in the region, the impacts of the regional

economic crisis on the Vietnamese economy are not much severe. The impacts are still

remarkable as mentioned above.

On the way of integration into the regional and world markets, Vietnamese economy has

attained sound achievements as well as to face high competition and challenges. What

kinds of measures should be carried out to help Vietnamese economy to successfully

compete and overcome challenges to keep its sustainable growth?

Primary products in export currently account for over 60% of Vietnam's export turnover

and they depend on some items. It would have impacts on the earning growth if these

export products get unstable price. Thus, it is necessary to search for new, refined and

fully-processed export products. In some areas have witnessed process technology

improvement. With up-dated equipment and technology for dehusking rice, processing

rubber latex, and producing sugar, fruit juice and confectionery that lifted Vietnam's

processing industry to a niche position in the international markets. However, the

processing industry's improvements have yet to keep pace with the burgeoning

agricultural production. The main issues of Vietnam's agricultural product export are

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quality improvement and diversification. For example, in Vietnam's rice export, the share

of low quality rice export is prominent. Vietnam rice is not easy to compete to high

quality rice of Thailand and that of America. It is necessary to carry out research

programs for new high quality strains to introduce and help farmers to grow them in

appropriate regions. In seafood export, many enterprises are using outdated machines and

lack of adequate freezing systems leading to high production cost and substandard

products. Export of coffee and tea faces the unstable quality disadvantage due to the

inadequate process of drying, classifying and reserving. Thus, the state gives incentives

to encourage the investment into modernizing processing technology, especially for

agricultural product processing one is still sound meaning. Currently, post-harvest losses

remain high, about 13% for rice and 20% for vegetables and fruits. Although

manufacture share in export is in creasing but it is still low, 27% in 97 compared to that

of other Asian countries. Manufacture export of Vietnam has comparative advantages in

resource-based products and labor-intensive products such as rubber, textiles, garment,

leather and footwear and assemble electronics. It is necessary to continue update

equipment and technology, training labor force to raise the competitive capacity of other

kinds of manufacture products in order to lift the share of manufacture products in

export. Reducing tariff protection and removing tariff barriers to a reasonable level, it

will help enterprises improve their competitiveness soon and avoid shocks when Vietnam

joints to AFTA. Looking for new potential markets such as European market and

American one to expand export markets for Vietnam products, it helps export more

stable compared to depending only on Asian markets as recently. Although Vietnam

adjusted its exchange rate, in the circumstances other Asian currencies were devalued

sharply VND is still relatively appreciated, it makes Vietnam's export goods less

competitive in the international market. Maintaining a competitive exchange rate is

essential to promote export.

FDI has become more and more crucial to Vietnam economy. Foreign direct invested

enterprises create nearly 9% of the country's GDP and contribute nearly 8% of the state

budget in taxes and charges. They also account for one-fourth of the country's import-

export turnover and 30% of the total industrial output. FDI seems to be a vehicle through

which advanced technologies and techniques and capital transferred to Vietnam enabling

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to create products for domestic consumption and export. FDI inflow to Vietnam is

declining due to many reasons, from the outside as well as from the inside of the country.

The difficulties from the outside such as the impacts from the Asian economic crisis, the

problems from the host country. The obstacles from the country such as cumbersome

license granting procedure, some discriminations on taxes, prices, issues related to legal

framework. The amendment of foreign investment law was promulgated in 93. Then

other obstacles were gradually removed such as simplifying the lincense granting

procedure, implementing one price policy, reducing land lease rate, creating a level

playing field for equal treatment. Decision 145 effective from July 99, more economic

sectors are allowed to open to foreign investment. These are telecommunication, tourism,

entertainment, leasing land for the construction of offices and residence buildings for

rent, education, health care, cement, steel production. More preferential tax rates, tax

reduction and exemption as well as more favorable conditions are offered for the form of

wholly foreign enterprises. With many comparative advantages on natural resources, low

labor wage, infrastructure system is in improving and construction. With changes

mentioned, it is hopeful that FDI inflow to Vietnam will have new trend soon.

Besides specific issues related to Export and FDI in Vietnam as mentioned, Vietnamese

economy currently faces other difficulties. The economy's growth rate has declined since

96. The most pressing problem is the lack of competitiveness of Vietnamese businesses.

Only 40% of the total enterprises nation-wide are now operating profitably. Large stock

piles were noted in many state corporations such as coal, cement, paper, rubber, textiles,

garment, sugar, coffee. Most of these goods have higher production costs than those in

regional countries. The main reasons for low competitiveness of State-owned enterprises

are obsolete technology, poor management and excessive protection. To speed up SOEs

renovation the State should give state corporations more autonomy and deals drastically

with some problems such as debts, finance and surplus labor. The performance of

domestic banking system remains poor. From August 99, the state bank of Vietnam

reduced the maxium loan interest rate to stimulate the demand for investment of business

operation and production. The drop in loan interest rates affects the operation of banking

system, to help banks find a way to escape from frozen capital as investments expand.

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Private Sector has its own contribution to the country's economy. It contributes not only

in create products but also in employment generation. Currently, the sector made up

40.2% of the country's GDP. Private sector in Vietnam is still small with 600 enterprises

employing 100 workers and about more 2 million households' businesses in urban areas

and attaining a growth rate of between 15% and 20%. It is still not yet favored in

Vietnam. It is necessary to give more incentives, to create an equality among different

types of enterprises and more fair treatment. It is essential for promoting the

development of the sector, it helps keep a balance with state-owned sector and the sector

will fuel economic growth and create employment.

There are many issues need to be improved to ensure a stable macro-economic

environment. This includes competitive exchange rate, public investment in basic

infrastructure to facilitate production, human resource development, and export. Besides

focusing on attracting FDI sources, it is necessary to give incentives to mobilize domestic

saving in order to increase domestic investment. It is the way to rely more on the internal

forces other while Vietnam could get foreign debts in near future.

What kind of lessons can be learn for Vietnam economy from the Asian economic crisis?

The financial crisis firstly started in Thailand then spread through out the region. There

were many reasons mentioned to explain for the on-going regional crisis such as:

In a long period of time, many economies in the region increased borrowing foreign loan,

attracted more foreign investment to keep a high growth rate. It exceeded their own

internal forces. The high growth rate it is, the high foreign debt results, in which the short

term debt got a big share.

An inefficient and inappropriate investment- real estate investment continues to boom

despite the fact that offices, hotels and apartment were being experiencing the occupancy

declining and most of investment were financing in $US because the interest rate of the

kind of loan is lower compared to the domestic one. There is no attention on the risk of

exchange rate in the future.

A fixed exchange rate for a long period of time leads to currency appreciation and

competition disadvantage.

A weak banking system, credit was expanded to the extent they became unmanageable

and bad loans were increasing.

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Export-led strategy has helped southeast Asian countries to attain a high growth rate for a

long period of time. It has become vulnerable when they face the instability in the

international market.

How is it about Vietnam case? It can be said that certain conditions that led to the crisis

are emerging in Vietnamese economy. Banking and legal system is rather weak. Real

estate sector, both domestic and foreign were in trouble with large quantities of unsold or

unrented new space. Construction of luxury apartments and hotel’s rooms has gotten far

ahead of demand. FDI has decreased sharply. At the short run period, with the absence of

a capital market and inconvertible currency, Vietnam can proceed well. In the long run

one, Vietnam needs further reforms in banking and financial system to keep the macro

economic stability. So more incentives and simplification in investment procedures are

necessary to attract more domestic investment as well as foreign one to sustain and

expand economic activities in the future.

References:

UNDP in Vietnam, Staff paper (June 1998) East Asia: From Miracle to Crisis -

Lessons for Vietnam.

Radelet Steven c. and Sachs Jeffrey D , The East Asian Financial Crisis, HIID.Research

Review, Volume XI, number III Spring/Summer 1998.

Dapice David O. (September 98) Vietnam and the Asian Economic Crisis, Paper

prepared for UNDP in Vietnam.

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Perkins Dwight H.(February 1998) Implications of the Asian Financial Crisis for

Vietnam.

Nguyen Ngoc Bao Chau, M.A thesis (1997) Impacts of Inward-Foreign Direct

Investment on Export Expansion of the Host Country- The Case of Vietnam during

1988-1997

Doan Van Lien, M.A thesis (1999) Foreign Direct Investment in Vietnam and Its Trade

Orientation, Period Study From 1988 to 1998.

Khung hoang tai chinh - tien te chau A va anh huong doi voi Viet Nam. VAPEC - Thoi

Bao Kinh Te Sai Gon thang 2, 1998.

Tran Vo Hung Son & Chau Van Thanh: Tang Truong Kinh Te Viet Nam: Mot vai phan

tich su dung phuong trinh tinh toan tang truong.

Tran Hoang Ngan: Khung Hoang Tai Chinh Tien Te Dong Nam A va Van De Kinh Te

Tai Chinh Nay Sinh o Viet Nam.

The Saigon Times Weekly, September 4,11/1999

Vietnam Economic News, No 31,32,33,36/1999

Vietnam Statistical Yearbook 1997,1998.

Investment Times, 9/1999

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